Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following information should be read in conjunction with the consolidated financial information and the notes thereto appearing elsewhere in this Annual Report.
This discussion and other parts of this Annual Report contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Annual Report, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
Our mission is to develop therapies that change the treatment paradigm for amyotrophic lateral sclerosis, or ALS, and a broad range of other neurodegenerative diseases by keeping neurons alive. Unlike most other cells in the body that regularly die and are replaced as part of healthy function, mature neurons are normally resistant to cell death and generally cannot regenerate. We are pursuing commercialization of our product candidate, AMX0035, which we believe is the first drug candidate to show both a functional and survival benefit in a large-scale clinical trial of patients with ALS. We submitted a New Drug Submission, or NDS, in Canada in the second quarter of 2021 for AMX0035 for the treatment of ALS, which was accepted for review in the third quarter of 2021, a New Drug Application, or NDA, to the U.S. Food and Drug Administration, or FDA, in the fourth quarter of 2021, which was accepted for priority review in the same quarter and a Marketing Authorization Application, or MAA, in Europe in the first quarter of 2022, which was validated in the same quarter. The Prescription Drug User Fee Act date, the target date by which the FDA intends to complete its review and take action on the NDA for AMX0035 for the treatment of ALS, is June 29, 2022. On March 30, 2022, the FDA held a virtual meeting of its Peripheral and Central Nervous System Drugs Advisory Committee, or the Advisory Committee. At that meeting, on the question whether the data from our randomized, controlled Phase 2 CENTAUR trial and open-label extension, or OLE, trial established a conclusion that AMX0035 is effective in the treatment of patients with ALS, the Advisory Committee voted 4 (yes) and 6 (no). Although the FDA considers the recommendations of its advisory committees, the recommendation by the Advisory Committee is non-binding. The final decision regarding approval of a pending NDA is made by the FDA, and we remain committed to pursuing its approval given the pressing need for new treatments for ALS. The Prescription Drug User Fee Act date, the target date by which the FDA intends to complete its review and take action on the NDA for AMX0035 for the treatment of ALS, is June 29, 2022. We believe AMX0035 has the potential to be a foundational therapy, meaning that it could be used alone or in conjunction with other therapies to change the treatment paradigm across a broad range of neurodegenerative diseases.
AMX0035 is a dual UPR-Bax apoptosis inhibitor composed of sodium phenylbutyrate, or PB, and TURSO (also known as tauroursodeoxycholic acid, or TUDCA). Through the resolution of the unfolded protein response, or UPR, and by inhibiting translocation of the Bcl-2 Associated X-protein, or Bax, to the outer mitochondrial membrane, we have shown in multiple models that AMX0035 can keep neurons alive under a variety of different conditions and stresses, including in in vitro models of neurodegeneration, endoplasmic reticulum stress, mitochondrial dysfunction, oxidative stress and disease-specific models of a variety of other conditions, as well as in vivo models of Alzheimer’s Disease, or AD, and multiple sclerosis. We are pursuing ALS as our first indication as it is a disease of rapid and profound neurodegeneration, and we are focused on the development and potential commercialization of AMX0035 for ALS globally.
In November 2021, we initiated a global Phase 3 clinical trial of AMX0035 for the treatment of ALS, known as the PHOENIX trial, at clinical trial sites in the United States and Europe. Enrollment in this trial has completed in the United States and remains ongoing in Europe. This trial is designed to provide further data supporting the safety and efficacy of AMX0035 for the treatment of ALS and to further support our global regulatory efforts. Based on dialogue with the FDA prior to our NDA submission, including at a pre-NDA meeting recommended by the FDA and subsequent discussions, we believed that data from the PHOENIX trial would not be required for the FDA to make a determination on the approval of AMX0035 for the treatment of ALS, although we had no assurance that the FDA would not require further data before making a determination. Based on the Advisory Committee meeting held on March 30, 2022, and the FDA’s feedback at that meeting, it remains uncertain whether additional clinical data will be required to make a determination on the approval of AMX0035 for the treatment of ALS. On March 18, 2022, we also announced the launch of a United States expanded access program that the FDA has authorized for people with ALS who meet eligibility criteria for participation.
We were incorporated under the laws of the State of Delaware on January 10, 2014. In October 2020 and August 2021, we created wholly owned subsidiaries, Amylyx Pharmaceuticals Canada, Inc., or Amylyx Canada, in Calgary, Canada and Amylyx Pharmaceuticals EMEA B.V, or Amylyx EMEA, in Amsterdam, Netherlands. Since inception, we have devoted
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substantially all of our efforts to research and development activities, including recruiting management and technical staff, raising capital, producing materials for non-clinical and clinical studies, and building infrastructure to support such activities. Our expenses have primarily been for research and development and related general and administrative costs. We have generated revenues through five grants from ALS Association, ALS Finding a Cure Foundation, Cure Alzheimer’s Fund, Alzheimer’s Drug Discovery Foundation and Alzheimer’s Association, or the Grantors.
Since inception, we have financed our operations primarily through the sale and issuance of redeemable convertible preferred stock, convertible notes, PPP loan, and grant agreements with the Grantors and, to a lesser extent, a government loan. From August 2016 to November 2017, we issued and sold Series A preferred stock for an aggregate purchase price of approximately $7.7 million. In July 2017, we received $2.3 million from the issuance of convertible promissory notes, or the 2017 Notes. In November 2018, we received $13.0 million from the issuance of convertible promissory notes, or the 2018 Notes. In December 2019, we received $0.6 million from the issuance of convertible promissory notes, or the 2019 Notes. In January, February, and April 2020, we received $15.4 million in aggregate from the issuance of convertible promissory notes, or the 2020 Notes. The 2017 Notes, 2018 Notes, 2019 Notes and 2020 Notes, or the Old Notes, were to mature on December 31, 2021. We also received $0.3 million of net proceeds in April 2020 pursuant to the PPP Loan, which we repaid in full in October 2021. In June 2020, we issued and sold shares of Series B preferred stock for an aggregate purchase price of approximately $30.0 million. The Old Notes automatically converted into shares of Series B preferred stock pursuant to their original terms in June 2020 in connection with our Series B financing. From December 2020 to February 2021, we received $27.3 million from the issuance of convertible promissory notes, or the 2021 Notes, of which $1.2 million was received in December 2020 and $26.1 million was received in January and February 2021. In July 2021, we issued and sold shares of Series C-1 preferred stock, or the Series C-1 preferred stock, for an aggregate purchase price of approximately $135.0 million. The 2021 Notes automatically converted into shares of Series C-2 preferred stock pursuant to their original terms in July 2021 in connection with our sale of Series C-1 preferred stock. Grant revenue was $0.3 million for the year ended December 31, 2021, compared to $0.7 million for the year ended December 31, 2020. On January 11, 2022, we completed the initial public offering, or IPO, of our common stock pursuant to which we received aggregate net proceeds of $196.9 million after deducting underwriting discounts and commissions and other offering costs.
We have incurred operating losses since inception, including a net loss of $87.9 million and $42.3 million for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, we had an accumulated deficit of $155.8 million. These losses have resulted primarily from costs incurred in connection with research and development activities and general and administrative costs associated with our operations. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future as we advance AMX0035 and any future product candidates through preclinical and clinical development, hire additional clinical, scientific, management and administrative personnel, seek regulatory approval and pursue commercialization of any approved product candidates. To date, we have primarily developed AMX0035 internally, with assistance from our network of contract research organizations, or CROs, and other advisors. This has resulted in increased research and development spending but has enabled us to manage AMX0035 efficiently through the development and manufacturing process.
We expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, including potential collaborations with other companies, royalty financings, or other strategic transactions. Our inability to raise capital as and when needed could have a negative impact on our financial condition and ability to pursue our business strategies. There can be no assurances, however, that the current operating plan will be achieved or that additional funding will be available on terms acceptable to us, or at all.
As of December 31, 2021, we had cash, cash equivalents and short-term investments of $96.1 million. We believe that our existing cash, cash equivalents and short-term investments, together with the net proceeds from our IPO, will be sufficient to meet our anticipated operating and capital expenditure requirements for at least twelve months after the date of the filing of this Annual Report. 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. See “—Liquidity and Capital Resources—Funding Requirements” below.
Impact of COVID-19
The development of AMX0035 and any future product candidates could be disrupted and materially adversely affected in the future by a pandemic, epidemic or outbreak of an infectious disease, such as the ongoing and evolving
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COVID-19 pandemic. The spread of COVID-19 and identification of new variants of the virus has impacted the global economy and our operations, including requiring us to make certain alterations to our preclinical and clinical trial activities, such as scheduling certain work off-site and performing off-site assessments. In addition, we had to amend our CENTAUR trial protocol to allow for remote visits by patients, instead of patients making site visits and in certain cases we were forced to delay enrollment at certain sites in our Phase 2 clinical trial for AMX0035 in AD.
In spite of current rate and success of vaccination efforts, if the disruption due to the ongoing COVID-19 pandemic continues, our ongoing global Phase 3 PHOENIX clinical trial for AMX0035 for the treatment of ALS could be delayed due to government orders and site policies on account of the pandemic. Additionally, some patients may be unwilling or unable to travel to study sites, enroll in our trials or be unable to comply with clinical trial protocols, which would delay our ability to conduct preclinical studies and clinical trials or release clinical trial results, as well as delay our ability to obtain regulatory approval for and commercialize AMX0035. Furthermore, COVID-19 could continue to affect our employees or the employees of research sites and service providers on whom we rely as well as those of companies with which we do business, including our suppliers, thereby disrupting our business operations. Existing or renewed quarantines and travel restrictions imposed by governments in the jurisdictions in which we and the companies with which we do business operate could materially impact the ability of employees to access preclinical and clinical sites, laboratories, manufacturing sites and offices. We have implemented and continue to follow work-at-home policies and may experience limitations in employee resources. Our continued reliance on personnel working from home may negatively impact productivity, or disrupt, delay or otherwise adversely impact our business.
PPP Loan
In April 2020, the Company obtained a PPP Loan from First Republic Bank in the aggregate amount of $0.3 million, which was established under the CARES Act. Under the terms of the CARES Act and the PPP, all or a portion of the principal amount of the PPP Loan is subject to forgiveness so long as, over the 24-week period following the Company’s receipt of the proceeds of the PPP Loan, the Company uses those proceeds for payroll costs, rent, utility costs or the maintenance of employee and compensation levels. The PPP Loan is unsecured, guaranteed by the Small Business Administration (“SBA”), and has a two-year term, maturing in April 2022. Interest accrues on the PPP Loan beginning with the initial disbursement. The application for the forgiveness of the PPP Loan can be made during an 8-week period beginning from the date of initial disbursement. Unless forgiven in whole or in part in accordance with the PPP regulation, the terms of the PPP Loan provide for the Company to make monthly payments of the principal and interest on the outstanding principal balance of the PPP Loan equal to the balance of the PPP Loan amortized over the term of the PPP Loan beginning seven (7) months from the initial disbursement until maturity. Notwithstanding the forgiveness of the PPP Loan, on October 7, 2021, we repaid the PPP Loan in full.
Components of Our Results of Operations
Revenue
Our revenue to date has been comprised of grant revenue, which are amounts earned from performing contracted research and development services. These grants generally require us to meet certain research milestones in order for funds to be provided. To date, we have not generated any revenue from product sales. If our development efforts for AMX0035 or any future product candidates are successful and result in regulatory approval, or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from product sales or payments from such collaboration or license agreements, or a combination of product sales and payments from such agreements.
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Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred in connection with the research and development of AMX0035. We expense research and development costs as incurred. These expenses include:
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expenses incurred under agreements with CROs, contract manufacturing organizations, or CMOs, as well as investigative sites and consultants that conduct our clinical trials, preclinical studies and other scientific development services;
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manufacturing scale-up expenses and the cost of acquiring and manufacturing preclinical studies, including manufacturing registration and validation batches, as well as clinical trial materials;
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expenses to acquire technologies to be used in research and development;
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employee-related expenses, including salaries, payroll taxes, related benefits and stock-based compensation expense for employees engaged in research and development functions; and
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costs related to compliance with quality and regulatory requirements.
Advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered, or the services rendered.
Certain of our indirect research and development expenses are not tracked on an indication-by-indication basis for AMX0035. We do not allocate employee costs and facilities, including depreciation or other indirect costs, to specific indications because these costs are deployed across multiple indications and, as such, are not separately classified. We use internal resources to oversee the research and discovery as well as to manage our preclinical development, process development, manufacturing and clinical development activities. These employees work across multiple indications and, therefore, we do not track their costs by indication.
Research and development activities are central to our business model. Product candidates such as AMX0035 in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials and related product manufacturing expenses. We expect that our research and development expenses will increase substantially in connection with our planned clinical development activities in the near term and in the future. At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the clinical development of AMX0035 and any future product candidates. Our clinical development costs may vary significantly based on factors such as:
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per patient trial costs;
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the number of trials required for approval;
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the number of sites included in the trials;
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the countries in which the trials are conducted;
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the length of time required to enroll eligible patients;
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the number of patients that participate in the trials;
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the number of doses that patients receive;
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the drop-out or discontinuation rates of patients;
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potential additional safety monitoring requested by regulatory agencies;
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the duration of patient participation in the trials and follow-up periods;
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the cost and timing of manufacturing our current or future product candidates;
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the phase of development of our current or future product candidates;
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the efficacy and safety profile of our current or future product candidates; and
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the number of product candidates we are developing.
The successful development and commercialization of AMX0035 and any future product candidates is highly uncertain, due to the numerous risks and uncertainties associated with product development and commercialization, including the following:
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the timing and progress of nonclinical and clinical development activities;
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the number and scope of nonclinical and clinical trials for separate indications we decide to pursue;
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raising necessary additional funds;
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the progress of the development efforts of parties with whom we may enter into collaboration arrangements;
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our ability to maintain our current development activities and to establish new ones;
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our ability to establish new licensing or collaboration arrangements;
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the successful initiation and completion of clinical trials with safety, tolerability and efficacy profiles that are satisfactory to Health Canada, the U.S. Food and Drug Administration, or the FDA, the European Medicines Association, or the EMA, or any other comparable foreign regulatory authority;
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the receipt and related terms of regulatory approvals from applicable regulatory authorities;
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the availability of drug substance and drug product for use in production of AMX0035;
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establishing and maintaining agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if AMX0035 is approved;
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our ability to obtain and maintain patents, trade secret protection and regulatory exclusivity, both in the United States and internationally;
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our ability to protect our rights in our intellectual property portfolio;
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the commercialization of AMX0035, if and when approved;
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obtaining and maintaining third-party insurance coverage and adequate reimbursement;
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the acceptance of AMX0035, if approved, by patients, the medical community and third-party payors;
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competition with other product; and
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a continued acceptable safety profile of our therapies following approval.
A change in the outcome of any of these variables with respect to the development of AMX0035 or any future product candidates. We may never succeed in obtaining regulatory approval for AMX0035 or any future product candidates.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related costs for personnel in executive, finance, sales, marketing, as well as administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing, tax and administrative consulting services; insurance costs; administrative travel expenses; marketing expenses; rent expense and other operating costs. We anticipate that our general and administrative expenses will continue to increase in the future as we further increase our headcount to support our continued research activities and development of AMX0035 and as we continue to increase headcount and incur other significant costs related to our pre-commercialization activities as we prepare for potential near term regulatory approvals. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance, and director and officer insurance costs as well as investor and public relations expenses associated with being a public company. Additionally, we are pursuing regulatory approval of AMX0035 for the treatment of ALS, initially in Canada, the United States and Europe. As we prepare for a potential approval in each territory, we have incurred increased, and anticipate further increases in, payroll and expense as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of AMX0035.
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Other Income (Expense), Net
Interest Expense
Interest expense consists of coupon interests and amortization of derivative discounts associated with our Old Notes. Also, included in interest expense is a contingent beneficial conversion feature recorded upon conversion of our 2017 Notes into shares of Series B redeemable convertible preferred stock and the immediate charge to interest expense for the remaining unamortized debt discount associated with our 2017 Notes upon conversion.
Interest Income
Interest income consists of interest income earned on our cash and cash equivalents, and money market funds.
Other (Expense) Income, Net
Other (expense) income, net consists primarily of (i) extinguishment gain from the conversion of our 2019 Notes and 2020 Notes into Series B redeemable convertible preferred stock in June 2020, (ii) the amortization of premiums and accretion of discounts on our short-term investments, (iii) income from our short-term investments and (iv) unrealized gain on foreign exchange transactions.
Change in Fair Value of Derivative Liability
Change in fair value of derivative liability is comprised of adjustments to the fair value of embedded derivatives associated with certain redemption features of our Old Notes.
The Old Notes contain redemption features which we determined were embedded derivatives. For the respective Old Notes, we bundled these features together and accounted for the feature as a single, compound embedded derivative at each issuance. The embedded derivative was recorded as a liability and measured at fair value at inception of the Old Notes. The fair value was remeasured at the end of each reporting period and immediately prior to the conversion of the Old Notes. Changes in the estimated fair value during the period were recorded as a component of other income (expense). Subsequent to June 2020, when the Old Notes converted into shares of our Series B redeemable convertible preferred stock, we no longer have an outstanding embedded derivative liability. Prior to such conversion, the embedded derivative liability was recorded at fair value utilizing an income approach that identified the cash flows using a “with-and-without” valuation methodology. The inputs used to determine the estimated fair value of the derivative instrument were based primarily on the probability of an underlying event triggering the embedded derivative occurring and the timing of such event.
Change in Fair Value of Convertible Notes
Change in fair value of convertible notes is comprised of adjustments to the fair value of our 2021 Notes. As permitted under ASC Topic 825, Financial Instruments (ASC 825), we elected the fair value option to account for our 2021 Notes, and as a result, we measured our 2021 Notes at fair value at each financial reporting period and immediately before conversion in July 2021. All changes to the fair value of our 2021 Notes for the year ended December 31, 2021 resulted in a loss. Our 2021 Notes converted into shares of Series C-2 redeemable convertible preferred stock concurrently with the issuance of our Series C-1 redeemable convertible preferred stock. Immediately prior to the conversion, we determined the fair value of our 2021 Notes based on the fair value of the Series C-1 redeemable convertible preferred stock and the conversion price at which these notes converted, which was at 85% of the fair value of the Series C-1 redeemable convertible preferred stock.
Income Taxes
The provision for income taxes primarily consists of state minimum taxes in the United States, which do not fluctuate when there is a pre-tax loss. Since our inception, we have incurred significant net losses and anticipate that we will continue to incur significant losses for the foreseeable future. Therefore, we do not know whether or when we will generate the U.S. federal or state taxable income necessary to utilize our Net Operating Losses, or NOLs, or research and development tax credits.
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As of December 31, 2021 and 2020, we had federal net operating loss carryforwards of approximately $115.7 million and $46.8 million, respectively, and state net operating loss carryforwards of approximately $102.9 million and $44.9 million, respectively, which are available to reduce future taxable income. Of the $115.7 million federal net operating loss carryforwards, $1.3 million begin to expire in 2034 and the remaining $114.5 million net operating losses carryforward indefinitely. Of the $102.9 million state net operating loss carryforwards, $101.1 million of Massachusetts net operating loss carryforwards begin to expire in 2034. As of December 31, 2021 and 2020, we also had federal tax credits of $2.7 million and $1.6 million, respectively, and state tax credits of $1.2 million and $0.7 million, respectively. The tax credit carryforwards will expire at various dates beginning in 2029.
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Results of Operations
Comparison of the Years Ended December 31, 2021 and 2020
The following table summarizes our results of operations for the years ended December 31, 2021 and 2020:
Year Ended December 31,
(in thousands)
Operating expenses:
Other income (expense), net:
Change in fair value of derivative liability — (1,270 ) 1,270 (100 )%
Change in fair value of convertible notes (5,228 ) — (5,228 ) *NM
* NM - not meaningful
Grant Revenue
Grant revenue was $0.3 million for the year ended December 31, 2021, compared to $0.7 million for the year ended December 31, 2020. The decrease of $0.4 million was primarily due to less contracted research and development services being performed during the year ended December 31, 2021 than during the year ended December 31, 2020. We performed less contracted research and development services in 2021 as compared to 2020 based on the terms of the grant agreements with our Grantors. Our grant agreements provide estimated timelines over which contracted research and development services would be provided to the Grantors. As less research and development services were scheduled to be provided in 2021, this resulted in the recognition of less revenue during the year ended December 31, 2021 as compared to 2020.
Research and Development Expenses
The following table summarizes our research and development expenses for the years ended December 31, 2021 and 2020:
Year Ended December 31,
(in thousands)
Research and development expenses were $44.0 million for the year ended December 31, 2021, compared to $24.6 million for the year ended December 31, 2020. During these years, all our research and development expenses were related to the development of and clinical trials of AMX0035. The increase of $19.4 million was primarily due to a $13.3 million increase in spending on AMX0035 for the ALS indication, a $5.6 million increase in payroll and personnel-related costs, and a $0.5 million increase in all other costs. The increases in spending on AMX0035 were primarily related to costs associated with our Phase 3 Phoenix trial of AMX0035 in ALS that commenced in 2021 and consulting and manufacturing development expenses in anticipation of potential commercialization. The increase in payroll and personnel-related costs was primarily due to an increase in the number of employees supporting research and development efforts. Increase in the other costs is primarily due to an increase in consulting costs in support of research and development activities in 2021.
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General and Administrative Expenses
General and administrative expenses were $38.9 million for the year ended December 31, 2021 compared to $15.1 million for the year ended December 31, 2020. The increase of $23.9 million was primarily due to a $10.1 million increase in payroll and personnel-related costs, $7.9 million in professional services, $2.9 million in consulting expenses and $1.2 million in computer and software related expenses. The increase in payroll and personnel-related costs was primarily due to hiring additional personnel in general and administrative functions to support our growth initiatives. The increase in professional services and consulting expenses was primarily due to an increase in spending for commercial readiness activities. The increase in computer and software related expenses is primarily due to increased IT hardware, software, services and support to meet the needs of the growing organization.
Other Income (Expense), Net
Interest Income
Interest income for the years ended December 31, 2021 and 2020 were less than $0.1 million for both years.
Interest Expense
Interest expense was zero for the year ended December 31, 2021 compared to $2.3 million for the year ended December 31, 2020. Interest expense for the year ended December 31, 2020 was comprised of interest expense recorded as a result of the amortization of derivative discount associated with our 2020 Notes, the recognition of a contingent beneficial conversion feature associated with our 2017 Notes upon the conversion of these notes into Series B redeemable convertible preferred stock in June 2020, and immediate charge to interest expense for the unamortized derivative discount associated with our 2017 Notes upon conversion of these notes. The conversion of the notes in June 2020 resulted in our recognition of no interest expense on these notes during the year ended December 31, 2021.
Change in Fair Value of Derivative Liability
The change in fair value of derivative liability was zero for the year ended December 31, 2021, compared to a loss of $1.3 million for the year ended December 31, 2020. The change of $1.3 million was primarily due to the issuance of the 2020 Notes, which included embedded derivatives, and a change in the probability related to the settlement scenarios associated with our 2019 Notes and 2020 Notes including the timing of the conversion of these notes. The 2019 and 2020 notes were converted in 2020.
Change in Fair Value of Convertible Notes
The change in fair value of convertible notes was $5.2 million for the year ended December 31, 2021, compared to zero for the year ended December 31, 2020. The $5.2 million recorded for the year ended December 31, 2021 represented a loss related to our 2021 Notes, which were measured quarterly at fair value. The change in fair value was primarily due to interest expense for our 2021 Notes at the stated interest rate and the conversion of our 2021 Notes into shares of Series C-2 redeemable convertible preferred stock at 15% discount to the fair value of the Series C-1 redeemable convertible preferred stock issued in July 2021.
Other Expense (Income), Net
Other expense, net was $0.1 million for the year ended December 31, 2021, compared to other income of $0.3 million for the year ended December 31, 2020. The $0.1 million expense in 2021 was related to realized and unrealized transaction gains and losses. The $0.3 million of other income in 2020 was related to the extinguishment gain from the conversion of our 2019 Notes and 2020 Notes into 1,058,033 shares of our Series B redeemable convertible preferred stock and represented the difference between the fair value of the Series B redeemable convertible preferred stock of $18.0 million and the carrying value of the 2019 and 2020 Notes including derivative liability of $18.3 million.
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Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have incurred significant operating losses and generated revenues through five grants from the Grantors. We have not yet commercialized any products. To date, we have financed our operations primarily through the sale and issuance of convertible preferred stock, convertible notes, grant agreements with the Grantors and, to a lesser extent, a government loan. As of December 31, 2021, we had cash, cash equivalents and short-term investments of $96.1 million.
From inception through December 31, 2021, we have raised $234.4 million in aggregate proceeds, net of issuance costs, primarily from the issuance of convertible preferred stock, convertible notes and grant agreements. In July 2021, we issued and sold shares of Series C-1 preferred stock for an aggregate purchase price of approximately $135.0 million. The 2021 Notes automatically converted into shares of Series C-2 preferred stock pursuant to their original terms in July 2021 in connection with our sale of Series C-1 preferred stock. In January 11, 2022, we completed the IPO of our common stock pursuant to which we received aggregate net proceeds of $196.9 million after deducting underwriting discounts and commissions and other offering costs. Based on our current operational plans and assumptions, we believe that our existing cash, cash equivalents and short-term investments, together with the net proceeds from our initial public offering, will be sufficient to meet our anticipated operating and capital expenditure requirements for at least twelve months after the date of the filing of this Annual Report.
We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities, manufacturing and clinical trials of AMX0035 and any future product candidates, and prepare for the commercial launch of AMX0035, if approved. In addition, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company. Our expenses will also increase as we:
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continue our research and development efforts, including our ongoing global Phase 3 PHOENIX trial of AMX0035 for the treatment of ALS;
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pursue commercialization of AMX0035 for the treatment of ALS, initially in Canada, the United States and Europe;
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submit investigational new drug applications, or INDs, of AMX0035 for the treatment of Wolfram syndrome and potentially for other indications;
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conduct preclinical studies and clinical trials for potential future product candidates;
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seek to identify and develop, acquire or in-license additional product candidates;
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experience any delays or encounter any issues with any of the above, including but not limited to failed studies, complex results, safety issues, or other regulatory challenges;
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develop the necessary processes, controls and manufacturing data to obtain marketing approval for AMX0035 or any future product candidates and to support manufacturing on a commercial scale;
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seek regulatory approvals for AMX0035 or any future product candidates that successfully complete clinical trials, if any;
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hire and retain additional personnel, such as non-clinical, clinical, quality assurance, regulatory affairs, manufacturing, distribution, legal, compliance, finance, general and administrative, commercial and scientific personnel;
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develop, maintain, expand and protect our intellectual property portfolio; and
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continue to transition our organization to being a public company.
We are now a publicly traded company and will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as rules adopted by the SEC and the Nasdaq Global Select Market, require public companies to implement specified corporate governance practices that are currently not applicable to us as a private company. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we will first be required to furnish a report by our management on our internal control over financial reporting for the year ending December 31, 2022. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm.
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To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. We expect these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.
Based on our current operational plans and assumptions, we expect that our current cash, cash equivalents and short-term investments, combined with the net proceeds from our initial public offering, will be sufficient to fund operations for at least twelve months after the date of filing of this Annual Report. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. As we progress with our development activities and the regulatory review process, we expect to incur significant commercialization expenses related to product manufacturing, pre-commercial activities and commercialization.
Because of the numerous risks and uncertainties associated with research, development and commercialization of product candidates and programs, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on and could increase significantly as a result of many factors, including:
•
the scope, progress, results and costs of drug discovery, laboratory testing, preclinical and clinical development for AMX0035 and any future product candidates;
•
the costs, timing and outcome of potential future commercialization activities, including manufacturing, marketing, sales and distribution for AMX0035 or any future product candidates for which we receive marketing approval;
•
the costs, timing and outcome of regulatory review of AMX0035 and any future product candidates;
•
our ability to establish and maintain collaborations and license agreements on favorable terms, if at all;
•
our ability to enroll clinical trials in a timely manner and to quickly resolve any delays or clinical holds that may be imposed on our development activities;
•
timing delays with respect to preclinical and clinical development of AMX0035 and any future product candidates, including as result of the ongoing COVID-19 pandemic or other pandemics or disruptions;
•
the costs of expanding our facilities to accommodate our expected growth in personnel;
•
the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
•
the extent to which we acquire technologies or other assets;
•
the sales price and availability of adequate third-party coverage and reimbursement for AMX0035 and any future product candidates, if and when approved; and
•
the costs of operating as a public company.
Until such time, if ever, that we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through equity offerings, debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, current ownership interests will be diluted. If we raise additional funds through collaborations or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. In addition, debt financing, if available, may result in fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, creating liens, redeeming stock or declaring dividends, that could adversely impact our ability to conduct our business. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
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Cash Flows
Comparison of the Years Ended December 31, 2021 and 2020
The following table summarizes our sources and uses of cash for the years ended December 31, 2021 and 2020:
Year Ended December 31,
(in thousands)
* NM – not meaningful
Operating Activities
During the year ended December 31, 2021, operating activities used $74.8 million of cash, primarily resulting from our net loss of $87.9 million, offset by $5.2 million of change in fair value of convertible notes, $3.1 million of non-cash stock-based compensation expense, $0.1 million of depreciation expense, $0.1 million net amortization of premiums and discounts on investments, and $4.6 million increase in net cash used in our operating assets and liabilities.
Net cash used in our operating assets and liabilities primarily consisted of a $8.4 million increase in accrued expenses and deferred rent due to increased spending for external research and development to support our growth, a $0.7 million increase in accounts payable and a $0.1 million decrease in other assets, offset by a $0.1 million increase in interest receivable from short-term investment and $4.5 million increase in prepaid expenses and other current assets due to increase in sign-on bonuses as a result of an increase in headcount and increase in other receivables related to milestones achieved under the grant agreements for which we were owed by the grantors.
During the year ended December 31, 2020, operating activities used $36.7 million of cash, primarily resulting from our net loss of $42.3 million and $0.3 million of extinguishment gain from the conversion of our 2019 Notes and 2020 Notes into Series B redeemable convertible preferred stock, partially offset by $1.7 million of non-cash interest expense, $2.6 million of net cash provided by changes in our operating assets and liabilities, $1.3 million of change in fair value of derivative liability, and $0.2 million of non-cash stock compensation expense.
The increase in non-cash interest expense was primarily due to the amortization of the derivative discount associated with the 2020 Notes and the recognition of a contingent beneficial conversion feature associated with our 2017 Notes upon the conversion of these Notes into Series B redeemable convertible preferred stock. Net cash provided by changes in our operating assets and liabilities primarily consisted of a $1.4 million increase in accounts payable, a $1.4 million increase in accrued expenses and other current liabilities and a $0.6 million increase in accrued interest on our Notes, partially offset by a $0.7 million increase in prepaid expenses and other current assets. The increases in accounts payable, accrued expenses and other current liabilities were primarily due to timing of invoicing and cash disbursement to our vendors in connection with our increased level of operating activities in 2020. The increase in prepaid expenses and other current assets was primarily due to subscription to a health data analytics software program used in the research and development of AMX0035 and future product candidates in 2020 and increase in sign-on bonus payments to our employees in our research and development department as a result of an increase in headcount.
Investing Activities
During the year ended December 31, 2021, net cash used in investing activities was $46.4 million, resulting from $0.4 million of purchases of property and equipment and $49.1 million of purchases of short-term investments, offset by $3.0 million investment matured.
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During the year ended December 31, 2020, net cash used in investing activities was $0.2 million, driven by purchases of property and equipment.
Financing Activities
During the year ended December 31, 2021, net cash provided by financing activities was $158.5 million. This amount consisted of $134.8 million of net proceeds from the sale of our Series C-1 redeemable convertible preferred stock, $14.3 million of net proceeds from the issuance of convertible notes to related parties, $11.9 million of net proceeds from the issuance of the convertible notes and $0.3 million of proceeds from exercises of stock options, offset by a $2.5 million payment of deferred offering costs, $0.3 million repayment of PPP loan, and less than $0.1 million of issuance costs related to the conversion of the convertible notes, which was related to the 2021 Notes.
During the year ended December 31, 2020, net cash provided by financing was $46.8 million, consisting of $30.0 million of net proceeds from the sale of Series B redeemable convertible preferred stock, $10.6 million of net proceeds from the issuance of the 2020 Notes, net of issuance costs, $1.2 million of proceeds received in advance of the issuance of the 2021 Notes, $4.8 million of net proceeds from the issuance of the 2020 Notes to related parties, and $0.3 million of net proceeds received from the PPP Loan.
In April 2020, we received the PPP Loan from First Republic Bank. Under the terms of the CARES Act and the PPP Loan, all or portion of the principal amount of the PPP Loan is subject to forgiveness so long as, over the 24-week period following our receipt of the proceeds of the PPP Loan, we use those proceeds for payroll costs, rent, utility costs or the maintenance of employee and compensation levels. The PPP Loan was forgiven in March 2021 and notwithstanding the forgiveness of the PPP Loan, we repaid it in full on October 7, 2021.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are 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. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements appearing at the end of this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Accrued Research and Development Expenses
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in the consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of these estimates with the service providers and make adjustments if necessary.
The estimate of accrued research and development expense is dependent, in part, upon the receipt of timely and accurate reporting from CROs, CMOs and other third-party service providers. Examples of estimated accrued research and development expenses include fees paid to:
•
vendors in connection with preclinical development activities;
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•
CROs and investigative sites in connection with preclinical studies and clinical trials; and
•
CMOs in connection with drug substance and drug product formulation of preclinical study and clinical trial materials.
We base our expenses related to preclinical studies and clinical trials on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple CMOs and CROs that conduct and manage preclinical studies and clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or the amount of prepaid expenses accordingly. 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 relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.
Valuation of Derivative Liability
In connection with our issuance of the 2017 Notes, 2018 Notes, 2019 Notes, and 2020 Notes, we recognized derivative liabilities associated with the redemption features as they met the requirements for separate accounting as derivatives. The derivative instruments were recorded at fair value at inception and were subject to re-measurement to fair value the end of each reporting period and immediately prior to conversion, with any changes in fair value recognized in the statements of operations. The primary inputs for the valuation approach included the probability of achieving various settlement scenarios that provide the lenders the rights or the obligations to receive cash at maturity or a variable number of shares upon the completion of qualified financing, and stock or asset sale. The fair value of the derivative instruments associated with each note was estimated using a two-step approach to valuation, employing a probability-weighted scenario valuation method and then comparing the instrument’s value with-and-without the derivative features in order to estimate their combined fair value, using unobservable inputs. In order to estimate the fair value of the 2017, 2018, 2019, and 2020 Notes, we estimated the future payoff in each scenario, discounted them to a present value and then probability weighted them based upon our best estimate of likelihood of each event occurring. In June 2020, in connection with our issuance of the Series B redeemable convertible preferred stock, our 2017, 2018, 2019 and 2020 Notes converted into shares of Series B redeemable convertible preferred stock.
Fair Value Option
As permitted under ASC Topic 825, Financial Instruments (ASC 825), we elected the fair value option to account for our 2021 Notes, which converted into Series C-2 redeemable convertible preferred stock in July 2021. In accordance with ASC 825, we recorded the 2021 Notes at fair value with changes in fair value recorded in the consolidated statement of operations for the year ended December 31, 2021. As a result of applying the fair value option, direct costs and fees related to the 2021 Notes were expensed as incurred and were not deferred. We concluded it was appropriate to apply the fair value option to the 2021 Notes because they are liabilities that are not, in whole or in part, classified as a component of the stockholders’ deficit. In addition, the 2021 Notes met other applicable criteria for electing fair value option under ASC 825.
In determining the fair value of the 2021 Notes under the fair value option, we used a scenario-based analysis to incorporate estimates and assumptions concerning our prospects and market indications into a model to estimate the value of the 2021 Notes. The most significant estimates and assumptions used as inputs are those concerning timing, probability of possible scenarios for conversion or settlement of the 2021 Notes and discount rates. The fair value of the 2021 Notes upon settlement in July 2021 was determined based on the fair value of the Series C-1 redeemable convertible preferred stock issued. This method was selected as we concluded that the contemporaneous financing transaction was an arm’s length transaction.
Stock-Based Compensation
We account for stock-based compensation under the provisions of ASC 718-10, Compensation—Stock Compensation, which requires all share-based payments to employees, non-employees and directors, including grants of
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stock options and restricted stock, to be recognized in the consolidated statements of operations based on their fair values on the date of grant over the requisite service period, which is generally the vesting period of the respective award. Forfeitures are accounted for as they occur. Generally, we issue stock option awards with only service-based vesting conditions and record the expense for these awards using the straight-line method. We classify stock-based compensation expense in the same manner in which the awards recipient’s payroll or service provider’s costs are classified.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, which requires inputs based on certain subjective assumptions, including the expected stock price volatility, the expected term of the award, the risk-free interest rate, and expected dividends. We estimate the expected stock price volatility based on the historical volatility of publicly traded peer companies. The expected term of our 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. There is no expected dividend yield since we have never paid cash dividends on common stock and do not expect to pay any cash dividends in the foreseeable future.
Common Stock Valuations
As there was no public market for our common stock until the closing of our initial public offering, the estimated fair value of common stock was determined by our Board of Directors as of the date of each option grant, with input from management, considering third-party valuations of our common stock as well as our Board of Directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent third-party valuation through the date of the grant. Historically, these independent third-party valuations of our equity instruments were performed contemporaneously with identified value inflection points. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately Held Company Equity Securities Issued as Compensation or the Practice Aid. The Practice Aid identifies various available methods for allocating the enterprise value across classes of series of capital stock in determining the fair value of our common stock at each valuation date.
The assumptions used to determine the estimated fair value of our common stock were based on numerous objective and subjective factors, combined with management judgment, including:
•
external market conditions affecting the pharmaceutical and biotechnology industry and trends within the industry;
•
our stage of development and business strategy;
•
the rights, preferences, and privileges of our redeemable convertible preferred stock relative to those of our common stock;
•
the prices at which we sold shares of our redeemable convertible preferred stock;
•
our financial condition and operating results, including our levels of available capital resources;
•
the progress of our research and development efforts;
•
equity market conditions affecting comparable public companies;
•
economic outlook including economic growth, inflation and unemployment, interest rate environment, and global economic trends; and
•
the lack of marketability of our common stock
In accordance with the Practice Aid, we determined the hybrid method of the option pricing method, or OPM, and the Probability-Weighted Expected Return Method, or PWERM, was the most appropriate method for determining the fair value of our common stock based on our stage of development and other relevant factors. The OPM uses option theory to value the various classes of a company’s securities in light of their respective claims to the enterprise value. Total shareholders’ equity value is allocated to the various share classes based upon their respective claims on a series of call options with strike prices at various value levels depending upon the rights and preferences of each class. A Black-Scholes closed form option pricing model is employed in this analysis, with an option term assumption that is consistent with the expected time to a liquidity event and a volatility assumption based on the estimated stock price volatility of a peer group of comparable public companies over a similar term.
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The PWERM values each class of equity based on an analysis of the range of potential future enterprise values of the company and the manner in which those values would accrue to the owners of the different classes of equity. This method involves estimating the overall value of the subject company under various liquidity event scenarios and allocating the value to the various share classes based on their respective claim on the proceeds as of the date of each event. These different scenarios typically include an initial public offering, an acquisition, or a liquidation of the business, each resulting in a different value. For each scenario, the future value of each share class is calculated and discounted to a present value. The results of each scenario are then probability weighted in order to arrive at an estimate of fair value for each share class as of a current date.
The hybrid method is a hybrid between the PWERM and OPM, estimating the probability-weighted value across multiple scenarios, but using the OPM to estimate the allocation of value within one or more of the scenarios. In our hybrid method, two types of future event scenarios were considered: an initial public offering, or IPO, and a non-IPO scenario accounting for all other potential future exits. Under both scenarios, the enterprise value was determined at each valuation date using a combination of the cost approach; the income approach, specifically a discounted cash flow analysis; and the market approach, specifically a backsolve to the last round of financing. The relative probabilities between the future exit scenarios were determined by our board of directors based on an analysis of performance and market conditions at the time, including then current IPO valuations of similarly situated companies and expectations as to the timing and likely prospects of future event scenarios.
The assumptions underlying these valuations represented management’s best estimates, which involved inherent uncertainties and the application of management’s judgment. As a result, if we had used significantly different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could have been materially different.
Upon the closing of our initial public offering, our board of directors will determine the fair market value of our common stock based on its closing price as reported on the date of grant on the primary stock exchange on which our common stock is traded.
Emerging Growth Company and Smaller Reporting Company Status
The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies, and our consolidated financial statements may not be comparable to other public companies that comply with new or revised accounting pronouncements as of public company effective dates. We may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for private companies.
We will cease to be an emerging growth company on the date that is the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more, (ii) the last day of our fiscal year following the fifth anniversary of the date of the closing of our initial public offering, (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years or (iv) the date on which we are deemed to be a large, accelerated filer under the rules of the Securities and Exchange Commission.
We are also a “smaller reporting company”, meaning that the market value of our stock held by non-affiliates plus the aggregate amount of gross proceeds to us as a result of our initial public offering is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company after our initial public offering if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
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Recently Issued 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.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
Item 8. Financial Statements and Supplementary Data.
Our consolidated financial statements, together with the reports of our independent registered public accounting firms, appear beginning on page F-1 of this Annual Report on Form 10-K for the year ended December 31, 2021.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the Exchange Act) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our principal executive officers and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2021. Based on the evaluation of our disclosure controls and procedures as of December 31, 2021, our Chief Executive Officers and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control Over Financial Reporting
This Annual Report on Form 10-K does not include a report of management's assessment regarding internal control over financial reporting or an attestation report of our independent registered public accounting firm as permitted in this transition period under the rules of the SEC for newly public companies.
Remediation of Prior Material Weakness
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the consolidated financial statements will not be prevented or detected on a timely basis. We previously identified and disclosed in our Registration Statement on Form S-1 filed with the SEC on December 16, 2021, a material weakness related to deficiencies in the design of controls over the expenditures process. Specifically, our information technology controls related to the expenditures cycle were not designed to post invoices approved in the correct period, and our controls over the review of the completeness of operating expenses during our close cycle were not appropriately designed, as we lacked sufficient personnel in our Finance and IT organizations to review and provide reasonable assurance that transactions were being recorded timely and completely.
During 2021, we implemented the following changes to our processes to improve our internal controls over financial reporting with respect to the expenditures cycle as follows:
a)
Corrected the system issue to post invoices in the proper period;
b)
Added IT and Finance personnel to our organization; and
c)
Augmented our controls addressing the completeness of operating expenses.
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These actions resulted in an improved internal control environment that was in place for a period of time to allow for our management to conclude, based on evidence obtained in validating the design and implementation of these controls, that we have fully remediated this material weakness as of December 31, 2021.
Changes in Internal Control over Financial Reporting
Other than the changes noted above related to the remediation of our material weakness, there was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on the Effectiveness of Controls
The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item 10 will be included in the Proposal No. 1, Corporate Governance and Executive Officers section of our definitive proxy statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this Item 11 will be included in the Executive Compensation and Director Compensation sections of our definitive proxy statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item 12 will be included in the Security Ownership of Certain Beneficial Owners and Management sections of our definitive proxy statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 13 will be included in the Certain Relationships and Related Party Transactions and Corporate Governance sections of our definitive proxy statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
Our independent public accounting firm is Deloitte & Touche, LLC, Boston, Massachusetts, PCAOB Auditor ID: 34.
The information required by this Item 14 will be included in the Proposal No. 2 section of our definitive proxy statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
a)
Financial Statements
For a list of the consolidated financial statements included herein, see Index to the Consolidated Financial Statements on page F-1 of this Annual Report, which is incorporated into this Item by reference.
b)
Exhibits
ExhibitNumber Description
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4.3 Description of Securities.
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21.1 List of Subsidiaries of Registrant.
+ This certification will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, except to the extent specifically incorporated by reference into such filing.
# Indicates a management contract or any compensatory plan, contract or arrangement.
† Portions of this exhibit (indicated by asterisks) have been omitted in accordance with Item 601(b)(10) of Regulation S-K.
c)
Financial Statement Schedules
No financial statements have been submitted because they are not required or are not applicable or because the information required is included in the consolidated financial statements or the notes thereto.
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
AMYLYX PHARMCEUTICALS, INC.
Date: March 31, 2022 By: /s/ Joshua B. Cohen
Joshua B. Cohen
Co-Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Name Title Date
Joshua B. Cohen
Justin B. Klee
James M. Frates
/s/ George Mclean Milne Jr. Director March 31, 2022
George Mclean Milne Jr. Ph.D.
/s/ Paul Fonteyne Director March 31, 2022
Paul Fonteyne, M.S., M.B.A.
/s/ Isaac Cheng Director March 31, 2022
Isaac Cheng, M.D.
/s/ Daphne Quimi Director March 31, 2022
Daphne Quimi, M.B.A.
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Amylyx Pharmaceuticals, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Comprehensive Loss F-5
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
F-1
REPORT of independent registered public accounting firm
To the stockholdersand the Board of Directors of Amylyx Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Amylyx Pharmaceuticals, Inc. and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, redeemable convertible preferred stock and stockholders’ deficit, and cash flows, for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
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/ Deloitte & Touche LLP
Boston, Massachusetts
March 31, 2022
We have served as the Company’s auditor since 2020.
F-2
AMYLYX PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31,
Assets
Current assets:
Short-term investments 45,927 —
Prepaid expenses and other current assets 5,392 762
Deferred offering costs 3,441 —
Property and equipment, net 474 151
Other assets — 125
Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Deficit
Current liabilities:
Accrued interest — 2
Proceeds received in advance of issuance of 2021 Notes — 1,162
Commitments and contingencies (Note 16)
Stockholders’ deficit:
Accumulated other comprehensive loss 9 —
The accompanying notes are an integral part of these consolidated financial statements.
F-3
AMYLYX PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Year Ended December 31,
Operating expenses:
Other income (expense), net:
Interest income 36 14
Interest expense — (2,288 )
Change in fair value of derivative liability — (1,270 )
Change in fair value of convertible notes (5,228 ) —
Other (expense) income, net (51 ) 269
Total other expense, net (5,243 ) (3,275 )
The accompanying notes are an integral part of these consolidated financial statements.
F-4
AMYLYX PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Year Ended December 31,
Other comprehensive income (loss):
Other comprehensive loss 9 —
The accompanying notes are an integral part of these consolidated financial statements.
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AMYLYX PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
(in thousands, except share data)
Stock-based compensation expense — — — — — — — — — — 243 — — 243
Net loss — — — — — — — — — — — — (42,280 ) (42,280 )
Stock-based compensation expense — — — — — — — — — — 3,136 — — 3,136
Other comprehensive loss — — — — — — — — — — — 9 — 9
Net loss — — — — — — — — — — — — (87,931 ) (87,931 )
The accompanying notes are an integral part of these consolidated financial statements.
F-6
AMYLYX PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
Cash flows used in operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Change in fair value of derivative liability — 1,270
Non-cash interest expense — 1,738
Stock-based compensation expense 3,136 243
Depreciation expense 52 1
Net amortization of premiums and discounts on investments 121 —
Gain on extinguishment of convertible notes — (268 )
Change in fair value of convertible notes 5,228 —
Changes in operating assets and liabilities:
Interest receivable (144 ) —
Prepaid expenses and other current assets (4,486 ) (651 )
Accrued expenses and deferred rent 8,432 1,389
Accrued interest and accrued interest—related parties (2 ) 550
Net cash used in operating activities (74,799 ) (36,697 )
Cash flows used in investing activities:
Purchases of property and equipment (353 ) (151 )
Purchases of investments (49,053 ) —
Investment matured 3,000 —
Net cash used in investing activities (46,406 ) (151 )
Cash flows from financing activities:
Repayment and proceeds from PPP loan (263 ) 263
Proceeds from issuance of convertible notes—related parties 14,272 4,794
Proceeds from issuance of convertible notes, net of issuance costs 11,887 10,598
Issuance costs related to conversion of convertible notes (50 ) —
Proceeds from exercise of stock options 343 48
Proceeds received in advance of issuance of 2021 Notes — 1,162
Payment of deferred offering costs (2,474 ) —
Net cash provided by financing activities 158,506 46,823
Net increase in cash, cash equivalents and restricted cash 37,314 9,975
Cash, cash equivalents and restricted cash, beginning of period 13,066 3,091
Cash, cash equivalents and restricted cash, end of period $ 50,380 $ 13,066
Supplemental disclosure of cash flow information:
Unrealized loss on short-term investments $ 5 $ —
Purchases of property and equipment included in accounts payable $ 22 $ —
The accompanying notes are an integral part of these consolidated financial statements.
F-7
AMYLYX PHARMACEUTICALS, INC.
NOTES TO Consolidated FINANCIAL STATEMENTS
1. Nature of Business
Amylyx Pharmaceuticals, Inc. (“Amylyx”) was incorporated under the laws of the State of Delaware on January 10, 2014. The Company has two subsidiaries, Amylyx Pharmaceuticals Canada, Inc. (“Amylyx Canada”) and Amylyx Pharmaceuticals EMEA B.V ("Amylyx EU", and together with “Amylyx” and "Amylyx Canada", the “Company”). The Company is headquartered in Cambridge, Massachusetts. The Company is a clinical stage biotechnology company with a goal to improve the quality and length of life of patients suffering from neurodegenerative disease. The Company is pursuing commercialization of its asset, AMX0035, which it believes is the first drug candidate to show both a functional and survival benefit in a large-scale clinical trial of patients with amyotrophic lateral sclerosis, or ALS. The Company believes AMX0035 has the potential to be a foundational therapy, meaning a that it could be used alone or in conjunction with other therapies to change the treatment paradigm across a broad range neurodegenerative diseases. The Company has designed AMX0035 to target two key pathways of neuron death, specifically endoplasmic reticulum, or ER, stress and mitochondrial dysfunction. The Company is focused on the development of and potential commercialization of AMX0035 for ALS globally. In addition, the Company is developing AMX0035 for other neurodegenerative diseases by leveraging its unique knowledge and relationships in the neurodegenerative space.
Risks and Uncertainties
The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, the outcome of clinical trials, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, ability to secure additional capital to fund operations, and risks associated with the COVID-19 global pandemic, including potential delays associated with the Company’s ongoing and anticipated trials. COVID-19 may have an adverse impact on the Company’s operations, supply chains and distribution systems or those of its contractors, and increase expenses, including as a result of impacts associated with preventive and precautionary measures that are being taken, such as restrictions on travel and border crossings, quarantine polices and social distancing. The Company and its contractors may experience disruptions in supply of items that are essential for its research and development activities, including, for example, raw materials and bulk drug substances that the Company imports from Europe and Canada used in the manufacturing of AMX0035, and any future product candidates. In addition, the spread of COVID-19 has disrupted global healthcare and healthcare regulatory systems which could divert healthcare resources away from, or materially delay, U.S. Food and Drug Administration (“FDA”) approval and approval by other health authorities worldwide with respect to AMX0035 and any future product candidates. Furthermore, the Company’s clinical trials may be negatively affected by the COVID-19 outbreak. Site initiation, patient enrollment and patient follow-up visits may be delayed, for example, due to prioritization of hospital resources toward the COVID-19 outbreak, travel restrictions, the inability to access sites for initiation and monitoring, and difficulties recruiting or retaining patients in the Company’s ongoing and planned clinical trials.
There can be no assurance that the Company will be able to successfully complete the development of, or receive regulatory approval for, any products developed, and if approved, that any products will be commercially viable. Any products resulting from the Company’s current research and development efforts will require significant additional research and development, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts will require significant amounts of additional capital, adequate personnel, infrastructure, and extensive compliance reporting capabilities. The Company has not generated any revenues from the sale of any products to date. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.
Going Concern
In accordance with Accounting Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), the Company has evaluated whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the consolidated financial statements are issued.
F-8
Since its inception, the Company has devoted substantially all of its efforts to research and development activities, including recruiting management and technical staff, raising capital, producing materials for non-clinical and clinical studies, and building infrastructure to support such activities. Expenses have primarily been for research and development and related general and administrative costs. The Company has generated revenues through five grants from ALS Association, ALS Finding a Cure Foundation, Cure Alzheimer’s Fund, Alzheimer’s Drug Discovery Foundation and Alzheimer’s Association (collectively, the “Grantors”). In addition to money received from its grants, the Company has also financed its operations through the issuance of redeemable convertible preferred stock and convertible notes (see Notes 9 and 7, respectively). In addition, the Company has financed its operation pursuant to the loan under the Paycheck Protection Program, or the PPP, of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act (the “PPP Loan”) as administered by the SBA (See Note 6). Subsequently in January 2021, the Company completed an initial public offering of its common stock (see Note 17).
The accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred recurring losses and negative cash flows from operations since inception. As of December 31, 2021, the Company had an accumulated deficit of $155.8 million. The Company expects its operating losses and negative operating cash flows to continue into the foreseeable future as it continues to build capabilities and develop AMX0035, and any future product candidates. The Company expects that its cash, cash equivalents and short-term investments as of December 31, 2021 will enable the Company to fund its ongoing operating expenses and capital expenditure requirements for at least the twelve-month period following the issuance of these consolidated financial statements.
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation—The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and ASU of the Financial Accounting Standards Board (“FASB”).
Use of Estimates—The preparation of the consolidated financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of expenses during the reporting period. Actual results could differ from those estimates. Management considers many factors in selecting appropriate financial accounting policies in developing the estimates and assumptions that are used in the preparation of the financial statements. Management must apply significant judgment in this process. Management’s estimation process often may yield a range of potentially reasonable estimates and management must select an amount that falls within that range of reasonable estimates. Estimates are used in the following areas, among others: determining the fair value of the Company’s common stock; determining the fair value of derivative liabilities; determining the fair value of convertible notes; accrued expenses; stock option valuations; valuation allowance for deferred tax assets and research and development expenses.
Grant Revenue—Grant revenue consists of amounts earned from performing contracted research and development services. The grants between the Company and the Grantors generally provide for the Company to meet certain research milestones in order for funds to be provided. The Company accounts for grants received to perform research and development services in accordance with ASC 730-20, Research and Development Arrangements, which requires an assessment, at the inception of the grant, of whether the grant is a liability or a contract to perform research and development services for others. If the Company is obligated to repay the grant funds to the Grantor regardless of the outcome of the research and development activities, then the Company is required to estimate and recognize that liability. Alternatively, if the Company is not required to repay, or if it is required to repay the grant funds only if the research and development activities are successful, then the grant agreement is accounted for as a contract to perform research and development services for others, in which case, grant revenue is recognized as the related research and development expenses are incurred. The Company obtained funding from the Grantors of $0.3 million and $0.7 million during the years ended December 31, 2021 and 2020, respectively, which was recorded as grant revenue in the Company’s consolidated statements of operations. Under the terms of the grants, the Company will be required to pay royalties upon occurrence of contingent future events (see Note 16).
F-9
Comprehensive Income (Loss)—Comprehensive loss includes net loss, as well as other changes in stockholders’ deficit that result from transactions and economic events other than those with stockholders. Comprehensive loss is composed of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) consists of unrealized gains and losses on marketable securities and foreign currency translation.
Cash and Cash Equivalents—The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash equivalents represent funds invested in readily available checking and money market funds.
Restricted Cash—As of December 31, 2021 and 2020, the Company maintained a restricted cash account with a balance of $0.2 million. The restricted cash represents collateral provided for a letter of credit issued as a security deposit in connection with the Company’s lease of its corporate office. The lease expires in October 2026 at which time the cash will be released from restriction.
Short-Term Investments—Short-term investments are composed of corporate debt securities and commercial paper with maturities of less than one year from the balance sheet date. The Company classifies all of its short-term investments as available-for-sale. Accordingly, these investments are recorded at fair value, which is determined based on quoted market prices. Unrealized gains and losses on available-for-sale securities are included as a separate component of other accumulated comprehensive loss. The cost of short-term investments is adjusted for amortization of premiums and accretion of discounts until maturity. Such amortization and accretion are included in other income, net. Realized gains and losses are included in other income, net. The Company evaluates short-term investments for other-than-temporary impairment at the balance sheet date. Declines in fair value, if any, determined to be other than temporary-than-temporary are also included in other income, net.
When assessing short-term investments for other-than-temporary declines in value, the Company considers such factors as, among other things, how significant the decline in value is as a percentage of the original cost, how long the market value of the investment has been less than its original cost, and the Company’s ability and intent to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value and market conditions in general. As of December 31, 2021, there were no impairment charges on short-term investments.
Concentrations of Credit Risk—Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents and short-term investments. The Company maintains its cash in financial institutions that it believes have high credit quality. The Company 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.
Convertible Note—Derivative—The Company reviews the terms of the convertible note issued to determine whether there are features, including redemption and conversion features, which are required to be bifurcated and accounted for separately as derivative financial instruments. In circumstances where the host instrument contains more than one embedded derivative instrument that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
Bifurcated embedded derivatives are initially recorded at fair value and are then revalued at the end of each reporting period and immediately prior to the conversion or the extinguishment of the convertible note. Changes in the fair value are reported in the consolidated statement of operations. When the convertible note contains embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds received are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the host instruments themselves, usually resulting in those host instruments being recorded at a discount from their face value. The discount from the face value of the convertible note, together with the stated interest on the host instrument, is amortized over the life of the host instrument through periodic charges to interest expense. The Company’s convertible notes, as further discussed in Note 7, had embedded derivatives that required bifurcation from the host instrument.
Convertible Note—Beneficial Conversion Feature—If the conversion feature is not treated as a derivative, the Company assesses whether it is a beneficial conversion feature (“BCF”). A BCF exists if the conversion price of the convertible note is less than the price of the stock into which it is convertible to on the commitment date. This typically occurs when the conversion price is less than the fair value of the stock on the date the instrument was issued. The value of a BCF is equal to the intrinsic value of the feature, the difference between the effective conversion price and the fair value of the stock into which it is convertible to and is recorded as additional paid-in capital and as a debt discount in the consolidated
F-10
balance sheets. The Company amortizes the debt discount as non-cash interest expense over the life of the underlying convertible note using the effective interest method. If the convertible note is retired early, the associated debt discount is then recognized immediately as non-cash interest expense in the consolidated statements of operations. If the conversion feature does not qualify for either the derivative treatment or as a BCF, the convertible note is treated as traditional debt.
Fair Value Measurements—Assets and liabilities recorded at fair value on a recurring basis on the consolidated balance sheet are categorized based upon the level of judgment associated with the inputs used to measure their fair values. 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. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:
•
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.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The Company’s financial instruments consist of cash, cash equivalents, restricted cash, short-term investments, accounts payable, accrued expenses and convertible notes. The Company’s short-term investments are carried at fair value, determined according to Level 2 inputs to the fair value hierarchy described above. The Company’s 2021 Notes (as defined in Note 7) and derivative liability is carried at fair value, determined according to Level 3 inputs in the fair value hierarchy described above (see Note 8). The remaining financial instruments are stated at their respective carrying amounts, which approximate fair value due to the short-term nature of these assets and liabilities.
Deferred Offering Costs—The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings, including the initial public offering (IPO), as deferred costs until such financings are consummated. After consummation of the equity financing, these costs are recorded in stockholders’ deficit as a reduction of proceeds generated as a result of the offering. Should an in-process equity financing be abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the consolidated statements of operations and consolidated statements of comprehensive loss. The Company recorded deferred offering costs of $3.4 million, which are included in the consolidated balance sheet as of December 31, 2021.
Property and Equipment, net—Property and equipment are stated at cost, net of accumulated depreciation. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the respective assets. Maintenance and repairs that do not improve or extend the life of the assets are expensed when incurred. Upon sale or retirement of assets, the cost and accumulated depreciation are removed from the consolidated balance sheets and any resulting gain or loss is reflected in the consolidated statements of operations in the period realized. The range of useful lives of property and equipment is as follows:
Estimated Useful Life
Leasehold improvements Lesser of the estimated life or remaining lease term
Furniture and fixtures 4 years
Computer hardware and software 3 years
Construction in progress Not depreciated
F-11
Impairment of Long-Lived Assets—The Company evaluates assets for potential impairment when events or changes in circumstances indicate the carrying value of the assets may not be recoverable. Recoverability is measured by comparing the book values of the assets to the expected future net undiscounted cash flows that the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the book values of the assets exceed their fair value. The Company has not recognized any impairment losses in the years ended December 31, 2021 and 2020.
Research and Development—Research and development expenses include costs directly attributable to the conduct of research and development activities. Expenditures relating to research and development are expensed in the period incurred. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. In addition, research and development-related salaries and benefits, facility, and overhead costs, supplies and other related costs are included in research and development expense.
Patent-Related Costs—Patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses in the accompanying consolidated statements of operations and comprehensive loss.
Stock-Based Compensation Expense—The Company accounts for stock-based compensation under the provisions of ASC 718-10, Compensation—Stock Compensation , which requires all share-based payments to employees, non-employees and directors, including grants of stock options and restricted stock, to be recognized in the consolidated statements of operations and comprehensive loss based on their fair values on the date of grant over the requisite service period, which is generally the vesting period of the respective award. Forfeitures are accounted for as they occur. Generally, the Company issues stock option awards with only service-based vesting conditions and records the expense for these awards using the straight-line method. The Company classifies stock-based compensation expense in the same manner in which the awards recipient’s payroll or service provider’s costs are classified.
The fair value of each restricted common stock award is estimated on the date of grant based on the fair value of the Company’s common stock on that same date.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, which requires inputs based on certain subjective assumptions, including the expected stock price volatility, the expected term of the award, the risk-free interest rate, and expected dividends. As there is no public market for the Company’s common stock, the estimated fair value of common stock was determined by the Company’s Board of Directors as of the date of each option grant, with input from management, considering third-party valuations of its common stock as well as the Company’s Board of Directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent third-party valuation through the date of the grant. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately Held Company Equity Securities Issued as Compensation. The Company estimates its expected stock price volatility based on the historical volatility of publicly traded peer companies. 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. There is no expected dividend yield since the Company has never paid cash dividends on common stock and does not expect to pay any cash dividends in the foreseeable future.
Contingencies—From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business activities. The Company accrues for loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability on the Company’s consolidated balance sheets. The Company does not accrue for contingent losses that, in its judgement, are considered to be reasonably possible, but not probable; however, it discloses the range of reasonably possible losses. There were no loss or gain contingencies recorded in the Company’s consolidated financial statements as of and during the years ended December 31, 2021 and 2020.
Leases—The Company leases its offices, and may from time to time, enter into other lease agreements in conducting its business. At the inception of each lease, the Company evaluates the lease agreement to determine whether the lease is an operating or capital lease in accordance with ASC 840, Leases (ASC 840). When any one of the four test criteria in ASC 840 is met, the lease then qualifies as a capital lease. If the lease agreements contain renewal options, tenant
F-12
improvement allowances, rent holidays or rent escalation clauses, the Company records a deferred rent asset or liability equal to the difference between the rent expense and future minimum lease payments due. The rent expense related to operating leases is recognized on a straight-line basis in the statements of operations over the term of each lease. The Company did not have capital leases as of December 31, 2021 and 2020.
Income Taxes—The Company accounts for income taxes using the asset and liability approach. Deferred tax assets and liabilities represent future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities and for loss carryforwards using enacted tax rates expected to be in effect in the years in which the differences reverse. A valuation allowance is established to reduce deferred tax assets to the amounts expected to be realized. The Company also recognizes a tax benefit from uncertain tax positions only if it is “more likely than not” that the position is sustainable based on its technical merits. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for income taxes. To date, the Company has not incurred interest and penalties related to uncertain tax positions.
Segment Information—An operating segment is defined as a component of a business that engages in business activities for which it may earn revenues and incur expenses and for which discrete financial information is available that is evaluated regularly by the chief operating decision maker or makers in order to make decisions about resources to be allocated to the segment and assess its performance. The Company has determined that its chief executive officers are the chief operating decision maker (“CODM”). The CODM reviews consolidated operating results to make decisions about allocating resources or capital to specific compounds or projects in line with the Company’s overall strategies and goals. The Company's entire business is managed by a single management team, which reports to the Chief Executive Officers. The Company has one operating segment which is the business of researching and developing therapeutics for neurodegenerative disorders.For the years ended December 31, 2021 and 2020, all of the Company's long-lived assets were held within the U.S.
Net income (loss) per share—The Company follows the two-class method when computing net income (loss) per share as the Company has issued shares that meet the definition of participating securities. The two-class method determines net income (loss) per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed.
Basic net income (loss) per share attributable to common stockholders is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) attributable to common stockholders is computed by adjusting net income (loss) attributable to common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net income (loss) per share attributable to common stockholders is computed by dividing the diluted net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period, including potential dilutive common shares. For purpose of this calculation, stock options, convertible notes, and redeemable convertible preferred stock are considered potential dilutive common shares.
The Company’s redeemable convertible preferred stock contractually entitles the holders of such shares to participate in dividends but does not contractually require the holders of such shares to participate in losses of the Company. Accordingly, in periods in which the Company reports a net loss attributable to common stockholders, such losses are not allocated to such participating securities. In periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.
Emerging Growth Company Status—The Company is an emerging growth company (“EGC”) as defined in the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not EGCs. The Company may take advantage of these exemptions until it is no longer an EGC under Section 107 of the JOBS Act and has elected to use the extended transition period for complying with new or revised accounting standards. As a result of this election, the Company’s consolidated financial statements may not be comparable to companies that comply with public company FASB standards’ effective dates. The Company intends to take advantage of the reduced reporting requirements and exemptions up until the last day of the fiscal year following the fifth anniversary of an offering or such earlier time that it is no longer an EGC.
F-13
Recent Accounting Pronouncements
New Accounting Pronouncements Not Yet Adopted—In February 2016, the FASB issued ASU No. 2016-02, Leases, as subsequently amended (collectively “ASC 842”). The guidance amends the existing accounting standards for lease accounting, including requirements for lessees to recognize assets and liabilities related to long-term leases on the balance sheet and expanding disclosure requirements regarding leasing arrangements. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the consolidated statement of operations. In July 2018, the FASB issued additional guidance, which offers a transition option to entities adopting ASC 842 in which entities can elect to apply the new guidance using a modified retrospective approach at the beginning of the year in which the new lease standard is adopted. The Company currently expects to utilize this transition option whereby financial information for prior periods presented before the ASC 842 effective date will not be updated. In November 2019, the FASB issued ASU 2019-10 deferring the effective date for private entities for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. In June 2020, the FASB issued ASU 2020-05 which further defers the effective date for private entities for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022.
The Company expects to elect the available package of practical expedients which allows it to not reassess previous accounting conclusions around whether arrangements are or contain leases, the classification of its leases, and the treatment of initial direct costs. The Company also expects it will make an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. The Company is continuing to evaluate developments within the new lease guidance and is finalizing its evaluation of its existing population of contracts to ensure all contracts that meet the definition of a lease contract under the new standard are identified. The Company has assessed the impact that the adoption of this guidance will have on its financial statements and footnote disclosures. The standard will have a material impact on the consolidated balance sheet related to the recognition of right-of-use assets and lease liabilities for operating leases. The standard will not have a material impact on the consolidated statement of operations.
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”). The provisions of ASU 2016-13 modify the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology and require a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security. ASU 2016-13 requires a cumulative effect adjustment to the consolidated balance sheet as of the beginning of the first reporting period in which the guidance is effective. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates, which defers the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022 for all entities except Securities and Exchange Commission filers that are not smaller reporting companies. ASU 2016-13 will be effective for the Company beginning January 1, 2023. The Company intends to adopt the ASU when it becomes effective. The Company is currently evaluating the impact of this ASU and does not expect that adoption of this standard will have a material impact on its consolidated financial statements and related disclosures.
Recently Adopted Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. The Company adopted this standard on January 1, 2020 and it did not have a material impact on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which is intended to enhance and simplify various aspects of the accounting for income taxes. The amendments in this update remove certain exceptions to the general principles in ASC Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and amends existing guidance to improve consistency in application of the accounting for franchise taxes, enacted changes in tax laws or rates and transactions that result in a step-up in the tax basis of goodwill. The adoption of ASU 2019-12 on January 1, 2021 did not have a material effect on our consolidated financial statements.
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In August 2020, the FASB issued Accounting Standards Update 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”, (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. ASU 2020-06 removes from U.S. GAAP the separation models for (i) convertible debt with a cash conversion feature and (ii) convertible instruments with a beneficial conversion feature. As a result, after adopting the ASU’s guidance, entities will not separately present in equity an embedded conversion feature in such debt. Instead, the entity will account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e., as a single unit of account), unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC 815 or (2) a convertible debt instrument was issued at a substantial premium. In addition, the ASU also states that entities must apply the if-converted method to all convertible instruments for calculation of diluted earnings per share and the treasury stock method is no longer available. The Company early adopted ASU 2020-06 on January 1, 2021 using the modified retrospective transition approach. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements, which provided codification updates for technical corrections such as conforming amendments, clarifications to guidance, simplifications to wording or structure of guidance, and other minor improvements. Additionally, changes to clarify the codification or correct unintended application of guidance that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities were also included in this update. The adoption of ASU 2020-10 on January 1, 2021 did not have a material effect on our consolidated financial statements.
3. SHORT-TERM INVESTMENTS
Short-term investments, which are classified as available-for-sale, consisted of the following:
December 31, 2021 AmortizedCost Basis UnrealizedLoss FairValues
(in thousands)
As of December 31, 2021, all investments had contractual maturities within one year.
4. Property and equipment, net
Property and equipment, net consisted of the following:
(in thousands)
Furniture and fixtures $ 88 $ 49
Computer hardware and software 250 —
Leasehold improvements 50 41
Construction in progress 139 62
Total property and equipment 527 152
Less: accumulated depreciation (53 ) (1 )
Total property and equipment, net $ 474 $ 151
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5. Accrued Expenses
Accrued expenses consisted of the following:
December 31,
(in thousands)
External research and development $ 5,666 $ 293
Payroll and employee related expenses 4,280 1,855
Accrued legal and other professional fees 2,820 584
6. PPP LOAN
In April 2020, the Company obtained a PPP Loan from First Republic Bank in the aggregate amount of $0.3 million, which was established under the CARES Act. Under the terms of the CARES Act and the PPP, all or a portion of the principal amount of the PPP Loan is subject to forgiveness so long as, over the 24-week period following the Company’s receipt of the proceeds of the PPP Loan, the Company uses those proceeds for payroll costs, rent, utility costs or the maintenance of employee and compensation levels. The PPP Loan is unsecured, guaranteed by the SBA, and has a two-year term, maturing in April 2022. Interest accrues on the PPP Loan beginning with the initial disbursement. The application for the forgiveness of the PPP Loan can be made during an 8-week period beginning from the date of initial disbursement. Unless forgiven in whole or in part in accordance with the PPP regulation, the terms of the PPP Loan provide for the Company to make monthly payments of the principal and interest on the outstanding principal balance of the PPP Loan equal to the balance of the PPP Loan amortized over the term of the PPP Loan beginning seven (7) months from the initial disbursement until maturity.
The terms of the PPP loan provide for customary events of default including, among other things, payment defaults, breach of representations and warranties, and insolvency events. The Company has determined to account for the PPP Loan as debt under ASC 470, Debt. The PPP loan was repaid in full in October 2021. As of December 31, 2021 and 2020, the outstanding balance of the PPP Loan was $0 and $0.3 million, respectively.
7. CONVERTIBLE NOTES
Convertible Notes
There were no convertible notes outstanding as of December 31, 2021 and 2020.
Issuance of the 2017 Notes, 2018 Notes, 2019 Notes and 2020 Notes (collectively, the “Notes”)
In July 2017, the Company commenced an offering to issue $2.3 million convertible notes (“2017 Notes”) to certain investors with a maturity date of December 31, 2021. These 2017 Notes carried both a voluntary conversion feature and an automatic conversion feature. The 2017 Notes were secured and carried an interest rate of 6%.
In November 2018, the Company commenced an offering to issue $13.0 million convertible notes (“2018 Notes”) with a maturity date of December 31, 2021. These 2018 Notes carried both a voluntary conversion feature and an automatic conversion feature. The 2018 Notes were secured and carried an interest rate of 6%.
In December 2019, the Company issued $0.6 million of convertible notes (“2019 Notes”) to certain investors with a maturity date of December 31, 2021. These 2019 Notes carried an automatic conversion feature only. The 2019 Notes were secured and carried an interest rate of 2%.
In January, February and April 2020, the Company issued, in aggregate, $15.4 million in convertible notes (“2020 Notes”) to certain investors with a maturity date of December 31, 2021. These 2020 Notes carried an automatic conversion feature only. The 2020 Notes were secured and carried an interest rate of 2%.
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The Notes contained the following features: