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 the related notes to those statements included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. You should read the “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” sections of this report for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Some of the numbers included herein have been rounded for the convenience of presentation.
Overview
We are a global, science-driven biopharmaceutical company dedicated to developing and commercializing innovative medicines for patients with unmet medical needs, with an initial focus on in-licensing assets for Greater China and other Asian markets. We have assembled a pipeline of nine assets across five therapeutic areas, each with its own distinct value proposition and the potential to drive new standards of care across cardiovascular, oncology, ophthalmology, inflammatory disease and respiratory indications.
Recent Business Highlights and Clinical Development Updates
Initial Public Offering
In November 2021, we completed an initial public offering (“IPO”) of our ordinary shares through the sale and issuance of 20,312,500 American Depositary Shares (“ADSs”), at a public offering price of $16.00 per ADS. Following the close of the IPO, on December 1, 2021, the underwriters partially exercised their option to purchase additional shares and purchased an additional 593,616 ADSs at the initial public offering price of $16.00 per ADS. We received gross proceeds of $334.5 million in connection with the IPO and subsequent exercise of the underwriters’ option and aggregate net proceeds of $304.8 million after deducting underwriting discounts, commissions and other offering expenses.
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Mavacamten
In November 2021, we initiated and completed enrollment and dosing in a pharmacokinetic (“PK”) study of mavacamten in healthy volunteers.
In November 2021, our partner Bristol-Myers Squibb (“BMS”) announced a Prescription Drug User Fee Act (“PDUFA”) target action date of April 28, 2022 for its New Drug Application to the U.S. Food and Drug Administration (“FDA”) for mavacamten for the treatment of patients with oHCM.
In November 2021, BMS presented data at the American Heart Association Scientific Sessions 2021 from the Phase 2 MAVERICK study demonstrating long-term efficacy and safety of mavacamten in patients with non-obstructive hypertrophic cardiomyopathy.
In January 2022, we announced the first patient had been dosed in the Phase 3 EXPLORER-CN clinical trial of mavacamten in Chinese patients with symptomatic oHCM.
In February 2022, we announced that the Center for Drug Evaluation (“CDE”) of the National Medical Products Administration (“NMPA” granted Breakthrough Therapy Designation in China for mavacamten for the treatment of patients with oHCM.
In February 2022, BMS announced positive topline results from Phase 3 VALOR-HCM trial, evaluating mavacamten in patients with obstructive hypertrophic cardiomyopathy who are eligible for septal reduction therapy.
Infigratinib
In August 2021, we announced that we began treating patients in a Phase 2a clinical trial of infigratinib in locally advanced or metastatic gastric cancer or gastroesophageal junction adenocarcinoma with fibroblast growth factor receptor-2 (“FGFR2”) gene amplification and other advanced solid tumors with FGFR genomic alterations.
In December 2021, we announced that infigratinib has been approved by the Health Commission and Medical Products Administration of Hainan Province, under the special Named Patient Program (“NPP”), for the treatment of patients with previously treated, unresectable locally advanced or metastatic cholangiocarcinoma with a FGFR2 fusion or other rearrangement. The approval enables early commercial access to infigratinib in the Bo’ao Lecheng International Medical Tourism Pilot Zone based on the drug’s approval in other global jurisdictions.
TP-03
In November 2021, our partner Tarsus Pharmaceuticals, Inc. (“Tarsus”) presented data from two studies on the prevalence and impact of Demodex blepharitis (“DB”) at the American Academy of Optometry 2021 Annual Meeting. Data from the Titan real-world prevalence study demonstrated that DB accounts for 69% of all blepharitis cases and that current management tools for this disease are largely ineffective. Data from the multi-center observational Atlas impact study demonstrated that DB is associated with a significant symptomatic and psychosocial burden, negatively affecting daily life in 80% of patients.
In February 2022, Tarsus announced that the second pivotal trial of TP-03 in DB, Saturn-2, has completed enrollment and that they expect to announce topline results in April 2022.
NBTXR3
In October 2021, our partner Nanobiotix S.A. (“Nanobiotix”) presented data at the 2021 Annual Meeting of the American Society for Radiation Oncology. The first analysis of overall survival (“OS”) and progression-free survival (“PFS”) from the ongoing Phase 1 trial of NBTXR3 in elderly and frail locally advanced head and neck squamous cell carcinoma patients ineligible for cisplatin and intolerant to cetuximab (Study 102) demonstrated median OS of 18.1 months and median PFS of 10.6 months in the evaluable population (n=41) from the dose expansion part of the study. NBTXR3 administration was feasible and well-tolerated overall. A total of eight Grade 3-4 NBTXR3-related adverse events (“AEs”) were observed in eight patients. Of these AEs related to NBTXR3, five serious adverse events (“SAEs”) were observed including dysphagia, sepsis, soft tissue necrosis, stomatitis, and tumor hemorrhage. Of the SAEs, one death from sepsis assessed by the investigator as possibly related to NBTXR3, radiotherapy, and cancer was observed.
In January 2022, Nanobiotix announced enrollment of the first patient in the NANORAY-312 global Phase 3 registrational study of NBTXR3 in head and neck cancer.
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LYR-210
In October 2021, our partner Lyra Therapeutics, Inc. (“Lyra”) presented new data from the Phase 2 LANTERN clinical trial of LYR-210 in surgically naïve chronic rhinosinusitis patients who had failed previous medical management at the 67th Annual Meeting of the American Rhinologic Society (“ARS”). The data presented at ARS demonstrated that 24 weeks after LYR-210 removal, 50% of treated patients continued to experience durable symptom improvement. LYR-210 continued to show strong safety during the 24-week follow up period with no increased incidence of treatment-related AEs.
In January 2022, Lyra announced the initiation of the Phase 3 ENLIGHTEN I clinical trial of LYR-210 in adult, surgically naïve chronic rhinosinusitis “(CRS”) patients. In February 2022, Lyra announced dosing of the first patient in ENLIGHTEN I and that it plans to initiate ENLIGHTEN II, the second Phase 3 study by mid-year 2022.
Omilancor
In November 2021, our partner Landos BioPharma, Inc. (“Landos”) announced that prior to initiating a pivotal Phase 3 study, the company plans to leverage the results of the prior Phase 2 study of omilancor in mild-to-moderate ulcerative colitis (“UC”) patients to design and initiate a Phase 2b study in 2022. The Phase 2b study is expected to provide additional data to inform the pivotal Phase 3 study design. Accordingly, we are evaluating our clinical development strategy within our territories.
In October 2021, Landos presented positive translational data from the Phase 2 trial of omilancor in mild-to-moderate UC at United European Gastroenterology Week. Patients remaining on omilancor after the induction phase of the trial maintained low Mayo scores, an assessment of disease severity in UC, and nearly 90% of patients achieved remission thresholds in stool frequency and rectal bleeding after 36 weeks of open-label treatment.
Factors Affecting our Results of Operations
Impact of the COVID-19 pandemic on our operations
Beginning in December 2019, the outbreak of the COVID-19 pandemic created business interruptions for companies globally, including us. For example, in the biotechnology sector, companies, including our company, have experienced delays in their ability to enroll patients at clinical trial sites because of the pandemic, potentially leading to delays in the regulatory approval process. Other outbreaks may occur, or there could be further resurgences of the COVID-19 pandemic (such as current resurgences in certain locations in China, including locations in which we are conducting clinical trials), which have caused and could further cause business disruptions in the future.
Efforts to contain the spread of the COVID-19 pandemic in the United States (including in New Jersey, where our U.S. headquarters is located) have included quarantines, shelter-in-place orders and various other government restrictions in order to control the spread of this virus.
We have been carefully monitoring the COVID-19 pandemic and its potential impact on our business. We have taken important steps to ensure the workplace safety of our employees when working within our administrative offices, or when traveling to our clinical trial sites. We may take further actions as may be required by federal, state or local authorities.
To date, we have been able to continue our key business activities and advance our clinical programs. However, COVID has impacted our clinical trial enrollment and it is possible that our clinical development timelines and business plans could be adversely affected. We maintain regular communication with our vendors and clinical sites to appropriately plan for, and mitigate, the impact of the COVID-19 pandemic on our operations.
See “Part I—Item 1A—Risk Factors” included in this Annual Report on Form 10-K for a further discussion of the potential adverse impact of COVID-19 on our business, results of operations and financial condition.
Key Components of Results of Operations
Research and development expenses
We believe our ability to successfully develop product candidates will be a significant factor affecting our long-term competitiveness, as well as our future growth and development. Developing high quality product candidates requires a significant investment of resources over a prolonged period of time, and a core part of our strategy is to continue making sustained investment in this area.
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We expect our research and development expense to increase significantly in connection with our ongoing activities, particularly as we advance the clinical development of our product candidates and initiate additional clinical trials of, and seek regulatory approval for, these and other future product candidates. These expenses include:
•payments made under third party licensing and asset acquisition agreements;
•employee-related expense, including salaries, related benefits, equity-based compensation and travel expenses for employees engaged in research and development functions;
•expense incurred in connection with the clinical development of our product candidates, including expenses incurred under agreements with CROs;
•costs related to compliance with regulatory requirements; and
•facilities, depreciation and amortization, insurance and other direct and allocated expense incurred as a result of research and development activities.
The following table sets forth the components of our research and development expenses for the years indicated:
Research and development expenses (in thousands):
Licensing arrangements
Our results of operations have been, and we expect them to continue to be, affected by our licensing, collaboration and development agreements. We are generally required to make upfront payments upon entry into such agreements and milestone payments upon the achievement of certain development, regulatory and commercial milestones for the relevant product candidate under these agreements, as well as tiered royalties based on net sales of the license products. These upfront payments and milestone payments upon the achievement of certain development and regulatory milestones are recorded in research and development expense in our consolidated financial statements and totaled $136.9 million and $114.4 million, for the years ended December 31, 2021 and 2020, respectively.
The following table sets forth a breakdown of licensing fees by program for the years indicated:
Licensing fees (in thousands):
General and administrative expenses
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Our general and administrative expense consists primarily of salaries and other related costs for personnel in executive, finance and administrative functions. General and administrative expense also includes professional fees for legal, consulting, auditing, tax services and insurance costs.
We expect that our general and administrative expense will increase in the future to support continued development and commercialization of our product candidates. These increases will likely include increased costs related to hiring additional personnel and fees to outside consultants, attorneys and accountants, among other expenses. Additionally, we have incurred and will continue to incur increased expenses associated with being a public company, including costs of additional personnel, accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and office insurance costs, and investor and public relations costs.
Interest (expense) income, net
Interest (expense) income, net consists of interest expense from the payment made upon reaching the financing milestone under the exclusive license agreement with MyoKardia (“the MyoKardia Agreement”), offset by interest income received on our cash balances.
Other income (expense), net
Other income (expense), net consists of unrealized gains and losses on foreign currencies held in our China subsidiary, Shanghai LianBio Development Co., Ltd., unrealized foreign exchange activity from the remeasurement of our intercompany payables and bank fees incurred on our cash balances.
Income taxes
Provision for income taxes consists of U.S. federal and state income taxes and income taxes in certain foreign jurisdictions in which we conduct business. We expect income tax expense to increase over time as the Company continues to grow net income.
As of December 31, 2021, we had U.S. federal net operating losses (“NOLs”) of approximately $11.2 million, which are available to reduce future taxable income. U.S. federal NOLs can be carried forward indefinitely. Additionally, we carried forward foreign NOLs of approximately $20.1 million, some of which will begin to expire in 2025. Our carryforwards are subject to review and possible adjustment by the appropriate taxing authorities.
As required by Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, our management has evaluated the positive and negative evidence bearing upon the realizability of our deferred tax assets, which are composed principally of NOL carryforwards, intangible assets, share compensation, and accrued expenses. Management has determined that it is more likely than not that we will not realize the benefits of the deferred tax assets. As a result, a valuation allowance of $9.6 million was recorded as of December 31, 2021.
Cayman Islands
We are incorporated in the Cayman Islands. The Cayman Islands currently levies no taxes on profits, income, gains or appreciation earned by individuals or corporations. In addition, our payment of dividends, if any, is not subject to withholding tax in the Cayman Islands.
People’s Republic of China
Our subsidiaries incorporated in Mainland China are governed by the PRC Enterprise Income Tax Law (“EIT Law”), and regulations. Under EIT Law, the standard Enterprise Income Tax (“EIT”) rate is 25.0% on taxable profits as reduced by available tax losses. Tax losses may be carried forward to offset any taxable profits for up to following five years.
Hong Kong
Our subsidiaries incorporated and carrying on a trade or business in Hong Kong are generally subject to profits tax at a rate of 16.5%. Tax losses incurred may be carried forward indefinitely to offset any taxable profits in subsequent years. Hong Kong does not levy tax on capital gains or non-Hong Kong sourced income. Payments of dividend and interest are not subject to withholding tax in Hong Kong. However, certain payments (such as payment for right to use intellectual properties) made to non-resident persons may be subject to withholding tax.
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Singapore
Our subsidiary incorporated and carrying on a trade or business in Singapore is generally subject to income tax at the prevailing corporate income tax rate (currently, 17%). Tax losses incurred may be carried forward indefinitely to offset any taxable profits in subsequent years provided conditions are met. Singapore does not levy tax on capital gains. Payments of dividend are not subject to withholding tax in Singapore, however, certain payments (such as interest and royalty or payment for the use or right to use intellectual properties) made to non-resident persons may be subject to withholding tax.
Results of operations
Comparison of the years ended December 31, 2021 and December 31, 2020
The following table sets forth a summary of our consolidated results of operations for the periods indicated.
Operating expenses (in thousands):
Other income (expense):
Interest income (expense), net 243 (4,854)
Other (expense) income, net (455) 123
Research and development expenses
Research and development expenses increased by $37.8 million from $120.9 million for the year ended December 31, 2020 to $158.7 million for the year ended December 31, 2021. For the year ended December 31, 2021, research and development cost was primarily attributable to (i) $55.0 million in upfront and development milestone payments and $9.4 million of expenses related to warrants issued in connection with our development and license agreement with Tarsus (the “Tarsus Agreement”), (ii) a $20.0 million upfront payment pursuant to our license, development and commercialization agreement with Nanobiotix (the “Nanobiotix Agreement”), (iii) a $18.0 million upfront payment pursuant to our license and collaboration agreement with Landos (the “Landos Agreement”), (iv) a $14.0 million upfront payment pursuant to our co-development and license agreement with ReViral (the “ReViral Agreement”), (v) a $12.0 million upfront payment pursuant to our license and collaboration agreement with Lyra (the “Lyra Agreement”), and (vi) a $8.5 million development milestone payment pursuant to our exclusive license agreement with Navire (the “Navire Agreement"). The remaining expense was attributable to higher personnel-related expenses, including share-based compensation expense, as a result of increased employee headcount, development activities to support our clinical trials and professional fees.
For the year ended December 31, 2020, research and development cost was primarily attributable to (i) $72.7 million in upfront and milestone payments and $33.8 million of expenses related to the warrant issued in connection with the MyoKardia Agreement and (ii) the $8.0 million upfront payment related to the Navire Agreement.
General and administrative expenses
General and administrative expenses increased by $22.9 million from $14.0 million for the year ended December 31, 2020 to $36.9 million for the year ended December 30, 2021. The increase was primarily attributable to a $11.3 million increase in payroll and personnel-related expenses (including share-based compensation expense) for increased employee headcount, a $8.9 million increase, primarily attributable to legal service costs, consulting costs and accounting services, and a $2.8 million increase related to other expenses.
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Interest income (expense), net
Interest income (expense) decreased by $5.1 million from $(4.9) million for the year ended December 31, 2020 to $0.2 million for the year ended December 31, 2021. The decrease was primarily attributable to interest expense of $2.3 million in 2020 related to imputed interest related to the achievement of the financing milestone under the MyoKardia Agreement that did not exist in 2021 and $2.5 million interest expense related to the conversion in 2020 of the $15.0 million convertible promissory notes due June 29, 2021 issued to Perceptive (the “2020 Convertible Notes”).
Other (expense) income, net
Other (expense) income, net decreased by $(0.6) million from $0.1 million for the year ended December 31, 2020 to $(0.5) million for the year ended December 31, 2021. The decrease was primarily attributable to unrealized loss on foreign currencies held in our China subsidiary, Shanghai LianBio Development Co., Ltd., unrealized foreign exchange loss from the remeasurement of our intercompany payables, and by bank fees incurred on our cash balances.
Income taxes
Our income tax expense was $0.5 million for the year ended December 31, 2021, resulting in an effective income tax rate of 0.27% for the year ended December 31, 2021, as compared to $0.0 million, or an effective income tax rate of 0.00%, for the same period in 2020. A reconciliation of the statutory federal income tax rate to the effective income tax rate for each period is included in “Note 12: Income Taxes” in the notes to our consolidated financial statements.
Liquidity and capital resources
Sources of liquidity
Since our incorporation, our operations have been substantially financed with proceeds from sales of preferred shares as part of the Series Seed financing, the Series A financing, the issuance of the 2020 Convertible Notes and our initial public offering, which was completed in November 2021 (the “IPO”). As of December 31, 2021, we had cash and cash equivalents and marketable securities of $383.2 million.
On November 3, 2021, the Company completed its IPO through an underwritten sale of 20,312,500 ADSs representing 20,312,500 ordinary shares at a price of $16.00 per share. On December 1, 2021, the underwriters partially exercised their option to purchase additional shares and purchased an additional 593,616 ADSs at the initial public offering price of $16.00 per ADS. We received gross proceeds of $334.5 million in connection with the IPO and subsequent exercise of the underwriters’ option and aggregate net proceeds of $304.8 million after deducting underwriting discounts, commissions and other offering expenses.
We are a holding company with no operations of our own and, as such, we may rely on dividends and other distributions on equity paid by our Chinese subsidiaries to fund any cash and financing requirements we may have, including the funds necessary to pay dividends and other cash distributions to our shareholders or holders of our ADSs or to service any debt we may incur. Deterioration in the financial condition, earnings or cash flow of our subsidiaries for any reason, as well as any changes in Chinese laws or regulations, could limit or impair their ability to pay such distributions. See “Part I—Item 1A—Risk Factors—Risks Related to Doing Business in China and Our International Operations—We may rely on dividends and other distributions on equity paid by our Chinese subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our Chinese subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business.”
Funding requirements
Our primary use of cash is to fund our operating expenditures, consisting of research and development expense (including activities within our clinical and regulatory initiatives and upfront and milestone payments) and general and administrative expense. Our use of cash is impacted by the timing and extent of the required payments for each of these activities.
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To date, we have not generated any material revenue. We do not expect to generate revenue from the sale of our products unless and until we (i) complete development of any of our product candidates; (ii) obtain applicable regulatory approvals; and (iii) successfully commercialize or enter into collaborative agreements for our product candidates. We do not know with certainty when, or if, any of these items will ultimately occur. We expect to incur continuing significant losses for the foreseeable future and for our losses to increase as we ramp up our clinical development programs and begin activities related to commercial launch readiness. We may encounter unforeseen expenses, difficulties, complications, delays and other currently unknown factors that could adversely affect our business. Moreover, since the completion of our IPO, we have incurred and will continue to incur additional costs associated with operating as a publicly traded company.
We will require additional capital to develop our product candidates and fund our operations into the foreseeable future. We anticipate that we will eventually need to raise substantial additional capital, the requirements for which will depend on many factors, including:
•the number and scope of clinical programs we decide to pursue;
•the cost, timing and outcome of preparing for and undergoing regulatory review of our product candidates;
•the cost and timing associated with commercializing our product candidates, if they receive regulatory approval;
•the amount of revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive regulatory approval;
•the achievement of milestones or occurrence of other developments that trigger payments under any collaboration agreements we might have at such time;
•the extent to which we acquire or in-license other product candidates and technologies;
•the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
•our ability to establish and maintain collaborations on favorable terms, if at all;
•our efforts to enhance operational systems and our ability to attract, hire and retain qualified personnel, including personnel to support the development of our product candidates and, ultimately, the sale of our products, following regulatory approval;
•the impact of the COVID-19 pandemic on our clinical development or operations; and
•the costs associated with being a public company.
A change in the outcome of any of these or other variables with respect to the development and regulatory approval of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. Furthermore, our operating plans may change in the future, and we will continue to require additional capital to meet operational needs and capital requirements associated with such operating plans. If we raise additional funds by issuing equity securities, our shareholders may experience dilution. Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our ordinary shares, make certain investments or engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our shareholders.
Adequate funding may not be available to us on acceptable terms or at all. Our potential inability to raise capital when needed could have a negative impact on our financial condition and our ability to pursue our additional licensing opportunities.
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Cash flows
The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented:
Net cash (used in) provided by (in thousands):
Net cash used in operating activities
During the year ended December, 2021, operating activities used approximately $164.0 million of cash, primarily due to our net loss of $196.3 million, partially offset by non-cash consideration of $9.4 million related to the warrants granted to Tarsus, $20.0 million of other receivables related to Pfizer in-licensing and co-development activities, $8.7 million related to share-based compensation expense, and other changes related to operating assets and liabilities.
During the year ended December 31, 2020, operating activities used approximately $98.1 million, primarily due to our net loss of $139.6 million, partially offset by non-cash items of $33.8 million related to the MyoKardia Warrant, $2.5 million related to the amortization of the beneficial conversion feature on the 2020 Convertible Notes, $5.2 million related to share-based compensation expense, and due to changes related to operating assets and liabilities.
Net cash used in investing activities
During the year ended December 31, 2021, investing activities used approximately $155.9 million, consisting of approximately $155.0 million for the purchases of marketable securities and approximately $0.9 million for the purchases of property and equipment.
During the year ended December 31, 2020, investing activities used approximately $0.9 million, primarily resulting from the purchases of property and equipment.
Net cash provided by financing activities
During the year ended December 31, 2021, financing activities provided approximately $313.3 million in net proceeds due to our issuance of Series A Preferred shares of $2.9 million, net proceeds from the IPO of $304.8 million and the exercise of share options of $5.5 million.
During the year ended December 31, 2020, financing activities provided approximately $309.8 million in net proceeds, primarily resulting from the net proceeds from our issuance of Series A Preferred shares and the 2020 Convertible Notes.
Contractual and other Obligations
Contractual Obligations
In the normal course of business, we enter into contracts and commitments that obligate us to make payments in the future. These obligations include operating lease commitments and other liabilities. See “Note 8: Commitments and Contingencies” in the notes to our consolidated financial statements in this Annual Report on Form 10-K for further information on material cash requirements from known contractual and other obligations.
Other Obligations
We enter into contracts in the normal course of business with various third parties for clinical trials, preclinical research studies, and testing, manufacturing, and other services and products for operating purposes. These contracts provide for termination upon notice. Payments due upon cancellation generally consist only of payments for services provided or expenses incurred, including non-cancellable obligations of our service providers, up to the date of cancellation. These payments have not been included separately within these contractual and other obligations disclosures.
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Off-balance sheet arrangements
In the ordinary course of our business, we do not enter into transactions involving, or otherwise form relationships with, unconsolidated entities or financial partnerships that are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical accounting policies and significant judgments and estimates
We prepare our financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”), which requires us to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and notes to the financial statements. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experiences and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates. Some of our accounting policies require a higher degree of judgment than others in their application and require us to make significant accounting estimates.
The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. While our significant accounting policies are described in more detail in “Note 2: Significant Accounting Policies” in the notes to our consolidated financial statements included in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements:
Research and development expenses
Research and development expenses, including clinical trial costs and accruals, consist primarily of costs incurred for our research activities, including the development of our product candidates, which include:
•payments made under third party licensing and asset acquisition agreements;
•employee-related expenses, including salaries, related benefits, travel and share-based compensation expense for employees engaged in research and development functions;
•expenses incurred in connection with the clinical development of our product candidates, including expenses incurred under agreements with CROs;
•the cost of consultants and our licensors’ CMOs that manufacture product candidates for use in our preclinical studies and clinical trials; and
•facilities, depreciation, and other expenses, which include allocated expenses for rent and maintenance of facilities, insurance and supplies.
We expense research and development costs to operations as incurred. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid assets. Our prepaid assets are expensed as the related goods are delivered or the services are performed.
We monitor research and development expenses directly associated with our clinical assets at the program level to some degree, however, indirect costs associated with clinical development and the balance of our research and development expenses are not tracked at the program or candidate level.
Equity-based compensation expense
We account for share-based payments under the guidance as set forth in the Share-Based Payment Topic 718 of the FASB Accounting Standards Codification (“AS 2018-07”), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, officers, directors and consultants, including employee stock options, based on estimated fair values. We adopted ASU 2018-07 upon our incorporation, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. As a result, non-employee share-based transactions are measured by estimating the fair value of the equity instruments at the grant date, taking into consideration the probability of satisfying performance conditions.We account for forfeitures as they occur.
We recognize share-based compensation expense for stock options on a straight-line basis over the requisite service period. Our share-based compensation costs are based upon the grant date fair value of options estimated using the Black-Scholes-Merton option pricing model. This model utilizes various inputs, and these assumptions include:
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•Expected Term. The expected term represents the period that the share-based awards are expected to be outstanding. We use the simplified method (based on the mid-point between the vesting date and the end of the contractual term) to determine the expected term.
•Expected Volatility. Since we have historically been privately held and do not have any trading history for our Ordinary Shares, the expected volatility was estimated based on the average historical volatilities for comparable publicly traded pharmaceutical companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on their similar size, stage in the life cycle and area of specialty. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of the price of our ADSs becomes available.
•Risk-Free Interest Rate. The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.
•Expected Dividend. We have never paid dividends on our ordinary shares and have no plans to pay dividends on our ordinary shares. Therefore, we used an expected dividend yield of zero.
We recorded share-based compensation expense of $8.7 million and $5.2 million for the years ended December 31, 2021 and December 31, 2020, respectively. While we were a private company, the fair values of the ordinary shares underlying our share-based awards were estimated on each grant date by our board of directors. Our board of directors considered, among other things, valuations of our ordinary shares prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants 2013 Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. In determining a fair value for our ordinary shares, the unrelated third-party valuation firm used the Backsolve Method, which utilizes a recent equity financing to estimate the equity value at the valuation date, to estimate the fair value of our ordinary shares. The equity value was then allocated to the equity classes using an option pricing method and then reducing the implied ordinary share value by a discount for lack of marketability. For the independent third-party valuations prepared as of March 31, 2021 and May 1, 2021, the unrelated third-party valuation firm used the Calibration Method of the Market Approach. When the transaction is at fair value at initial recognition, the Calibration Method of the Market Approach is used at subsequent periods with valuation techniques and assumptions that are consistent with the observed transaction, updated to take into account any changes in Company-specific factors as well as current market conditions. At subsequent measurement dates, the valuation would consider our progress and changes in observable market data to estimate the fair value under current market conditions. The equity value is then allocated to the equity classes using an option pricing method and then reducing the implied ordinary share value by a discount for lack of marketability. Subsequent to the IPO, the Company utilizes the closing price of our publicly traded ADSs as the input for the fair value of our ordinary shares.
The assumptions used in determining the fair value of stock-based awards represent our best estimates, but the estimates involve inherent uncertainties and the application of our judgment. As a result, if factors change and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different in the future.
Income Taxes
We recognize deferred income taxes for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. In evaluating our valuation allowance, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Due to uncertainty with respect to ultimate realizability of deferred tax assets, we have provided a valuation allowance against the U.S., China and Hong Kong deferred tax assets. We intend to maintain a full valuation allowance on the U.S. federal and state deferred tax assets and foreign deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance.
As of December 31, 2021, we had U.S. federal NOLs of approximately $11.2 million, which are available to reduce future taxable income. U.S. federal NOLs can be carried forward indefinitely. Additionally, we carried forward foreign NOLs of approximately $20.1 million, some of which will begin to expire in 2025. Our carryforwards are subject to review and possible adjustment by the appropriate taxing authorities.
We record unrecognized tax benefits as liabilities and adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. We have not identified nor recorded any liabilities for unrecognized tax benefits as of December 31, 2021.
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Under Sections 382 and 383 of the Code, substantial changes in our ownership may limit the amount of NOL and research and development tax credit carryforwards that could be used annually in the future to offset taxable income. The tax benefits related to future utilization of U.S. federal and state NOL carryforwards, research and development tax credit carryforwards and other deferred tax assets may be limited or lost if cumulative changes in ownership exceeds 50% within any three-year period.
Recently issued accounting standards
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in “Note 2: Significant Accounting Policies” in the notes to our consolidated financial statements included in this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk including foreign exchange risk, credit risk and cash flow interest rate risk.
Foreign currency exchange rate risk
Our business mainly operates in China with transactions in renminbi, and our financial statements are presented in U.S. dollars. We do not believe that we currently have any significant direct foreign exchange risk and have not used any derivative financial instruments to hedge our exposure to such risk. Although, in general, our exposure to foreign exchange risk should be limited, the value of any investment in our ADSs will be affected by the exchange rate between the U.S. dollar and the renminbi because a portion of the value of our business is effectively denominated in renminbi, while the ADSs will be traded in U.S. dollars.
Renminbi is not a freely convertible currency. The State Administration of Foreign Exchange (“SAFE”), under the authority of the People’s Bank of China (“PBOC”), controls the conversion of renminbi into foreign currencies. The value of renminbi is subject to changes in the central government policies and to international economic and political developments affect supply and demand in the China Foreign Exchange Trading System market.
Translation of the net proceeds that we received from our IPO into renminbi will also expose us to currency risk. The value of the renminbi against the U.S. dollar and other currencies may fluctuate and is affect by, among other things, changes in China’s political and economic conditions. To the extent that we need to convert U.S. dollars into renminbi for our operations or if any of our arrangements with other parties are denominated in U.S. dollars and need to be converted into renminbi, appreciation of the renminbi against the U.S. dollar would have an adverse effect on the renminbi amount we receive from the conversion. Conversely, if we decide to convert renminbi to U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the renminbi would have a negative effect on the U.S. dollar amounts available to us.
We are exposed to market risk related to changes in interest rates. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in short-term securities. Our available for sale securities are subject to interest rate risk and will fall in value if market interest rates increase. At any time, sharp changes in interest rates can affect the fair value of the investment portfolio and its interest earnings. There were no investments classified as long-term at December 31, 2021. At December 31, 2021, we held $383.2 million in cash and cash equivalents and marketable securities.
Currently, we do not hedge these interest rate exposures. We maintain an investment portfolio in accordance with our investment policy. The primary objectives of our investment policy are to preserve principal, maintain proper liquidity and to meet operating needs. Although our investments are subject to credit risk, our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure from any single issue, issuer or type of investment. Our investments are also subject to interest rate risk and will decrease in value if market interest rates increase. However, due to the conservative nature of our investments and relatively short duration, interest rate risk is mitigated. We do not own derivative financial instruments. Accordingly, we do not believe that there is any material market risk exposure with respect to derivative or other financial instruments.
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Item 8. Financial Statements and Supplementary Data
LIANBIO
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
Notes to Consolidated Financial Statements 186
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
LianBio:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of LianBio and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, redeemable convertible preferred shares and shareholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2020.
New York, New York
March 31, 2022
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LianBio
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
Assets
Current assets:
Marketable securities 155,067 —
Prepaid expenses and other current assets 10,354 2,396
Restricted cash, non-current 20,000 —
Property and equipment, net 1,882 822
Operating lease right-of-use assets 4,763 1,706
Other non-current assets 51 12
Current liabilities:
Current portion of operating lease liabilities 1,125 539
Other current liabilities 760 360
Other liabilities 206 —
Commitments and contingencies (Note 8)
Shareholders’ equity (deficit):
Accumulated other comprehensive income (loss) 526 (40)
Total LianBio shareholders’ equity (deficit) 353,562 (132,843)
See accompanying notes to the consolidated financial statements
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LianBio
Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except share and per share amounts)
Operating expenses:
Other income (expense):
Interest income (expense), net 243 (4,854)
Other (expense) income, net (455) 123
Other comprehensive income (loss):
Foreign currency translation income (loss), net of tax 512 (40)
Unrealized gain on marketable securities, net of tax 54 —
See accompanying notes to the consolidated financial statements
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LianBio
Consolidated Statements of Redeemable Convertible Preferred Shares and Shareholders’ Equity (Deficit)
(In thousands, except share amounts)
Shares Amount Shares Amount
Share-based compensation expense — — — — 5,177 — — 5,177 — 5,177
Warrants issued in license agreement — — — — — — — — 33,774 33,774
Comprehensive Loss — — — — — (40) — (40) — (40)
Share-based compensation expense — — — — 8,664 — — 8,664 — 8,664
Warrants issued in license agreement — — — — — — — — 9,415 9,415
Comprehensive Income — — — — — 566 — 566 — 566
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LianBio
Consolidated Statements of Cash Flows
(In thousands)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash share consideration, issued in acquisition of IPR&D 9,415 33,774
Amortization of beneficial conversion feature — 2,475
Non-cash operating lease (benefit) expense (106) 169
Depreciation expense 525 76
Share based compensation expense 8,664 5,177
Amortization of discounts on investments, net (23) —
Unrealized foreign currency transaction losses (gain), net 87 (380)
Changes in operating assets and liabilities:
Increase in prepaid expenses and other current assets (8,176) (2,327)
Decrease (increase) in other receivable 14,216 (20,000)
Increase in other non-current assets (40) (7)
(Decrease) increase in accounts payable (1,708) 4,164
Increase in accrued expenses 8,761 811
Increase in nonrefundable research deposit — 20,000
Increase in other current liabilities 732 375
Decrease in related party payable — (2,845)
Net cash used in operating activities (163,953) (98,142)
Cash flows from investing activities:
Purchase of property and equipment (947) (886)
Purchase of marketable securities (154,990) —
Net cash used for investing activities (155,937) (886)
Cash flows from financing activities:
Proceeds from exercise of share options 5,546 —
Proceeds from issuance of ordinary shares upon initial public offering 311,083 —
Issuance costs for initial public offering (6,296) —
Proceeds from issuance of redeemable convertible preferred shares 3,000 310,000
Issuance costs related to redeemable convertible preferred shares (60) (15,211)
Issuance of convertible notes — 15,000
Debt issuance costs related to convertible notes — (36)
Effect of exchange rate changes on cash and cash equivalents 449 325
Restricted cash—end of period $ 20,000 $ —
Supplemental disclosure of non-cash financing and investing activities:
Right-of-use assets obtained in exchange for lease obligations $ 5,160 $ 1,375
Seller financing related to the MyoKardia license — 35,000
Issuance costs in accounts payable and other accrued liabilities 1,496 1,152
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Beneficial conversion feature related to convertible notes — 2,439
Purchase of property and equipment in accounts payable 613 —
See accompanying notes to the consolidated financial statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Share and per Share Data)
1. Nature of Business
LianBio (“LianBio” or the “Company”) is a global, science-driven biopharmaceutical company dedicated to developing and commercializing innovative medicines for patients with unmet medical needs, with an initial focus on in-licensing assets for Greater China and other Asian markets.
The Company was incorporated in the Cayman Islands in July 2019 and maintains its Chinese headquarters in Shanghai, China. The Company conducts its corporate activities at its United States headquarters located in Princeton, New Jersey.
On November 3, 2021, the Company completed its initial public offering (“IPO”) through an underwritten sale of 20,312,500 American Depositary Shares (“ADSs") representing 20,312,500 ordinary shares at a price of $16.00 per share. Following the close of the IPO, on December 1, 2021, the underwriters partially exercised their option to purchase additional shares and purchased an additional 593,616 ADSs at the initial public offering price of $16.00 per ADS. The Company received gross proceeds of $334.5 million in connection with the IPO and subsequent exercise of the underwriters’ option and aggregate net proceeds of $304.8 million after deducting underwriting discounts, commissions and other offering expenses.
Concurrent with the IPO, all of the Company’s convertible preferred shares then-outstanding (see Note 10) were automatically converted into an aggregate of 64,467,176 ordinary shares and were reclassified into permanent equity. Following the IPO, there were no preferred shares outstanding.
2. Significant Accounting Policies
(A) Basis of presentation
The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”).
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, which include the People’s Republic of China (“PRC”) registered entities directly owned by the Company. All intercompany accounts and transactions have been eliminated in consolidation.
(B) Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and assumptions that affect the reported financial position at the date of the financial statements and the reported results of operations during the reporting period. Such estimates and assumptions affect the reported amounts of assets, liabilities, and expenses, and disclosure of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The only material estimates in the accompanying financial statements are the fair value of warrants, share-based compensation, and share options. Actual results could differ from those used in evaluating these accounting estimates.
(i) Concentration of Credit Risk and Other Risks and Uncertainties
In March 2020, the World Health Organization declared the global novel coronavirus disease 2019 (“COVID-19”) outbreak a pandemic. The Company’s operations have not been significantly impacted by the COVID-19 pandemic. However, the Company cannot at this time predict the specific extent, duration, or full impact that the COVID-19 pandemic will have on its financial condition and operations, including planned clinical trials. The impact of the COVID-19 pandemic on the Company’s financial performance will depend on future developments, including the duration and spread of the pandemic and related governmental advisories and restrictions. These developments and the impact of the COVID-19 pandemic on the financial markets and the overall economy are highly uncertain and cannot be predicted. If the financial markets and/or the overall economy continue to be impacted for an extended period, the Company’s results may be materially adversely affected.
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Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents in deposits at financial institutions that exceed federally insured limits. The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to material credit risk due to the financial position of the banking institutions. The Company has no off-balance sheet risk, such as foreign exchange contracts, option contracts, or other foreign hedging arrangements.
The Company’s results of operations involve numerous risks and uncertainties. Factors that could affect the Company’s operating results and cause actual results to vary materially from expectations include, but are not limited to, uncertainty of results of clinical trials, uncertainty of regulatory approval of the Company’s potential product candidates, uncertainty of market acceptance of its product candidates, competition from substitute products and larger companies, securing and protecting proprietary technology, strategic relationships and dependence on key individuals and sole source suppliers.
Each of the Company’s product candidates require approvals from the National Medical Products Administration (“NMPA”) in China and comparable foreign regulatory agencies prior to commercial sales in their respective jurisdictions. There can be no assurance that any product candidates will receive the necessary approvals. If the Company is denied approval, approval is delayed or the Company is unable to maintain approval for any product candidate, such events could have a materially adverse impact on the Company’s business.
(ii) Liquidity
The Company has incurred operating losses since inception and had an accumulated deficit of $360.2 million as of December 31, 2021 and $163.9 million as of December 31, 2020. The Company’s cash and cash equivalents and marketable securities were $383.2 million and $254.4 million as of December 31, 2021 and December 31, 2020, respectively. The Company has financed its operations to date primarily through equity capital raises.
The Company believes that existing capital resources, including the net proceeds from the IPO in November 2021, will be sufficient to meet projected operating requirements for at least 12 months from the date of issuance of the accompanying consolidated financial statements, though it expects to continue to incur operating losses and negative operating cash flows. The Company will be required to raise additional capital to fund future operations, however, no assurance can be given as to whether additional needed financing will be available on terms acceptable to the Company, if at all. If sufficient funds on acceptable terms are not available when needed, the Company may be required to curtail planned activities to preserve cash resources. These factors may adversely impact the Company’s ability to achieve its business objectives and would likely have an adverse effect on its future business prospects, or even its ability to remain a going concern.
(C) Net loss per share
Basic net loss per share is computed by dividing net loss by the weighted average number of ordinary shares outstanding for the period. Diluted net loss per share excludes the potential impact of convertible preferred shares, options to purchase ordinary shares, restricted share units and unexercised warrants, because their effect would be anti-dilutive due to the Company’s net loss. Since the Company had a net loss in each of the periods presented, basic and diluted net loss per ordinary share are the same.
(D) Segment Information
Operating segments are defined as components of an entity about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company operates and manages its business as one reportable and operating segment, which is the business of license acquisitions, regulatory approvals, clinical trials, and commercial activity related to the current portfolio of in-licensed products. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for allocating resources and evaluating financial performance.
(E) Emerging Growth Company Status
The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has irrevocably elected to not avail itself of this exemption and, as a result, will adopt new or revised accounting standards on the relevant effective dates on which adoption of such standards is required for other public companies that are not emerging growth companies.
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(F) Fair Value of Financial Instruments
FASB guidance specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
The three levels of the fair value hierarchy are as follows:
a.Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities.
b.Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (e.g., quoted prices of similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active). Level 2 includes financial instruments that are valued using models or other valuation methodologies.
c.Level 3 – Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when the fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable. The Company had no Level 3 assets or liabilities as of December 31, 2021 and December 31, 2020.
(G) Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of 90 days or less at the time of purchase to be cash equivalents. Cash equivalents are carried at cost which approximates fair value due to their short-term nature. The Company maintains cash balances at both U.S.-based and foreign-based commercial banks.
Amounts included in restricted cash represent those required to be set aside by a contractual agreement with Pfizer, Inc. (“Pfizer”), and will remain restricted until such time as the upfront payment is utilized for specified in-licensing and co-development activities or until the agreement terminates.
A summary of cash, cash equivalents and restricted cash is as follows:
Restricted cash, non-current 20,000 —
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(H) Marketable Securities
The Company considers securities with original maturities of greater than 90 days to be available for sale securities. Securities under this classification are recorded at fair value and unrealized gains and losses within accumulated other comprehensive income. The estimated fair value of the available for sale securities is determined based on quoted market prices or rates for similar instruments. In addition, the cost of debt securities in this category is adjusted for amortization of premium and accretion of discount to maturity. For available for sale debt securities in an unrealized loss position, the Company assesses whether it intends to sell or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value. If the criteria are not met, the Company evaluates whether the decline in fair value has resulted from a credit loss or other factors. In making this assessment, management considers, among other factors, the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized costs basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. For the twelve-month period ended December 31, 2021, no allowance was recorded for credit losses.
(I) Concentration of credit risk
The Company’s financial instruments that are exposed to credit risks consist primarily of cash and cash equivalents, available-for-sale marketable securities and accounts receivable. The Company maintains its cash and cash equivalents in bank accounts, which, at times, exceed federally insured limits. The Company has not experienced any credit losses in these accounts and does not believe it is exposed to any significant credit risk on these funds. The Company’s investment policy includes guidelines on the specific credit quality standards and limits the credit exposure of any single issuer the Company is allowed to invest in, which the Company believes minimizes the exposure to concentration of credit risk.
The Company is subject to credit risk from its accounts receivable related to its product sales. The payment terms are predetermined and the Company evaluates the creditworthiness of each customer or distributor on a regular basis. The Company reserves all uninsured amounts billed directly to a patient until the time of cash receipt as collectability is not reasonably assured at the time the product is received. To date, the Company has not incurred any material credit losses.
(J) Property and Equipment
Property and equipment are stated at cost net of accumulated depreciation, which is computed by the straight-line method based on the estimated useful lives of the respective assets, as discussed below. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the leased assets. Maintenance and repair costs are charged to expense as incurred, and expenditures for major renewals and improvements are capitalized. The Company assesses the net book value of its property and equipment for impairment at least annually or when events or circumstances indicate that the carrying amounts may not be recoverable in the ordinary course of its business.
(K) Foreign Currency
The functional currencies of the Company’s foreign subsidiaries primarily are the local currencies of the country in which the subsidiary operates. The Company’s asset and liability accounts are translated using the current exchange rate as of the balance sheet date. Shareholders’ deficit accounts are translated using historical rates at the balance sheet date. Revenue and expense accounts are translated using a weighted average exchange rate over the period ended on the balance sheet date. Adjustments resulting from the translation of the financial statements of the Company’s foreign subsidiaries into U.S. dollars are accumulated as a separate component of shareholders’ deficit within accumulated other comprehensive income (loss).
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(L) Research and Development
Costs incurred for research and development are expensed as incurred. Included in research and development expense are personnel related costs, expenditures for laboratory equipment and consumables, payments made pursuant to licensing and acquisition agreements related to in-process research and development (“IPR&D”), and the cost of conducting clinical trials. Expenses incurred associated with conducting clinical trials include, but are not limited to, drug development trials and studies, drug manufacturing, laboratory supplies, external research, and payroll. Prepayments the Company makes for research and development services prior to services being rendered are recorded as prepaid expenses in the balance sheet and expensed as the services are provided.
(M) Acquisition of In-Process Research and Development
The Company has entered into agreements with third parties to acquire or license pharmaceutical product candidates for development. Such agreements generally require an initial payment by the Company when the contract is executed, and additional payments upon the achievement of certain milestones. Additionally, the Company may be obligated to make future royalty payments in the event the Company commercializes the pharmaceutical product candidate and achieves a certain sales volume. In accordance with FASB ASC Topic 730, “Research and Development,” expenditures for research and development, including upfront licensing fees and milestone payments associated with products that have not yet been approved by the NMPA, are charged to research and development expense as incurred as there is no alternative future use. Future contract milestone payments will be recognized as expense when achievement of the milestone is determined to be probable. Once a product candidate receives regulatory approval, subsequent license payments are recorded as an intangible asset and will be amortized over its estimated useful life.
(N) Accruals for Research and Development Expense and Clinical Trials
As part of the process of preparing its financial statements, the Company is required to recognize its expense resulting from its obligations under contracts with vendors, clinical research organizations and consultants and under clinical site agreements in connection with conducting clinical trials. This process involves reviewing open contracts and purchase orders, communicating with the applicable personnel to identify services that have been performed on behalf of the Company and estimating the level of service performed and the associated cost incurred for the service when the Company has not yet been invoiced or otherwise notified of actual cost. The majority of service providers invoice the Company monthly in arrears for services performed. The Company records estimates of accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known to the Company at that time. The Company’s clinical trials accruals are dependent on the timely and accurate reporting of contract research organization and other third-party vendors. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in it reporting amounts that are too high or too low for any particular period. The Company periodically confirms the accuracy of its estimates with the service providers and records adjustments if necessary.
(O) Income Taxes
The Company accounts for income taxes under the asset and liability method. Under this method, the amount of taxes currently payable or refundable is accrued, and deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial reporting and tax basis of existing assets and liabilities. Deferred tax assets also include realizable tax losses.
The deferred tax assets may be reduced by a valuation allowance, which is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In addition, management is required to evaluate all available evidence, both positive and negative, when making its judgment to determine whether to record a valuation allowance for a portion, or all, of its deferred tax assets. Deferred tax assets and liabilities are measured using enacted income tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in income tax rate is recognized in the period that includes the enactment date.
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The Company accounts for uncertainty in income taxes using a two-step approach. The first step requires the Company to conclude that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination by a tax authority. The second step requires the Company to measure the largest amount of benefit, determined on a cumulative probability basis, that is more likely than not to be realized upon ultimate settlement with tax authority. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Further, the benefit to be recorded in the consolidated financial statements is the amount most likely to be realized assuming a review by the tax authorities having all relevant information and applying current conventions. The Company’s policy is to recognize interest and penalties related to income tax positions taken as a component of the provision for income taxes.
The Company does not anticipate any significant changes to its uncertain tax positions during the next 12 months. As of December 31, 2021, the Company was not aware of any anticipated audits by the IRS or any other state, local, or foreign taxing authorities for any other matters.
(P) Leases
In accordance with ASC 842, the Company accounts for a contract as a lease when it has the right to control the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines if an arrangement is a lease or contains an embedded lease at inception. For arrangements that meet the definition of a lease, the Company determines the initial classification and measurement of its right-of-use asset and lease liability at the lease commencement date and thereafter if modified. The lease term includes any renewal options that the Company is reasonably assured to exercise. The present value of lease payments is determined by using the interest rate implicit in the lease, if that rate is readily determinable; otherwise, the Company uses its estimated secured incremental borrowing rate for that lease term. The Company’s policy is to not record leases with an original term of 12 months or less on its consolidated balance sheets and recognizes those lease payments in the income statement on a straight-line basis over the lease term. The Company’s existing leases are for office space.
In addition to rent, leases may require the Company to pay additional costs, such as utilities, maintenance, and other operating costs, which are generally referred to as non-lease components. The Company has elected to not separate lease and non-lease components for its office leases. Only the fixed costs for lease components and their associated non-lease components are accounted for as a single lease component and recognized as a right-of-use asset and liability. Rent expense for operating leases is recognized on a straight-line basis over the lease term based on the total lease payments and is included in operating expense in the consolidated statements of operations and comprehensive loss.
(Q) Share-Based Compensation
ASC 718 requires companies to measure the cost of employee services incurred in exchange for the award of equity instruments based on the estimated fair value of share-based award on the grant date. The share compensation awards issued to employees are equity classified, and the related expense is recognized over the requisite service period. The Company recognizes share-based award forfeitures only as they occur rather than an estimate by applying a forfeiture rate in accordance with ASU 2016-09.
The Company uses a Black-Scholes option-pricing model to value the Company’s share option awards and the Monte Carlo simulation model to value the Company’s performance share awards with market conditions. The performance share awards vest upon meeting certain market conditions and service conditions. The share option awards generally vest pro-rata annually. Performance share awards vest upon meeting certain regulatory approvals and service conditions. Using these option-pricing models, the fair value of each share option award and performance share award is estimated on the grant date. The fair value of the share options and performance share awards with market conditions is expensed on a straight-line basis over the vesting period. For awards that vest or begin vesting upon achievement of a performance condition, the Company estimates the likelihood of satisfaction of the performance condition and recognizes compensation expense when achievement of the performance condition is deemed probable using an accelerated attribution model. The expected volatility assumption used is based on the volatility of the share price of comparable public companies. The expected life used in share options is determined using the “simplified method.” The expected life used in performance award is determined as the midpoint between the requisite service period (the longer of the service or performance periods) and the contractual term. The risk-free interest rate used in both models is based on the implied yield on a U.S. Treasury security at a constant maturity with a remaining term equal to the expected term of the option granted. The dividend yield used in both models is zero, as the Company has never declared a cash dividend.
Restricted share units ("RSUs") are measured and recognized over the vesting period and are based on the quoted market price of the Company's ADSs on the grant date.
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(R) Deferred Offering Costs
Costs directly related to the Company’s IPO were deferred for expense recognition. These deferred offering costs are temporarily capitalized and consist of legal fees, accounting fees, and other applicable professional services. As of December 31, 2021 and December 31, 2020, $0.0 million and $1.1 million of these deferred offering costs are reported on the accompanying balance sheets within “prepaid expenses and other current assets.” With the completion of the Company’s IPO on November 3, 2021, these deferred offering costs were concurrently reclassified to additional paid in capital.
(S) Ordinary Share Split
On October 7, 2021, the Company’s board of directors approved a 5.8478-for-1 forward share split, which was approved by the Company’s shareholders on October 14, 2021. Effective as of October 14, 2021, the Company’s issued and outstanding ordinary shares were impacted by the forward share split. All share and per share data in the consolidated financial statements and notes thereto have been retrospectively revised to reflect the forward share split. Ordinary shares underlying outstanding share options and other equity instruments and the respective exercise prices, if applicable, were proportionately adjusted in accordance with the terms of the appropriate securities agreements. The respective conversion prices related to ordinary shares reserved for issuance upon the conversion of the Company’s convertible preferred shares were proportionately adjusted.
(T) Other Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 enhances and simplifies multiple aspects of the income tax accounting guidance in ASC 740. The standard will be effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. The guidance is generally effective as of January 1, 2021, with early adoption permitted. The Company adopted ASU 2019-12 in the first quarter of 2021 and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduces a new accounting model known as Credit Expected Credit Losses (“CECL”). CECL requires earlier recognition of credit losses on financial assets, while also providing additional transparency about credit risk. The Company adopted ASU 2016-13 in the third quarter of 2021 and applied the guidance prospectively. The adoption of this new standard did not have a material impact on the Company’s consolidated financial statements.
(U) Recently Issued Accounting Pronouncements Not Yet Adopted
The Company has evaluated recent accounting pronouncements through the date the financial statements were issued and filed with the SEC and believes that there are none that will have a material impact on the Company’s consolidated financial statements.
(V) Reclassification
Certain reclassifications of prior year information have been made to conform to the current year's presentation.
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3. Material Agreements
License Agreement with QED Therapeutics, Inc.
In October 2019, the Company entered into a license agreement (the “QED License Agreement”) with QED Therapeutics, Inc. (“QED”), as subsequently amended, under which the Company obtained an exclusive license under certain patents and know-how (including patents and know-how that QED licensed from QED’s upstream licensor) to develop, manufacture, use, sell, import, and commercialize QED’s ATP-competitive, FGFR1-3 tyrosine kinase inhibitor, infigratinib, in pharmaceutical products in the licensed territory of Mainland China, Macau, Hong Kong, Taiwan, Thailand, Singapore and South Korea, in the licensed field of human prophylactic and therapeutic uses in cancer indications. In September 2020, the Company entered into an amendment with QED to reduce the licensed territories to include Mainland China, Macau and Hong Kong. In December 2021, the Company entered into a second amendment with QED to modify the Company’s development obligations with respect to certain clinical trials, and change the development milestone payments the Company owes to QED and the royalty rates for the tiered royalties on net sales of licensed products the Company will pay to QED. Under the QED License Agreement, QED received a nonrefundable upfront payment of $10.0 million and was granted warrants to purchase 100,000 ordinary shares in Lian Oncology, a subsidiary of LianBio, valued at $1.0 million. Pursuant to ASC 505-50, as the fair value of the warrants were more reliably determinable than the fair value of the benefits received from the licensing agreement, the Company valued the warrants using the Black-Scholes Model. The warrants were issued in three tranches with the aggregate number of shares across all tranches equaling 10% of the fully diluted equity of Lian Oncology as of the issue date. Vesting of the warrant shares are linked to regulatory milestones and the warrants expire 10 years from the issue date. The amended and restated option agreement also provides QED with the option to choose to either convert the warrant (“Subsidiary Warrant”) into ordinary shares of the Company (“Parent Company Shares”) or a warrant to purchase a certain number of Parent Company Shares (“Parent Company Warrant”) immediately prior to an IPO of the Company. In the event QED chooses to convert the Subsidiary Warrant into Parent Company Shares, the number of Parent Company Shares QED is entitled to receive would be calculated as the aggregate fair market value of the ordinary shares of Lian Oncology that are under the Subsidiary Warrant, divided by the per share fair market value of the Parent Company Shares, on a fully diluted and as-converted basis and as of the date the Company sent QED the notice of the IPO. In the event QED chose to convert the Subsidiary Warrant into the Parent Company Warrant, the number of Parent Company Shares under the Parent Company Warrant QED was entitled to receive would have been calculated as the aggregate intrinsic value of the Subsidiary Warrant (the number of the ordinary shares of Lian Oncology under the Subsidiary Warrant multiplied by the difference between the strike price of the Subsidiary Warrant and the per share fair market value of Lian Oncology), divided by the per share intrinsic value of the Parent Company Warrant (the difference between the strike price of the Parent Company Warrant and the per share fair market value of Parent Company Shares), on a fully diluted and as-converted basis on the date of the warrant conversion. This conversion feature was not required to be bifurcated as it is clearly and closely related to the equity host instrument, pursuant to ASC 815. On October 18, 2021, based on the conversion feature, LianBio issued to QED a warrant to purchase 347,569 of its ordinary shares at an exercise price of $0.000017100448 per share and, concurrently with such issuance, the Subsidiary Warrant was deemed to be performed and settled in full and was irrevocably terminated. The QED License Agreement also required the Company to refund QED for costs incurred on the study through the execution date which was determined to be $2.8 million and was recorded as a related party payable as of December 31, 2019 on the consolidated balance sheet. Additionally, QED is entitled to receive from the Company development milestone payments of up to $7.0 million upon achievement of specified development milestones, and sales milestone payments of up to $87.5 million based on cumulative net sales of infigratinib, in addition to tiered royalties on net sales of licensed products at the greater of (a) percentage rates in the mid- to high-teens on the net sales of the licensed products, or (b) the applicable rate payable under QED’s agreement with its upstream licensor (capped in the mid-teens).
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License Agreement with MyoKardia
In August 2020, the Company entered into an exclusive license agreement (the “MyoKardia License Agreement”) with MyoKardia Inc. (“MyoKardia,” now a wholly-owned subsidiary of Bristol-Myers Squibb (“BMS”)), under which the Company obtained an exclusive license under certain patents and know-how of MyoKardia to develop, manufacture, use, sell, import and commercialize MyoKardia’s proprietary compound, mavacamten, in the licensed territory of Mainland China, Hong Kong, Macau, Taiwan, Thailand and Singapore, and in the licensed field of any indication in humans, which includes any prophylactic or therapeutic use in humans. Under the MyoKardia License Agreement, MyoKardia received a nonrefundable upfront payment of $40.0 million and was granted a warrant to purchase 170,000 ordinary shares in Lian Cardiovascular, a subsidiary of LianBio, valued at $33.8 million. Pursuant to ASC 505-50, as the fair value of the warrants were more reliably determinable than the fair value of the benefits received from the licensing agreement, the Company valued the warrants using the Black-Scholes Model and the underlying assumptions are discussed in further detail in Note 10. The warrants, representing 17% of the fully diluted equity of Lian Cardiovascular, are exercisable by MyoKardia at any time after issuance. The amended and restated option agreement also provides MyoKardia with the option to choose to either convert the warrant (“Subsidiary Warrant”) into ordinary shares of the Company (“Parent Company Shares”) or a warrant to purchase a certain number of Parent Company Shares (“Parent Company Warrant”) immediately prior to an IPO of the Company. MyoKardia was entitled to choose to convert the Subsidiary Warrant into Parent Company Shares, and the number of Parent Company Shares MyoKardia was entitled to receive would have been calculated as the aggregate fair market value of the ordinary shares of Lian Cardiovascular that are under the Subsidiary Warrant, divided by the per share fair market value of the Parent Company Shares, on a fully diluted and as-converted basis on the date the Company sent MyoKardia the notice of the IPO. Alternatively, MyoKardia was entitled to choose to convert the Subsidiary Warrant into the Parent Company Warrant, the number of Parent Company Shares under the Parent Company Warrant MyoKardia was entitled to receive would be calculated as the aggregate intrinsic value of the Subsidiary Warrant (the number of the ordinary shares of Lian Cardiovascular under the Subsidiary Warrant multiplied by the difference between the strike price of the Subsidiary Warrant and the per share fair market value of Lian Cardiovascular), divided by the per share intrinsic value of the Parent Company Warrant (the difference between the strike price of the Parent Company Warrant and the per share fair market value of Parent Company Shares), on a fully diluted and as-converted basis on the date of the warrant conversion. This conversion feature was not required to be bifurcated as it was clearly and closely related to the equity host instrument, pursuant to ASC 815. As of October 12, 2021, MyoKardia elected not to exercise this option and, therefore, continues to hold its warrant to purchase 170,000 ordinary shares in Lian Cardiovascular. MyoKardia’s option to convert the warrant irrevocably terminated upon the completion of the Company’s IPO. Additionally, MyoKardia was entitled to receive a nonrefundable financing milestone payment of $35.0 million upon a specified financing event, which occurred on October 29, 2020. The financing milestone was recorded at present value upon execution of the MyoKardia License Agreement, with total imputed interest of $2.3 million accreted under the effective interest method through the date the liability was settled. The financing milestone was paid to MyoKardia in December 2020 as a result of the Series A Preferred financing. Additionally, MyoKardia is entitled to receive from the Company development milestone payments of up to $60.0 million upon achievement of specified development milestones, and sales milestone payments of up to $87.5 million based on cumulative net sales of mavacamten, plus tiered royalties on net sales ranging from the low to upper-teens.
Navire License
In August 2020, pursuant to the BridgeBio exclusivity agreement, the Company entered into an exclusive license agreement with Navire Pharma, Inc. (“Navire”), a BridgeBio affiliate. Pursuant to the license agreement, Navire granted to the Company an exclusive, sublicensable license under certain patents and know-how of Navire to develop, manufacture, use, sell, import and commercialize Navire’s proprietary SHP2 inhibitor, BBP-398 (formerly known as IACS-15509) in the licensed territory of Mainland China, Hong Kong, Macau, Taiwan, Thailand, Singapore, and South Korea. Under the license agreement, Navire received a nonrefundable upfront payment of $8.0 million. Additionally, Navire is entitled to receive from the Company development milestone payments of up to $24.5 million upon achievement of specified development milestones, and sales milestone payments of up to $357.6 million upon achievement of specified commercialization milestones, plus tiered royalties on net sales ranging from approximately 5-15% on the net sales of the licensed products. As of December 31, 2021, the Company had recorded and paid the first development milestone of $8.5 million for IND acceptance in the PRC.
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Pfizer Strategic Collaboration
In November 2020, the Company entered into a strategic collaboration agreement (the “Pfizer Agreement”) with Pfizer Inc. (“Pfizer”), pursuant to which Pfizer will contribute up to $70.0 million of restricted, non-dilutive capital (the “Funds”), including a $20.0 million upfront payment, toward the Company’s in-licensing and co-development activities in Greater China. The Company has accounted for the Pfizer Agreement as a contract to perform research and development services for others under ASC 730-20 and the consideration received for performing these services will be recognized as contra-R&D in the consolidated statement of operations as the services are performed. Additionally, as the upfront payment of the $20.0 million was received subsequent to December 31, 2020, the Company recognized a receivable for this amount on the consolidated balance sheet as of December 31, 2020. Upon receipt in 2021, the upfront payment was recorded as restricted cash within consolidated balance sheet and will remain restricted until such time as the upfront payment is utilized for specified in-licensing and co-development activities or until the Pfizer Agreement terminates. Under the Pfizer Agreement, Pfizer and LianBio will form a joint collaboration committee to discuss potential third party in-license opportunities and development and commercialization of the Company’s products in Greater China. In the event the Company seeks to engage a third-party commercialization partner with respect to the commercialization of the Company’s future products in Greater China, Pfizer will have a right to opt into such product. Upon opting in, a portion of the Funds will be used to pay for development and commercialization costs of such product and Pfizer will thereafter have a right of first negotiation and right of last refusal to obtain the commercialization rights of such product in Greater China, in each instance for additional, separate financial consideration. During the collaboration, Pfizer may provide in-kind support to us for marketing, development, and regulatory activities.
ReViral License
In March 2021, the Company entered into an exclusive license agreement (the “ReViral License Agreement”) with ReViral Ltd. (“ReViral”). Pursuant to the license agreement, ReViral granted to the Company an exclusive, sublicensable license under the licensed patent rights and know-how to develop, manufacture and commercialize novel antiviral therapeutics that target respiratory syncytial virus in Mainland China, Macau, Hong Kong, and Singapore. Under the license agreement, ReViral received a nonrefundable upfront payment of $14.0 million. Additionally, ReViral is entitled to receive payments from the Company totaling an aggregate of up to $105.0 million upon the achievement of specified development and commercial milestones, up to $45.0 million and $60.0 million, respectively, plus tiered royalties on net sales ranging from ten to the low-teens.
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Tarsus License
In March 2021, the Company entered into an exclusive license agreement (the “Tarsus License Agreement”) with Tarsus Pharmaceuticals, Inc. (“Tarsus”). Pursuant to the license agreement, Tarsus granted to the Company an exclusive, sublicensable license under the licensed patent rights and know-how to develop, manufacture and commercialize TP-03 for the treatment of patients with Demodex Blepharitis (“DB”) and Meibomian Gland Disease (“MGD”) in Mainland China, Macau, Hong Kong, and Taiwan. Under the license agreement, Tarsus received a nonrefundable upfront payment of $15.0 million and was granted three warrants to purchase 125,000 ordinary shares in Lian Ophthalmology, a subsidiary of LianBio, valued at $9.4 million (the “Tarsus Warrants”). Pursuant to ASC 505-50, as the fair value of the warrants were more reliably determinable than the fair value of the benefits received from the licensing agreement, the Company valued the warrants using the Black-Scholes Model and the underlying assumptions are discussed in further detail in Note 10. The warrants were issued in three tranches with the aggregate number of shares across all tranches equaling 12.5% of the fully diluted equity of Lian Ophthalmology as of the issue date. Vesting of the warrant shares are linked to regulatory milestones and the warrants expire 10 years from the issue date. Pursuant to a related option agreement (the “Tarsus Option Agreement”), Tarsus also had the option to convert the warrants into ordinary shares of the Company (“Parent Company Shares”) or warrants to purchase a certain number of the Company’s ordinary shares (“Parent Company Warrants”) based on appreciation of the value in the Lian Ophthalmology since the inception of the Tarsus License Agreement. This conversion feature was not required to be bifurcated as it was clearly and closely related to the equity host instrument, pursuant to ASC 815. On October 18, 2021, Tarsus exercised its option to convert the Tarsus Warrants under the Tarsus Option Agreement. On October 18, 2021, Tarsus exercised its options to convert the Tarsus Warrants under the Tarsus Option Agreement and the Company subsequently issued to Tarsus 78,373 of its ordinary shares and two warrants to purchase an aggregate of 156,746 of its ordinary shares at an exercise price of $0.000017100448 per share. Following the issuances, the Tarsus Warrants were irrevocably terminated. Additionally, Tarsus is entitled to receive a nonrefundable second milestone payment of $10.0 million due and payable within forty-five days following the effective date. Additionally, Tarsus is entitled to receive payments from the Company totaling an aggregate of up to $175.0 million upon the achievement of specified development and commercial milestones, up to $75.0 million and $100.0 million, respectively, plus tiered royalties at percentage rates ranging from the low- to high-teens on net sales. During 2021, the Company was notified that Tarsus had achieved certain development milestones. The Company paid $30.0 million to Tarsus during the twelve months ended December 31, 2021 as a result of the achievement of these milestones.
Landos License
In May 2021, the Company entered into an exclusive license agreement (the “Landos License Agreement”) with Landos BioPharma, Inc. (“Landos”). Pursuant to the license agreement, Landos granted to the Company an exclusive, sublicensable license under the licensed patent rights and know-how to develop, manufacture and commercialize novel, gut-restricted small molecule omilancor (formerly known as BT-11) and NX-13 for the treatment of inflammatory bowel disease, that targets the NLRX1 pathway in Mainland China, Hong Kong, Macau, Taiwan, Cambodia, Indonesia, Myanmar, Philippines, Singapore, South Korea, Thailand, and Vietnam. Under the license agreement, Landos received a nonrefundable upfront payment of $18.0 million. Additionally, Landos is entitled to receive payments from the Company totaling an aggregate of up to $200.0 million upon the achievement of specified development and commercial milestones, up to $95.0 million and $105.0 million, respectively, plus tiered royalties at percentage rates ranging from the low- to the mid-teens on net sales.
Nanobiotix License
In May 2021, the Company entered into an exclusive license agreement (the “Nanobiotix License Agreement”) with Nanobiotix S.A. (“Nanobiotix”). Pursuant to the license agreement, Nanobiotix granted to the Company an exclusive, sublicensable license under the licensed patent rights and know-how to develop and commercialize NBTXR3, a potential first-in-class radioenhancer in Mainland China, Hong Kong, Taiwan, and Macau, South Korea, Singapore and Thailand. Under the license agreement, Nanobiotix received a nonrefundable upfront payment of $20.0 million. Additionally, Nanobiotix is entitled to receive payments from the Company totaling an aggregate of up to $220.0 million upon the achievement of specified development and commercial milestones, up to $65.0 million and $155.0 million, respectively, plus tiered royalties of 10-13% of net sales.
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Lyra License
In May 2021, the Company entered into an exclusive license agreement (the “Lyra License Agreement”) with Lyra Therapeutics, Inc. (“Lyra”). Pursuant to the license agreement, Lyra granted to the Company an exclusive, sublicensable license under the licensed patent rights and know-how to develop and commercialize LYR-210, an anti-inflammatory, intra-nasal drug matrix in late-stage development that is designed to treat chronic rhinosinusitis (“CRS”) in Mainland China, Hong Kong, Taiwan, and Macau, South Korea, Singapore and Thailand. Under the license agreement, Lyra received a nonrefundable upfront payment of $12.0 million. Additionally, Lyra is entitled to receive payments from the Company totaling an aggregate of up to $135.0 million upon the achievement of specified development and commercial milestones, up to $40.0 million and $95.0 million, respectively, plus tiered royalties from the low- to high-teens on net sales.
4. Marketable Securities and Fair Value Measurements
The following is a summary of marketable securities accounted for as available-for-sale securities at December 31, 2021 and 2020:
Corporate debt securities 4,138 — — 4,138
Commercial paper $ — $ — $ — $ —
Corporate debt securities — — — —
Government obligations — — — —
Total $ — $ — $ — $ —
The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of December 31, 2021 are as follows:
Commercial paper $ — $ — $ — $ — $ — $ —
Corporate debt securities — — — — — —
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Commercial paper $ — $ — $ — $ — $ — $ —
Corporate debt securities — — — — — —
Government obligations — — — — — —
Total $ — $ — $ — $ — $ — $ —
Marketable securities on the balance sheet at December 31, 2021 and 2020 mature as follows:
Less than 12 Months More Than 12 Months
Corporate debt securities 4,138 —
Government obligations — 4,980
Less than 12 Months More Than 12 Months
Commercial paper $ — $ —
Corporate debt securities — —
Government obligations — —
Total Marketable securities $ — $ —
The Company classifies all of its securities as current as they are all available for sale and are available for current operations.
The following tables present information about the Company's financial assets measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:
As of December 31, 2021 (in thousands) Level 1 Level 2 Level 3 Total
Cash equivalents:
Corporate debt securities — 8,165 — 8,165
Marketable securities:
Corporate debt securities — 4,138 — 4,138
As of December 31, 2020, the Company's financial assets were all measured and recognized at a fair value of Level 1.
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5. Property and Equipment, Net
Property and equipment consisted of the following:
Leasehold improvements $ 807 $ 693
Furniture and fixtures 65 7
Computer equipment and software 471 180
Construction in progress 1,145 18
Accumulated depreciation (606) (76)
Total property and equipment, net $ 1,882 $ 822
Total depreciation related to property and equipment for the years ended December 31, 2021 and 2020 was $0.5 million and $0.1 million, respectively.
6. Prepaid Expense and Other Current Assets
Prepaid expense and other current assets consist of the following:
Advance payments to suppliers and rent deposit $ 1,499 $ 1,070
Other prepaid expenses 298 21
Total prepaid expenses and other current assets $ 10,354 $ 2,396
7. Accrued Expenses
Accrued expenses consist of the following:
Employee compensation and related benefits $ 2,309 $ 236
Consulting and contracted research 3,925 49
Total accrued expenses $ 9,976 $ 998
8. Commitments and Contingencies
(A) Leases
In 2019, the Company entered into a real estate lease in Shanghai, effective December 23, 2019 for office space on the 9th floor of the Kerry Parkside building. The initial lease term ends on April 6, 2022 with an option to renew for one additional period of 24 months.
In 2020, the Company entered into two real estate leases for office space, one in Princeton, New Jersey, effective June 18, 2020 and one in Shanghai on the 7th floor of the Kerry Parkside building, effective August 31, 2020. The initial lease term of the 7th floor Kerry Parkside building ends on April 6, 2022 with an option to renew for one additional period of 24 months. The Company does not plan to renew either of the leases for office space in the Kerry Parkside buildings.
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In November 2021, the Company entered into an amendment to increase the office space in Princeton, New Jersey. The amended lease term ends on October 31, 2024 with an option to renew for one additional period of 36 months.
On November 4, 2021, the Company entered into a real estate lease for office space in Shanghai, effective November 16, 2021. The initial lease term ends on March 31, 2025with an option to renew for one additional period of 36 months.
The components of total lease costs were as follows:
Supplemental lease term and discount rate information related to leases was as follows:
Weighted-average remaining lease terms—operating leases (years) 3.11 3.28
Weighted-average discount rate—operating leases 9.37 % 11.57 %
Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 1,117 $ 274
Right-of-use assets obtained in exchange for lease obligations:
Commitments
As of December 31, 2021, future minimum lease payments, were as follows:
Operating Leases
Less imputed interest (765)
Present value of lease liabilities $ 4,834
(B) Litigation and Contingencies
The Company is subject to claims and assessments from time to time in the ordinary course of business. The Company will accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. As of December 31, 2021, and December 31, 2020, there have been no such matters identified. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within the range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. The Company is not currently party to any material legal proceedings.
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9. Share-Based Compensation
In December 2019, the Company adopted a shareholder-approved share-based compensation plan (the “2019 Plan”), which permits the granting of incentive share options, nonqualified share options, share awards and certain other awards to its employees, members of its Board of Directors, and consultants.
In connection with the IPO, the Company adopted a shareholder-approved share-based compensation plan (the “2021 Equity Plan”), which permits the granting of incentive share options, nonqualified share options, share awards and certain other awards to its employees, members of its Board of Directors, and consultants. The maximum number of shares that may be delivered in satisfaction of awards under the 2021 Equity Plan is approximately 14.2 million shares, plus that number of shares that remain available for issuance under the 2019 Plan and that may again become available for issuance under such plan, not to exceed approximately 10.7 million shares in the aggregate, and an annual increase, to be added as of January 1st of each year from January 1, 2022, to January 1, 2031, equal to the lesser of (i) four percent (4%) of the number of shares outstanding as of such date; and (ii) the number of shares determined by our board on or prior to such date for such year. Subsequent to the effectiveness of the 2021 Equity Plan, no additional awards will be made pursuant to the 2019 Plan. However, any outstanding awards granted under the 2019 Plan will remain outstanding, subject to the terms of the 2019 Plan and award agreements. Through December 31, 2021, there were awards issued for approximately 9.7 million ordinary shares under the 2019 Plan and approximately 5.0 million ordinary shares under the 2021 Equity Plan.
Share Option Awards
Share option grants provide the right to purchase a specified number of ordinary shares from the Company at a specified price during a specified period of time. The share option exercise price per share is the fair market value of the Company’s ordinary shares on the date of the grant of the share option.
In January 2020, the Company issued options to purchase 2,999,920 ordinary shares to senior management at an exercise price of $1.71 per share. During December 2020, the Company issued options to purchase an aggregate of 5,374,114 ordinary shares to employees, senior management and non-employee directors at an exercise price of $6.49 per share.
During the year ended December 31, 2021, the Company issued 7,426,136 options to purchase ordinary shares to employees, senior management and non-employee directors at exercise prices ranging from $6.16 to $16.00 per share.
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The fair values of service-based stock options granted during each of the periods presented below were estimated using the Black-Scholes Model based on the following assumptions:
Expected Dividend Yield — % — %
Weighted Average grant date fair value per stock option $ 6.44 $ 2.67
A summary of share option activity is as follows:
As of December 31, 2021, $49.8 million of total unrecognized expense related to non-vested share options is expected to be recognized over a weighted average period of 3.65 years from the date of grant. Options granted to senior management and employees generally vest in equal annual increments over four years and grants issued subsequent to the IPO generally vest over four years with 25% vesting over the first year and monthly thereafter.
Performance Share Awards
In May 2021, the Company granted certain option awards with both market-vesting conditions and service-vesting conditions to a member of management. The market condition is based on the Company’s enterprise value. Per the terms of the award, these options will vest in two equal tranches based on the following thresholds:
1.25% of the performance options shall vest upon the satisfaction of the Company achieving an enterprise value of not less than $2.0 billion at any time after the grant date in accordance with the service condition described below.
2.25% of the performance options shall vest upon the satisfaction of the Company achieving an enterprise value of not less than $4.0 billion at any time after the grant date in accordance with the service condition described below.
The enterprise value shall be equal to the number of outstanding ordinary shares of the Company multiplied by the volume weighted average price of a single ordinary share averaged over a period of thirty days ending one day prior to the date of the valuation.
Subject to the market conditions described above, the option contains explicit service vesting conditions, with one-fourth vesting each year over four years.
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A summary of the activity associated with these awards is as follows:
Outstanding at January 1, 2021 — — — —
Vested — —
Exercised — —
Expired or forfeited — —
The Company used a Monte-Carlo simulation to determine the grant date fair value for these awards, which takes into consideration the possible outcomes pertaining to the enterprise value market condition. The assumptions used in the Monte-Carlo simulation for the performance options along with the weighted-average grant date fair value for awards granted in the periods presented are as follows:
Dividend Yield 0%
Risk-free interest rate 0.81%—1.63%
Weighted average grant date fair value per share $4.72
As of December 31, 2021, there was $7.7 million total unrecognized of compensation cost related to the performance share units.
In December 2021, 733,926 performance-based share units (“PSUs”) were granted to certain management employees. 60% of the total number of PSUs will vest on the one-year anniversary of the date on which the mavacamten NDA acceptance in China is obtained. The remaining 40% of the PSUs will vest on the six-month anniversary of the date on which the mavacamten NMPA approval in China is obtained. Upon termination of an employee’s service with the Company for any reason, any of these PSUs that are outstanding and not yet vested will be immediately forfeited.
A summary of the activity associated with these PSUs is as follows:
Outstanding at January 1, 2021 — — 0 —
Vested — —
Exercised — —
Expired or forfeited — —
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The fair values of PSUs granted during the period presented below were estimated using the Black-Scholes Model based on the following assumptions:
Expected volatility 76.55%
Dividend Yield 0%
Risk-free interest rate 1.37%
Expected term, in years 6.24
Weighted average grant date fair value per share $4.16
As of December 31, 2021, there was $3.1 million of total unrecognized of compensation cost related to the PSUs.
Restricted Share Units
In December 2021, 479,673 restricted share units (“RSUs”) were granted to certain employees. One fourth of the RSUs will vest and be released from the restrictions on each yearly anniversary from the date of the grant. Upon termination of an employee’s service with the Company for any reason, any RSUs that are outstanding and not yet vested will be immediately forfeited. The Company measured the fair value of the non-vested RSUs as of respective grant dates.
The following table summarized the non-vested RSU activity in 2021:
Numbersof nonvestedRSUs Weightedaveragegrantdatefair value $
Non-vested as of January 1, 2020 — —
Granted — —
Vested — —
Non-vested as of December 31, 2020 — —
Vested — —
As of December 31, 2021, there was $3.0 million of total unrecognized compensation expense related to non-vested RSUs. The Company recorded compensation expense related to the RSUs of $0.0 million for the years ended December 31, 2021 and 2020, respectively.
In December 2021, 146,786 performance-based RSUs were granted to certain management. 60% of the total number of RSUs will vest on the one-year anniversary of the date on which the mavacamten NDA acceptance in China is obtained. The remaining 40% of the RSUs will vest on the six-month anniversary of the date on which the mavacamten NDA acceptance in China is obtained. Upon termination of an employee’s service with the Company for any reason, any performance-based RSUs that are outstanding and not yet vested will be immediately forfeited.The Company measured the fair value of the non-vested performance-based RSUs as of respective grant dates.
The following table summarized the non-vested performance-based RSU activity in 2021:
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Numbersof nonvestedrestrictedshares Weightedaveragegrantdatefair value $
Non-vested as of January 1, 2020 — —
Granted — —
Vested — —
Non-vested as of December 31, 2020 — —
Vested — —
As of December 31, 2021, there was $0.9 million of total unrecognized compensation expense related to non-vested performance-based RSUs. The Company recorded compensation expense related to the performance-based RSUs of $0.0 million for the years ended December 31, 2021 and 2020, respectively.
10. Equity
Ordinary Shares
As of December 31, 2021, the Company was authorized to issue up to 2,923,900,005 ordinary shares, each with a par value of $0.000017100448.
As of December 31, 2020, the Company was authorized to issue up to 2,923,900,005 ordinary shares, of which 2,859,742,435 were authorized as ordinary shares with a par value of $0.000017100448, 5,500,000 were authorized Series Seed Preferred Shares with a par value of $0.0001, and 5,471,231 were authorized Series A Preferred Shares with a par value of $0.0001.
Preferred Shares
On November 3, 2021, upon the closing of the IPO, all Series Seed Preferred Shares were automatically converted into an aggregate 32,162,900 of the Company’s ordinary shares, after giving effect to the 5.8478-for-1share split effected October 14, 2021 and $55.0 million of mezzanine equity was reclassified to ordinary shares and additional paid-in capital.
On November 3, 2021, upon the closing of the IPO, all Series A Preferred Shares were automatically converted into an aggregate 32,304,276 of the Company’s ordinary shares, after giving effect to the 5.8478-for-1share split effected October 14, 2021 and $297.7 million of mezzanine equity was reclassified to ordinary shares and additional paid-in capital.
The table below describes the preferred shares outstanding as of December 31, 2020.
The Company’s redeemable convertible preferred shares are not liability classified as they do not embody an unconditional obligation requiring the issuer to redeem the instrument by transferring its assets at a specified date or an event certain to occur. Due to the conversion at the option of the holder and redemption upon an occurrence that is not solely within the Company’s control, the Company classified the redeemable convertible preferred shares in mezzanine equity rather than as a component of shareholders’ deficit.
The characteristics of the redeemable convertible preferred shares are as follows:
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Voting
The holders of the redeemable convertible preferred shares have one vote for each ordinary share into which the shares of redeemable convertible shares may be converted, subject to certain limitations.
Dividends
The holders of redeemable convertible preferred shares are entitled to receive non-cumulative dividend preference over the ordinary shareholders only when and if declared by the Board of Directors. As of December 31, 2021 and December 31, 2020, no dividends have been declared or paid.
Liquidation Preference
In the event of any liquidation, dissolution, or winding up of the Company, the holders of the then outstanding redeemable convertible preferred shares will have distribution preference over the ordinary shareholders in the amount of 100% of their original purchase price plus accrued but unpaid dividends. If the assets and funds to be distributed among the holders of redeemable convertible preferred shares are insufficient to permit the full payment to which the holders are entitled, then the entire assets and funds of the Company legally available for distribution will be distributed ratably among the holders of redeemable convertible preferred shares in proportion to the preferential amount each such holder is otherwise entitled to receive before distribution is made to the ordinary shareholders.
Conversion
The Series Seed Preferred Shares are convertible, at the option of the holder, into such number of fully paid shares of the Company’s ordinary shares as is determined by dividing the original issuance price by the conversion price in effect at the time of conversion. Based on the conversion ratios in effect as of December 31, 2021 and December 31, 2020, after giving effect to the 5.8478-for-1share split effected October 14, 2021, the Series Seed Preferred Shares converted into an aggregate of 32,162,900 of the Company’s ordinary shares on November 3, 2021.
Based on the conversion ratios in effect as of December 31, 2021 and December 31, 2020, after giving effect to the 5.8478-for-1share split effected October 14, 2021, the Series A Preferred Shares converted into an aggregate of 32,304,276 of the Company’s ordinary shares on November 3, 2021.
Redemption
No redeemable convertible preferred shares are unilaterally redeemable by either the shareholders or the Company.
Warrants
In August 2020, the Company issued a warrant exercisable for 170,000 ordinary shares of Lian Cardiovascular (the “MyoKardia Warrant”). The warrant is equity classified and was issued by Lian Cardiovascular, a wholly owned subsidiary of the Company, as partial consideration to MyoKardia for the MyoKardia License Agreement. The MyoKardia Warrant, if exercised, represents 17% of the fully diluted equity of Lian Cardiovascular. The MyoKardia Warrant is accounted for under ASC 718 Compensation – Stock Compensation and is fair valued on the grant date using the Black-Scholes Model based on the following weighted average assumptions:
Current Price of the Underlying Share $ 275.00
Expected Term 10 years
Risk Free Interest Rate 0.60 %
Dividend Yield 0 %
Expected Volatility 70 %
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In March 2021, the Company issued three warrants exercisable for 125,000 ordinary shares of Lian Ophthalmology (the “Tarsus Warrants”). The Tarsus Warrants are equity classified and were issued by Lian Ophthalmology, a wholly owned subsidiary of the Company, as partial consideration to Tarsus for the Tarsus License Agreement. The Tarsus Warrants, if exercised, represent 12.5% of the fully diluted equity of Lian Ophthalmology. The Tarsus Warrants are accounted for under ASC 718 Compensation – Stock Compensation and are fair valued on the grant date using the Black-Scholes Model based on the following weighted average assumptions: