Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, this discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Special Note Regarding Forward-Looking Statements” and “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Our fiscal year ends on December 31 each year.
Overview
We are a clinical-stage biopharmaceutical company focused on developing novel therapeutics to address unmet medical needs in liver diseases and viral infections, including in the areas of non-alcoholic steatohepatitis (NASH), coronavirus (e.g., SARS-CoV-2 and related infections) and chronic hepatitis B (CHB). We utilize our proprietary small molecule and oligonucleotide platforms to develop pharmacologically optimized drug candidates for use in combination regimens designed to achieve improved treatment outcomes.
In February 2023, we announced a strategic reprioritization of our portfolio. Going forward, we will emphasize our clinical NASH and COVID-19 programs, and continue to support our collaboration agreements, including the agreement with Merck & Co. to develop an oligonucleotide candidate to address NASH. With respect to CHB, we plan to complete our ongoing 48-week cohorts and single ascending dose cohorts for our capsid assembly modulator and small interfering RNA programs, respectively.
Our primary area of focus is NASH, a complex, chronic liver disease where combination regimens may prove beneficial. Our most advanced drug candidate for NASH is ALG‐055009, a small molecule thyroid hormone receptor (THR‐ß) agonist. This drug candidate is being evaluated in a Phase 1 study in healthy volunteers (HVs) (oral single ascending doses (SAD)) and subjects with hyperlipidemia (14 oral daily doses). Preliminary data after single doses up to 4 mg and multiple doses up to 1 mg have previously been reported at the European Association for the Study of the Liver conference (EASL 2022) and the 2022 American Association for the Study of Liver Diseases meeting (AASLD 2022), respectively. At these conferences, data were presented that showed ALG‐055009 was well tolerated, had dose proportional pharmacokinetics (PK) and low variability, and demonstrated expected thyromimetic effects (i.e., generally dose proportional increases in sex hormone binding globulin and decreases in various atherogenic lipids and thyroid hormones). We are currently taking the necessary steps to advance ALG‐055009 into a Phase 2 proof of concept study. These steps include: 1) conducting a relative bioavailability cohort in the Phase 1 study; 2) completing 13-week Good Laboratory Practice (GLP) toxicology studies; and 3) manufacturing Phase 2 drug supply. We anticipate submitting the Phase 2 protocol to the FDA in the fourth quarter of 2023. We believe ALG‐055009 has the potential to become a best‐in‐class THR‐ß agonist and could play an integral role in future NASH combination regimens based on its favorable pharmacokinetic profile, which could result in uniform exposures and lead to consistent efficacy and safety in a NASH population.
In addition to our small molecule THR‐ß program, we are also progressing oligonucleotide projects for NASH, including in collaboration with Merck. The programs are currently progressing through preclinical activities.
Our second area of focus is to develop drug candidates with pan-coronavirus activity, including against Severe Acute Respiratory Syndrome coronavirus 2 (SARS-CoV-2), the virus responsible for COVID-19. In this area of focus, we are using a small molecule approach, where we are exploring coronavirus 3CL protease inhibitors (PIs) in collaboration with Katholieke Universiteit Leuven (KU Leuven), the Center for Innovation and Stimulation of Drug Discovery (CISTIM) and the Centre for Drug Design and Discovery (CD3). In addition, the preclinical activities of our COVID-19 program are funded through a grant from the National Institutes of Health (NIH) and the National Institute of Allergy and Infectious Disease (NIAID)'s Antiviral Drug Discovery (AViDD) Centers for Pathogens of Pandemic Concern program through the Metropolitan AntiViral Drug Accelerator (MAVDA) consortium. Our lead candidate, ALG‐097558, is at least 6-fold more potent than nirmatrelvir and PBI-0451 in cell-based assays against a panel of SARS-CoV-2 variants (including Omicron), demonstrates broad pan-coronavirus activity, and based on preclinical studies, is not projected to require ritonavir boosting. Evaluation of ALG‐097558 in the hamster SARS-CoV-2 infection model has shown that, when dosed prior to infection or up to 24 hours post-infection, the compound caused a significant reduction in the levels of infectious virus in the lungs. ALG‐097558 also appeared to better maintain its antiviral activity against certain resistant mutants compared to other 3CL PIs in development
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based on publicly available data. We are currently completing first-in-human enabling nonclinical studies for ALG‐097558 and anticipate a Phase 1 CTA filing and initiation of dosing in HVs in the second quarter of 2023.
Our third area of focus seeks to enhance the rate of functional cure for CHB, which often results in life-threatening conditions such as cirrhosis, and the most common form of liver cancer, hepatocellular carcinoma (HCC). The most widely used treatment for CHB, nucleos(t)ide analogs (NAs), suppress viral replication, but only achieve low rates of functional cure and often require long-term administration. To address this, we have developed a portfolio of differentiated drug candidates for CHB, including a small molecule Capsid Assembly Modulator that results in the production of empty viral capsids (CAM-E), and a small interfering ribonucleic acid (siRNA), which is designed to suppress production of hepatitis B virus (HBV) surface antigen (HBsAg). Each of these drugs is designed against clinically validated targets in the HBV life cycle and is currently being evaluated in clinical trials.
The initial Phase 1a study in HVs for our CAM-E, ALG‐000184, has been completed as has a Phase 1b dose ranging study evaluating the safety, pharmacokinetics and antiviral activity of 10-300 mg doses of ALG‐000184 for 28 days among untreated HBV E-antigen (HBeAg) positive/negative CHB subjects. ALG‐000184 was found in these portions of the study to be well tolerated with a favorable PK profile and demonstrated potentially best-in-class HBV DNA and RNA reductions as well as HBsAg reductions in a subset of HBeAg positive subjects receiving 300 mg ALG‐000184 (Hou et. al, AASLD 2022). Based on the favorable profile after dosing ≤300 mg ALG‐000184 x 28 days, additional Phase 1b cohorts are currently being evaluated for the risk-benefit profile of 100-300 mg doses of ALG‐000184 with or without background entecavir (ETV) therapy for ≤48 weeks in HBeAg positive or negative CHB patients. Preliminary data presented for these cohorts (Hou et. al, APASL 2023) indicate that ALG‐000184 dosed for up to 12 weeks is well tolerated with a favorable PK profile and potentially best-in-class antiviral activity. Specifically, antiviral activity data through Week 10 were summarized in cohorts of HBeAg positive subjects with normal baseline ALT (100 mg (Part 4 Cohort 1) and HBeAg positive subjects with normal/elevated baseline ALT (300 mg (Part 4 Cohort 2)). In Part 4 Cohorts 1 and 2, respectively, we observed greater mean DNA (4.9, 5.2 log10 IU/mL) and RNA (2.7, 3.3 log10 copies/mL) reductions vs. ETV alone (3.7 log10 IU/mL reduction, 0.1 log10 copies/mL increase, respectively). Similarly, among subjects with available data at Week 10, HBsAg levels declined in cohorts 1 and 2 to a maximum of 0.3 log10 IU/mL and 0.7 log10 IU/mL compared to no meaningful change in subjects dosed with ETV alone. Dosing in these and at least one additional cohort will continue throughout 2023 and interim safety, PK, and antiviral activity data will be presented at scientific conferences throughout the year.
With respect to our siRNA drug candidate, ALG‐125755, a Phase 1 study is ongoing in New Zealand and in several countries in Eastern Europe. Part 1 of this study evaluated single doses in doses ranging from 20 mg to 200 mg in HVs and found that these doses were well tolerated with a favorable PK profile (Gane et al., APASL 2023). Part 2 of the study, which is an SAD in virologically suppressed HBeAg negative CHB subjects, is ongoing. To date, a 50 mg dose of ALG‐125755 has been evaluated in Part 2 and found to be well tolerated with an acceptable PK profile. We plan to share preliminary data from this study at scientific conferences throughout 2023.
We are also exploring ways to boost immune responses via small molecule inhibitors of the programmed death 1 (ligand) PD-1/PD-L1 interaction. We have rationally designed these T cell activating drugs to localize in the liver and thereby potentially mitigate systemic toxicity in an effort to develop better tolerated PD-1/PD-L1 inhibitors for CHB patients. Lead molecules developed to date show similar in vivo efficacy to approved PD-1/PD-L1 antibodies and greater target occupancy at a lower dose in a liver metastatic tumor model compared to a subcutaneous tumor model. We believe that combination regimens utilizing our broad portfolio of CHB drug candidates, with or without other mechanisms of action, may lead to higher rates of functional cure.
In July 2021, we completed a follow-on offering and issued 4,400,000 shares of our common stock at a price to the public of $19.00 per share for net proceeds of $77.7 million, after deducting underwriting discounts and commissions and offering expenses payable by us.
We have incurred net losses and negative cash flows from operations in each year since our formation in February 2018. Our net losses were $96.0 million and $128.3 million for the years ended December 31, 2022 and 2021, respectively. We have had no revenue from product sales. As of December 31, 2022, we had an accumulated deficit of $399.1 million. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We expect to continue to incur significant expenses and increasing operating losses over at least the next several years. Our net operating losses may fluctuate from quarter to quarter and year to year depending primarily on the timing of our clinical trials and nonclinical studies and our other research and development expenses. We have no internal manufacturing capabilities or sales force and outsource a substantial portion of our clinical trial work to third parties.
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Components of our results of operations
Operating expenses
Our operating expenses since inception have consisted solely of research and development costs and general and administrative costs.
Research and development expenses
We rely substantially on third parties to conduct our discovery activities, nonclinical studies, clinical trials and manufacturing. We primarily estimate research and development expenses based on estimates of services performed and rely on third party contractors and vendors to provide us with timely and accurate estimates of expenses of services performed to assist us in these estimates. A portion of our research and development expenses are based on contractual milestones. Research and development costs consist primarily of costs incurred for the identification and development of our drug candidates through our technology platforms, which include:
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salaries, benefits and other employee-related costs, including stock-based compensation expense, for personnel engaged in research and development functions;
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costs of outside consultants, including their fees, and related travel expenses;
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costs associated with in-process research and development, including license fees and milestones paid to third-party collaborators for technologies with no alternative use;
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costs related to production of clinical materials, including fees paid to contract manufacturers;
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expenses incurred under agreements with collaborators that perform nonclinical activities;
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costs related to compliance with regulatory requirements; and
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facility costs, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance, and other supplies.
We expense research and development costs as the services are performed or the goods are received. Non-refundable payments for goods or services that will be used for future research and development activities are deferred and capitalized. Such amounts are recognized as an expense as the goods are delivered or the related services are performed until it is no longer expected that the goods will be delivered, or the services will be rendered.
Our research and development costs may increase in future periods as we continue to invest in research and development activities and advance our nonclinical and clinical programs through clinical development. The process of conducting nonclinical studies and, eventually, clinical trials necessary to obtain regulatory approval is costly and time consuming, and the successful development of our drug candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and development projects or clinical trials or if and to what extent we will generate revenue from the commercialization and sale of any of our drug candidates.
We track direct external research and development expenses on a program-specific basis (chronic hepatitis B, coronaviruses, steatohepatitis and early-stage programs). The following table summarizes these research and development costs, in thousands:
Year Ended December 31,
Direct research and development expenses by development program:
Non-alcoholic Steatohepatitis program $ 3,489 $ 3,937
Total direct research and development expenses $ 41,145 $ 62,729
Total indirect research and development expenses 43,931 41,425
Total research and development expense $ 85,077 $ 104,153
General and administrative expenses
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General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, corporate and business development and administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing, tax and consulting services; insurance costs; travel expenses; and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs not otherwise classified as research and development costs.
Interest and other (expense) income, net
Interest and other (expense) income, net comprises interest (expense) income, net and other income (expense), net. Interest income (expense), net primarily consists of interest earned on our cash, cash equivalents, and investments. Other (expense) income, net consists primarily of foreign currency exchange gains and losses.
Provision for income taxes
Since our inception in 2018, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in any year or for our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items. As of December 31, 2022, we had federal net operating loss (NOL) carryforwards of $272.4 million available to reduce taxable income and these NOLs can be carried forward indefinitely. We have state NOL carryforwards of $352.7 million as of December 31, 2022, available to reduce future state taxable income, which expire at various dates beginning in 2038. As of December 31, 2022, the Company had $3.2 million of Australia NOL carryforwards, which carryforward indefinitely. As of December 31, 2022, we also had federal and state research and development tax credit carryforwards of $7.9 million and $3.9 million, respectively. The federal research and development tax credit carryforwards begin to expire in 2038, while the state research and development tax credit carryforwards can be carried forward indefinitely. Under Sections 382 and 383 of the Code, and corresponding provisions of state law, if a corporation undergoes an “ownership change” (generally defined as a greater than 50 percentage point change (by value) in its equity ownership over a rolling three-year period), the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income may be limited. We performed a Code Section 382 analysis in 2021 and determined there was an ownership change that resulted in Section 382 limitations. The ownership change limited our ability to utilize NOLs against future taxable income but will not result in the expiration of any NOLs. We may in the future experience ownership changes as a result of changes in our stock ownership (some of which are not in our control). In addition, under current tax law, federal NOL carryforwards generated in periods after December 31, 2017, may be carried forward indefinitely but, in taxable years beginning after December 31, 2020, may only be used to offset 80% of our taxable income. For these reasons, our ability to utilize our NOL carryforwards and other tax attributes to reduce future tax liabilities may be limited.
Results of operations
Comparison of the years ended December 31, 2022 and 2021
The following table summarizes our operating expenses for the years ended December 31, 2022 and 2021:
Consolidated Statements of Operations Data: 2022 2021 Change
(in thousands) $ %
Operating expenses:
Interest and other income, net
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Research and development expenses
Research and development expenses were $85.1 million for the year ended December 31, 2022, compared to $104.2 million for the year ended December 31, 2021, a decrease of $19.1 million. This is due to a decrease of $21.6 million of third-party expenses due to our reduced costs related to our discontinuation of our STOPS and ASO programs, and the manufacturing of drug supply in advance of our clinical trial activity for our CAM-E and siRNA programs, a decrease of $0.7 million in depreciation, and a decrease of $0.4 million in recruiting expenses. This was partially offset by an increase of $2.1 million in additional employee-related costs, of which $0.3 million related to stock-based compensation, an increase of $0.4 million in travel & entertainment expenses, and an increase of $1.1 million in facility expenses.
General and administrative expenses
General and administrative expenses were $26.4 million for the year ended December 31, 2022, compared to $28.5 million for the year ended December 31, 2021, a decrease of $2.1 million. This is due to a decrease of $2.1 million of third-party expenses primarily due to lower legal and patent attorney costs, a decrease of $0.5 million in consulting and recruiting costs, and a decrease of $0.7 million in facility expenses. The decrease was partially offset by an increase of $1.2 million of additional employee-related costs, of which $0.7 million related to stock-based compensation.
Interest income, net
Interest income, net increased to $1.5 million for the year ended December 31, 2022 from $0.2 million for the year ended December 31, 2021, an increase of approximately $1.3 million, primarily due to the change in our portfolio of cash equivalents, short-term and long-term investments as well as a general increase in market interest rates during the year ended December 31, 2022.
Other income (loss), net
Other income (loss), net was an income of $0.1 million for the year ended December 31, 2022 compared to a loss of $0.1 million for the year ended December 31, 2021, a difference of $0.2 million. The difference was due primarily to foreign currency exchange losses versus the U.S. dollar.
Liquidity and capital resources
Liquidity
We have incurred net losses since inception. We have not generated any revenue from product sales or any other sources and have incurred significant operating losses. We have not yet commercialized any products and we do not expect to generate revenue from sales of any drug candidates for at least several years, if ever.
Our operations have been financed primarily by net proceeds from the sale and issuance of our convertible preferred stock, net proceeds from our IPO, and the issuance of convertible debt. In July 2021, we completed a follow-on offering and issued 4,400,000 shares of our common stock at a price to the public of $19.00 per share for net proceeds of $77.7 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
As of December 31, 2022, we had cash, cash equivalents and investments of $125.8 million.
Capital resources
Our primary use of cash is to fund operating expenses, which consist primarily of research and development costs related to our drug candidates and our discovery programs, and to a lesser extent, general and administrative expenditures. We expect our expenses to increase substantially in connection with our ongoing clinical development activities related to our NASH drug candidate ALG-055009, which we have initiated clinical trials, as well as our research and development of our other drug candidates within our coronavirus and CHB programs.
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In addition, we continue to incur additional costs associated with operating as a public company following our IPO in October 2020. We expect that our expenses will increase substantially to the extent we:
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conduct our current and future clinical trials, and additional nonclinical studies;
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initiate and continue research and nonclinical and clinical development of other drug candidates;
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seek to identify additional drug candidates;
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pursue marketing approvals for any of our drug candidates that successfully complete clinical trials, if any;
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establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval;
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require the manufacture of larger quantities of our drug candidates for clinical development and potentially commercialization;
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obtain, maintain, expand, protect and enforce our intellectual property portfolio;
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acquire or in-license other drug candidates and technologies;
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hire and retain additional clinical, quality control and scientific personnel;
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achieve milestones triggering payments by us under our current and potential future licensing and/or collaboration agreements;
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build out or expand existing facilities to support our ongoing development activity; and
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add operational, financial and management information systems and personnel, including personnel to support our drug development, any future commercialization efforts and any additional requirement of being a public company.
We believe that our existing cash, cash equivalents and investments will enable us to fund our planned operating expenses and capital expenditure requirements through at least the twelve months from the date of issuing our financial statements. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. Furthermore, we may elect to raise additional capital on an opportunistic basis to fund operations.
Because of the numerous risks and uncertainties associated with our research and development programs and because the extent to which we may enter into collaborations with third parties for development of our drug candidates is unknown, we are unable to estimate the timing and amounts of increased capital outlays and operating expenses associated with completing the research and development of our drug candidates. Our future capital requirements will depend on many factors, including:
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the scope, progress, results and costs of researching and developing our drug candidates and programs, and of conducting nonclinical studies and clinical trials;
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the timing of, and the costs involved in, obtaining marketing approvals for drug candidates we develop if clinical trials are successful;
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the cost of commercialization activities for our current drug candidates, and any future drug candidates we develop, whether alone or in collaboration, including marketing, sales and distribution costs if our current drug candidates or any future drug candidate we develop is approved for sale;
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the cost of manufacturing our current and future drug candidates for clinical trials in preparation for marketing approval and commercialization;
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our ability to establish and maintain strategic licenses or other arrangements and the financial terms of such agreements;
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the costs involved in preparing, filing, prosecuting, maintaining, expanding, defending and enforcing patent claims, including litigation costs and the outcome of such litigation;
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the timing, receipt and amount of sales of, or profit share or royalties on, our future products, if any;
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the emergence of competing therapies for hepatological indications and viral diseases and other adverse market developments; and
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any acquisitions or in-licensing of other programs or technologies.
Developing pharmaceutical products, including conducting nonclinical studies and clinical trials, is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval for any drug candidates or generate revenue from the sale of any drug candidate for which we may obtain marketing approval. In addition, our drug candidates, if approved, may not achieve commercial success. Our commercial product revenues, if any, will be derived from sales of drugs that we do not expect to be commercially available for many years, if ever. Accordingly, we will need to obtain substantial additional funds to achieve our business objectives.
Adequate additional funds may not be available to us on acceptable terms, or at all. We do not currently have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, ownership interest may be diluted, and the terms of these securities may include liquidation or other preferences and anti-dilution protections that could adversely affect the rights of a common stockholder. Additional debt or preferred equity financing, if available, may involve agreements that include restrictive covenants that may limit our ability to take specific actions, such as incurring debt, making capital expenditures or declaring dividends, which could adversely constrain our ability to conduct our business, and may require the issuance of warrants, which could potentially dilute ownership interest.
If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technology, future revenue streams, research programs, or drug candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or collaborations, strategic alliances or licensing arrangements with third parties when needed, we may be required to delay, limit, reduce and/or terminate our product development programs or any future commercialization efforts or grant rights to develop and market drug candidates that we would otherwise prefer to develop and market ourselves.
Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented:
Net cash (used in) operating activities $ (79,389 ) $ (115,662 )
Net cash provided by (used in) investing activities (26,293 ) 3,022
Net cash provided by financing activities 164 78,677
Operating activities
During Fiscal 2022, operating activities used $79.4 million of cash, primarily resulting from our net loss of $96.0 million and cash used as a result of changes in our operating assets and liabilities of $1.6 million, partially offset by non-cash charges of $18.2 million. Net cash used as a result of changes in our operating assets and liabilities of $1.6 million consisted of a decrease in accrued liabilities of $9.1 million, an increase of $0.3 million in right of use assets, a decrease of $1.8 million in operating lease liabilities, and a decrease of $0.1 million in other liabilities, partially offset by a decrease in other current assets of $5.6 million, an increase of $1.6 million in accounts payable, and an increase of $2.5 million in deferred revenue from collaborations.
The decrease in other assets resulted from reduced costs due to the discontinuation of our STOPS and ASO programs including deposits for manufacturing slot reservation fees. The increase in deferred revenue from collaborations was a result of our collaboration agreements (refer to Note 10 License and collaboration agreements, for details), partially offset by the recognition of revenue from collaborations due to progress towards the completion of the projects. Operating lease liabilities decreased due to contractual lease payments, and the decrease in accrued liabilities was due primarily due to a slowdown in manufacturing activities for various drug compounds that are expected to be consumed in future clinical trials.
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During Fiscal 2021, operating activities used $115.7 million of cash, primarily resulting from our net loss of $128.3 million and cash used as a result of changes in our operating assets and liabilities of $4.7 million, partially offset by non-cash charges of $17.3 million. Net cash used as a result of changes in our operating assets and liabilities of $4.7 million consisted of an increase of an increase in other assets of $8.1 million, a decrease of $4.4 million in deferred revenue from collaborations, a decrease of $1.4 million in operating lease liabilities, a decrease of $0.3 million in accounts payable and a decrease of $0.2 million in other liabilities, partially offset by an increase in accrued liabilities of $9.7 million.
The increase in other assets resulted from advances for clinical trial costs and deposits for manufacturing slot reservation fees. The decrease in deferred revenue from collaborations was a result of recognition of revenue from collaborations due to progress towards the completion of the project. Operating lease liabilities decreased due to contractual lease payments, and the increase in accrued liabilities was due primarily due to a ramp in manufacturing activities for various drug compounds that are expected to be consumed in future clinical trials.
Investing activities
During Fiscal 2022, investing activities used $26.3 million of cash, consisting primarily of $104.3 million of investment purchases, and $0.9 million of purchases of property and equipment, partially offset by $78.9 million of investment maturities.
During Fiscal 2021, investing activities provided $3.0 million of cash, consisting primarily of $23.0 million of investment maturities, offset by $19.1 million of investment purchases and $0.9 million of purchases of property and equipment.
Financing activities
During Fiscal 2022, net cash provided by financing activities was $0.2 million, consisting primarily of $0.2 million from the issuance of common stock from the exercise of employee stock options and the issuance of shares through our employee stock purchase plan, partially offset by payments of our finance leases.
During Fiscal 2021, net cash provided by financing activities was $78.7 million, consisting primarily of $78.6 million in proceeds from our follow-on offering, net of issuance costs, and $1.0 million from the issuance of common stock from the exercise of employee stock options and the issuance of shares through our employee stock purchase plan. The cash provided was partially offset by costs related to our follow-on offering of $0.9 million and payments for our capital leases of $0.1 million.
Contractual obligations and commitments
Our principal commitments consist of obligations under our operating leases for office space in South San Francisco, California, and Belgium, and finance lease commitments representing obligations related to vehicle leases for employees and a lease for lab equipment. All of our finance leases are for assets in Belgium. We do not have any material purchase commitments for contracts with fixed or minimum service requirements. We also enter into contracts in the normal course of business with various vendors that generally provide for contract termination following a certain notice period. The Company enters into contracts in the normal course of business that includes arrangements with clinical research organizations, vendors for preclinical research and vendors for manufacturing. These agreements generally allow for cancellation with notice. As of December 31, 2022, the Company had no material non-cancellable purchase commitments.
Off-balance sheet arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Indemnification agreements
We enter into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, we indemnify, hold harmless and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third party with respect to its technology. The term of these indemnification agreements is generally perpetual any time after the execution of the agreement. The maximum potential amount of future payments we could be required to make under these arrangements is not determinable. We have never
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incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the fair value of these agreements is minimal.
Critical accounting estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts and the disclosure of assets and liabilities at the date of the consolidated financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on relevant assumptions that we believe are 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. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Accrued research and development costs
We record accrued expenses for estimated costs of our research and development activities conducted by third-party service providers, which include the conduct of clinical trials and nonclinical studies. We record the estimated costs of research and development activities based upon the estimated amount of services provided but not yet invoiced and include these costs in accrued liabilities in the consolidated balance sheets and within research and development expense in the consolidated statements of operations and comprehensive loss. These expenses are a significant component of our research and development costs. We record accrued expenses for these costs based on factors such as estimates of the work completed and in accordance with agreements established with these third-party service providers. Any payments made in advance of services provided are recorded as prepaid expenses and other assets, which are expensed as the contracted services are performed.
We estimate the amount of work completed through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. We make significant judgments and estimates in determining the accrued balance in each reporting period. As actual costs become known, we adjust our accrued estimates. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed could vary from actuals and result in us reporting amounts that are too high or too low in any particular period. Our accrued expenses are dependent, in part, upon the receipt of timely and accurate reporting from clinical research organizations and other third-party service providers. For the periods presented, we have experienced no material differences between our accrued expenses and actual expenses.
Research and development expenses
We expense research and development costs as incurred. Acquired intangible assets are expensed as research and development if, at the time of payment, the technology is under development; is not approved by the U.S. Food and Drug Administration or other regulatory agencies for marketing; has not reached technical feasibility; or otherwise has no foreseeable alternative future use.
Research and development expenses consist of costs incurred in performing research and development activities, including salaries, stock-based compensation and benefits, facilities costs, depreciation, and third-party license fees. Non-refundable prepayments for goods or services that will be used or rendered for future research and development activities are expensed as incurred. In-process research and development (IPR&D) expense represents the costs to acquire technologies to be used in research and development that have not reached technological feasibility or have no alternative future uses and thus are expensed as incurred. IPR&D expense also includes upfront license fees and milestones paid to collaborators for technologies with no alternative use.
Stock-based compensation
We measure stock options and other stock-based awards granted to employees, directors and other service providers based on their fair value on the date of grant and recognize compensation expense of those awards over
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the requisite service period, which is generally the vesting period of the respective award. We recognize the impact of forfeitures on stock-based compensation expense as forfeitures occur. We apply the straight-line method of expense recognition to all awards with only service-based vesting conditions. During the year ended December 31, 2022 and 2021, we did not grant any stock-based awards with performance-based vesting conditions. We recognize compensation expense related to such awards when it is determined that satisfying the performance conditions is probable using the accelerated attribution method over the requisite service period.
We estimate the fair value of each stock option grant on the date of grant using the Black-Scholes option-pricing model, which requires the use of highly subjective assumptions including:
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Expected term - We have opted to use the “simplified method” for estimating the expected term of plain-vanilla options, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option (generally 10 years). We estimated the expected term of performance-based vesting options based on the expected life of the options to remain outstanding, which is estimated to be materially consistent with time-vesting options.
•
Risk-free interest rate - The risk-free rate assumption is based on the U.S. Treasury instruments with maturities similar to the expected term of our stock options.
•
Expected dividend - We have not issued any dividends and do not anticipate to issue dividends on our common stock. As a result, we have estimated the dividend yield to be zero.
•
Expected volatility - Due to our limited operating history and a lack of company-specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards.
Emerging growth company status
In April 2012, the Jumpstart Our Business Startups Act of 2012 (the JOBS Act), was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” (an EGC) can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period for any new or revised accounting standards during the period in which we remain an EGC; however, we may adopt certain new or revised accounting standards early.
We will remain an EGC until the earliest to occur of: (1) the last day of the fiscal year in which we have more than $1.235 billion in annual revenue; (2) the date we qualify as a “large accelerated filer,” with at least $700.0 million of equity securities held by non-affiliates; (3) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period; and (4) the last day of the fiscal year ending after the fifth anniversary of our initial public offering.
In addition, we intend to rely on the other exemptions and reduced reporting requirements provided to EGCs by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an EGC, we are not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis) or (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation.
Recently issued and adopted accounting pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our consolidated financial statements.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest rate risk
Our cash, cash equivalents and investments of $125.8 million as of December 31, 2022, consist of bank deposits, money market funds, certificates of deposit and US Treasury available-for-sale securities. We are exposed to market risk related to changes in interest rates applicable to our investment portfolio of cash equivalents and short-term and long-term investments. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. Should U.S. interest rates decline, interest income would be reduced in future periods for short- and long-term investments which mature and the proceeds of which are reinvested in similar instruments at lower interest rates. Additionally, the fair value of our short-term and long-term investments is subject to change as a result of potential changes in market interest rates, including changes resulting from the impact of the COVID-19 pandemic. As of December 31, 2022, we estimate that a hypothetical 100 basis point adverse movement would not result in a material impact on our financial position or results of operations or cash flows.
Foreign currency exchange risk
We have employees and operations, including contracts with third-party vendors, in Europe through our subsidiary Aligos Belgium BVBA. We have similar, but more limited, operations in Australia and China. Though the functional currency in these locations is the U.S. dollar, we remeasure transactions initially recorded in local currencies in these locations, the Euro, Australian dollar and Chinese Yuan, respectively, to the U.S. dollars periodically. As such, we are exposed to foreign currency exchange risk as the underlying contracts to pay employees or vendors in these locations are generally denominated in the local currencies. A decline in the value of the U.S. dollar relative to these currencies would increase our cost of doing business in these locations. We are subject to foreign currency transaction gains or losses on our contracts denominated in foreign currencies. To date, foreign currency transaction gains and losses have not been material to our financial statements, and we have not had a formal hedging program with respect to foreign currency. A 10% increase or decrease in current exchange rates would not have a material effect on our financial position or results of operations or cash flows.
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Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID 42) 105
Consolidated Balance Sheets 106
Consolidated Statements of Operations and Comprehensive Loss 107
Consolidated Statements of Changes in Stockholders’ Equity 108
Consolidated Statements of Cash Flows 109
Notes to Consolidated Financial Statements 111
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Aligos Therapeutics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Aligos Therapeutics, Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2019.
San Mateo, California
March 9, 2023
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Consolidated balance sheets
(In thousands, except share and per share data)
December 31, December 31,
ASSETS
Current assets:
Operating lease right-of-use assets 7,698 8,789
Long-term investments — 15,110
LIABILITIES, PREFERRED STOCK,
AND STOCKHOLDERS’ EQUITY
Current liabilities:
Operating lease liabilities, current 3,035 2,769
Finance lease liabilities, current 108 138
Deferred Revenue from customers, current 467 —
Deferred Revenue from collaborations, current 8,743 7,641
Operating lease liabilities, net of current portion 9,201 11,287
Finance lease liabilities, net of current portion 230 261
Long term liabilities — 133
Deferred revenue from customers 233 —
Commitments and contingencies (Note 12)
Stockholders’ equity:
Accumulated other comprehensive income 401 452
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated statements of operations and comprehensive loss
(In thousands, except share and per share data)
Year EndedDecember 31, Year EndedDecember 31,
Operating expenses:
Interest and other income, net 1,640 132
Income tax expense (106 ) (143 )
Other comprehensive (loss) and income:
Gains on pension plans 6 749
Losses on available for sale investments (57 ) (109 )
Net loss per share, basic and diluted $ (2.25 ) $ (3.22 )
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated statements of changes in stockholders’ equity
(In thousands, except share and per share data)
Shares Amount Capital Deficit Income (Loss) Equity
Issuance of common stock upon exercise of stock options 124,013 — 394 — — 394
Issuance of common stock under employee stock purchase plan 45,610 — 653 — — 653
Costs related to the follow-on offering — — (875 ) — — (875 )
Stock-based compensation related to employee stock awards — — 12,541 — — 12,541
Vesting of early exercised common stock — — 292 — — 292
Other comprehensive income — — — — 640 640
Issuance of common stock upon exercise of stock options 12,896 0 20 — — 20
Costs related to the follow-on offering — — — — — —
Vesting of early exercised common stock — — 209 — — 209
Other comprehensive loss — — — — (51 ) (51 )
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated statements of cash flows
(In thousands)
Year EndedDecember 31, Year EndedDecember 31,
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Accretion of discount on short term investments (159 ) 86
Amortization of right of use assets 1,369 759
Changes in operating assets and liabilities:
Operating lease liabilities (1,819 ) (1,404 )
Other liabilities (133 ) (245 )
Deferred revenue from collaborations 2,502 (4,359 )
ROU asset (278 ) —
Cash flows from investing activities:
Purchases of short-term investments (104,265 ) (2,696 )
Purchases of long-term investments — (16,390 )
Purchases of property and equipment (943 ) (892 )
Cash flows from financing activities:
Payments on finance lease (61 ) (79 )
Payments of deferred offering costs — (875 )
Proceeds from ESPP purchase 205 —
Proceeds from the issuance of common stock under employee stock plans 20 1,047
Net cash and cash equivalents provided by financing activities $ 164 $ 78,677
Cash, cash equivalents, and restricted cash, beginning of period 186,980 220,943
Cash, cash equivalents, and restricted cash, end of period $ 81,462 $ 186,980
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated statements of cash flows (Continued)
(In thousands)
Year EndedDecember 31, Year EndedDecember 31,
Reconciliation to amounts on the consolidated balance sheet:
Total cash, cash equivalents, and restricted cash $ 81,462 $ 186,980
Supplemental disclosures of cash flow information:
Interest paid $ — $ —
Income taxes paid $ — $ —
Supplemental disclosures of noncash financing and investing activities:
Mark to market adjustments for available-for-sale investments $ (57 ) $ (109 )
Equipment acquired through finance lease $ — $ 284
Receivable due from arrangement $ 700 $ —
Vesting of early exercised options $ 209 $ 292
Acquisition of right-of-use asset through operating lease obligation $ — $ 2,647
PP&E purchase still in accounts payable $ — $ 15
Change in pension obligation $ 6 $ 749
The accompanying notes are an integral part of these consolidated financial statements.
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Aligos Therapeutics, Inc.
Notes to consolidated financial statements
Unless otherwise indicated, financial information except share and per share data, including dollar values stated in the text of the notes to financial statements, is expressed in dollars.
1. Organization
Description of business
Aligos Therapeutics, Inc. (Aligos-US) was incorporated in the state of Delaware on February 5, 2018 (inception). On September 10, 2018, the Company formed Aligos Belgium BVBA (the Subsidiary or Aligos-Belgium). On March 30, 2020, the Company formed as a wholly owned subsidiary, Aligos Australia Pty LTD (Aligos-Australia), a proprietary limited company. On May 18, 2021, the Company formed as a wholly owned subsidiary, Aligos Therapeutics (Shanghai) Co. Ltd. (Aligos-Shanghai) and together with Aligos-US, Aligos-Belgium, and Aligos-Australia being the Company or Aligos.
Aligos is a clinical-stage biopharmaceutical company developing novel therapeutics to address unmet medical needs in liver diseases and viral infections, including therapeutics for nonalcoholic steatohepatitis (NASH), coronaviruses, and chronic hepatitis B.
The Company is devoting substantially all of its efforts to the research and development of its drug candidates. The Company has not generated any product revenue to date. The Company is also subject to a number of risks similar to other companies in the biotechnology industry, including the uncertainty of success of its preclinical studies and clinical trials, regulatory approval of drug candidates, uncertainty of market acceptance of products, competition from substitute products and larger companies, the need to obtain additional financing, compliance with government regulations, protection of proprietary technology, dependence on third-parties, product liability, and dependence on key individuals.
Liquidity
The Company has incurred losses and negative cash flows from operations since its inception. As of December 31, 2022 and 2021, the Company had an accumulated deficit of approximately $399.1 million and $303.1 million, respectively. Management expects to continue to incur additional substantial losses in the foreseeable future as a result of expanded research and development activities.
As of December 31, 2022, the Company has cash, cash equivalent and investments of approximately $125.8 million, which is available to fund future operations. The Company expects to continue to spend substantial amounts to continue the nonclinical and clinical development of its current and future programs. If the Company is able to gain marketing approval for drug candidates that are being developed, it will require significant additional amounts of cash in order to launch and commercialize such drug candidates. In addition, other unanticipated costs may arise. Because the design and outcome of the Company’s planned and anticipated clinical trials is highly uncertain, the Company cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of any drug candidate the Company may develop.
The Company expects to finance its cash needs through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing or distribution arrangements. Based on the Company’s research and development plans, it is expected that the Company’s existing cash, cash equivalents and investments, will enable the Company to fund its operations for at least 12 months following the date the consolidated financial statements are issued. However, the Company’s operating plan may change as a result of many factors currently unknown, and the Company may need to seek additional funds sooner than planned. Moreover, it is particularly difficult to estimate with certainty the Company’s future expenses given the dynamic nature of its business, the COVID-19 pandemic and the macro-economic environment generally.
The Company’s ability to raise additional funds will depend on financial, economic and other factors, many of which are beyond its control. In particular, the COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets. If the disruption persists or deepens, the Company could be unable to access additional capital, which could negatively affect its ability to consummate certain corporate development transactions or other important, beneficial or opportunistic investments. If additional funds
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are not available to the Company when needed, on terms that are acceptable to the Company, or at all, the Company may be required to: delay, limit, reduce or terminate nonclinical studies, clinical trials or other research and development activities or eliminate one or more of its development programs altogether; or delay, limit, reduce or terminate its efforts to establish manufacturing and sales and marketing capabilities or other activities that may be necessary to commercialize any future approved products, or reduce the Company’s flexibility in developing or maintaining its sales and marketing strategy.
2. Summary of significant accounting policies
The accompanying consolidated financial statements have been prepared on a basis that contemplates the continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
Risks and uncertainties
The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, new technological innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations and the need to obtain additional financing. As a result, the Company is unable to predict the timing or amount of increased expenses or when or if the Company will be able to achieve or maintain profitability. Drug candidates currently under development will require significant additional research and development efforts, including extensive nonclinical and clinical testing and regulatory approval.
Moreover, it is particularly difficult to estimate with certainty the Company’s future expenses given the dynamic nature of its business, the COVID-19 pandemic and the macro-economic environment generally.
Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and include all adjustments necessary for the fair presentation of the Company’s financial position for the periods presented. Any reference in these notes to applicable accounting guidance is meant to refer to the authoritative U.S. GAAP included in the Accounting Standards Codification (ASC), and Accounting Standards Update (ASU) issued by the Financial Accounting Standards Board (the FASB).
Principles of consolidation
The accompanying consolidated financial statements include Aligos-US and its wholly owned subsidiaries Aligos-Belgium, Aligos-Australia and Aligos-Shanghai. All intercompany balances and transactions have been eliminated.
Use of estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP generally requires management to make certain estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. The Company regularly evaluates estimates and assumptions related to assets and liabilities, at the dates of the consolidated financial statements and the reported amounts of expenses during the reporting period. Areas where management uses subjective judgments include, but are not limited to, right-of-use assets, lease obligations, impairment of long-lived assets, stock-based compensation, accrued research and development costs, revenue from collaborations, deferred revenue, redeemable convertible preferred stock liability and pension liabilities in the accompanying consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.
Foreign currency
The Company’s foreign subsidiaries use the U.S. dollar as their functional currency, and they initially measure the foreign currency denominated assets and liabilities at the transaction date. Monetary assets and liabilities are then re-measured at exchange rates in effect at the end of each period, and non-monetary assets and liabilities are converted at historical rates. A re-measurement loss was recognized during the year ended December 31, 2022 of $42,000, and a re-measurement loss was recognized during the year ended December 31, 2021 of $6,000, and are
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reflected within interest and other income (expense), net on the consolidated statements of operations and comprehensive loss.
Segment information
The Company has determined that the Chief Executive Officer is its Chief Operating Decision Maker. The Company’s Chief Executive Officer reviews financial information presented on a consolidated basis for the purposes of assessing the performance and making decisions on how to allocate resources. Accordingly, the Company has determined that it operates in a single reportable segment. No product revenue has been generated since inception.
The Company has $4.1 million and $0.7 million of fixed assets in Aligos-US and Aligos-Belgium, respectively, as of December 31, 2022 and $5.0 million and $1.2 million of fixed assets in Aligos-US and Aligos‐Belgium, respectively as of December 31, 2021.
Cash equivalents
The Company considers all highly liquid investments purchased with original maturities of 90 days or less at acquisition to be cash equivalents.
Restricted cash
As of December 31, 2022 and 2021, the restricted cash balance was $0.1 million and $0.2 million, respectively, and was used primarily to secure letters of credit in relation to the Company’s operating leases and deposits on rental assets (Note 6), as well as employee withholdings for the employee stock purchase plan.
Investments
The Company generally invests its excess cash in money market funds and investment grade short-to-intermediate-term fixed income securities. Such investments are included in cash, cash equivalents, short-term and long-term investments on the consolidated Balance Sheets.
The Company determines the appropriate classification of short-term and long-term securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity, otherwise securities are classified as available-for sale. Held-to-maturity securities are carried at amortized cost. Available-for-sale debt securities are measured and reported at fair value using quoted prices in active markets for similar securities. Unrealized gains and losses on available-for-sale securities are reported as a separate component of stockholders’ equity. Premiums or discounts from par value are amortized to investment income over the life of the underlying investment. The cost of securities sold is determined on a specific identification basis, and realized gains and losses are included in interest and other income (expense), net within the consolidated statements of operations and comprehensive loss.
For both held-to-maturity and available-for-sale investments, the Company periodically reviews each individual security position that has an unrealized loss, or impairment, to determine if that impairment is other-than-temporary. If the Company believes an impairment of a security position is other than temporary, based on available quantitative and qualitative information as of the report date, the loss will be recognized as other income (expense), net, in the Company’s consolidated statements of operations and a new cost basis in the investment is established. No impairment charges were recorded during the years ended December 31, 2022 and 2021.
As of December 31, 2022 and 2021, investments consisted of Certificates of Deposit and U.S. Treasury securities, with original maturities of up to 1.50 years.
Concentrations of credit risk and significant suppliers
The Company has no significant off-balance sheet risk, such as foreign exchange contracts, option contracts, or other foreign hedging arrangements. Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, restricted cash and investments. Periodically, the Company maintains deposits in accredited financial institutions in excess of federally insured limits. The Company deposits its cash in financial institutions that it believes have high credit quality and has not experienced any losses on such accounts and does not believe it is exposed to any unusual credit risk beyond the normal credit risk associated with commercial banking relationships. The Company generally invests its excess capital in money market funds, U.S. treasury bonds, U.S. treasury bills and certificates of deposit that are subject to minimal credit and market risks.
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The Company is dependent on various third parties to manufacture compounds for the Company to conduct research and studies for its programs. These programs would be adversely delayed by a significant interruption in the supply of active pharmaceutical ingredients.
Leases
The Company determines if an arrangement is a lease at the inception of the lease. Operating leases are included in operating lease right-of-use (ROU) assets and operating lease liabilities in the consolidated balance sheet. Finance leases are included in property and equipment and finance lease liabilities in the consolidated balance sheet.
ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. When the Company’s leases do not provide an implicit rate, an incremental borrowing rate is used based on the information available at the commencement dates in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The operating lease ROU assets also include any lease payments made and excludes lease incentives when paid by the Company or on the Company’s behalf. The Company’s lease terms may include the period covered by options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components. The Company elected to not separate lease and non-lease components for all of its building leases. For vehicle leases, lease and non-lease components are accounted for separately. The Company also made an accounting policy election to recognize lease expense for leases with a term of 12 months or less on a straight-line basis over the lease term and not recognize ROU assets or lease liabilities for such leases.
Property and equipment
Property and equipment is stated at cost less accumulated depreciation, and is depreciated using the straight-line method over the estimated useful life of the asset, which are as follows:
Lab equipment 3 years
Computer equipment 3 years
Furniture and office equipment 3-8 years
Vehicles 4 years
Leasehold improvements Shorter of the useful life orremaining lease term
Expenditures for repairs and maintenance of assets are charged to expense as incurred. Upon retirement or sale, the cost and related accumulated depreciation of assets disposed of are removed from the accounts and any resulting gain or loss is included in loss from operations.
Impairment of long-lived assets
The Company regularly reviews the carrying amount of its property, equipment and intangible assets to determine whether indicators of impairment may exist which warrant adjustments to carrying values or estimated useful lives. If indications of impairment exist, projected future undiscounted cash flows associated with the asset are compared to the carrying amount to determine whether the asset’s value is recoverable. If the carrying value of the asset exceeds such projected undiscounted cash flows, the asset will be written down to its estimated fair value. No impairment charges were recorded during the years ended December 31, 2022 or 2021.
Research and development expenses
Research and development costs are expensed as incurred. Research and development expenses consist of costs incurred in performing research and development activities, including salaries, stock-based compensation and benefits, facilities costs, depreciation, and third-party license fees. Non-refundable prepayments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized.
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In-process research and development (IPR&D) expense represents the costs to acquire technologies to be used in research and development that have not reached technological feasibility or have no alternative future uses and thus are expensed as incurred. IPR&D expense also includes upfront license fees and milestones paid to collaborators for technologies with no alternative use.
Collaborative arrangements
The Company enters into collaboration arrangements with pharmaceutical and other partners, under which the Company may grant licenses to its collaboration partners to research and develop potential drug candidates. Consideration under these contracts may include an upfront payment, development, regulatory, sales and other milestone payments. Contractual payments received for research and development activities performed are recognized on a gross basis in revenue from collaboration arrangements.
The Company may also perform research and development activities under the collaboration agreements where the Company may be granted licenses from its collaboration partners. Contractual payments to the other party in collaboration agreements and costs incurred by the Company are recognized on a gross basis in research and development expenses. Royalties and license payments are recorded as due.
When the Company enters into collaboration arrangements, the Company assesses whether the arrangement falls within the scope of ASC 808, Collaborative Arrangements (ASC 808) based on whether the arrangement involves joint operating activities and whether both parties would be active participants and would be exposed to significant risks and rewards of the arrangement. To the extent that the arrangement falls within the scope of ASC 808, the Company assesses whether the payments between the parties fall within the scope of other accounting literature such as ASC 606, Revenue from Contracts with Customers (ASC 606).
During the year ended December 31, 2022, the Company did not make any milestone payments. No royalties were due; therefore, the Company did not pay or expense any royalties. During the year ended December 31, 2021, a development milestone was met and so the Company made a payment of $0.5 million. The milestone payments were included in research and development in the consolidated statement of operations. The upfront payment received during the year ended December 31, 2021 was recorded on the consolidated balance sheet as deferred revenue from collaborations.
Fair value measurements
Certain assets and liabilities of the Company are carried at fair value under U.S. GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Unobservable inputs that are supported by little or no market activity that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
Stock-based compensation
The Company’s stock-based awards consist of restricted stock awards and stock options. For stock-based awards issued to employees and nonemployees, the Company measures the estimated fair value of the stock-based awards on the date of grant and recognizes compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective awards. The Company records expense for awards with service-based vesting using the straight-line method. The Company accounts for forfeitures as they occur.
The Company classifies stock-based compensation expense in its consolidated statements of operations and comprehensive loss in the same manner in which the award recipient’s cash compensation costs are classified.
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The fair value of each restricted stock award is determined based on the number of shares granted and the value of the Company’s common stock on the date of grant. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option-pricing model requires the use of a number of assumptions including the fair value of the common stock, expected volatility, risk-free interest rate, expected dividends, and expected term of the option.
The Company determined the expected stock volatility using a weighted-average of the historical volatility of a group of guideline companies that issued options with substantially similar terms, and expects to continue to do so until such time as the Company has adequate historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the simplified method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The Company has not paid, and does not anticipate paying, cash dividends on its common stock; therefore, the expected dividend yield is assumed to be zero.
The fair value of the Company’s 2020 Employee Stock Purchase Plan (the ESPP) is determined on the date the offering period begins using a Black-Scholes option-pricing model and similar assumptions for stock options as described above.
See Note 8 for the assumptions used by the Company in determining the grant date fair value of stock-based awards granted, as well as a summary of the stock-based award activity under the Company’s stock-based compensation plan for years ended December 31, 2022 and 2021.
Income taxes
Deferred tax assets and liabilities are determined on the basis of the differences between the consolidated financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established.
The Company accounts for uncertain tax positions recognized in the consolidated financial statements by prescribing a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related interest and penalties.
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 shares of common stock outstanding during the period, without consideration for potentially dilutive securities.
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 and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, redeemable convertible preferred stock, stock options, common stock subject to repurchase related to early exercise of stock options, unvested restricted stock subject to repurchase, warrants and convertible notes are considered to be potentially dilutive securities.
Accordingly, in periods in which the Company reports a net loss, diluted net loss per share is the same as basic net loss per share, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.
Benefit plans
The Company has established a defined contribution savings plan for its employees in Aligos-US under Section 401(k) of the Internal Revenue Code, and a defined benefits plan for its employees in Aligos-Belgium.
The Company uses the standard method for the recognition of the actuarial results as described in ASC 715. This means application of a 10% corridor and amortization over the expected average remaining working lives of
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the employees. The plan contains benefits to the plan participant on the normal plan retirement date and benefits to the partner after death of the plan participant. This plan is recognized under ASC 715.
Recently issued accounting standards
In June 2016, the FASB issued ASU No. 2016-13. Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. Currently, U.S. GAAP delays recognition of the full amount of credit losses until the loss is probable of occurring. Under this ASU, the income statement will reflect an entity’s current estimate of all expected credit losses. The measurement of expected credit losses will be based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses (ASU 2018-19), which clarifies that receivables from operating leases are accounted for using the lease guidance and not as financial instruments. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses (ASU 2019-04), which clarifies the new expected credit loss methodology for loans, receivables and other financial assets, including recoveries and accrued interest on receivables. In November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses (ASU 2019-11), which clarifies guidance around how to report expected recoveries. The standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the potential impact of this standard on its consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12). The guidance removes specific exceptions to the general principles in ASC 740, improves application of income tax-related guidance and reduces complexity related to the accounting for income taxes. The standard is effective for fiscal years beginning after December 15, 2021, and interim periods with fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company has evaluated the impact of this standard and there is not a material impact on its consolidated financial statements.
From time to time, new accounting pronouncements are issued by FASB that the Company adopts as of the specified effective date. The Company qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and has the option to not “opt out” of the extended transition related to complying with new or revised accounting standards. This means that when a standard is issued or revised and it has different application dates for public and nonpublic companies, the Company has the option to adopt the new or revised standard at the time nonpublic companies adopt the new or revised standard and can do so until such time that the Company either (i) irrevocably elects to “opt out” of such extended transition period or (ii) no longer qualifies as an emerging growth company.
3. Property and equipment
The components of property and equipment were as follows as of December 31, 2022 and 2021:
Furniture and office equipment 739 472
Asset under construction 22 22
Accumulated depreciation (9,568 ) (7,262 )
During the years ended December 31, 2022 and December 31, 2021, depreciation expense was $2.3 million and $3.0 million, respectively. Finance leases for vehicles and lab equipment are also included in property and equipment on the consolidated balance sheets (Note 6).
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4. Investments
As of December 31, 2022 and 2021, amortized cost, gross unrealized gains and losses, and estimated fair values of total fixed-maturity securities were as follows:
Amortized Gross Unrealized Gross Unrealized Estimated
(in thousands) Cost Gain Loss Fair Value
Available-for-sale securities:
Certificates of deposit - - - -
Amortized Gross Unrealized Gross Unrealized Estimated
(in thousands) Cost Gain Loss Fair Value
Available-for-sale securities:
Changes in fair value are related to changes in market interest rates. The Company expects to collect all contractual principal and interest payments.
Amortized cost and estimated fair value of fixed-maturity securities at December 31, 2022 by contractual maturity were as follows:
(in thousands) AmortizedCost EstimatedFair Value
Amounts maturing in:
More than one year — —
The Company recorded interest income of $1.5 million and $0.2 million, respectively, during the years ended December 31, 2022, and 2021, as a component of interest and other income, net on the Company’s consolidated statement of operations and comprehensive loss.
5. Accrued liabilities
Accrued liabilities consisted of the following as of December 31:
Liability for early exercised stock options 66 276
6. Leases
The Company has operating and finance leases for corporate offices, research and development facilities, and certain vehicles and lab equipment. These leases have remaining lease terms of four to six years, some of which include options to extend the leases for five to eight years. The Company has determined that it is not reasonably certain to exercise the options under any leases. The lease of research and development facilities includes costs for
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utilities and common area maintenance which have been included in the calculation of lease payments. Differences between lease payments as measured at lease inception and variations in monthly payments will be recognized as operating expenses in the period in which the obligation is incurred. The Company entered into a 5-year lease in the fourth quarter of 2021. The lease is for approximately 12,000 square feet of office space in South San Francisco, with a renewal option for an additional 5-years, which we are not certain to renew at this time. The rental payments under the lease agreement are approximately $2.7 million over the lease term.
Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the Company recognizes lease expense for these leases on a straight-line basis over the lease terms. Leases with terms greater than 12 months are included in operating lease ROU assets and operating lease liabilities in the Company’s consolidated balance sheets as of December 31, 2022 and 2021. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Maturities of lease liabilities as of December 31, 2022, were as follows:
(in thousands) OperatingLease FinanceLease
Year ending December 31:
Thereafter - —
Less: imputed interest (2,616 ) (20 )
Present value of lease liabilities 12,236 338
Less: current portion (3,035 ) (108 )
Lease liabilities net of current portion $ 9,201 $ 230
The components of lease expense were as follows for the years ended December 31, 2022 and 2021:
Finance lease cost:
Amortization of right-of-use assets 108 107
Interest on lease liabilities 13 15
Total finance lease cost $ 121 $ 122
Short-term lease cost $ — $ 89
The Company made payments of $3.4 million and $2.8 million during the years ended December 31, 2022, and 2021, respectively, which are included as cash flow from operations on the consolidated statements of cash flows.
As of December 31, 2022 and 2021, $0.7 million and $0.6 million of finance lease ROU assets, respectively, were presented as part of property and equipment on the consolidated balance sheet with accumulated amortization of $0.3 million and $0.2 million, respectively.
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Additional information related to the Company’s leases was as follows as of December 31:
Operating Lease:
Weighted-average remaining lease term (years) 4.21 5.18
Weighted-average discount rate 9.04 % 9.08 %
Finance Lease:
Weighted-average remaining lease term (years) 3.26 3.83
Weighted-average discount rate 5.15 % 4.86 %
7. Capital stock
Common stock
On October 20, 2020, the certificate of incorporation was amended to increase the total shares of Common Stock authorized for issuance to 320,000,000 and decrease the total shares of preferred stock authorized for issuance to 10,000,000 with a par value of $0.0001 per share. 300,000,000 shares of the Common Stock were designated as “Voting Common Stock” and 20,000,000 shares of the Common Stock were designated as “Non-Voting Common Stock”.
The holders of shares of voting Common Stock are entitled to one vote for each share of Common Stock at all meetings of stockholders.
Preferred stock
As of December 31, 2022 and 2021, there were 10,000,000 shares of preferred stock authorized and no preferred stock issued.
8. Stock-based compensation
2018 Equity incentive plan
The Company’s 2018 Equity Incentive Plan (the 2018 Plan) allows the Company to issue restricted stock awards and restricted stock units, and to grant incentive stock options or non-qualified stock options. Incentive stock options may be granted only to the Company’s employees including officers and members of the Board who are also employees. Restricted stock awards, restricted stock units and non-qualified stock options may be granted to employees, members of the Board, outside advisors, and consultants of the Company (the Participants). The Company is authorized to issue awards for 4,913,665 shares of Common Stock under the 2018 Plan. The Company has granted awards of common stock in the form of 4,279,693 shares as of December 31, 2022 with none remaining available for future grant.Following the Company’s IPO in October 2020, all remaining shares from the 2018 Plan will be available for issuance under the 2020 Plan (as defined below).
2020 Incentive award plan
The Company adopted the 2020 Incentive Award Plan (the 2020 Plan) effective October 15, 2020. The 2020 Plan provides for a variety of stock-based compensation awards, including stock options, stock appreciation rights, or SARs, restricted stock awards, restricted stock unit awards, performance bonus awards, performance stock unit awards, dividend equivalents, or other stock or cash based awards. The Company has granted 8,967,670 shares subject to awards as of December 31, 2022 with 562,010 remaining available for future grant.
Following the effectiveness of the 2020 Plan, the Company will not make any further grants under the 2018 Plan. However, the 2018 Plan will continue to govern the terms and conditions of the outstanding awards granted under this plan. Shares of common stock subject to awards granted under the 2018 Plan that are forfeited or lapse unexercised and which following the effective date of the 2020 Plan are not issued under the 2018 Plan will be available for issuance under the 2020 Plan.
2020 Employee stock purchase plan
The Company adopted the 2020 Employee Stock Purchase Plan (the 2020 ESPP) effective on October 15, 2020. The 2020 ESPP enables eligible employees of the Company to purchase shares of common stock at a discount
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to fair market value. The Company has initially reserved for issuance 368,901 shares of common stock pursuant to the 2020 ESPP. As of December 31, 2022, 265,465 grants of awards under this plan have been made.
During the year ended December 31, 2022 and 2021, the Company's 2020 ESPP compensation expense was $1.3 million and $0.8 million, respectively. The assumptions that the Company used to determine the grant-date fair value of shares granted to participants were as follows, disclosed on a grant date basis:
Expected term (in years) 0.5 - 2.0 years 0.5 - 2.0 years
Dividend yield — —
Stock options
The exercise price for incentive stock options is at least 100% of the fair market value on the date of grant for stockholders owning less than 10% of the voting power of all classes of stock, or at least 110% of the fair market value for stockholders owning more than 10% of the voting power of all classes of stock. Options generally expire in 10 years and vest over periods determined by the Board, generally 48 months. Certain stock options referred to as “early exercise stock options” permit the holders to exercise the option in whole or in part prior to the full vesting of the option in exchange for unvested shares of Restricted Stock with respect to any unvested portion of the option so exercised.
During the years ended December 31, 2022 and December 31, 2021, the Company’s stock option compensation expense was approximately $13.4 million and $12.2 million, respectively, and there was no recognized tax benefit in either year. As of December 31, 2022, the unamortized expense balance was $28.3 million, to be amortized over a weighted-average period of 2.26 years.
The assumptions that the Company used to determine the grant-date fair value of stock options granted to Participants were as follows, presented on a weighted-average basis:
Expected term (in years) 5.95 5.72
Risk-free interest rate 2.20 % 0.99 %
Dividend yield — —
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Stock option activity during the year ended December 31, 2022 and 2021 was as follows:
The weighted-average grant date fair value of stock options granted was $1.80 per share during the year ended December 31, 2022. The weighted-average grant date fair value of stock options granted was $13.76 per share during the year ended December 31, 2021.
During the years ended December 31, 2022 and 2021 the Company did not issue shares for unvested stock options. As of December 31, 2022 and 2021, there were 28,711 and 163,855 shares of Common Stock, respectively, held by employees subject to repurchase at an aggregate price of $0.1 million and $0.3 million, respectively. A corresponding liability was recorded and included in accrued expenses on the consolidated balance sheet as of December 31, 2022 and 2021.
Restricted stock awards
The Company may grant restricted stock purchase awards to the Participants to purchase restricted stock under the Company’s Plan, which are subject to vesting conditions. The purchase prices of the restricted stock are determined by the Board. The Company has a right to repurchase the shares if the Participant’s service period is not fulfilled or upon termination of service at the original per share issuance price. The right of repurchase lapses over a service period which is typically four years with 25% vesting on the first anniversary of the vesting commencement date and 1/48 each month thereafter.
Before the adoption of the Company’s Plan, the Company granted 502,964 restricted stock awards to employees and founders. These restricted stock awards have similar characteristics to the restricted stock awards granted under the Company’s Plan, other than the right of repurchase, which typically lapses over three years with 33% vesting on the first anniversary of the vesting commencement date and 1/36 each month thereafter.
During the years ended December 31, 2022 and December 31, 2021, the Company recorded a total stock-based compensation expense of $0.1 million and $0.4 million, respectively, related to the restricted stock awards. As of December 31, 2022, there was no unrecognized stock-based compensation costs related to outstanding unvested restricted stock awards that are expected to vest.
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The following table summarizes the Company’s restricted common stock activity for years ended December 31, 2022 and 2021:
Restricted stock awards granted — —
Restricted stock awards granted — —
Issued and unvested as of December 31, 2022 0 $ — $ —
Stock-based compensation expense was allocated as follows for the years ended December 31, 2022 and December 31, 2021:
9. Fair value measurements
The following tables present the fair value of the Company’s financial instruments that are measured or disclosed at fair value on a recurring basis:
Fair Value Measurements as of December 31, 2022
(in thousands) Level 1 Level 2 Level 3
Assets:
Cash equivalents $ 81,347 $ — $ —
Certificates of deposit - — —
U.S. Treasury bonds 44,480 — —
Fair Value Measurements as of December 31, 2021
(in thousands) Level 1 Level 2 Level 3
Assets:
Cash equivalents $ 186,816 $ — $ —
Certificates of deposit 3,918 — —
U.S. Treasury bonds 15,110 — —
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10. License and collaboration agreements
Agreement with Emory University (Emory)
In June 2018, the Company entered into a license agreement with Emory (the Emory License Agreement), pursuant to which Emory granted the Company a worldwide, sublicenseable license under certain of its intellectual property rights to make, have made, develop, use, offer to sell, sell, import and export products containing certain compounds relating to Emory’s hepatitis B virus capsid assembly modulator technology, for all therapeutic and prophylactic uses. Such license is initially exclusive with respect to specified licensed patents owned by Emory and non-exclusive with respect to certain of Emory’s specified know-how. In June 2022, the license to such patents became non-exclusive with respect to all fields except for the treatment and prevention of HBV; however, the Company may select up to six compounds which will maintain exclusivity with respect to all therapeutic and prophylactic uses. With respect to all other compounds that are enabled by the licensed patents, those which are jointly invented by the Company and Emory or inventors in the Schinazi laboratory, or which are disclosed in a specified licensed patent, are licensed to the Company exclusively including as to Emory; whereas all other such compounds are licensed to the Company non-exclusively. Under the terms of the Emory License Agreement, the Company is obligated to use commercially reasonable efforts to bring licensed products to market in accordance with a mutually agreed upon development plan. Unless terminated earlier by either party in accordance with the provisions thereof, the Emory License Agreement shall continue until the expiration of the last–to-expire of the patents licensed to the Company thereunder.
In June 2020, the Company amended the license agreement with Emory. Pursuant to the amended license agreement, Emory granted the Company additional patent rights to certain compounds targeting the treatment or prevention of HBV. As consideration for the additional rights, the Company made a one-time, non-refundable payment to Emory in the amount of $0.2 million, with an additional obligation to pay up to a maximum of $35,000. On the same date, the Company entered into a collaboration agreement with Emory, with the initial research plan pertaining to the synthesis and evaluation of the compounds licensed through the additional patent rights granted in the amended license agreement. The research plan terminates one year from the effective date, with the Company having an option to extend for a second year. In connection with the research plan, the Company will provide Emory funding up to $0.3 million per year.
The Company has agreed to pay Emory up to an aggregate of $125.0 million upon the achievement of specified development, regulatory, and commercial milestones, and all ongoing patent costs. During the year ended December 31, 2022, the Company had $0.2 million expenses related to milestone payments. During the year ended December 31, 2021, the Company made a payment of $0.2 million in relation to milestone payments. The Company also agreed to pay Emory tiered single-digit royalties on worldwide annual net sales of licensed products, on a quarterly basis and calculated on a product-by-product basis. With respect to licensed products containing any of a specified subset of the licensed compounds, such royalties range from a mid-single digit to a high-single digit percentage rate. With respect to licensed products which do not contain such compounds, the royalties span a range of percentage rates within the mid-single digits if a Phase 1 clinical trial is initiated for the product within three years of the effective date of the Emory License Agreement, and range from a low-single digit to a mid-single digit rate if a Phase 1 clinical trial is initiated more than three years after the effective date. During the years ended December 31, 2022 and December 31, 2021, the Company made no payments associated with royalties.
Agreement with Luxna Biotech Co., Ltd. (Luxna)
On December 19, 2018, the Company entered into a license agreement with Luxna, pursuant to which Luxna granted the Company an exclusive, worldwide, sublicenseable license under certain of Luxna’s intellectual property rights to research, develop, make, have made, and commercialize for all therapeutic and prophylactic uses, (i) products containing oligonucleotides targeting the hepatitis B virus genome, (ii) products containing certain oligonucleotides targeting up to three genes which contribute to NASH, which the Company may select at any time during the first eight years of the term, to the extent not licensed to a third party, and (iii) products containing oligonucleotides targeting up to three genes which contribute to hepatocellular carcinoma, which the Company may select at any time during the first three years of the term. As consideration for this agreement, the Company paid an upfront license fee of $0.6 million.
In April 2020, the Company amended the license agreement with Luxna. Pursuant to the amended license agreement, Luxna granted the Company an exclusive, worldwide license under the licensed patents to research, develop, make, have made and commercialize products containing oligonucleotides targeting three families of
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viruses: Orthomyxoviridae, Paramyxoviridae, and Coronaviridae (a family which includes SARS-CoV-2). As consideration for the amended license agreement, the Company paid Luxna a one-time non-refundable fee of $0.2 million in April 2020.
The Company is obligated to make payments to Luxna, in aggregate, totaling up to but no more than $55.5 million upon the achievement of specified development, regulatory, and commercial milestones. During the year ended December 31, 2022, the Company did not make any milestone payments, and in the year ended December 31, 2021, the Company recognized $0.5 million in milestone payments. The Company is also required to pay Luxna a low-single digit royalty percentage on net sale of applicable products, if any. During the years ended December 31, 2022 and December 31, 2021, the Company made no payments associated with royalties.
Agreement with Katholieke Universiteit Leuven (KU Leuven)
On June 25, 2020, the Company entered into a Research, Licensing and Commercialization Agreement (KU Leuven Agreement) with KU Leuven, under which the Company is collaborating with KU Leuven’s Rega Institute for Medical Research, as well as its Centre for Drug Design and Discovery, to research and develop potential protease inhibitors for the treatment, diagnosis or prevention of coronaviruses, including of SARS-CoV-2. Unless terminated earlier by either party in accordance with provisions in the agreement, the collaboration period will terminate at the earlier of completion of all collaboration activities or 2.5 years. In connection with the KU Leuven Agreement, KU Leuven and the Company granted each other exclusive cross-licenses to use certain know-how and existing patents of the other party as well as certain joint know-how and joint patents to carry out research and development collaboration activities during the collaboration period. KU Leuven granted to the Company an exclusive (including as to KU Leuven), worldwide license under certain of KU Leuven’s know-how and existing patents, and certain joint patents and joint know-how, to manufacture and commercialize the licensed products for the treatment, diagnosis or detection of viral infections in humans. KU Leuven reserved the right to use all KU Leuven knowhow, existing KU Leuven patents, joint patents and joint know-how for academic and non-commercial research and teaching purposes. As consideration for this license, the Company is obligated to make payments to KU Leuven, in aggregate, totaling up to but no more than $30.0 million upon the achievement of certain commercial sales milestones. For each licensed product developed through KU Leuven and the Company’s collaborative effort, the Company is obligated to make payments to KU Leuven, in aggregate, totaling up to $32.0 million upon the achievement of certain development and regulatory milestones. The Company is also required to pay KU Leuven a low-to-mid-single digit royalty percentage, subject to certain adjustments, on net sales of applicable products, if any. Unless terminated earlier by either party, the agreement shall continue until the expiration of the last to expire royalty term, which is the later of the expiration or termination of the last valid patent claim covering the manufacture, use, sale or importation of the licensed product in a particular country or 10 years after the first commercial sale of a licensed product. During the years ended December 31, 2022 and December 31, 2021, the Company recognized no expenses related to milestone payments.
Agreements with Merck
In December 2020, the Company and Merck Sharp & Dohme Corp. (Merck), a subsidiary of Merck & Co., Inc., entered into an exclusive License and Research Collaboration Agreement (Original Agreement) under which Merck and the Company agreed to apply the Company’s oligonucleotide platform technology to discover, research, optimize and develop oligonucleotides directed against a NASH target and up to one additional liver-targeted cardiometabolic and/or fibrosis target. Under the terms of the Original Agreement, the Company received an upfront payment of $12 million from Merck. With respect to the collaboration target, the Company is eligible to receive up to $458.0 million in development and commercialization milestones as well as tiered royalties on net sales of licensed products. These potential payments consist of (i) potential development milestones (such as for the first dosing of an animal specimen in a Good Laboratory Practice toxicology study, and initiation of Phase 1, 2 and 3 clinical trials), (ii) regulatory milestones (such as for marketing authorizations for a product in certain countries) and (iii) sales-based milestones. The Company is primarily responsible for designing, preparing and evaluating the oligonucleotide molecules and delivering optimized lead molecules, and Merck is responsible for subsequent research, clinical development and commercialization efforts.
In January 2022, the Company and Merck entered into an amendment to the exclusive License and Research Collaboration Agreement (the First Amendment, together with the Original Agreement, the Expanded Arrangement). As a result of the First Amendment, our collaboration with Merck was expanded to include our grant of rights to Merck of an early-stage program with respect to a second undisclosed NASH target, on which the Company had previously been working independently. In addition, under this Expanded Arrangement, Merck has
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the ability to add an additional third target of interest in the cardiometabolic/fibrosis space to the collaboration. This right to add an additional third target expired in January 2023. Under the Expanded Arrangement, the Company received an upfront payment of $15 million from Merck for our grant of rights to the program directed at a second undisclosed NASH target. Moreover, the Company may receive an additional payment of $15 million from Merck if Merck elects to designate a third target for collaboration. With respect to the second target in the collaboration, the Company is eligible to receive up to approximately $460.0 million in development and commercialization milestones as well as tiered royalties on net sales. These potential payments consist of (i) potential development milestones (such as for the first dosing of an animal specimen in a Good Laboratory Practice toxicology study, and initiation of Phase 1, 2 and 3 clinical trials), (ii) regulatory milestones (such as for marketing authorizations for a product in certain countries) and (iii) sales-based milestones.
In February 2023, Merck provided to the Company written notice of termination for one of the targets in the collaboration.
The Company determined that the Original Agreement and First Amendment fall within the scope of ASC 808, Collaborative Arrangements (ASC 808), due to Merck and the Company being joint active participants, as well as both parties having significant risks and rewards. The Company analogized to ASC 606, Revenue from Contracts with Customers (ASC 606), for the accounting of payments including upfront payments and other milestones. Management of the Company determined that there was one performance obligation for each of the agreements given the deliverables are not distinct. The Company evaluated the performance obligation within each agreement and determined the performance obligations are satisfied over time as Merck jointly owns any collaboration intellectual property that is developed during the research term. Given the nature of the arrangements, the Company believes that the satisfaction of its performance obligations is best measured by the progress of its efforts. As such, the Company has used an input method based on costs incurred to recognize revenue associated with the upfront payments. This assessment is performed separately for each of the Original Agreement and the First Amendment, and the Company recognizes revenue over time based on the costs incurred. The effect of any updates to the estimated overall costs are recorded as a change in estimate. In addition, variable consideration (e.g., milestone payments) were evaluated based on the Company’s analysis that the possibility of achieving any of the milestone payments is remote, and therefore determined to be constrained and excluded from the transaction price. Similarly, the Company accounts for the future royalties under the sales-based royalty exception in ASC 606-10-55-65 through 55-65B therefore they are not considered in the transaction price and expected to be recognized when future sales occur since that is expected to occur after the performance obligation has been fully satisfied.
During the years ended December 31, 2022, and 2021, the Company recognized $13.9 million and $4.4 million in revenue from collaborative arrangements related to upfront payments. During the years ended December 31, 2022, and 2021, the Company recognized no revenue from collaborative arrangements related to milestone payments. The unrecognized portion of the upfront payments received during the years ended December 31, 2022 and 2021 is recorded on the consolidated balance sheets as “Deferred revenue from collaborations”.
Changes in deferred revenue balances arose as a result of the Company recognizing the following revenue from collaborative arrangements during the periods below (in thousands):
Year EndedDecember 31,
Deferred revenue from collaborations as of January 1 $ 7,641 $ 12,000
Consideration received in the year $ 15,000 $ —
Revenue from collaborations recognized in the year $ (13,898 ) $ (4,359 )
Deferred revenue from collaborations as of December 31 $ 8,743 $ 7,641
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11. Income taxes
The components of the current provision for income taxes were as follows for the years ended December 31, 2022 and 2021:
Current:
State $ — $ —
Federal — —
Total current provision for income taxes $ 106 $ 143
Deferred:
State $ — $ —
Federal — —
Foreign — —
Total deferred provision for income taxes $ — $ —
The Company did not have any deferred provision for income taxes for the years ended December 31, 2022 and 2021.
A reconciliation of the expected income tax (benefit) computed using the federal statutory income tax rate to the Company’s effective income tax rate is as follows for the years ended December 31, 2022 and 2021:
Income tax computed at federal statutory rate 21.00 % 21.00 %
State taxes, net of federal benefit 6.95 % 6.91 %
R&D credit carryovers 1.25 % 0.90 %
Change in valuation allowance -26.32 % -27.42 %
Stock based compensation -1.08 % -1.19 %
Permanent differences -1.91 % -0.31 %
Change in fair value of derivatives 0.00 % 0.00 %
Effective income tax rate -0.11 % -0.11 %
The components of the deferred tax assets and liabilities were as follows at December 31:
Deferred tax assets:
Deferred tax liabilities:
Right of use assets $ (2,803 ) $ (3,205 )
Stock-based compensation — —
Property and equipment (365 ) (570 )
Total deferred tax liabilities $ (3,168 ) $ (3,775 )
Total deferred income taxes $ — $ —
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Management believes that, based on a number of factors, including the Company’s historical operating performance and accumulated deficit, it is more likely than not that the deferred tax assets will not be utilized, such that a full valuation allowance has been recorded againstthe Company’s deferred tax assets. In assessing the reliability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized on a jurisdiction by jurisdiction basis. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differencesbecome deductible. The valuation allowance increased by $25.3 million and $35.2 million during the years ended December 31, 2022 and 2021, respectively.
As of December 31, 2022, the Company had $272.4 million of federal and $352.7 million of state net operating loss (NOL) carryforwards available to offset future taxable income. The Company’s federal NOL carryforwards can be carried forward indefinitely while state NOL carryforwards, if not utilized, will begin expiring in 2038. As of December 31, 2022, the Company had $3.2 million of Australia NOL carryforwards, which carryforward indefinitely. As of December 31, 2022, the Company had research and development credit carryforwards of $7.9 million and $3.9 million available to reduce future taxable income, if any, for federal and state income tax purposes, respectively. If not utilized, the federal credit carryforwards will begin expiring in 2038. The California credit carryforwards have no expiration date. Under Sections 382 and 383 of the Code, and corresponding provisions of state law, if a corporation undergoes an “ownership change” (generally defined as a greater than 50 percentage point change (by value) in its equity ownership over a rolling three-year period), the Company’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income may be limited. We performed a Code Section 382 analysis in 2021 and determined there was an ownership change that resulted in Section 382 limitations. The ownership change limited our ability to utilize NOLs against future taxable income but will not result in the expiration of any NOLs. We may in the future experience ownership changes as a result of changes in our stock ownership (some of which are not in our control). In addition, under current tax law, federal NOL carryforwards generated in periods after December 31, 2017, may be carried forward indefinitely but, in taxable years beginning after December 31, 2020, may only be used to offset 80% of our taxable income. For these reasons, our ability to utilize our NOL carryforwards and other tax attributes to reduce future tax liabilities may be limited.
The Company adopted the provisions of FASB Accounting Standards Codification (ASC) 740-10, Accounting for Uncertainty in Income Taxes, upon the date of incorporation. ASC 740-10 prescribes a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of any uncertain tax positions that have been taken or expected to be taken on a tax return. It is the Company’s policy to include penalties and interest expense related to income taxes as a component of other expense and interest expense, respectively, as necessary. During the years ended December 31, 2022 and 2021, the Company had not recognized any tax-related penalties or interest. No liability related to uncertain tax positions is recorded on the financial statements related to uncertain tax positions.
Balance, beginning of the period $ 2,441 $ 1,536
Increase related to prior year positions 687 63
Increase / (decrease) related to current year positions (28 ) 842
Balance, ending of the period $ 3,100 $ 2,441
The Company does not expect that its uncertain tax positions will materially change in the next twelve months. The reversal of the uncertain tax benefits would not impact the Company's effective tax rate as the Company continues to maintain a full valuation allowance against its deferred tax assets.
The Company files income tax returns in the United States, including California, and other states, Australia, Belgium, and China. The Company is not currently under examination by income tax authorities in federal, state or other jurisdictions. All income tax returns will remain open for examination by the federal, state and foreign authorities for three or four years, from the date of utilization of any NOLs or credits.
In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (GILTI) provisions of the Tax Cuts and Jobs Act of 2017. The GILTI provisions impose a tax on foreign
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income in excess of a deemed return on tangible assets of foreign corporations. The guidance allows companies to make an accounting policy election to either (i) account for GILTI as a component of tax expense in the period in which they are subject to the rules (the period cost method), or (ii) account for GILTI in the Company’s measurement of deferred taxes (the deferred method). After completing the analysis of the GILTI provisions, the Company elected to account for GILTI using the period cost method.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the CARES Act) was signed into law. The CARES Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, NOL carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company analyzed the provisions of the CARES Act and determined there was no significant impact to its income taxes for the year ended December 31, 2022.
On June 29, 2020, the California Governor signed into law Assembly Bill 85 (A.B. 85). A.B. 85, which includes several tax measures, provides for a three-year suspension of the use of NOLs for medium and large businesses and a three-year cap on the use of business incentive tax credits to offset no more than $5 million of tax per year. Generally, A.B. 85 suspends the use of NOLs for taxable years 2020, 2021, and 2022 for taxpayers with taxable income of $1 million or more. Since the Company did not generate California source taxable income of more than $1 million in taxable years 2020, 2021 or 2022, no impact resulted.
On December 27, 2020, the Consolidated Appropriations Act, 2021 (the CAA) was signed into law. The CAA includes provisions meant to clarify and modify certain items put forth in the CARES Act, while providing aid to businesses affected by the pandemic. The CAA allows deductions for expenses paid for by the Paycheck Protection Program and Economic Injury Disaster Loan (EIDL) Program, clarifies forgiveness of EIDL advances, and includes other business provisions. The Company analyzed the provisions of the CAA and determined there was no significant impact to its 2022 tax provision.
12. Commitments and contingencies
From time to time, the Company may have certain contingent liabilities, including legal matters that arise in the ordinary course of its business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated. The Company had no contingent liabilities requiring accrual as of December 31, 2022 and 2021. The Company enters into contracts in the normal course of business that includes arrangements with clinical research organizations, vendors for preclinical research and vendors for manufacturing. These agreements generally allow for cancellation with notice. As of December 31, 2022, the Company had no material non-cancellable purchase commitments.
On March 26, 2022, the Company received notice of a complaint (the Complaint) filed by Janssen Biopharma, LLC (Janssen), which generally concerned an alleged breach by certain of our employees of their obligations to Janssen as prior employees of Janssen by purporting to assign to Aligos various inventions allegedly owned by Janssen. The Complaint was filed on March 9, 2022 in the Superior Court of the State of California, County of San Mateo, against the Company, Lawrence M. Blatt, Chairman, Chief Executive Officer and Director of the Company, and Leonid Beigelman, President and Director of the Company. The Complaint alleges breach of contract by Lawrence M. Blatt and Leonid Beigelman and tortious interference with contract by the Company and seeks declaratory judgment of ownership of certain intellectual property by the Company, among other claims. The Complaint states that Janssen is seeking injunctive relief, assignment of certain intellectual property from us to Janssen and monetary damages. The Company believes the allegations in the Complaint are without merit and intends to continue to defend itself vigorously.
On August 22, 2022, the Company filed its response to the Complaint and on August 4, 2022, filed counterclaims against Janssen alleging Janssen has engaged in unfair competition and promissory fraud.
13. Benefit plans
Defined contribution plans
The Company established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. The Company made matching
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contributions of $0.9 million and $0.7 million to the plan during the years ended December 31, 2022 and 2021, respectively.
Defined benefit plans—regular pension plan
ASC Topic 715, Compensation—Retirement Benefits, requires an employer to: (a) recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s under-funded status; (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year; and (c) recognize changes in the funded status of a defined benefit post retirement plan in the year in which the changes occur. Accordingly, the Company is required to report changes in its funded status on its consolidated statement of stockholders’ deficit and consolidated statement of operations and comprehensive loss.
Aligos-Belgium offers its employees a regular pension plan in the form of a defined contribution plan (the Regular Pension Plan), which contains a 1.75% legally required minimum rate of return for the participants. The Regular Pension Plan does not meet all the requirements that are needed for recognition of the plans as a defined contribution plan. The Company therefore recognizes the Regular Pension Plan as a defined benefit plan.
The Company measures the fair value of the Regular Plan assets by using Level 3 inputs, unobservable inputs that are supported by little or no market activity that are significant to determining the fair value of assets, including pricing models, discounted cash flow methodologies and similar techniques.
The net periodic benefit cost of the Pension Plan was $0.3 million and $0.2 million, and is recognized in accrued liabilities on the consolidated balance sheet as of December 31, 2022 and 2021, respectively. As of December 31, 2022, the projected benefit obligation was $1.1 million, the plan assets were $1.0 million and the net pension liability was $0.1 million. As of December 31, 2021, the projected benefit obligation was $1.0 million, the plan assets were $0.9 million, and the net pension liability was $0.1 million. The Company has recorded the unfunded amount as a liability in its consolidated balance sheet at December 31, 2022 and 2021, under the accrued liabilities caption. The unrealized actuarial gain and loss on pension benefits, net of tax, at December 31, 2022 and 2021 was $0.1 million and $0.1 million, respectively. These amounts were reflected in other comprehensive loss under the caption gain (loss) on pension plans. The Company expects to make contributions to the Pension Plan of approximately $0.2 million during 2023. The Company estimates future benefit payments from 2024 to 2027 to be $0.3 million, and from 2028 thereafter to be $0.9 million.
Defined benefit plans—Top Hat Plan
In Aligos-Belgium, the Company established a pension bonus complementary plan (the Top Hat Plan), where the bonus payments to each participant are added to the Top Hat Plan. The annual contributions to this plan are based on performance and determined on a discretionary basis by the Company. The Top Hat Plan contains a legal yield guarantee of 1.75%. The Top Hat Plan became effective as of January 1, 2019.
In 2019, the Company accounted for the Top Hat Plan in accordance with ASC 715—Compensation—Retirement Benefits, once it became effective. The Top Hat Plan does not meet all the requirements that are needed for recognition as a defined contribution plan. The Company therefore recognizes the Top Hat Plan as a defined benefit plan.
The net periodic benefit cost of the Top Hat Plan was $0.2 million and $0.4 million, and is recognized in accrued liabilities on the consolidated balance sheet as of December 31, 2022 and 2021, respectively.As of December 31, 2022, the projected benefit obligation was $1.7 million, the plan assets were $1.5 million and the net pension liability was $0.2 million. As of December 31, 2021, the projected benefit obligation was $1.7 million, the plan assets were $1.2 million, and the net pension liability was $0.5 million. The Company has recorded the unfunded amount as a liability in its consolidated balance sheet at December 31, 2022 and 2021, under the accrued liabilities caption. The unrealized actuarial gain and loss on pension benefits, net of tax, at December 31, 2022 and 2021 was $0.1 millionand $0.5 million, respectively. These amounts were reflected in other comprehensive loss under the caption gain (loss) on pension plans. The Company expects to make contributions to the Pension Plan of approximately $0.2 million during 2023. The Company estimates future benefit payments from 2024 to 2027 to be $0.2 million, and from 2028 thereafter to be $0.6 million.
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