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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO

Commission File Number: 001-41365

 

HILLEVAX, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

85-0545060

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

75 State Street, Suite 100 - #9995, Boston, Massachusetts

02109

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (617) 213-5054

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.0001 par value per share

 

HLVX

 

Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.


 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of May 9, 2023, the registrant had 39,200,174 shares of common stock, $0.0001 par value per share, outstanding.

 

 


 

Table of Contents

 

 

 

Page

PART I

FINANCIAL INFORMATION

1

 

 

 

Item 1.

Financial Statements (Unaudited)

1

 

Condensed Consolidated Balance Sheets

1

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

2

 

Condensed Consolidated Statements of Stockholders' Equity (Deficit)

3

 

Condensed Consolidated Statements of Cash Flows

4

 

Notes to Condensed Consolidated Financial Statements

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

28

 

 

 

PART II

OTHER INFORMATION

28

 

 

 

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

Item 3.

Defaults Upon Senior Securities

29

Item 4.

Mine Safety Disclosures

29

Item 5.

Other Information

29

Item 6.

Exhibits

30

Signatures

31

 

 

 


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

HilleVax, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and par value data)

(unaudited)

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

260,542

 

 

$

279,401

 

Prepaid expenses and other current assets

 

 

9,317

 

 

 

11,212

 

Total current assets

 

 

269,859

 

 

 

290,613

 

Property and equipment, net

 

 

10,450

 

 

 

5,586

 

Operating lease right-of-use assets

 

 

18,999

 

 

 

19,359

 

Restricted cash

 

 

1,631

 

 

 

1,631

 

Other assets

 

 

22

 

 

 

22

 

Total assets

 

$

300,961

 

 

$

317,211

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable (includes related party amounts of $0 and $141,
   respectively)

 

$

1,744

 

 

$

4,744

 

Accrued expenses (includes related party amounts of $312 and $140,
   respectively)

 

 

17,412

 

 

 

8,210

 

Accrued interest

 

 

79

 

 

 

55

 

Current portion of operating lease liability

 

 

38

 

 

 

37

 

Total current liabilities

 

 

19,273

 

 

 

13,046

 

Operating lease liability, net of current portion

 

 

22,977

 

 

 

21,569

 

Long-term debt, net of debt discount

 

 

14,903

 

 

 

14,792

 

Other long-term liabilities

 

 

747

 

 

 

575

 

Total liabilities

 

 

57,900

 

 

 

49,982

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, $0.0001 par value; authorized shares— 50,000,000 at March 31, 2023
and December 31, 2022;
no shares issued and outstanding at March 31, 2023 and
December 31, 2022

 

 

 

 

 

 

Common stock, $0.0001 par value; authorized shares— 500,000,000 at March 31, 2023
and December 31, 2022; issued shares—
39,200,174 and 39,240,746  at
March 31, 2023 and December 31, 2022, respectively; outstanding shares—
37,841,987 and 37,656,037 at March 31, 2023 and December 31, 2022, respectively

 

 

4

 

 

 

4

 

Additional paid-in capital

 

 

535,221

 

 

 

532,499

 

Accumulated other comprehensive loss

 

 

(282

)

 

 

(281

)

Accumulated deficit

 

 

(291,882

)

 

 

(264,993

)

Total stockholders’ equity

 

 

243,061

 

 

 

267,229

 

Total liabilities and stockholders’ equity

 

$

300,961

 

 

$

317,211

 

 

See accompanying notes.

1


 

HilleVax, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share data)

(unaudited)

 

 

Three Months Ended
March 31,

 

 

2023

 

 

2022

 

Operating expenses:

 

 

 

 

 

 

Research and development (includes related party
   amounts of $
168 and $1,422, respectively)

 

$

23,164

 

 

$

6,211

 

In-process research and development - related party

 

 

 

 

 

2,500

 

General and administrative (includes related party
   amounts of $
3 and $26, respectively)

 

 

5,795

 

 

 

2,603

 

Total operating expenses

 

 

28,959

 

 

 

11,314

 

Loss from operations

 

 

(28,959

)

 

 

(11,314

)

Other income (expense):

 

 

 

 

 

 

Interest income

 

 

2,574

 

 

 

6

 

Interest expense (includes related party amounts
   of $
0 and $529, respectively)

 

 

(449

)

 

 

(2,064

)

Change in fair value of convertible promissory notes (includes related party amounts of $0 and $4,378, respectively)

 

 

 

 

 

(17,073

)

Change in fair value of warrant liabilities - related party

 

 

 

 

 

(37,424

)

Other income (expense)

 

 

(55

)

 

 

(18

)

Total other income (expense)

 

 

2,070

 

 

 

(56,573

)

Net loss

 

$

(26,889

)

 

$

(67,887

)

Other comprehensive loss:

 

 

 

 

 

 

Pension and other postemployment benefits

 

 

(1

)

 

 

 

Total comprehensive loss

 

$

(26,890

)

 

$

(67,887

)

Net loss per share, basic and diluted

 

$

(0.71

)

 

$

(10.06

)

Weighted-average shares of common stock outstanding, basic and diluted

 

 

37,753,522

 

 

 

6,748,668

 

 

See accompanying notes.

 

2


 

HilleVax, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(in thousands, except share data)

(unaudited)

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional
Paid-in
Capital

 

 

Accumulated Other Comprehensive Loss

 

 

Accumulated
Deficit

 

 

Total
Stockholders’
Equity (Deficit)

 

Balance at December 31, 2021

 

 

6,599,886

 

 

$

1

 

 

$

4,426

 

 

$

 

 

$

(105,184

)

 

$

(100,757

)

Vesting of restricted shares

 

 

297,564

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock—based compensation

 

 

 

 

 

 

 

 

272

 

 

 

 

 

 

 

 

 

272

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(67,887

)

 

 

(67,887

)

Balance at March 31, 2022

 

 

6,897,450

 

 

 

1

 

 

 

4,698

 

 

 

 

 

 

(173,071

)

 

 

(168,372

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2022

 

 

37,656,037

 

 

 

4

 

 

 

532,499

 

 

 

(281

)

 

 

(264,993

)

 

 

267,229

 

Vesting of restricted shares

 

 

174,568

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock—based compensation

 

 

 

 

 

 

 

 

2,642

 

 

 

 

 

 

 

 

 

2,642

 

Exercise of common stock options

 

 

11,382

 

 

 

 

 

 

80

 

 

 

 

 

 

 

 

 

80

 

Pension and other postemployment benefits

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(26,889

)

 

 

(26,889

)

Balance at March 31, 2023

 

 

37,841,987

 

 

$

4

 

 

$

535,221

 

 

$

(282

)

 

$

(291,882

)

 

$

243,061

 

 

See accompanying notes.

3


 

HilleVax, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

Three Months Ended
March 31,

 

 

2023

 

 

2022

 

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$

(26,889

)

 

$

(67,887

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation

 

 

1

 

 

 

 

Stock-based compensation

 

 

2,642

 

 

 

272

 

Change in fair value of convertible promissory notes (includes related party
   amounts of $
0 and $4,378, respectively)

 

 

 

 

 

17,073

 

Change in fair value of warrant liabilities - related party

 

 

 

 

 

37,424

 

Amortization of operating lease right-of-use assets

 

 

360

 

 

 

13

 

Amortization of debt discount

 

 

126

 

 

 

 

Issuance of PIK interest debt

 

 

94

 

 

 

 

Acquired in-process research and development - related party

 

 

 

 

 

2,500

 

Loss on disposal of property and equipment

 

 

 

 

 

42

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

1,895

 

 

 

(339

)

Accounts payable, accrued expenses and other long-term liabilities
   (includes related party amounts of $
31 and $(3,402), respectively)

 

 

4,384

 

 

 

(1,868

)

Accrued interest (includes related party amounts of $0 and $529,
   respectively)

 

 

24

 

 

 

2,064

 

Operating lease liabilities

 

 

1,409

 

 

 

(9

)

Net cash used in operating activities

 

 

(15,954

)

 

 

(10,715

)

Cash flows from investing activities

 

 

 

 

 

 

Cash paid for purchased in-process research and development

 

 

 

 

 

(2,500

)

Purchases of property and equipment

 

 

(2,985

)

 

 

 

Net cash used in investing activities

 

 

(2,985

)

 

 

(2,500

)

Cash flows from financing activities

 

 

 

 

 

 

Payment of initial public offering costs

 

 

 

 

 

(99

)

Proceeds from exercise of stock options

 

 

80

 

 

 

 

Net cash provided by (used in) financing activities

 

 

80

 

 

 

(99

)

Net decrease in cash, cash equivalents and restricted cash

 

 

(18,859

)

 

 

(13,314

)

Cash, cash equivalents and restricted cash—beginning of period

 

 

281,032

 

 

 

124,566

 

Cash, cash equivalents and restricted cash—end of period

 

$

262,173

 

 

$

111,252

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Cash paid for interest

 

$

192

 

 

$

 

Supplemental disclosure of noncash investing and financing activities

 

 

 

 

 

 

Unpaid initial public offering costs

 

$

 

 

$

548

 

Unpaid property and equipment purchases

 

$

3,453

 

 

$

 

Accreted final interest payment fees

 

$

109

 

 

$

 

 

See accompanying notes.

4


 

HilleVax, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Organization

Organization

HilleVax, Inc. (the “Company” or “HilleVax”) was incorporated in the state of Delaware in March 2020 under the name MokshaCo, Inc. (“MokshaCo”). On February 8, 2021, MokshaCo changed its name to HilleVax and merged with North Bridge V, Inc. (“North Bridge V”) and YamadaCo III, Inc. (“YamadaCo III”), each a Delaware corporation formed in 2019, with HilleVax being the surviving entity (the “Merger”). The Company is a biopharmaceutical company focused on developing and commercializing novel vaccines.

Forward Stock Split

On April 22, 2022, the Company effected a 1.681-for-1 forward split of shares of the Company’s common stock (the “Forward Stock Split”). The par value of the common stock was not adjusted as a result of the Forward Stock Split and the authorized shares were increased to 50,000,000 shares of common stock in connection with the Forward Stock Split. The accompanying financial statements and notes to the financial statements give retroactive effect to the Forward Stock Split for all periods presented, unless otherwise indicated.

Initial Public Offering

On May 3, 2022, the Company completed its initial public offering ("IPO") whereby it sold 13,529,750 shares of common stock at a public offering price of $17.00 per share, for net proceeds of approximately $209.5 million, after deducting underwriting discounts, commissions and offering costs of approximately $20.5 million (see Note 8).

Liquidity and Capital Resources

From inception to March 31, 2023, the Company has devoted substantially all of its efforts to organizing and staffing the Company, business planning, raising capital, in-licensing its initial vaccine candidate, HIL-214, preparing for and managing its clinical trials of HIL-214, and providing other general and administrative support for these operations. The Company has a limited operating history, has never generated any revenue, and the sales and income potential of its business is unproven. The Company has incurred net losses and negative cash flows from operating activities since its inception and expects to continue to incur net losses into the foreseeable future as it continues the development and potential commercialization of HIL-214. From inception to March 31, 2023, the Company has funded its operations through the issuance of convertible promissory notes, commercial bank debt and the sale of common stock in its IPO which closed in May 2022.

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classification of liabilities. Management is required to perform a two-step analysis over the Company’s ability to continue as a going concern. Management must first evaluate whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern (Step 1). If management concludes that substantial doubt is raised, management is also required to consider whether its plans alleviate that doubt (Step 2). Management believes that it has sufficient working capital on hand to fund operations through at least the next twelve months from the date these financial statements were issued. There can be no assurance that the Company will be successful in acquiring additional funding, if needed, that the Company’s projections of its future working capital needs will prove accurate, or that any additional funding would be sufficient to continue operations in future years.

2. Summary of Significant Accounting Policies

Basis of Presentation

The Company's financial statements include the accounts of HilleVax GmbH, a wholly-owned subsidiary formed in Zurich, Switzerland. The functional currency of both the Company and HilleVax GmbH is the U.S. dollar. The Company’s assets

5


 

and liabilities that are not denominated in the functional currency are remeasured into U.S. dollars at foreign currency exchange rates in effect at the balance sheet date except for nonmonetary assets, which are remeasured at historical foreign currency exchange rates in effect at the date of transaction. Net realized and unrealized gains and losses from foreign currency transactions and remeasurement are reported in other income (expense), in the condensed consolidated statements of operations and were not material for the periods presented. All intercompany transactions have been eliminated in consolidation.

Unaudited Interim Financial Information

The unaudited condensed consolidated financial statements as of March 31, 2023, and for the three months ended March 31, 2023 and 2022, have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”), and with U.S. generally accepted accounting principles (“GAAP”) applicable to interim financial statements. These unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s audited financial statements and include all adjustments, consisting of only normal recurring accruals, which in the opinion of management are necessary to present fairly the Company’s financial position as of the interim date and results of operations for the interim periods presented. Interim results are not necessarily indicative of results for a full year or future periods. The condensed consolidated balance sheet data as of December 31, 2022 was derived from the Company’s audited financial statements but does not include all disclosures required by GAAP. These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 17, 2023.

Use of Estimates

The preparation of the Company’s unaudited condensed consolidated financial statements requires it to make estimates and assumptions that impact the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in the Company’s condensed consolidated financial statements and accompanying notes. The most significant estimates in the Company’s unaudited condensed consolidated financial statements relate to accruals for research and development expenses, and the valuation of convertible promissory notes, warrant liabilities and various other equity instruments. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results could differ materially from those estimates and assumptions.

Fair Value Option

As permitted under Accounting Standards Codification (“ASC”) 825, Financial Instruments, (“ASC 825”), the Company has elected the fair value option to account for its convertible promissory notes issued through May 2022, when the convertible promissory notes converted into equity in connection with the Company's IPO. In accordance with ASC 825, the Company recorded these convertible promissory notes at fair value with changes in fair value recorded in the condensed consolidated statements of operations. As a result of applying the fair value option, direct costs and fees related to the convertible promissory notes were recognized in earnings as incurred and not deferred.

Fair Value Measurements

The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or non-recurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets.

Level 2: Inputs, other than the quoted prices in active markets that are observable either directly or indirectly.

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

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The carrying amounts of the Company’s financial instruments, including cash, cash equivalents and restricted cash, classified within the Level 1 designation discussed above, prepaid expenses and other current assets, accounts payable, and accrued liabilities, approximate fair value due to their short maturities. The estimated fair value of the Company’s long-term debt approximated the carrying amount given its floating interest rate basis.

The Company has no financial assets measured at fair value on a recurring basis. None of the Company’s non-financial assets or liabilities are recorded at fair value on a non-recurring basis. No transfers between levels have occurred during the periods presented.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Cash and cash equivalents include cash in readily available checking accounts and money market funds.

Restricted Cash

Restricted cash consists of a money market account securing a standby letter of credit issued in connection with the Company’s Boston Lease (as defined and described in Note 4).

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents and restricted cash. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.

Property and Equipment, Net

Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful life of the related assets (generally 3 years). Repairs and maintenance costs are charged to expense as incurred.

Leases

At the inception of a contractual arrangement, the Company determines whether the contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. Lease terms are determined at the commencement date by considering whether renewal options and termination options are reasonably assured of exercise. For its long-term operating leases, the Company recognizes a lease liability and a right-of-use (“ROU”) asset on its balance sheet and recognizes lease expense on a straight-line basis over the lease term. The lease liability is determined as the present value of future lease payments, reduced by any reimbursements for tenant improvements, using the discount rate implicit in the lease or, if the implicit rate is not readily determinable, an estimate of the Company’s incremental borrowing rate. The ROU asset is based on the lease liability, adjusted for any prepaid or deferred rent, and reduced by any reimbursements for tenant improvements. The Company aggregates all lease and non-lease components for each class of underlying assets into a single lease component and variable charges for common area maintenance and other variable costs are recognized as expense as incurred. The Company has elected to not recognize a lease liability or ROU asset in connection with short-term operating leases and recognizes lease expense for short-term operating leases on a straight-line basis over the lease term. The Company does not have any financing leases.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, such as property and equipment, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value would be assessed using discounted cash flows or other appropriate measures of fair value. The Company has not recognized any impairment losses through March 31, 2023.

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Research and Development Expenses and Accruals

All research and development costs are expensed in the period incurred and consist primarily of salaries, payroll taxes, employee benefits, stock-based compensation charges for those individuals involved in research and development efforts, external research and development costs incurred under agreements with contract research organizations and consultants to conduct and support the Company’s clinical trials of HIL-214.

The Company has entered into various research and development contracts with clinical research organizations, clinical manufacturing organizations and other companies. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and payments made in advance of performance are reflected in the accompanying balance sheets as prepaid expenses. The Company records accruals for estimated costs incurred for ongoing research and development activities. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the services, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates may be made in determining the prepaid or accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates.

In-Process Research and Development

The Company evaluates whether acquired intangible assets are a business under applicable accounting standards. Additionally, the Company evaluates whether the acquired assets have a future alternative use. Intangible assets that do not have future alternative use are considered acquired in-process research and development. When the acquired in-process research and development assets are not part of a business combination, the value of the consideration paid is expensed on the acquisition date.

Patent Costs

Costs related to filing and pursuing patent applications are recorded as general and administrative expenses and expensed as incurred since recoverability of such expenditures is uncertain.

Stock-Based Compensation

Stock-based compensation expense represents the cost of the grant date fair value of equity awards, primarily consisting of stock options and employee stock purchase rights, recognized on a straight-line basis over the requisite service period for stock options and over the respective offering period for employee stock purchase plan rights. The Company recognizes forfeitures as they occur.

Benefit plans

The Company has established a defined contribution savings plan for its employees in the United States under Section 401(k) of the Internal Revenue Code, and a defined benefits plan for its employees outside of the United States.

The defined benefits plan is valued by an independent actuary using the projected unit credit method. The liabilities correspond to the projected benefit obligations of which the discounted net present value is calculated based on years of employment, expected salary increase, and pension adjustments. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends. This plan is recognized under ASC 715, Compensation - Retirement Benefits.

Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the condensed consolidated statements of operations in the period that includes the enactment date.

The Company recognizes net deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If management determines that the Company would be able to realize its deferred tax assets in the future in excess of their net recorded amount, management would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

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The Company records uncertain tax positions on the basis of a two-step process whereby (i) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense in the condensed consolidated statements of operations. Any accrued interest and penalties are included within the related tax liability in the condensed consolidated balance sheets. The Company did not recognize any interest or penalties during the periods presented.

Comprehensive Loss

Comprehensive loss is defined as a change in equity during a period from transactions and other events and circumstances from non-owner sources. For the three months ended March 31, 2023, comprehensive loss included gains and losses on the Company's pension benefit obligation. For the three months ended March 31, 2022, the Company’s comprehensive loss was the same as its reported net loss.

Segment Reporting

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker in making decisions on how to allocate resources and assess performance. The Company views its operations and manages its business as one operating segment.

Net Loss Per Share

Basic net loss per share is computed by dividing the consolidated net loss by the weighted-average number of common shares outstanding for the period, without consideration for potentially dilutive securities. The Company has excluded weighted-average unvested shares of 1,492,789 shares and 2,476,653 shares from the basic weighted-average number of common shares outstanding for the three months ended March 31, 2023 and 2022, respectively. Diluted net loss per share is computed by dividing the consolidated net loss by the weighted-average number of common shares and dilutive common stock equivalents outstanding for the period determined using the treasury-stock and if-converted methods. Potentially dilutive common stock equivalents are comprised of unvested common stock, common stock options, contingently issuable shares under the Company's employee stock purchase plan, and common stock warrants. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding as inclusion of the potentially dilutive common stock equivalents would be antidilutive.

Potentially dilutive securities not included in the calculation of diluted net loss per share, because to do so would be anti-dilutive, are as follows (in common stock equivalent shares):

 

 

March 31,

 

 

2023

 

 

2022

 

Common stock options

 

 

3,373,332

 

 

 

1,190,148

 

Common stock warrants

 

 

 

 

 

5,883,500

 

Unvested common stock

 

 

2,117,453

 

 

 

2,327,871

 

ESPP shares

 

 

20,002

 

 

 

 

Total potentially dilutive shares

 

 

5,510,787

 

 

 

9,401,519

 

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 irrevocably elected to avail itself of this exemption from new or revised accounting standards and, therefore, will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Recently Adopted Accounting Standards

There were no recently adopted accounting standards which would have a material impact on the Company's financial statements.

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Recently Issued Accounting Pronouncements

The Company assesses the adoption impacts of recently issued accounting standards by the Financial Accounting Standards Board or other standard setting bodies on the Company's condensed consolidated financial statements as well as material updates to previous assessments, if any. Although there were several other new accounting pronouncements issued or proposed by the FASB, the Company does not believe any of those accounting pronouncements have had or will have a material impact on its financial position or operating results.

 

3. Other Balance Sheet Details

Property and Equipment

 

Property and equipment, net consisted of the following (in thousands):

 

 

March 31,

 

 

December 31,

 

 

2023

 

 

2022

 

Furniture and equipment

 

$

10

 

 

$

11

 

Leasehold improvements

 

 

378

 

 

 

378

 

Construction in progress

 

 

10,063

 

 

 

5,198

 

Total property and equipment, at cost

 

 

10,451

 

 

 

5,587

 

Less accumulated depreciation

 

 

1

 

 

 

1

 

Property and equipment, net

 

$

10,450

 

 

$

5,586

 

 

Depreciation expense for the three months ended March 31, 2023 and 2022 was not material.

 

Accrued Expenses

 

Accrued expenses consisted of the following (in thousands):

 

 

March 31,

 

 

December 31,

 

 

2023

 

 

2022

 

Accrued external research and development costs

 

$

11,638

 

 

$

3,510

 

Accrued payroll and payroll-related costs

 

 

1,657

 

 

 

4,018

 

Other

 

 

4,117

 

 

 

682

 

Total accrued expenses

 

$

17,412

 

 

$

8,210

 

 

Cash, Cash Equivalents and Restricted Cash

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash recorded within the accompanying condensed consolidated balance sheets that sum to the amounts shown in the condensed consolidated statements of cash flows (in thousands):

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Cash and cash equivalents

 

$

260,542

 

 

$

279,401

 

Restricted cash

 

 

1,631

 

 

 

1,631

 

Total cash, cash equivalents and restricted cash

 

$

262,173

 

 

$

281,032

 

 

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4. Leases

Operating Leases

In August 2021, the Company entered into a five-year noncancelable operating lease for a facility in Switzerland, which it determined was an operating lease at the inception of the lease contract. The lease commencement date occurred in September 2021 when the Company gained access to the facility. The Company is obligated to make monthly rental payments that periodically escalate during the lease term and is subject to additional charges for common area maintenance and other costs. The Company has an option to extend the lease for a period of five years which the Company is not reasonably certain to exercise.

In March 2022, the Company entered into a lease for office and laboratory space located in Boston, Massachusetts (the “Boston Lease”), which it determined was an operating lease at the inception of the lease contract. The Boston Lease commenced in April 2022 with base rental payments beginning in January 2023. The Boston Lease includes certain tenant improvement allowances for the reimbursement of up to $6.3 million of costs incurred by the Company, and an option for the Company to extend the lease for a period of five years, which the Company is not reasonably certain to exercise. The Company determined that it owns the leasehold improvements related to the Boston Lease and, as such, reflected the $6.3 million lease incentive as a reduction of the rental payments used to measure the operating lease liability, and, in turn, the operating lease right-of-use asset as of the lease commencement date in April 2022. Between the lease commencement date and March 31, 2023, the Company recorded increases of $1.9 million to the operating lease liability as and when such leasehold improvements were paid for by the landlord. The Company expects to receive all tenant improvement reimbursements during the year ending December 31, 2023. Under the terms of the Boston Lease, the Company provided the lessor with an irrevocable standby letter of credit secured by restricted cash in the amount of $1.6 million.

The following table summarizes operating lease expense for the three months ended March 31, 2023 (in thousands):

 

 

Three Months Ended
March 31,

 

 

2023

 

Lease expense:

 

 

 

Operating lease expense

 

$

779

 

The Company incurred an immaterial amount of expense related to short-term leases and variable lease costs during the three months ended March 31, 2023. Operating lease expense was not material for the three months ended March 31, 2022.

The following table summarizes the lease term and discount rate for operating leases:

 

 

Three Months Ended
March 31,

 

 

2023

 

 

2022

 

Other information:

 

 

 

 

 

 

Weighted-average remaining lease term

 

 

9.70

 

 

 

4.50

 

Weighted-average discount rate

 

 

7.4

%

 

 

6.0

%

As there was not an implicit rate within the leases, management estimated the incremental borrowing rate based on the rate of interest the Company would have to pay to borrow a similar amount on a collateralized basis over a similar term as well as by using a set of peer companies' incremental borrowing rates.

The following table summarizes the cash paid for amounts included in the measurement of lease liabilities (in thousands):

 

 

March 31,
2023

 

Cash paid for amounts included in the measurement of operating lease liabilities (operating cash flows)

 

$

871

 

 

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At March 31, 2023, the future minimum noncancelable operating lease payments were as follows (in thousands):

 

 

March 31,
2023

 

Years ending December 31:

 

 

 

2023

 

$

2,613

 

2024

 

 

3,584

 

2025

 

 

3,688

 

2026

 

 

3,784

 

2027

 

 

3,860

 

Thereafter

 

 

21,075

 

Total undiscounted operating lease payments

 

 

38,604

 

Present value adjustment

 

 

(11,113

)

Tenant improvement reimbursements

 

 

(4,476

)

Operating lease liability

 

 

23,015

 

Less current portion of operating lease liability

 

 

38

 

Operating lease liability, net of current portion

 

$

22,977

 

 

5. Related Party Transactions

Frazier Life Sciences X, L.P. or its affiliates (“Frazier”) is a principal stockholder of the Company and is represented on the Company’s board of directors. From January 8, 2019 (inception) to March 31, 2023, the Company and Frazier reimbursed each other for various goods and services, including personnel related expenses, travel, insurance, facilities and other various overhead and administrative expenses. As of March 31, 2023 and December 31, 2022, the Company had outstanding amounts due to Frazier of $9,000 and $6,000, respectively, related to these shared operating expenses. For the three months ended March 31, 2023 and 2022, the Company incurred $3,000 and $26,000, respectively, of shared operating expenses.

As described in Note 7, the Company borrowed amounts from Frazier in connection with various convertible note financings. For the three months ended March 31, 2022, the Company recognized a $17.1 million change in fair value of convertible promissory notes in connection with convertible promissory notes issued to Frazier. For the three months ended March 31, 2022, the Company recognized $2.1 million of interest expense in connection with convertible promissory notes issued to Frazier. The convertible promissory notes automatically converted into 10,672,138 shares of the Company's common stock immediately prior to the completion of the IPO.

In connection with the Takeda License (as defined and described in Note 6), Takeda became a related party stockholder with representation on the Company’s board of directors. The Company and Takeda are party to a TSA (as defined and described in Note 6) under which the Company is obligated to pay Takeda for certain services, including pass-through costs, related to research and development and regulatory assistance services, oversight and management of ongoing clinical and research studies, and maintenance of third-party vendor contracts. For the three months ended March 31, 2023 and 2022, the Company incurred $0.2 million and $1.4 million, respectively, of research and development expenses for Takeda’s services. As of March 31, 2023 and December 31, 2022, the Company had $0.3 million and $0.3 million, respectively, of accounts payable and accrued expenses due to Takeda. See Note 6 for further information regarding the Company’s related party transactions with Takeda.

6. Commitments and Contingencies

License Agreement

On July 2, 2021, the Company entered into a license agreement with Takeda pursuant to which it was granted an exclusive sublicensable, royalty-bearing license (the “Takeda License”) to develop and commercialize HIL-214 pharmaceutical products for all human uses on a worldwide basis outside of Japan (the “Territory”).

The Company will be responsible, at its own cost, for the development, manufacture and commercialization of HIL-214 products in the Territory, and the Company will integrate certain Japan development activities into its development activities at its own cost. The Company is obligated to use commercially reasonable efforts to develop and commercialize HIL-214 products in the Territory, and to seek regulatory approval for such products throughout the world.

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In consideration of the Takeda License, the Company (i) paid Takeda $2.5 million in cash, (ii) issued Takeda 840,500 shares of its common stock at a fair value of $4.4 million, (iii) issued Takeda a warrant (the “Takeda Warrant”) to purchase 5,883,500 shares of its common stock at an exercise price of $0.0000595 per share, which was fully exercised in November 2022, and (iv) issued Takeda a warrant right (the “Takeda Warrant Right”) to receive an additional common stock warrant should Takeda’s fully-diluted ownership of the Company, including the Takeda Warrant, represent less than a certain specified percentage of the fully-diluted capitalization, including shares issuable upon conversion of outstanding convertible promissory notes, calculated immediately prior to the earlier of the closing of the Company’s IPO or a change of control transaction, at an initial fair value of $34,000. In addition, the Company is obligated to pay Takeda an aggregate of $2.5