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 together with our financial statements and the related notes included elsewhere in this Annual Report on Form 10-K (this “report”). This discussion and analysis and other parts of this report contain forward-looking statements based upon current beliefs, plans and expectations related to future events and our future financial performance that involve risks, uncertainties and assumptions, such as statements regarding our intentions, plans, objectives, expectations, forecasts and projections. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under the section titled “Risk Factors” and elsewhere in this report.
Overview
We are a clinical-stage gene therapy company pioneering the development of product candidates using our targeted and evolved AAV vectors. We seek to unlock the full potential of gene therapy using our platform, Therapeutic Vector Evolution, which combines the power of directed evolution with our approximately one billion synthetic capsid sequences to invent evolved vectors for use in targeted gene therapy products. Our targeted and evolved vectors are invented with the goal of being delivered through clinically routine, well-tolerated and minimally invasive routes of administration, of transducing diseased cells in target tissues efficiently, of having reduced immunogenicity and, where relevant, of having resistance to pre-existing antibodies. We believe these key design features will help us to potentially create targeted gene therapy product candidates with improved therapeutic profiles, and address a broad range of diseases from rare to large patient populations, including those that other gene therapies are unable to address. Each of our product candidates is created with our targeted and evolved AAV vectors. Our platform is designed to be modular, in that an evolved vector invented for a given set of diseases can be equipped with different transgene payloads to treat other diseases affecting the same tissue types. We believe this modularity will help inform the clinical development of subsequent product candidates using the same vector.
We have built a deep portfolio of gene therapy product candidates initially focused in three therapeutic areas: ophthalmology (intravitreal vector), cardiology (intravenous vector) and pulmonology (aerosol vector). We have three product candidates that are in clinical trials. We are developing 4D-125 for the treatment of X-linked retinitis pigmentosa (“XLRP”), currently in Phase 1/2 clinical trial with initial clinical data expected in the second half of 2021. We are advancing 4D-110 for the treatment of choroideremia, currently in a Phase 1 clinical trial with initial clinical data expected in 2022. Roche holds an exclusive worldwide license to 4D-110 and has the exclusive option to in-license 4D-125 prior to initiation of pivotal clinical trials. We received FDA Fast Track designation for 4D-310 for the treatment of Fabry disease, which is currently in a Phase 1/2 clinical trial, with initial clinical data expected in the second half of 2021. Our two IND candidates are 4D-150 for the treatment of wet age-related macular degeneration (“wet AMD”), and 4D-710 for the treatment of cystic fibrosis lung disease. We expect to file the IND and to initiate clinical trials for both of these programs in the second half of 2021.
We have funded our operations primarily through the sale and issuance of equity securities and to a lesser extent from cash received pursuant to our collaboration and license agreements. In December 2020, we completed our IPO and issued and sold 9,660,000 shares of common stock at a price to the public of $23.00 per share. The aggregate net proceeds from our IPO were $204.7 million after deducting underwriting discounts and commissions and other offering costs. As of December 31, 2020, we had cash and cash equivalents of $276.7 million.
We have incurred significant operating losses and expect that our operating losses will increase significantly as we, among other things, continue to advance our product candidates through preclinical and clinical development, seek regulatory approval, and prepare for, and, if approved, proceed to commercialization; broaden and improve our platform; acquire, discover, validate and develop additional product candidates; maintain, protect and enforce our intellectual property portfolio; and hire additional personnel. In addition, we expect to incur additional costs associated with operating as a public company.
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Our net losses were $56.7 million and $49.3 million for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, we had an accumulated deficit of $135.7 million. We do not expect positive cash flows from operations in the foreseeable future. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and our expenditures on other research and development activities.
We do not have any products approved for sale and have not generated any revenue from product sales since our inception. Our ability to generate product revenue will depend on the successful development, regulatory approval and eventual commercialization of one or more of our product candidates, if approved.
We will require substantial additional funding to support our continuing operations and further the development of our product candidates. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the sale of equity, debt financings, or other capital sources, which could include income from collaborations, strategic partnerships or other strategic arrangements, for the foreseeable future. Adequate funding may not be available when needed or on terms acceptable to us, or at all. If we are unable to raise additional capital as needed, we may have to significantly delay, scale back or discontinue development of our product candidates. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic and otherwise. If we fail to obtain necessary capital when needed on acceptable terms, or at all, it could force us to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations. Insufficient liquidity may also require us to relinquish rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities.
The global COVID-19 pandemic continues to rapidly evolve, and we will continue to monitor the COVID-19 situation closely. The extent of the impact of the COVID-19 pandemic on our business, operations and clinical development timelines and plans remains uncertain, and will depend on certain developments, including the duration and spread of the outbreak and its impact on our clinical trial enrollment, trial sites, CROs, third-party manufacturers, and other third parties with whom we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel and the majority of our employees working remotely. We will continue to actively monitor the rapidly evolving situation related to the COVID-19 pandemic and may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business. At this point, the extent to which the COVID-19 pandemic may affect our business, operations and clinical development timelines and plans, including the resulting impact on our expenditures and capital needs, remains uncertain.
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Components of Results of Operations
Revenue
Our revenue to date has been generated through payments from our collaboration and license agreements, primarily from upfront and milestone payments and expense reimbursement. We have not generated any revenue from the sale of approved products and do not expect to do so for the foreseeable future. The primary drivers for revenue consist of the following:
Future collaboration and license revenue is highly dependent on the successful development and commercialization of products by our collaboration partners, which is uncertain, and revenue may fluctuate significantly from period to period. Additionally, we may never receive the consideration from our license agreements that is contemplated for option fees, development and sales-based milestone payments or royalties on sales of licensed products, given the contingent nature of these payments. We expect that our collaboration and license revenue in 2021 will primarily be from Roche and uniQure. If our agreements with Roche or uniQure were terminated, it may materially impact the amount of license revenue we recognize in future periods.
Operating Expenses
Research and Development
Our research and development expenses primarily consist of costs incurred for the discovery and preclinical and clinical development of our product candidates. These expenses include salaries and personnel-related costs, including stock-based compensation of our scientific personnel performing research and development activities; laboratory supplies; research materials; fees paid to CROs to execute preclinical studies and clinical trials; fees paid to CMOs to manufacture materials for preclinical studies and clinical trials; fees related to obtaining technology licenses; consulting costs; costs related to seeking regulatory approval of our product candidates; and allocated facility-related costs, information technology costs, depreciation expense and other overhead.
We expense all research and development costs in the periods in which they are incurred. We have entered into various agreements with CROs and CMOs. Costs of certain activities are recognized based on an evaluation of the progress to completion of specific tasks. Payments made prior to the receipt of goods or services that will be used or rendered for future research and development activities are deferred and capitalized as prepaid expenses and other current assets on our balance sheet. The
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capitalized amounts are recognized as expense as the goods are delivered or the related services are performed.
We do not allocate our costs by product candidate, as a significant amount of research and development expenses includes internal costs, such as payroll and other personnel expenses, laboratory supplies and allocated overhead, and external costs, such as fees paid to third parties to conduct research and development activities on our behalf, none of which are tracked by product candidate. In particular, with respect to internal costs, several of our departments support multiple product candidate research and development programs, and therefore the costs cannot be allocated to a particular product candidate or development program.
At this time, we cannot reasonably estimate or know the nature, timing or estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates. We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, as our product candidates advance into later stages of development, as we begin to conduct larger clinical trials, as we seek regulatory approvals for any product candidates that successfully complete clinical trials, and incur expenses associated with hiring additional personnel to support our research and development efforts. 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 is highly uncertain. See the section titled “Risk Factors” for additional risks regarding regulatory development and approval.
General and Administrative
Our general and administrative expenses consist primarily of personnel-related expenses, including salaries, employee benefit costs and stock-based compensation expense for our personnel in executive, finance and accounting, human resources, business development and other administrative functions. General and administrative expenses also include professional fees for legal, patent, consulting, accounting and tax services, allocated overhead, including rent, equipment, depreciation, information technology costs and utilities, and other general operating expenses not otherwise classified as research and development expenses.
We expect our general and administrative expenses to increase as a result of increased personnel-related costs, patent costs for our product candidates, consulting, legal and accounting services associated with maintaining compliance with stock exchange listing and requirements of the SEC, investor relations costs, director and officer insurance premiums and other costs associated with being a public company.
Other Income (Expense)
Our other income (expense) primarily consists of interest income earned on our cash equivalents and adjustments for the change in the fair value of our derivative liability which must be remeasured at each reporting period.
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Results of Operations
Comparison of the Years Ended December 31, 2020 and 2019
The following table summarizes our results of operations for the periods indicated (dollars in thousands):
Year Ended December 31,
Revenue:
Collaboration and license revenue, related parties 249 26 223 *
Operating Expenses:
Acquired in-process research and development — 5,137 (5,137 ) *
* Percentage is not meaningful
Revenue
Revenue increased $6.6 million, or 95%, from the year ended December 31, 2019 to the year ended December 31, 2020 due to a $6.6 million increase in revenue recognized under our collaboration and license agreement with Roche and a $0.7 million increase in revenue recognized under our collaboration and license agreement with uniQure, which was partially offset by a decline in revenue recognized from other collaboration and license agreements.
Research and Development Expenses
The following table provides a breakout of research and development expenses for the periods indicated (dollars in thousands):
Year Ended December 31,
Research and development expense increased $14.3 million, or 37%, from the year ended December 31, 2019 to the year ended December 31, 2020. The increase was due to the following:
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Acquired In-Process Research and Development Expenses
We recorded acquired in-process research and development expenses of $5.1 million in the year ended December 31, 2019. This was due to the acquisition of in-process research and development from uniQure as a result of the execution of an Amended and Restated Collaboration and License Agreement and a separate Collaboration and License Agreement with uniQure. See Note 6 to our financial statements included elsewhere in this report for further discussion regarding the accounting treatment of this transaction. We did not incur any acquired in-process research and development expenses in 2020.
General and Administrative Expenses
General and administrative expenses increased $3.3 million, or 24%, from the year ended December 31, 2019 to the year ended December 31, 2020. The increase was due to the following:
These increases were partially offset by a $2.6 million decrease for public offering costs expensed in the year ended December 31, 2019, as a result of delays in the IPO process in 2019. We completed our IPO in December 2020 and the related offering costs were recorded within additional paid-in capital and reduced the IPO gross proceeds.
Other Income (Expense)
Other income (expense) decreased $1.5 million from the year ended December 31, 2019 to the year ended December 31, 2020 primarily due to lower interest income because of lower interest rates.
Liquidity and Capital Resources
Sources of Liquidity
We have funded our operations primarily through the sale and issuance of our equity securities, including from the sale of our common stock in our IPO and the sale of our Series A, Series A-1, Series B and Series C redeemable preferred stock, and to a lesser extent from cash received pursuant to our collaboration and license agreements.
In December 2020, we completed our IPO. We issued and sold 9,660,000 shares of common stock at a price to the public of $23.00 per share. The aggregate net proceeds from our IPO were $204.7 million after deducting underwriting discounts and commissions and other offering costs. As of December 31, 2020, we had cash and cash equivalents of $276.7 million.
Future Funding Requirements
We have experienced recurring net losses and had an accumulated deficit of $135.7 million for the year ended December 31, 2020. Our transition to profitability is dependent upon the successful development, approval and commercialization of our product candidates and those of our collaboration partners and achieving a level of revenue adequate to support our cost structure. We expect to continue to incur losses for the foreseeable future.
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We expect that our research and development and general and administrative expenses will continue to increase for the foreseeable future. Additionally, we expect our capital expenditures will increase significantly in the future for costs associated with building additional manufacturing capacity. As a result, we will need significant additional capital to fund our operations, which we may obtain through one or more equity offerings, debt financings or other third-party funding, including potential strategic alliances and licensing or collaboration arrangements.
Because of the numerous risks and uncertainties associated with the development and commercialization of gene therapy product candidates, we are unable to estimate the amount of increased capital we will need to raise to support our operations and the outlays and operating expenditures necessary to complete the development of our product candidates and build additional manufacturing capacity, and we may use our available capital resources sooner than we currently expect.
Our future capital requirements will depend on many factors, including:
• continuing our research and discovery activities;
• continuing the development of our Therapeutic Vector Evolution platform;
• changing or adding additional contract manufacturers or suppliers;
• attracting, hiring and retaining qualified personnel;
• potential delays or other issues related to our operations;
• meeting the requirements and demands of being a public company;
We believe that our existing cash and cash equivalents will allow us to fund our planned operations for at least one year from the date of the issuance of the financial statements for the year ended December 31, 2020.
We have based our estimates as to how long we expect we will be able to fund our operations on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect, in which case we would be required to obtain additional financing sooner than
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currently projected, which may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. See the section titled “Risk Factors” for additional risks associated with our substantial capital requirements.
We do not have any committed external sources of funds. Accordingly, we will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources to complete the clinical development for the product candidates in treatment of Fabry disease, XLRP or choroideremia or any other indication we may pursue. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing into which we enter would result in fixed payment obligations and may involve agreements that include grants of security interests on our assets and restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, granting liens over our assets, redeeming stock or declaring dividends, that could adversely impact our ability to conduct our business. Any debt financing or additional equity that we raise may contain terms that could adversely affect our common stockholders. Further, additional funds may not be available when we need them, on terms that are acceptable to us, or at all. Our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic.
If we are unable to obtain additional funding, we expect to delay, reduce or eliminate some or all of our research and development programs, product portfolio expansion or investment in internal manufacturing capabilities, which could adversely affect our business. If we raise additional funds through collaborations or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to future revenue streams or product candidates or grant licenses on terms that may not be favorable to us.
Summary Statement of Cash Flows
The following is a summary of cash flows for the periods indicated below (in thousands):
Year Ended December 31,
Net cash used in operating activities $ (50,909 ) $ (36,711 )
Net cash used in investing activities (1,000 ) (3,203 )
Net cash provided by (used in) financing activities 278,983 (2,195 )
Net increase (decrease) in cash and cash equivalents $ 227,074 $ (42,109 )
Net Cash Used in Operating Activities
Net cash used in operating activities was $50.9 million for the year ended December 31, 2020. This was primarily due to the net loss of $56.7 million and an increase in prepaid expenses of $2.6 million, which were partially offset by stock-based compensation expense of $5.0 million and depreciation and amortization expense of $1.4 million and an increase in accrued and other liabilities of $1.9 million.
Net cash used in operating activities was $36.7 million for the year ended December 31, 2019. This was primarily due to the net loss of $49.3 million, which was partially offset by the acquisition of in-process research and development of $5.1 million, stock-based compensation expense of $3.5 million, write-off of public offering costs of $2.6 million and depreciation and amortization expense of $1.0 million.
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Net Cash Used in Investing Activities
Net cash used in investing activities was $1.0 million for the year ended December 31, 2020, all of which was used to purchase property and equipment.
Net cash used in investing activities was $3.2 million for the year ended December 31, 2019, all of which was used to purchase property and equipment.
Net Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities was $279.0 million for the year ended December 31, 2020, which was primarily due to $205.7 million of proceeds from our IPO net of paid underwriting discounts and commissions and offering costs and $72.5 million of net proceeds received from the issuance of our Series C redeemable convertible preferred stock in April and June 2020.
Net cash used in financing activities was $2.2 million for the year ended December 31, 2019, which was primarily for payments of public offering costs of $2.3 million.
Contractual Obligations, Commitments and Contingencies
Our commitments include obligations under vendor contracts to provide research services and other purchase commitments with our vendors. In the normal course of business, we enter into services agreements with contract research organizations, contract manufacturing organizations and other third parties. Generally, these agreements provide for termination upon notice, with specified amounts due upon termination based on the timing of termination and the terms of the agreement. The actual amounts and timing of payments under these agreements are uncertain and contingent upon the initiation and completion of the services to be provided. These amounts are not fixed and determinable and therefore are not included in the table below.
The following table summarizes our contractual obligations, commitments and contingencies as of December 31, 2020 (in thousands):
Payments Due by Period
Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years
In October 2018, we entered into a long-term lease for additional office and laboratory space in Emeryville, California, at a cost of $9.3 million over an 87-month term (the “Second Lease”). We concurrently amended our existing lease to extend the lease term to end at the same time as the Second Lease.
In May 2019, we amended the Second Lease (the “Second Lease Amendment”) to add 17,497 square feet to the space being leased pursuant to the Second Lease. The Second Lease Amendment extended the term of the Second Lease to December 31, 2029.
Critical Accounting Policies and Significant Judgments and Estimates
Our financial statements have prepared in accordance with generally accepted accounting principles in the United States. The preparation of our 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 our financial statements, as well as the reported revenue and expenses during the reported periods. We evaluate these estimates and assumptions on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are
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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.
Our significant accounting policies are described in Note 2 to our financial statements included elsewhere in this report. We believe the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements and understanding and evaluating our reported financial results.
Revenue Recognition
We determine revenue recognition for arrangements within the scope of ASC 606 by performing the following five steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) we satisfy each performance obligation.
Our revenue is primarily derived through our license, research, development and commercialization agreements. The terms of these types of agreements may include (i) licenses to our technology, (ii) research and development services, and (iii) services or obligations in connection with participation in research or steering committees. Payments to us under these arrangements typically include one or more of the following: nonrefundable upfront and license fees, research funding, milestone and other contingent payments to us for the achievement of defined collaboration objectives and certain preclinical, clinical, regulatory and sales-based events, as well as royalties on sales of any commercialized products. Arrangements that include upfront payments are recorded as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a future period until performance obligations are met. The event-based milestone payments, royalties and cost reimbursements represent variable consideration, and we use the most likely amount method to estimate this variable consideration. Royalty payments are recognized when earned or as the sales occur. We record cost reimbursements as accounts receivable when right to consideration is unconditional.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. We allocate the total transaction price to each performance obligation based on the estimated selling price and recognize revenue when, or as, the performance obligation is satisfied. We include the unconstrained amount of estimated variable consideration in the transaction price. At the end of each reporting period, we re-evaluate the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjust our estimate of the overall transaction price.
Significant management judgment is required to determine the level of effort required under an arrangement, and the period over which the Company expects to complete its performance obligations under the arrangement. Changes in these estimates can have a material effect on revenue recognized.
Accrued Research and Development Expenses
We estimate our accrued research and development expenses as of each balance sheet date. This process involves reviewing contracts and purchase orders with service providers, identifying services that have been performed on our behalf and estimating the level of service performed, the expected remaining period of performance and the associated expenses incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. Depending on the timing of payments to the service providers and the estimated expenses incurred, we may record net prepaid or accrued research and development expenses relating to these costs.
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Examples of estimated accrued research and development expenses include fees paid to:
• CROs in connection with preclinical development and clinical studies; and
Our understanding of the status and timing of services performed relative to the actual status and timing may vary and may result in us reporting changes in estimates in any particular period. To date, there have been no material differences from our estimates to the amounts actually incurred.
Stock-Based Compensation Expense
We use a fair value-based method to account for all stock-based compensation arrangements with employees and nonemployees including stock options and stock awards. Our determination of the fair value of stock options on the date of grant utilizes the Black-Scholes option pricing model.
The fair value of the option granted is recognized on a straight-line basis over the period during which an optionee is required to provide services in exchange for the option award, known as the requisite service period, which usually is the vesting period. Prior to January 1, 2020, the stock-based compensation expense for nonemployees was subject to remeasurement until the related vesting conditions were met. Effective January 1, 2020, the measurement date for nonemployee awards is the date of grant without changes in the fair value of the award. We account for forfeitures as they occur for both employees and nonemployees.
Estimates of the fair value of equity awards as of the grant date using valuation models such as the Black-Scholes option pricing model are affected by assumptions with a number of complex variables.
Changes in the following assumptions can materially affect the estimate of fair value and ultimately how much stock-based compensation expense is recognized; and the resulting change in fair value, if any, is recognized in our statement of operations and comprehensive loss during the period the related services are rendered. These inputs are subjective and generally require significant analysis and judgment to develop:
As of December 31, 2020, the unrecognized stock-based compensation expense related to stock options was $19.4 million and is expected to be recognized as expense over a weighted-average period of approximately 3.1 years. The intrinsic value of all outstanding stock options as of December 31, 2020 was approximately $97.1 million, of which approximately $44.8 million related to vested options and approximately $52.3 million related to unvested options.
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Common Stock Valuations
Prior to our IPO in December 2020, the estimated fair value of the common stock underlying our stock options and stock awards was determined at each grant date by our board of directors, with assistance from management and external appraisers. All options to purchase shares of our common stock were intended to be exercisable at a price per share not less than the per-share fair value of our common stock underlying those options on the date of grant. The approach to estimate the fair value of our common stock was consistent with the methods outlined in the American Institute of Certified Public Accountants’ Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Subsequent to our IPO, the fair value of our common stock is determined based on its closing market price as reported on the Nasdaq Global Select Market.
Income Taxes
We account for income taxes under the asset and liability method, which requires, among other things, that deferred income taxes be provided for temporary differences between the financial statement reporting and tax basis of our assets and liabilities. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards and are measured using the enacted tax rates and laws that will be in effect when such items are expected to reverse. A valuation allowance is provided against deferred tax assets unless it is more likely than not that they will be realized.
We account for uncertain tax positions by assessing all material positions taken in any assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit. To date, there have been no interest or penalties charged in relation to the unrecognized tax benefits.
NOLs and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service (IRS) and may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50% as defined under Sections 382 and 383 in the Internal Revenue Code, which could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on our value immediately prior to the ownership change. We have experienced ownership changes in the past. As a result of the ownership changes, we determined that $0.9 million of our NOLs will expire unutilized for federal income tax purposes and such amounts are excluded from our NOLs as of December 31, 2020. Subsequent ownership changes may result in additional limitations.
Off-Balance Sheet Arrangements
Since our inception, we have not engaged in any off-balance sheet arrangements as defined in the rules and regulations of the SEC.
JOBS Act
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies may 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 avail ourselves of this exemption from new or revised accounting standards and, therefore, while we are an emerging growth company, we will not be subject to new or revised accounting standards at the same time that they become applicable to other public companies that are not emerging growth companies. 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.
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We will remain an emerging growth company until the earlier of (i) the last day of the year following the fifth anniversary of the completion of our IPO, (ii) the last day of the year in which we have total annual gross revenue of at least $1.07 billion, (iii) the last day of the year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year, or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. An emerging growth company may take advantage of specified reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company:
As a result, the information in this report in the future may be different than what you might receive from other public reporting companies.
Recent Accounting Pronouncements
See Note 2 to our financial statements included elsewhere in this report for information.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Sensitivity and Effects of Inflation
The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates. As of December 31, 2020, we had cash and cash equivalents of $276.7 million, consisting of bank deposits and interest-bearing money market funds, for which the fair value would be affected by changes in the general level of U.S. interest rates. However, due to the short-term maturities of our cash equivalents, an immediate 10% change in interest rates would not have a material effect on the fair value of our cash equivalents.
We do not believe that inflation or interest rate changes have had a significant impact on our results of operations for any periods presented herein.
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Item 8. Financial Statements and Supplementary Data.
The financial statements required by this item are set forth beginning on page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Management’s Evaluation of our Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to our management, including our principal executive and principal financial and accounting officers, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives.
Our management, with the participation of our principal executive officer and principal financial and accounting officer, evaluated the effectiveness of our disclosure controls and procedures at the end of the period covered by this Annual Report on Form 10-K. Based upon such evaluation, our principal executive officer and principal financial and accounting officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of such date.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended December 31, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our independent registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies.
Item 9B. Other Information.
On March 19, 2021, William Burkoth notified our board of directors that he would not stand for reelection at our 2021 annual meeting of stockholders (the “Annual Meeting”). Mr. Burkoth will serve on our board of directors through the Annual Meeting. Mr. Burkoth’s decision to not stand for reelection was not related to any disagreement he had with us or any matter relating to our operations, policies (including accounting or financial policies) or practices.
On March 20, 2021, Tony Yao, M.D., Ph.D., notified our board of directors that he was resigning from the board effective as of the date of his notification. Dr. Yao’s decision to resign was not related to any disagreement he had with us or any matter relating to our operations, policies (including accounting or financial policies) or practices.
153
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this item will be contained in our definitive proxy statement to be filed with the SEC in connection with the Annual Meeting within 120 days after December 31, 2020 (the “Proxy Statement”) and is incorporated in this Annual Report on Form 10-K by reference.
Item 11. Executive Compensation.
The information required by this item will be contained in the Proxy Statement and is incorporated in this Annual Report on Form 10-K by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item will be contained in the Proxy Statement and is incorporated in this Annual Report on Form 10-K by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item will be contained in the Proxy Statement and is incorporated in this Annual Report on Form 10-K by reference.
Item 14. Principal Accounting Fees and Services.
The information required by this item will be contained in the Proxy Statement and is incorporated in this Annual Report on Form 10-K by reference.
154
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) The financial statements schedules and exhibits filed as part of this Annual Report on Form 10-K are as follows:
(1) Financial Statements;
Reference is made to the financial statements included in Item 8 of Part II hereof.
(2) Financial Statement Schedules
All financial statement schedules are omitted because they are not required or the required information is included in the financial statements or notes thereto.
(3) Exhibits
The exhibits required to be filed as part of this report are listed in the Exhibit List attached hereto and are incorporated herein by reference.
155
Exhibit Index
Incorporated by Reference
Exhibit Number Exhibit Description Form Date Number Filed Herewith
3.2 Amended and Restated Bylaws, as currently in effect. 8-K 12/15/20 3.2
4.1 Description of Securities of the Registrant. X
4.2 Form of Common Stock Certificate. S-1/A 12/7/20 4.2
156
Incorporated by Reference
Exhibit Number Exhibit Description Form Date Number Filed Herewith
24.1 Power of Attorney (included on the signature page of this Form 10-K). X
101.SCH Inline XBRL Taxonomy Extension Schema Document X
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document X
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document X
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document X
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document X
# Indicates management contract or compensatory plan.
157
Item 16. Form 10-K Summary
None.
158
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
4D Molecular Therapeutics, Inc.
Date: March 25, 2021 By: /s/ David Kirn
David Kirn, M.D.
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David Kirn and August Moretti, jointly and severally, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
159
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Name Title Date
/s/ David Kirn Chief Executive Officer and Director March 25, 2021
David Kirn, M.D. (Principal Executive Officer)
/s/ August J. Moretti Chief Financial Officer March 25, 2021
August J. Moretti (Principal Financial and Accounting Officer)
/s/ John F. Milligan Executive Chairman March 25, 2021
John F. Milligan, Ph.D.
/s/ William Burkoth Director March 25, 2021
William Burkoth, MBA
/s/ Jacob Chacko Director March 25, 2021
Jacob Chacko, M.D., MBA
/s/ Susannah Gray Director March 25, 2021
Susannah Gray, MBA
/s/ Nancy Miller-Rich Director March 25, 2021
Nancy Miller-Rich
/s/ David Schaffer Director March 25, 2021
David Schaffer, Ph.D.
/s/ Charles P. Theuer Director March 25, 2021
Charles P. Theuer, M.D., Ph.D.
/s/ Shawn Cline Tomasello Director March 25, 2021
Shawn Cline Tomasello, MBA
160
4D Molecular Therapeutics, Inc.
Index to Financial Statements
Page
Report of Independent Registered Public Accounting Firm F-2
Balance Sheets F-3
Statements of Operations and Comprehensive Loss F-4
Statements of Cash Flows F-6
Notes to Financial Statements F-7
F-1
Report of Independent Registered Public Accounting Firm
To theBoard of Directors and Stockholders of 4D Molecular Therapeutics, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of 4D Molecular Therapeutics, Inc. (the “Company”) as of December 31, 2020 and 2019, and the related statements of operations and comprehensive loss, of redeemable convertible preferred stock and stockholders’ equity (deficit) and of cash flows for the years then ended, including the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the 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/ PricewaterhouseCoopers LLP
San Jose, California
March 25, 2021
We have served as the Company’s auditor since 2016.
F-2
4D Molecular Therapeutics, Inc.
Balance Sheets
(In thousands, except share and per share amounts)
As of December 31,
Assets
Current assets:
Current liabilities
Accrued and other current liabilities 8,371 5,347
Commitments and contingencies (Note 8)
Stockholders’ equity (deficit)
The accompanying notes are an integral part of these financial statements
F-3
4D Molecular Therapeutics, Inc.
Statements of Operations and Comprehensive Loss
(In thousands, except share and per share amounts)
Year Ended December 31,
Revenue:
Collaboration and license revenue $ 13,363 $ 6,960
Collaboration and license revenue, related parties 249 26
Operating expenses:
Acquired in-process research and development, related parties — 5,137
Other income (expense):
Other income (expense), net (181 ) (46 )
Total other income (expense) (29 ) 1,458
Net loss and comprehensive loss $ (56,693 ) $ (49,306 )
The accompanying notes are an integral part of these financial statements
F-4
4D Molecular Therapeutics, Inc.
Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(In thousands, except share amounts)
Shares Amount Shares Amount Capital Deficit Deficit
Cumulative effect of adoption of ASC 606 — — — — — 307 307
Issuance of common stock upon exercise of stock options — — 52,611 — 75 — 75
Stock-based compensation — — — — 3,541 — 3,541
Cumulative effect of adoption of ASU 2018-07 — — — — (39 ) 39 —
Issuance of common stock upon exercise of stock options — — 267,044 — 857 — 857
Stock-based compensation — — — — 4,984 — 4,984
Vesting of common stock warrant issued for services — — — — 48 — 48
The accompanying notes are an integral part of these financial statements.
F-5
4D Molecular Therapeutics, Inc.
Statements of Cash Flows
(In thousands)
Year Ended December 31,
Cash flows from operating activities
Adjustments to reconcile net loss to net cash used in operating activities
Stock-based compensation expense 4,984 3,541
Vesting of common stock warrant in return for services 48 —
Change in fair value of derivative liability 21 37
Depreciation and amortization 1,443 1,004
(Gain) loss on disposition of property and equipment (1 ) 7
Write-off of public offering costs — 2,610
Changes in operating assets and liabilities
Prepaid expenses and other current assets (2,566 ) (695 )
Accrued and other liabilities 1,900 3,841
Net cash used in operating activities (50,909 ) (36,711 )
Cash flows from investing activities
Acquisition of property and equipment (1,000 ) (3,203 )
Net cash used in investing activities (1,000 ) (3,203 )
Cash flows from financing activities
Issuance of common stock upon exercise of stock options 857 75
Net cash provided by (used in) financing activities 278,983 (2,195 )
Net increase (decrease) in cash and cash equivalents 227,074 (42,109 )
Cash and cash equivalents, beginning of period 49,652 91,761
Cash and cash equivalents, end of period $ 276,726 $ 49,652
Supplemental disclosures of non-cash investing and financing information
Unpaid offering costs $ 946 $ 368
The accompanying notes are an integral part of these financial statements.
F-6
4D Molecular Therapeutics, Inc.
Notes to Financial Statements
1. The Company
4D Molecular Therapeutics, Inc. (the “Company”) was formed as a limited liability company in September 2013 under the name 4D Molecular Therapeutics, LLC. The Company changed its name and converted into a corporation which was incorporated in the state of Delaware in March 2015. The Company is a clinical-stage gene therapy company pioneering the development of product candidates using its targeted and evolved adeno-associated viruses (“AAV”) vectors.
Initial Public Offering
In December 2020, the Company sold and issued 9,660,000 shares of common stock at a price to the public of $23.00 per share, which included shares sold upon the underwriters’ exercise of their overallotment option to purchase 1,260,000 additional shares. The Company received an aggregate of $204.7 million in net proceeds, after deducting underwriting discounts and commissions and offering costs.
Upon the closing of the IPO, all outstanding shares of redeemable convertible preferred stock automatically converted into 11,575,984 shares of common stock. Subsequent to the closing of the IPO, there were no shares of redeemable convertible preferred stock outstanding.
Liquidity
The Company has incurred significant losses and negative cash flows from operations and had an accumulated deficit of $135.7 million as of December 31, 2020. The Company believes that its cash and cash equivalents as of December 31, 2020 are sufficient for the Company to fund planned operations for at least one year from the issuance date of these financial statements for the year ended December 31, 2020. The Company has historically financed its operations primarily through the sale of equity securities and, to a lesser extent from cash received pursuant to its collaboration and license agreements. To date, none of the Company’s product candidates have been approved for sale and therefore, the Company has not generated any revenue from product sales. Management expects operating losses and negative cash flows from operations to continue for the foreseeable future. The Company currently plans to raise additional funding as required based on the status of its clinical trials and projected cash flows. There can be no assurance that, in the event the Company requires additional financing, such financing will be available at terms acceptable to the Company, if at all. Failure to generate sufficient cash flows from operations, raise additional capital and reduce discretionary spending should additional capital not become available could have a material adverse effect on the Company’s ability to achieve its business objectives.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”).
Use of Estimates and Judgements
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgements that affect the reported amounts of assets, liabilities, revenue and expenses; and disclosure of contingent assets and liabilities as of the date of the financial statements. Such estimates include the determination of useful lives for property and equipment, the contract term, transaction price and costs of collaboration agreements, as well as estimates of the fair value of common
F-7
stock (prior to the IPO), stock options and derivative instruments and income tax uncertainties. Actual results could differ from those estimates.
Due to the coronavirus (“COVID-19”) pandemic, there has been uncertainty and disruption in the global economy and financial markets. The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of December 31, 2020. While there was not a material impact to the Company’s financial statements as of December 31, 2020, these estimates may change, as new events occur and additional information is obtained, as well as other factors related to the COVID-19 pandemic that could result in material impacts to the financial statements in future reporting periods.
Segment Information
The Company operates and manages its business as one reportable and operating segment. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on a company-wide basis for purposes of allocating resources and assessing financial performance.
As of and for the years ended December 31, 2020 and 2019, all of the Company’s long-lived assets were located in the United States and all revenue was earned in the United States.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents and accounts receivable. The Company’s cash is held at two financial institutions in the United States of America. The Company’s cash equivalents are invested in money market funds. The Company has not experienced any losses on its deposits of cash and cash equivalents. Such deposits may, at times, exceed federally insured limits.
The Company’s partners in collaboration and license agreements who represent 10% or more of the Company’s total revenue are as follows:
Customer B * *
* Less than 10%
The Company’s partners in collaboration and license agreements who represent 10% or more of the Company’s total accounts receivable are as follows:
F-8
The Company’s total revenues by geographic region, based on the location of the customer, are as follows (in thousands):
Australia $ — $ 7
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents consist of money market funds.
Other Risks and Uncertainties
The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, protection of proprietary technology, dependence on key personnel, suppliers for key raw materials, contract manufacturing organizations (“CMOs”) and contract research organizations (“CROs”), compliance with government regulations and the need to obtain additional financing to fund operations. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical studies, clinical trials and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance and reporting.
There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained or maintained, that any products developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from product sales. The Company operates in an environment of rapid change in technology and substantial competition from other pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its employees, consultants and other third parties (including for clinical trials and some aspects of research and preclinical testing).
The extent of the impact of the COVID-19 pandemic on the Company’s business will depend upon the duration and spread of the outbreak and the extent and severity of the impact on the Company’s clinical trial activities, research activities and suppliers, all of which are uncertain and cannot be predicted. The extent to which the coronavirus outbreak may materially impact the Company’s financial condition, liquidity or results of operations is uncertain.
Fair Value Measurements
The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.
F-9
As a basis for considering such assumptions, a three-level fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:
The Company accounts for transfers of financial instruments between levels of the fair value hierarchy on the date of the event or change in circumstance that caused the transfer.
Accounts Receivable—Allowance for Doubtful Accounts
The Company regularly reviews accounts receivable for collectability and establishes an allowance for probable credit losses and writes off uncollectible accounts as necessary. The Company has determined that no allowance was required at December 31, 2020 and 2019. The Company did not have any write-offs relating to uncollectible accounts receivable during the years ended December 31, 2020 and 2019.
Property and Equipment, net
Property and equipment are stated at cost less accumulated depreciation for acquired assets. Depreciation is computed using the straight-line method over the estimated useful lives of assets, ranging from three to five years. Leasehold improvements are amortized over the shorter of the useful life of the assets or the lease term. Upon sale or retirement of assets, the costs and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected within operating expenses in the statements of operations and comprehensive loss. Maintenance and repairs are charged to expense as incurred.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amount to the future undiscounted net cash flows, which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is typically measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset. There have been no such impairments of long-lived assets in the years ended December 31, 2020 and 2019.
Redeemable Convertible Preferred Stock
The Company recorded all shares of redeemable convertible preferred stock at their respective fair values on the dates of issuance, net of issuance costs. The redeemable convertible preferred stock was recorded outside of permanent equity because while it was not mandatorily redeemable, in certain events considered not solely within the Company’s control, such as a merger or consolidation, sale, lease, or license of substantially all of the Company’s assets (each, a “deemed liquidation event”), the convertible preferred stock would become redeemable at the option of the holders of a majority of the outstanding series of redeemable convertible preferred stock. The Company did not adjust the carrying values of the redeemable convertible preferred stock to the liquidation preference of such shares because a deemed liquidation event obligating the Company to pay the liquidation preference did not occur. All outstanding
F-10
shares of the redeemable convertible preferred stock converted into common stock upon the closing of the IPO in December 2020.
Common Stock Warrants
The Company accounts for common stock warrants which meet the definition of a derivative as liabilities if the warrant requires net cash settlement or gives the holder the option of net cash settlement. The Company accounts for common stock warrants as equity if the contract requires physical settlement or net physical settlement or if the Company has the option of physical settlement or net physical settlement. Common stock warrants classified as liabilities are initially recorded at fair value and remeasured at fair value each balance sheet date with the offset adjustments recorded in other income (expense), net within the statements of operations and comprehensive loss. Common stock warrants classified as equity are initially measured at fair value on the grant date and are not subsequently remeasured.
Revenue Recognition
Effective January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”), using the modified retrospective transition method. The Company determines revenue recognition for arrangements within the scope of ASC 606 by performing the following five steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
The Company’s revenue is primarily derived through its license, research, development and commercialization agreements. The terms of these types of agreements may include (i) licenses to the Company’s technology, (ii) research and development services, and (iii) services or obligations in connection with participation in research or steering committees. Payments to the Company under these arrangements typically include one or more of the following: nonrefundable upfront and license fees, research funding, milestone and other contingent payments to the Company for the achievement of defined collaboration objectives and certain preclinical, clinical, regulatory and sales-based events, as well as royalties on sales of any commercialized products. Arrangements that include upfront payments are recorded as deferred revenue upon receipt or when due and are recognized as revenue as performance conditions are met. The event-based milestone payments, royalties and cost reimbursements represent variable consideration, and the Company uses the most likely amount method to estimate this variable consideration. Royalty payments are recognized when earned or as the sales occur. The Company records cost reimbursements as accounts receivable when right to consideration is unconditional.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. The Company allocates the total transaction price to each performance obligation based on the estimated standalone selling price and recognizes revenue when, or as, the performance obligation is satisfied. The Company includes the unconstrained amount of estimated variable consideration in the transaction price. At the end of each reporting period, the Company re-evaluates the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjusts its estimate of the overall transaction price.
Significant management judgment is required to determine the level of effort required under an arrangement and the period over which the Company expects to complete its performance obligations under the arrangement. Changes in these estimates can have a material effect on revenue recognized.
F-11
Research and Development Expenses
Costs related to research, design and development of programs are charged to research and development expense as incurred. Research and development costs include, but are not limited to, payroll and personnel expenses including stock-based compensation, materials, laboratory supplies, outside services and allocated overhead, including rent, insurance, repairs and maintenance, depreciation and utilities. The Company expenses all research and development costs in the period in which they are incurred.
Costs incurred in obtaining technology licenses are charged to research and development expense as acquired in-process research and development if the technology licensed has not reached technological feasibility and has no alternative future use.
Accrued Research and Development
The Company has entered into various agreements with CROs and CMOs. The Company’s research and development accruals are estimated based on the level of services performed, progress of the studies, including the phase or completion of events, and contracted costs. The estimated costs of research and development provided, but not yet invoiced, are included in accrued and other current liabilities on the balance sheet. If the actual timing of the performance of services or the level of effort varies from the original estimates, the Company will adjust the accrual accordingly. Payments made to CROs or CMOs under these arrangements in advance of the performance of the related services are recorded as prepaid expenses and other current assets until the services are rendered.
Stock-Based Compensation
As of January 1, 2020, the Company adopted ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees. As of January 1, 2020, the Company accounts for stock-based compensation for stock options granted to employees, directors and nonemployees as measured at grant date, based on the fair value of the award. The Company measures the fair value of awards granted using the Black-Scholes option pricing model and recognizes the expense in the statements of operations and comprehensive loss over the requisite service period using the straight-line method. Forfeitures are accounted for as they occur. The Company’s policy for issuing stock upon stock option exercise is to issue new common stock.
Prior to the adoption of ASU 2018-07 on January 1, 2020, stock-based compensation expense related to stock options granted to nonemployees was recognized based on the vesting date fair value of options as the stock options were earned. The Company remeasured the stock-based compensation at each reporting period end with the resulting change in fair value being recognized in the statements of operations and comprehensive loss over the period the related services were rendered. The Company estimated the service period for the options based on the time that would be required to satisfy the service condition, assuming the service condition would be satisfied. Stock-based compensation expense was recognized over the estimated service period but was accelerated if the performance condition was achieved earlier than estimated.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires, among other things, that deferred income taxes be provided for temporary differences between the tax basis of the Company’s assets and liabilities and their financial statement reported amounts. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards and are measured using the enacted tax rates and laws that will be in effect when such items are expected to reverse. A valuation allowance is provided against deferred tax assets unless it is more likely than not that they will be realized.
F-12
The Company accounts for uncertain tax positions by assessing all material positions taken in any assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company’s policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit. To date, there have been no interest or penalties charged in relation to the unrecognized tax benefits.
Embedded Derivative
Embedded derivatives that are required to be bifurcated from the underlying host instrument are accounted for and valued as a separate financial instrument. An embedded derivative exists in the award agreement with the Cystic Fibrosis Foundation (“CFF”). As described in Note 15, the embedded derivative has been bifurcated and is classified as a liability on the balance sheet and separately accounted for at its fair value. The derivative liability is subject to remeasurement to fair value each reporting period. Changes in the fair value of the derivative liability are recognized as a component of other income (expense), net within the statements of operations and comprehensive loss.
Deferred Offering Costs
The Company capitalizes certain legal, accounting and other third-party fees that are directly related to the Company’s in-process financings, until such financings are consummated. After consummation of the financing, these costs are recorded as a reduction of the proceeds received as a result of the offering. In the event that a planned offering does not occur or is significantly delayed, all related deferred offering costs will be expensed immediately within the Company’s statements of operations and comprehensive loss.
Net Loss Per Share Attributable to Common Stockholders
The Company calculates basic and diluted net loss per share to common stockholders in conformity with the two-class method required for companies with participating securities. The Company considers all series of redeemable convertible preferred stock to be participating securities as the holders are entitled to receive non-cumulative dividends on a pari passu basis in the event the dividend is paid on common shares. Under the two-class method, the net loss attributable to common stockholders is not allocated to the redeemable convertible preferred stock as the holders of redeemable convertible preferred stock do not have a contractual obligation to share in losses.
Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted net loss per share attributable to common stockholders is computed by giving effect to all potentially dilutive common shares outstanding for the period. For purposes of this calculation, redeemable convertible preferred shares, stock options to acquire shares of common stock, common stock warrants, and unvested common stock subject to repurchase, are considered potentially dilutive common shares, but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is antidilutive.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASC 606. This standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. The Company adopted ASC 606 effective January 1, 2019 using the modified retrospective method only to contracts not completed as of this date. The Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to the balance of
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accumulated deficit at January 1, 2019 with a cumulative effect adjustment of $0.3 million reflected as a decrease to the opening balance of accumulated deficit and a decrease to deferred revenue.
In June 2018, FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payment to employees. Under this ASU, the measurement of equity-classified nonemployee awards will be fixed at the grant date, which may lower their cost and reduce volatility in the statement of operations and comprehensive loss. The transition method provided by this ASU is on a modified retrospective basis, which recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020, with early adoption permitted, but no earlier than a company’s adoption date of ASC 606. The Company adopted this guidance effective January 1, 2020 using the modified retrospective method. The Company recorded a less than $0.1 million cumulative-effect adjustment reflected as a decrease to the opening balance of accumulated deficit and a decrease to additional paid-in capital.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This ASU amends the disclosure requirement in ASC 820, Fair Value Measurement, by adding, changing, or removing certain disclosures. This ASU applies to all entities that are required under this guidance to provide disclosure about recurring or nonrecurring fair value measurements. The amendments require new disclosures related to: (i) changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and (ii) the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements. In addition, there are certain changes in disclosure requirements in the existing guidance. For all entities, this ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company adopted this guidance effective January 1, 2020 with relevant updates made to disclosures.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815) (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. This ASU simplifies the accounting for certain financial instruments with down round features, a provision in an equity-linked financial instrument (or embedded feature) that provides a downward adjustment of the current exercise price based on the price of future equity offerings. Down round features are common in warrants, preferred shares, and convertible debt instruments issued by private companies and early-stage public companies. This ASU requires companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. The amendments in Part I of this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The amendments in Part I should be applied (1) retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the first fiscal year and interim periods; (2) retrospectively to outstanding financial instruments with a down round feature for each prior reporting period presented. The amendments in Part II of this ASU do not require any transition guidance because those amendments do not have an accounting effect. The Company adopted this guidance effective January 1, 2020. The adoption did not have an impact on the Company’s financial statements and related disclosures.
New Accounting Pronouncements Not Yet Adopted
As an “emerging growth company,” the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The Company has
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elected to use this extended transition period under the JOBS Act. The adoption dates discussed below reflects this election.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606. This ASU clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606, Revenue from Contracts with Customers, when the counterparty is a customer. This ASU also precludes an entity from presenting consideration received from a transaction as revenue from contracts with customers if the counterparty is not a customer for that transaction. This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted for entities that have adopted ASC 606, Revenue from Contracts with Customers. The Company is currently evaluating the impact the adoption of this standard will have on its financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Implementation Costs Incurred in a Cloud ComputingArrangement That Is a Service Contract, or ASU 2018-15. ASU 2018-15 requires a customer that is a party to a cloud computing service contract to follow the internal-use software guidance in Subtopic 350-40 to determine which implementation costs to capitalize and which costs to expense. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The Company is currently evaluating the impact the adoption of this standard will have on its financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASC 842”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which provides clarification to ASU 2016-02. These ASUs (collectively the “new leasing standard”) require lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASC 842 supersedes the previous leases standard, ASC 840, Leases. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which allows entities to elect an optional transition method where entities may continue to apply the existing lease guidance during the comparative periods and apply the new lease requirements through a cumulative effect adjustment in the period of adoption rather than in the earliest period presented. ASU 2016-02 is effective for the Company in the fiscal year beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this standard will have on its financial statements and related disclosures.
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3. Fair Value Measurements
The following tables represent the Company’s fair value hierarchy for financial assets and financial liabilities measured at fair value on a recurring basis as of December 31, 2020 and 2019 (in thousands):
Basis for Fair Value Measurements Fair Value as of
(Level 1) (Level 2) (Level 3) December 31, 2020
Assets
Liabilities
Derivative liability $ — $ — $ 122 $ 122
Basis for Fair Value Measurements Fair Value as of
(Level 1) (Level 2) (Level 3) December 31, 2019
Assets
Liabilities
Derivative liability $ — $ — $ 101 $ 101
Level 3 Inputs
The fair value of the derivative liability is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of the derivative liability was determined using a present value analysis with multiple scenarios. In determining the fair value of the derivative liability, the inputs impacting fair value include the change of control payment to CFF, the probability of a change of control event, the product status at time of a change of control event and the discount rate. See Note 15 for further discussion on embedded derivative.
There were no transfers between Level 1, 2 and 3 during the periods presented.
The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial instruments (in thousands):
Derivative Liability
Change in fair value included in other income (expense), net 37
Change in fair value included in other income (expense), net 21
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4. Property and Equipment, Net
Property and equipment, net, consisted of the following (in thousands):
Computer equipment and software 366 306
Construction in progress 539 563
Less: Accumulated depreciation and amortization (3,844 ) (2,625 )
Property and equipment, net $ 5,073 $ 5,049
All property and equipment are maintained in the United States. Depreciation expense was $1.4 million and $1.0 million for the years ended December 31, 2020 and 2019, respectively.
5. Accrued and Other Liabilities, Current and Noncurrent
Accrued liabilities consisted of the following (in thousands):
Accrued clinical and preclinical study costs 869 494
Total accrued and other current liabilities $ 8,371 $ 5,347
Other liabilities, noncurrent consisted of the following (in thousands):
Deferred rent, noncurrent $ 1,237 $ 1,023
Other payable, noncurrent 615 542
Total other liabilities, noncurrent $ 1,852 $ 1,565
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6. Research and Collaboration Arrangements
Collaboration and license revenue for each period was as follows (in thousands):
Year Ended December 31,
Benitec — 7
CRF — —
AstraZeneca — 548
Deferred revenue for each period was as follows (in thousands):
Deferred Revenue
Benitec — —
CRF — —
AstraZeneca — —
The total amount of revenue in the year ended December 31, 2020, which was included in deferred revenue at January 1, 2020, was $3.2 million.The total amount of revenue in the year ended December 31, 2019, which was included in deferred revenue at January 1, 2019, was $3.6 million.
uniQure
In January 2014, the Company and uniQure biopharma B.V. (“uniQure”) entered into a Collaboration and License Agreement (the “uniQure Agreement”) to collaborate on the discovery and non-clinical research activities related to the Company’s Therapeutic Vector Evolution platform in order to generate and validate vectors for gene delivery to treat diseases within the central nervous system and liver (together, the “uniQure Field”).
The uniQure Agreement provided uniQure with a research license as well as an exclusive development and commercialization license for each project variant selected for further development. The initial research term is three years with an option for uniQure to extend the research term one time for an additional year. Once the Company’s research plan has concluded, uniQure is solely responsible for the continued development, manufacturing and commercialization of the project variants as potential product candidates. In October 2016, uniQure exercised its option to extend the research term for an additional year to January 2018. The Company was also required to work exclusively with uniQure in the uniQure Field (the “uniQure Exclusivity Clause”).
Pursuant to the uniQure Agreement, the Company received upfront payments of $0.2 million, and was entitled to receive (i) contingent payments for the achievement of research and development milestones of up to $5.0 million for each licensed product selected under the arrangement, and (ii) royalties in the single digit range on future sales of the potential product candidates and sublicense
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consideration in the low teens to low thirties range on any future sublicensing arrangements. The Company also received capped research and development service fees based on contractual full-time employee rates per year. In connection with the performance obligations under the uniQure Agreement, the founders of 4D Molecular Therapeutics, LLC received equity options to purchase an aggregate of 609,744 of uniQure ordinary shares that vest over the initial three-year term of the agreement.
The upfront payment of $0.2 million was recorded as deferred revenue and was recognized on a ratable basis over the estimated performance period of four years. Payments and reimbursements for research costs were recognized on an as-incurred basis. The options to purchase uniQure shares were deemed to be a noncash component of the arrangement consideration, as the vesting of options is linked to the uniQure Agreement and there is a requirement for the holders of the options to provide services under the agreement. The fair value of the uniQure options, which was estimated to be $10.6 million, was recognized ratably as revenue over the estimated performance period of four years and the associated compensation expense related to the stock options were recorded as research and development expense.
In August 2019, the Company and uniQure entered into an Amended and Restated Collaboration and License Agreement (the “Amended uniQure Agreement”), which amended and restated the uniQure Agreement, and a separate Collaboration and License Agreement (the “Second uniQure Agreement”). Under these agreements, the Company agreed to transfer incremental rights and services to uniQure in exchange for uniQure eliminating the uniQure Exclusivity Clause and transferring other rights back to the Company.
Under the Amended uniQure Agreement, uniQure continues to have an exclusive license to select AAV capsid variants (the “Selected Variants”) in the uniQure Field. uniQure continues to be solely responsible, at its cost, to develop and commercialize the compounds and products containing the Selected Variants. The amended uniQure Agreement eliminated the uniQure Exclusivity Clause in the uniQure Agreement. Furthermore, the contingent payments that the Company was entitled to from uniQure for the achievement of research and development milestones of up to $5.0 million for each licensed product selected under the uniQure Agreement were eliminated and sublicense consideration on any future sublicensing arrangements was reduced from the low teens to low thirties percentages to mid-single digit to mid-twenties percentages.
Under the Second uniQure Agreement, the parties agreed to research and develop new AAV capsid variants (the “New Variants”) that are not Selected Variants that affect certain targets selected by uniQure (the “uniQure Targets”) in the uniQure Field. The Company is solely responsible, at its cost, for the research of the New Variants. The Company granted uniQure an exclusive license to a certain number of the New Variants (the “uniQure New Variants”) that affect the uniQure Targets. uniQure is solely responsible, at its cost, to develop and commercialize the compounds and products containing the uniQure New Variants that affect the uniQure Targets (the “Licensed Products”). The Company retains all rights to New Variants in the uniQure Field that affect targets other than the uniQure Targets.
Under both the Amended uniQure Agreement and the Second uniQure Agreement, uniQure will be required to pay the Company royalties on worldwide annual net sales of Licensed Products at a mid-single digit percentage rate, subject to certain specified reductions. uniQure will also be required to pay the Company sublicensing consideration for sublicensing the Company’s intellectual property rights licensed under the Amended uniQure Agreement or the Second uniQure Agreement to third parties at a rate between the mid-single digit to mid-twenties. The Company has reciprocal obligations, at the same percentage rates as uniQure, to pay uniQure royalties and sublicensing consideration for sublicensing certain intellectual property rights licensed under the Amended uniQure Agreement or the Second uniQure Agreement to third parties.
The Company concluded that the Amended uniQure Agreement and the Second uniQure Agreement should be accounted for as one combined contract that should be accounted for as a separate contract from the uniQure Agreement given that the incremental licensed intellectual property rights and research and development services are distinct from the rights and services previously
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transferred to uniQure under the uniQure Agreement and the transaction price increased by an amount that equals the standalone selling price of the incremental rights and services to be transferred to uniQure under the Amended uniQure Agreement and Second uniQure Agreement.
Neither party was required to pay monetary consideration in connection with the execution of the Amended uniQure Agreement or the Second uniQure Agreement or for subsequent performance by the parties under those agreements, notwithstanding the potential future royalty and sublicense consideration described above. The fair value of the non-monetary consideration given by uniQure to the Company, for the intellectual property right is $5.1 million. This intellectual property right is considered to be an in-process research and development asset with no alternative future use and, accordingly, was written off as acquired in-process research and development expense in the year ended December 31, 2019.
The incremental transaction price described in the paragraph above was recorded as deferred revenue given that the Company identified one single combined performance obligation under ASC 606, which includes the licenses to the New Variants, research services and participation in the joint steering committee (“JSC”). Revenue is being recognized using the input method based on actual costs incurred as a percentage of total budgeted costs as the Company completes its performance obligation. Based on the current estimated timelines, the deferred revenue is expected to be recognized as revenue over approximately two to three years from December 31, 2020.
The Company determined the transaction price using the risk adjusted net present value analysis (“rNPV”) methodology to value the elimination of the uniQure exclusivity clause and other material rights received by the Company, including the potential royalties the Company would receive from uniQure. The rNPVs incorporate estimates and assumptions including the number of products the Company and uniQure would develop, the risk-adjusted probability of successfully developing a biopharmaceutical product, the probability that uniQure will develop a product, the research and development costs, the potential worldwide sales and associated commercialization costs, corporate tax rate, and discount rate.
During the years ended December 31, 2020 and 2019 the Company recognized revenue of $0 and less than $0.1 million under the uniQure Agreement, respectively. During the years ended December 31, 2020 and 2019 the Company recognized revenue of $0.7 million and $0 under the Amended uniQure Agreement and the Second uniQure Agreement, respectively. As of December 31, 2020 and 2019, deferred revenue relating to uniQure was $4.4 million and $5.1 million, respectively. There were no amounts due from uniQure under the uniQure Agreement, Amended uniQure Agreement or Second uniQure Agreement as of December 31, 2020 and 2019. As of December 31, 2020 and 2019, the aggregate amount of the transaction price allocated to the remaining performance obligation was $4.4 million and $5.1 million, respectively.
Benitec
In November 2014, the Company and Benitec Biopharma Limited (“Benitec”) entered into a collaboration and license agreement to collaborate on the discovery and non-clinical research activities related to the Company’s Therapeutic Vector Evolution platform in order to generate and validate vectors for gene delivery to treat certain ophthalmic diseases (the “Benitec Agreement”). Benitec had the option of nominating up to three project variants as part of the Benitec Agreement.
The Benitec Agreement provided Benitec with a temporary research license as well as an exclusive development and commercialization license for each project variant selected to further develop. The initial research term was two years and was automatically extended in six-month increments, if necessary, in order to complete additional required studies, for a maximum of five years. Once the Company’s research plan concluded, Benitec was solely responsible for the continued development, manufacturing and commercialization of the project variants as potential product candidates.
Pursuant to the Benitec Agreement, the Company received as consideration (i) an upfront payment of $0.5 million, (ii) capped research and development service fees based in part on prescribed
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full-time equivalent labor rates and (iii) reimbursements of pass-through and overhead costs incurred on behalf of Benitec.
On January 24, 2017, the Benitec Agreement was amended to give Benitec sole responsibility for the performance of certain research work which would have generated research services revenue for the Company under the original agreement. Pursuant to the amendment, the Company received $0.5 million as consideration. This $0.5 million was recorded as deferred revenue and was recognized over the same period as the upfront payment.
In March 2019, the Benitec Agreement was terminated based on mutual agreement between the Company and Benitec.
The Company identified one combined performance obligation to provide the research license, exclusive development and commercialization licenses for each project variance selected to further develop, research services and participation in the JSC. The transaction price included the $1.0 million non-refundable upfront fees and $2.4 million reimbursement for costs incurred and the value of labor hours expended. The Company excluded any consideration related to sales-based milestones, including royalties, which are recognized when the related sales occur. For the year ended December 31, 2019, there was no change in the transaction price.
During the years ended December 31, 2020 and 2019, the Company recognized revenue of $0 and less than $0.1 million, respectively. As of December 31, 2020 and 2019, deferred revenue relating to the Benitec Agreement was $0. There were no amounts due from Benitec under the Benitec Agreement as of December 31, 2020 and 2019. Upon termination of the Benitec Agreement in March 2019, the Company had no further obligations impacting revenue recognition.
CRF
In November 2015, the Company entered into a research funding and collaboration agreement (the “CRF Agreement”) with the Choroideremia Research Foundation (“CRF”), a non-profit organization dedicated to finding a cure for choroideremia, a rare inherited disorder that causes progressive vision loss, ultimately leading to complete blindness. The goal of the CRF Agreement is for CRF to contribute funding to help with the advancement of the Company’s choroideremia research program. The Company is responsible for all decision making and execution of any and all of the related activities to be completed in its sole discretion. The initial term of the CRF Research Plan is two years. The agreement includes contribution to CRF of up to $2.5 million upon certain development or approval milestones. The overall arrangement has automatic extensions of up to three additional years. As of December 31, 2020, no milestones have been achieved.
Revenue was fully recognized for this agreement in the year ended December 31, 2017. There was no deferred revenue relating to the CRF Agreement as of December 31, 2020 and 2019. No amount was due from CRF under the CRF Agreement as of December 31, 2020 and 2019.
Roche
In November 2017, the Company entered into a collaboration and license agreement with F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc. (together, “Roche”) to discover and develop products containing optimized next generation AAV Vectors focused on ophthalmological diseases and disorders excluding select criteria (the “2017 Roche Agreement”). The Company and Roche both have the ability to nominate products to discover, develop and commercialize.
At the effective date, choroideremia was designated a Roche product. The Company is responsible for conducting research and development services prior to pivotal clinical studies, and Roche is responsible for conducting subsequent development and commercialization activities. In addition, Roche agreed to pay for research and development services at the agreed upon full-time employee rate for work performed for choroideremia under the 2017 Roche Agreement, except for the costs associated with the manufacturing work for choroideremia.
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For any product that the Company nominates and conducts research and development services under the 2017 Roche Agreement prior to pivotal clinical studies, including 4D-125 (for the treatment of XLRP), Roche has an option to convert the status of the product to a Roche product during the 90-day option period. If Roche chooses to not exercise its option, the Company can continue subsequent development and commercialization activities and Roche will have no further rights with respect to such product.
Pursuant to the 2017 Roche Agreement, the Company received an upfront payment of $21.0 million as consideration. In addition, the Company is entitled to contingent payments including (i) $1.0 million for each Roche nominated product beyond the first three, (ii) up to $30.0 million upon exercise of the option to convert a product the Company nominated and developed prior to pivotal clinical studies (iii) development milestone payments of up to $223.0 million, of which $86.0 million relates to choroideremia and the rest relate to other licensed products; and (iv) sales-based milestones of up to $123.0 million in connection with licensed products. The 2017 Roche Agreement also includes provisions that entitle the Company to receive royalty payments ranging from the mid-single digits to the mid-teens for the net sales of the licensed products, in each case subject to the reductions in accordance with the terms of the agreement.
Under ASC 606, the Company identified a single combined performance obligation for the license, research services and participation in the JSC. Furthermore, the Company concluded that at the inception of the agreement, Roche’s option, exercisable prior to pivotal clinical study initiation, does not represent a material right and should be allocated to the single performance obligation and recognized as revenue upon Roche’s exercise of the option. The transaction price related to the agreement upon adoption of ASC 606 included the $21.0 million non-refundable upfront fee and $10.7 million for estimated reimbursements for research and development services at the agreed upon full-time employee rate and third party costs. The Company’s contract with Roche does not include a significant financing component. The Company concluded that the transaction price should not include the variable consideration related to development milestones as they were considered to be constrained as it is probable that the inclusion of such variable consideration could result in a significant reversal of cumulative revenue in the future. The Company excluded any consideration related to sales-based milestones, including royalties, which are recognized when the related sales occur. The transaction price and estimated period of performance will be re-evaluated at each reporting period. For the year ended December 31, 2020, an adjustment of $17.0 million was made to the transaction price to reflect an increase of $7.0 million in the scope of the project and expected reimbursable costs and the addition of $10.0 million of variable consideration as the uncertainty associated with two development milestones was resolved. The adjustments to the transaction price and total budgeted costs in 2020 resulted in a $4.6 million increase in revenue recognized in the year ended December 31, 2020 related to performance obligations partially satisfied in periods prior to January 1, 2020. For the year ended December 31, 2019, an adjustment of $4.5 million was made to the transaction price to reflect an increase in the scope of the project and expected reimbursable costs. The increase in the transaction price and total budgeted costs in 2019 resulted in a $1.6 million decrease in revenue recognized in the year ended December 31, 2019 related to performance obligations partially satisfied in periods prior to January 1, 2019.
During the years ended December 31, 2020 and 2019, the Company recognized revenue of $12.9 million and $6.3 million, respectively. As of December 31, 2020 and 2019, deferred revenue relating to the Roche Agreement was $14.3 million and $13.6 million, respectively. Accounts receivable from Roche under this agreement as of December 31, 2020 and 2019 was $1.1 million and $0.6 million, respectively. As of December 31, 2020 and 2019, the aggregate amount of the transaction price allocated to the remaining performance obligation was $25.8 million and $21.6 million, respectively. Based on current timelines, the deferred revenue is expected to be recognized as revenue over the next three to four years as the Company continues to develop nominated products until the initiation of pivotal studies.
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CFF
In September 2016, the Company entered into an award agreement for the Optimized Adeno-Associated Virus for Lung Epithelia Gene Delivery Development Program with CFF, a non-profit organization dedicated to finding a cure for cystic fibrosis, an inherited disorder that causes disease in the pulmonary airways leading to morbidity and mortality. Under this agreement, CFF contributes funding to help advance the Company’s CF research program. The agreement was subsequently amended in September 2017 and August 2018 (all three agreements are collectively referred to as the “CFF Agreement”). The total amount of the award under the CFF Agreement is $3.5 million. As of December 31, 2020 and 2019, the Company achieved milestones totaling $1.3 million and $0.9 million under the CFF Agreement, respectively. The remaining award amount will be paid by CFF based on achievement of certain development milestones by the Company.
The Company expects to make payments to CFF equal to six times the actual award received by the Company in three installments within the first four years of the first commercial sale of a product developed under this agreement. The Company also has agreed to make future sales-based milestone payments to CFF of up to three times the actual award received upon achieving specified commercialization milestones with respect to the first of any product developed utilizing any compound covered under the CFF Agreement. The CFF Agreement also requires the Company to pay to CFF royalties of a mid-single digit percentage, up to six times the actual award received, on any amounts received by the Company from the sale, license or transfer to a third-party of rights in the technology developed as a result of this collaboration. Any such royalty payments shall be credited against the payments owed by the Company upon first commercial sale. In the event of a change of control of the Company, CFF will receive certain payments, depending on the timing of the change of control and the size of the transaction.
To date, the Company has not developed a commercial product in connection with the CFF Agreement, and it has not licensed, sold or otherwise transferred to another party the product developed under the CFF Agreement or the underlying technology.
If at any time prior to the first commercial sale of a product developed as a result of the CFF Agreement, the Company ceases to use commercially reasonable efforts to develop or commercialize any product under the CFF Agreement for a continuous period of 180 consecutive days and fails to present a reasonable plan to resume commercially reasonable efforts, the Company will grant to CFF an irrevocable, exclusive worldwide interruption license under all of the Company’s interest in the research plan technology to exploit such product. Any third-party license granted by the Company shall be subject to such interruption license.
Under ASC 606, the Company identified one performance obligation within the CFF grant agreement for research activities. The Company’s contract with CFF does not include a significant financing component.
The Company concluded that the transaction price should not include the variable consideration related to future research milestones as they were considered to be constrained as it is probable that the inclusion of such variable consideration could result in a significant reversal of cumulative revenue in the future. The Company re-evaluates the transaction price and estimated period of performance at each reporting period. For the year ended December 31, 2020, an adjustment of $0.4 million was made to the transaction price to reflect the achievement of the third milestone related to in-vitro screenings under the CFF Agreement.
During the years ended December 31, 2020 and 2019, the Company recognized revenue of less than $(0.1) million and $0.1 million, respectively. As of December 31, 2020 and 2019, deferred revenue relating to the CFF Agreement was $1.1 million and $0.7 million, respectively. Accounts receivable from CFF under the CFF Agreement as of both December 31, 2020 and 2019 was $0.4 million.As of December 31, 2020 and 2019, the aggregate amount of the transaction price allocated to the remaining performance obligation was $1.1 million and $0.7 million, respectively. Based on current timelines, the deferred revenue is expected to be recognized as revenue over the next two to three years as the Company performs research services through the completion of IND-enabling studies.
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The obligation to make payments to CFF upon a change of control meets the definition of an embedded derivative that is required to be bifurcated and separately accounted for as a derivative liability. The Company determined the estimated fair value of this derivative liability to be $0.1million as of both December 31, 2020 and 2019. See Note 15 for further discussion of the embedded derivative.
AstraZeneca
In December 2017, the Company entered into a collaboration and option agreement with MedImmune, Inc., the global biologics research and development arm of AstraZeneca (“AstraZeneca”) to discover and develop optimized AAV vectors to treat specific lung disease indications (the “AstraZenecaAgreement”). The AstraZeneca agreementincluded both a research funding component as well as a licensing component, wherein AstraZenecawas granted the option to license up to three resulting project vector variants for further development and commercialization.
The initial research term was approximately twelve months with AstraZeneca’soption to extend the term for an additional six months. AstraZenecarequested the six-month extension in October 2018. AstraZeneca’s option to license the resulting project variants expires twelve months after the conclusion of the research phase. Once the Company’s research activities concluded, AstraZenecawas solely responsible for the continued development, manufacturing and eventual commercialization of the project variants as potential product candidates.
Pursuant to the AstraZeneca Agreement, the Company received an upfront payment of $1.5 million as consideration.
The Company identified a single combined performance obligation within the AstraZeneca agreement for the research program license, research and development activities and participation in the joint project team and JSC. The Company concluded that these activities are not distinct and, therefore, should be combined into a single combined performance obligation. Furthermore, the Company concluded that at the inception of the agreement, AstraZeneca’s license option, did not represent a material right and should be allocated to the single performance obligation and recognized as revenue upon AstraZeneca’s exercise of the option.
The transaction price related to the agreement consists of the $1.5 million non-refundable upfront fee. The Company concluded that the transaction price should not include the variable consideration related to developmental milestones as they were considered to be constrained as it is probable that the inclusion of such variable consideration could result in a significant reversal of cumulative revenue in the future. The Company excluded any consideration related to sales-based milestones, including royalties, which are recognized when the related sales occur. The Company re-evaluates the transaction price and estimated period of performance at each reporting period. The Company’s contract with AstraZeneca does not include a significant financing component.
Under ASC 606, the Company used the input method to measure progress toward completion of the performance obligation and concluded that revenue will be recognized based on actual resources consumed, labor hours expended and costs incurred as a percentage of total budgeted costs.
In June 2019, the research phase concluded and the Company delivered its final report to AstraZeneca. In June 2020, AstraZeneca’s option to obtain the license of up to three project vector variants under the AstraZeneca Agreement expired unexercised.
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During the years ended December 31, 2020 and 2019, the Company recognized revenue of $0 and $0.5 million, respectively. As of December 31, 2020 and 2019, deferred revenue relating to the AstraZeneca Agreement was $0. No amount was due from AstraZeneca under this agreement as of December 31, 2020 and 2019.
7. License Arrangements
The Company has exclusive, worldwide license agreements (the “UC Agreements”) with the Regents of the University of California (the “UC Regents”) relating to the use of certain patents and intellectual property surrounding its core technologies, including Therapeutic Vector Evolution. Pursuant to each of the UC Agreements executed prior to January 2019, the Company was obligated to pay a (i) non-refundable license fee of $5,000 upon execution, (ii) a non-refundable license fee of $5,000 each year thereafter, until sales of a licensed product are made and royalties are paid to the UC Regents, (iii) reimbursement of domestic and foreign patent filing, prosecution and maintenance fees, and (iv) either $50,000 or issuance of a 3% equity interest in the Company upon the closing of the first qualified financing at the option of the UC Regents. The Company’s first qualified financing occurred in 2015 and at the election of the UC Regents, the Company issued the UC Regents in January 2016 an amount of common stock equal to 6% of the equity interests in the Company pursuant to the applicable clause in each of the UC Agreements.
Pursuant to an agreement with the UC Regents executed in January 2019 the Company paid a non-refundable license fee of $50,000 to the UC Regents upon execution of the agreement. The Company is obligated to pay a non-refundable license fee of $5,000 on the one-year anniversary of the contract effective date and each year thereafter, until sales of a licensed product are made and royalties are paid to the UC Regents.
In addition, the Company is obligated to make certain contingent payments including (i) development milestones up to $3.1 million, (ii) low single digit royalties on the net sales of its developed products that consists of a minimum annual royalty of up to $0.1 million per year for the term of the Agreement beginning in the first calendar year after the year in which net sales first occurred, and (iii) sublicense consideration in the mid-teens to the mid-twenties-range on any future sublicensing arrangements the Company may enter into with third-party licensees.
During the years ended December 31, 2020 and 2019, the Company incurred expenses of $0.2 million and $0.3 million, respectively, under the provisions of the UC Agreements.
8. Commitments and Contingencies
Operating Lease Commitments
In May 2015, the Company executed a lease agreement for office and laboratory space in Emeryville, California. In January 2016, the Company executed the first amendment to the lease agreement for additional rentable office and laboratory space which extended the lease to March 31, 2023. In October 2018, the Company executed a second amendment to extend the lease to September 2026. Additionally, the second amendment provided a tenant improvement allowance of $0.2 million, which was paid to the Company in November 2018. The Company amortizes the tenant improvement allowance on a straight-line basis over the remaining term of the lease as a reduction of rent expense.
In October 2018, the Company executed a second lease agreement for additional office and laboratory space in Emeryville, California. The new lease has an initial term of 87 months beginning on the rent commencement date with the option to renew the lease for one additional term of five years. The Company did not have to pay rent until October 2019. This lease agreement also provided for a tenant improvement allowance of $0.4 million, which was paid to the Company in December 2019. The Company amortizes the tenant improvement allowance on a straight-line basis over the remaining term of the lease as a reduction of rent expense.
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In May 2019, the Company amended the second lease agreement executed in October 2018 to add additional office and laboratory space. The amendment extended the term of the lease to December 31, 2029. The Company did not have to pay rent until December 2019. The annual rent for the additional space is $1.0 million per annum and escalates at 3% annually. This lease agreement also provides for a tenant improvement allowance of at least $1.6 million.
The Company recognizes rent expense on a straight-line basis over the lease term with the difference between the rent payments and the straight-line rent expense recorded as deferred rent. Rent expense for the years ended December 31, 2020 and 2019 was $3.0 million and $1.3 million, respectively. Deferred rent as of December 31, 2020 and 2019 was $1.6 million and $1.2 million, respectively. In conjunction with the lease agreements and amendments, the Company paid total security deposits of $0.6 million, which is included in other assets within the balance sheets as of both December 31, 2020 and 2019.
The following table summarizes the Company’s future minimum commitments under lease contracts (in thousands):
Indemnification Agreements
In the ordinary course of business, the Company enters into agreements that may include indemnification provisions, such as with vendors and other parties. Pursuant to such agreements, the Company may indemnify, hold harmless and defend an indemnified party for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third-party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. The Company has never incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. The Company has also entered into indemnification agreements with its directors and officers that require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by Delaware corporate law. The Company currently maintains directors’ and officers’ liability insurance that would generally enable it to recover a portion of any future amounts paid. The Company believes the estimated fair value of its indemnification agreements in excess of applicable insurance coverage is not material.
Legal Proceedings
From time to time, the Company may become involved in legal proceedings arising from the ordinary course of its business. If applicable, the Company records a legal liability when it believes that it is both probable that a liability may be imputed, and the amount of the liability can be reasonably estimated. Significant judgment by the Company is required to determine both probability and the estimated amount.
Included in Accrued and Other Current Liabilities within the balance sheet at December 31, 2020 is a $1.4 million accrual relating to the estimated settlement of a claim from a former employee.
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9. Income Taxes
The Company did not record any income tax expense during the years ended December 31, 2020 and 2019. The Company has a net operating loss and has provided a valuation allowance against net deferred tax assets due to uncertainties regarding the Company’s ability to realize these assets. All losses before income taxes arose in the United States.
The effective tax rate of the Company’s income tax expense (benefit) differs from the federal statutory rate as follows:
Federal statutory income tax rate 21.0 % 21.0 %
Research tax credit 2.8 % 5.2 %
Permanent differences (1.7 )% (0.7 )%
Valuation allowance (22.1 )% (25.5 )%
Provision for income taxes 0.0 % 0.0 %
The tax effects of temporary differences that give rise to significant components of the deferred taxes are as follows (in thousands):
Deferred Tax Assets
Other accrued liabilities 422 336
Net deferred tax assets $ — $ —
ASC 740, Income Taxes, requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. Because of the Company’s recent history of operating losses, management believes that recognition of the deferred tax assets arising from future tax benefits is currently not likely to be realized and, accordingly, has provided a full valuation allowance. The valuation allowance increased by $12.5 million during each of the years ended December 31, 2020 and 2019. The increase in the valuation allowance for each of the years ended December 31, 2020 and 2019 was primarily driven by losses and tax credits generated in the U.S.
The Company had net operating loss (“NOL”) carryforwards of $100.6 million and $50.7 million as of December 31, 2020 and 2019, respectively, available to reduce future taxable income, if any, for federal income tax purposes. $9.5 million of the federal NOL carryforwards expire in 2037 and the remaining $91.1 million carryforward indefinitely.
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As of December 31, 2020 and 2019, the Company had federal research and development credit carryforwards of $5.7 million and $3.3 million, respectively, and state research and development credit carryforwards of $4.3 million and $3.3 million, respectively, available to reduce future taxable income, if any, for federal and California state income tax purposes, respectively. The federal credit carryforwards begin expiring in 2035 and the state credits carryforward indefinitely.
Utilization of the NOL carryforwards and research credit carryforwards may be subject to an annual limitation due to the ownership percentage change limitations provided by the Internal Revenue Code and similar state provisions. Annual limitations may result in the expiration of the NOL and tax credit carryforwards before they are utilized.The Company has experienced ownership changes in the past as a result of its Series B redeemable convertible preferred stock financing. As a result of the ownership changes, the Company has determined that $0.9 million of its NOLs will expire unutilized for federal income tax purposes and such amounts are excluded from its NOL carryforwards. The Company does not expect any ownership changes during the year ended December 31, 2020. Subsequent ownership changes may affect the limitation in future years.
The reconciliation of the beginning and ending unrecognized tax benefits amounts is as follows (in thousands):
Unrecognized Income Tax Benefits
Additions for current year tax positions 907
Additions for current year tax positions 1,729
Additions for tax positions of prior years 72
The entire amount of the unrecognized tax benefits would not impact the Company’s effective tax rate if recognized. During each of the years ended December 31, 2020 and 2019, the Company did not recognize accrued interest and penalties related to unrecognized tax benefits. The Company does not anticipate that the amount of existing unrecognized tax benefits will materially increase or decrease during the next 12 months.
The Company files income tax returns in the U.S. federal and California tax jurisdictions. In general, the Company is no longer subject to tax examination by the Internal Revenue Service or state taxing authorities for years before 2016. Although the federal and state statutes are closed for purposes of assessing additional income tax in those prior years, the taxing authorities may still make adjustments to the NOL and credit carryforwards used in open years. Therefore, the tax statutes should be considered open as it relates to the NOL and credit carryforwards used in open years. The Company has no ongoing income tax examinations by tax authorities at this time.
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act changed certain provisions of the Tax Act. Under the CARES Act, NOLs arising in taxable years beginning after December 31, 2017 and before January 1, 2021 may be carried back to each of the five taxable years preceding the tax year of such loss, but NOLs arising in taxable years beginning after December 31, 2020 may not be carried back. In addition, the CARES Act eliminated the limitation on the deduction of NOLs to 80% of current year taxable income for taxable years beginning before January 1, 2021 and increased the amount of interest expense that may be deducted to 50% of adjusted taxable income for taxable years beginning in 2019 or 2020. The Company evaluated the impact of the CARES act on its tax provision and concluded that there was not a material impact.
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On December 21, 2020, the U.S. president signed into law the Consolidated Appropriations Act, 2021 which includes further COVID-19 economic relief and extension of certain expiring tax provisions. The relief package includes a tax provision clarifying that businesses with forgiven PPP loans can deduct regular business expenses that are paid for with the loan proceeds. Additional pandemic relief tax measures include an expansion of the employee retention credit, enhanced charitable contribution deductions, and a temporary full deduction for business expenses for food and beverages provided by a restaurant. The Company evaluated the impact of the Consolidated Appropriations Act, 2021 on its tax provision and concluded that there was not a material impact.
10. Redeemable Convertible Preferred Stock
As of December 31, 2020 and 2019, the Company’s certificate of incorporation authorized the Company to issue 0 and 7,375,638 shares of redeemable convertible preferred stock, respectively at the par value of $0.0001 per share.
As of December 31, 2019, redeemable convertible preferred stock consisted of the following (in thousands, except per share and share amounts):
In April and June of 2020, the Company issued a total of 4,200,353 shares of Series C redeemable convertible preferred stock at $18.00 per share for net proceeds of $72.5 million.Upon the closing of the Company’s IPO on December 15, 2020, all outstanding redeemable convertible preferred stock automatically converted into shares of common stock and the related carrying value was reclassified to common stock and additional paid in capital. There were no shares of redeemable convertible preferred stock outstanding as of December 31, 2020.
Prior to the closing of the Company’s IPO the holders of redeemable convertible preferred stock had various rights and preferences including the following:
Liquidation Preference—In the event of a liquidation event, the holders of the shares of Series C and Series B redeemable convertible preferred stock were entitled to receive any distribution of any of the assets of the Company in preference to the holders of the Series A-1 redeemable convertible preferred stock, Series A redeemable convertible preferred stock or common stock, an amount per share equal to the greater of (i) the sum of the original Series C issue price plus all declared but unpaid dividends thereon or the original Series B issue price plus all declared but unpaid dividends and (ii) such amount per share payable had all shares of Series C and Series B redeemable convertible preferred stock been converted into common stock. If upon the occurrence of a liquidation event, the available assets were insufficient to pay the holders of Series C and Series B redeemable convertible preferred stock the full amount to which they were entitled, then the available assets would be distributed to the holders of the shares of Series C and Series B redeemable convertible preferred stock, in proportion to the full preferential amount each holder was otherwise entitled to receive. After full payment to holders of the Series C and Series B redeemable convertible preferred stock, payment would be made to the holders of Series A-1 redeemable convertible preferred stock, in preference to the holders of the Series A redeemable convertible preferred stock or common stock, in an amount equal to the greater of (i) the original Series A-1 issue price plus all declared but unpaid dividends and (ii) such amount per share payable had all shares of Series A-1 redeemable convertible preferred stock been converted into common stock. After full payment to holders of the Series A-1 redeemable convertible preferred stock, payment would be made to the holders of Series A redeemable convertible preferred stock, in preference
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to the holders of the common stock, in an amount equal to the greater of (i) the original Series A issue price plus all declared but unpaid dividends and (ii) such amount per share payable had all shares of Series A redeemable convertible preferred stock been converted into common stock. If upon the occurrence of a liquidation event, the available assets were insufficient to pay the holders of Series A-1 or Series A redeemable convertible preferred stock the full amount to which they are entitled, then the available assets would bedistributed to the holders of such redeemable convertible preferred stock on a pro rata, on an equal priority, pari passu basis, in proportion to the full preferential amount such holder was otherwise entitled to receive.
Notwithstanding the above, for purposes of determining the amount each holder of shares of redeemable convertible preferred stock would be entitled to receive with respect to a Liquidation Event, each such holder of shares of a series of redeemable convertible preferred stock would be deemed to have converted such holder’s shares of such series into shares of common stock immediately prior to the Liquidation Event if, as a result of an actual conversion, such holder would receive, in the aggregate, an amount greater than the amount that would be distributed to such holder if such holder did not convert such series of redeemable convertible preferred stock into shares of common stock. If any such holder was deemed to have converted shares of redeemable convertible preferred stock into common stock pursuant to this paragraph, then such holder would not be entitled to receive any distribution that would otherwise be made to holders of redeemable convertible preferred stock that had not converted into shares of common stock.
Conversion—Shares of any series of redeemable convertible preferred stock could be converted, at the option of the holder, into such number of fully paid and non-assessable shares of common stock using a conversion rate determined by dividing the applicable original issue price by the applicable conversion price, as adjusted for any anti-dilution adjustments. The Company’s redeemable convertible preferred stock was convertible into the Company’s shares of common stock on a one-for-one basis.
Prior to the issuance of Series C redeemable convertible preferred stock in April 2020, shares of redeemable convertible preferred stock would automatically be converted into shares of common stock at the then effective conversion price for such share, immediately prior to either: (i) the completion of an underwritten public offering of the Company’s common stock at a price of at least 1.5 times the original Series B issuance price for any initial public offering consummated at any time prior to the first anniversary of the Series B original issuance date, or 1.25 times the original Series B issuance price for any such IPO thereafter and that provides at least $30.0 million of gross proceeds to the Company or (ii) the conversion by the holders of redeemable convertible preferred stock, which requires the vote of the holders of a majority of the then outstanding shares of redeemable convertible preferred stock, voting together as a single class on an as-converted to common stock basis.
After the issuance of the Series C redeemable convertible preferred stock in April 2020, shares of redeemable convertible preferred stock would automatically be converted into shares of common stock at the then effective conversion price for such share, immediately prior to either: (i) the completion of an underwritten public offering of the Company’s common stock at a price of at least 1.25 times the original Series C issuance price, as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like that provides at least $50.0 million of gross proceeds to the Company or (ii) the conversion by the holders of redeemable convertible preferred stock, which requires the vote of the holders of a majority of the then outstanding shares of redeemable convertible preferred stock voting together as a single class on an as-converted to common stock basis; provided, however that any automatic conversion of the Series C and Series B redeemable convertible preferred stock under (ii) shall require the consent of the holders of a majority of Series C and Series B redeemable convertible preferred stock then outstanding voting together as a single class on an as-converted to common stock basis.
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Dividends—The redeemable convertible preferred stock dividends were not cumulative and were payable only when declared by the board of directors. No such dividends were declared. Such dividends were in preference to any dividends to holders of common stock.
Voting Rights—Each holder of redeemable convertible preferred stock would be entitled to the number of votes equal to the number of shares of common stock into which the shares of redeemable convertible preferred stock held by such holder could be converted as of the record date.
Redemption and Balance Sheet Classification—The redeemable convertible preferred stock was recorded in mezzanine equity because while it was not mandatorily redeemable, it would become redeemable at the option of the stockholders upon the occurrence of a deemed liquidation event that was considered not solely within the Company’s control.
Funding Agreement with CFF —In April 2020, CFF made a $10.0 million investment in the Company’s Series C redeemable convertible preferred stock financing. In return for the investment, CFF received shares of Series C redeemable convertible preferred stock, and the Company and CFF entered into a Funding Agreement (“the Funding Agreement”). Pursuant to the terms of the Funding Agreement, except in the event of a technical failure, the $10.0 million received from CFF will be used to advance the development program for 4D-710, the Company’s lead product in cystic fibrosis, or any other therapeutic approved by the Program Advisory Group (“PAG”) to alleviate pulmonary complications of cystic fibrosis (“the Funding Agreement Product”). CFF is committed to provide an additional $4.0 million of funding upon acceptance of an Investigational New Drug application or its equivalent to allow for human testing of the Funding Agreement Product (“Acceptance”), except in the event of a change of control transaction occurring prior to Acceptance or Acceptance occurring after April 29, 2026. At the time of Acceptance, CFF will receive shares of common stock priced at the 10-day average reported closing price of the Company’s common stock on the date of Acceptance.
Except in the event of a technical failure, the Company is committed to providing an amount equal to the funding provided by CFF to be used solely to advance the Funding Agreement Product. A technical failure is defined as a determination by the Company, after consultation with and approval of the PAG that (i) the Funding Agreement Product has failed to reach its intended endpoints due to safety issues, lack of sufficient transgene expression and/or efficacy, each despite commercially reasonable efforts and (ii) the exercise of further commercially reasonable efforts is unlikely to correct such failure. Under the terms of the Funding Agreement, neither the $10.0 million investment in the Series C redeemable convertible preferred stock, which converted to common stock as of December 31, 2020, nor the $4.0 million of funding upon Acceptance are restricted as to withdrawal or usage.
11. Common Stock
As of each of December 31, 2020 and 2019, the Company’s certificate of incorporation authorized the Company to issue 300,000,000 and 50,000,000 shares of common stock, respectively, at the par value of $0.0001 per share. The holder of each share of common stock is entitled to one vote per share.
Common stockholders are entitled to dividends if and when declared by the board of directors, subject to the prior rights of the redeemable preferred stockholders. As of December 31, 2020 and 2019, no dividends on common stock had been declared by the board of directors.
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As of December 31, 2020 and 2019, the Company has reserved common stock, on an as-converted basis, for future issuance as follows:
Conversion of redeemable convertible preferred stock — 7,375,631
Issuance of common stock under the 2015 Equity Incentive Plan — 125,353
Issuance of common stock under the 2020 Equity Incentive Plan 2,606,546 —
Issuance of common stock under the Employee Stock Share Purchase Plan 252,337 —
Restricted Common Stock
During 2015, the Company issued common stock to the Company founders of 4,710,060 shares, of which 4,473,374 were fully vested upon issuance. The remainder were deemed to be restricted based on their vesting conditions. The stock agreement contains certain provisions that allow the Company to repurchase unvested portions of stock from such founders in the event they depart from the Company. The repurchase rights on the restricted common stock lapsed over time and fully expired in March 2019. As of December 31, 2020 and 2019, no shares of restricted common stock remained subject to repurchase.
12. Stock-based Compensation
2020 Incentive Award Plan