Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those discussed in the section titled “Risk Factors” included under Part I, Item 1A and elsewhere in this Annual Report. See “Special Note Regarding Forward-Looking Statements” in this Annual Report.
Overview
We are a clinical-stage biopharmaceutical company focused on developing drugs that meaningfully improve the lives of patients with rare cardiopulmonary disease. Our initial focus is on advancing AV-101, our dry powder inhaled formulation of imatinib for the treatment of pulmonary arterial hypertension, or PAH, a devastating disease impacting approximately 70,000 people in the United States and Europe. Imatinib, marketed as Gleevec tablets, was originally developed for the treatment of multiple cancers. Oral imatinib also demonstrated statistically significant improvement on the primary endpoint, six-minute walk distance, and multiple secondary hemodynamic endpoints in PAH patients in an international Phase 3 trial conducted by Novartis but was poorly tolerated due to adverse events, or AEs, and never approved for the treatment of PAH. AV-101, delivered using a dry powder inhaler, is designed to provide lung concentrations at or above those observed with the oral dose while limiting systemic levels of the drug. We have completed a Phase 1 clinical trial in healthy volunteers and AV-101 was generally well-tolerated with no serious adverse events reported. We are enrolling patients in Inhaled iMatinib Pulmonary Arterial Hypertension Clinical Trial (IMPAHCT), our global Phase 2b/Phase 3 trial of AV-101 in adults with PAH, and we have assembled a team with deep expertise in developing innovative PAH and inhaled therapies and commercializing novel drugs. We do not have any products approved for sale and have incurred significant operating losses since our inception and expect to continue to incur significant operating losses for the foreseeable future.
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Recent Developments
Initial Public Offering
In July 2021, we completed our initial public offering, or IPO, of 9,984,463 shares of our common stock at a price to the public of $14.00 per share, including the exercise in full by the underwriters of their option to purchase 1,302,321 additional shares of our common stock. Including the option exercise, our aggregate net proceeds from the offering were $126.9 million after deducting underwriting discounts and commissions and other offering costs. Immediately prior to the closing of our IPO, all outstanding shares of our redeemable convertible preferred stock were converted into 14,182,854 shares of our common stock.
COVID-19 Pandemic and Future Infectious Disease Outbreaks
We continue to closely monitor the impact of the COVID-19 pandemic on our business, operations and clinical development timelines. In addition, we are actively monitoring its impact on our clinical trial enrollment, trial sites, contract research organizations, or 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. The ultimate impact of the COVID-19 pandemic or any future infectious disease outbreaks is highly uncertain and subject to change.
We continue to actively monitor the impact of infectious disease outbreaks on our business operations and may take future 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. The COVID-19 pandemic or any future infectious disease outbreaks may affect our business, operations and clinical development timelines and plans, including the resulting impact on our expenditures and capital needs.
Components of Results of Operations
Revenue
We currently have no products approved for sale, and we have not generated any revenue to date. In the future, we may generate revenue from collaboration or license agreements we may enter into with respect to our drug candidate, as well as product sales from any approved product, which approval we do not expect to occur for at least the next several years, if ever. Our ability to generate product revenue will depend on the successful development and eventual commercialization of AV-101 and any other drug candidates we may pursue. If we fail to complete the development of AV-101 in a timely manner, or to obtain regulatory approval, our ability to generate future revenue and our results of operations and financial position would be materially adversely affected.
Operating Expenses
Research and Development
To date, our research and development expenses have related to the development of AV-101. Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received.
Research and development expenses include:
● costs related to manufacturing AV-101 for use in clinical trials; and
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Our research and development expenses consist principally of direct costs, such as fees paid to CROs, investigative sites and consultants in connection with our clinical trials, preclinical and non-clinical studies, and costs related to manufacturing clinical trial materials. We deploy our personnel related resources across all of our research and development activities. We track direct expenses on a clinical and non-clinical basis.
We plan to substantially increase our research and development expenses for the foreseeable future as we continue the development of AV-101. We cannot determine with certainty the timing of initiation, the duration or the completion costs of current or future clinical trials and nonclinical studies of AV-101 or any future product candidates due to the inherently unpredictable nature of clinical and preclinical development. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. We will need to raise substantial additional capital in the future.
Our future clinical development costs may vary significantly based on factors such as:
● per patient trial costs;
● the number of trials required for approval;
● the number of sites included in the trials;
● the countries in which the trials are conducted;
● the length of time required to enroll eligible patients;
● the number of patients that participate in the trials;
● the number of doses evaluated in the trials;
● the drop-out or discontinuation rates of patients;
● potential additional safety monitoring requested by regulatory agencies;
● the duration of patient participation in the trials and follow-up; and
● the efficacy and safety profile of the product candidate.
General and Administrative
General and administrative expenses consist primarily of personnel-related costs, including salaries, payroll taxes, employee benefits, and stock-based compensation charges for those individuals in executive, finance and other administrative functions. Other significant costs include legal fees relating to intellectual property and corporate matters, professional fees for accounting and consulting services, and insurance costs. We anticipate that our general and administrative expenses will increase for the foreseeable future to support our continued research and development activities, pre-commercial preparation activities and commercialization activities for AV-101. We also anticipate increased expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums, and investor relations costs associated with operating as a public company.
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Results of Operations
Comparison of the Years Ended December 31, 2022 and December 31, 2021
The following table summarizes our results of operations for the years ended December 31, 2022 and December 31, 2021 (in thousands):
Year Ended December 31,
Operating expenses:
Other income (expense):
Other expense (79) (3) (76)
Provision for income taxes 25 3 22
Research and Development Expenses
Research and development expenses for the year ended December 31, 2022 were $38.6 million compared to $15.0 million for the year ended December 31, 2021. The increase of $23.6 million was primarily due to increases of $13.5 million in clinical trial costs, $6.8 million in headcount related costs, $3.0 million in manufacturing costs, and $0.9 million in professional fees, partially offset by lower pre-clinical and regulatory related costs of $0.7 million.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2022 were $14.6 million compared to $8.0 million for the year ended December 31, 2021. The increase of $6.6 million was primarily due to increases of $2.5 million in headcount related costs, $1.7 million in professional services related to other consulting expenses, corporate legal fees and audit and accounting services, $1.2 million in insurance expense and $1.2 million in other operating expenses.
Total Other Income (Expense)
Other income for the year ended December 31, 2022 was $1.8 million compared to $0.1 million of other income for the year ended December 31, 2021. The change was primarily due to interest earned on the Company’s cash and cash equivalents and short-term investments for the year ended December 31, 2022.
Liquidity and Capital Resources
From our inception through December 31, 2022, we have received aggregate net proceeds of $79.8 million from the sale of shares of our convertible preferred stock and $5.0 million from convertible promissory notes to related parties. In July 2021, we completed our IPO with aggregate net proceeds from the offering of $126.9 million, after deducting underwriting discounts and commissions and offering costs.
At-the-Market Offering
On August 15, 2022, we entered into an Open Market Sale AgreementSM, or the Sale Agreement, with Jefferies LLC, or the Agent, pursuant to which we can sell, from time to time, at our option, up to an aggregate of $75.0 million of shares of
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our common stock, through the Agent, as our sales agent. As of December 31, 2022, no shares were sold under the Sale Agreement.
Future Funding Requirements
We have prepared operating plans and cash flow forecasts which indicate that our existing cash and cash equivalents and short-term investments on-hand of $129.2 million will be sufficient to fund our planned operations into the second half of 2025. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect. Additionally, the process of conducting clinical trials is costly, and the timing of progress and expenses in these trials is uncertain.
Our future capital requirements will depend on many factors, including:
Until such time, if ever, as we can generate substantial product revenue to support our cost structure, we expect to finance our cash needs through equity offerings, debt financings, or other capital sources, potentially including collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms
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of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, or other similar arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or drug candidates or grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock. Our failure to raise capital or enter into such other arrangements when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our drug candidates even if we would otherwise prefer to develop and market such drug candidates ourselves.
Contractual Obligations and Commitments
In August 2021, we entered into a lease agreement, or the Waltham Lease, for approximately 5,000 square feet of office space in Waltham, Massachusetts. The base rent under the Waltham Lease is $43.00 per rentable square foot, or approximately $18,000 per month and is subject to scheduled annual increases of $1.00 per rentable square foot during the lease term. The term of the Waltham Lease is thirty-nine months, unless extended or earlier terminated pursuant to the terms of the Waltham Lease. We have the option to extend the Waltham Lease for one additional period of three years.
In April 2022, we entered into a lease agreement, or the Foster City Lease, for approximately 3,500 square feet of office space in Foster City, California. The base rent under the Foster City Lease is $76.80 per rentable square foot, or approximately $22,600 per month and is subject to scheduled annual increases of 3% on each annual anniversary during the lease term. The term of the Foster City Lease is thirty-nine months, unless extended or earlier terminated pursuant to the terms of the Foster City Lease. We have the option to extend the Foster City Lease for one additional period of one year.
As of December 31, 2022, we do not have any other operating lease obligations, long-term debt obligations, capital lease obligations, purchase obligations or long-term liabilities.
We enter into contracts in the normal course of business for contract research services, contract manufacturing services, professional services and other services and products for operating purposes. These contracts generally provide for termination after a notice period, and, therefore, are cancelable contracts and not included above.
Cash Flows
Comparison of the Years Ended December 31, 2022 and December 31, 2021
The following table sets forth a summary of the net cash flow activity for the years ended December 31, 2022 and December 31, 2021 (in thousands):
Year Ended December 31,
Net cash used in operating activities $ (39,122) $ (27,399)
Net cash provided by (used in) investing activities 6,926 (113,434)
Net cash provided by financing activities 396 190,457
Net (decrease) increase in cash and cash equivalents $ (31,800) $ 49,624
Operating Activities
Net cash used in operating activities for the year ended December 31, 2022 was $39.1 million, consisting primarily of our net loss incurred during the period of $51.5 million adjusted for $4.6 million of noncash charges and $7.8 million for net changes in operating assets and liabilities. Noncash charges consisted primarily of $5.5 million in stock-based
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compensation expense, partially offset by $0.9 million of amortization of our investments. The net change in operating assets and liabilities related to a $5.0 million increase in accounts payables and accrued liabilities, a $4.7 million increase in prepaid expenses and other current assets, partially offset by a $1.9 million decrease in other long-term assets.
Net cash used in operating activities for the year ended December 31, 2021 was $27.4 million, consisting primarily of our net loss incurred during the period of $23.0 million adjusted for $2.1 million of noncash charges and $6.5 million for net changes in operating assets and liabilities. Noncash charges consisted primarily of $2.0 million in stock-based compensation expense. The net change in operating assets and liabilities related to a $6.8 million increase in prepaid expenses and other current assets and a $0.3 million increase in other long-term assets, partially offset by a $0.6 million increase in accounts payable.
Investing Activities
Net cash provided by investing activities for the year ended December 31, 2022 of $6.9 million was comprised of sales and maturities of investments of $154.7 million, offset by purchase of short-term investments of $147.6 million and purchases of property and equipment of $0.2 million to support our research activities and leasehold improvements, furniture and fixtures for our office spaces in Waltham, Massachusetts and Foster City, California.
Net cash used by investing activities for the year ended December 31, 2021 of $113.4 million was comprised of purchases of short-term investments of $113.2 million using the proceeds from our initial public offering in July 2021 and purchases of property and equipment of $0.2 million for purchases of property and equipment to support our research activities and leasehold improvements, furniture and fixtures for our office space in Waltham, Massachusetts.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2022 was $0.4 million due to $0.8 million in net proceeds received from stock option exercises and issuances of common stock under our employee stock purchase plan, which were partially offset by $0.4 million of payments made for offering costs.
Net cash provided by financing activities for the year ended December 31, 2021 was $190.5 million due to $63.6 million in net proceeds received from the First Milestone Closing, Second Milestone Closing and Third Milestone Closing of Series A redeemable convertible preferred stock, net of issuance of costs, and $126.9 million in net proceeds from the issuance of common stock, net of issuance costs, in connection with the closing of the Company’s IPO on July 2, 2021.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and the related disclosures of contingent liabilities in our consolidated financial statements and accompanying notes. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and judgments on an ongoing basis. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.
See Note 2 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for a summary of significant accounting policies and the effect on our consolidated financial statements.
Research and Development Expenses
We are required to estimate our expenses resulting from obligations under contracts with vendors, consultants and CROs, in connection with conducting research and development activities. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts. We reflect research and development expenses in our consolidated financial statements by matching those expenses with the period in which services and efforts are expended.
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We account for these expenses according to the progress of the preclinical or clinical study as measured by the timing of various aspects of the study or related activities. We determine clinical trial cost estimates through review of the underlying contracts along with preparation of financial models taking into account discussions with research and other key personnel and outsider service providers as to the progress of studies or other services being conducted. During the course of a study, we adjust our rate of expense recognition if actual results differ from our estimates.
Emerging Growth Company Status
As an emerging growth company under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to “opt out” of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time public companies adopt the new or revised standard. The decision to opt out of the extended transition period under the JOBS Act is irrevocable.
Recently Issued Accounting Pronouncements
See Note 2 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10 K for a summary of recently issued accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities related to our cash, cash equivalents and short-term investments. We invest our excess cash primarily in money market funds, commercial paper, corporate debt securities and U.S. Treasury bills. We mitigate credit risk by maintaining a well-diversified portfolio and limiting the amount of investment exposure as to institution, maturity and investment type.
Because of the short-term maturities of our cash equivalents and short-term investments, along with the low risk profile of our investments, we do not believe that an increase in market rates would have any significant impact on the realized value of our investments. An immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our cash equivalents and short-term investments.
Inflation Fluctuation Risk
Inflation generally affects us by increasing our cost of labor. We do not believe that inflation had a material effect on our business, financial condition or results of operations during the years ended December 31, 2022 and December 31, 2021.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K. An index of those consolidated financial statements is found in Item 15, Exhibits and Financial Statement Schedules, of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
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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 Securities Exchange Act of 1934, as amended, or 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 (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive and principal financial officer, 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 officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2022. Based upon such evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of such date.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, our principal executive officer and our principal financial officer, and effected by our board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP, and includes those policies and procedures that:
●pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets;
●provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and
●provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Under the supervision of and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework provided in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in (2013 Framework). Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2022.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Attestation Report of the Registered Public Accounting Firm
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm due to an exemption established by the JOBS Act for “emerging growth companies.”
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Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
On March 27, 2023, we delivered written notice to Jefferies LLC, or Jefferies, that we were terminating the Open Market Sale Agreement dated August 15, 2022, or the Sales Agreement, by and between us and Jefferies, effective as of a date no later than 10 trading days from the date of delivery, the Termination Date. All of the continuing obligations under the Sales Agreement will be terminated as of the Termination Date, other than those provisions which expressly survive termination as provided in the Sales Agreement. We are not subject to any termination penalties related to the termination of the Sales Agreement. Prior to termination, no shares of our common stock, $0.0001 par value per share, were sold pursuant to the Sales Agreement. A copy of the Sales Agreement was filed as Exhibit 1.2 to our Registration Statement on Form S-3 (File No. 333-266883) filed with the SEC on August 15, 2022.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item 10 will be included in our Definitive Proxy Statement to be filed with the Securities and Exchange Commission, or SEC, with respect to our 2023 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this Item 11 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2023 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item 12 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2023 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 13 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2023 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
Our independent public accounting firm is KPMG LLP, San Diego, California (PCAOB Auditor ID: 185).
The information required by this Item 14 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2023 Annual Meeting of Stockholders and is incorporated herein by reference.
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PART IV
Item 15. Exhibits, Financial Statement Schedules
1.All financial statements.
The consolidated financial statements of Aerovate Therapeutics, Inc., together with the report thereon of KPMG LLP, an independent registered public accounting firm, are included in this annual report on Form 10-K beginning on page F-1.
2.Financial statement schedules.
All schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the consolidated financial statements or notes thereto.
3.Exhibits
A list of exhibits is set forth on the Exhibit Index immediately preceding the signature page of this annual report on Form 10-K and is incorporated herein by reference.
Item 16. Form 10-K Summary
The Company has elected not to include summary information.
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AEROVATE THERAPEUTICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-3
Consolidated Statements of Operations and Comprehensive Loss F-4
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Aerovate Therapeutics, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Aerovate Therapeutics, Inc. and subsidiary (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2019.
San Diego, California
March 29, 2023
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AEROVATE THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
December 31,
Assets
Current assets:
Prepaid expenses and other current assets 2,276 6,958
Property and equipment, net 242 186
Operating lease right-of-use assets 1,003 542
Other long-term assets 2,560 302
Liabilities and Stockholders’ Equity
Current liabilities:
Accrued and other current liabilities 4,822 1,150
Operating lease liabilities 385 192
Total current liabilities 7,782 2,550
Operating lease liabilities, net of current portion 705 382
Other liabilities 71 13
Commitments and contingencies (Note 5)
Stockholders’ equity:
Accumulated other comprehensive loss (466) (59)
Total liabilities and stockholders’ equity $ 135,301 $ 175,363
See accompanying notes to consolidated financial statements.
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AEROVATE THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Year Ended December 31,
Operating expenses:
Other income (expense):
Other expense (79) (3)
Total other income 1,751 62
Net loss before income taxes (51,486) (22,960)
Provision for income taxes 25 3
Comprehensive loss:
Other comprehensive loss:
Unrealized loss on securities (407) (59)
Net loss per share, basic and diluted $ (2.10) $ (1.87)
See accompanying notes to consolidated financial statements.
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AEROVATE THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Series Seed
Shares Amount Shares Amount Shares Amount Capital Loss Deficit (Deficit)
Unrealized loss on investments — — — — — — — (59) — (59)
Stock based compensation — — — — — — 2,043 — — 2,043
Net loss — — — — — — — — (22,963) (22,963)
Unrealized loss on investments — — — — — — — (407) — (407)
Stock based compensation — — — — — — 5,476 — — 5,476
Issuance of common stock under ESPP — — — — 13,869 — 150 — — 150
Net loss — — — — — — — — (51,511) (51,511)
See accompanying notes to consolidated financial statements.
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AEROVATE THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year ended December 31,
Cash flow from operating activities:
Stock-based compensation expense 5,476 2,043
Depreciation and amortization expense 68 15
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 4,677 (6,855)
Other long-term assets (1,872) (302)
Accrued and other liabilities 3,672 (6)
Operating lease assets and liabilities, net 43 32
Other liabilities (133) 12
Net cash used in operating activities $ (39,122) $ (27,399)
Cash flow from investing activities:
Purchases of short-term investments (147,623) (113,253)
Sales and maturities of short-term investments 154,744 —
Purchases of property and equipment (195) (181)
Net cash provided by (used in) investing activities $ 6,926 $ (113,434)
Cash flow from financing activities:
Payments for deferred offering costs (371) —
Proceeds from issuance of common stock under ESPP 150 —
Proceeds from exercise of stock options 617 —
Proceeds from issuance of common stock, net of issuance costs — 126,945
Net cash provided by financing activities $ 396 $ 190,457
Net (decrease) increase in cash and cash equivalents (31,800) 49,624
Cash and cash equivalents at the beginning of the year 54,197 4,573
Cash and cash equivalents at the end of the period $ 22,397 $ 54,197
Supplemental disclosure of noncash investing and financing activities:
Deferred offering costs included in accounts payable $ 15 $ —
Purchases of property and equipment in accounts payable $ — $ 21
See accompanying notes to consolidated financial statements.
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AEROVATE THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Nature of Operations
Aerovate Therapeutics Inc. (“Aerovate” or the “Company”) was incorporated in the state of Delaware in July 2018, and is headquartered in Waltham, Massachusetts. The Company has a wholly owned subsidiary, Aerovate Securities Corporation. The Company is a clinical-stage biopharmaceutical company that is focused on the development of drugs that meaningfully improve the lives of patients with rare cardiopulmonary disease. The Company’s initial focus is on advancing AV-101, the Company’s dry powder inhaled formulation of imatinib for the treatment of pulmonary arterial hypertension (“PAH”). The Company initiated a global Phase 2b/Phase 3 trial of AV-101 in adults with PAH in December 2021.
(b) Initial Public Offering
On July 2, 2021, the Company completed its initial public offering (“IPO”). The Company’s Registration Statement on Form S-1 (File No. 333-256949) relating to the IPO was declared effective by the Securities and Exchange Commission (“SEC”) on June 29, 2021. The shares began trading on The Nasdaq Global Market on June 30, 2021. The Company issued 9,984,463 shares of its common stock, including 1,302,321 shares associated with the full exercise of the underwriters’ option to purchase additional shares, at an offering price of $14.00 per share. Immediately prior to the closing of the Company’s IPO on July 2, 2021, all outstanding shares of the Company’s redeemable convertible preferred stock were converted into 14,182,854 shares of the Company’s common stock. In aggregate, the shares issued in the IPO generated approximately $126.9 million in net proceeds after deducting underwriting discounts and commissions and other offering costs.
At-the-Market Offering
On August 15, 2022, we entered into an Open Market Sale AgreementSM, or the Sale Agreement, with Jefferies LLC, or the Agent, pursuant to which we can sell, from time to time, at our option, up to an aggregate of $75.0 million of shares of our common stock, through the Agent, as our sales agent. As of December 31, 2022, no shares were sold under the Sale Agreement.
(c) Liquidity and Management Plans
Since inception, the Company has devoted substantially all of its resources to research and development activities, business planning, establishing and maintaining its intellectual property portfolio, hiring personnel, raising capital, and providing general and administrative support for these operations and has not realized revenues from its planned principal operations. The Company has incurred losses and negative cash flows from operations since inception. In addition, the Company expects to incur substantial operating losses for the next several years as it continues its research and development activities. As of December 31, 2022, the Company had cash and cash equivalents and short-term investments of $129.2 million.
Management plans to continue to incur substantial costs in order to conduct research and development activities and additional capital will be needed to undertake these activities. The Company intends to raise such capital through debt or equity financings or other arrangements to fund operations. Management believes that the Company’s current cash and cash equivalents and short-term investments will provide sufficient funds to enable the Company to meet its obligations for at least twelve months from the filing date of this report.
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(2)BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the Company’s wholly owned subsidiary, Aerovate Securities Corporation. All intercompany transactions and balances have been eliminated in consolidation.
(b) Reverse Stock Split
On June 22, 2021, the Company effected a 1-for-3.1060103 reverse stock split (the “Reverse Stock Split”) of its issued and outstanding common stock. Accordingly, the conversion ratio for the Company’s outstanding convertible preferred stock was proportionately adjusted such that the common stock issuable upon conversion of such preferred stock was decreased in proportion to the Reverse Stock Split. The par value of the common stock was not adjusted as a result of the Reverse Stock Split. All references to common stock, options to purchase common stock, early exercised options, share data, per share data, convertible preferred stock (to the extent presented on an as-converted to common stock basis) and related information contained in these consolidated financial statements have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented.
(c) Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of expenses during the reporting period. Reported amounts and note disclosures reflect the overall economic conditions that are most likely to occur and anticipated measures management intends to take. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations, and financial condition will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat it, as well as the economic impact on local, regional, national and international markets. Actual results could differ materially from those estimates. Accounting estimates and management judgements reflected in the consolidated financial statements include: normal recurring accruals, including the accrual for research and development expenses, stock-based compensation, fair value of investments, and operating lease right-of-use assets and lease liabilities. Estimates and assumptions are reviewed quarterly. Any revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
(d) Cash and Cash Equivalents
Cash and cash equivalents include cash in readily available checking accounts, money market funds and commercial paper. The Company considers all highly liquid investments with an original maturity of three months or less from the date of purchase to be cash equivalents.
(e) Short-term Investments
Short-term investments consist of corporate debt securities, commercial paper and U.S. Treasury bills, classified as available-for-sale securities and have maturities of greater than three months. The Company has classified all of its available-for-sale investment securities as current assets on the consolidated balance sheets because these are considered highly liquid securities and are available for use in current operations. The Company carries these securities at fair value and reports unrealized gains and losses as a separate component of accumulated other comprehensive loss. The cost of debt securities is adjusted for amortization of purchase premiums and accretion of discounts to maturity. Such amortization and accretion is included in interest income in the consolidated statements of operations and comprehensive loss. Realized gains and losses on sales of securities are determined
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using the specific identification method and recorded in other income (expense), net in the consolidated statement of operations and comprehensive loss.
(f) Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash, cash equivalents and short-term investments. The Company maintains cash, cash equivalents and short-term investments with various high credit quality banks and other financial institutions in the United States. Such deposits may be in excess of federally insured limits. Management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. The Company has not experienced any losses on deposits since inception.
(g) Comprehensive Loss
Comprehensive loss consists of net loss and unrealized gains or losses on available-for-sale investments. The Company displays comprehensive loss and its components as part of the consolidated statements of operations and comprehensive loss.
(h) Fair Value Measurements
The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or non-recurring basis. Fair value is defined as 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. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1: Observable inputs such as quoted prices in active markets.
Level 2: Inputs, other than the quoted prices in active markets that are observable either directly or indirectly.
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The carrying amounts of prepaid expenses and other current assets, accounts payable, accrued liabilities and other current liabilities are reasonable estimates of their fair value due to the short-term nature of these accounts.
(i) Prepaid Expenses and Other Current Assets
Any expenses paid prior to the related services rendered are recorded as prepaid expenses. Such prepaid expenses are expensed in the period the expense is incurred. If the expense is for a service covering multiple periods, it is expensed from the date the services begin and over the period of the service rendered (or contract service period if services rendered dates are not defined).
(j) Property and Equipment, Net
Property and equipment, which consist of leasehold improvements, furniture and fixtures, research equipment, computers and construction-in-progress are stated at cost less accumulated depreciation or accumulated amortization. Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the assets, which ranges from three to five years. Leasehold improvements are amortized over the remaining life of the lease for leasehold improvements at the time the asset is placed into service.
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(k) Impairment of Long-lived Assets
The carrying value of long-lived assets, including property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the asset may not be recoverable. An impairment loss is recognized when the total of estimated future undiscounted cash flows, expected to result from the use of the asset and its eventual disposition, are less than its carrying amount. Impairment, if any, would be assessed using discounted cash flows or other appropriate measures of fair value. Through December 31, 2022, there has been no such impairment losses recorded by the Company.
(l) Leases
At the commencement date of a lease, the Company recognizes lease liabilities which represent its obligation to make lease payments, and right-of-use assets (“ROU assets”) which represent its right to use the underlying asset during the lease term. The lease liability is measured at the present value of lease payments over the lease term. As the Company’s leases typically do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the lease commencement date. The ROU asset is measured at cost, which includes the initial measurement of the lease liability and initial direct costs incurred by the Company and excludes lease incentives. ROU assets are recorded in operating lease ROU assets and lease liabilities are recorded in operating lease liabilities, current and noncurrent in the consolidated balance sheets.
Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term. The Company has elected not to separate lease and non-lease components and not recognize lease liabilities and ROU assets for short-term leases with terms of twelve months or less.
(m) Convertible Preferred Stock
The Company records convertible preferred stock at fair value on the dates of issuance, net of issuance costs. Upon the occurrence of certain events that are outside the Company’s control, including a deemed liquidation event, holders of the convertible preferred stock can cause redemption for cash. Therefore, convertible preferred stock is classified outside of stockholders’ deficit on the balance sheets as events triggering the liquidation preferences are not solely within the Company’s control. The carrying values of the convertible preferred stock are adjusted to their liquidation preferences if and when it becomes probable that such a liquidation event will occur.
(n) Research and Development Expenses
Research and development costs are expensed as incurred. Research and development costs consist primarily of salaries and other benefits of research and development personnel, including associated share-based compensation, costs related to research activities, preclinical studies, clinical trial, drug manufacturing and allocated overhead and facility-related expenses. The Company accounts for non-refundable advance payments for goods or services that will be used in future research and development activities as expenses when the goods have been received or when the service has been performed rather than when the payment is made.
Clinical trial costs are a component of research and development expenses. The Company expenses costs for its clinical trial activities performed by third parties, including clinical research organizations and other service providers, as they are incurred, based upon estimates of the work completed over the life of the individual study in accordance with associated agreements. The Company uses information it receives from internal personnel and outside service providers to estimate the clinical trial costs incurred.
(o) Stock-Based Compensation
Stock-based compensation expense represents the cost of the grant-date fair value of employee, officer, director, and non-employee stock option grants and restricted stock units, estimated in accordance with the applicable
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accounting guidance, recognized using the straight-line method over the vesting period for service-based options and using the graded vesting method for performance-based options. The vesting period generally approximates the expected service period of the awards. Forfeitures are recognized and accounted for as they occur.
The fair value of stock options is estimated using a Black-Scholes option pricing model on the date of grant. This method requires certain assumptions be used as inputs, such as the fair value of the underlying common stock, expected term of the option before exercise, expected volatility of the Company’s common stock, expected dividend yield, and a risk-free interest rate. Options and awards granted during the year have a maximum contractual term of ten years. The Company has limited historical stock option activity and therefore estimates the expected term of stock options granted using the simplified method, which represents the average of the contractual term of the stock option and its weighted-average vesting period. The expected volatility of stock options is based upon the historical volatility of a number of publicly traded companies in similar stages of clinical development. The Company has historically not declared or paid any dividends and does not currently expect to do so in the foreseeable future. The risk-free interest rates used are based on the U.S. Department of Treasury (“U.S. Treasury”) yield in effect at the time of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the expected term of the stock options.
(p) Income Taxes
Income taxes are accounted for using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss (“NOL”) and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance against deferred tax assets is recorded if, based upon the weight of all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company records uncertain tax positions on the basis of a two-step process whereby (1) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense. Any accrued interest and penalties are included within the related tax liability.
(q) Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker in making decisions on how to allocate resources and assess performance. The Company views its operations and manages its business as one operating segment.
(r) Net Loss Per Share
Basic net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period, without consideration of potential dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the sum of the weighted average number of common shares plus the potential dilutive effects of potential dilutive securities outstanding during the period. Potential dilutive securities are excluded from diluted earnings or loss per share if the effect of such inclusion is antidilutive. The Company’s potentially dilutive securities, which include convertible preferred stock prior to the conversion of such shares to common stock and outstanding stock options under the Company’s equity incentive plan, have been excluded from the computation of diluted net loss per share as they would be anti-dilutive to the net loss per share. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position.
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The following table summarizes the Company’s net loss per share:
Year Ended December 31,
Numerator:
Net loss available to common stockholders $ (51,511) $ (22,985)
Denominator:
Net loss per share, basic and diluted $ (2.10) $ (1.87)
Potentially dilutive securities not included in the calculation of diluted net loss per share attributable to common stockholders because to do so would have had an anti-dilutive effect are as follows (in common stock equivalent shares):
As of December 31,
Unvested restricted stock units 28,881 —
(p) Recently Issued Accounting Pronouncements
In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement (Topic 820) - Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. This standard clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. This standard will be effective for the Company on January 1, 2024, and is not expected to have an impact on the Company’s financial position or results of operations upon adoption.
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following tables summarize the Company’s financial assets measured at fair value on a recurring basis and their respective input levels based on the fair value hierarchy (in thousands):
Fair Value Measurements Using
Quoted Prices in
Active Markets Significant Other Significant
for Identical Observable Unobservable
December 31, Assets Inputs Inputs
2022 (Level 1) (Level 2) (level 3)
Assets:
Cash equivalents
Money market funds $ 18,436 $ 18,436 $ — $ —
Short-term investments
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Fair Value Measurements Using
Quoted Prices in
Active Markets Significant Other Significant
for Identical Observable Unobservable
December 31, Assets Inputs Inputs
2021 (Level 1) (Level 2) (level 3)
Assets:
Cash equivalents
Money market funds $ 39,653 $ 39,653 $ — $ —
Short-term investments
Corporate debt securities 10,715 — 10,715 —
Cash Equivalents and Short-Term Investments
Financial assets measured at fair value on a recurring basis consist of the Company’s cash equivalents and short-term investments. Cash equivalents consisted of cash, money market funds and commercial paper, and short-term investments consisted of U.S. Treasury bills, agency bonds, corporate debt securities and commercial paper. The Company obtains pricing information from its investment manager and generally determines the fair value of investment securities using standard observable inputs, including reported trades, broker/dealer quotes, and bids and/or offers.
The following tables summarize the Company’s short-term investments (in thousands):
As of December 31, 2022
Gross Gross
Amortized unrealized unrealized Estimated fair
Maturity cost gains losses value
As of December 31, 2021
Gross Gross
Amortized unrealized unrealized Estimated fair
Maturity cost gains losses value
Corporate debt securities 1 year or less $ 10,726 $ — $ (11) $ 10,715
U.S. Treasury bills 2 years or less 25,183 — (48) 25,135
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The following tables summarize the Company’s short-term investments with unrealized losses for less than 12 months and 12 months or greater:
Less than 12 months 12 months or Greater
Unrealized Unrealized Total Total Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
Less than 12 months 12 months or Greater
Unrealized Unrealized Total Total Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
Corporate debt securities $ 10,757 $ (11) $ — $ — $ 10,757 $ (11)
The Company considers whether unrealized losses have resulted from a credit loss or other factors. The unrealized losses on the Company’s available-for-sale securities as of December 31, 2022 were caused by fluctuations in market value and interest rates as a result of the economic environment and not credit risk. The Company concluded that an allowance for credit losses was unnecessary as of December 31, 2022. It is neither management’s intention to sell nor is it more likely than not that the Company will be required to sell these investments prior to recovery of their cost basis or recovery of fair value. Unrealized gains and losses are included in accumulated other comprehensive loss.
Accrued interest receivable is written off through net realized investment gains (losses) at the time the issuer of the bond defaults or is expected to default on payment. Accrued interest receivable related to short-term investments was $0.3 million and $0.1 million as of December 31, 2022 and December 31, 2021, respectively.
(4) BALANCE SHEET COMPONENTS
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
As of December 31,
Prepaid research and development 478 5,233
Other current assets 295 240
Total prepaid expenses and other current assets $ 2,276 $ 6,958
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Accrued and Other Current Liabilities
Accrued and other current liabilities consisted of the following (in thousands):
As of December 31,
Accrued research and development $ 2,751 $ 217
Accrued payroll and other employee benefits 1,691 790
Total accrued and other current liabilities $ 4,822 $ 1,150
(5) COMMITMENTS AND CONTINGENCIES
In August 2021, the Company entered into a lease agreement (the “Waltham Lease”) for approximately 5,000 square feet of office space in Waltham, Massachusetts for the Company’s corporate headquarters. The Waltham Lease has a term of thirty-nine months (“Lease Term”), unless extended or earlier terminated. The Company has the option to extend the Waltham Lease for one additional period of three years. The Lease Term had an initial abatement period, and the initial base rent payable is approximately $18,000 per month following the abatement period. The initial base rent payable will increase by approximately 2% per year over the Lease Term. The Waltham Lease commencement date was September 1, 2021.
In April 2022, the Company entered into a lease agreement (the “Foster City Lease”) for approximately 3,500 square feet of office space in Foster City, California. The Foster City Lease has a term of thirty-nine months, unless extended or earlier terminated. The Company has the option to extend the Foster City Lease for on additional period of one year. The base rent payable under the Lease Term will be $22,600 per month and will be subject to annual increase of 3% on each anniversary.
As of December 31, 2022, the consolidated balance sheet includes an operating lease right-of-use asset of $1.0 million and operating lease liability of $1.1 million. The total operating lease expense was $0.4 million and $0.1 million, for the years ended December 31, 2022 and 2021, respectively.
As of December 31, 2022, the future minimum annual lease payments under the operating leases were as follows (in thousands):
Total Minimum
Lease Payments
Total operating lease payments 1,176
Less: Amount representing interest (86)
Present value of net minimum lease payments $ 1,090
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The components of operating leases for the years ended December 31, 2022 and December 31, 2021 were as follows (in thousands except lease term and discount rate):
As of December 31,
Operating lease liabilities: 2022 2021
Total lease liabilities $ 1,090 $ 574
Weighted-average remaining lease term (in years) 2.4 3.0
Weighted-average incremental borrowing rate 6 % 6 %
Legal Proceedings
The Company may from time to time be party to litigation arising in the ordinary course of business. The Company was not subject to any material legal proceedings during the years ended December 31, 2022 and 2021, and no material legal proceedings are currently pending or, to the best of its knowledge, threatened.
(6) STOCKHOLDERS’ EQUITY
Under the Company’s Amended and Restated Certificates of Incorporation dated August 3, 2020, the Company had a total of 94,052,154 shares of capital stock authorized for issuance, consisting of 50,000,000 shares of common stock, par value of $0.0001 per share, and 44,052,154 shares of convertible preferred stock, par value of $0.0001 per share. Shares of authorized convertible preferred stock were designated as 4,000,000 shares of Series Seed redeemable convertible preferred stock and 40,052,154 shares of Series A redeemable convertible preferred stock.
Following the Reverse Stock Split, the Company filed a Second Amended and Restated Certificate of Incorporation, which provided for 150,000,000 authorized shares of common stock with a par value of $0.0001 per share and 10,000,000 authorized shares of undesignated preferred stock with a par value of $0.0001 per share, effective upon completion of the Company’s IPO.
(a) Redeemable Convertible Preferred Stock
In August 2018, the Company sold to RA Capital Health Care Fund, L.P. an aggregate of 4,000,000 shares of Series Seed redeemable preferred stock at a purchase price of $1.00 per share, for net proceeds of $4.0 million. On August 5, 2020, the Company entered into the Stock Purchase Agreement. The Company’s initial closing of its Series A redeemable convertible preferred stock occurred on this date. The Company issued 3,468,536 shares of Series A redeemable convertible preferred shares for gross proceeds of $6.6 million at a price per share of $1.893. In addition to the cash proceeds, 3,020,998 shares of Series A redeemable convertible preferred stock were issued in connection with the conversion of the 2019 Notes and the 2020 Notes.
The Stock Purchase Agreement contained provisions that potentially obligate the Company to sell, outside of its control, an additional 33,562,620 shares of Series A redeemable convertible preferred stock at $1.893 per share for expected gross proceeds of $63.5 million, upon the occurrence of three subsequent Milestone Closings or earlier, at the option of any holder of the Series A redeemable convertible preferred stock. If the defined milestones were not achieved prior to the Company’s initial public offering, the holders had the right to purchase these shares prior to the completion of the initial public offering. If the shares were not purchased prior to the completion of the initial public offering, then this right to purchase these shares would have automatically expired.
On February 1, 2021, upon the completion of the First Milestone Closing, the Company sold 4,224,274 shares of Series A redeemable convertible preferred stock at the Series A Original Issue Price for aggregate gross proceeds of $8.0 million. On June 4, 2021, upon the completion of the Second Milestone Closing and the Third Milestone
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Closing, the Company sold 29,338,346 shares of Series A redeemable convertible preferred stock at the Series A Original Issue Price for aggregate gross proceeds of $55.5 million.
Immediately prior to the closing of the Company’s IPO on July 2, 2021, all outstanding shares of the Company’s redeemable convertible preferred stock converted into 14,182,854 shares of the Company’s common stock.
(b) Common Stock
In August 2018, the Company issued 241,467 shares of common stock to RA Capital Healthcare Fund, L.P. at a price of $0.0012 per share. On July 2, 2021, in conjunction with the Company’s IPO, the Company issued 9,984,463 shares of its common stock and all outstanding shares of the Company’s redeemable convertible preferred stock were converted into 14,182,854 shares of the Company’s common stock.
The holders of the common stock are entitled to one vote for each share of common stock held at all meetings of stockholders.
As of December 31, 2022, the Company had reserved the following shares of common stock for future issuance:
Common stock options granted and outstanding 4,110,219
Shares reserved for issuance under the 2021 Plan 1,077,557
Reserved for vesting of outstanding restricted stock units 28,881
Reserved for future ESPP issuances 216,131
(7) SHARE-BASED COMPENSATION
(a) Stock Option Plan
The Company’s 2021 Stock Option and Incentive Plan (the “2021 Plan”) was adopted by the Company’s board of directors and approved by the Company’s stockholders in June 2021 and became effective as of June 29, 2021. Upon the effectiveness of the 2021 Plan, the Company’s 2018 Equity Incentive Plan (the “2018 Plan”) was terminated and no further grants may be made thereunder. The Company’s 2021 Plan allows for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, stock bonuses, restricted stock, stock units and other forms of awards including cash awards to its officers, directors, employees, consultants and advisors.
As of December 31, 2022, a total of 3,576,415 shares of the Company’s common stock were authorized for issuance with respect to awards granted under the 2021 Plan. The share limit will automatically increase on the first trading day in January of each year (commencing with 2022) by an amount equal to the lesser of (1) 4% of the total number of outstanding shares of the Company’s common stock on the last trading day in December in the prior year, or (2) such lesser number as determined by the Company’s board of directors. The number of shares available under the 2021 Plan increased by 976,415 and 988,918 shares, effective January 1, 2022 and January 1, 2023, respectively, as determined by the Company’s board of directors. Any shares subject to awards granted under the 2021 Plan or the 2018 Plan that are not paid, delivered or exercised before they expire or are canceled or terminated, or otherwise fail to vest, as well as shares used to pay the purchase or exercise price of such awards or related tax withholding obligations, will become available for new award grants under the 2021 Plan.
As of December 31, 2022, 2,467,977 options had been granted and 28,881 restricted stock units awarded under the 2021 Plan, with 1,077,557 shares authorized for future issuance. As of December 31, 2022, a total of 1,642,242 options had been granted and were outstanding under the 2018 Plan.
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The options that are granted under the 2021 Plan and the 2018 Plan are exercisable at various dates as determined upon grant and terminate within 10 years of the date of grant. The vesting period generally occurs over three to four years.
The following table summarizes the option activity under the 2021 Plan and 2018 Plan for the year ended December 31, 2022:
Weighted-
Average
Remaining Aggregate
Weighted-Average Contractual Term Intrinsic Value
Options Exercise Price (in years) (in thousands)
Cancelled/Forfeited — —
The weighted-average grant date fair value of stock option grants was $10.48 and $4.46 per share for the years ended December 31, 2022 and December 31, 2021, respectively. All exercisable options are vested and all outstanding options are vested or expected to vest.
As of December 31, 2022 there was approximately $17.2 million of unrecognized stock-based compensation expense related to nonvested stock-based compensation arrangements granted under the 2021 Plan and 2018 Plan, which is expected to be recognized over a weighted-average period of 2.7 years
(b) Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan (the “ESPP”) was adopted by the Company’s board of directors and stockholders in June 2021 and became effective upon the consummation of the IPO. A total of 230,000 shares of the Company’s common stock is initially available for issuance under the ESPP. The share limit will automatically increase on the first trading day in January of each year (commencing with 2022) by an amount equal to the lesser of (1) 1% of the total number of outstanding shares of the Company’s common stock on the last trading day in December in the prior year, or (2) such lesser number as determined by the Company’s board of directors. The number of shares available under the 2021 Plan increased by 247,229 shares effective January 1, 2023 as determined by the Company’s board of directors. The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations. The ESPP provides for six-month offering periods, and at the end of each offering period, employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last trading day of the offering period. As of December 31, 2022, 13,869 shares had been issued under the ESPP, and 216,131 shares authorized under the ESPP Plan were available for issuance.
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(c) Restricted Stock Units
As of December 31, 2022, 28,881 restricted stock units had been awarded under the 2021 Plan. A summary of the status of and changes in unvested restricted stock unit activity under the Company’s equity award plans for the nine months ended December 31, 2022 was as follows:
Weighted-
Average Grant
Date Fair Value
Units Per Unit
Unvested restricted stock units as of December 31, 2021 — —
Vested — —
Forfeited — —
Stock-based compensation of restricted stock units is based on the fair value of the Company’s common stock on the date of grant and recognized over the vesting period. The vesting period generally occurs over one to four years.
As of December 31, 2022, the Company had unrecognized stock-based compensation expense related to its unvested restricted stock units of $0.6 million, which is expected to be recognized over the remaining weighted-average vesting period of 3.3 years. The Company did not incur or have any unrecognized stock-based compensation related to restricted stock units as of December 31, 2021.
(d) Stock-Based Compensation Expense
The Company estimated the fair value of stock options using the Black-Scholes valuation model. The Company accounts for any forfeitures of options when they occur. Previously recognized compensation expense for an award is reversed in the period that the award is forfeited. The fair value of stock options was estimated using the following assumptions:
Year Ended December 31,
Expected term (in years) 5.5 - 6.1 5.2 - 6.1
Risk-free interest rate 1.6 - 4.3 % 0.9 - 1.4 %
Expected dividend — —
Stock-based compensation expense recognized for stock option grants has been reported in the statements of operations and comprehensive loss as follows (in thousands):
Year Ended December 31,
General and administrative $ 3,347 $ 1,673
Research and development 2,129 370
F-19
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Stock-based compensation expense by type of award included within the consolidated statements of operations and comprehensive (loss) income was as follows: