Rani Therapeutics Holdings, Inc. 10-K

Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) 109 Consolidated Balance Sheets as of December 31, 2021 and 2020 110 Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2021 and 2020 111 Consolidated Statements of Changes in Stockholders’ Equity/Convertible Preferred Units and Members' Deficit for the Years ended December 31, 2021 and 2020 112 Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020 113 Notes to the Consolidated Financial Statements 114 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Rani Therapeutics Holdings, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Rani Therapeutics Holdings, Inc. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity / convertible preferred units and members' deficit and cash flows for each of the two years in the period ended December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, 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 2019. Redwood City, California March 30, 2022 RANI THERAPEUTICS HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except par value) December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 117,453 $ 73,058 Related party note receivable — 1,720 Prepaid expenses 2,142 167 Total current assets 119,595 74,945 Property and equipment, net 4,612 4,470 Total assets $ 124,207 $ 79,415 Liabilities, Convertible Preferred Units and Stockholders' Equity / Members’ Deficit Current liabilities: Accounts payable $ 1,080 $ 537 Related party payable 126 145 Accrued expenses 1,434 550 Deferred revenue — 2,717 Current portion of long-term debt — 1,359 Total current liabilities 2,640 5,308 Preferred unit warrant liability — 320 Long-term debt, less current portion — 2,412 Total liabilities 2,640 8,040 Commitments and contingencies (Note 10) Convertible preferred units — 184,714 Stockholders' equity / (members’ deficit): Common units — 664 Preferred stock, $ 0.0001 par value - 20,000 shares authorized; no ne issued and outstanding as of December 31, 2021 — — Class A common stock, $ 0.0001 par value - 800,000 shares authorized; 19,712 issued and outstanding as of December 31, 2021 2 — Class B common stock, $ 0.0001 par value - 40,000 shares authorized; 29,290 issued and outstanding as of December 31, 2021 3 — Class C common stock, $ 0.0001 par value - 20,000 shares authorized; no ne issued and outstanding as of December 31, 2021 — — Additional paid-in capital 55,737 — Accumulated deficit ( 8,331 ) ( 114,003 ) Total stockholders' equity attributable to Rani Therapeutics Holdings, Inc. / (members' deficit) 47,411 ( 113,339 ) Non-controlling interest 74,156 — Total stockholders' equity / (members' deficit) 121,567 ( 113,339 ) Total liabilities, convertible preferred units and stockholders' equity / (members' deficit) $ 124,207 $ 79,415 The accompanying notes are an integral part of these consolidated financial statements. RANI THERAPEUTICS HOLDINGS, INC. Consolidated Statements of Operations and Comprehensive Loss (in thousands, except per share amounts) Year Ended December 31, 2021 2020 Contract revenue $ 2,717 $ 462 Operating expenses Research and development 26,482 12,044 General and administrative 27,834 4,962 Total operating expenses $ 54,316 $ 17,006 Loss from operations ( 51,599 ) ( 16,544 ) Other income (expense), net Interest income 89 63 Loss on extinguishment of debt ( 700 ) — Interest expense and other, net ( 466 ) ( 124 ) Change in estimated fair value of preferred unit warrant ( 371 ) ( 63 ) Loss before income taxes ( 53,047 ) ( 16,668 ) Income tax expense ( 41 ) ( 35 ) Net loss and comprehensive loss $ ( 53,088 ) $ ( 16,703 ) Net loss attributable to non-controlling interest ( 44,757 ) ( 16,703 ) Net loss attributable to Rani Therapeutics Holdings, Inc. $ ( 8,331 ) $ — Net loss per Class A common share attributable to Rani Therapeutics Holdings, Inc., basic and diluted $ ( 0.43 ) Weighted-average Class A common shares outstanding—basic and diluted 19,534 The accompanying notes are an integral part of these consolidated financial statements. RANI THERAPEUTICS HOLDINGS, INC. Consolidated Statements of Changes in STOCKHOLDERS’ Equity/CONVERTIBLE PREFERRED UNITS AND MEMBERS' Deficit (in thousands) Class A Common Stock Class B Common Stock Convertible Preferred Units Members’ Deficit Shares Amount Shares Amount Additional Paid In Capital Accumulated Deficit Non-Controlling Interest Total Stockholders' Equity/(Members' Deficit) Balance at December 31, 2019 $ 115,505 $ ( 96,636 ) — — — — — — — $ ( 96,636 ) Cashless exercise of Series B Preferred warrants 718 — — — — — — — — — Issuance of Series E Preferred Units, net of issuance costs of $ 190 68,491 — — — — — — — — — Net loss — ( 16,703 ) — — — — — — — $ ( 16,703 ) Balance at December 31, 2020 $ 184,714 $ ( 113,339 ) — $ — — $ — $ — $ — $ — $ ( 113,339 ) Activity prior to initial public offering ("IPO") and related Organizational Transactions Issuance of Series E preferred units 6,320 — — — — — — — — — Equity-based compensation from secondary sales transactions — 453 — — — — — — — 453 Exercise of warrant for common units — 26 — — — — — — — 26 Settlement of preferred unit warrant liability 691 — — — — — — — — — Equity-based compensation — 17,324 — — — — — — — 17,324 Net loss — ( 31,727 ) — — — — — — — ( 31,727 ) Effects of the IPO and related Organizational Transactions Effects of Organizational Transactions ( 191,725 ) 127,263 12,048 1 29,290 3 18,106 — 46,352 191,725 Issuance of Class A common stock in connection with the IPO, net of issuance costs of $ 10,686 — — 7,667 1 — — 73,647 — — 73,648 Non-controlling interest adjustment for purchase of newly issued Class A units of Rani LLC with proceeds from the IPO — — — — — — ( 37,895 ) — 37,895 — Net loss — — — — — — — ( 149 ) ( 233 ) ( 382 ) Activity subsequent to the IPO and related Organizational Transactions Equity-based compensation — — — — — — 1,880 — 2,940 4,820 Forfeiture of restricted stock awards — — ( 3 ) — — — ( 1 ) — ( 1 ) ( 2 ) Net loss — — — — — — — ( 8,182 ) ( 12,797 ) ( 20,979 ) Balance at December 31, 2021 $ — $ — 19,712 $ 2 29,290 $ 3 $ 55,737 $ ( 8,331 ) $ 74,156 $ 121,567 The accompanying notes are an integral part of these consolidated financial statements. RANI THERAPEUTICS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2021 2020 Cash flows from operating activities Net loss $ ( 53,088 ) $ ( 16,703 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 497 589 Equity-based compensation expense 22,595 — Change in fair value of preferred unit warrant liability 371 63 Loss on extinguishment of debt 700 — Other 109 47 Changes in operating assets and liabilities: Prepaid expenses and other assets ( 1,975 ) ( 9 ) Accounts payable 543 933 Accrued expenses 739 ( 636 ) Related party payable ( 19 ) ( 1,782 ) Deferred revenue ( 2,717 ) 2,538 Net cash used in operating activities ( 32,245 ) ( 14,960 ) Cash flows from investing activities Purchases of property and equipment ( 506 ) ( 1,200 ) Net cash used in investing activities ( 506 ) ( 1,200 ) Cash flows from financing activities Proceeds from issuance of Class A common stock sold in the IPO, net of issuance costs 73,648 — Proceeds from issuance of preferred units, net of issuance costs 6,320 68,491 Proceeds from exercise of warrants for common units 26 — Proceeds from the Paycheck Protection Program Loan — 1,254 Repayment of the Paycheck Protection Program Loan ( 1,254 ) — Proceeds from issuance of convertible note, net of issuance costs — 2,781 Repayment of convertible note ( 3,314 ) — Principal and interest repayments from related party for note receivable 1,720 156 Net cash provided by financing activities 77,146 72,682 Net increase in cash and cash equivalents 44,395 56,522 Cash and cash equivalents, beginning of period 73,058 16,536 Cash and cash equivalents, end of period $ 117,453 $ 73,058 Supplemental disclosures of cash flow information Cash paid for interest $ 285 $ 57 Cash paid for income taxes $ 73 $ — Supplemental disclosures of non-cash investing and financing activities Property and equipment purchases included in accounts payable and accrued expenses $ 145 $ — Settlement of preferred unit warrant liability $ 691 $ — Exchange of Class A Units of Rani LLC from the Former LLC Owners $ 132,527 $ — Reissuance of previously expired warrant for Series B preferred units $ — $ 718 Cashless exercise of warrant for Series B preferred units $ — $ 718 The accompanying notes are an integral part of these consolidated financial statements. RANI THERAPEUTICS HOLDINGS, INC. Notes to THE Consolidated Financial Statements 1. Organization and Nature of Business Description of Business Rani Therapeutics Holdings, Inc. (“Rani Holdings”) was formed as a Delaware corporation in April 2021 for the purpose of facilitating an initial public offering (“IPO”) of its Class A common stock, and to facilitate certain organizational transactions and to operate the business of Rani Therapeutics, LLC (“Rani LLC”) and its consolidated subsidiary, Rani Management Services, Inc. (“RMS”). Rani Holdings and its consolidated subsidiaries, Rani LLC and RMS are collectively referred to herein as “Rani” or the “Company.” The Company is a clinical stage biotherapeutics company focusing on advancing technologies to enable the administration of biologics orally, to provide patients, physicians, and healthcare systems with a convenient alternative to painful injections. The Company is advancing a portfolio of oral biologic therapeutics using its proprietary delivery technology, the RaniPill capsule, which can deliver any drug, including large molecules such as peptides, proteins, and antibodies. The Company is headquartered in San Jose, California and operates in one segment. Up to December 31, 2019, Rani LLC maintained no employees of its own and contracted InCube Labs, LLC (“ICL”), the majority common unit holder of Rani LLC and a related party, through service agreements to provide research, development and administrative services. ICL and Rani LLC have common management and interest holders and, in the course of performing under the terms of the service agreements, ICL employees acted on behalf of Rani LLC. Effective January 1, 2020, the ICL personnel that were substantially dedicated to providing services to Rani LLC were hired by RMS as full-time employees (Note 6). Initial Public Offering and Organizational Transactions In August 2021, the Company closed its IPO and sold 7,666,667 shares of its Class A common stock, including shares issued pursuant to the exercise in full of the underwriters’ option, for cash consideration of $ 11.00 per share and received approximately $ 73.6 million in net proceeds, after deducting underwriting discounts, offering costs and commissions. The Company used the proceeds from the IPO to purchase 7,666,667 newly issued economic nonvoting Class A units (“Class A Units”) of Rani LLC. In connection with the IPO, the Company was party to the following organizational transactions (the “Organizational Transactions”): • Amended and restated Rani LLC’s operating agreement (the “Rani LLC Agreement”) to appoint the Company as the sole managing member of Rani LLC and effectuated an exchange of all outstanding (i) convertible preferred units, automatic or net exercised warrants to purchase preferred units and common units, and common units of Rani LLC, into Class A Units and an equal number of voting noneconomic Class B units (“Class B Units”) and (ii) all Profits Interests into Class A Units. In connection with the closing of the IPO, each LLC interest was exchanged 1 for 0.5282 as determined and predicated on the initial public offering price of the Company’s Class A common stock; • Amended and restated the Company’s certificate of incorporation in July 2021, to provide for the issuance of (i) Class A common stock, each share of which entitles its holders to one vote per share , (ii) Class B common stock, each share of which entitles its holders to 10 votes per share on all matters presented to the Company's stockholders , (iii) Class C common stock, which has no voting rights, except as otherwise required by law and (iv) preferred stock; • Exchanged 12,047,925 shares of Class A common stock for existing Class A Units of Rani LLC held by certain individuals and entities (the “Former LLC Owners”) on a one-for-one basis; • Issued 29,290,391 shares of Class B common stock to the certain individuals and entities that continued to hold Class A Units in Rani LLC after the IPO (the “Continuing LLC Owners”) in return for an equal amount of Rani LLC Class B Units; • Entered into a Registration Rights Agreement with certain of the Continuing LLC Owners. The Continuing LLC Owners are entitled to exchange, subject to the terms of the Rani LLC Agreement, the Class A Units they hold in Rani LLC, together with the shares they hold of the Company Class B common stock (together referred to as a "Paired Interest"), in return for shares of the Company’s Class A common stock on a one-for-one basis provided that, at the Company’s election, the Company has the ability to effect a direct exchange of such Class A common stock or make a cash payment equal to a volume weighted average market price of one share of Class A common stock for each Paired Interest redeemed. Any shares of Class B common stock will be cancelled on a one-for-one basis if, at the election of the Continuing LLC Owners, the Company redeems or exchanges such Paired Interest pursuant to the terms of the Rani LLC Agreement. Certain individuals who continue to own interests in Rani LLC but do not hold shares of the Company’s Class B common stock have the ability to exchange their Class A Units of Rani LLC for 1,545,522 shares of the Company’s Class A common stock. Liquidity The Company has incurred recurring losses since its inception, including net losses of $ 53.1 million for the year ended December 31, 2021. As of December 31, 2021 , the Company had an accumulated deficit of $ 8.3 million and for the year ended December 31, 2021 had negative cash flows from operations of $ 32.2 million. The Company expects to continue to generate operating losses and negative operating cash flows for the foreseeable future as it continues to develop the RaniPill capsule. The Company expects that its cash and cash equivalents of $ 117.5 million as of December 31, 2021 will be sufficient to fund its operations through at least twelve months from the date the consolidated financial statements are issued. The Company expects to finance its future operations with its existing cash and through strategic financing opportunities that could include, but are not limited to, future offerings of its equity, collaboration or licensing agreements, or the incurrence of debt. However, there is no guarantee that any of these strategic or financing opportunities will be executed or realized on favorable terms, if at all, and some could be dilutive to existing stockholders and holders of interests in the Company. The Company will not generate any revenue from product sales unless, and until, it successfully completes clinical development and obtains regulatory approval for the RaniPill capsule. If the Company obtains regulatory approval for the RaniPill capsule, it expects to incur significant expenses related to developing its internal commercialization capability to support manufacturing, product sales, marketing, and distribution. The Company’s ability to raise additional capital through either the issuance of equity or debt, is dependent on a number of factors including, but not limited to, the market interest of the Company, which itself is subject to a number of development and business risks and uncertainties, as well as the uncertainty that the Company would be able to raise such additional capital at a price or on terms that are favorable to the Company. Market volatility resulting from the novel coronavirus disease (“COVID-19”) pandemic or other factors could also adversely impact the Company’s ability to access capital when and as needed. 2. Summary of Significant Accounting Policies Basis of Presentation These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Company operates and controls all of the business and affairs of Rani LLC and, through Rani LLC and its subsidiary, conducts its business. Because the Company manages and operates the business and controls the strategic decisions and day-to-day operations of Rani LLC and also has a substantial financial interest in Rani LLC, the Company consolidates the financial results of Rani LLC, and a portion of its net loss is allocated to the non-controlling interests in Rani LLC held by the Continuing LLC Owners. All intercompany accounts and transactions have been eliminated in consolidation. The Organizational Transactions were considered transactions between entities under common control. As a result, the consolidated financial statements for periods prior to the IPO and the Organizational Transactions have been adjusted to combine the previously separate entities for presentation purposes. Variable Interest Entities The Company consolidates all entities that it controls through a majority voting interest or as the primary beneficiary of a variable interest entity (“VIE”). In determining whether the Company is the primary beneficiary of an entity, the Company applies a qualitative approach that determines whether it has both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. The Company’s determination about whether it should consolidate such VIEs is made continuously as changes to existing relationships or future transactions may result in a consolidation event. Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in the Company’s consolidated financial statements and accompanying notes. These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Estimates include, but are not limited to, revenue recognition, equity-based compensation expense, accrued research and development costs and, until the occurrence of the Company's IPO, the fair value of Profits Interests and preferred unit warrants. Actual results may differ materially and adversely from these estimates. Revenue Recognition The Company enters into evaluation arrangements with certain pharmaceutical partners, under which the Company performs evaluation services of the partner’s drug molecules using the RaniPill capsule. Revenue is recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To determine revenue recognition for its arrangements with customers, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Revenue for an individual contract is recognized at the related transaction price, which is the amount the Company expects to be entitled to in exchange for transferring these services. The terms of the evaluation services agreements usually include payments for evaluation services and evaluation milestones based on a decision to extend the agreement. The transaction price of the evaluation services contracts may include variable consideration. Application of the constraint for variable consideration requires judgment. The constraint for variable consideration is applied such that it is probable a significant reversal of revenue will not occur when the uncertainty associated with the contingency is resolved. Application of the constraint for variable consideration is updated at each reporting period as a revision to the estimated transaction price. For arrangements where the anticipated period between timing of transfer of services and the timing of payment is one year or less, the Company has elected to not assess whether a significant financing component exists. The Company recognizes evaluation services revenue over the period in which evaluation services are provided. Specifically, the Company recognizes revenue using an output method to measure progress, using samples processed relative to total expected samples to be processed as its measure of progress. For services under these arrangements, costs incurred are included in research and development expenses in the Company’s consolidated statements of operations and comprehensive loss. Customer options, such as options granted to allow a customer to acquire later stage evaluation services, are evaluated at contract inception in order to determine whether those options provide a material right (i.e., an optional good or service offered for free or at a discount) to the customer. If the customer options represent a material right, the material right is treated as a separate performance obligation at the outset of the arrangement. The Company allocates the transaction price to material rights based on the standalone selling price, and revenue is recognized when or as the future goods or services are transferred or when the option expires. Customer options that are not material rights do not give rise to a separate performance obligation, and as such, the additional consideration that would result from a customer exercising an option in the future is not included in the transaction price for the current contract. Instead, the option is deemed a marketing offer, and additional option fee payments are recognized or being recognized as revenue when the licensee exercises the option. The exercise of an option that does not represent a material right is treated as a separate contract for accounting purposes. Revenue is recognized for each distinct performance obligation as control is transferred to the customer. The Company recognizes revenue from its evaluation services over time as services are delivered, using a cost-based input method of revenue recognition over the contract term. The cost-based input measured is based on an estimate of total costs to be incurred to deliver the services over the contract period compared to costs incurred to date for each contract. The Company’s evaluation of estimated costs to perform the services typically includes estimates for effort related to contracted research, formulation, and animal testing. These estimates are based on the Company’s reasonable assumptions and its historical experience. Actual results may differ materially and adversely from these estimates. Incremental costs of obtaining contracts are expensed when incurred when the amortization period of the assets that otherwise would have been recognized is one year or less. To date, none of these costs have been material. The costs to fulfill the contracts are determined to be immaterial and are recognized as an expense when incurred. Contract assets are generated when contractual billing schedules differ from revenue recognition timing and the Company records a contract receivable when it has an unconditional right to consideration. No contract assets balance was recorded as of December 31, 2021 or December 31, 2020. Contract liabilities are recorded as deferred revenue when cash payments are received or due in advance of performance or where the Company has unsatisfied performance obligations. As of December 31, 2020 , the Company had deferred revenue of $ 2.7 million. There was no deferred revenue as of December 31, 2021 . Concentrations of Credit Risk and Other Risks and Uncertainties Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains accounts in federally insured financial institutions in excess of federally insured limits. The Company also holds money market funds that are not federally insured. However, management believes the Company is not exposed to significant credit risk due to the financial strength of the depository institutions in which these deposits are held and of the money market funds and other entities in which these investments are made. In December 2019, a novel strain of coronavirus, which causes the disease known as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 coronavirus has spread globally. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The COVID-19 pandemic has impacted and may continue to impact the Company’s third-party manufacturers and suppliers, which could disrupt its supply chain or the availability or cost of materials. The effects of the public health directives and the Company’s work-from-home policies may negatively impact productivity, disrupt its business, and delay clinical programs and timelines and future clinical trials, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on the Company’s ability to conduct business in the ordinary course. These and similar, and perhaps more severe, disruptions in the Company’s operations could negatively impact business, results of operations and financial condition, including its ability to obtain financing. To date, the Company has not incurred impairment losses in the carrying values of its assets as a result of the pandemic and is not aware of any specific related event or circumstances that would require the Company to revise its estimates reflected in these consolidated financial statements. The Company cannot be certain what the overall impact of the COVID-19 pandemic will be on its business and prospects. The extent to which the COVID-19 pandemic will further directly or indirectly impact its business, results of operations, financial condition, and liquidity, including planned and future clinical trials and research and development costs, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19, the actions taken to contain or treat it, and the duration and intensity of the related effects. In addition, the Company could see some limitations on employee resources that would otherwise be focused on its operation, including but not limited to sickness of employees or their families, the desire of employees to avoid contact with large groups of people, and increased reliance on working from home. If the financial markets and/or the overall economy are impacted for an extended period, the Company’s business, financial condition, results of operations and prospects may be adversely affected. Cash and Cash Equivalents The Company considers all cash held on deposit and highly liquid investments purchased with original or remaining maturities of less than three months at the date of purchase to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value. The Company’s cash and cash equivalents consist of balances held in demand depositary accounts and money market funds. The Company limits its credit risk associated with cash and cash equivalents by maintaining its bank accounts at major financial institutions. Fair Value of Financial Instruments Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable: Level 1—Quoted prices in active markets for identical assets or liabilities. Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data. Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques. The carrying values of the Company’s cash equivalents, prepaid expenses, accounts payable, and accruals approximate their fair value due to their short-term nature. The fair value of the Company’s long-term debt approximated its carrying value based on borrowing rates currently available to the Company for debt with similar terms and maturities (Level 2 inputs). To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgement exercised by the Company in determining fair value is greatest for instruments categorized in Level 3 (Note 3). A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value of the instrument. Research and Development Costs Research and development costs are expensed as incurred. Research and development expenses consist primarily of contract research fees and process development, outsourced labor and related expenses for personnel, facilities cost, fees paid to consultants and advisors, depreciation and supplies used in research and development and costs incurred under the Company's evaluation agreements. Payments made prior to the receipt of goods or services to be used in research and development activities are recorded as prepaid expenses until the related goods or services are received. Until future commercialization is considered probable and the future economic benefit is expected to be realized, the Company does not capitalize pre-launch inventory costs. Costs of property and equipment related to scaling-up of the manufacturing capacity for clinical trials and to support commercialization are capitalized as property and equipment unless the related asset does not have an alternative future use. Clinical and preclinical costs are a component of research and development expense. The Company accrues and expenses clinical and pre-clinical trial activities performed by third parties based upon actual work completed in accordance with agreements established with its service providers. The Company determines the actual costs through discussions with internal personnel and external service providers as to the progress or stage of completion of services and the agreed-upon fee to be paid for such services. Equity-Based Compensation Stock-Based Compensation In July 2021, the Company adopted and its stockholders approved, the Rani Therapeutics Holdings, Inc. 2021 Equity Incentive Plan (the “2021 Plan”). The Company has subsequently granted stock options to purchase shares of its Class A common stock as well as restricted stock units (“RSUs”) and restricted stock awards ("RSAs") from the 2021 Plan to both employees and non-employees. The Company measures stock-based compensation at fair value on the grant date of the award. The fair value of employee and nonemployee RSUs is determined based on the number of shares granted and the closing market price of the Company’s Class A common stock on the date of grant. The fair value of employee RSAs is determined based on the estimated fair value of the Company’s Class A common stock on the grant date and is subject to the Company's reacquisition right which is accounted for as a forfeiture provision (Note 9). For awards that vest subject to the satisfaction of service requirements, compensation expense is measured based on the fair value of the award on the date of grant and expense is recognized on a straight-line basis over the requisite service period. The Company accounts for forfeitures as they occur. Stock-based compensation is classified in the accompanying consolidated statements of operations and comprehensive loss based on the function to which the related services are provided. The Company determines the grant-date fair value of options to purchase common shares using the Black-Scholes option-pricing model which requires inputs based on certain subjective assumptions, including the expected stock price volatility, the expected term of the option, the risk-free interest rate for a period that approximates the expected term of the option, and the Company’s expected dividend yield . Such assumptions represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. If actual results are not consistent with the Company’s assumptions and judgments used in making these estimates, the Company may be required to increase or decrease compensation expense, which could be material to the Company’s consolidated results of operations. Unit-Based Compensation Prior to the IPO, Rani LLC had granted equity-based awards to employees, members of the Board of Managers and nonemployees, including ICL employees and consultants, in the form of non-vested incentive units (“Profits Interests”) and/or options to purchase common units. All awards of Profits Interests and options to purchase common units were measured based on the estimated fair value of the award on the date of grant. Forfeitures were recognized when they occurred. All of the Profits Interests were subject to service and performance-based conditions and the Company evaluated the probability of achieving each performance-based condition at each reporting date and recognized equity-based compensation expense for employee and consultant awards and distributions of equity for ICL employee awards in the consolidated financial statements when it was deemed probable that the performance-based condition would be met using the accelerated attribution method over the requisite service period. The options to purchase common units were subject to service conditions and generally vested over three or four years. The Company utilized estimates and assumptions in determining the fair value of its Profits Interests and options to purchase common units on the date of grant. The Company utilized various valuation methodologies in accordance with the framework of the American Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately Held Company Equity Securities Issued as Compensation , to estimate the fair value of its preferred units, common units and Profits Interests. Each valuation methodology includes estimates and assumptions that require the Company’s judgment. These estimates and assumptions include several objective and subjective factors, including probability weighting of events, volatility, time to an exit event, a risk-free interest rate, the prices at which Rani LLC sold preferred units, the superior rights, and preferences of the preferred units senior to Rani LLC’s common units at the time, and a discount for the lack of marketability. Changes to the key assumptions used in the valuations could result in different fair values at each valuation date. Income Taxes The Company is the managing member of Rani LLC and, as a result, consolidates the financial results of Rani LLC and its taxable subsidiary RMS in the consolidated financial statements. Rani LLC is a pass-through entity for United States federal and most applicable state and local income tax purposes following the IPO and Organizational Transactions. As an entity classified as a partnership for tax purposes, Rani LLC is not subject to United States federal and certain state and local income taxes. Any taxable income or loss generated by Rani LLC is passed through to, and included in the taxable income or loss of, its members, including the Company. The Company is taxed as a corporation and pays corporate federal, state and local taxes with respect to income allocated to the it, based on the its economic interest in Rani LLC. The Company's tax provision also includes the activity of RMS, which is taxed as a corporation for United States federal and state income tax purposes. The Company accounts for income taxes under the asset and liability method of accounting. Current income tax expense or benefit represents the amount of income taxes expected to be payable or refundable for the current year. The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as for operating loss and tax credit carryforwards. The Company measures deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which the Company expects to recover or settle those temporary differences. The Company recognizes the effect of a change in tax rates on deferred tax assets and liabilities in the results of operations in the period that includes the enactment date. The Company reduces the measurement of a deferred tax asset, if necessary, by a valuation allowance if it is more likely than not that the Company will not realize some or all of the deferred tax asset. The Company’s tax positions are subject to income tax audits. The Company uses a recognition threshold and measurement attribute for the consolidated financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. A tax position is recognized when it is more likely than not that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than a 50% likelihood of being realized upon ultimate settlement with a taxing authority. Interest and penalties related to unrecognized tax benefits are recognized in income tax expense in the accompanying consolidated statements of operations and comprehensive loss. No such interest and penalties were recognized for any period presented. In March 2020, the United States enacted the Families First Coronavirus Response Act (“FFCR Act”) and Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19. While the CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, there was no material impact from the related income tax provisions on the Company's consolidated financial statements for each of the years ended December 31, 2021 and 2020. In December 2020, the United States enacted the Consolidated Appropriations Act, 2021 (the "Appropriations Act"). Included in the tax provisions are a number of items directly related to COVID-19 relief such as a provision allowing recipients of PPP loans to deduct associated costs and an extension and significant expansion of the employee retention credit originally enacted in the CARES Act. There was no material impact from the provisions of the Appropriations Act in 2020. With respect to PPP loan, while the expenses are deductible for United States income tax purposes, they are not currently deductible for California income tax purposes as of the date of the financial statements. In June 2020, the state of California enacted Assembly Bill No. 85 (“AB 85”) suspending California net operating loss utilization and imposing a cap on the amount of business incentive tax credits companies can utilize, effective for tax years 2020, 2021 and 2022. There was no material impact from the provisions of AB 85 on the Company's consolidated financial statements for each of the years ended December 31, 2021 and 2020. In March 2021, the American Rescue Plan (“H.R. 1319”) was signed into law. This legislation extends and enhances a number of current-law tax incentives for businesses, but also expands the definition of a “covered employee” as defined by Section 162(m)(1) of the Internal Revenue Code. There was no material impact from the provisions of H.R. 1319 on the Company's consolidated financial statements for the year ended December 31, 2021 . Tax Receivable Agreement In August 2021, in connection with the IPO and Organizational Transactions, the Company entered into a tax receivable agreement ("TRA") with certain of the Continuing LLC Owners. The TRA provides that the Company pay to such Continuing LLC Owners, 85 % of the amount of tax benefits, if any, it is deemed to realize (calculated using certain assumptions) as a result of (i) increases in the tax basis of assets of Rani LLC resulting from (a) any future redemptions or exchanges of Paired Interests and (b) payments under the TRA and (ii) certain other benefits arising from payments under the TRA (collectively the “Tax Attributes”). A liability for the payable to parties subject to the TRA, and a reduction to stockholders’ equity, is accrued when (i) an exchange of a Paired Interest has occurred and (ii) when it is deemed probable that the Tax Attributes associated with the exchange will be used to reduce the Company’s taxable income based on the contractual percentage of the benefit of Tax Attributes that the Company expects to receive over a period of time. No exchanges of Paired Interests had occurred through December 31, 2021 and therefore no liability had been incurred for the TRA. Comprehensive Loss Comprehensive loss is defined as a change in equity of a business enterprise during a period, resulting from transactions and other events and/or circumstances from non-owner sources. The Company did not have any other comprehensive loss for any of the periods presented, and therefore comprehensive loss was the same as the Company’s net loss. Non-Controlling Interest Non-controlling interest ("NCI") represents the portion of income or loss, net assets and comprehensive loss of Rani LLC that is not allocable to the Company based on the Company's percentage of ownership of Rani LLC. In August 2021, based on the Organizational Transactions, the Company became the sole managing member of Rani LLC. As of December 31, 2021 , the Company held approximately 39 % of the Class A Units of Rani LLC, and approximately 61 % of the outstanding Class A Units of Rani LLC are held by the Continuing LLC Owners. Therefore, the Company reports NCI based on the Class A Units of Rani LLC held by the Continuing LLC Owners on its consolidated balance sheet as of December 31, 2021. Income or loss attributed to the NCI in Rani LLC is based on the Class A Units outstanding during the period for which the income or loss is generated and is presented on the consolidated statements of operations and comprehensive income or loss. Future exchanges of Paired Interests and certain Class A Units of Rani LLC without corresponding shares of the Company’s Class B common stock will result in a change in ownership and reduce or increase the amount recorded as NCI and increase or decrease additional paid-in-capital when Rani LLC has positive or negative net assets, respectively. From the date of the Organizational Transactions to December 31, 2021 , there were no exchanges of Paired Interests nor certain Class A Units of Rani LLC without corresponding shares of Company's Class B common stock. Property and Equipment, Net Property and equipment, net are stated at cost, less accumulated depreciation and amortization calculated using the straight-line method over the estimated useful lives of the assets, generally between three and five years. Leasehold improvements are amortized over the shorter of the related lease term or useful life. Maintenance and repairs are charged to operations when incurred, while betterments or renewals are capitalized. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation and amortization accounts are relieved, and any gain or loss is included in the results of operations. Construction-in-progress consists of production equipment that will be used to scale-up the manufacturing of the RaniPill capsule for clinical trials and that has been determined to have an alternative future use. Construction-in-progress is stated at cost and does not begin to depreciate until it is put into production. Impairment of Long-Lived Assets The Company reviews the carrying amounts of its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. If indicators of impairment exist, an impairment loss would be recognized when the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The impairment charge is determined based upon the excess of the carrying value of the asset over its estimated fair value, with estimated fair value determined based upon an estimate of discounted future cash flows or other appropriate measures of estimated fair value. Management believes that no revision to the remaining useful lives or write-down of long-lived assets is required as of and for the year ended December 31, 2021 . Related Party Note Receivable The principal balance on the related party note receivable is recorded on the consolidated balance sheet along with earned and not yet received interest income. The principal balance is classified on the consolidated balance sheet based upon the expected timing of the repayments by the related party. Interest income received and receivable on the related party note receivable is recorded as a component of interest income in the consolidated statement of operations and comprehensive loss. Associated interest earned is recognized using the effective interest method. The estimated fair value of the Company’s related party note receivable at December 31, 2020, approximated its carrying value due to its short-term nature. In March 2021, the related party repaid in full the $ 1.7 million of principal and interest related to the note receivable. Convertible Preferred Units The Company records convertible preferred units at fair value on the dates of issuance, net of issuance costs. The Company has classified convertible preferred units as temporary equity in the accompanying consolidated balance sheets due to terms that allow for redemption of the units in cash upon certain change in control events that are not within the Company’s control, including the sale or transfer of the Company. The carrying values of the convertible preferred units are adjusted to their liquidation preferences if and when it becomes probable that such a liquidation even will occur. The Company did not accrete the value of the convertible preferred units to their redemption values since a liquidation event was not considered probable. The Company also evaluates the features of its convertible preferred units to determine if the features require bifurcation from the underlying units, by evaluating if they are clearly and closely related to the underlying units and if they do, or do not, meet the definition of a derivative. Preferred Unit Warrant Liability Outstanding warrants to purchase preferred units of the Company were classified as liabilities in the accompanying consolidated balance sheets due to a contingent redemption right of the holder of the preferred unit warrants that is outside of the control of the Company that precluded equity classification. Such preferred unit warrants were subject to re-measurement at the end of each reporting period until they were settled in July 2021. The Company estimated the fair value of preferred unit warrants at each reporting period, using a hybrid between the probability weighted expected return and option pricing methods, estimating the probability weighted value across multiple scenarios, but using the option pricing method to estimate the allocation of value within one or more of those scenarios, until the earlier of the exercise of the preferred unit warrants, at which time the liability was revalued and reclassified to members’ deficit upon the completion of the Company’s IPO. Net Loss Per Class A Common Share Attributable to Rani Holdings Basic net loss per Class A common share attributable to Rani Holdings is computed by dividing net loss attributable to the Company by the weighted average number of Class A Common shares outstanding during the period, without consideration of potential dilutive securities. Diluted net loss per Class A Common share is computed giving effect to all potentially dilutive shares. Diluted net loss per Class A Common share for all periods presented is the same as basic loss per share as the inclusion of potentially issuable shares would be antidilutive. Net loss per share is not presented for the year ended December 31, 2020 as the Company did not have any economic interests prior to the date of the IPO and Organizational Transactions through which it was given ownership in Rani LLC. Losses prior to the IPO and Organizational Transactions would have been allocated to the original members of Rani LLC. The basic and diluted net loss per Class A common share attributable to Rani Holdings for the year ended December 31, 2021 is applicable only for the period from August 4, 2021 to December 31, 2021 , which is the period following the IPO and Organizational Transactions and represents the period that the Company had Class A common shares outstanding. Emerging Growth Company Status The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act, until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. New Accounting Pronouncements In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-02, Leases (“Topic 842”), as subsequently amended, to improve financial reporting and disclosures about leasing transactions. Topic 842 requires companies that lease assets to recognize on the consolidated balance sheet the assets and liabilities for the rights and obligations created by those leases, where the lease terms exceed 12 months. The recognition, measurement, and presentation of expense and cash flows arising from a lease by a lessee will depend primarily on its classification as a finance or operating lease; both types of leases will be recognized on the consolidated balance sheet. Topic 842 also requires disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. On June 3, 2020, the FASB amended the effective dates of Topic 842 to give immediate relief from business disruptions caused by the COVID-19 pandemic and provided a one-year deferral of the effective date for nonpublic companies. The Company plans to adopt this standard using the modified retrospective approach with a cumulative effect adjustment to accumulated deficit at the beginning of the period of adoption. The Company will also adopt certain practical expedients provided by Topic 842. As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act Topic 842 was effective for the Company on January 1, 2022. The Company is in the process of evaluating the effects of Topic 842 on its consolidated financial statements but does not expect the adoption of Topic 842 will have a material impact on the Company’s consolidated financial statements and related notes to the recognition of right of use assets and lease liabilities on the Company’s consolidated balance sheets or on the Company’s consolidated statement of income. The adoption of Topic 842 will also result in enhanced disclosures. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (“ASU 2016-13”) to require the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, and assuming the Company continues to be considered an emerging growth company, ASU 2016-13 will be effective for the Company on January 1, 2023. The Company has not yet determined the potential effects of ASU 2016-13 on its consolidated financial statements and disclosures. 3. Fair Value Measurements The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicates the level of inputs used in such measurements (in thousands): As of December 31, 2021 Level 1 Level 2 Level 3 Total Assets: Money market funds $ 115,595 $ — $ — $ 115,595 Total assets $ 115,595 $ — $ — $ 115,595 As of December 31, 2020 Level 1 Level 2 Level 3 Total Assets: Money market funds $ 71,666 $ — $ — $ 71,666 Total assets $ 71,666 $ — $ — $ 71,666 Liabilities: Preferred unit warrant liability $ — $ — $ 320 $ 320 Total liabilities $ — $ — $ 320 $ 320 There were no financial liabilities measured at fair value on a recurring basis as of December 31, 2021. Money market funds are highly liquid and actively traded marketable securities that generally transact at a stable $ 1.00 net asset value representing its estimated fair value. There were no transfers between Level 1, Level 2 and Level 3 of the fair value hierarchy for any of the periods presented. The Company held a Level 3 liability associated with preferred unit warrants that were issued in conjunction with a loan and security Agreement (Note 11). These preferred unit warrants were settled with Class A common stock as part of the IPO and Organizational Transactions (Note 7). The following tables set forth a summary of the changes in the fair value of the Company’s liability measured using Level 3 inputs (in thousands): Year Ended December 31, 2021 2020 Balance at beginning of period $ 320 $ 655 Issuance of Series E warrants — 320 Change in estimated fair value of Series B warrants — 63 Change in estimated fair value of Series E warrants 371 — Settlement of Series B warrants — ( 718 ) Settlement of Series E warrants ( 691 ) — Balance at end of period $ — $ 320 4. Balance Sheet Components Property and equipment, net Property and equipment, net consist of the following (in thousands): December 31, 2021 2020 Laboratory equipment $ 1,734 $ 1,612 Leasehold improvements 1,233 1,120 Software 60 60 Office equipment 42 28 Total 3,069 2,820 Less accumulated depreciation and amortization ( 2,331 ) ( 1,834 ) Total 738 986 Construction-in-progress 3,874 3,484 Total property and equipment, net $ 4,612 $ 4,470 Depreciation and amortization expense totaled approximately $ 0.5 million and $ 0.6 million for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021 and 2020 , all of the Company’s property and equipment was located in the United States, with the exception of $ 3.5 million, respectively, of construction-in-progress that is located in Germany at a third-party manufacturing facility. Accrued expenses Accrued expenses consist of the following (in thousands): December 31, 2021 2020 Accrued clinical trial costs $ 621 $ 145 Accrued professional fees 213 181 Payroll and related 202 136 Other 398 88 Total accrued expenses $ 1,434 $ 550 5. Evaluation Agreements Takeda Takeda Pharmaceutical Company, Limited ("Takeda") was collaborating with the Company to conduct research on the use of the RaniPill capsule for the oral delivery of factor VIII (“FVIII”) therapy for patients with hemophilia A. The agreement granted Takeda a right of first negotiation to a worldwide, exclusive license under the Company’s intellectual property related to a FVIII-RaniPill therapeutic. Takeda paid the Company up-front payments of $ 5.9 million upon execution of and subsequent modifications to the agreement. Upon the initial evaluation services being completed, Takeda had an option to pay the Company $ 3.0 million to perform later stage evaluation services. Takeda also had the ability to terminate the agreement at any time by providing 30 days written notice after the effective date of the agreement. Unless terminated early, the agreement term ended upon the expiration of the right of first negotiation period which is 120 days after the completion of the evaluation services. The Takeda agreement could be terminated for cause by either party based on uncured material breach by the other party or bankruptcy of the other party. Upon early termination, all ongoing activities under the agreement and all mutual collaboration, development and commercialization licenses and sublicenses would terminate. The Company identified one material promise under the Takeda agreement, the obligation to perform services to evaluate if Takeda’s FVIII therapy can be orally delivered using the RaniPill capsule (“Research and Development Services”), which was concluded to be a single performance obligation. For revenue recognition purposes, the Company determined that the duration of the contract began on the effective date in November 2017 and ended upon completion of the Research and Development Services. The contract duration was defined as the period in which parties to the contract had present enforceable rights and obligations. The Company also analyzed the impact of Takeda terminating the agreement prior to the completion of the performance obligation and determined, considering both quantitative and qualitative factors, that there were substantive non-monetary penalties to Takeda for doing so. The Company determined that the cost-based input method most faithfully depicted the transfer of its performance obligation to Takeda. Accordingly, the Company recognized its contract revenue based on actual costs incurred as a percentage of total estimated costs the Company expected to incur to deliver its performance obligation. These actual costs consisted of internal labor efforts, in vivo testing services and materials costs related to the Takeda agreement, as the costs incurred over time reflect the transfer of its performance obligations to Takeda. The cumulative effect of revisions to estimated costs to complete the Company’s performance obligation was recorded in the period in which changes were identified and amounts were reasonably estimable. In May 2021, the Company received written notice from Takeda as to their intent to terminate the contract for convenience. Due to the delivery of the termination notice, the Company determined that there were no further enforceable rights and obligations under the agreement beyond May 2021 and the remaining $ 2.0 million of deferred revenue was recognized during the year ended December 31, 2021 . For the years ended December 31, 2021 and 2020 , the Company recognized contract revenue related to the Takeda agreement of $ 2.7 million and $ 0.5 million, respectively. As of December 31, 2020 , deferred revenue related to the remaining identified performance obligation for the Takeda agreement of $ 2.7 million was recorded on the consolidated balance sheets. There was no deferred revenue as of December 31, 2021. Changes in the deferred revenue balance are as follows (in thousands): December 31, 2021 2020 Balance at beginning of period $ 2,717 $ 179 Additions — 3,000 Deductions ( 2,717 ) ( 462 ) Balance at end of period $ — $ 2,717 There were no receivables or net contract assets recorded as of December 31, 2021 or December 31, 2020 associated with the Takeda agreement. The Company expensed all incremental costs of obtaining the Takeda agreements, as such amounts were insignificant. 6. Related Party Transactions ICL is wholly-owned by the Company’s founder and Executive Chairman and his family. The founder and Executive Chairman is also the father of the Company’s Chief Executive Officer. The Company’s Chief Scientific Officer is the brother of the founder and Executive Chairman and uncle of the Company’s Chief Executive Officer. Services agreements In January 2019, Rani LLC entered into a one year service agreement with ICL. This service agreement was amended in January 2020 to extend the period for an additional year and expired in December 2020. In June 2021, Rani LLC entered into a Service Agreement with ICL effective retrospectively to January 1, 2021 (the "Rani LLC-ICL Service Agreement"), pursuant to which Rani LLC and ICL agreed to provide personnel services to the other upon requests. The Rani LLC-ICL Service Agreement has a twelve month term and will automatically renew for a successive twelve month periods unless terminated. Rani LLC or ICL may terminate services under the Rani LLC-ICL Service Agreement upon 60 days' notice to the other party. The Rani LLC-ICL Service Agreement specifies the scope of services to be provided as well as the methods for determining the costs of services. Costs are billed or charged on a monthly basis by ICL or Rani LLC, respectively. In June 2021, RMS entered into a Service Agreement with ICL (the “RMS-ICL Service Agreement”) effective retrospectively to January 1, 2021, pursuant to which ICL agreed to rent a specified portion of its facility to RMS. Additionally, RMS and ICL agreed to provide personnel services to the other upon requests based on rates specified in the RMS-ICL Service Agreement. The RMS-ICL Service Agreement has a twelve month term and will automatically renew for successive twelve month periods unless terminated. RMS or ICL may terminate services under the RMS-ICL Service Agreement upon 60 days' notice to the other party, except for occupancy which requires six months notice. The RMS-ICL Service Agreement specifies the scope of services to be provided as well as the methods for determining the costs of services. Costs are billed or charged on a monthly basis by ICL or RMS, respectively, as well as allocations of expenses based upon RMS’s utilization of ICL’s facilities and equipment. The table below details the amounts charged by ICL for services and rent, net of the amount that RMS charged ICL of $ 0.6 million and $ 0.4 million for the years ended December 31, 2021 and 2020, respectively, which is included in the consolidated statements of operations and comprehensive loss (in thousands): Year Ended December 31, 2021 2020 Research and development $ 1,115 $ 535 General and administrative 735 1,826 Total $ 1,850 $ 2,361 The Company’s eligible employees are permitted to participate in ICL’s 401(k) Plan (“401(k) Plan”). Participation in the 401(k) Plan is offered for the benefit of the employees, including the Company’s named executive officers, who satisfy certain eligibility requirements. As of December 31, 2021 , all of the Company's facilities have a lease term of twelve months and are owned or leased by an entity affiliated with the Company’s Executive Chairman. The Company pays for the use of these facilities through the services agreement with ICL. Total operating lease expense incurred with ICL was $ 0.8 million for each of the years ended December 31, 2021 and 2020. Financing activity From inception to the first half of 2017, the Company advanced funds to ICL, and ICL made payments directly to certain vendors on behalf of Rani, Rani has reimbursed ICL for all such payments at cost on a monthly basis. In June 2017, the Company converted the outstanding net advances of $ 6.6 million to ICL into three notes receivable. The notes provide for interest at 1.97 % compounded annually, loan fees of 2.75 % and are payable upon demand to the Company any time after January 1, 2024. During 2020, the Company received $ 0.2 million in payments for interest and repayment of principal on the remaining note receivable. As of December 31, 2020 , $ 1.7 million of the note receivable was outstanding. In March 2021, the outstanding balance due, including all accrued interest, was fully repaid by ICL. During 2020, the Company amended certain Series B warrants held by an entity affiliated with ICL. In December 2020, this entity elected to cashless exercise all of their Series B warrants in return for 51,341 Series B units of Rani LLC (Note 7). This same entity also acquired 59,312 Series D units of Rani LLC for $ 1.0 million in 2017. During 2020 and 2021, South Lake One LLC, a related party of the Company, and its affiliates purchased 2,100,800 common units of Rani LLC and 7,880,120 Series E Preferred Units of Rani LLC. As part of the Organizational Transactions the common units and Series E Preferred Units were exchanged for 5,277,729 shares of the Company's Class A common stock. In connection with the IPO and subsequent thereto, South Lake One LLC and its affiliates purchased an additional 6,458,904 shares of the Company’s Class A common stock for total gross proceeds of $ 71.1 million. Exclusive License, Intellectual Property and Common Unit Purchase Agreement The Company, through Rani LLC, and ICL entered into an exclusive license and an intellectual property agreement and common unit purchase agreement in 2012. Pursuant to the common unit purchase agreement, the Company issued 46.0 million common units to ICL in return for rights to exclusive commercialization, development, use and sale of certain products and services related to the RaniPill capsule technology. ICL also granted the Company a fully-paid, royalty-free, sublicensable, exclusive license under the intellectual property made by ICL during the course of providing services to the Company related to the RaniPill capsule technology. Such rights were not recorded on the Company’s consolidated balance sheet as the transaction was considered a common control transaction. In June 2021, ICL and the Company, through Rani LLC, entered into an Amended and Restated Exclusive License Agreement which replaced the 2012 Exclusive License Agreement between ICL and Rani LLC, as amended in 2013, and terminated the 2012 Intellectual Property Agreement between ICL and Rani LLC, as amended in June 2013. Under the Amended and Restated Exclusive License Agreement, the Company has a fully paid, exclusive license under certain scheduled patents related to optional features of the device and certain other scheduled patents to exploit products covered by those patents in the field of oral delivery of sensors, small molecule drugs or biologic drugs including, any peptide, antibody, protein, cell therapy, gene therapy or vaccine. The Company covers patent-related expenses and, after a certain period, the Company will have the right to acquire four specified United States patent families from ICL by making a one-time payment of $ 0.3 million to ICL for each United States patent family that the Company desires to acquire, up to $ 1.0 million in the aggregate. This payment will not become an obligation until the fifth anniversary of the Amended and Restated Exclusive License Agreement. The Amended and Restated Exclusive License Agreement will terminate when there are no remaining valid claims of the patents licensed under the Amended and Restated Exclusive License Agreement. Additionally, the Company may terminate the Amended and Restated Exclusive License Agreement in its entirety or as to any particular licensed patent upon notification to ICL of such intent to terminate. Non-Exclusive License Agreement between Rani and ICL (“Non-Exclusive License Agreement”) In June 2021, the Company, through Rani LLC, entered into the Non-Exclusive License Agreement with ICL a related party, pursuant to which the Company granted ICL a non-exclusive, fully-paid license under specified patents that were assigned from ICL to the Company. Additionally, the Company agreed not to license these patents to a third party in a specific field outside the field of oral delivery of sensors, small molecule drugs or biologic drugs including, any peptide, antibody, protein, cell therapy, gene therapy or vaccine, if ICL can prove that it or its sublicensee has been in active development of a product covered by such patents in that specific field. ICL may grant sublicenses under this license to third parties only with the Company’s prior approval. The Non-Exclusive License Agreement will continue in perpetuity unless earlier terminated. Intellectual Property Agreement with Mir Imran (the “Mir Agreement”) In June 2021, the Company, through Rani LLC, entered into the Mir Agreement, pursuant to which the Company and Mir Imran agreed that the Company would own all intellectual property conceived (a) using any of the Company’s people, equipment, or facilities or (b) that is within the field of oral delivery of sensors, small molecule drugs or biologic drugs including, any peptide, antibody, protein, cell therapy, gene therapy or vaccine. Neither the Company nor Mir Imran may assign the Mir Agreement to any third party without the prior written consent of the other party. The initial term of the Mir Agreement is three years, which can be extended upon mutual consent of the parties. The Mir Agreement may be terminated by either party for any reason within the initial three year term upon providing three months’ notice to the other party. Board Services During the year ended December 31, 2020 , the Company made a $ 0.2 million payment to a member of the Board of Managers of Rani LLC for legacy board services provided to the Company, there were no such payments made in the year ended December 31, 2021. Secondary Sales Transactions In February 2021, one of the Company's named executive officer's and then member of the Board of Managers of Rani LLC, and a current member of the Board of Managers of Rani LLC sold a total of 210,000 common units to a third-party investor at $ 7.1471 per unit. The Company determined that the sales price was above fair value of such units and as a result recorded equity-based compensation expense of $ 0.5 million for which $ 0.2 million was recorded as general and administrative expense and $ 0.3 million was recorded as research and development expense. The $ 0.5 million represents the difference between the sales price and fair value of the common units. Equity-Based Compensation In connection with the IPO and Organizational Transactions, the Company effectuated an exchange of all outstanding Profits Interests into Class A Units including certain Profits Interests related to ICL and its affiliates ("ICL Holders"). Upon the IPO and Organizational Transactions, the performance condition was met for all Profits Interest no longer subject to a service based vesting condition resulting in the recognition of compensation cost associated with these awards (Note 9). ICL Holders of 919,282 Class A Units exchanged 854,807 such units for the Company's Class A common stock, the remaining 64,475 Class A Units of Rani LLC continue to be outstanding and are exchangeable for the Company's Class A common stock at the option of the ICL Holders. The following table summarizes the components of equity-based compensation expense recorded in the consolidated statement of operations and comprehensive loss related to awards granted to employees of ICL and its affiliates by the Company (in thousands): Year Ended December 31, 2021 2020 Research and development $ 644 $ — General and administrative 2,999 — Total $ 3,643 $ — Tax Receivable Agreement ICL is party to the TRA, entered into in August 2021 pursuant to the IPO and Organizational Transactions. The TRA provides that the Company pay to such entities and individuals 85% of the amount of tax benefits, if any, it is deemed to realize from exchanges of Paired Interests (Note 2). Registration Rights Agreement In connection with the IPO, the Company entered into a Registration Rights Agreement. ICL is a party to this agreement. The Registration Rights Agreement provides certain registration rights whereby, at any time following the IPO and the expiration of any related lock-up period, ICL Holders with LLC Interests can require the Company to register under the Securities Act of 1933, as amended (the “Securities Act”) shares of Class A common stock issuable to such ICL Holders upon, at the Company’s election, redemption or exchange of their Paired Interests. The Registration Rights Agreement also provides for piggyback registration rights. Rani LLC Agreement The Company operates its business through Rani LLC and its subsidiary. In connection with the IPO, the Company and the Continuing LLC Owners, including ICL, entered into the Rani LLC Agreement. The governance of Rani LLC, and the rights and obligations of the holders of LLC Interests, are set forth in the Rani LLC Agreement. As a Continuing LLC Owner, ICL is entitled to exchange, subject to the terms of the Rani LLC Agreement, Paired Interests for Class A common stock of the Company; provided that, at the Company’s election, the Company may effect a direct exchange of such Class A common stock or make a cash payment equal to a volume weighted average market price of one share of Class A common stock for each Paired Interest redeemed. No exchanges by ICL of Paired Interests occurred during the year ended December 31, 2021 . 7. Warrants Preferred unit warrants In May 2013, in conjunction with the Series B convertible preferred unit (the “Series B” or “Series B units”) financing, the Company issued warrants to ICL to purchase 107,357 Series B units. The Series B warrants were exercisable for a period of five years from the grant date at an exercise price of $ 3.73 per unit. During 2018, the Company amended the terms of the Series B warrants, extending the exercise period for an additional two years . These Series B warrants expired unexercised in May 2020 resulting in a $ 0.6 million decrease in fair value. In December 2020, the Company amended the terms of these expired Series B warrants, extending the exercise period for an additional two years resulting in a $ 0.7 million increase in fair value. In December 2020, ICL elected to cashless exercise all of their Series B warrants and Rani LLC issued 51,341 Series B units. There were no Series B warrants outstanding at December 31, 2021 or 2020, respectively. In September 2020, in conjunction with a loan and security Agreement (Note 11), the Company issued warrants to purchase up to 118,929 Series E preferred units. The Series E warrants were exercisable for a period of seven years from the grant date at an exercise price of $ 7.1471 per unit. In the event of a change of control or IPO, the Series E warrants were to automatically be exchanged for the same number of units of the Company’s securities for no consideration had the holder of the warrant elected to exercise the warrant immediately prior to a change in control or IPO. In conjunction with the IPO, all of the Series E warrants were ultimately settled for 62,887 shares of the Company's Class A common stock. At December 31, 2020 , there were 118,929 Series E warrants outstanding. There were no Series E warrants outstanding at December 31, 2021. Common unit warrants In 2017, in conjunction with the Series D convertible preferred unit financing, the Company issued 229,315 common unit warrants with an exercise price of $ 2.18 per unit and an exercise period of five years . The Company recorded the issuance-date fair value of the common warrants of $ 0.3 million in equity as the warrant met all criteria for equity classification. In January 2021, 6,000 common unit warrants were exercised at $ 2.18 per unit, and in July 2021 5,913 common unit warrants were exercised at $ 2.18 per unit. In connection with the IPO and Organizational Transactions, the remaining common warrants were net exercised for 71,867 Class A Units of Rani LLC, of which 60,494 were then exchanged into shares of the Company's Class A common stock as part of the Organizational Transactions. At December 31, 2020 , 229,315 common unit warrants were outstanding. There were no common unit warrants outstanding at December 31, 2021 . 8. Stockholders’ Equity / Members’ Deficit Prior to the Organizational Transactions, Rani LLC was authorized to issue 101,000,000 common units, of which 10,850,000 had been reserved for issuance as Profits Interests and 32,620,000 were reserved for six separate classes, the Series A convertible preferred units (the “Series A units”), the Series B convertible preferred units (the “Series B units”), the Series C convertible preferred units (the “Series C units”), the Series C-1 convertible preferred units (the “Series C-1 units”), the Series D convertible preferred units (the “Series D units”), and the Series E convertible preferred units (the “Series E units”), collectively the “Preferred Units”. The members of the Rani LLC who held these common and Preferred Units were not liable, solely by reason of being a member, for the debts, obligations, or liabilities of the Company whether arising in contract or tort; under a judgment, decree, or order of a court; or otherwise. The members were also not obligated to make capital contributions to Rani LLC and Rani LLC would have dissolved only upon a written consent of a majority of the members. The Company’s Profits Interests were subject to either a combination of service, market, or performance vesting conditions. Vested Profits Interests were treated as common units for purposes of distributions. Amendment and Restatement of Certificate of Incorporation In connection with the Organizational Transactions, the Company’s certificate of incorporation was amended and restated to, among other things, provide for the (i) authorization of 800,000,000 shares of Class A common stock with a par value of $ 0.0001 per share; (ii) authorization of 40,000,000 shares of Class B common stock with a par value of $ 0.0001 per share; (iii) authorization of 20,000,000 shares Class C common stock with a par value of $ 0.0001 per share; and (iv) authorization of 20,000,000 shares of preferred stock with a par value of $ 0.0001 per share. Holders of Class A common stock are entitled to one vote per share; holders of Class B common stock are entitled to ten votes per share; and holders of Class C common stock have no voting rights. Except as otherwise expressly provided in the Amended and Restated Certificate of Incorporation or as required by law, the holders of Class A common stock and Class B common stock (and, on any matter on which the Class C common stock or the holders of preferred stock are entitled to vote with the Class A common stock and the Class B common stock, the Class C common stock and the preferred stock) will vote together as a single class and not as separate series or classes. The Company is required to, at all times, maintain (i) a one-to-one ratio between the number of shares of Class A common stock outstanding and the number of Class A Units owned by Company and (ii) a one-to-one ratio between the number of shares of Class B common stock owned by the Continuing LLC Owners and the number of Class A Units owned by the Continuing LLC Owners. The Company may issue shares of Class B common stock only to the extent necessary to maintain these ratios. Shares of Class B common stock are not transferable except (a) to the Company for no consideration (in which case the shares will be cancelled automatically) or (b) together with an equal number of Class A Units to a transferee in compliance with the LLC Agreement and the provisions set forth in the Company’s amended and restated certificate of incorporation . All Class B common stock that is exchanged as part of a Paired Interest for Class A common stock shall be automatically retired and cancelled and shall no longer be outstanding. In August 2021, the Company received 29,290,391 Class B Units of Rani LLC as consideration for the issuance of Class B common stock on a one -for-one basis. Management of Rani LLC In August 2021, Rani LLC’s members and Board of Managers adopted the amended and restated Rani LLC Agreement to, among other things, appoint the Company as Rani LLC’s sole managing member and provide that, except where the approval of one or more members is specifically required by the express terms of the Rani LLC Agreement, all management powers over the business and affairs of Rani LLC are vested exclusively in the Company as the sole managing member. Initial Public Offering In July 2021, the Company completed an IPO of 7,666,667 shares of common stock, inclusive of the 1,000,000 shares of Class A common stock purchased by underwriters pursuant to the underwriters’ option to purchase additional shares at the offering price, less underwriting discounts and commissions. The Company received net proceeds from the IPO of approximately $ 73.6 million after deducting underwriting discounts and commissions, which was used to purchase 7,666,667 newly-issued Class A Units of Rani LLC. Registration Rights Agreement In connection with the IPO, the Company entered into a Registration Rights Agreement with the Continuing LLC Owners, including ICL. The Registration Rights Agreement provides the Continuing LLC Owners certain registration rights whereby, at any time following the IPO and the expiration of any related lock-up period, the Continuing LLC Owners can require the Company to register under the Securities Act shares of Class A common stock issuable to them upon, at the Company’s election, redemption or exchange of their Paired Interests. The Registration Rights Agreement also provides for piggyback registration rights for the Continuing LLC Owners. 9. Equity-Based Compensation Equity Plans Prior to the IPO, Rani LLC had adopted the 2016 Equity Incentive Plan (the “2016 Plan”) under which the Board of Managers of Rani LLC issued options for common units, Profits Interests, and restricted common units to managers, consultants or other individuals who provide service to the Company. The Board of Managers had the authority to determine to whom Profits Interests would be granted, the number of options granted, and the Profits Interests threshold amount, which was the minimum amount determined by the Board of Managers in its reasonable discretion to be necessary to cause such interests to be treated as Profits Interests (“Threshold Amounts”). In 2020, the Board of Managers approved an additional 2,000,000 common units to be reserved under the Plan for issuance as Profit Interests. Effective April 2021, in anticipation of the IPO, the Company ceased granting Profits Interests and began to issue options for common units out of the remaining pool. In July 2021, the 2016 Plan was frozen for new awards, concurrent with the adoption of the 2021 Plan. Immediately upon receipt of a Profits Interests award, the recipient had no initial capital account balance and the Profits Interests received did not entitle such recipient to any portion of the capital of Rani LLC at the time of such recipient’s admission to Rani LLC as an unitholder member, such that if Rani LLC’s assets were sold at fair market value immediately after the grant to such recipient of Profits Interests and the proceeds distributed in complete liquidation of Rani LLC, the Profits Interests recipient would not be entitled to receive a portion of those proceeds. Additionally, Rani LLC would not make a distribution with respect to any Profits Interests holder until Rani LLC had made aggregate distributions to each of its members not subject to the Profits Interests Threshold Amount. The common units underlying each Profits Interests award entitled the holder, upon a sale or other specified capital transaction (as set forth in the Operating Agreement), to participate in a portion of the profits and appreciation in the equity value of Rani LLC arising after the date of grant, as determined in reference to the Profits Interests Threshold Amount set forth in each award agreement. In July 2021, in connection with the IPO, the Company adopted and its stockholders approved the 2021 Plan. The 2021 Plan provides for the grant of incentive stock options ("ISOs"), non-statutory stock options ("NSOs"), stock appreciation rights, RSAs, RSUs, performance-based awards and other awards for shares of the Company’s Class A common stock. In July 2021, the Company's board of directors adopted and its stockholders approved, the Rani Therapeutics Holdings, Inc. 2021 Employee Stock Purchase Plan (the “ESPP”). As of December 31, 2021 , no shares have been issued under the ESPP. The Company reserved 500,000 shares of Class A Common Stock for issuance under the ESPP and 5,500,000 shares of Class A common stock for future issuance under the 2021 Plan. Stock Options A summary of stock option activity during the periods indicated is as follows: Number of Stock Option Awards Weighted Average Exercise Price Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Balance at December 31, 2020 — $ — $ — Granted 2,300,819 $ 14.12 9.55 $ 976 Balance at December 31, 2021 2,300,819 $ 14.12 9.55 $ 976 Exercisable at December 31, 2021 89,182 $ 9.44 9.46 $ 616 Nonvested at December 31, 2021 2,211,637 $ 14.30 9.55 $ 360 In connection with the Organizational Transactions, 2,292,309 options for common units of Rani LLC still subject to service vesting conditions were amended to be exercisable into 1,212,124 shares of the Company’s Class A common stock. This was considered to be a modification but did not result in modification accounting as it did not impact the awards’ vesting conditions, classification or fair value. These stock options vest based on the grantees continued services over a three or four year period. As of December 31, 2021 , there was $ 19.8 million of unrecognized equity-based compensation expense related to stock options which is expected to be recognized over a weighted-average period of approximately 3.3 years. Options for Rani LLC Common Units A summary of options for common units activity during the periods indicated is as follows: Number of Unit Option Awards Weighted Average Exercise Price Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Balance at December 31, 2020 — $ — — Granted 2,292,309 $ 4.99 9.89 Amended to be exercisable into the Company’s Class A common stock ( 2,292,309 ) $ 4.99 9.89 Balance at December 31, 2021 — $ — — $ — Through July 2021, the Company granted options to acquire 2,292,309 common units of Rani LLC to certain executives and members of the Board of Managers. In conjunction with the Organizational Transactions, these unit options were amended to be exercisable into 1,212,124 shares of the Company’s Class A common stock. Restricted Stock Units A summary of RSU activity during the periods indicated is as follows: Number of Restricted Stock Units Weighted Average Grant-Date Fair Value per Share Balance at December 31, 2020 — $ — Granted 599,500 $ 19.56 Forfeited ( 3,000 ) $ 19.56 Balance at December 31, 2021 596,500 $ 19.56 As of December 31, 2021 , there was $ 9.9 million of unrecognized equity-based compensation expense related to RSUs which is expected to be recognized over a weighted-average period of approximately 1.7 years. Restricted Stock Awards A summary of RSA activity during the periods indicated is as follows: Number of Restricted Stock Awards Weighted Average Grant-Date Fair Value per Share Balance at December 31, 2020 — $ — Granted 137,691 $ 6.15 Vested ( 21,800 ) $ 6.12 Forfeited ( 2,718 ) $ 6.27 Balance at December 31, 2021 113,173 $ 6.15 In connection with the IPO and Organizational Transactions, 397,500 Profits Interests of Rani LLC were amended and replaced with 137,691 RSAs of the Company’s Class A common stock. This was considered to be a modification but did not result in modification accounting as it did not impact the awards’ vesting conditions, classification or fair value. The RSAs are subject to both service vesting conditions and the Company's reacquisition right of unvested RSAs from the holder, for no monetary consideration, upon the termination of continuous service by the holder. The RSAs are not deemed to be issued for accounting purposes until they vest and are therefore excluded from shares outstanding for accounting purposes until the repurchase right lapses and the shares are no longer subject to the reacquisition right. As of December 31, 2021 , there was $ 0.4 million of unrecognized equity-based compensation expense related to RSAs which is expected to be recognized over a weighted-average period of approximately 1.4 years. The total fair value of the RSAs that vested in 2021 was approximately $ 0.4 million. Profits Interests A summary of Profits Interests activity during the periods indicated is as follows: Number of Profits Interests Weighted Average Grant Date Fair Value Profits Interests Threshold Balance at December 31, 2020 6,926,358 $ 1.63 $ 1.44 - $ 2.29 Granted 1,857,000 $ 2.13 $ 1.99 - $ 2.13 Forfeited ( 235,957 ) $ 2.04 $ 1.45 - $ 2.29 Vested ( 8,149,901 ) $ 1.70 $ 1.44 - $ 2.29 Canceled and replaced with restricted stock awards ( 397,500 ) $ 2.13 $ 1.99 - $ 2.13 Balance at December 31, 2021 — $ — In connection with the IPO and Organizational Transactions, 1,771,767 units of unvested Profits Interests that contained a performance condition were modified to accelerate their vesting in return for exchanging such awards for shares of the Company’s Class A common stock upon an IPO. Concurrent with the IPO, such Profits Interests holders exchanged their then issued 3,201,220 Class A Units of Rani LLC for 1,655,409 shares of the Company’s Class A common stock. This resulted in an improbable to improbable modification and resulted in the remeasurement of the related compensation cost at the fair value of these Profits Interests on the modification date in July 2021. As a result of the modification and based on the performance condition being satisfied with the IPO and Organizational Transactions in July 2021, the Company recognized an incremental equity-based compensation expense of $ 3.0 million for the year ended December 31, 2021 . Profits Interests of 397,500 still subject to service based vesting, but where the performance condition associated with the IPO and Organizational Transactions had been met, were exchanged for 137,691 RSAs with the same remaining service vesting conditions. All Profits Interests no longer subject to a vesting condition and that did not participate in the exchange, were converted into 1,545,522 Class A Units of Rani LLC. Upon the IPO and Organizational Transactions, the performance condition was met for all Profits Interest no longer subject to a service based vesting condition and the Company recorded an additional $ 14.0 million of equity-based compensation expense. Valuation of Awards The Company uses the Black-Scholes option pricing model to estimate the fair value of each stock option award on the date of grant. The assumptions and estimates are as follows: • Expected term - The expected term represents the period of time that stock option awards are expected to remain outstanding. The Company estimates the expected term as the midpoint between actual or expected vesting date and the contractual term. • Expected volatility - The expected volatility was derived from the historical stock volatilities of peer public companies within the Company's industry that are considered to be comparable businesses over a period equivalent to the expected term of the stock option awards, since there has been limited trading history of the Company's stock. • Risk-free interest rate - The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the stock option awards’ expected term. • Expected dividend yield - The expected dividend yield is zero as the Company has no plans to make dividend payments. The following table sets forth the weighted average assumptions used in estimating the fair value of stock option awards on the grant date: Year Ended December 31, 2021 Expected volatility 81.7 % Risk-free interest rate 1.07 % Expected term (in years) 6.2 Expected dividend yield — % Equity-Based Compensation Expense The following table summarizes the components of equity-based compensation expense resulting from the grant of stock options, RSUs, RSAs, Profits Interests, and options for common units, recorded in the Company’s consolidated statement of operations and comprehensive loss (in thousands): Year Ended December 31, 2021 2020 Research and development $ 8,156 $ — General and administrative 14,439 — Total equity-based compensation $ 22,595 $ — 10. Commitments and Contingencies Leases Rani LLC pays for the use of its office, laboratory and manufacturing facility in San Jose, California as part of the RMS-ICL Service Agreement (Note 6), which is accounted for as an operating lease. The lease requires for certain payments of real estate taxes, insurance and certain common area maintenance costs in addition to future minimum lease payments. The RMS-ICL Service Agreement has a twelve month term and will automatically renew for successive twelve month periods unless RMS or ICL terminate occupancy under the RMS-ICL Service Agreement upon six months notice. As of December 31, 2021 , no renewal option periods were included in the estimated minimum lease terms as the options were not deemed to be reasonably assured to be exercised. Total operating lease expense incurred with ICL was $ 0.8 million for each of the years ended December 31, 2021 and 2020. Legal Proceedings In the ordinary course of business, the Company may be subject to legal proceedings, claims and litigation as the Company operates in an industry susceptible to patent legal claims. The Company accounts for estimated losses with respect to legal proceedings and claims when such losses are probable and estimable. Legal costs associated with these matters are expensed when incurred. The Company is currently involved in several opposition proceedings at the European Patent Office, all of which were asserted against us by Novo Nordisk AS. The ultimate outcome of this matter as a loss is not probable nor is there any amount that is reasonably estimable. However, the outcome of the opposition proceedings could impact the Company’s ability to commercialize its products in Europe. 11. Long-Term Debt Convertible Notes In September 2020, Rani LLC entered into a secured convertible loan agreement (the “Loan and Security Agreement” or the “Loan”) with Avenue Venture Opportunity Fund L.P. (“Avenue”), whereby Rani LLC could borrow up to a maximum of $ 10.0 million, with $ 3.0 million being immediately available. The remaining $ 7.0 million available could be borrowed if Avenue received evidence of at least $ 40.0 million of net cash proceeds from the sale or issuance of securities to existing investors, or upfront payments in connection with strategic partnerships by March 31, 2021. Rani LLC opted not to draw down this additional amount, and the option has since expired undrawn. In exchange for access to this facility, Rani LLC agreed to issue warrants exercisable into Rani LLC preferred units amounting to $ 0.9 million; Rani LLC subsequently granted 118,929 Series E warrants with an exercise price of $ 7.1471 per unit (Note 7). The Loan was interest only until September 2021 and bore interest at a variable rate of interest per annum, compounded monthly until its maturity date of September 2023 , at which time all outstanding principal and interest would have become due and payable in cash if not already converted. Rani LLC’s obligations under the Loan were secured by a first priority security interest in substantially all of its assets. The Loan included customary events of default, including instances of a material adverse change in the Rani LLC’s operations, which may require prepayment of the outstanding Loan. At December 31, 2020 , the effective interest rate on the Loan was 20.56 %. At December 31, 2021 , there was no Loan outstanding. The Loan contained a contingent interest feature in the event of default that was not clearly and closely related to the underlying note and met the definition of a derivative. The Company concluded that the fair value of this derivative was insignificant for all periods presented. The Loan and Security Agreement contained negative and affirmative covenants, including covenants that restricted the ability of Rani LLC and its current and future subsidiaries' ability to, among other things, incur or prepay existing indebtedness, pay dividends or distributions, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, and make changes in the nature of the business. The Loan and Security Agreement also contained certain objective events of default, including, without limitation, nonpayment of principal, interest or other obligations, violation of the covenants, insolvency, court ordered judgments, and change in control. The Loan and Security Agreement required Rani LLC to provide audited consolidated financial statements to the lenders no later than 120 days after year-end. In July 2021, the Company repaid, in full, the $ 3.0 million of principal and approximately $ 0.5 million of final payment and fees under the Loan and Security Agreement resulting in a $ 0.7 million loss on extinguishment of debt recorded in the Company's consolidated statement of operations and comprehensive loss for the year ended December 31, 2021. Avenue Capital also waived their right to convert the outstanding principal into Series E Preferred Units. Paycheck Protection Program Loan In April 2020, the Company received a $ 1.3 million small business loan under the Paycheck Protection Program (“PPP Loan”) as part of the CARES Act. The PPP Loan was due to mature in April 2022 , and bore interest at a rate of 1.0 % per annum. The PPP Loan was evidenced by a promissory note, which contained customary events of default relating to, among other things, payment defaults and breaches of representations and warranties. The PPP Loan could be prepaid at any time prior to maturity with no prepayment penalties. The Company used all proceeds from the PPP Loan to retain employees, maintain payroll and make lease and utility payments. In September 2021, the Company repaid in full the $ 1.3 million of principal and interest related to the PPP Loan. 12. Income Taxes Income tax expense consisted of the following for the years ended (in thousands): December 31, 2021 2020 Current Federal $ 38 $ 34 State 3 1 Total current tax expense $ 41 $ 35 Deferred Federal $ — $ — State — — Total deferred tax expense $ — $ — Income tax expense $ 41 $ 35 The effective tax rate for the years ended December 31, 2021 and 2020 is different from the federal statutory rate primarily due to the valuation allowance against deferred tax assets as a result of insufficient sources of income and pass-through loss not subject to income tax. A reconciliation between the Company’s effective tax rate and the applicable U.S. federal statutory income tax rate is summarized as follows: Year Ended December 31, 2021 2020 Federal statutory rate 21.0 % 21.0 % State tax, net of federal tax benefit 1.0 ( 0.3 ) Loss from non-controlling interest ( 5.3 ) — Rate effect from pass-through entity ( 12.6 ) ( 21.9 ) Permanent items ( 0.1 ) — Research and development credits 2.9 3.8 Uncertain tax positions ( 0.4 ) ( 0.6 ) Change in valuation allowance ( 6.6 ) ( 2.2 ) Effective tax rate ( 0.1 ) % ( 0.2 ) % Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes. The components that comprise the Company’s net deferred taxes consist of the following (in thousands): Year Ended December 31, 2021 2020 Deferred tax assets Investment in partnership $ 25,226 $ — Net operating loss carryforward 1,952 — Research and development credits 1,458 350 Accruals 55 32 Total deferred tax assets 28,691 382 Valuation allowance ( 28,671 ) ( 369 ) Total deferred tax assets, net of valuation allowance 20 13 Deferred tax liability Prepaid expenses ( 20 ) ( 13 ) Net deferred tax asset $ — $ — The Company determines its valuation allowance on deferred tax assets by considering both positive and negative evidence in order to ascertain whether it is more likely than not that deferred tax assets will be realized. Realization of deferred tax assets is dependent upon the generation of future taxable income, if any, the timing and amount of which are uncertain. Because of the Company’s recent history of operating losses, the Company believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly, has recognized a full valuation allowance on its deferred tax assets. The valuation allowance increased by $ 28.3 million and $ 0.4 million for the years ended December 31, 2021 and 2020 , respectively, primarily due to the increase in the Company’s net operating losses (“NOL”) during the period. As of December 31, 2021, the Company had the following tax attribute carryforwards that will expire on various dates as follows: Amount (in thousands) Expiration Years Net operating losses, federal (post December 31, 2017) $ 6,977 Indefinite Net operating loss, state (definite) 6,974 2041 Research and development tax credits, federal 1,021 2040 - 2041 Research and development tax credits, state 963 Indefinite Pursuant of Internal Revenue Code (“IRC”) Sections 382 and 383, annual use of the Company’s research and development credit carryforwards may be limited in the event accumulative change in ownership of more than 50% occurs within a three-year period. As of December 31, 2021, the Company has not performed an IRC Section 382 or 383 analysis. If a change in ownership were to have occurred, additional tax credit carryforwards could be eliminated or restricted. If eliminated, the related asset would be removed from the deferred tax asset schedule with a corresponding reduction in the valuation allowance. The Company is subject to United States federal and California income taxes and is not currently under examination by any federal or state taxing authorities. The federal and California returns for tax years 2017 through 2021 remain open to examination. The following table summarizes the changes in the amount of the unrecognized tax benefits (in thousands): Year Ended December 31, 2021 2020 Balance at the beginning of the year $ 104 $ — Gross increase related to current year positions 254 104 Balance at the end of the year $ 358 $ 104 Included in the balance of unrecognized tax benefits at December 31, 2021, is $ 0.3 million that if recognized would impact the Company’s income tax benefit and effective tax rate. The Company does not expect any significant increases or decreases in its unrecognized tax benefits within the next twelve months. Tax Receivable Agreement The Company is party to a TRA with the Continuing LLC Owners (Note 2). As there have been no transactions that would trigger a liability under this agreement, the Company has no t recognized any deferred tax assets or liabilities related to this agreement as of December 31, 2021 . 13. Net Loss Per Share The following table sets forth the computation of basic and diluted net loss per Class A common share attributable to Rani Holdings (in thousands, except per share data): Year Ended December 31, 2021 Numerator: Net loss per Class A common share attributable to Rani Therapeutics Holdings, Inc. $ ( 8,331 ) Denominator: Weighted average Class A common share outstanding—basic and diluted 19,534 Net loss per Class A common share attributable to Rani Therapeutics Holdings, Inc.—basic and diluted $ ( 0.43 ) The following table shows the total outstanding securities considered anti-dilutive and therefore excluded from the computation of diluted net loss per Class A common share attributable to Rani Holdings: Year Ended December 31, 2021 Paired Interests 29,290,391 Stock options 2,300,819 Class A Units of Rani LLC exchangeable for Class A common stock 1,545,522 Restricted stock units 596,500 Restricted stock awards 113,173 33,846,405 Shares of Class B Common Stock do not share in the Company’s earnings and are not participating securities. Accordingly, separate presentation of loss per share of Class B common stock under the two-class method has not been provided. The outstanding shares of Class B Common Stock were determined to be anti-dilutive for the year ended December 31, 2021 . Therefore, they are not included in the computation of net loss per Class A common share attributable to Rani Therapeutics Holdings, Inc. 14. Subsequent Events In March 2022, Rani LLC amended the Rani LLC-ICL Service Agreement, pursuant to which Rani LLC has a right to occupy certain facilities leased by ICL in Milpitas, California and San Antonio, Texas (“Occupancy Services”) for general office, research and development, and light manufacturing. The Occupancy Services in Milpitas, California have a term until February 2023, with the potential for two annual renewals, subject to approval by ICL upon a nine months’ notice of renewal prior to the end of the lease term, and the Occupancy Services in San Antonio, Texas continue until either party gives six months notice of termination . The future aggregate minimum lease payments associated with the Occupancy Services total $ 0.4 million. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.