Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed in Part I, Item 1A, “Risk Factors” and elsewhere in this Annual Report on Form 10-K. See “Special Note Regarding Forward-Looking Statements.”
Overview
We are a clinical stage biopharmaceutical company focused on discovering, developing and commercializing antiviral therapeutics to improve the lives of patients suffering from life threatening viral infections. Our current focus is on the development of product candidates to treat COVID-19, dengue, chronic hepatitis C infection (“HCV”), and respiratory syncytial virus (“RSV”). Leveraging our deep understanding of antiviral drug development, nucleos(t)ide chemistry, biochemistry and virology, we have built a proprietary purine nucleotide prodrug platform to develop novel treatments for life threatening diseases caused by single stranded ribonucleic acid (“ssRNA”) viral infections.
In October 2020, we entered into a License Agreement (the “Roche License Agreement”) with F. Hoffmann-LaRoche Ltd. and Genentech, Inc. (together, “Roche”) under which we granted an exclusive license for certain development and commercialization rights related to AT-527 outside of the United States (other than for certain HCV uses) to Roche. Pursuant to the Roche License Agreement, we will rely on Roche to manufacture the commercial supply of AT-527 for the treatment of COVID-19. As part of the consideration, Roche agreed to pay us an upfront payment of $350.0 million which was received in November 2020.
On November 3, 2020, we completed the initial public offering of our common stock (the “IPO”). In connection with the IPO, we issued 14,375,000 shares of common stock at $24.00 per share for net proceeds of $317.6 million after deducting underwriting discounts and commissions and offering expenses. Upon closing of the IPO, all then-outstanding shares of our former convertible preferred stock converted into 57,932,090 shares of common stock.
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AT-527 for the Treatment of COVID-19
Our product candidate for the treatment of patients with COVID-19 is AT-527, an orally administered, novel antiviral agent. We, together with our collaborator Roche, anticipate initiating a Phase 3 clinical trial to study AT-527 in adult patients with mild or moderate COVID-19 in the outpatient setting (MORNINGSKY) in thesecond quarter of 2021. Currently, we are evaluating AT-527 for the treatment of patients with mild or moderate COVID-19 in two Phase 2 clinical trials. The first trial is a randomized, double-blind, placebo-controlled Phase 2 clinical trial in approximately 190 adult patients with moderate COVID-19 and one or more risk factors for poor outcomes in a hospitalized setting. We dosed our first patient in September 2020 and expect to report interim virology data from this clinical trial in the second quarter of 2021. The second trial, which is being conducted in collaboration with Roche, is a randomized, double-blind, placebo-controlled Phase 2 clinical trial in up to 220 adult patients with mild or moderate COVID-19 in an outpatient setting (MOONSONG). The first patient in this trial was dosed in February 2021. We expect to report interim virology data from this trial in the second quarter of 2021. In addition, several Phase 1 clinical trials in healthy volunteers are planned in addition to the one currently being conducted and the one recently completed for which positive results have been announced.
AT-752 for the Treatment of Dengue
We are developing AT-752, an oral, purine nucleoside prodrug product candidate for the treatment of dengue. AT-752 has shown potent activity against all serotypes tested in preclinical studies. We have initiated a randomized, double-blind, placebo-controlled Phase 1a trial to evaluate the safety and pharmacokinetics (“PK”) of several different dosages of AT-752 in 50-60 healthy adult subjects. Following the completion of the Phase 1a trial, we expect to initiate in the second half of 2021 a Phase 1b trial of AT-752 in 60-80 adult subjects with dengue virus infection to evaluate antiviral activity, safety and PK. As part of the Roche License Agreement, we agreed that we would not commercialize AT-752 outside the United States unless we enter into a separate agreement with Roche to do so.
AT-787 for the Treatment of Hepatitis C
HCV is a blood-borne, positive sense, ssRNA virus, primarily infecting cells of the liver. HCV is a leading cause of chronic liver disease and liver transplants and spreads via blood transfusion, hemodialysis and needle sticks. We are developing AT-787 for the treatment of chronic HCV infection, including patients with decompensated cirrhosis. AT-787 combines AT-527 with a second generation NS5A inhibitor, AT-777, into a single, oral, pan-genotypic fixed-dose combination therapy. Despite recent advances in treatment, there remains a large underserved HCV patient population which continues to grow. Based on our preclinical and clinical data to date, we believe that AT-787, if approved, could offer potential benefits over currently available treatments, including to shorten treatment duration in non-cirrhotic and compensated cirrhosis HCV in all genotypes and to eliminate the need for ribavirin in patients with decompensated cirrhosis. We temporarily paused our development program for AT-787 in HCV infected patients at the outset of the COVID-19 pandemic in March 2020. Currently we expect to restart this program in the second half of 2021, starting with our Phase 1/2a clinical trial, which is designed to evaluate the safety and PK of different dosages of AT-777 in healthy adults and evaluate the combination of AT-527 and AT-777.
AT-889 and Other Candidates for the Treatment of RSV
RSV is a seasonal respiratory virus that can be serious for infants, older adults, and the immuno-compromised population. We are evaluating AT-889, a second generation nucleoside pyrimidine prodrug and other compounds for the treatment of RSV. We believe AT-889 or one of our other candidates for RSV has the potential to inhibit both initiation of viral replication, as well as viral transcription. We anticipate nominating our product candidate and initiating the IND-enabling studies in the second half of 2021. We believe that the product candidate we develop, if successful, could be the first therapy in over 30 years to be approved specifically for the treatment of RSV.
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Financial Operations Overview
Since our formation in July 2012, we have devoted substantially all of our resources to developing our product candidates. We have incurred significant operating losses to date. Our net loss was $10.9 million, $14.0 million and $9.1 million for the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, we had an accumulated deficit of $65.2 million. We expect that our operating expenses will increase significantly as we advance our product candidates through preclinical and clinical development, seek regulatory approval, and prepare for and, if approved, proceed to commercialization; acquire, discover, validate and develop additional product candidates; obtain, maintain, protect and enforce our intellectual property portfolio; and hire additional personnel. In addition, we expect to incur additional costs associated with operating as a public company.
We do not have any product candidates approved for sale and have not generated any product revenue since inception. We have funded our operations primarily from the sale and issuance of convertible preferred stock, proceeds from our initial public offering and proceeds from the Roche License Agreement. As of December 31, 2020, we had cash and cash equivalents of $850.1 million. We believe that our available cash and cash equivalents will be sufficient to fund our planned operations through at least 2023.
Our ability to generate product revenue will depend on the successful development, regulatory approval and eventual commercialization of one or more of our product candidates. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through private or public equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. Adequate funding may not be available to us on acceptable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of our product candidates.
We plan to continue to use third-party service providers, including contract research organizations (“CROs”) and contract manufacturing organizations(“CMOs”), to carry out our preclinical and clinical development and to manufacture and supply the materials to be used during the development and commercialization of our product candidates.
We expect to continue to incur significantly higher expenses over the next several years. We anticipate that our expenses will increase significantly in connection with our ongoing activities, as we:
• continue clinical development of AT-527 for the treatment of COVID-19;
• continue clinical development of AT-752 for the treatment of dengue;
• re-initiate clinical development of AT-787 for the treatment of HCV;
• maintain, expand, protect and enforce our intellectual property portfolio;
• establish commercialization capabilities; and
• incur additional costs associated with operating as a public company.
Components of Results of Operations
Revenue
To date, we have not generated any revenue from product sales. Our revenue has been collaboration revenue solely derived from the Roche License Agreement, which became effective in October 2020. If our development efforts for our product candidates are successful and result in commercialization, we may generate additional revenue in the future from a combination of product sales or payments from collaboration or license agreements that we may enter into with third parties.
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Operating Expenses
Research and Development Expenses
Substantially all of our research and development expenses consist of expenses incurred in connection with the development of our product candidates. These expenses include fees paid to third parties to conduct certain research and development activities on our behalf, consulting costs, certain payroll and personnel-related expenses, including salaries and bonuses, employee benefit costs and stock-based compensation expenses for our research and product development employees and allocated overhead, including rent, equipment, depreciation, information technology costs and utilities attributable to research and development personnel. We expense both internal and external research and development expenses as they are incurred. In circumstances where amounts have been paid in advance or in excess of costs incurred, we record a prepaid expense, which is expensed as services are performed or goods are delivered.
A significant portion of our research and development costs have been external costs, which we track by therapeutic area. Our internal research and development costs are primarily personnel-related costs, facility costs, including depreciation and lab consumables. We have not historically tracked our internal research and development expenses by therapeutic area as they are deployed across multiple programs. The following table summarizes our external research and development expenses by indication and internal research and development expenses:
Years Ended December 31,
(in thousands)
COVID-19 external costs $ 23,043 $ — $ —
We are focusing substantially all of our resources on the development of our product candidates, particularly AT-527. We expect our research and development expenses to increase substantially for at least the next few years, as we seek to initiate additional clinical trials for our product candidates, complete our clinical programs, pursue regulatory approval of our product candidates and prepare for the possible commercialization of these product candidates. Predicting the timing or cost to complete our clinical programs or validation of our commercial manufacturing and supply processes is difficult and delays may occur because of many factors, including factors outside of our control. For example, if the U.S. Food and Drug Administration (“FDA”) or other regulatory authorities were to require us to conduct clinical trials beyond those that we currently anticipate, we could be required to expend significant additional financial resources and time on the completion of clinical development. Furthermore, we are unable to predict when or if our product candidates will receive regulatory approval with any certainty.
General and Administrative Expenses
General and administrative expenses consist principally of payroll and personnel expenses, including salaries and bonuses, benefits and stock-based compensation expenses, professional fees for legal, consulting, accounting and tax services, allocated overhead, including rent, equipment, depreciation, information technology costs and utilities, and other general operating expenses not otherwise classified as research and development expenses.
We anticipate that our general and administrative expenses will increase as a result of increased personnel costs, expanded infrastructure and higher consulting, legal and accounting services costs associated with complying with Nasdaq and SEC requirements, investor relations costs and director and officer insurance premiums associated with being a public company.
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Interest Income and Other, Net
Interest income and other, net, consists primarily of interest income earned on our cash and cash equivalents.
Results of Operations
Comparison of the Years Ended December 31, 2020 and 2019
The following table summarizes our results of operations for the periods indicated:
Years Ended December 31,
(in thousands)
Operating expenses:
Interest income and other, net 83 574 (491 )
Revenue
Collaboration revenue for the year ended December 31, 2020 was derived from the Roche License Agreement that was executed in October 2020. See Note 3 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a description of the accounting treatment of the Roche License Agreement.
Research and Development Expenses
Research and development expenses increased by $27.8 million from $10.2 million for the year ended December 31, 2019 to $38.0 million for the year ended December 31, 2020. The increase in research and development expenses was primarily due to a $20.2 million increase in external expenses incurred related to CRO and CMO services in connection with the advancement of product candidates for the treatment of COVID-19 and dengue, partially offset by a decrease in external spend related to our HCV and RSV programs and an increase of $6.5 million in internal spend primarily due to an increase in personnel-related expenses, including salaries and bonuses, benefits and stock-based compensation expense of $3.3 million for our research and product development employees and consulting fees, and $1.1 million in other research and development expenses. Research and development expenses include a reduction of $7.9 million representing Roche’s share of certain expenses incurred that are subject to ASC 808 as discussed in Note 3 to our audited consolidated financial statements. The Company also recorded research and development expense of $2.1 million relating to its share of costs incurred by Roche.
General and Administrative Expenses
General and administrative expenses increased by $17.2 million from $4.4 million for the year ended December 31, 2019 to $21.6 million for the year ended December 31, 2020. The increase in general and administrative expenses was primarily due to the expansion of our organization and reflected an increase of $5.8 million in payroll and personnel-related expenses, including salaries, benefits and stock-based compensation expense of $3.5 million; professional fees of $10.0 million including $7.0 million paid in connection with Roche License Agreement; and an increase in other general and administrative expenses of $1.4 million.
Interest Income and Other, Net
Interest income and other, net, decreased by $0.5 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to lower interest rates.
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Comparison of the Years Ended December 31, 2019 and 2018
The following table summarizes our results of operations for the periods indicated:
Years Ended December 31,
(in thousands)
Operating expenses:
Research and Development Expenses
Research and development expenses increased by $3.5 million from $6.7 million for the year ended December 31, 2018 to $10.2 million for the year ended December 31, 2019. The increase in research and development expenses was primarily due to the advancement of preclinical, manufacturing and clinical expense of $2.9 million related to product candidates for the treatment of HCV and an increase of $0.5 million in consulting, payroll and personnel-related expenses, including salaries and bonuses, benefits and stock-based compensation expense.
General and Administrative Expenses
General and administrative expenses increased by $1.6 million from $2.8 million for the year ended December 31, 2018 to $4.4 million for the year ended December 31, 2019. The increase in general and administrative expenses was primarily due to the expansion of our organization and reflected an increase of $0.5 million in payroll and personnel-related expenses, including salaries, benefits and stock-based compensation expense; and an increase in other general and administrative expenses, including legal and accounting of $1.1 million.
Interest Income and Other, Net
Interest income and other, net increased by $0.2 million for year ended December 31, 2019 from the year ended December 31, 2018 due higher average cash and cash equivalent balances during the year.
Liquidity and Capital Resources
Sources of Liquidity
From our formation in 2012 through December 31, 2020, we funded our operations with an aggregate of $285.6 million in gross cash proceeds from the sale of convertible preferred stock, $317.6 million from our IPO and $350.0 million from the Roche License Agreement. As of December 31, 2020, we had cash and cash equivalents of $850.1 million. We believe that our available cash and cash equivalents will be sufficient to fund our planned operations through at least 2023.
Future Funding Requirements
To date, we have not generated any product revenue. We do not expect to generate any product revenue unless and until we obtain regulatory approval of and commercialize any of our product candidates and we do not know when, or if, this will occur. We expect to continue to incur increased expenditures for the foreseeable future, and we expect our expenses to increase as we continue the development of, and seek regulatory approvals for, our product candidates and begin to commercialize any approved products. We are subject to all of the risks typically related to the development of new product candidates, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. Moreover, we expect to incur additional general and administrative costs as we continue to operate as a public company.
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We will continue to require additional capital to develop our product candidates and fund operations for the foreseeable future. We may seek to raise capital through public or private equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. We anticipate that we may need to raise substantial additional capital, the requirements for which will depend on many factors, including:
• the number and scope of clinical programs we decide to pursue;
• the scope and costs of development and commercial manufacturing activities;
• our implementation of operational, financial and management systems; and
• the costs associated with being a public company.
A change in the outcome of any of these or other variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. Furthermore, our operating plans may change in the future, and we will continue to require additional capital to meet operational needs and capital requirements associated with such operating plans. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments or engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders.
Adequate funding may not be available to us on acceptable terms or at all. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategies. If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials or we may also be required to sell or license to others rights to our product candidates in certain territories or indications that we would prefer to develop and commercialize ourselves. If we are required to enter into collaborations and other arrangements to supplement our funds, we may have to give up certain rights that limit our ability to develop and commercialize our product candidates or may have other terms that are not favorable to us or our stockholders, which could materially affect our business and financial condition.
See Part I, Item 1A,“Risk Factors” for additional risks associated with our substantial capital requirements.
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Summary Statement of Cash Flows
The following table sets forth the primary sources and uses of cash, cash equivalents, and restricted cash for each of the periods presented below:
Years Ended December 31,
(in thousands)
Net cash used in investing activities (26 ) (2 ) (12 )
Net cash provided by financing activities 531,748 — 27,483
Cash Flows from Operating Activities
Net cash provided by operating activities was $296.7 million for the year ended December 31, 2020. Cash provided by operating activities was primarily due to an increase in deferred revenue of $301.4 million related to the Roche License Agreement, an increase in accounts payable and accrued expenses of $11.9 million and stock based compensation of $7.5 million, partly offset by the use of funds in our operations to develop our product candidates, resulting in a net loss of $10.9 million. Additional uses of cash during the period included an increase in prepaid expenses and other current assets $7.3 million and unbilled accounts receivable of $5.8 million. The net increase in deferred revenue of $301.4 was the result of the $350.0 million upfront payment offset by revenue recognized of $48.6 million.
Net cash used in operating activities was $12.8 million for the year ended December 31, 2019. Cash used in operating activities was primarily due to the use of funds in our operations to develop our product candidates resulting in a net loss of $14.0 million, offset by stock based compensation of $0.6 million and increases in accounts payable and accrued expenses of $0.6 million.
Net cash used in operating activities was $7.9 million for the year ended December 31, 2018. Cash used in operating activities was primarily due to the use of funds in our operations to develop our product candidates resulting in a net loss of $9.1 million, offset by stock based compensation of $0.4 million and increases and accrued expenses of $0.7 million.
Cash Flows from Investing Activities
Net cash used in investing activities consisted of purchases of property and equipment for the years ended December 31, 2020, 2019 and 2018.
Cash Flows from Financing Activities
Net cash provided by financing activities was $531.8 million for the year ended December 31, 2020, which consisted primarily of $106.6 million of net proceeds from the sale of Series D convertible preferred stock, $107.5 million of net proceeds from the sale of Series D-1 convertible preferred stock and $317.6 million of net proceeds from the initial public offering.
Net cash used in financing activities during the year ended December 31, 2019 was less than $0.1 million and consisted of payments of deferred financing costs.
Net cash provided by financing activities was $27.5 million for the year ended December 31, 2018, which consisted primarily of $27.4 million of net proceeds from the sale of Series C convertible preferred stock.
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Contractual Obligations and Commitments
We lease our office space under a non-cancelable operating lease in Boston, Massachusetts, that expires in July 2022. The following table summarizes our contractual obligations as of December 31, 2020:
Payments Due by Period
Less than 1 year 1 to 3 years 3 to 5 years More than 5 years Total
(in thousands)
Operating lease obligations $ 340 $ 200 $ — $ — $ 540
We enter into contracts in the normal course of business with third-party contract organizations for preclinical and clinical studies and testing, manufacture and supply of our preclinical materials and other services and products used for operating purposes. These contracts do not contain any minimum purchase commitments and generally provide for termination following a certain period after notice, and therefore we believe that our non-cancelable obligations under these agreements are not material. Payments due upon cancelation consist only of payments for services provided and expenses incurred up to the date of cancelation.
The table above also does not include potential milestone and success fees that we may be required to pay under agreements we have entered into with certain consultants. We have an agreement with a consultant that requires payment of a success fee calculated as a percentage of certain product sales, subject to a cumulative maximum payout of $5.0 million. This success payment is contingent upon the occurrence of future events and the timing and likelihood of such payment is neither probable nor estimable.
Critical Accounting Policies and Estimates
Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The effects of material revisions in estimates, if any, will be reflected in the consolidated financial statements prospectively from the date of change in estimates.
Our critical accounting policies are those policies that require the most significant judgements and estimates in the preparation of the financial statements. Management has determined that our most critical accounting policies are those relating to revenue recognition, accrued research and development expenses and stock based compensation.
Revenue Recognition
As of December 31, 2020, all of our revenue to date had been collaboration revenue generated from our license agreement with Roche.
We analyze our collaboration arrangements to assess whether they are within the scope of Accounting Standards Codification ASC Topic 808, Collaborative Arrangements (“ASC 808”), to determine whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards that are dependent on the commercial success of such activities. If we conclude that some or all aspects of the arrangement are within the scope of ASC 808 and do not represent a transaction with a customer, we recognize our allocation of the shared costs incurred with respect to the jointly conducted activities as a component of the related expense in the period incurred. If we conclude that some or all aspects of the arrangement represent a transaction with a customer, we account for those aspects of the arrangement within the scope of ASC 606, Revenue from Contracts with Customers (“ASC 606”).
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To determine the appropriate amount of revenue to be recognized for arrangements that we determine are within the scope of ASC 606, we perform the following steps: (i) identify the contract(s) with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) each performance obligation is satisfied. ASC 606 requires significant judgment and estimates and results in changes to, but not limited to: (i) the determination of the transaction price, including estimates of variable consideration, (ii) the allocation of the transaction price, including the determination of estimated selling price, and (iii) the pattern of recognition, including the application of proportional performance as a measure of progress on service-related promises and application of point-in-time recognition for supply-related promises.
The transaction price is generally comprised of an upfront payment due at contract inception and variable consideration in the form of payments for our services and materials and milestone payments due upon the achievement of specified events. Other payments we could be entitled to include tiered royalties earned when customers recognize net sales of licensed products. We consider the existence of any significant financing component within our arrangements and have determined that a significant financing component does not exist in our arrangements as substantive business purposes exist to support the payment structure other than to provide a significant benefit of financing. We measure the transaction price based on the amount of consideration to which we expect to be entitled in exchange for transferring the promised goods and/or services to the customer. We utilize either the expected value method or the most likely amount method to estimate the amount of variable consideration, depending on which method is expected to better predict the amount of consideration to which we will be entitled. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. With respect to arrangements that include payments for a development or regulatory milestone payment, we evaluate whether the associated event is considered probable of achievement and estimate the amount to be included in the transaction price using the most likely amount method. Milestone payments that are not within our control or the licensee, such as those dependent upon receipt of regulatory approval, are not considered to be probable of achievement until the triggering event occurs. At the end of each reporting period, we re-evaluate the probability of achievement of each milestone and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenue and net loss in the period of adjustment. For arrangements that include sales-based royalties, including milestone payments based upon the achievement of a certain level of product sales, wherein the license is deemed to be the sole or predominant item to which the payments relate, we recognize revenue upon the later of: (i) when the related sales occur or (ii) when the performance obligation to which some or all of the payment has been allocated has been satisfied (or partially satisfied). Consideration that would be received for optional goods and/or services is excluded from the transaction price at contract inception.
We generally allocate the transaction price to each performance obligation based on a relative standalone selling price basis. We develop assumptions that require judgment to determine the standalone selling price for each performance obligation in consideration of applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated research and development costs. However, in certain instances, we allocate variable consideration entirely to one or more performance obligation if the terms of the variable consideration relate to the satisfaction of the respective performance obligation and the amount allocated is consistent with the amount we would expect to receive for the satisfaction of the respective performance obligation.
We recognize revenue based on the amount of the transaction price that is allocated to each respective performance obligation when or as the performance obligation is satisfied by transferring a promised good or service to the customer. For performance obligations that are satisfied at a point in time, we recognize revenue when control of the goods and/or services is transferred to the customer. For performance obligations that are satisfied over time, we recognize revenue by measuring the progress toward complete satisfaction of the performance obligation using a single method of measuring progress which depicts the performance in transferring control of the associated goods and/or services to the customer. We generally use input methods to measure the progress toward the complete satisfaction of
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performance obligations satisfied over time. With respect to arrangements containing a license to our intellectual property that is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenue from amounts allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. Significant management judgment is required in determining the level of effort and costs required under an arrangement and the period over which we are expected to complete our performance obligations under an arrangement. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenue and net loss in the period of adjustment.
Contract costs
We recognize as an asset the incremental costs of obtaining a contract with a customer if the costs are expected to be recovered. We have elected a practical expedient wherein we recognize the incremental costs of obtaining a contract as an expense when incurred if, at inception, the expected amortization period of the asset that we otherwise would have recognized is one year or less. In connection with the Roche License Agreement, we incurred an incremental cost of $7.0 million, which was included in general and administrative costs in the statement of operations and comprehensive loss for the year ended December 31, 2020 included elsewhere in this Annual Report on Form 10-K.
Accrued Research and Development
We have entered into various agreements with CMOs and CROs. Our research and development accruals are estimated based on the level of services performed, progress of the studies, including the phase or completion of events, and contracted costs. The estimated costs of research and development provided, but not yet invoiced, are included in accrued liabilities on the balance sheet. If the actual timing of the performance of services or the level of effort varies from the original estimates, we will adjust the accrual accordingly. Payments made to CMOs and CROs under these arrangements in advance of the performance of the related services are recorded as prepaid expenses and other current assets until the services are rendered. 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.
Stock-Based Compensation
We use a fair value-based method to account for all stock-based compensation arrangements with employees and non-employees, including stock options and stock awards. The fair value of the option granted is recognized on a straight-line basis over the period during which an optionee is required to provide services in exchange for the option award, known as the requisite service period, which usually is the vesting period. In determining fair value of the stock options granted, we use the Black–Scholes model, which requires the input of subjective assumptions. These assumptions include: estimating the fair market value of the common stock, estimating the length of time employees will retain their vested stock options before exercising them (expected term), the estimated volatility of our common stock price over the expected term (expected volatility), risk-free interest rate and expected dividends. See Note 10 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options granted during the years ended December 31, 2020, 2019 and 2018, respectively. Estimating the fair value of our common stock involves significant judgement and the use of estimates.
Estimating the Fair Value of Common Stock
We are required to estimate the fair value of the common stock underlying our share-based awards when performing the fair value calculations using the Black-Scholes option pricing model. Prior to our IPO, the
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fair value of the common stock underlying our stock options has been determined on each grant date by our board of directors, with input from management, considering the most recently available third-party valuation of our common shares. All options to purchase shares of our common stock are intended to be granted with an exercise price per share no less than the estimated fair value per share of our common stock underlying those options on the date of grant, based on the information known to us on the date of grant.
In the absence of a public trading market for our common stock prior to our IPO, on each grant date, we developed an estimate of the fair value of our common stock based on valuations from an independent third-party valuation firm using information known to us on the date of grant, a review of any recent events and their potential impact on the estimated fair value per share of the common stock.
The third-party valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation (the “Practice Aid”).
The assumptions used to determine the estimated fair value of our common stock are based on numerous objective and subjective factors, combined with management judgment, including:
• our stage of development and business strategy;
• the progress of our research and development efforts;
• equity market conditions affecting comparable public companies; and
The Practice Aid identifies various available methods for allocating enterprise value across classes and series of capital stock to determine the estimated fair value of common stock at each valuation date. In accordance with the Practice Aid, we considered the following methods:
Based on our early stage of development and other relevant factors, we determined that OPM method as well as a hybrid approach of the OPM and the PWERM methods were the most appropriate methods for allocating our enterprise value to determine the estimated fair value of our common stock. In determining the estimated fair value of our common stock, our board of directors also considered the fact that our stockholders could not freely trade our common stock in the public markets. Accordingly, we applied discounts to reflect the lack of marketability of our common stock based on the weighted-average expected time to liquidity. The estimated fair value of our common stock at each grant date reflected a non-marketability discount partially based on the anticipated likelihood and timing of a future liquidity event.
Upon the completion of our initial public offering, the fair value of our common stock is based on the daily closing quoted market price of our common stock.
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We also account for any modifications to share based payments in accordance with ASC 718.
Off-Balance Sheet Arrangements
Since our inception, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Indemnification Agreements
We enter into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, we indemnify, hold harmless and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, including in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third party with respect to its technology. The term of these indemnification agreements is generally perpetual any time after the execution of the agreement. The maximum potential amount of future payments we could be required to make under these arrangements is not determinable. We have never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the fair value of these agreements is minimal.
We have also agreed to indemnify our directors and officers for certain events or occurrences while the director or officer is, or was serving, at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the director’s or officer’s service. The maximum potential amount of future payments we could be required to make under these indemnification agreements is not specified in the agreements; however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.
JOBS Act Accounting Election
The Jumpstart Our Business Startups Act of 2012 (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. We have elected to avail ourselves of this exemption from new or revised accounting standards, and, therefore, will not be subject to the same new or revised accounting standards as public companies that are not emerging growth companies. We intend to rely on other exemptions provided by the JOBS Act, including without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.
We will remain an emerging growth company until the earliest to occur of: (1) the last day of our first fiscal year in which we have total annual revenues of more than $1.07 billion; (2) the date we qualify as a “large accelerated filer,” with at least $700.0 million of equity securities held by non-affiliates; (3) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period; and (4) the last day of the fiscal year ending after the fifth anniversary of our initial public offering.
Based on our current market capitalization we may become a large accelerated filer for the year ended December 31, 2021 which would result in us losing emerging growth company status. The final determination won’t be known until June 30, 2021, the last day of our second fiscal quarter.
Recently Issued Accounting Pronouncements
See the section titled “Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements” in Note 2 to our consolidated financial statements included elsewhere in this Annual Report for additional information.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Sensitivity
The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates or exchange rates. As of December 31, 2020, we had cash and cash equivalents of $850.1 million, consisting of interest-bearing money market funds for which the fair value would be affected by changes in the general level of U.S. interest rates. However, due to the short-term maturities and the low-risk profile of our cash equivalents, an immediate 10% relative change in interest rates would not have a material effect on the fair value of our cash equivalents or on our future interest income.
We do not believe that inflation, interest rate changes or foreign currency exchange rate fluctuations have had a significant impact on our results of operations for any periods presented herein.
Item 8. Financial Statements and Supplementary Data.
The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K. An index of those financial statements is found in Item 15 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Management’s Evaluation of our Disclosure Controls and Procedures
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable 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 judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2020, 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 our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) or an attestation report of our independent registered accounting firm due to a transition period established by rules of the SEC for newly public companies. Additionally, our independent registered accounting firm will not be required to opine on the effectiveness of our internal control over financial reporting pursuant to Section 404 until such time as we are no longer an “emerging growth company” as defined in the JOBS Act.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Code of Ethics
Our board of directors has adopted a written Code of Business Conduct and Ethics applicable to all officers, directors and employees, including our principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions. We have posted a current copy of our Code of Business Conduct and Ethics on our website at www.ateapharma.com in the “Investors” section under “Corporate Governance.” We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of our Code of Business Conduct and Ethics, as well as Nasdaq’s requirement to disclose waivers with respect to directors and executive officers, by posting such information on our website at the address and location specified above. The information contained on our website is not incorporated by reference into this Annual Report on Form 10-K.
Executive Officers and Directors
The information concerning our executive offers and directors required by this Item 10 is contained under the caption “Executive Officers and Directors” at the end of Part I, Item I, Business, of this Annual Report on Form 10-K. The remainder of the information required to be disclosed by this Item 10 will be included in our definitive Proxy Statement for the 2021 Annual Meeting of Stockholders under the headings “Corporate Governance,” “Delinquent Section 16(a) Reports” (if applicable) and “Committees of the Board” and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this Item 11 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2021 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 our definitive proxy statement to be filed with the SEC with respect to our 2021 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 our definitive proxy statement to be filed with the SEC with respect to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
The information required by this Item 14 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference.
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
(1) Financial Statements
The following documents are included on pages F-1 through F-23 attached hereto and are filed as part of this Annual Report on Form 10-K.
Report of Independent Registered Accounting Firm F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations and Comprehensive Loss F-4
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
(2) Financial Statement Schedules
Schedules have been omitted since they are either not required or not applicable or the information is otherwise included herein.
(3) Exhibits
Incorporated by Reference Filed/
4.2 Description of Capital Stock *
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Incorporated by Reference Filed/
21.1 List of Subsidiaries of the Registrant *
23.1 Consent of Independent Registered Public Accounting Firm *
101.INS XBRL Instance Document *
101.SCH XBRL Taxonomy Extension Schema Document *
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document *
101.DEF XBRL Taxonomy Extension Definition Linkbase Document *
101.LAB XBRL Taxonomy Extension Label Linkbase Document *
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document *
* Filed herewith.
** Furnished herewith.
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 the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
ATEA PHARMACEUTICALS, INC.
Date: March 30, 2021 By: /s/ Jean-Pierre Sommadossi
Jean-Pierre Sommadossi, Ph.D.
President and 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
Jean-Pierre Sommadossi, Ph.D.
Andrea Corcoran
Wayne Foster
/s/ Franklin Berger Director (Lead Director) March 30, 2021
Franklin Berger
/s/ Isaac Cheng Director March 30, 2021
Isaac Cheng, M.D.
/s/ Andrew Hack Director March 30, 2021
Andrew Hack, M.D., Ph.D.
/s/ Bruno Lucidi Director March 30, 2021
Bruno Lucidi
/s/ Polly A. Murphy Director March 30, 2021
Polly A. Murphy, D.V.M., Ph.D.
/s/ Bruce Polsky Director March 30, 2021
Bruce Polsky, M.D.
/s/ Barbara Duncan Director March 30, 2021
Barbara Duncan
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations and Comprehensive Loss F-4
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Atea Pharmaceuticals, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Atea Pharmaceuticals, Inc. and subsidiary (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2014.
Boston, Massachusetts
March 30, 2021
F-2
ATEA PHARMACEUTICALS, INC.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
December 31,
Assets
Current assets
Unbilled other receivable 5,815 —
Prepaid expenses and other current assets 7,545 249
Property and equipment, net 48 41
Liabilities, Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Current liabilities
Accounts payable $ 60 $ 548
Accrued expenses and other current liabilities 14,368 1,887
Other liabilities 36 95
Commitments and contingencies (see Note 7)
Stockholders’ equity (deficit):
The accompanying notes are an integral part of these consolidated financial statements.
F-3
ATEA PHARMACEUTICALS, INC.
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share amounts)
Years Ended December 31,
Collaboration revenue $ 48,633 $ — $ —
Operating expenses
Interest income and other, net 83 574 413
The accompanying notes are an integral part of these consolidated financial statements.
F-4
ATEA PHARMACEUTICALS, INC.
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(in thousands, except share amounts)
Shares Amount Shares Amount Capital Deficit Equity (Deficit)
Vesting of restricted common stock — — 103,333 — — — —
Stock-based compensation expense — — — — 414 — 414
Stock-based compensation expense — — — — 624 — 624
Issuance of common stock for exercise of stock options — — 18,747 — 27 — 27
Stock-based compensation expense — — — — 6,800 — 6,800
The accompanying notes are an integral part of these consolidated financial statements.
F-5
ATEA PHARMACEUTICALS, INC.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
Cash flows from operating activities
Depreciation and amortization expense 19 17 17
Changes in operating assets and liabilities
Unbilled accounts receivable (5,815 ) — —
Prepaid expenses and other current assets (7,296 ) (43 ) 86
Net cash provided by (used in) operating activities 296,734 (12,829 ) (7,908 )
Cash flows from investing activities
Additions to property and equipment (26 ) (2 ) (12 )
Net cash used in investing activities (26 ) (2 ) (12 )
Cash flows from financing activities
Net proceeds from issuance of convertible preferred stock 214,116 — 27,359
Proceeds from issuance of common stock 27 — 124
Net proceeds from initial public offering of common stock 317,605 — —
Net cash provided by financing activities 531,748 — 27,483
Cash, cash equivalents and restricted cash at the end of period
Supplemental disclosure of non-cash financing activities
The accompanying notes are an integral part of these consolidated financial statements.
F-6
ATEA PHARMACEUTICALS, INC.
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
1. Nature of Business
Atea Pharmaceuticals, Inc., together with its subsidiary Atea Pharmaceuticals Securities Corporation, is referred to on a consolidated basis as “the Company”.
The Company is a clinical-stage biopharmaceutical company focused on discovering, developing and commercializing antiviral therapeutics to improve the lives of patients suffering from life-threatening viral infections.
In October 2020, the Company entered into a license agreement, (“the License Agreement”) with F. Hoffmann-La Roche Ltd and Genentech, Inc. (collectively “Roche”), granting Roche an exclusive license to develop and commercialize certain of the Company’s compounds outside of the United States. Atea is responsible for completing certain ongoing clinical and non-clinical and manufacturing activities and at its own expense.
As part of the consideration, Roche agreed to pay the Company an upfront payment of $350,000 (the “Roche Upfront Payment”), which was received in November 2020.
On November 3, 2020, the Company completed an initial public offering of its common stock (the “IPO”). In connection with the IPO, the Company issued 14,375,000 shares of its common stock at $24.00 per share for net proceeds of $317,605 after deducting underwriting discounts and commissions and offering expenses. Upon closing of the IPO, all outstanding shares of the Company’s convertible preferred stock converted into 57,932,090 shares of common stock.
The Company is subject to risks and uncertainties common to clinical-stage biopharmaceutical companies. These risks include, but are not limited to, potential failure of preclinical and clinical studies, uncertainties associated with research and development activities generally, competition from technical innovations of others, dependence upon key personnel, compliance with governmental regulations, the need to obtain marketing approval for any product candidate that the Company may discover and develop, the need to gain broad acceptance among patients, payers and health care providers to successfully commercialize any product for which marketing approval is obtained and the need to secure and maintain adequate intellectual property protection for the Company’s proprietary technology and products. Further, the Company is currently dependent on third-party service providers for much of its preclinical research, clinical development and manufacturing activities. Product candidates currently under development will require significant amounts of additional capital, additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercialization. Even if the Company is able to generate revenues from the sale of its product candidates, if approved, it may not become profitable. If the Company fails to become profitable or is unable to sustain profitability on a continuing basis, then it may be unable to continue its operations at planned levels and be forced to reduce its operations. The Company is also subject to risks associated with the COVID-19 global pandemic, including actual and potential delays associated with certain of its ongoing and anticipated trials, and potential negative impacts on the Company’s business operations and its ability to raise additional capital to finance its operations.
Since its inception, the Company has incurred recurring operating losses. As of December 31, 2020, the Company had an accumulated deficit of $65,160. The Company expects to continue to generate operating losses for the foreseeable future. The Company believes that its cash and cash equivalents of $850,117 as of December 31, 2020 will be sufficient to fund its operations as currently planned through at least 2023.
The Company may seek additional capital through one or more of a combination of financing through the sale of additional equity securities, debt financing, or funding in connection with any additional collaborative relationships it may enter into or other arrangements. There can be no assurance that the Company will be able to obtain such additional funding, on terms acceptable to the Company, on a timely basis or at all. The terms of any financing may adversely affect the holdings or the rights of the Company’s existing shareholders.
F-7
2. Summary of Significant Accounting Policies
Basis of Presentation and Use of Estimates
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and in these accompanying notes. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors and assumptions that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates, which include but are not limited to estimates of revenue, accrued research and development expenses, and the valuation of common stock in connection with the issuance of stock-based awards prior to the completion of the IPO. Changes in estimates are recorded in the period in which they become known.
Principles of Consolidation
The consolidated financial statements include the accounts of Atea Pharmaceuticals, Inc. and its wholly- owned subsidiary, Atea Pharmaceuticals Securities Corporation. All intercompany amounts have been eliminated in consolidation.
Revenue Recognition
As of December 31, 2020, all of the Company’s revenue to date had been collaboration revenue generated from its license agreement with Roche.
The Company analyzes its collaboration arrangements to assess whether they are within the scope of Accounting Standards Codification ASC Topic 808, Collaborative Arrangements (“ASC 808”), to determine whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards that are dependent on the commercial success of such activities. If the Company concludes that some or all aspects of the arrangement are within the scope of ASC 808 and do not represent a transaction with a customer, the Company recognizes its allocation of the shared costs incurred with respect to the jointly conducted activities pursuant to ASC 730, Research and Development. As such, the Company will expense costs as incurred, including any reimbursements made, and recognize reimbursements received as a reduction of research and development expense. If the Company concludes that some or all aspects of the arrangement represent a transaction with a customer, the Company accounts for those aspects of the arrangement within the scope of ASC 606, Revenue from Contracts with Customers (“ASC 606”).
To determine the appropriate amount of revenue to be recognized for arrangements that the Company determines are within the scope of ASC 606, it performs the following steps: (i) identify the contract(s) with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) each performance obligation is satisfied. ASC 606 requires significant judgment and estimates and results in changes to, but not limited to: (i) the determination of the transaction price, including estimates of variable consideration, (ii) the allocation of the transaction price, including the determination of estimated selling price, and (iii) the pattern of recognition, including the application of proportional performance as a measure of progress on service-related promises and application of point-in-time recognition for supply-related promises.
The transaction price is generally comprised of an upfront payment due at contract inception and variable consideration in the form of payments for the Company’s services and materials and milestone payments due upon the achievement of specified events. Other payments the Company could be entitled to include tiered royalties earned when customers recognize net sales of licensed products. The Company considers the existence of any significant financing component within its arrangements and has determined that a significant financing component does not exist in its arrangements as substantive business purposes exist to support the payment structure other than to provide a significant benefit of financing. The Company measures the transaction price based on the amount of consideration to which it expects to be entitled in exchange for transferring the promised goods and/or services to the customer. The Company utilizes either the expected value method or the most likely amount method to estimate the
F-8
amount of variable consideration, depending on which method is expected to better predict the amount of consideration to which the Company will be entitled. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. With respect to arrangements that include payments for a development or regulatory milestone payment, the Company evaluates whether the associated event is considered probable of achievement and estimate the amount to be included in the transaction price using the most likely amount method. Milestone payments that are not within the Company’s control or the licensee, such as those dependent upon receipt of regulatory approval, are not considered to be probable of achievement until the triggering event occurs. At the end of each reporting period, the Company re-evaluates the probability of achievement of each milestone and any related constraint, and if necessary, adjustsits estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenue and net loss in the period of adjustment. For arrangements that include sales-based royalties, including milestone payments based upon the achievement of a certain level of product sales, wherein the license is deemed to be the sole or predominant item to which the payments relate, the Company recognizes revenue upon the later of: (i) when the related sales occur or (ii) when the performance obligation to which some or all of the payment has been allocated has been satisfied (or partially satisfied). Consideration that would be received for optional goods and/or services is excluded from the transaction price at contract inception.
The Company generally allocates the transaction price to each performance obligation based on a relative standalone selling price basis. The Company develops assumptions that require judgment to determine the standalone selling price for each performance obligation in consideration of applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated research and development costs. However, in certain instances, the Company allocates variable consideration entirely to one or more performance obligation if the terms of the variable consideration relate to the satisfaction of the respective performance obligation and the amount allocated is consistent with the amount the Company would expect to receive for the satisfaction of the respective performance obligation.
The Company recognizes revenue based on the amount of the transaction price that is allocated to each respective performance obligation when or as the performance obligation is satisfied by transferring a promised good or service to the customer. For performance obligations that are satisfied at a point in time, the Company recognizes revenue when control of the goods and/or services is transferred to the customer. For performance obligations that are satisfied over time, the Company recognizes revenue by measuring the progress toward complete satisfaction of the performance obligation using a single method of measuring progress which depicts the performance in transferring control of the associated goods and/or services to the customer. The Company generally uses input methods to measure the progress toward the complete satisfaction of performance obligations satisfied over time. With respect to arrangements containing a license to its intellectual property that is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from amounts allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. Significant management judgment is required in determining the level of effort required under an arrangement and the period over which the Company is expected to complete its performance obligations under an arrangement. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenue and net loss in the period of adjustment.
F-9
Contract costs
The Company recognizes as an asset the incremental costs of obtaining a contract with a customer if the costs are expected to be recovered. The Company has elected the practical expedient in ASC 340, Other Assets and Deferred Costs, wherein it recognizes the incremental costs of obtaining a contract as an expense when incurred if, at inception, the expected amortization period of the asset that the Company otherwise would have recognized is one year or less. In connection with the Roche License Agreement, the Company incurred an incremental cost of $7,000, which was included in general and administrative costs in the accompanying statement of operations and comprehensive loss for the year ended December 31, 2020.
Cash and Cash Equivalents
The Company considers all highly-liquid investments purchased with maturities of 90 days or less at acquisition to be cash equivalents. Cash and cash equivalents include bank demand deposits and money market funds that invest in U.S. government and U.S. government agency obligations. Cash equivalents are reported at fair value.
Concentrations of Credit Risk and Significant Suppliers
Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents. The Company maintains its cash and cash equivalents with a financial institution that management believes is creditworthy. The Company’s investment policy includes guidelines on the quality of the financial institutions and financial instruments and defines allowable investments that the Company believes minimizes the exposure to concentration of credit risk.
The Company is dependent on third-party manufacturers to supply products for research and development activities in its programs. In particular, the Company relies and expects to continue to rely on a small number of manufacturers to supply it with its requirements for the active pharmaceutical ingredients and formulated drugs related to these programs. These programs could be adversely affected by a significant interruption in the supply of active pharmaceutical ingredients and formulated drugs.
Fair Value Measurement
Assets and liabilities recorded at fair value on a recurring basis in the consolidated balance sheets 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 an exit price that would be paid to transfer a liability 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—Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2—Observable inputs (other than quoted prices included in Level 1) that are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determination of fair value of the assets or liabilities.
Cash, cash equivalents and restricted cash are Level 1 assets which are comprised of funds held in checking and money market accounts. Cash, cash equivalents and restricted cash were recorded at fair value as disclosed in Note 4. The carrying amounts of accounts payable, accrued expenses and unbilled other receivables approximate their fair values due to their short-term maturities.
F-10
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the asset. The Company estimates the useful life of its assets as follows:
Asset Estimated useful life
Laboratory equipment Five years
Office furniture and fixtures Five years
Computer hardware Two years
Leasehold improvements Shorter of useful life or remaining lease term
Maintenance and repairs that do not improve or extend the life of the respective asset are expensed to operations as incurred. Upon disposal of an asset, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the consolidated statements of operations.
Other Assets
Other assets consists primarily of bank deposits of $107, classified as restricted cash, to collateralize a letter of credit.
Impairment of Long-lived Assets
The Company reviews long-lived assets when events or changes in circumstances indicate the carrying value of the assets may not be recoverable. Recoverability is measured by comparing the book value of the assets to the estimated undiscounted future net cash flows that the asset is expected to generate. If the estimated undiscounted future net cash flows are less than the book value, the asset is impaired, and the impairment loss to be recognized in income is measured as the amount by which the book value of the asset exceeds its fair value, which is measured based on the estimated discounted future net cash flows that the asset is expected to generate. No impairment losses were recorded during the years ended December 31, 2020, 2019 and 2018.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development expenses consist principally of costs associated with outsourced research and development activities, including preclinical and clinical development, manufacturing and research conducted by contract research organizations and academic institutions, employee compensation, including stock-based compensation and consulting expenses together with related expenses, professional fees and facility and overhead costs. Facility and overhead costs primarily include the allocation of rent, utility and office-related expenses attributable to research and development personnel. In circumstances where amounts have been paid in advance or in excess of costs incurred, the Company records a prepaid expense, which is expensed as services are performed or goods are delivered.
The Company has entered into various research and development contracts with third parties. These agreements are generally cancelable, and related payments are recorded as research and development expenses as incurred. The Company records accruals for estimated ongoing research costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies, including the phase of completion of events, invoices received and contracted costs. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates. The Company’s historical accrual estimates have not been materially different from the actual costs.
Patent Costs
Costs to secure and maintain the Company’s patents are expensed as incurred and are classified as general and administrative expenses in the Company’s consolidated statements of operations.
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Stock-based Compensation
Stock-based compensation expense is classified in the consolidated statement of operations in the same manner in which the award recipient’s payroll costs or service payments are classified. Stock-based awards granted to employees and non-employees are measured based on the estimated fair value of the awards using the Black-Scholes option pricing model (“Black-Scholes”). Stock-based compensation expense with respect to awards with service conditions is recognized using the straight-line method over the service period. Stock-based compensation with respect to awards with performance conditions is recognized when satisfaction of the performance conditions is probable. Stock-based compensation is based on awards ultimately expected to vest and, as such, it is reduced by forfeitures. The Company accounts for forfeitures as they occur.
Black-Scholes requires the use of subjective assumptions which determine the fair value of stock-based awards. These assumptions include:
Fair value of common stock— Through October 29, 2020, because there was no public market for the Company’s common stock, the fair value of the Company’s common stock underlying stock-based awards was estimated on each grant date by the board of directors.
In the absence of a public trading market for the Company’s common stock prior to its IPO, on each grant date, the Company developed an estimate of the fair value of its common stock based on valuations from an independent third-party valuation firm using information known to the Company on the date of grant, a review of any recent events and their potential impact on the estimated fair value per share of the common stock.
The third-party valuations of the Company’s common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid.
The assumptions used to determine the estimated fair value of the Company’s common stock are based on numerous objective and subjective factors, combined with management judgment, including:
• the Company’s stage of development and business strategy;
• the progress of the Company’s research and development efforts;
• equity market conditions affecting comparable public companies; and
The Practice Aid identifies various available methods for allocating enterprise value across classes and series of capital stock to determine the estimated fair value of common stock at each valuation date. In accordance with the Practice Aid, the Company considered the following methods:
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Based on the Company’s early stage of development and other relevant factors, the Company determined that OPM method as well as a hybrid approach of the OPM and the PWERM methods were the most appropriate methods for allocating its enterprise value to determine the estimated fair value of its common stock. In determining the estimated fair value of the Company’s common stock, its board of directors also considered the fact that its stockholders could not freely trade its common stock in the public markets. Accordingly, the Company applied discounts to reflect the lack of marketability of its common stock based on the weighted-average expected time to liquidity. The estimated fair value of our common stock at each grant date reflected a non-marketability discount partially based on the anticipated likelihood and timing of a future liquidity event.
Upon the completion of the Company’s initial public offering, the fair value of its common stock is based on the daily closing quoted market price of its common stock.
Risk-free interest rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of a stock-based award.
Expected term—The expected term represents the period that stock-based awards are expected to be outstanding. Given the Company’s lack of specific history, the expected term for option grants is determined using the simplified method. The simplified method deems the term to be the average of the time-to-vesting and the contractual life of the stock-based awards.
Expected volatility—Since the Company was privately held through October 29, 2020 and did not have any trading history for its common stock, the expected volatility was estimated based on the average volatility for comparable publicly traded biotechnology companies over a period equal to the expected term of the stock-based awards. The comparable companies were chosen based on their similar size, stage in the life cycle or area of specialty. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.
Expected dividend yield —The Company has never paid dividends on its common stock and has no plans to pay dividends on its common stock. Therefore, the Company used an expected dividend yield of zero.
The Company also accounts for any modifications to share based payments in accordance with ASC 718.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base. Deferred tax assets, which relate primarily to the carrying amount of the Company’s net operating loss carryforwards, are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax expense or benefit is the result of changes in the deferred tax assets and liabilities. Valuation allowances are established to reduce deferred tax assets where, based upon the available evidence, the Company concludes that it is more-likely-than-not that the deferred tax assets will not be realized. In evaluating its ability to recover deferred tax assets, the Company considers all available positive and negative evidence, including its operating results, ongoing tax planning and forecasts of future taxable income.
Reserves are provided for tax benefits for which realization is uncertain. Such benefits are only recognized when the underlying tax position is considered more-likely-than-not to be sustained on examination by a taxing authority. Interest and penalties related to uncertain tax positions are recognized in the provision of income taxes.
Comprehensive Loss
Comprehensive income (loss) includes net income (loss) as well as other changes in stockholders’ equity (deficit) that result from transactions and economic events other than those with equity holders. The Company did not have any items of comprehensive income or loss other than net loss for the years ended December 31, 2020, 2019 and 2018.
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Net Loss Per Share Attributable to Common Stockholders
The Company calculates basic and diluted net loss per share attributable to common stockholders in conformity with the two-class method required for participating securities. The Company considers its convertible preferred stock to be participating securities as, in the event a dividend is paid on common stock, the holders of convertible preferred stock would be entitled to receive dividends on a basis consistent with the common stockholders. Under the two-class method, the net loss attributable to common stockholders is not allocated to the convertible preferred stock as the holders of the convertible preferred stock do not have a contractual obligation to share in losses.
Since inception, the Company has incurred recurring operating losses and, as such, under the two-class method, basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock. Under the two-class method, for periods with net income, basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Net income attributable to common stockholders is computed by subtracting from net income the portion of current year earnings that the participating securities would have been entitled to receive pursuant to their dividend rights had all of the year’s earnings been distributed. No such adjustment to earnings is made during periods with a net loss, as the holders of the participating securities have no obligation to fund losses. Diluted net loss per common share is computed by using the weighted-average number of shares of common stock outstanding. Due to net losses for the years ended December 31, 2020, 2019 and 2018, basic and diluted net loss per share attributable to common stockholders were the same, as the effect of all potentially dilutive securities would have been anti-dilutive.
Segments
Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the chief operating decision maker (the “CODM”), in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s CODM is its chief executive officer, who manages and allocates resources to the operations on a total company basis. Accordingly, there is a single operating segment and one reportable segment.
Emerging Growth Company Status
The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act, until such time as those standards apply to private companies. The Company has 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 that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases, which requires a lessee to record a right-of-use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. As the Company has elected to use the extended transition period for complying with new or revised accounting standards as available under the Jobs Act, the standard is effective for the Company beginning January 1, 2021. The Company plans to use the modified retrospective method of adoption and to elect the available practical expedients. The Company expects that the adoption of the new leasing standard will result in the recognition of a material right to use asset and lease liability in the consolidated balance sheets and does not expect it to have a material impact to its results of operations or statements of cash flows.
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In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) I. Accounting for Certain Financial Instruments with Down Round Features II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception(“ASU 2017-11”). Part I applies to entities that issue financial instruments such as warrants, convertible debt or convertible preferred stock that contain down-round features. Part II replaces the indefinite deferral for certain mandatorily redeemable noncontrolling interests and mandatorily redeemable financial instruments of nonpublic entities contained within ASC Topic 480 with a scope exception and does not impact the accounting for these mandatorily redeemable instruments. As the Company has elected to use the extended transition period for complying with new or revised accounting standards as available under the Jobs Act, the standard is effective for the Company beginning January 1, 2021, with early adoption permitted. The Company is currently evaluating the expected impact that the standard could have on its consolidated financial statements and related disclosures.
Recently Adopted Accounting Pronouncements
In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. This update clarifies that transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement participant is a customer in the context of a unit of account, consistent with the unit of account guidance in ASC 606. The update also requires that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting that transaction together with revenue recognized under ASC 606 is precluded if the collaborative arrangement participant is not a customer. The Company early adopted the new standard on October 1, 2020. The standard was retroactively applied to January 1, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial position and results of operations.
3. Collaboration Revenue
Background
In October 2020, the Company entered into the Roche License Agreement, granting Roche an exclusive license to develop and commercialize certain of the Company’s compounds outside of the United States.
Atea is responsible for completing certain ongoing clinical and non-clinical and manufacturing activities and at its own expense. These obligations are referred to as the Atea Ongoing Studies and the Atea Manufacturing Obligations. The parties will work collaboratively on a global development plan intended to support regulatory approvals and will share joint development costs equally.
The agreement provided for a nonrefundable upfront payment of $350,000 which the Company received in November 2020. In addition, the Roche License Agreement further provides that Roche is obligated to pay the Company up to $330,000 in the aggregate upon the achievement of certain development and regulatory milestone events; up to $320,000 in the aggregate upon the achievement of certain sales based milestone events; and tiered royalties based on annual net sales of the products covered by the Roche License Agreement, ranging between low double-digits and mid-twenties, subject to certain adjustments and limitations. Roche has the right to terminate the Roche License Agreement for convenience pursuant to the terms of the agreement. In addition, the Roche License Agreement contains a provides for a co-promotion agreement for the United States at the Company’s election.
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Accounting Analysis
The Company concluded that the License Agreement is under the scope of ASC 808 as both parties will actively participate in a joint operating activity and are exposed to significant risks and rewards that depend on the activity’s commercial success. ASC 808 provides that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all of the guidance in ASC 606 should be applied, including recognition, measurement, presentation, and disclosure requirements related to such unit of account. The unit-of-account guidance in ASC 808, which aligns with the guidance in ASC 606 (that is, a distinct good or service) is used when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of ASC 606. Based on the Company’s analysis, it concluded that the delivery of the license to Roche, the performance of the Atea Ongoing Studies and the Atea Manufacturing Obligations should be accounted for under ASC 606. The Company’s efforts under the Global Development Plan, which include certain manufacturing obligations in the initial year of the contract, will be accounted for under ASC 808.
The Company concluded that the provision of the license to Roche, the performance of the Atea Ongoing Studies and the Atea Manufacturing Obligations should be combined as one performance obligation as Roche cannot receive the benefit of each promise without the other promises. Specifically, Roche is dependent on the Company’s expertise and ability to complete the Atea Ongoing Studies and the Atea Manufacturing Obligations, which cannot be performed by other third parties, in order to exploit the value from the license.
The transaction price consists of the $350,000 upfront payment. The Company concluded that all other forms of variable consideration, including future development and regulatory milestones should be constrained at contract inception. As part of this conclusion, the Company assessed the stage of development and risk associated with remaining development required to achieve each milestone, including whether the achievement of certain milestones was outside the control of the Company. Sales based milestone payments and royalty payments qualify for the sales based royalty exception and will be recognized when the underlying sale transaction have occurred.
The transaction price will be recognized as collaboration revenue over the period in which the Company performs the Atea Ongoing Studies and the Atea Manufacturing Activities. The Company concluded that an inputs method based on costs incurred compared to total estimated costs-to-complete approach most faithfully depicts the Company’s progress towards completion.
The Company concluded that its efforts to complete the Global Development Plan will be accounted for under ASC 808. The Company will account for expenses incurred and reimbursements made or received from Roche pursuant to ASC 730, Research and Development. As such, the Company will expense costs as incurred, including any reimbursements made to Roche, and recognize reimbursement received from Roche as a reduction of research and development expense.
The Company incurred approximately $7,000 of capitalizable costs to obtain the contact. The Company will utilize the practical expedient in ASC 340 and recognize such costs immediately as the Company expected to complete its performance obligations under the Roche License Agreement in less than 12 months.
The Company classifies all revenues recognized under the Roche License Agreement as collaboration revenues within the accompanying consolidated statements of operations and comprehensive loss. For the year ended December 31, 2020, the Company recognized collaboration revenue of $48,633 related to the combined performance obligation. As of December 31, 2020, the Company recorded Deferred Revenue of $301,367 related to the Roche License Agreement. Deferred Revenue is classified in current liabilities in the accompanying balance sheet as of December 31, 2020 as the performance obligation is expected to be completed within twelve months (or one year) from the inception of the contract.
For the year ended December 31, 2020, costs reimbursable by Roche and reflected as a reduction to operating expenses were $7,901, of which $5,815 had not been reimbursed by Roche as of December 31, 2020 and was recorded as Unbilled other receivable in current assets in the accompanying
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consolidated balance sheet. The Company also recorded research and development expense of $2,086 related to its share of costs incurred by Roche.
4. Fair Value Measurements
The following tables present information about the Company’s financial assets measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:
Fair Value Measurements as of December 31, 2020
Level 1 Level 2 Level 3 Total
Cash equivalents
Fair Value Measurements as of December 31, 2019
Level 1 Level 2 Level 3 Total
Cash equivalents
The Company’s assets with fair value categorized as Level 1 within the fair value hierarchy include money market accounts which invest in money market funds are publicly traded mutual funds and are presented as cash equivalents on the consolidated balance sheets as of December 31, 2020 and 2019.
There were no transfers among Level 1, Level 2 or Level 3 categories in the years ended December 31, 2020, 2019 and 2018.
5. Property and Equipment, net
Property and equipment, net, consist of the following:
December 31,
Laboratory equipment $ 5 $ 5
Office furniture and fixtures 13 13
Computer hardware 37 11
Total property and equipment, at cost 180 154
Less: accumulated depreciation and amortization (132 ) (113 )
Property and equipment, net $ 48 $ 41
Depreciation and amortization expense was $19, $17 and $17 for the years ended December 31, 2020, 2019 and 2018, respectively.
6. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
December 31,
License fees (Note 7) — 200
Professional fees and other 1,079 361
Payroll and payroll related 2,743 —
Total accrued expenses and other current liabilities $ 14,368 $ 1,887
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7. Commitments and Contingencies
Operating Lease Agreements
The Company leases an office facility under a non-cancelable operating lease that expires July 2022. The office lease includes commitments obligating the Company to pay a pro rata share of certain building operating costs and annual rent escalations which will result in higher lease payments in future years. Rent expense is recognized on a straight-line basis over the term of the lease with the difference between expense and the payments recorded as deferred rent, which is included in accrued expenses and other current liabilities and other liabilities in the consolidated balance sheets.
As of December 31, 2020, future minimum payments for operating leases are as follows:
Total future minimum lease payments $ 540
Rent expense recognized under all operating leases was $303, $305 and $316 for the years ended December 31, 2020, 2019 and 2018, respectively.
The Company is required to maintain a letter of credit for the duration of the office lease. The Company maintains bank deposits of $107 to collateralize the letter of credit which are classified as restricted cash and a long-term asset in the consolidated balance sheets as of December 31, 2020 and 2019.
The Company has an agreement with a consultant that requires payment of a success fee calculated as a percentage of certain product sales, subject to a cumulative maximum payout of $5.0 million. This success payment is contingent upon the occurrence of future events and the timing and likelihood of such payment is neither probable nor estimable.
Indemnification
The Company enters into certain types of contracts that contingently requires the Company to indemnify various parties against claims from third parties. These contracts primarily relate to (i) the Company’s bylaws, under which the Company must indemnify directors and executive officers, and may indemnify other officers and employees, for liabilities arising out of their relationship, (ii) contracts under which the Company must indemnify directors and certain officers and consultants for liabilities arising out of their relationship, and (iii) procurement, service or license agreements under which the Company may be required to indemnify vendors, service providers or licensees for certain claims, including claims that may be brought against them arising from the Company’s acts or omissions with respect to the Company’s products, technology, intellectual property or services.
From time to time, the Company may receive indemnification claims under these contracts in the normal course of business. In the event that one or more of these matters were to result in a claim against the Company, an adverse outcome, including a judgment or settlement, may cause a material adverse effect on the Company’s future business, operating results or financial condition. It is not possible to determine the maximum potential amount potentially payable under these contracts since the Company has no history of prior indemnification claims and the unique facts and circumstances involved in each particular claim will be determinative.
8. Convertible Preferred Stock
As of December 31, 2019, the Company had 33,645,447 shares of convertible preferred stock (“Convertible Preferred Stock), authorized, issued and outstanding, of which 20,000,000 shares were designated as Series A convertible preferred stock (“Series A Preferred”); 7,592,830 shares were designated as Series B convertible preferred stock (“Series B Preferred”); and 6,052,617 shares were designated as Series C convertible preferred stock (“Series C Preferred”). The Company’s Series A Preferred, Series B Preferred and Series C Preferred were issued at $1.00, $3.03 and $4.56 per share, respectively.
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In May 2020, the Company authorized 15,313,382 shares of Series D convertible preferred stock (“Series D Preferred”) and 8,973,261 shares of Series D-1 convertible preferred stock (“Series D-1 Preferred”). In May 2020 the Company entered into a stock purchase agreement with certain investors and issued 15,313,382 shares of Series D Preferred for net proceeds of $106,631. In October 2020, the Company issued8,973,261 shares of Series D-1 Preferred at a purchase price of $11.98 per share for aggregate net proceeds of $107,485.
In connection with the Company’s IPO, all shares of its convertible preferred stock converted into 57,932,090 shares of common stock.
As of December 31, 2020 the Company has 10,000,000 shares of preferred stock authorized. No shares of preferred stock have been issued.
9. Common Stock
At December 31, 2020, the authorized capital of the Company included 300,000,000 shares of common stock, of which 82,436,937 shares of common stock were issued and outstanding. On all matters to be voted upon by the holders of common stock, holders of common stock are entitled to one vote per share. The holders of common stock are entitled to receive dividends, when declared by the board, and to share ratably in the Company’s assets legally available for distribution to the holders of the Company’s stock in the event of liquidation. The holders of common stock have no preemptive, redemption or conversion rights.
The Company had the following reserved shares of common stock:
Shares reserved under ESPP 1,187,000 —
10. Stock-based Compensation
In October 2020, the Company’s shareholders approved the Company’s 2020 Incentive Award Plan (the “2020 Plan”), which became effective in connection with the Company’s initial public offering on October 29, 2020. The 2020 Plan provides for the issuance of up to 7,924,000 shares of common stock and for grant of incentive stock options or other incentive awards to employees, members of the board of directors and consultants of the Company. The number of shares of common stock that may be issued under 2020 Plan is also subject to increase on the first day of each calendar year equal to the lesser of i) 5% of the aggregate number of shares of common stock outstanding on the final day of the immediately preceding calendar year or ii) such smaller number of shares as is determined by the board of directors. In January 2021, the shares available under the plan were increased by 4,130,847 shares.
The 2020 Plan replaced and is the successor of 2013 Equity Incentive Plan, as amended (the “2013 Plan”), which provided for the grant of incentive stock options, non-qualified stock options, restricted common stock awards and other awards for up to 7,807,200 shares of common stock to employees, officers, directors and consultants of the Company. Upon the closing of the Company’s initial public offering the 2013 Plan was terminated and no further awards will be made under the 2013 Plan. Any cancellation of outstanding awards at the time of the IPO under the 2013 Plan will be made available for grant under 2020 Plan.
As of December 31, 2020 there were 7,059,000 shares of common stock remaining available for future issuance under the 2020 Plan.
Restricted Common Stock
Restricted stock awards generally include vesting and risk of forfeiture provisions that lapse upon satisfaction of performance conditions or over time periods commencing on the grant date and concluding
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on the third or fourth anniversary of the grant date. As of December 31, 2020, there were no unvested shares of restricted stock.
As of January 1, 2020, the Company had issued 200,000 shares of restricted stock to a consultant in connection with a business development agreement that were subject to vesting provisions. In December 2020, the Company and the consultant agreed to terminate the consulting agreement. In connection with the termination, the Company agreed to vest 20,000 shares of restricted stock. The Company recorded compensation expense of $657 in connection with the vesting. The remaining 180,000 shares of restricted stock have been forfeited.
Employee Stock Purchase Plan
In October 2020, the Company’s shareholders approved the 2020 Employee Stock Purchase Plan (the “ESPP”), which became effective in connection with the Company’s initial public offering on October 29, 2020. A total of 1,187,000 shares of common stock are reserved for issuance under this plan. As of December 31, 2020 the Company had not commenced any offering under the ESPP and no shares have been issued.
Stock Options
The following summarizes stock option activity:
The aggregate intrinsic value of options granted is calculated as the difference between the exercise price of the options and the estimated fair value of the Company’s common stock for those options that had exercise prices lower than the fair value of the Company’s common stock.
Option grants generally vest over a service period of three or four years and have a contractual term of ten years. As of December 31, 2020, total unrecognized compensation expense related to stock option awards was $33,240, which amount is being recognized over a remaining weighted average period of 3.7 years.
The weighted average grant date fair value per option granted during the years ended December 31, 2020, 2019 and 2018 was $14.93, $1.19 and $0.77, respectively. The fair value of each award was estimated using Black-Scholes based on the following assumptions:
For the Year Ended December 31,
Expected dividend yield 0 % 0 % 0 %
Stock-based Compensation Expense
Stock-based compensation expense is classified as follows:
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For the Year Ended December 31,
Research and development expense $ 3,565 $ 255 $ 192
Total stock-based compensation expense $ 7,457 $ 624 $ 414
The components of stock-based compensation expense were:
For the Year Ended December 31,
Restricted common stock $ 657 $ — $ 5
Total stock-based compensation expense $ 7,457 $ 624 $ 414
During the year ended December 31, 2020 the Company modified the terms of certain options granted to a former employee. As a result, the Company recorded a compensation expense of $1,951. There were no modifications during the years ended December 31, 2019 and 2018.
11. Income Taxes
During the years ended December 31, 2020, 2019 and 2018, the Company did not record a current or deferred income tax expense or benefit.
The reconciliation of federal statutory income tax rate to the Company’s effective income tax rate is as follows:
For the Year Ended December 31,
Expected income tax benefit at the federal statutory rate 21.0 % 21.0 % 21.0 %
Research and development credits 12.5 0.9 1.1
Stock-based compensation (13.6 ) — —
Change in valuation allowance (17.3 ) (27.6 ) (26.4 )
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The principal components of the Company’s deferred tax assets consisted of the following:
December 31,
Deferred tax assets
Research and development credits 1,791 455
Net deferred tax assets $ — $ —
As of December 31, 2020, the Company had federal net operating losses of $53,197 and state net operating loss carryforwards of $52,540. The Company also has federal and state research and development tax credit carryforwards of $1,574 and $274, respectively, which may be used to offset
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future tax liabilities. Federal net operating losses generated prior to 2018 of $27,522 can be carried back two years and carried forward 20 years. Federal net operating losses generated prior to 2018 and federal tax credit carryforwards will begin to expire in 2033. Federal net operating losses generated post 2017 of $25,675 can be carried forward indefinitely but can only offset 80 percent of annual taxable income. State net operating losses will begin to expire in 2033 and state tax credit carryforwards will begin to expire in 2031.
Management has evaluated the positive and negative evidence bearing upon the realizability of the Company’s deferred tax assets, which are comprised principally of net operating loss carryforwards. Based on the Company’s cumulative net losses since inception and projected potential net operating loss for tax purposes in 2021, the Company determined that it is more likely than not that it will not recognize the benefits of the deferred tax assets. As a result, the Company has recorded a full valuation allowance of approximately $16,985 at December 31, 2020. The Company increased its valuation allowance by $1,888 for the year ended December 31, 2020 in order to maintain a full valuation allowance against its deferred tax assets.
Under the provisions of Sections 382 and 383 of the Internal Revenue Code (the “IRC”), net operating loss and credit carryforwards and other tax attributes may be subject to limitation if there has been a significant change in ownership of the Company, as defined by the IRC. Future owner or equity shifts, including an initial public offering, could result in limitations on net operating loss and credit carryforwards.
The Company performed an analysis through December 31, 2020 pursuant to Section 382 of the IRC to determine whether any limitations might exist on the utilization of net operating losses and other tax attributes. Based on this analysis, the Company has determined that ownership changes occurred in 2014, resulting in an annual limitation of $169 on the use of its net operating losses and other tax attributes generated prior to the ownership change. To the extent that the Company raises additional equity financing or other changes in the ownership interest of significant stockholders occurs, additional tax attributes may become subject to an annual limitation. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities.
The Company files federal and Commonwealth of Massachusetts state income tax returns. The statute of limitations for assessment by the Internal Revenue Service (the “IRS”), and state tax authorities remains open for all tax years ended since the inception of the Company. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the IRS or state tax authorities to the extent utilized in a future period. No federal or state tax audits are currently in process.
The Company evaluates tax positions for recognition using a more-likely-than-not recognition threshold, and those tax positions eligible for recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon the effective settlement with a taxing authority that has full knowledge of all relevant information. The Company has not recorded any amounts for unrecognized tax benefits as of December 31, 2020 nor has it recorded any penalties or interest.
12. Net Loss Per Share Attributable to Common Stockholders
The following outstanding potentially dilutive shares have been excluded from the calculation of diluted net loss per share, as their effect is anti-dilutive:
For the Year Ended December 31,
13. Related Party Transactions
The Company recorded expense of $43, $145 and $0 for consulting services provided by an entity affiliated with the former interim Chief Financial Officer for the years ended December 31, 2020, 2019 and 2018, respectively. Of these amounts, $0 and $20 were included in accrued expenses and other current liabilities as of December 31, 2020 and 2019, respectively.
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NovaMedica
In May 2014, the Company entered into an exclusive license agreement with NovaMedica LLC, an affiliated entity of a stockholder, pursuant to which the Company granted NovaMedica a license to certain intellectual property rights for commercialization of a potential product for the treatment of hepatitis C. In connection with the license, the Company received a license fee of $200 in partial consideration for the grant of the license. Recognition of the license fee had been deferred until both the Company and NovaMedica finalized certain other terms and conditions of the license agreement.
The Company and NovaMedica failed to agree on the terms of an amendment to the license agreement and the license agreement was terminated in May 2020. The Company paid a fee of $400 in connection with the termination.
There were no other material transactions with related parties.
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