Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial statements and the related notes included elsewhere in this Annual Report. In addition to historical financial information, this discussion and other parts of this report contain forward-looking statements that involve risks and uncertainties. You should carefully read the sections entitled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements.
Overview
We have historically been a clinical-stage biopharmaceutical company focused on developing transformative medicines for the treatment of diseases of the retina and optic nerve. On June 28, 2022, we announced that our board of directors would conduct a comprehensive review of strategic alternatives focused on maximizing shareholder value. As part of this review of strategic alternatives, we explored the potential for an acquisition, company sale, merger, divestiture of assets, private placement of equity securities, and other strategic transactions. Prior to this announcement, we had devoted substantially all our resources to conducting research and development and raising capital.
After conducting a broad and rigorous search for strategic partners who could fund the clinical development of our most advanced programs, GB-102 for the treatment of wet age-related macular degeneration and GB-401 for glaucoma, we concluded that we did not have sufficient capital to pursue further clinical development of either program on our own, nor did we believe that we had the ability to raise sufficient additional capital to do so. Between October 2021 and August 2022, we contacted 38 parties to solicit interest in licensing or partnering GB-102, and 11 parties to solicit interest in licensing GB-401, but received only one proposal, and it was on terms that were not acceptable to us. As a result, on August 18, 2022, our board of directors approved a restructuring plan, which included the termination of all activities related to GB-102 and GB-401, as well as certain cost-reduction initiatives, including a 71% reduction in our workforce. On October 3, 2022, we provided written notification to Johns Hopkins University (“JHU”) of our decision to terminate our exclusive license agreement to all licensed patent rights owned by JHU that were relevant to our GB-102 program. On November 10, 2022, we entered into an agreement with Mireca Medicines GmbH (“Mireca”) to assign certain intellectual property and revert all rights to our GB-601 preclinical program for retinitis pigmentosa, Stargardt Disease, and Leber congenital amaurosis back to Mireca, thereby terminating our involvement in that program. On November 21, 2022, we announced that we had entered into a definitive merger agreement with CalciMedica, Inc. (“CalciMedica”) to combine our companies in an all-stock transaction, subject to shareholder approval.
We are continuing the preclinical development of our two remaining programs: GB-501, a gene therapy delivered via a recombinant adeno-associated virus (“rAAV”) vector to treat corneal clouding caused by mucopolysaccharidosis type 1 (“MPS1”), and GB-701, a novel and potent small-molecule complement factor B inhibitor being developed to target the complement pathway as a potential treatment for geographic atrophy (“GA”). As GB-501 is a biologic, it will not require, nor benefit from, our drug delivery technologies as it is administered via an intrastromal injection into the cornea. GB-701 is a new chemical entity currently being developed in collaboration with Insilico Medicine, a clinical-stage, end-to-end artificial intelligence (“AI”)-drug discovery company. As a small molecule that is targeted to treat a chronic disease, GB-701 will likely require a sustained delivery technology.
On November 21, 2022, we entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), as may be amended from time to time, with CalciMedica, Inc. (“CalciMedica”) a clinical-stage biopharmaceutical company focused on developing first-in-class therapies for serious inflammatory diseases with high unmet need, and Camaro Merger Sub, Inc., our wholly-owned subsidiary (“Merger Sub”). Upon the terms and subject to the satisfaction of the conditions described in the Merger Agreement, Merger Sub will be merged with and into CalciMedica, with CalciMedica surviving such merger as a wholly owned subsidiary of Graybug (the “Merger”). Based on a CalciMedica valuation of $100.0 million and a Graybug valuation of $40.0 million, the equity holders of Graybug immediately prior to the effective time of the transaction are expected to own approximately 28.6% of the aggregate number of outstanding shares of Graybug common stock immediately after the Effective Time and the equity holders of CalciMedica immediately prior to the effective time are expected to own 71.4% of the aggregate number of outstanding shares of Graybug common stock immediately after the effective time. The Merger, which has been approved by our board of directors and the board of directors and stockholders of CalciMedica, is expected to close in the first quarter of 2023, subject to the satisfaction or waiver of certain closing conditions, including the approval of our stockholders. Certain officers, directors and stockholders of Graybug who in the aggregate own approximately 45% of the outstanding shares of our common stock immediately prior to the date of the Merger Agreement are parties to support agreements whereby such stockholders have agreed, among other things, to vote in favor of the Merger, subject to the terms of the support agreements. Although we have entered into the Merger Agreement and intend to consummate the proposed Merger, there is no assurance that we will be able to successfully consummate the proposed Merger on a timely basis, or at all. If, for any reason, the proposed Merger is not completed, we will reconsider our strategic alternatives and could pursue another strategic transaction similar to the proposed Merger, potential collaborative, partnering or other strategic arrangements for our programs, including a sale or divestiture of our legacy programs, or liquidate and distribute available cash.
We were incorporated in May 2011 and our operations to date have been financed primarily by gross proceeds of approximately $134.0 million from the issuance of convertible promissory notes and convertible preferred stock, and $92.0 million in net proceeds
from our initial public offering of our common stock (“IPO”) after deducting underwriters’ discounts and commissions of $7.2 million and offering costs of $4.2 million.
Since inception, we have had significant operating losses. Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures and, to a lesser extent, general and administrative expenditures. Our net loss was $35.6 million and $35.8 million for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, we had an accumulated deficit of $204.8 million and cash, cash equivalents and short-term investments of $39.1 million.
We expect to continue to incur net losses for the foreseeable future, and, if the closing of the Merger does not occur, and if we continue to operate our business as we have historically, we expect our research and development expenses, general and administrative expenses, and capital expenditures to continue to increase. In particular, we would expect our expenses to increase if we continue our development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products, as well as hire additional personnel, develop commercial infrastructure, pay fees to outside consultants, lawyers and accountants, and incur increased costs associated with being a public company, such as expenses related to services associated with maintaining compliance with Nasdaq listing rules and SEC reporting requirements, insurance and investor relations. If the Merger fails to close and we continue to operate our business as we have historically, our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending upon the timing of our clinical trials and our expenditures on other research and development activities. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our accounts payable and accrued research and development and other current liabilities.
Recent Developments
Proposed Merger
On February 9, 2023, we filed a definitive proxy statement further describing the Merger including setting March 15, 2023 as the date on which our stockholders can vote on the Merger. Upon the terms and subject to the satisfaction of the conditions described in the Merger Agreement, including approval of the transaction by our stockholders, our wholly-owned subsidiary will consummate the Merger. Upon the closing of the Merger, we will adopt the business and operating plan of CalciMedica. In the event the Merger is not consummated, our Board will be required to develop a new business plan. We cannot currently ascertain such plan nor the financial impact on us at this time.
Minimum Bid Price
On June 16, 2022, we received a written notification (the “Notice Letter”) from Nasdaq indicating that we were not in compliance with Nasdaq Listing Rule 5450(a)(1), as the closing bid price for our common stock was below the $1.00 per share requirement for the 30 prior consecutive business days which is the minimum closing price required to maintain continued listing on the Nasdaq Stock Market under Nasdaq Listing Rule 5450(a)(1) (the “Minimum Bid Requirement”). The Notice Letter stated that we had 180 calendar days, or until December 13, 2022, to regain compliance with the Minimum Bid Requirement.
On July 21, 2022, we received a written notification from Nasdaq indicating that we had regained compliance with Nasdaq Listing Rule 5550(a)(2) because the closing bid price of our common stock during the preceding ten consecutive business days, July 7, 2022 to July 20, 2022, had been at $1.00 per share or greater.
On December 27, 2022, we received a second written notification (the “Second Notice Letter”) from Nasdaq indicating that we were not in compliance with the Minimum Bid Requirement. The Second Notice Letter stated that we had 180 calendar days, or until June 23, 2023, to regain compliance with the Minimum Bid Requirement. We currently anticipate effecting a reverse stock split in connection with the Merger that would allow us to regain compliance with the Minimum Bid Requirement, but there can be no assurance that we will continue to satisfy Nasdaq’s minimum financial and other requirements in future periods.
Business Effects of the COVID-19 Pandemic
The full impact of the ongoing COVID-19 pandemic remains highly uncertain and subject to change. There are many uncertainties around the COVID-19 pandemic and future developments, which are unpredictable, may result in a material, negative impact to our operations and financial condition.
For additional information on the various risks posed by the COVID-19 pandemic, please read Item 1A. Risk Factors.
Components of Operating Results
Research and Development Expenses
Our research and development expenses have included:
•
personnel costs, which include salaries, benefits and stock-based compensation;
•
expenses incurred under agreements with consultants, third-party contract organizations that conduct research and development activities on our behalf;
•
costs related to production of preclinical and clinical materials, including fees paid to contract manufacturers;
•
laboratory and vendor expenses related to the execution of preclinical studies and previously planned clinical trials;
•
laboratory supplies and materials used for internal research and development activities;
•
the acquisition cost of in-licensed and purchased intellectual property;
•
the acquisition of acquired in-process research and development; and
•
facilities and equipment costs.
Most of our historical research and development expenses have been related to the preclinical and clinical development of GB-102, which was terminated in August 2022. We have not reported program costs since inception because we have not tracked or recorded our research and development expenses on a program-by-program basis historically. We have historically used our personnel and infrastructure resources across the breadth of our research and development activities, which are directed toward identifying and developing product candidates.
We expense all research and development costs in the periods in which they are incurred. Costs for certain research and development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and third-party service providers.
If the Merger fails to close, we would expect our research and development expenditures to increase substantially if we continued to invest in research and development activities related to developing our GB-501 and GB-701 product candidates, and if we elected to continue to advance either of those programs to conduct clinical trials. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates would be highly uncertain.
Because of the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration and completion costs of any preclinical studies or clinical trials or if, when, or to what extent we would generate revenues from the commercialization and sale of our product candidates or if we even continue to pursue such product development, commercialization or sales if the Merger fails to close. We may never succeed in achieving regulatory approval for our product candidates. The duration, costs and timing of preclinical studies and clinical trials and development of our remaining product candidates, to the extent we continue to pursue such activities if the Merger fails to close, will depend on a variety of factors, including:
•
securing a strategic transaction, or one or more partnerships, to provide funding for the timely execution of further product development;
•
successful completion of preclinical studies and clinical trials to the satisfaction of the FDA, European Medicines Agency (“EMA”) or other regulatory authorities;
•
demonstrating that our product candidates are safe and effective for any of their proposed indications;
•
acceptance of our products, if and when approved, by patients, the medical community and third-party payors;
•
effectively competing with other therapies;
•
maintaining a continued acceptable safety and profile of our products following approval;
•
obtaining and maintaining coverage and adequate reimbursement from third-party payors;
•
applying for and receiving marketing approvals from applicable regulatory authorities for our product candidates;
•
scaling up our manufacturing processes and capabilities to support additional or larger clinical trials of our product candidates and commercialization of any of our product candidates for which we obtain marketing approval;
•
developing, validating and maintaining a commercially viable manufacturing process that is compliant with current good manufacturing practices;
•
developing and expanding our sales, marketing and distribution capabilities and launching commercial sales of our product candidates, if and when approved, whether alone or in collaboration with others;
•
minimizing and managing any delay or disruption to our ongoing or planned clinical trials, and any adverse impacts to the U.S. and global market for pharmaceutical products, as a result of the current COVID-19 pandemic;
•
obtaining and maintaining patent and trade secret protection and regulatory exclusivity;
•
protecting our rights in our intellectual property portfolio; and
•
the impact of the COVID-19 pandemic and the corresponding responses of businesses and governments.
If the Merger fails to close, we may never succeed in achieving regulatory approval for any of our remaining product candidates. We may obtain unexpected results from our preclinical studies and subsequent clinical trials, if any. We may elect to discontinue, delay or modify future clinical trials of some product candidates or focus on others. A change in the outcome of any of these factors could mean a significant change in the costs and timing associated with the development of our current preclinical product candidates. For example, if the FDA, or another regulatory authority, were to require us to conduct clinical trials beyond those that we currently anticipate would be required for the completion of clinical development, or if we experience significant delays in execution of or enrollment in any of our preclinical studies or future clinical trials, if any, we could be required to expend significant additional financial resources and time on the completion of preclinical and clinical development.
General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel costs, costs related to maintenance and filing of intellectual property and other expenses for outside professional services, including legal, human resources, audit and accounting services. Personnel costs consist of salaries, benefits and stock-based compensation expense. If the Merger fails to close, and we pursue an operating plan that involves an expansion of our current headcount or operations, we would expect our general and administrative expenses to increase over the next several years to support such an expansion, increased costs of operating as a public company, retaining and motivating our employees, the development of a commercial infrastructure to support the potential commercialization of our product candidates, and the use of outside service providers such as insurers, consultants, lawyers, and accountants.
Restructuring, Impairment and Other Costs of Terminated Programs
Restructuring, impairment and other costs of terminated programs primarily consists of severance and termination benefit expense for the 20 employees terminated during 2022 and non-cash impairment of capital equipment and a right-of-use asset.
Interest Income
Our interest income principally reflects interest earned on our investments. Our investments include U.S. government-backed money-market funds, corporate debt securities, commercial paper and government bonds. We place cash in excess of immediate requirements into a custodial account and invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation.
Results of Operations
Comparison of the Years Ended December 31, 2022 and 2021
The following sets forth our results of operations (in thousands):
Year Ended December 31, Change
Operating expenses:
Restructuring, impairment and other costs of terminated programs 2,963 — 2,963 *
* Not meaningful
Research and Development Expenses
Research and development expenses comprised (dollars in thousands):
Year Ended December 31, Change
Acquired in-process research and development 2,193 — 2,193 *
* Not meaningful
As of December 31, 2022 and 2021, we had 2 and 19 employees, respectively, engaged in research and development activities.
Research and development expenses were $14.1 million and $18.9 million for the years ended December 31, 2022 and 2021, respectively. The decrease was primarily due to the completion of the extension phase of the GB-102 Phase 2b clinical trial in May 2021, a decrease in licensing fees, and a decrease in personnel costs due to the termination of employees in the second half of 2022 in connection with our restructuring, offset in part by a $2.2 million increase due to the acquisition of in-process research and development related to the acquisition of RainBio, Inc. in March 2022. If our Merger fails to close, we would expect research and development expenses to decrease in 2023 compared to 2022.
General and Administrative Expenses
General and administrative expenses to support our business activities comprised (dollars in thousands):
Year Ended December 31, Change
Facility costs, travel and other expenses 3,185 3,917 (732 ) (19 )%
Patent filing and portfolio costs 1,006 1,078 (72 ) (7 )%
Write-off deposits on fixed assets purchase commitments — 1,352 (1,352 ) *
* Not meaningful
As of December 31, 2022 and 2021, we had 6 and 8 employees, respectively, engaged in general and administrative activities.
General and administrative expenses were $19.1 million and $17.0 million for the years ended December 31, 2022 and 2021, respectively. The increase was primarily due to a $2.8 million increase in legal, accounting and investment banking fees resulting from the strategic review, including the proposed Merger with CalciMedica and an increase in stock based compensation of $1.2 million, offset in part by a reduction of $1.4 million in the write-off of deposits on fixed assets purchase commitments in March 2021 and a decrease in the cost of the director and officer liability insurance of $0.5 million.
Restructuring, Impairment and Other Costs of Terminated Programs
For the year ended December 31, 2022, we recorded $3.0 million of restructuring, impairment and other costs of terminated programs. We terminated all development activities relating to the GB-102 and GB-401 programs and reduced our workforce by 71%. Refer to Notes 1 and 6 to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K for more details.
Year Ended December 31,
Impairment of capital equipment and right-of-use asset $ 1,599
Severance and termination benefit expense 1,065
Other restructuring costs 299
Total restructuring, impairment and other costs of terminated programs $ 2,963
Interest Income
Interest income was $0.6 million and $0.1 million for the years ended December 31, 2022 and 2021, respectively. The increase was primarily due to higher interest rates in 2022.
Liquidity and Capital Resources
Overview
To date, we have incurred losses and negative cash flows from operations. As of December 31, 2022, we had available cash, cash equivalents and short-term investments of $39.1 million and an accumulated deficit of $204.8 million. To date, we have financed our operations primarily through private placements of our convertible preferred stock and convertible promissory notes and the issuance of common stock upon our initial public offering (“IPO”).
On November 21, 2022, we entered into the Merger Agreement with CalciMedica, which, among other things, prohibits us from raising additional capital without CalciMedica’s consent, which is outside of our control.
We incurred net losses of $35.6 million and $35.8 million for the years ended December 31, 2022 and 2021, respectively. If the Merger fails to close, we would expect to continue to incur significant operational expenses and net losses in the upcoming 12 months and beyond. Our net losses may fluctuate significantly from quarter to quarter and year to year, depending on the stage and complexity of our research and development studies and related expenditures, if any, the receipt of additional payments on the sale or licensing of our technology, if any, and the receipt of payments under any current or future collaborations we may enter into.
If the Merger fails to close, and we continued operations based on our current operating plan, we believe our cash, cash equivalents and short-term investments of $39.1 million at December 31, 2022 would be adequate to meet our cash needs for at least 12 months from the issuance date of this Annual Report on Form 10-K.
Commitments and Other Obligations
For a detailed description of our commitments and obligations, see Note 5 – Commitments and Contingencies, to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
Leases
As of December 31, 2022, we had two real property leasing arrangements: one for our Baltimore, MD laboratory, which had been our research and development facility before being decommissioned in October 2022, and a second for our corporate offices in Redwood City, CA, which subsequently expired on January 31, 2023. The lease on the Baltimore facility will expire on June 30, 2023. As of December 31, 2022, we had fixed lease payment obligations of $0.2 million, payable within 12 months.
License Agreements
We are party to an agreement with the University of North Carolina, pursuant to which we have in-licensed intellectual property rights. This agreement obligates us to timely achieve certain development milestones, as well as pay royalties in the low-single digits based on sales of products arising from our GB-501 program. None of these events had occurred as of December 31, 2022, and no royalties were due from the sales of licensed products.
Other Commitments
We have historically entered into contracts in the normal course of business with CDMOs, for manufacturing process development and supply, and with other vendors for preclinical research studies and other services or products for operating purposes. These contracts generally provide for termination on notice of 60 to 90 days. As of December 31, 2022, there was one such contract, worth approximately $1.3 million, still in effect for future services, and there were no unpaid cancellation or other related costs.
In connection with an agreement with an investment banking firm for services related to the proposed Merger with CalciMedica, we incurred and paid approximately $0.8 million during the current year and will be required to make an additional payment of approximately $2.3 million contingent upon the consummation of the proposed Merger with CalciMedica. The $0.8 million incurred during the current year is included in general and administrative expenses.
In connection with the proposed Merger with CalciMedica, all outstanding stock awards will be fully accelerated and we will be required to make change-in-control severance payments to current employees totaling approximately $5.5 million.
As of December 31, 2022, these commitments were approximately $9.1 million due within 3 to 6 months.
During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements as defined under SEC rules.
Funding Requirements
The consummation of the Merger with CalciMedica is subject to a number of closing conditions, including the approval by our stockholders, approval by Nasdaq of our application for initial listing of our common stock in connection with the Merger, and other customary closing conditions. We are targeting a closing of the transaction in the first quarter of 2023.
If the proposed Merger is not consummated, we may have to revert to an operating plan more consistent with our historical operations. Our funding requirements, and ability to access additional capital, would then be determined by a number of factors and risks.
Any product candidates we may develop may never achieve commercialization, and we anticipate that we will continue to incur losses for the foreseeable future. If the Merger fails to close, we would expect that our research and development expenses, general and administrative expenses, and capital expenditures would decrease in the aggregate from historical levels as our current development programs are both early stage and preclinical. As a result, until such time, if ever, as we could generate substantial product revenue, we would expect to finance our cash needs through a combination of equity offerings, debt financings or other capital sources, including mergers, acquisitions, potential collaborations, licenses and other similar arrangements. If the Merger fails to close, our primary uses of capital would be compensation and related expenses, third-party clinical research, manufacturing and development services, license payments or milestone obligations that may arise, laboratory and related supplies, clinical costs, manufacturing costs, legal and other regulatory expenses and general overhead costs.
If the Merger fails to close, we believe that our existing cash, cash equivalents and short-term investments will enable us to fund our operating expenses and capital expenditure requirements in excess of 12 months from the issuance date of these financial statements. We base this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. We base the sufficiency of our existing cash, cash equivalents and short-term investments to fund our operations on the current period re-forecast of our projected cash burn rate following our decision to terminate all clinical development of our remaining product candidates, as well as our reduced headcount and reliance on CDMOs to perform all of our research and development work in 2023. While we believe that our current cash, cash equivalents and short-term investments are adequate to meet our needs for the next 12 months from issuance, we would need to raise or otherwise access additional funds in order to further advance our research and development programs, operate our business and meet our obligations as they come due if the Merger fails to close.
If the Merger fails to close, we would require additional financing to advance our remaining product candidates through clinical development, to develop, acquire or in-license other potential product candidates and to fund operations for the foreseeable future. In addition to exploring an acquisition, company sale, merger, divestiture of assets, private placement of equity securities, or other strategic transactions, we would continue to seek funds through equity offerings, debt financings or other capital sources, potentially including collaborations, licenses and other similar arrangements. We may, however, be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to raise capital, we will need to delay, reduce or terminate planned activities to reduce costs.
Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements if the Merger fails to close. Our future funding requirements would depend on many factors, including, but not limited to:
•
the scope, progress, results and costs of researching, developing and manufacturing our product candidates or any future product candidates, and conducting preclinical studies and clinical trials;
•
the timing of, and the costs involved in, obtaining regulatory approvals or clearances for our product candidates or any future product candidates;
•
the number and characteristics of any additional product candidates we develop or acquire;
•
the cost of manufacturing our product candidates or any future product candidates and any products we successfully commercialize, including costs associated with building-out our manufacturing capabilities;
•
our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of any such agreements that we may enter into;
•
the expenses needed to attract and retain skilled personnel;
•
the costs associated with being a public company;
•
the timing, receipt and amount of sales of any future approved or cleared products, if any; and
•
the impact of the COVID-19 pandemic and the corresponding responses of businesses and governments.
Further, if the Merger fails to close, our operating plans may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development activities. We currently have no credit facility or committed sources of capital. Because of the numerous risks and uncertainties associated with the development and commercialization of our remaining product candidates, we are unable to estimate the amounts of increased capital and operating expenditures associated with our current product development programs.
Cash Flows
The following table summarizes our cash flows for the periods indicated (in thousands):
Year Ended December 31,
Net cash (used in) provided by:
Financing activities (139 ) 695
Net increase (decrease) in cash and cash equivalents $ 3,940 $ (20,054 )
Operating Activities
Cash used in operating activities of $22.9 million during the year ended December 31, 2022 was primarily attributable to our net loss of $35.6 million, partially offset by non-cash stock-based compensation expense of $6.7 million, $2.2 million in acquired in-process research and development, $1.6 million in impairment of capital equipment and a right-of-use asset, a decrease of $1.8 million in our working capital, $0.3 million in depreciation expense and $0.3 million in non-cash lease expense.
Cash used in operating activities of $31.5 million during the year ended December 31, 2021 was primarily attributable to our net loss of $35.8 million and an increase of $1.6 million in our working capital, partially offset by non-cash stock-based compensation expense of $5.4 million and depreciation expense of $0.5 million.
Investing Activities
Cash provided by investing activities of $27.0 million during the year ended December 31, 2022 consisted of $64.3 million of cash provided upon maturity of short-term investments and $0.4 million in proceeds from the sale of property and equipment, partially offset by $35.6 million of purchases of short-term investments, $1.9 million paid to acquire in-process research and development, and $0.3 million of purchases of property and equipment.
Cash provided by investing activities of $10.8 million during the year ended December 31, 2021 consisted of $105.8 million of cash provided upon maturity of short-term investments, partially offset by $94.6 million of purchases of short-term investments and $0.5 million of purchases of property and equipment.
Financing Activities
There were no material cash activities from financing activities during the year ended December 31, 2022.
Cash provided by financing activities of $0.7 million for the year ended December 31, 2021 was related to proceeds received from the exercise of stock options.
Critical Accounting Policies and Significant Judgments and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as 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 and any such differences may be material.
We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Research and Development Expense and Accruals
We record research and development expenses to operations as incurred. Research and development expenses represent costs incurred by us for the discovery and development of our product candidates and the development of our technology and include: employee-related expenses, including salaries, benefits, travel and non-cash stock-based compensation expense; external research and development expenses incurred under arrangements with third parties, such as CROs, preclinical testing organizations, CDMOs, academic and non-profit institutions and consultants; license fees; and other expenses, which include direct and allocated expenses for laboratory, facilities and other costs.
As part of the process of preparing financial statements, we are required to estimate and accrue expenses. We estimate costs of research and development activities conducted by service providers, which include the conduct of sponsored research, preclinical studies and contract manufacturing activities. Payments made prior to the receipt of goods or services to be used in research and development are deferred and recognized as expense in the period in which the related goods are received or services are rendered. If the costs have been prepaid, this expense reduces the prepaid expenses on the balance sheet, and if not yet invoiced, the costs are included in accrued liabilities on the balance sheet. We classify such prepaid assets as current or non-current assets based on our estimates of the timing of when the goods or services will be realized or consumed. These costs are a significant component of our research and development expenses.
We estimate these costs based on factors such as estimates of the work completed and budget provided and in accordance with agreements established with our collaboration partners and third-party service providers. We estimate the amount of work completed through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. We make significant judgments and estimates in determining the accrued balance in each reporting period. As actual costs become known, we adjust our accrued estimates. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed may vary from our estimates and could result in us reporting amounts that are too high or too low in any particular period. Our accrued expenses are dependent, in part, upon the receipt of timely and accurate reporting from external CROs, CDMOs, and other third-party service providers. Amounts ultimately incurred in relation to amounts accrued for these services at a reporting date may be substantially higher or lower than our estimates.
Our expenses related to clinical trials are based on estimates of patient enrollment and related expenses at clinical investigator sites as well as estimates for the services provided and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that may be used to conduct and manage clinical trials on our behalf. We generally accrue expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis.
We have and may continue to enter into purchase and license agreements to access and utilize certain technologies. We evaluate if such agreements are an acquisition of an asset or a business. To date none of these agreements have been considered to be an acquisition of a business. For asset acquisitions, the upfront payments to acquire such assets, or licenses to such assets, as well as any future milestone payments made before product approval, will be immediately recognized as research and development expenses when due, provided there is no alternative future use of the rights in other research and development projects. These agreements may also include contingent consideration in the form of cash. We assess whether such contingent consideration meets the definition of a derivative.
Stock-based Compensation
We recognize compensation costs related to stock-based awards to employees and non-employees based on the estimated fair value of the awards on the date of grant. We estimate the grant date fair value, and the resulting stock-based compensation, using the Black-Scholes option-pricing model (“Black-Scholes”). The grant date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards.
Black-Scholes requires the use of subjective assumptions to determine the fair value of stock-based awards including:
•
Fair Value of Common Stock— see subsection entitled Common Stock Valuations below.
•
Expected Term—The expected term represents the period that stock-based awards are expected to be outstanding. Our historical share option exercise information is limited due to a lack of sufficient data points and did not provide a reasonable basis upon which to estimate an expected term. The expected term for option grants is therefore determined using the simplified method. The simplified method deems the expected term to be the midpoint between the vesting date and the contractual life of the stock-based awards.
•
Expected Volatility—Since we were a privately held company until September 2020, and do not yet have sufficient trading history for our common stock, the expected volatility is estimated based on the average volatility for comparable publicly traded biotechnology companies over a period equal to the expected term of the stock option grants. The comparable companies are chosen based on their similar size, stage in the life cycle or area of specialty. We will continue to apply this
method until a sufficient amount of historical information over a period equal to the expected term of the stock-based awards becomes available.
•
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 the option.
•
Expected Dividend—We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we used an expected dividend yield of zero.
We will continue to use judgment in evaluating the assumptions utilized for our stock-based compensation expense calculations on a prospective basis. In addition to the assumptions used in Black-Scholes, the amount of stock-based compensation expense we recognize in our financial statements includes stock option forfeitures as they occur. Such assumptions involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different.
Common Stock Valuations
Historically, for all periods prior to our IPO, the fair value of the shares of common stock underlying our stock-based awards was estimated on each grant date by our board of directors. In the absence of a public trading market for our common stock, our board of directors exercised their judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including contemporaneous valuations, our stage of development, important developments in our operations, the prices at which we sold shares of our preferred stock, the rights, preferences and privileges of our preferred stock relative to those of our common stock, actual operating results and financial performance, the conditions in the biotechnology industry and the economy in general, the stock price performance and volatility of comparable public companies, and the lack of liquidity of our common stock, among other factors.
In determining the fair value of our common stock, the methodologies used to estimate our enterprise value were performed using methodologies, approaches and assumptions consistent with the guidance outlined in the American Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately Held Company Equity Securities Issued as Compensation. The grant date fair value of our common stock was determined using valuation methodologies incorporating a number of assumptions including probability weighting of events, volatility, time to liquidation, a risk-free interest rate and an assumption for a discount for lack of marketability (Level 3 inputs). The methodology to determine the fair value of our common stock included estimating the fair value of the enterprise using a hybrid-method market approach, which estimates the fair value of the company by including an estimation of the value of the business based on scenarios in a probability-weighted expected return method (“PWERM”) framework. Under the hybrid-method market approach, the per share value calculated under the scenarios are weighted based on expected exit outcomes and the quality of the information specific to each allocation methodology to arrive at a final estimated fair value per share value of the common stock before a discount for lack of marketability is applied.
Following the closing of our IPO, our board of directors determines the fair market value of our common stock based on its closing price as reported on The Nasdaq Global Market on the date of grant.
Emerging Growth Company and Smaller Reporting Company Status
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (“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. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
We are also a “smaller reporting company,” as defined by Rule 12b-2 of the Securities Exchange Act of 1934, because both the market value of our stock held by non-affiliates is less than $700.0 million and our annual revenue is less than $100.0 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than $250.0 million or (ii) our annual revenue is less than $100.0 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700.0 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
Recently Adopted Accounting Pronouncements
For a full discussion of recently adopted accounting pronouncements, see Note 2 - Summary of Significant Accounting Policies to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company, as defined by Rule 12b-2 under the Securities and Exchange Act of 1934 and in Item 10(f)(1) of Regulation S-K, and are not required to provide the information under this item.
Item 8. Financial Statements and Supplementary Data.
GRAYBUG VISION, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) 77
Financial Statements:
Consolidated Balance Sheets 78
Consolidated Statements of Operations 79
Consolidated Statements of Comprehensive Loss 80
Consolidated Statements of Stockholders’ Equity 81
Consolidated Statements of Cash Flows 82
Notes to Consolidated Financial Statements 83
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Graybug Vision, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Graybug Vision, Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2017.
San Mateo, California
March 8, 2023
GRAYBUG VISION, INC.
Consolidated Balance Sheets
(in thousands, except share and par value information)
December 31,
Assets
Current assets:
Prepaid expenses and other current assets 542 3,408
Property and equipment, net — 1,981
Prepaid expenses and other non-current assets — 29
Liabilities and Stockholders’ Equity
Current liabilities:
Accrued research and development 200 304
Operating lease liability, current 203 —
Deferred rent, long term portion — 8
Commitments and contingencies (Note 5)
Stockholders’ Equity:
Accumulated other comprehensive loss (37 ) (16 )
Total liabilities and stockholders’ equity $ 39,670 $ 69,088
The accompanying notes are an integral part of these consolidated financial statements.
GRAYBUG VISION, INC.
Consolidated Statements of Operations
(in thousands, except share and per share amounts)
Year Ended December 31,
Operating expenses:
Restructuring, impairment and other costs of terminated programs 2,963 —
Net loss per share—basic and diluted $ (1.66 ) $ (1.69 )
The accompanying notes are an integral part of these consolidated financial statements.
GRAYBUG VISION, INC.
Consolidated Statements of Comprehensive Loss
(in thousands)
Year Ended December 31,
Unrealized loss on available-for-sale securities, net of tax (21 ) (12 )
The accompanying notes are an integral part of these consolidated financial statements.
GRAYBUG VISION, INC.
Consolidated Statements of Stockholders’ Equity
(in thousands, except share amounts)
Shares Amount Capital Deficit Loss Equity
Stock issued on exercise of stock options 353,508 — 695 — — 695
Issuance of common stock upon vesting of restricted stock units 25,000 — — — — —
Stock-based compensation expense — — 5,375 — — 5,375
Unrealized loss on available-for-sale securities, net of tax — — — — (12 ) (12 )
Stock-based compensation expense — — 6,713 — — 6,713
Unrealized loss on available-for-sale securities, net of tax — — — — (21 ) (21 )
The accompanying notes are an integral part of these consolidated financial statements.
GRAYBUG VISION, INC.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
Operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense 6,713 5,375
Loss on sale/disposal of assets 97 —
Noncash lease expense 277 —
Accretion of premium and discounts on short-term investments (319 ) 58
Acquired in-process research and development 2,194 —
Impairment of capital equipment and right-of-use asset 1,599 —
Changes in operating assets and liabilities:
Prepaid expenses and other current and non-current assets 2,895 1,378
Accrued research and development (104 ) (1,052 )
Operating lease liability (380 ) —
Other current and non-current liabilities (1,888 ) 95
Net cash used in operating activities (22,879 ) (31,500 )
Investing activities:
Purchases of property and equipment (308 ) (488 )
Acquisition of in-process research and development (1,944 ) —
Proceeds from sale of property and equipment 430 —
Net cash provided by investing activities 26,958 10,751
Financing activities:
Payment of taxes on vested restricted stock units (139 ) —
Proceeds from exercise of stock options — 695
Net cash (used in) provided by financing activities (139 ) 695
Net increase (decrease) in cash and cash equivalents 3,940 (20,054 )
Cash and cash equivalents at beginning of period 13,364 33,418
Cash and cash equivalents at end of period $ 17,304 $ 13,364
Supplemental disclosure of noncash items:
Right-of-use asset arising from the adoption of ASC 842 $ 567 $ —
Acquired in-process research and development in accrued liabilities $ 250 $ —
Unpaid balance for purchases of property and equipment $ — $ 115
The accompanying notes are an integral part of these consolidated financial statements.
GRAYBUG VISION, INC.
Notes to Consolidated Financial Statements
1. Organization
Graybug Vision, Inc., the Company or Graybug, has historically been a clinical-stage biopharmaceutical company developing medicines for the treatment of diseases of the retina and optic nerve. On June 28, 2022, the Company announced that it would conduct a comprehensive review of strategic alternatives focused on maximizing shareholder value. As part of this review of strategic alternatives, the Company explored the potential for an acquisition, company sale, merger, divestiture of assets, private placement of equity securities and other strategic transactions. Prior to this announcement, the Company had devoted substantially all of its resources to conducting research and development and raising capital. On August 18, 2022, the Company’s board of directors approved the restructuring plan that is described further in Restructuring below. On November 21, 2022, the Company entered into a definitive Agreement and Plan of Merger and Reorganization that is described further in Merger below. The Company was founded in May 2011 and had maintained facilities in Baltimore, Maryland and Redwood City, California. The Baltimore facility was vacated and decommissioned on October 1, 2022, and the Redwood City facility lease expired on January 31, 2023.
The Company has historically been subject to risks common to clinical stage companies in the biopharmaceutical industry, including dependence on the clinical success of its product candidates, ability to obtain regulatory approvals of its product candidates, compliance with regulatory requirements, the need for substantial additional financing and protection of its proprietary technology.
Restructuring
On August 18, 2022, the Company’s board of directors approved certain strategic, operational and organizational steps for the Company to undertake in connection with its announcement on June 28, 2022 that the Company would conduct a comprehensive review of strategic alternatives focused on maximizing shareholder value. These steps included both the termination of all activities relating to the Company’s GB-102 and GB-401 programs and certain cost-reduction initiatives, including a reduction in its workforce by 71%. While clinical development of GB-501 remains on hold, preclinical work is still proceeding. Work on GB-701 is still in the drug discovery stage.
In connection with these actions, the Company recorded a restructuring charge of $3.0 million during the year ended December 31, 2022. The restructuring charge includes: (i) severance and termination benefit expense for 20 employees terminated with separation dates between August 31, 2022 and October 31, 2022, (ii) charges related to the impairment of research and development equipment in its Baltimore, Maryland facility and the right-of-use asset for that facility that was decommissioned in October 2022, and (iii) costs to wind-down the GB-102 and GB-401 clinical development programs. Refer to Note 6 for additional information on the restructuring.
Merger
On November 21, 2022, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with CalciMedica, Inc. (“CalciMedica”) a clinical-stage biopharmaceutical company focused on developing first-in-class therapies for serious inflammatory diseases with high unmet need, and Camaro Merger Sub, Inc., Graybug's wholly-owned subsidiary (“Merger Sub”). Upon the terms and subject to the satisfaction of the conditions described in the Merger Agreement, Merger Sub will be merged with and into CalciMedica, with CalciMedica surviving such merger as a wholly owned subsidiary of Graybug (the “Merger”).
The Merger, which has been approved by the Company's board of directors and the board of directors and stockholders of CalciMedica, is expected to close in the first quarter of 2023, subject to the satisfaction or waiver of certain closing conditions, including the approval of the Company's stockholders. Although the Company has entered into the Merger Agreement and intends to consummate the proposed Merger, there is no assurance that the Company will be able to successfully consummate the proposed Merger on a timely basis, or at all. If, for any reason, the proposed Merger is not completed, the Company will reconsider its strategic alternatives and could pursue another strategic transaction similar to the proposed Merger, potential collaborative, partnering or other strategic arrangements for its programs, including a sale or divestiture of the Company's remaining programs, or liquidate and distribute available cash.
Going Concern Considerations
The Company incurred losses from operations and had negative cash flows from operating activities since inception, and the Company’s accumulated deficit at December 31, 2022 was $204.8 million. If the Merger fails to close, the Company expects that it would continue to incur losses from operations and generate negative cash flows from operating activities, given expenditures related to the research and development that would be required and the Company’s lack of revenue-generating activities at this point in the Company’s life cycle. Even if the Merger failed to close and the Company’s remaining product development efforts were successful, it is uncertain when, if ever, the Company would realize significant revenue from product sales.
In March 2021, the Company decided not to proceed with the significant investment required to initiate two Phase 3 clinical trials for GB-102 that were planned for late 2021 and, in August 2022, terminated all activities relating to GB-102 and GB-401, and reduced its workforce by 71%. As of December 31, 2022, the Company is continuing the preclinical development of two remaining programs and has eight remaining employees. As a result, anticipated operating expenses have been significantly reduced and management continues to believe that, if the Merger fails to close, the Company’s current cash, cash equivalents and short-term investments would be adequate to meet its cash needs for at least 12 months from the issuance date of this Annual Report on Form 10-K.
If the Merger fails to close, the Company may pursue financing alternatives, similar to what it has previously executed, which include debt and equity financing. There are no assurances that this process would result in any such transaction and such sources of capital may not be available to the Company in the necessary time frame, in the amounts that the Company requires, on terms that are acceptable to the Company, or at all. If the Merger fails to close, the Company may be unable to consummate a future acquisition, company sale, merger, divestiture of assets or other strategic transaction or raise the necessary funds when needed or reduce spending on required activities, it may not be able to continue the preclinical development of its remaining products, or it could be required to delay, scale back, or eliminate some or all of its research and development programs and other operations, including personnel, any of which may materially harm its business, financial position and results of operations.
COVID-19 Pandemic
The impact of the worldwide spread of a novel strain of coronavirus (“COVID-19”) has been unprecedented and unpredictable, including the emergence of new variants of the coronavirus, such as the Delta and Omicron variants, and resurgences in number and rates of infections, but based on the Company’s current assessment, the Company does not expect any material impact on its long-term strategic plans, operations, or its liquidity due to the worldwide spread of COVID-19. However, the Company is continuing to assess the effect on its operations by monitoring the spread of COVID-19 and the actions implemented to combat the virus and new variants thereof throughout the world and its assessment of the impact of COVID-19 may change.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and are stated in U.S. dollars. Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASUs”) of the Financial Accounting Standards Board (“FASB”).
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, RainBio, Inc. (“RainBio”), which was acquired in March 2022 (see Note 5). All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting periods. Actual results could differ from those estimates. Significant items subject to estimates include estimates related to accrued research and development expenses, contingent milestone payments, other long-lived assets, stock-based compensation, incremental borrowing rates for leases and the valuation of deferred tax assets. The Company bases its estimates using historical experience, Company forecasts and future plans, current economic conditions, and information from third-party professionals that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities and recorded amounts of expenses that are not readily apparent from other sources, and adjusts those estimates and assumptions when facts and circumstances dictate.
The Company’s results can also be affected by economic, political, legislative, regulatory and legal actions. Economic conditions, such as recessionary trends, inflation, interest, changes in regulatory laws and monetary exchange rates, and government fiscal policies, can have a significant effect on operations. While the Company maintains reserves for anticipated liabilities, the Company could be adversely affected by civil, criminal, regulatory or administrative actions, claims, or related proceedings.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities at the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents are stated at fair value and may include money market funds, corporate debt securities and commercial paper. The Company’s cash equivalents consist of money market fund investments, corporate debt securities, and commercial paper.
Investments
The Company invests its excess cash balances in marketable government agency bonds, corporate debt securities and commercial paper. The Company classifies its investments as available-for-sale, reports available-for-sale investments at their fair value at each balance sheet date, and includes any unrealized holding gains and losses (the adjustment to fair value) on debt securities in accumulated other comprehensive loss, a component of stockholders’ equity. Should there be any realized gains or losses, they will be determined using the specific-identification method and included as other income or expense in the statements of operations.
The Company periodically evaluates whether declines in fair values of its marketable securities below their book value are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss as well as the Company’s ability and intent to hold the marketable security until a forecasted recovery occurs. Additionally, the Company assesses whether it has plans to sell the security or it is more likely than not it will be required to sell any marketable securities before recovery of its amortized cost basis. Impairment assessments are made at the individual security level each reporting period. When the fair value of an available-for-sale security is less than its cost at the balance sheet date, a determination is made as to whether the impairment is other-than-temporary and, if it is other-than-temporary, an impairment loss is recognized in the statements of operations, equal to the difference between the investment’s amortized cost and fair value at such date. The Company did not record any impairment charges related to its marketable securities during the years ended December 31, 2022 and 2021. All investment transactions are recorded on a trade date basis.
The Company classifies its available-for-sale marketable securities as non-current if such instrument’s underlying effective maturity date exceeds 12 months and for which the Company has the intent and ability to hold the investment for a period of greater than 12 months. The Company’s marketable securities at December 31, 2022 and 2021 mature in less than 12 months and are included in short-term investments in the consolidated balance sheets.
Concentrations of Credit Risk and Off-balance Sheet Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents and available-for-sale marketable securities. The Company’s investment policy includes guidelines regarding 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 may invest in money market funds, U.S. Treasury securities, corporate debt, U.S. government-related agency securities, commercial paper and certificates of deposit. At December 31, 2022 and 2021, the Company’s cash and cash equivalents were held in financial institutions that management believes are creditworthy. These deposits may exceed federally insured limits. The Company has not experienced any losses historically in these accounts and believes it is not exposed to significant credit risk in its cash and cash equivalents. The Company has no significant off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts, or other hedging arrangements.
Property and Equipment
Property and equipment are stated at cost, subject to adjustments for impairments, less accumulated depreciation. Depreciation is calculated using the straight-line method over the useful lives of the assets as follows:
Asset Estimated useful life
Manufacturing and laboratory equipment Three to five years
Computer hardware Three to five years
Office furniture and equipment Three to five years
Leasehold improvements were amortized over the shorter of their useful lives or the related lease term. Maintenance and repairs that do not improve or extend the life of the respective asset are expensed to operations as incurred. Manufacturing and laboratory equipment received is classified as construction in progress until placed into service, at which time depreciation commences. 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 results of operations.
Leases
The Company adopted Accounting Standards Codification (“ASC”), Topic 842, Leases (“ASC 842”), on January 1, 2022, as discussed below in Recently Adopted Accounting Pronouncements. Under ASC 842, the Company determines if an arrangement is or contains a lease at contract inception.
Operating lease right-of-use assets represent the Company’s right and ability to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized based on the present value of lease payments over the lease term at the commencement date of the lease. Right-of-use assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement
date, less any lease incentive received. The present value of lease payments is determined by using the interest rate implicit in the lease, if that rate is readily determinable; otherwise, the Company uses its incremental borrowing rate. The incremental borrowing rate reflects the rate of interest that a lessee would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Lease expense for an operating lease is recognized on a straight-line basis over the lease term.
The Company elected the practical expedient to not separate lease and non-lease components for all classes of assets. Additionally, the Company has elected an accounting policy to not recognize short-term leases, which have a lease term of 12 months or less, on the condensed consolidated balance sheet. Variable lease payments are primarily related to utilities, property taxes, insurance and common area maintenance, and are recognized as lease cost when incurred.
Restructuring, Impairment and Other Costs of Terminated Programs
Restructuring, impairment and other costs of terminated programs primarily consists of severance and termination benefit expense and non-cash impairment of capital equipment and an operating lease right-of-use asset. These charges are included in restructuring, impairment and other costs of terminated programs in the condensed consolidated statement of operations.
The Company recognizes severance and termination benefits when it is probable that employees will be entitled to such benefits and the amount can be reasonably estimated and recorded at fair value. The timing of the recognition of expense for severance and termination benefits depends on whether employees are required to render service until they are terminated in order to receive the termination benefits. If employees are required to render service until they are terminated in order to receive the severance and termination benefits, a liability is recognized ratably over the future service period. Otherwise, a liability is recognized when management has committed to a restructuring plan and has communicated those actions to affected employees.
Refer to Note 6 for additional information on the severance expense that the Company recognized for employees terminated in connection with the August 2022 reduction-in-force.
Long-lived Asset Impairment
The Company assesses long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of the asset or group of assets may not be recoverable. During the year ended December 31, 2022, the Company commenced restructuring activities which indicated that the carrying amount of the long-lived assets might not be recoverable. The Company evaluated the long-lived assets, consisting primarily of capital equipment and an operating lease right-of-use asset, for impairment. If the carrying amount of an asset group exceeds its estimated undiscounted net future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset group exceeds its fair value. To the extent available, the Company will also consider third-party valuations of an asset group that were prepared for other business purposes. An impairment charge is recognized for the amount by which the carrying value exceeds its estimated fair value. When an impairment loss is recognized for equipment to be held and used, the adjusted carrying amounts are depreciated over their remaining useful life.
All of the Company’s equipment in its Maryland facility was sold during the year ended December 31, 2022. Additionally, the Company decommissioned the facility in the fourth quarter and all employees that had worked in that facility were either terminated or permanently working remotely as of December 31, 2022. As such, the Company recorded an impairment charge to reflect the net cash proceeds received from the sale of the equipment, and an impairment charge of the operating lease right-of-use asset related to the Maryland facility. Refer to Note 6 for additional information regarding the impairment charges recorded in connection with the Company’s restructuring.
Research and Development Expenses
Research and development costs are expensed as incurred. The Company’s research and development expenses consist primarily of costs incurred for the development of its product candidates and include expenses incurred under agreements with contract development and manufacturing organizations (“CDMOs”) contract research organizations (“CROs”) investigative sites and consultants to conduct clinical trials and preclinical and non-clinical studies, costs to acquire, develop and manufacture supplies for clinical trials and other studies, salaries and related costs, including stock-based compensation, depreciation and other allocated facility-related and overhead expenses.
Accrued Research and Development Costs
The Company records accruals for estimated costs of preclinical and clinical studies and manufacturing development. The Company’s clinical and manufacturing development activities have been conducted by third-party service providers, including CROs and CDMOs. The financial terms of these contracts are subject to negotiation, which vary by contract and may result in payments that do not match the periods over which materials or services are provided. The Company accrues the costs incurred under the agreements based on an estimate of actual work completed in accordance with the agreements. In the event the Company makes advance payments
for goods or services that will be used or rendered for future research and development activities, the payments are deferred and capitalized as a prepaid expense and recognized as expense as the goods are received or the related services are rendered. Such payments are evaluated for current or non-current classification based on when they are expected to be realized. If the Company does not identify costs that have begun to be incurred or if the Company underestimates or overestimates the level of services performed or the costs of these services, actual expenses could differ from the Company’s estimates.
Patent Costs
Costs to secure and maintain patents covering the Company’s technology and product candidates are expensed as incurred and are classified as general and administrative expenses in the consolidated statements of operations.
Stock-based Compensation
Stock-based compensation expense related to stock options and warrants granted to employees, directors and non-employees is recognized based on the grant-date estimated fair values of the awards using the Black-Scholes option pricing model (“Black-Scholes”). The valuation of restricted stock units (“RSUs”), is determined at the date of grant using the Company’s closing stock price on that date. The value is recognized as expense ratably over the requisite service period, which is generally the vesting term of the award. The Company adjusts the expense for actual forfeitures as they occur.
Income Taxes
The Company uses the liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company assesses the likelihood of deferred tax assets being realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. For the Company, the ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences representing net future deductible amounts become deductible. Based on the Company’s operations to date and the uncertainty as to the timing and amount of future taxable income, the Company has recorded a full valuation allowance in all periods and for all jurisdictions.
Financial statement effects of uncertain tax positions are recognized when it is more likely than not, based on the technical merits of the position, that it will be sustained upon examination. The Company evaluates uncertain tax positions on a regular basis. The evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of an audit, and effective settlement of audit issues. Interest and penalties related to unrecognized tax benefits would be included within the income tax provision.
Net Loss Per Share
Basic net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration of potential dilutive securities. Diluted net loss per share is calculated by dividing net loss by the weighted-average number of shares of common stock and potential dilutive common stock equivalents outstanding during the period if the effect is dilutive. Potentially dilutive securities include warrants, stock options and RSUs. Likewise, adjustments to the denominator are required to reflect the related dilutive shares. In all periods presented, the Company’s outstanding stock options, RSUs, and warrants were excluded from the calculation of diluted net loss per share because their effects were antidilutive.
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 (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s CODM is its chief executive officer. The Company has determined it operates in one segment.
Comprehensive Loss
Comprehensive loss is defined as the change in equity of a business enterprise during a period arising from transactions and other events and circumstances from non-owner sources. The Company’s comprehensive loss comprises changes in unrealized (loss) gain on available-for-sale securities.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), as amended, with guidance regarding the accounting for and disclosure of leases. The update requires lessees to recognize the liabilities related to all leases, including operating leases, with a term greater than 12 months on the balance sheet. This update also requires lessees and lessors to disclose key information about their leasing transactions. As an emerging growth company, this standard is effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. Early adoption is permitted. The Company adopted this standard on January 1, 2022, using the modified retrospective method by applying the new standard to all leases existing as of the effective date and not restating comparative periods. The Company elected the “package of practical expedients”, which permits the Company to not reassess under this standard its prior conclusions about lease identification, lease classification and initial direct costs, as well as the practical expedient to not separate lease and non-lease components for its real estate leases. In addition, the Company elected the short-term lease recognition exemption for all leases that qualify. The impact of adoption and additional disclosures required by the standard have been included in Note 2 - Summary of Significant Accounting Policies above and in Note 5 - Commitments and Contingencies. As a result of the adoption of the new lease accounting guidance, the Company recognized, on January 1, 2022, operating lease right-of-use asset of $0.6 million and operating lease liability of $0.6 million in the consolidated balance sheet. Prior period amounts before January 1, 2022 have not been adjusted and continue to be reported in accordance with the Company’s historical accounting under previous lease guidance, ASC Topic 840, Leases (“ASC 840”).
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which removes certain exceptions and amends certain requirements in the existing income tax guidance to ease accounting requirements. As an emerging growth company, this standard is effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022, and must be applied on a retrospective basis. The Company adopted ASU 2019-12 on January 1, 2022, and the adoption did not have a material impact on the consolidated financial statements.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets. In April 2019, the FASB issued a clarification to ASU 2016-13 within ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which modified the accounting for available-for-sale securities. As an emerging growth company, ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is currently assessing the potential impact of adopting ASU 2016-13 on its consolidated financial statements and financial statement disclosures.
3. Fair Value Measurements
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following three levels:
•
Level 1: Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.
•
Level 2: Inputs (other than quoted prices included in Level 1) that are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
•
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following tables present information about the Company’s financial assets measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):
Level 1 Level 2 Level 3 Total
Current assets:
Cash equivalents:
Short-term investments:
Corporate debt securities — 1,000 — 1,000
U.S. Government sponsored entities - mortgage-backed securities — 1,956 — 1,956
Level 1 Level 2 Level 3 Total
Current assets:
Cash equivalents:
Money market funds $ 8,920 $ — $ — $ 8,920
Corporate debt securities — 1,480 — 1,480
Short-term investments:
Corporate debt securities — 1,117 — 1,117
Money market funds are highly liquid investments which are actively traded. The pricing information on the Company’s money market funds is based on quoted prices in active markets for identical securities. This approach results in the classification of these securities as Level 1 of the fair value hierarchy.
The fair value of investments is determined from market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These pricing services utilize industry-standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; prepayment/default projections based on historical data; and other observable inputs. This approach results in the classification of these securities as Level 2 of the fair value hierarchy.
There were no transfers between Levels 1, 2 or 3 for the periods presented.
The following tables present information as to cost, unrealized gains and losses and fair value determination of the Company’s financial assets measured at fair value on a recurring basis (in thousands):
AmortizedCost UnrealizedGains UnrealizedLosses AggregateFair Value
Current assets:
Cash equivalents:
Short-term investments:
U.S. Government sponsored entities - mortgage-backed securities 1,956 — — 1,956
AmortizedCost UnrealizedGains UnrealizedLosses AggregateFair Value
Current assets:
Cash equivalents:
Money market funds $ 8,920 $ — $ — $ 8,920
Corporate debt securities 1,480 — — 1,480
Short-term investments:
As of December 31, 2022 and 2021, the contractual maturities of all available-for-sale investments were less than 12 months. The Company periodically reviews the available-for-sale investments for other-than-temporary impairment loss. The Company had 12 short-term investments in unrealized loss positions as of December 31, 2022. The Company’s unrealized losses from short-term investments as of December 31, 2022 were caused by interest rate increases and not by unfavorable changes in the credit quality associated with these securities. The Company does not intend to sell short-term investments that are in an unrealized loss position, and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity. Therefore, the Company believes these losses to be temporary and as a result, did not recognize any other-than-temporary impairment losses as of December 31, 2022 and 2021.
4. Balance Sheet Components
Property and Equipment, net
Property and equipment, net, consisted of the following (in thousands):
December 31,
Manufacturing and laboratory equipment $ — $ 2,511
Computer hardware — 28
Office furniture and equipment — 28
Leasehold improvements — 234
Construction in progress — 833
Total property and equipment, at cost — 3,634
Less: accumulated depreciation — (1,653 )
Property and equipment, net $ — $ 1,981
Depreciation expense for the years ended December 31, 2022 and 2021 was $0.3 million and $0.5 million, respectively. As of December 31, 2022, the Company had disposed all of its property and equipment.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
December 31,
Prepaid clinical and research expenses — 168
Interest and other receivables 39 21
Other current assets — 1,353
Total prepaid expenses and other current assets $ 542 $ 3,408
Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
December 31,
Holdback liability for acquisition of in-process research and development 250 —
Severance and termination benefits 124 —
Deferred rent — 8
Total other current liabilities $ 1,580 $ 3,226
5. Commitments and Contingencies
The Company has historically entered into contracts in the normal course of business with CDMOs, for manufacturing process development and preclinical/clinical supply manufacturing, and with other vendors for preclinical research studies and other services or products for operating purposes. These contracts generally provide for termination on notice of 60 to 90 days. As of December 31, 2022, there was one such contract, worth approximately $1.3 million, still in effect for future services, and there were no unpaid cancellation or other related costs.
In connection with the Company’s agreement with an investment banking firm for services related to the proposed Merger with CalciMedica, the Company incurred and paid approximately $0.8 million during the current year and will be required to make an additional payment of approximately $2.3 million contingent upon the consummation of the proposed Merger with CalciMedica. The $0.8 million incurred during the current year is included in general and administrative expenses.
In connection with the proposed Merger with CalciMedica, all outstanding stock awards will be fully accelerated and the Company will be required to make change-in-control severance payments to its current employees totaling approximately $5.5 million.
As of December 31, 2022, these commitments were approximately $9.1 million due within 3 to 6 months.
Operating Lease Agreements
The Company leases a facility in Baltimore, Maryland under an operating lease with a term through June 2023. The Company also had a short-term lease for approximately 2,560 rentable square feet of office space in Redwood City, California, which was amended in December 2022 to extend the term from August 31, 2022 to January 31, 2023, at which time it expired. The operating cash outflow for the Maryland lease liability was $0.4 million for the year ended December 31, 2022. The remaining term of the Maryland lease was 0.5 years, and the incremental borrowing rate used to determine the operating lease liability was 6.0%.
In the fourth quarter of 2022, following the sale of all equipment in the facility in connection with the restructuring (see Note 6), the Company decommissioned and vacated the Maryland facility and recorded an impairment charge to reduce the carrying value of the right-of-use asset to zero.
Lease expense recognized for the operating leases, including short-term leases not included in the measurement of the lease liability, was $0.5 million for the year ended December 31, 2022. Under the terms of the lease agreements, the Company is also responsible for certain variable lease payments that are not included in the measurement of the lease liability. Variable lease payments
for the operating leases were $0.5 million for the year ended December 31, 2022. Rent expense recognized under ASC 840 for the year ended December 31, 2021 was $0.7 million.
As of December 31, 2022, the Company's remaining future minimum lease payments were $0.2 million.
As of December 31, 2021, future minimum commitments under the Company's non-cancelable operating leases, in accordance with ASC 840, were as follows (in thousands).
Year Ended
December 31,
Total future minimum lease payments $ 732
License Agreements
Johns Hopkins University
In June 2011, the Company entered into an Exclusive License Agreement with Johns Hopkins University (“JHU”) which has been amended from time to time, such agreement as amended is referred to as the JHU Agreement. Pursuant to the JHU Agreement, JHU granted the Company an exclusive, worldwide, sublicensable license to three patent families to research, develop, make, use and sell products and provide services in any field, and a non-exclusive license to use specified know-how and materials with a provision that JHU would not grant a license to know how and materials to any other commercial entity.
The JHU Agreement was only relevant to our GB-102 and GB-103 programs, both of which had been terminated by August 2022. On October 3, 2022, the Company provided written notification to JHU of complete termination of the exclusive license agreement to all licensed patent rights owned by JHU.
Asset Acquisition & Divestiture
In December 2021, the Company entered into an Assignment and Licensing Agreement with a private company, pursuant to which the Company acquired certain intellectual property rights, including patents and know-how, related to new cyclic monophosphate (“cGMP”) compounds for the treatment of ocular disorders.
As consideration for the intellectual property rights acquired, the Company made an upfront cash payment of $0.5 million and may be required to make additional contingent payments of up to $27.0 million in the aggregate upon achievement of certain development and regulatory milestones. Additionally, upon commercialization, the Company would have been required to make tiered single-digit royalty payments based on net product sales.
As the acquired rights related to in-process research and development activities that had no alternative future use to the Company, the upfront payment of $0.5 million was recorded as research and development expense in the accompanying consolidated statements of operations for the year ended December 31, 2021. In November 2022, this Assignment and Licensing Agreement was terminated, and all rights were returned to the licensor. Accordingly, as of December 31, 2022, the Company had no further obligation to pay development or regulatory milestones and, accordingly, no amounts have been recognized in the accompanying consolidated financial statements with respect to these contingent payments.
RainBio Asset Acquisition
In March 2022, the Company acquired RainBio, a private company in the United States whose primary assets are certain gene therapy technology and preclinical data (“GB-501”). RainBio was purchased at a cost of approximately $2.2 million, including transaction costs and a contingent holdback, and the Company may be required to make additional contingent payments of up to $17.5 million in the aggregate upon the achievement of certain milestones. Other than the contingent holdback release, no further payments are required until FDA approval of a product based upon the acquired assets and the sale or utilization of any priority review voucher that may be granted in connection with such approval. The contingent holdback liability of $0.3 million was recorded in other current liabilities in the consolidated balance sheets.
The acquisition was accounted for as an asset acquisition, as substantially all of the fair value of the assets acquired was concentrated in a single in-process research and development (“IPR&D”) intangible asset. As the acquired IPR&D did not have an alternative future use to the Company, the purchase price of $2.2 million was recorded as research and development expense in the accompanying consolidated statement of operations for the year ended December 31, 2022. As of December 31, 2022, none of the milestones were probable of achievement and, accordingly, no amounts have been recognized in the accompanying consolidated financial statements with respect to these contingent payments.
Indemnification
The Company, as permitted under Delaware law and in accordance with its certification of incorporation and bylaws and pursuant to indemnification agreements with certain of its officers and directors, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, which the officer or director is or was serving at the Company’s request in such capacity.
The Company enters into certain types of contracts that contingently require 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.
Litigation
The Company is a party to legal proceedings and claims which have arisen during the ordinary course of business. The Company is not presently a party to any legal proceedings that, in the opinion of management, would have a material adverse effect on its business. The Company has been served with four complaints asserting that certain disclosures in the proxy statement filed by the Company with the Securities and Exchange Commission on December 14, 2022, in connection with the Merger, are inadequate. These complaints do not currently seek monetary damages. The Company reviews its legal proceedings and claims, regulatory reviews and inspections, and other legal matters on an ongoing basis and follow appropriate accounting guidance when making accrual and disclosure decisions. For all currently unresolved legal proceedings or claims, the Company does not believe there is a reasonable probability that any material loss will be incurred. Accordingly, no material accrual or disclosure of a potential range of loss has been made related to these matters. The Company does not expect the ultimate liability of these unresolved legal proceedings or claims to have a material effect on its financial position, liquidity or capital resources.
6. Restructuring, Impairment and Other Costs of Terminated Programs
As discussed in Note 1, based on the conclusions from the comprehensive review of strategic alternatives focused on maximizing shareholder value, the Company decided to terminate all activities relating to the GB-102 and GB-401 programs and to reduce its workforce as a part of cost-reduction initiatives. In connection with these events, impairment of capital equipment and operating right-of-use asset of its Maryland facility, severance and termination benefit costs for employees, and other costs were recorded under restructuring, impairment and other costs of terminated programs in the consolidated statement of operations for the year ended December 31, 2022.
The Company recorded the following under restructuring, impairment and other costs (in thousands):
Year Ended December 31,
Impairment of capital equipment and right-of-use asset $ 1,599
Severance and termination benefit expense 1,065
Other restructuring costs 299
Restructuring, impairment and other costs of terminated programs $ 2,963
Impairment of Capital Equipment and Right-of-Use Asset
In connection with the restructuring, the Company either sold or disposed of all the equipment in its Maryland facility, including equipment that had been fully depreciated. The fair value of the capital equipment was determined based on the net cash proceeds received from the sale of the equipment. Subsequently, in October 2022, the Company decommissioned and vacated the Maryland
facility and recorded an impairment charge of $0.3 million to reduce the carrying value of the right-of-use asset to zero. The Company recorded an impairment charge as follows (in thousands):
Amount
Net book value of capital equipment before impairment $ 1,659
Less: Fair value of capital equipment (350 )
Impairment expense for capital equipment 1,309
Impairment of right-of-use asset 290
Impairment of capital equipment and right-of-use asset $ 1,599
Severance and Termination Benefit Expense
Employees affected by the reduction-in-force are entitled to receive severance payments and certain Company-funded benefits. Severance and termination benefit expense was recorded in full for all terminated employees. As of December 31, 2022, $0.1 million in severance payments were not yet paid. The Company recorded severance and termination benefit expense as follows (in thousands):
Total
Total severance and other termination benefits, at fair value $ 1,065
Expense recognized during the period $ 1,065
Payments during the period (941 )
Liability balance as of December 31, 2022 $ 124
Adjustments to severance and termination benefit expense may be recorded in future periods as the estimates of the costs of benefits change. However, it is not expected that such adjustments will have a material effect on the results of operations or financial condition.
7. Stock-Based Compensation
2020 Equity Incentive Plan
In August 2020, the Company’s board of directors and stockholders adopted the Company’s 2020 Equity Incentive Plan (the “2020 Plan”) that became effective in connection with the IPO, and serves as the successor to the Company’s 2015 Stock Incentive Plan (“2015 Plan”). The Company’s 2020 Plan authorizes the award of stock options, restricted stock units (“RSUs”) restricted stock awards (“RSAs”) stock appreciation rights (“SARs”) performance awards and stock bonus awards. The Company initially reserved 1,850,000 shares of its common stock, plus any reserved shares not issued or subject to outstanding grants under the 2015 Plan on the effective date of the 2020 Plan, for issuance pursuant to awards granted under the 2020 Plan. The aggregate number of shares reserved for sale under the 2020 Plan will increase automatically on each January 1st of 2021 through 2030 by the number of shares equal to 5% of the aggregate number of outstanding shares of the Company’s common stock as of the immediately preceding December 31, or a lesser number as may be determined by the Company’s board of directors.
In conjunction with adopting the 2020 Plan, the Company may not grant any additional stock-based awards under the 2015 Plan, and any shares available for issuance under the 2015 Plan were added to the shares reserved under the 2020 Plan. The 2015 Plan will continue to govern outstanding stock-based awards granted thereunder. On January 1, 2021, the aggregate number of shares reserved for issuance was increased by an additional 1,048,963 shares pursuant to the automatic share reserve increase provision of the 2020 Plan.
In March 2022, the Company increased the aggregate number of shares reserved for issuance by an additional 1,067,888 shares pursuant to the automatic share reserve increase provision of the 2020 Plan and in June 2022, the Company reserved an additional 2,340,000 shares for future issuance under the 2020 Plan following approval by the Company’s stockholders. As of December 31, 2022, there were 593,887 shares available for issuance under the 2020 Plan.
2020 Employee Stock Purchase Plan
In August 2020, the Company’s board of directors and stockholders adopted the Company’s 2020 Employee Stock Purchase Plan (the “ESPP”) that became effective in connection with the IPO, in order to enable eligible employees to purchase shares of the Company’s common stock with accumulated payroll deductions. The Company’s ESPP is intended to qualify under Section 423 of the Internal Revenue Code. The Company initially reserved 210,000 shares of its common stock for sale under the ESPP. Per the terms of the ESPP, the aggregate number of shares reserved for sale under the Company’s ESPP will increase automatically on January 1st of each of the first ten calendar years after the first offering date under the ESPP by the number of shares equal to the lesser of 1% of the total outstanding shares of the Company’s common stock as of the immediately preceding December 31, or a number of shares as may
be determined by the Company’s board of directors in any particular year. The aggregate number of shares issued over the term of the ESPP, subject to stock-splits, recapitalizations or similar events, may not exceed 2,100,000 shares of the Company’s common stock. The Company’s board of directors have determined that there should be no increase in the number of shares reserved for the ESPP. Accordingly, as of December 31, 2022, there were 210,000 shares available for issuance under the ESPP. There have been no employee withholdings for the purchase of shares under the plan as of December 31, 2022.
Inducement Grants
On January 14, 2022, six newly-hired employees were granted inducement options to purchase an aggregate of 234,200 shares of the Company’s common stock at an exercise price of $1.55 per share. These inducement grants were made outside of the 2020 Equity Incentive Plan in accordance with the Nasdaq Listing Rule 5635(c)(4). All six employees have since been terminated in connection with the Company’s August 2022 reduction-in-force, which was prior to the first vesting date, resulting in the forfeiture of all such inducement grants.
Stock Option Activity
The following summarizes stock option activity:
Weighted
Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Options Price Term Value
(In years) (In thousands)
Exercised —
At December 31, 2022, the aggregate intrinsic value of options granted is calculated as the difference between the exercise price and the closing price on the same date. The aggregate intrinsic value of options exercised in the years ended December 31, 2022 and 2021 was zero and $2.5 million, respectively.
Restricted Stock Units
The following table summarizes restricted stock units (“RSUs”) activity for the year ended December 31, 2022:
RSUs Outstanding
The fair value of RSUs is determined on the date of grant based on the market price of the Company’s common stock on that date. The aggregate grant date fair value of RSUs vested during the year ended December 31, 2022 was $1.7 million.
Fair Value of Stock Option Awards
The Company estimates the fair value of stock option awards on the grant date using Black-Scholes. The weighted-average grant date fair value per option granted during the years ended December 31, 2022 and 2021 was $0.96 and $2.72, respectively. The fair value of each award is estimated using Black-Scholes based on the following assumptions:
Year Ended December 31,
Expected term (years) 5.5 - 6.1 5.1 - 6.1
Expected dividend — —
Black-Scholes requires the use of subjective assumptions which determine the fair value of stock-based awards. These assumptions include:
Expected Term: The expected term represents the period that options are expected to be outstanding and is determined using thesimplified method, based on the mid-point between the vesting date and the end of the contractual term.
Expected Volatility: The expected volatility is estimated based on the average volatility for comparable publicly-traded biopharmaceutical companies over a period equal to the expected term of the stock option grants as the Company does not yet have sufficient historical trading history for its own stock. The comparable companies are chosen based on their similarities to the Company, including life cycle stage, therapeutic focus and size. The Company will continue to apply this method until a sufficient amount of historical information over a period equal to the expected term of the stock-based awards becomes available.
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 periodscorresponding with the expected term of the stock option grants.
Expected Dividend: 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.
Stock-Based Compensation Expense
Stock-based compensation expense is classified as follows (in thousands):
Year Ended December 31,
Total stock-based compensation expense $ 6,713 $ 5,375
As of December 31, 2022, the total unrecognized stock-based compensation expense related to outstanding unvested stock awards that are expected to vest was $11.5 million, which the Company expects to recognize over an estimated weighted-average term of 2.2 years.
8. Income Taxes
The Company has incurred net operating losses for all the periods presented. The Company has not reflected the tax benefit of any such net operating loss carryforwards in the accompanying financial statements.
The effective tax rate for the years ended December 31, 2022 and 2021 is different from the federal statutory rate primarily due to the valuation allowance against deferred tax assets as a result of insufficient sources of income. The reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows:
Year Ended December 31,
Federal statutory income tax rate 21.0 % 21.0 %
State income taxes, net of federal benefit (2.5 ) 0.6
Research and development tax credits 1.7 1.4
Change in valuation allowance (14.9 ) (22.6 )
Effective income tax rate — % — %
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 net deferred tax assets consisted of the following (in thousands):
December 31,
Deferred tax assets
Federal and state net operating loss carryforwards $ 38,253 $ 34,431
Research and development tax credits 5,071 5,408
Capitalized research and development expense 2,323 —
Total deferred tax assets — 32
Deferred tax liabilities
Depreciation — (32 )
Total deferred tax liabilities — (32 )
Net deferred tax assets $ — $ —
The Company has incurred annual net operating losses in each year since inception. The Company has not reflected the tax benefit of any such net operating loss carryforwards in the financial statements. Due to the Company’s history of losses, and lack of other positive evidence, the Company has determined that it is more likely than not that its net deferred tax assets will not be realized and, therefore, the net deferred tax assets are fully offset by a valuation allowance at December 31, 2022 and 2021. The Company increased its valuation allowance by $5.3 million for the year ended December 31, 2022 in order to maintain a full valuation allowance against its deferred tax assets.
As of December 31, 2022, the Company had federal net operating loss carryforwards (“NOLs”) of $175.2 million and federal tax credits of $6.6 million available to offset tax liabilities. The Company’s federal NOLs and federal tax credit carryforwards begin to expire in 2035 and 2036, respectively. Of the federal NOLs, $141.1 million have an indefinite life. The Company also had gross state NOLs of $23.8 million and state tax credits of $0.6 million which are available to offset state tax liabilities. The state NOLs expire in 2036 and the state tax credit carryforwards can be carried forward indefinitely. Federal and state NOLs and tax credit carryforwards are also subject to annual limitations in the event that cumulative changes in the ownership interests of significant stockholders exceed 50% over a three-year period, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986. The Company has not completed an analysis to determine if the NOLs and tax credits are limited due to a change in ownership. Should there be ownership changes that occurred, or if the Merger will constitute a change in ownership, the Company’s ability to utilize existing carryforwards could be substantially restricted.
The Company determines its uncertain tax positions based on whether and how much of a tax benefit taken by the Company in its tax filings is more likely than not to be sustained upon examination by the relevant income tax authorities.
A reconciliation of the unrecognized tax benefit is as follows (in thousands):
Year Ended December 31,
Balance—beginning of year $ 2,090 $ 1,981
Addition based on tax position related to current year 155 257
Reduction based on tax position related to prior year (275 ) (148 )
The unrecognized tax benefits, if recognized, would not have an impact on the Company’s effective tax rate assuming the Company continues to maintain a full valuation allowance position. Based on prior year’s operations and experience, the Company does not expect a significant change to its unrecognized tax benefits over the next twelve months. The unrecognized tax benefits may increase or change during the next year for unexpected or unusual items for items that arise in the ordinary course of business. The Company has elected to include interest and penalties as a component of tax expense. During the years ended December 31, 2022 and 2021, the Company did not recognize accrued interest and penalties related to unrecognized tax benefits.
The Company files income tax returns in the U.S. federal, California, and several other tax jurisdictions. The federal and state income tax returns for all years remain subject to examination.
9. Employee Retirement Plan
The Company maintains a 401(k) retirement savings plan (“401(k) Plan”). The 401(k) Plan allows employees to make contributions up to the maximum allowable by the IRS. The Company did not make any contributions to the 401(k) Plan on behalf of its employees in the years ended December 31, 2022 or 2021.
10. Net Loss Per Share
Basic and diluted net loss per common share is calculated as follows (in thousands except share and per share amounts):
Year Ended December 31,
Net loss per share—basic and diluted $ (1.66 ) $ (1.69 )
The following outstanding potentially dilutive shares have been excluded from the calculation of diluted net loss per share due to their anti-dilutive effect:
As of December 31,
11. Subsequent Events
On February 10, 2023, the Company and CalciMedica entered into a note purchase agreement (the “Note Purchase Agreement”) providing for the Company to make short-term loans (the “Loan” or “Loans”) to CalciMedica up to an aggregate principal amount of $2.0 million. The Loans will bear simple interest, in arrears, at 7.5% per annum. On each of February 10 and 24, 2023, the Company purchased from CalciMedica Loans in the amount of $0.5 million for a total indebtedness of $1.0 million. CalciMedica’s ability to borrow the remaining $1.0 million under the Note Purchase Agreement is subject to certain conditions and restrictions on use.
In connection with the Note Purchase Agreement, on February 10, 2023, Graybug, CalciMedica and Camaro Merger Sub, Inc. entered into a First Amendment to the Merger Agreement, pursuant to which the parties agreed that the amount of any outstanding principal and accrued interest under the Loans will be included in the calculation of Graybug’s net cash at the closing of the Merger.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None
Item 9A. Controls and Procedures.
Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including our Chief Executive Officer (our Principal Executive Officer) and our Chief Financial Officer (our Principal Financial Officer and Principal Accounting Officer), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of December 31, 2022. Based on our management’s evaluation (with the participation of our Chief Executive Officer and our Chief Financial Officer), as of the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). Our management, including our Chief Executive Officer, assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – 2013 Integrated Framework. Based on that assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2022.
Changes in internal control over financial reporting.
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2022 that have materially affected , or are reasonably likely to materially affect, our internal control over financial reporting.
Attestation Report of the Registered Public Accounting Firm
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm due to an exemption established by the JOBS Act for “emerging growth companies.”
Item 9B. Other Information.
None.