Item 8. Financial Statements and Supplementary Data
Item 8. Financial Statements and Supplementary Data
95
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (Ernst & Young LLP; San Diego, California; PCAOB ID: 42)
97
Consolidated Balance Sheets
98
Consolidated Statements of Operations and Comprehensive Loss
99
Consolidated Statements of Changes in Stockholders’ Equity
100
Consolidated Statements of Cash Flows
101
Notes to Consolidated Financial Statements
102
96
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Reneo Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Reneo Pharmaceuticals, Inc. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2018.
San Diego, California
March 28, 2024
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RENEO PHARMACEUTICALS, INC.
Consolidated Balance Sheets
(In thousands, except par value and share data)
December 31,
2023
2022
Assets
Current assets:
Cash and cash equivalents
$
27,632
$
19,927
Short-term investments
75,331
81,246
Prepaid expenses and other current assets
3,659
5,180
Total current assets
106,622
106,353
Property and equipment, net
134
453
Right-of-use assets
599
1,292
Other non-current assets
81
84
Total assets
$
107,436
$
108,182
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
$
8,717
$
1,893
Accrued expenses
9,129
4,827
Operating lease liabilities, current portion
331
404
Total current liabilities
18,177
7,124
Operating lease liabilities, less current portion
642
1,059
Performance award
7
29
Total liabilities
18,826
8,212
Commitments and contingencies
Stockholders’ equity:
Common stock, $ 0.0001 par value; 200,000,000 shares authorized at
December 31, 2023 and December 31, 2022; 33,420,808
and 24,699,553 shares issued and outstanding at December 31, 2023
and December 31, 2022, respectively
3
3
Additional paid-in capital
307,073
236,693
Accumulated deficit
( 218,474
)
( 136,683
)
Accumulated other comprehensive income (loss)
8
( 43
)
Total stockholders’ equity
88,610
99,970
Total liabilities and stockholders’ equity
$
107,436
$
108,182
The accompanying notes are an integral part of these consolidated financial statements.
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RENEO PHARMACEUTICALS, INC.
Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except share and per share data)
Year Ended December 31,
2023
2022
Operating expenses:
Research and development
$
56,613
$
37,705
General and administrative
26,440
16,143
Total operating expenses
83,053
53,848
Loss from operations
( 83,053
)
( 53,848
)
Other income
5,665
1,893
Net loss
( 77,388
)
( 51,955
)
Unrealized gain (loss) on short-term investments
51
( 77
)
Comprehensive loss
$
( 77,337
)
$
( 52,032
)
Net loss per share attributable to common stockholders, basic and diluted
$
( 2.52
)
$
( 2.12
)
Weighted-average shares used in computing net loss per share, basic and
diluted
30,676,455
24,496,425
The accompanying notes are an integral part of these consolidated financial statements.
99
RENEO PHARMACEUTICALS, INC.
Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except share data)
Additional
Accumulated
Other
Total
Common Stock
Paid-In
Comprehensive
Accumulated
Stockholders’
Shares
Amount
Capital
Income (Loss)
Deficit
Equity
Balances, December 31, 2021
24,455,390
$
3
$
231,902
$
34
$
( 84,728
)
$
147,211
Stock based compensation
—
—
4,320
—
—
4,320
Issuance of common stock in connection
with at-the-market facility, net of
issuance costs
92,085
—
193
—
—
193
Issuance of common stock in
connection with equity plans
152,078
—
278
—
—
278
Other comprehensive loss
—
—
—
( 77
)
—
( 77
)
Net loss
—
—
—
—
( 51,955
)
( 51,955
)
Balances, December 31, 2022
24,699,553
$
3
$
236,693
$
( 43
)
$
( 136,683
)
$
99,970
Stock based compensation
—
—
5,112
—
—
5,112
Issuance of common stock in public
offering, net of offering costs
7,906,250
—
58,862
—
—
58,862
Issuance of common stock in private
placement, net of offering costs
625,000
—
4,667
4,667
Issuance of common stock in connection
with at-the-market facility, net of
issuance costs
407,877
—
1,009
—
—
1,009
Issuance of common stock in
connection with equity plans
358,571
—
730
—
—
730
Repurchase and retirement of common
stock in connection with common
stock repurchase agreement
( 576,443
)
—
—
—
( 4,403
)
( 4,403
)
Other comprehensive income
—
—
—
51
51
Net loss
—
—
—
—
( 77,388
)
( 77,388
)
Balances, December 31, 2023
33,420,808
$
3
$
307,073
$
8
$
( 218,474
)
$
88,610
The accompanying notes are an integral part of these consolidated financial statements.
100
RENEO PHARMACEUTICALS, INC.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended
December 31,
2023
2022
Cash flows from operating activities
Net loss
$
( 77,388
)
$
( 51,955
)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation
5,112
4,320
Depreciation and amortization
170
88
Amortization/accretion on short-term investments
( 4,777
)
( 817
)
Changes in the fair value of performance award
( 22
)
( 415
)
Non-cash lease expense
355
441
Right-of-use and leasehold improvement impairment expenses
650
17
Changes in operating assets and liabilities:
Prepaid and other assets
1,524
878
Accounts payable and accrued expenses
11,118
518
Operating lease liabilities
( 424
)
( 437
)
Net cash used in operating activities
( 63,682
)
( 47,362
)
Cash flows from investing activities
Purchases of property and equipment
( 221
)
( 346
)
Purchase of available-for-sale short-term investments
( 231,257
)
( 101,596
)
Proceeds from maturities of available-for-sale short-term investments
242,000
44,100
Net cash provided by (used in) investing activities
10,522
( 57,842
)
Cash flows from financing activities
Proceeds from public offering of common stock, net of offering costs
58,862
—
Proceeds from private placement of common stock, net of offering costs
4,667
193
Repurchase of common stock in connection with common
stock repurchase agreement
( 4,403
)
—
Proceeds from issuance of common stock under the at-the-market
facility, net of offering costs
1,009
—
Proceeds from issuance of common stock in connection with equity plans
730
278
Net cash provided by financing activities
60,865
471
Net increase (decrease) in cash and cash equivalents
7,705
( 104,733
)
Cash and cash equivalents, beginning of year
19,927
124,660
Cash and cash equivalents, end of year
$
27,632
$
19,927
Noncash operating activities:
Right-of-use assets obtained in exchange for lease obligations
$
—
$
1,733
The accompanying notes are an integral part of these consolidated financial statements.
101
RENEO PHARMACEUTICALS, INC.
Notes to Consolidated Financial Statements
1. Organization and Business
Organization
Reneo Pharmaceuticals, Inc. (Reneo or the Company) commenced operations on September 22, 2014 as a pharmaceutical company and has historically focused on the development of therapies for patients with rare genetic mitochondrial diseases. In December 2017, the Company in-licensed mavodelpar (REN001), a novel oral peroxisome proliferator-activated receptor delta (PPARδ) agonist.
Risks and Uncertainties
On December 14, 2023, the Company announced that its pivotal STRIDE study, a global, randomized, double-blind, placebo-controlled Phase 2b trial of mavodelpar in adult patients with primary mitochondria myopathy due to mitochondrial DNA defects, did not meet its primary or secondary efficacy endpoints. As a result, the Company suspended the development activities of its only product candidate, mavodelpar, and implemented cash preservation activities, including substantial workforce reduction. In December 2023, the Company implemented a workforce reduction and recognized approximately $ 2.5 million in severance and continuation of benefit expenses for the year ended December 31, 2023.
The Company is subject to a number of risks similar to other pharmaceutical companies including, but not limited to, dependency on the clinical and commercial success of the Company’s potential product candidates, ability to obtain regulatory approval of any such potential product candidates, the need for substantial additional financing to achieve its goals, uncertainty of broad adoption of its approved products, if any, by physicians, consumers and third-party payors, significant competition and untested manufacturing capabilities, and dependence on key individuals and sole source suppliers.
Liquidity
From its inception in 2014, the Company has incurred significant losses and negative cash flows from operations and expects to continue to incur net losses into the foreseeable future and may never become profitable. As of December 31, 2023, the Company had cash, cash equivalents and short-term investments of $ 103.0 million to fund future operations. Since inception through December 31, 2023, the Company has funded its operations primarily through the issuance and sale of equity securities. Management has prepared cash flow forecasts which indicate that, based on the Company’s current cash resources available and working capital, the Company will have sufficient resources to fund its operations for at least one year after the date the consolidated financial statements are issued.
Future capital requirements will depend on many factors, including the timing and extent of spending on its operations and there can be no assurance that the Company will be successful in obtaining additional funding, that the Company’s projections of its future working capital needs will prove accurate, or that any additional funding would be sufficient to continue operations in future years. If the Company is not able to secure adequate additional funding, the Company may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could negatively impact the Company’s business, results of operations, and future prospects.
Public Offerings
In May 2022, the Company entered into an at-the-market equity offering sales agreement with Leerink Partners LLC (Leerink), previously SVB Securities LLC (2022 ATM Facility), under which it could offer and sell from time to time at its sole discretion, up to $ 20.0 million in shares of its common stock. On November 13, 2023,
102
concurrent with entering into the 2023 ATM Facility (defined below), the Company and Leerink terminated the 2022 ATM Facility. The Company had sold an aggregate of $ 1.2 million under the 2022 ATM Facility as of the termination date.
In May 2023, the Company completed a public offering in which it sold an aggregate of 7,906,250 shares of common stock, which included the full exercise of the underwriters’ option to purchase an additional 1,031,250 shares of common stock, at a price of $ 8.00 per share. The Company received total net proceeds from the offering of approximately $ 58.9 million, after deducting underwriting discounts and commissions and offering expenses.
Also, in May 2023, the Company completed a concurrent private placement in which it sold an aggregate of 625,000 shares of common stock to Abingworth Bioventures 8 L.P., a holder of more than 5 % of the Company’s common stock, at a price of $ 8.00 per share. The Company received total net proceeds of approximately $ 4.7 million, after deducting advisor fees and other estimated fees and expenses.
On November 13, 2023, the Company entered into an at-the-market equity offering sales agreement (Sales Agreement) with Leerink under which it may offer and sell, from time to time, at its sole discretion, up to $ 100.0 million in shares of its common stock (2023 ATM Facility). As of December 31, 2023 , the Company had no t sold any shares of its common stock under the 2023 ATM Facility and on March 25, 2024, the Company provided notice to Leerink of its election to terminate the Sales Agreement, effective as of April 8, 2024 .
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP) and reflect the operation of the Company and its wholly owned subsidiary. All intercompany balances and transactions among the consolidated entities have been eliminated in consolidation.
Use of Estimates
The preparation of the Company’s consolidated financial statements requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities and expenses and the disclosure in the Company’s consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. By their nature, estimates are subject to an inherent degree of uncertainty and, as such, actual results may differ from management’s estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less, when purchased, to be cash equivalents. As of December 31, 2023 and 2022 , the Company had cash balances deposited at major financial institutions. Cash balances are subject to minimal credit risk as the balances are with high credit quality financial institutions. Cash and cash equivalents include cash in readily available checking, money market accounts and repurchase agreements.
Short-term Investments
The Company accounts for short-term investments in accordance with Accounting Standard Codification (ASC) Topic 320, Investments – Debt and Equity Securities . Management determines the appropriate classification of its investments at the time of purchase and reevaluates such determinations at each reporting period.
At December 31, 2023, the Company’s investments comprised of U.S. treasury securities and commercial paper classified as available-for-sale securities. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in accumulated other comprehensive income (loss) in stockholders’ equity.
103
Realized gains and losses on sales of investments are included in interest income and are derived using the specific identification method for determining the cost of securities.
When the fair value of an available-for-sale debt security falls below the amortized cost basis it is evaluated to determine if any of the decline in value is attributable to credit loss. Decreases in fair value attributable to credit loss are recorded directly to earnings with a corresponding allowance for credit losses, limited to the amount that the fair value is less than the amortized cost basis. If the credit quality subsequently improves the allowance is reversed up to a maximum of the previously recorded credit losses. When the Company intends to sell an impaired available-for-sale debt security, or if it is more likely than not that the Company will be required to sell the security prior to recovering the amortized cost basis, the entire fair value adjustment will immediately be recognized in earnings with no corresponding allowance for credit losses. The Company did not recognize any credit losses on its short-term investments during the years ended December 31, 2023 and 2022.
Money market account balances are included as cash and cash equivalents on the consolidated balance sheets, which are also disclosed in Note 4, Fair Value Measurements .
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to significant concentration of credit risk, consist primarily of cash, cash equivalents and short-term investments. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.
Property and Equipment, Net
Property and equipment are stated at cost, less accumulated depreciation and amortization. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred.
The following estimated useful lives were used to depreciate or amortize the Company’s assets:
Estimated Useful Life
Furniture and fixtures
5 years
Computers and software
3 years
Leasehold improvements
Shorter of useful life or remaining lease term
Impairment of Long-Lived Assets
Long-lived assets consist primarily of property and equipment. Long-lived assets are evaluated for impairment when events and circumstances indicate the assets might be impaired by first comparing the estimated future undiscounted cash flows of the asset or asset group to the carrying value. If the carrying value exceeds the estimated future undiscounted cash flows, an impairment loss is recognized based on the amount that the carrying value exceeds the fair value of the asset or asset group. As a result of suspending development activities of the Company’s only product candidate, mavodelpar, the Company recognized $ 0.3 million and $ 0.4 million in impairment losses of right-of-use assets and leasehold improvements, respectively, for the year ended December 31, 2023. The Company recognized an immaterial amount in impairment related to its leases for the year ended December 31, 2022.
Leases
The Company determines if an arrangement includes a lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company’s lease terms may include options to extend or terminate a lease when it is reasonably certain that it will exercise that option. The Company combines lease and non-lease components when determining lease payments.
104
Right-of-use (ROU) assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term, unless there is a transfer of title or purchase option the Company is reasonably certain to exercise. For leases where an implicit rate is not readily determinable, the Company uses its incremental borrowing rate based on information available at the lease commencement date to determine the present value of future lease payments. Lease expense for operating leases is recognized on a straight-line basis over the expected lease term.
Research and Development Costs and Accruals
All research and development costs are expensed as incurred. Research and development costs consist primarily of costs associated with manufacturing drug substance and drug product, costs associated with preclinical studies, clinical trials managed through contract research organizations (CROs) and other third parties, license fees, salaries and employee benefits.
The Company bases its expense accruals related to clinical trials on its estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical trials on its behalf. The financial terms of these agreements vary from contract to contract and may result in uneven payment flows. Payments under certain contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing costs, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period.
Nonrefundable advance payments for goods and services, including fees for process development or manufacturing and distribution of clinical supplies that will be used in future research and development activities, are deferred and recognized as expense in the period that the related goods are consumed, or services are performed.
To date, the Company has not experienced significant changes in its estimates of accrued research and development expenses after a reporting period.
License Fees
The Company expenses amounts paid to acquire licenses associated with products under development when the ultimate recoverability of the amounts paid is uncertain and the technology has no alternative future use when acquired. Acquisitions of technology licenses are charged to expense or capitalized based upon management’s assessment regarding the ultimate recoverability of the amounts paid and the potential for alternative future use. The Company has determined that technological feasibility for its product candidate would be reached when the requisite regulatory approvals are obtained to make the product available for sale. Contingent milestone payments are recognized when the related contingency is resolved, and the amounts are paid or become payable. These amounts are expensed to research and development if there is no alternative future use associated with the license or capitalized as an intangible asset if alternative future use of the license exists.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizes net deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations. If management determines that the Company would be able to realize its deferred tax assets in the future in excess of their net recorded amount,
105
management would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions on the basis of a two-step process whereby (1) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. The Company’s policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit. To date, there have been no interest or penalties charged in relation to unrecognized tax benefits.
The Company is subject to taxation in the United States and the United Kingdom (UK). As of December 31, 2023 , the Company’s tax years since inception are subject to examination by taxing authorities in the United States, and the UK tax returns from 2018 forward are subject to examination.
Stock-Based Compensation
The Company recognizes stock-based compensation expense for grants under its 2014 and 2021 Equity Incentive Plans and employee stock purchase plan (ESPP). The Company accounts for all stock-based awards granted to employees and directors at their fair value and recognizes compensation expense over the award’s vesting period. Determining the amount of stock-based compensation to be recorded requires the Company to develop estimates of fair values of stock options as of the grant date. The Company calculates the grant date fair values of stock options using the Black-Scholes valuation model, which requires the input of subjective assumptions, including but not limited to expected stock price volatility over the term of the awards and the expected term of stock options. The fair value of restricted stock awards granted to employees is based on the quoted closing market price per share on grant date.
The Company granted restricted stock awards with performance conditions that are based upon the achievement of pre-specified clinical development or regulatory performance events. As the outcome of each event has inherent risks and uncertainties, and a positive outcome may not be known until the event is achieved, the Company will begin to recognize the value of the performance-based restricted stock awards when the achievement of each performance condition is deemed probable, a determination that requires significant judgment by management. Compensation cost is recognized under the accelerated method and is adjusted in future periods for subsequent changes in the expected outcome of the performance-related conditions.
The Company granted restricted stock awards with market conditions. The Company measures the fair value of stock-based awards with market-based vesting conditions on the date of grant using a Monte Carlo simulation model. In accordance with accounting guidance for awards with market conditions, the stock-based compensation expense will be recognized over the derived service period regardless of whether the award achieves the market condition and will only be adjusted to the extent the service condition is not met.
Foreign Currency Transactions
The functional currency of Reneo Pharma Ltd, the Company’s wholly owned subsidiary in the UK, is the U.S. dollar. All foreign exchange transactional and remeasurement gains and losses are recognized in the consolidated statements of operations and comprehensive loss. For the years ended December 31, 2023 and 2022 , total foreign currency gains and losses were immaterial.
Comprehensive Income or Loss
Comprehensive income or loss is defined as a change in equity during a period from transactions and other events and circumstances from non-owner sources.
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New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standard Board (FASB) issued Accounting Standard Update (ASU) 2016-13, Financial Instruments - Credit Losses (ASC 326), Measurement of Credit Losses on Financial Instruments . The standard amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. For available-for-sale debt securities, entities will be required to recognize an allowance for credit losses rather than a reduction in the carrying value of the asset. Entities will no longer be permitted to consider the length of time that fair value has been less than amortized cost when evaluating when credit losses should be recognized. This new guidance was effective for the Company as of January 1, 2023. The Company adopted the guidance as of January 1, 2023 , with no material impact on its consolidated financial statements and related disclosures.
Recent Accounting Pronouncements Not Yet Adopted
In December 2023, the FASB issued ASU 2023-09, Income Taxes (ASC 740), Improvements to Income Tax Disclosures. The standard will require more detailed information in the rate reconciliation table and for income taxes paid, among other enhancements. The standard is effective for years beginning after December 15, 2025 and early adoption is permitted. The Company is evaluating the impact of this standard on its consolidated financial statements.
3. Net Loss Per Share
The Company computes basic loss per share by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share assumes the conversion, exercise or issuance of all potential common stock equivalents, unless the effect of inclusion would be anti-dilutive. For purposes of this calculation, common stock shares to be issued upon exercise of all outstanding stock options and vesting of restricted stock units were excluded from the diluted net loss per share calculation for the years ended December 31, 2023 and 2022 because such shares are anti-dilutive.
Historical outstanding anti-dilutive securities not included in the diluted net loss per share calculation include the following:
As of December 31,
2023
2022
Common stock options outstanding
5,301,254
5,877,745
Unvested restricted stock units
326,500
329,500
Total
5,627,754
6,207,245
4. Fair Value Measurements
ASC Topic 820, Fair Value Measurement , establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing an asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances.
107
ASC Topic 820 identifies fair value as the exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC Topic 820 establishes a three-tier fair value hierarchy that distinguishes between the following:
• Level 1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities.
• Level 2 – Inputs, other than quoted prices in active markets, which are observable for the asset or liability, either directly or indirectly.
• Level 3 – Unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions.
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. The Company’s financial assets are subject to fair value measurements on a recurring basis.
The Company categorizes its money market funds as Level 1, using the quoted prices in active markets. Commercial paper and U.S. treasury securities are categorized as Level 2, using significant other observable inputs. The fair value of the Company’s investments in certain money market funds is their face value and such instruments are classified as Level 1 and are included in cash and cash equivalents on the consolidated balance sheets.
Investments are reviewed periodically to identify possible other-than-temporary impairments. As the Company has the ability and intends to hold these investments with unrealized losses for a reasonable period of time sufficient for the recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired for any of the periods presented.
In connection with the Company’s chief executive officer’s (CEO) employment agreement, he is entitled to receive a special performance bonus in the amount of $ 7.5 million (Performance Award), payable in cash, common stock or a combination of cash and common stock, at the election of the Company, based on achievement of certain conditions as described in more detail in Note 9. The Company estimated the fair value of the Performance Award using a Monte Carlo simulation, which incorporates the stock price at the date of the valuation and utilizes Level 3 inputs such as volatility, probabilities of success, and other inputs that are not observable in active markets. The Performance Award is required to be measured at fair value on a recurring basis each reporting period, with changes in the fair value recognized in general and administrative expense in the consolidated statements of operations and comprehensive loss over the derived service period of the award.
No assets or liabilities were transferred into or out of their classifications during the years ended December 31, 2023 and 2022.
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The recurring fair value measurement of the Company’s assets and liabilities measured at fair value at December 31, 2023 consisted of the following (in thousands):
Quoted Prices in
Active Markets
For Identical
Items
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Assets
Cash and cash equivalents:
Money market investments
$
10,983
$
—
$
10,983
U.S. treasury securities
—
9,928
—
$
9,928
Short-term investments:
U.S. treasury securities
—
75,331
—
75,331
Total
$
10,983
$
85,259
$
—
$
96,242
Liabilities
Performance award
$
—
$
—
$
7
$
7
Total
$
—
$
—
$
7
$
7
The recurring fair value measurement of the Company’s assets and liabilities measured at fair value at December 31, 2022 consisted of the following (in thousands):
Quoted Prices in
Active Markets
For Identical
Items
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Assets
Cash and cash equivalents:
Money market investments
$
9,365
$
—
$
—
$
9,365
Commercial paper
—
4,978
—
4,978
Short-term investments:
U.S. treasury securities
—
76,253
—
76,253
Commercial paper
—
4,993
—
4,993
Total
$
9,365
$
86,224
$
—
$
95,589
Liabilities
Performance award
$
—
$
—
$
29
$
29
Total
$
—
$
—
$
29
$
29
The following table sets forth a summary of changes in the fair value measurements of the Performance Award liability (in thousands):
Performance
Award
Balance as of January 1, 2023
$
29
Change in fair value
( 22
)
Balance as of December 31, 2023
$
7
109
5. Marketable Debt Securities
The Company’s investments in debt securities are carried at fair value and classified as current assets available-for-sale and represent the investment of funds available for current operations. Unrealized gains and losses on available-for-sale debt securities are included in other comprehensive income or loss, and charged to income or expense in the period when realized. The following tables summarize the gross unrealized gains and losses of the Company’s available-for-sale securities (in thousands):
As of December 31, 2023
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Market
Value
Available-for-sale securities:
U.S. treasury securities
$
75,324
$
8
$
( 1
)
$
75,331
Total
$
75,324
$
8
$
( 1
)
$
75,331
As of December 31, 2022
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Market
Value
Available-for-sale securities:
U.S. treasury securities
$
76,297
$
2
$
( 46
)
$
76,253
Commercial paper
4,993
—
—
4,993
Total
$
81,290
$
2
$
( 46
)
$
81,246
6. Property and Equipment, Net
Property and equipment, net, consisted of the following (in thousands):
As of December 31,
2023
2022
Computer, software and office equipment
$
254
$
300
Leasehold improvements*
—
255
Total property and equipment, gross
254
555
Less: accumulated depreciation and amortization
( 120
)
( 102
)
Total property and equipment, net
$
134
$
453
*All leasehold improvements were fully impaired and written off. For further information see Note 13.
7. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
As of December 31,
2023
2022
Accrued clinical and regulatory
$
3,661
$
1,872
Accrued contract manufacturing cost
1,100
1,583
Accrued compensation*
3,948
807
Accrued other
420
565
Total accrued expenses
$
9,129
$
4,827
*Accrued compensation includes severance costs. For further information see Note 13.
110
8. Leases
The Company’s headquarters are located in Irvine, California, where it leases office space under a lease agreement that expires in November 2026. The Company leases additional office space located in Sandwich, UK under a lease agreement that expires in October 2027 (UK lease), with an option to early terminate in October 2025 with no termination fee. In January 2024, the Company exercised its early termination option . The Company concluded that its current leases are impaired and recognized approximately $ 0.3 million of ROU assets impairment expense for the year ended December 31, 2023. For further information, see Note 13.
At December 31, 2023, the weighted average incremental borrowing rate was 5 % and the weighted average remaining lease term was 3.8 years for the operating leases held by the Company. For the years ended December 31, 2023 and 2022, cash paid for amounts included for the measurement of lease liabilities was $ 0.5 million. For the years ended December 31, 2023 and 2022, operating lease expense was $ 0.4 million and $ 0.5 million, respectively.
Maturities of lease liabilities by fiscal year for the Company’s operating leases are as follows:
As of December 31, 2023
2024
$
381
2025
367
2026
285
Total lease payments
1,033
Less: Imputed interest
( 60
)
Present value of lease liabilities
$
973
9. Stock-Based Compensation
In March 2021, the Company’s Board of Directors adopted the Company’s 2021 Equity Incentive Plan (2021 Plan), which is the successor to the Company’s 2014 Equity Incentive Plan (2014 Plan). As of the effective date of the 2021 Plan, awards granted under the 2014 Plan that are forfeited or otherwise become available under the 2014 Plan will be included and available for issuance under the 2021 Plan. Under the 2021 Plan, the Company may grant stock options, stock appreciation rights, restricted stock awards, restricted stock units, and other awards to individuals who are employees, officers, directors or consultants of the Company and its affiliates.
Under the 2014 Plan, certain employees were granted the ability to early exercise their options. The shares of common stock issued pursuant to the early exercise of unvested stock options are restricted and continue to vest over the requisite service period after issuance. The Company has the option to repurchase any unvested shares at the original purchase price upon any voluntary or involuntary termination. The shares purchased by the employees pursuant to the early exercise of stock options are not deemed, for accounting purposes, to be outstanding until those shares vest. As of December 31, 2023 , there were no unvested shares of common stock outstanding that were issued pursuant to the early exercise of stock options.
Shares Reserved for Future Issuance
As of December 31, 2023, the Company had reserved shares of its common stock for future issuance as follows:
Shares
Reserved
Common stock options outstanding
5,301,254
Unvested restricted stock units
326,500
Available for future grants under the 2021 Equity Incentive Plan
2,109,225
Available for future grants under the 2021 Employee Stock Purchase Plan
445,890
Total shares of common stock reserved
8,182,869
111
Stock Options
A summary of the Company’s stock option activity and related information for the year ended December 31, 2023 is as follows:
Options
Outstanding
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual Term (in years)
Aggregate
Intrinsic
Value (in thousands)
Outstanding at December 31, 2022
5,877,745
$
4.47
8.2
$
907
Granted
578,915
6.85
Exercised
( 173,824
)
2.31
Forfeited/Expired
( 981,582
)
4.69
Outstanding at December 31, 2023
5,301,254
$
4.76
6.9
$
—
Vested at December 31, 2023
3,228,343
$
4.91
6.1
$
—
Exercisable at December 31, 2023
3,592,125
$
4.91
6.2
$
—
Options exercisable at December 31, 2023 include vested options and options eligible for early exercise. All outstanding options as of December 31, 2023 are expected to vest.
Unrecognized stock-based compensation expense at December 31, 2023 was $ 5.9 million, which is expected to be recognized over a weighted-average vesting term of 2.0 years.
The Company estimates stock awards fair value on the date of grant using the Black-Scholes valuation, with the vesting being subject to service requirements. The Company accounts for forfeitures when they occur. The weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of the employee stock option grants were as follows:
Year Ended December 31,
2023
2022
Risk-free interest rate
4.0
%
3.4
%
Expected volatility
88.6
%
84.8
%
Expected term (in years)
5.9
6.0
Expected dividend yield
—
%
—
%
Risk-free interest rate. The Company bases the risk-free interest rate assumption on the U.S. Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued.
Expected volatility. The expected volatility assumption was based on the volatilities of a peer group of similar companies whose share prices are publicly available. The peer group was developed based on companies in the biotechnology industry.
Expected term. The expected term represents the period of time that options are expected to be outstanding. Because the Company does not have historical exercise behavior, it determines the expected life assumption using the simplified method, which is an average of the contractual term of the option and its vesting period.
Expected dividend yield. The Company bases the expected dividend yield assumption on the fact that it has never paid cash dividends and has no present intention to pay cash dividends.
Restricted Stock Units (RSUs)
RSUs consist of time-based units (TSUs), performance-based units (PSUs) and market-based units (MSUs). The following table summarizes RSU activities during the year ended December 31, 2023:
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Number of
RSUs
Weighted-Average
Grant Date
Fair Value
Unvested at December 31, 2022
329,500
$
5.67
Granted
137,000
5.82
Cancelled
( 140,000
)
5.35
Unvested at December 31, 2023
326,500
$
5.90
Time-Based Units
TSUs typically vest over four years , with 25 % vesting on the one-year anniversary of the employee’s hire date and the remainder vesting monthly or quarterly over the following three years subject to the employee’s continued employment with the Company through the vesting dates. The fair value of the awards was based on the value of the Company’s common stock at the grant date of the award and expense is recognized on a straight-line basis. The Company had 57,000 unvested shares underlying TSUs as of December 31, 2023. The stock-based compensation expense related to such TSUs for the year ended December 31, 2023 was immaterial. Unrecognized stock-based compensation expense at December 31, 2023 was $ 0.3 million, which is expected to be recognized over a weighted-average vesting term of 1.3 years.
Performance-Based Units
The vesting of the PSUs is based on the Company achieving certain regulatory milestones and is subject to the employee’s continued employment with the Company through the achievement date. The fair value of the awards was based on the value of the Company’s common stock at the grant date of the award and expense recognition is based on the probability of achieving the performance conditions. Stock-based compensation expense is adjusted in future periods for subsequent changes in the expected outcome of the performance conditions. The Company had 149,500 unvested shares underlying PSUs as of December 31, 2023. The Company concluded that achievement of the performance conditions was not probable as of December 31, 2023 and 2022 , and therefore no stock-based compensation expense was recognized for the years ended December 31, 2023 and 2022 in connection with the PSUs. As of December 31, 2023 , there was $ 1.1 million of unrecognized stock-based compensation expense related to PSUs that were deemed not probable of vesting.
Market-Based Units
The vesting of the MSUs is based on the Company’s closing stock price trading above $ 20 per share for 30 consecutive trading days subject to the employee’s continued employment with the Company through the date of achievement. The share price of the Company’s common stock on the date of issuance of the MSUs was $ 2.78 per share. The fair value was based on Monte Carlo simulation model on the grant date. Stock-based compensation expense is recognized over the derived service period of approximately 3 years. The Company had 120,000 unvested shares underlying MSUs as of December 31, 2023. Stock-based compensation expense related to the MSUs during the years ended December 31, 2023 and 2022 was immaterial. As of December 31, 2023, unrecognized stock-based compensation expense related to the MSUs was immaterial.
Performance Award
In connection with the CEO’s employment agreement, he is entitled to receive a Performance Award in the amount of $ 7.5 million, payable in cash, common stock or a combination of cash and common stock, at the election of the Company, in the event that (i) the Company’s market value exceeds $ 750.0 million utilizing the volume-weighted average of the closing sale price of its common stock on the Nasdaq Stock Market or other principal exchange for each of the 30 trading days immediately prior to the measurement date, or (ii) the fair market value of the net proceeds available for distribution to the Company’s stockholders in connection with a
113
change in control as defined in the Company’s severance benefit plan, as determined in good faith by its Board of Directors, exceeds $ 750.0 million. The Company has determined that the Performance Award is subject to ASC 718, Compensation – Stock Compensation and includes both market and performance conditions. Since the Company’s initial public offering (IPO), neither of the events have yet been satisfied. The Company estimated the fair value of the Performance Award at each reporting period using the Monte Carlo simulation (Note 4), which is recognized as stock-based compensation expense over the derived service period. For the years ended December 31, 2023 and 2022 , the Company reversed approximately $ 22,000 and $ 0.4 million in stock-based compensation expenses, respectively, as a direct result of the decreased value of the Performance Award caused by a decline in the Company’s common stock price.
2021 Employee Stock Purchase Plan
In March 2021, the Company’s Board of Directors adopted the ESPP, which became effective immediately prior to the execution of the underwriting agreement in connection with the Company’s IPO. As of December 31, 2023 , 288,466 shares have been issued under the ESPP.
In September 2021, the compensation committee of the Company’s Board of Directors adopted the Company’s 2021 UK Sharesave Sub-plan (SAYE). An allocation of 25,875 shares of common stock from the ESPP reserve pool was approved and reserved for issuance under the SAYE. No shares have been issued under the SAYE through December 31, 2023.
The stock-based compensation expense related to the ESPP and the SAYE for the years ended December 31, 2023 and 2022 , was $ 0.4 million and $ 0.2 million, respectively.
Stock-Based Compensation Expense
The following table summarizes stock-based compensation expense, including expense associated with options, TSUs, MSUs and award modifications for unvested options, reflected in the consolidated statements of operations and comprehensive loss (in thousands):
Year Ended December 31,
2023
2022
Research and development
$
1,815
$
1,593
General and administrative
3,297
2,727
Total
$
5,112
$
4,320
10. License Agreement
In December 2017, the Company entered into a license agreement (the vTv License Agreement) with vTv Therapeutics LLC (vTv Therapeutics), under which the Company obtained an exclusive, worldwide, sublicensable license under certain vTv Therapeutics intellectual property to develop, manufacture and commercialize PPARδ agonists and products containing such PPARδ agonists, including mavodelpar, for any therapeutic, prophylactic or diagnostic application in humans. Since the Company has suspended all development activity related to mavodelpar, it is not currently performing any development efforts under the vTv License Agreement.
To date, the Company has paid a $ 3.0 million upfront payment, $ 2.0 million in milestone payments and issued an aggregate of 576,443 shares of its common stock to vTv Therapeutics.
On October 30, 2023, the Company repurchased from vTv Therapeutics all 576,443 shares of its common stock previously issued to vTv Therapeutics under the vTv License Agreement for an aggregate purchase price of approximately $ 4.4 million in a private, non-underwritten transaction.
114
Upon the achievement of certain pre-specified development and regulatory milestones, the Company is also required to pay vTv Therapeutics milestone payments totaling up to $ 64.5 million. The Company is also required to pay vTv Therapeutics up to $ 30.0 million in total sales-based milestones upon achievement of certain sales thresholds of the licensed product. As of December 31, 2023, the Company has paid an aggregate of $ 2.0 million in development and regulatory milestone payments. In addition, the Company is obligated to make royalty payments to vTv Therapeutics at mid-single digit to low teen percentage royalty rates, based on tiers of annual net sales of licensed products, subject to certain customary reductions. There were no milestone payments achieved or recorded for the years ended December 31, 2023 and 2022.
11. Income Taxes
The Company’s net loss was generated in the following jurisdictions (in thousands):
Year Ended December 31,
2023
2022
Domestic
$
( 78,132
)
$
( 51,994
)
Foreign
744
39
Net loss
$
( 77,388
)
$
( 51,955
)
The components of net deferred taxes consisted of the following (in thousands):
As of December 31,
2023
2022
Deferred tax assets:
NOL carryforwards
$
23,490
$
16,381
Capitalized research and development expenses
15,274
7,465
Credit carryforwards
6,111
4,061
Intangible assets
2,902
3,202
Compensation accruals
1,885
989
Operating lease liabilities
245
316
Depreciation
89
78
Other
2
2
Gross deferred tax assets
49,998
32,494
Less valuation allowance
( 49,872
)
( 32,214
)
Total deferred tax assets
126
280
Deferred tax liabilities:
ROU assets
( 126
)
( 280
)
Net deferred tax assets (liabilities)
$
—
$
—
For the years ended December 31, 2023 and 2022 , the Company recorded no provision for income taxes. A reconciliation of the effective tax rate to the amount computed by applying the statutory federal income tax rate to the loss from operations is summarized for the years ended December 31, 2023 and 2022, as follows:
As of December 31,
2023
2022
U.S. federal statutory income tax rate
21.0
%
21.0
%
Tax credits, net
2.5
%
3.4
%
Return-to-provision adjustment
0.1
%
0.5
%
Other
( 0.1
)%
( 0.8
)%
GILTI inclusion
( 0.4
)%
( 0.3
)%
Foreign Rate Differential
( 0.1
)%
—
Valuation allowance
( 23.0
)%
( 23.8
)%
U.S. federal effective tax rate
0.0
%
0.0
%
115
The Company had federal net operating loss (NOL) carryforwards available of approximately $ 110.9 million as of December 31, 2023, before consideration of limitations under Section 382 of the Internal Revenue Code of 1986, as amended (Section 382), as further described below. The federal NOLs generated after 2017 of $ 109.3 million will carry forward indefinitely. NOLs generated prior to 2018 of $ 1.6 million will begin to expire in 2034 . Additionally, the Company had state NOL carryforwards available of $ 1.8 million as of December 31, 2023 . The state NOLs may be used to offset future taxable income and will begin to expire in 2034 . The Company has generated UK NOLs of $ 0.2 million which carryforward indefinitely.
At December 31, 2023, the Company had federal and state tax credit carry forwards of approximately $ 16.9 million and $ 0.7 million, respectively. The Company has not performed a formal research and development credit study with respect to these credits. The federal credits will begin to expire in 2034 , if unused, and the state credits carry forward indefinitely.
The future utilization of the Company’s NOL and tax credit carryforwards to offset future taxable income may be subject to a substantial annual limitation as a result of changes in ownership by stockholders that hold 5 % or more of the Company’s common stock. An assessment of such ownership changes under Section 382 was not completed through December 31, 2023. To the extent that an assessment is completed in the future, the Company’s ability to utilize tax attributes could be restricted on a year-by-year basis and certain attributes could expire before they are utilized. The Company will examine the impact of any potential ownership changes in the future.
The Company has elected to record the inclusion related to the Global Intangible Low-Taxed Income (GILTI) in the period incurred. The estimated GILTI inclusion generated by the Company’s wholly-owned controlled foreign corporation in the UK for the year ended December 31, 2023 was $ 1.5 million. This amount is included in the income tax provision, however, has zero impact to the provision due to the full valuation allowance.
The Company has established a full valuation allowance for its deferred tax assets due to uncertainties that preclude it from determining that it is more likely than not that the Company will be able to generate sufficient taxable income to realize such assets. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2023. Such objective evidence limits the ability to consider other subjective evidence such as the Company’s projections for future growth. Based on this evaluation, as of December 31, 2023, a full valuation allowance of $ 49.9 million has been recorded against the Company net deferred tax assets, as the Company has determined that none of the Company’s balance of deferred tax assets is more likely than not to be realized. The amount of the deferred tax assets considered realizable, however, could be adjusted in the future if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence, such as estimates of future taxable income during carryforward periods and the Company’s projections for growth.
The following table summarizes the changes to unrecognized tax benefits (in thousands):
Year Ended December 31,
2023
2022
Beginning balance of unrecognized tax benefits
$
7,094
$
2,999
Additions based on tax positions related to the current year
4,331
4,095
Ending balance of unrecognized tax benefits
$
11,425
$
7,094
The amount of the unrecognized tax benefits that would impact the effective tax rate, absent the valuation allowance, would be $ 11.0 million. Due to the full valuation allowance, the impact, however, is zero. At December 31, 2023 and 2022 , the Company has no t accrued any interest or penalties related to uncertain tax positions. The Company does not anticipate that there will be a significant change in the amount of unrecognized tax benefits over the next 12 months. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.
116
The Company is subject to taxation in the United States and the UK. The Company’s federal and state returns since inception are subject to examination due to the carryover of net operating losses. The Company has not been, nor is it currently, under examination by any tax authorities. The UK tax returns from 2018 forward are subject to examination by the UK tax authorities.
12. Commitments and Contingencies
Legal Proceedings
The Company is currently not a party to any legal proceedings, nor is the Company aware of any threatened or pending litigation . However, from time-to-time in the future, the Company could be involved in disputes, including litigation, relating to claims arising out of operations in the normal course of business, which may have a material adverse effect on the Company’s consolidated results of operations or financial position.
401(k) Plan
The Company maintains a defined contribution 401(k) plan available to eligible employees. Employee contributions are voluntary and are determined on an individual basis, limited to the maximum amount allowable under federal tax regulations. Matching contributions to the 401(k) plan are made for certain eligible employees to meet non-discrimination provisions of the plan. During the years ended December 31, 2023 and 2022 , the expense recorded by the Company was $ 0.2 million and immaterial, respectively.
13. Financial Impact of Suspension of Mavodelpar Development Activities
On December 14, 2023, the Company announced that its pivotal STRIDE study did not meet its primary or secondary efficacy endpoints. As a result, the Company suspended the development activities of its only product candidate, mavodelpar, and implemented cash preservation activities, including substantial workforce reductions.
In December 2023, the Company implemented a workforce reduction and recognized approximately $ 2.5 million in severance and continuation of benefit expenses for the year ended December 31, 2023.
In addition, the Company assessed the impairment of its ROU and fixed assets due to the suspension of mavodelpar’s development activities and concluded that its current leases and leasehold improvements were impaired. The Company recognized approximately $ 0.3 million and $ 0.4 million of impairment expenses for ROU and leasehold improvements for the year ended December 31, 2023, respectively.
14. Subsequent Events
In February 2024, the Company implemented a second workforce reduction. As a result of this workforce reduction, the Company will recognize approximately $ 1.6 million in severance and continuation of benefit expenses in first quarter of 2024.
117
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.