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, 2020
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: 001-39062
FREQUENCY THERAPEUTICS, INC.
(Exact Name of Registrant as Specified in its Charter)
|
Delaware |
47-2324450 |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
|
19 Presidential Way, 2nd Floor Woburn, MA |
01801 |
|
(Address of principal executive offices) |
(Zip Code) |
(866) 389-1970
(Registrant’s telephone number, including area code )
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, $0.001 par value per share |
|
FREQ |
|
The 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 |
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☐ |
|
Accelerated filer |
|
☐ |
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|||
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Non-accelerated filer |
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☒ |
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Smaller reporting company |
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☒ |
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|
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|
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|
|
|
|
|
|
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 April 30, 2020, the registrant had 31,013,094 shares of common stock, $0.001 par value per share, outstanding.
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Page |
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PART I. |
4 |
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Item 1. |
4 |
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4 |
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5 |
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6 |
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Consolidated Statement of Convertible Preferred Stock and Stockholder’s Equity (Deficit) |
7 |
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8 |
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9 |
|
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
31 |
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Item 3. |
43 |
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Item 4. |
43 |
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PART II. |
44 |
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Item 1. |
44 |
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Item 1A. |
44 |
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Item 2. |
92 |
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Item 3. |
92 |
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Item 4. |
92 |
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Item 5. |
92 |
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Item 6. |
93 |
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94 |
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This Quarterly Report on Form 10-Q, or Quarterly Report, contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our future results of operations and financial position, business strategy, product candidates, clinical development plans and expectations, prospective products, product approvals, research and development costs, timing and likelihood of success, and plans and objectives of management for future operations and results, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of important factors that could cause actual results to differ materially from those in the forward-looking statements, including the risks, uncertainties and assumptions described under the sections in this Quarterly Report titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements are subject to numerous risks, including, without limitation, the following:
|
|
• |
the impact of the novel coronavirus, COVID-19, on our ongoing and planned clinical trials, our research development and manufacturing activities, the relocation of our offices and laboratory facilities and our business and financial markets; |
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|
• |
the initiation, timing, progress and results of our preclinical and clinical trials and research and development of programs, including our ongoing Phase 2a clinical trial and any planned additional Phase 2 clinical trials for FX-322 and our program to develop a product candidate for the treatment of multiple sclerosis, or MS; |
|
|
• |
our ability to continue to develop our progenitor cell activation, or PCA, platform and identify additional product candidates; |
|
|
• |
our ability to successfully complete clinical trials of any product candidate and obtain regulatory approval for it; |
|
|
• |
the timing or likelihood of regulatory filings and approvals, including our planned filing of an investigational new drug application for our MS product candidate; |
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|
• |
the commercialization, marketing and manufacture of any product candidate, if approved; |
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|
• |
the pricing and reimbursement of any product candidate, if approved; |
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• |
the rate and degree of market acceptance and clinical utility of any products for which we receive regulatory approval; |
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|
• |
the implementation of our strategic plans for our business, product candidates, and technology; |
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|
• |
the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates, PCA platform, and technology; |
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|
• |
estimates of our expenses, future revenues, capital requirements, and our needs for additional financing; |
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|
• |
our ability to maintain and establish collaborations, including our License and Collaboration Agreement with Astellas Pharma Inc.; |
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• |
our financial performance and the sufficiency of our financial resources; and |
|
|
• |
developments relating to our competitors and our industry, including the impact of government regulation. |
2
Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur, and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances, or otherwise.
You should read this Quarterly Report and the documents that we reference in this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. We qualify that all of our forward-looking statements by these cautionary statements.
3
PART I – FINANCIAL INFORMATION
(in thousands, except share and per share amounts)
(unaudited)
|
|
|
March 31, 2020 |
|
|
December 31, 2019 |
|
||
|
Assets |
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
203,090 |
|
|
$ |
200,158 |
|
|
Short-term marketable securities |
|
|
3,023 |
|
|
|
17,197 |
|
|
Prepaid expenses and other current assets |
|
|
3,828 |
|
|
|
4,000 |
|
|
Total current assets |
|
|
209,941 |
|
|
|
221,355 |
|
|
Property and equipment, net |
|
|
1,889 |
|
|
|
1,762 |
|
|
Operating lease - right-of-use |
|
|
2,088 |
|
|
|
— |
|
|
Restricted cash |
|
|
1,803 |
|
|
|
101 |
|
|
Total assets |
|
$ |
215,721 |
|
|
$ |
223,218 |
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
2,651 |
|
|
$ |
1,219 |
|
|
Accrued expenses |
|
|
1,992 |
|
|
|
3,239 |
|
|
Deferred revenue |
|
|
38,674 |
|
|
|
48,152 |
|
|
Operating lease liability - right-of-use |
|
|
411 |
|
|
|
— |
|
|
Other current liabilities |
|
|
— |
|
|
|
170 |
|
|
Total current liabilities |
|
|
43,728 |
|
|
|
52,780 |
|
|
Deferred revenue, net of current portion |
|
|
5,114 |
|
|
|
2,900 |
|
|
Operating lease liability - right of use, net of current portion |
|
|
2,030 |
|
|
|
— |
|
|
Long-term liabilities |
|
|
— |
|
|
|
180 |
|
|
Total liabilities |
|
|
50,872 |
|
|
|
55,860 |
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 10,000,000 shares authorized, no shares issued or outstanding at March 31, 2020 and December 31, 2019, respectively |
|
|
— |
|
|
|
— |
|
|
Common stock, $0.001 par value; 200,000,000 and 165,000,000 shares authorized, 31,009,250 and 30,844,507 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively |
|
|
31 |
|
|
|
31 |
|
|
Additional paid-in capital |
|
|
238,634 |
|
|
|
236,161 |
|
|
Accumulated other comprehensive income |
|
|
(15 |
) |
|
|
54 |
|
|
Accumulated deficit |
|
|
(73,801 |
) |
|
|
(68,888 |
) |
|
Total stockholders’ equity |
|
|
164,849 |
|
|
|
167,358 |
|
|
Total liabilities and stockholders’ equity |
|
$ |
215,721 |
|
|
$ |
223,218 |
|
See accompanying notes.
4
Consolidated Statements of Operations
(in thousands, except share and per share amounts)
(unaudited)
|
|
|
Three Months Ended March, 31 |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
Revenue |
|
$ |
7,264 |
|
|
$ |
— |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Research and development |
|
|
6,670 |
|
|
|
3,446 |
|
|
General and administrative |
|
|
6,249 |
|
|
|
2,470 |
|
|
Total operating expenses |
|
|
12,919 |
|
|
|
5,916 |
|
|
Loss from operations |
|
|
(5,655 |
) |
|
|
(5,916 |
) |
|
Interest income |
|
|
710 |
|
|
|
99 |
|
|
Realized gain on investments |
|
|
69 |
|
|
|
— |
|
|
Foreign exchange gain (loss) |
|
|
1 |
|
|
|
(9 |
) |
|
Loss before income taxes |
|
|
(4,875 |
) |
|
|
(5,826 |
) |
|
Income taxes |
|
|
(38 |
) |
|
|
— |
|
|
Net loss |
|
$ |
(4,913 |
) |
|
$ |
(5,826 |
) |
|
Net loss per share attributable to common stockholders-basic and diluted |
|
$ |
(0.16 |
) |
|
$ |
(3.24 |
) |
|
Weighted-average shares of common stock outstanding-basic and diluted |
|
|
30,868,220 |
|
|
|
1,797,986 |
|
See accompanying notes.
5
Consolidated Statements of Comprehensive Loss
(in thousands, except share and per share amounts)
(unaudited)
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
Net loss |
|
$ |
(4,913 |
) |
|
$ |
(5,826 |
) |
|
Other comprehensive gain (loss): |
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on marketable securities |
|
|
(69 |
) |
|
|
70 |
|
|
Total comprehensive gain (loss) |
|
|
(69 |
) |
|
|
70 |
|
|
Comprehensive loss |
|
$ |
(4,982 |
) |
|
$ |
(5,756 |
) |
See accompanying notes.
6
Consolidated Statement of Convertible Preferred Stock and Stockholder’s Equity (Deficit)
(in thousands, except share and per share amounts)
|
|
|
Series B convertible preferred shares issued |
|
|
Series B convertible preferred value |
|
|
Series B-1 convertible preferred shares issued |
|
|
Series B-1 convertible preferred value |
|
|
Series A convertible preferred shares issued |
|
|
Series A convertible preferred value |
|
|
Series A-1 convertible preferred shares issued |
|
|
Series A-1 convertible preferred value |
|
|
Non- controlling interest |
|
|
|
Common shares issued |
|
|
Common par value |
|
|
Additi- onal paid-in capital |
|
|
Accumulated Other Comprehensive Income |
|
|
Accumu- lated deficit |
|
|
Total Stock- holders’ equity |
|
|||||||||||||||
|
Balance, December 31, 2019 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
30,844,507 |
|
|
$ |
31 |
|
|
$ |
236,161 |
|
|
$ |
54 |
|
|
$ |
(68,888 |
) |
|
$ |
167,358 |
|
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
2,164 |
|
|
|
— |
|
|
|
— |
|
|
|
2,164 |
|
|
Issuance of common stock upon exercise of stock options |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
164,743 |
|
|
|
— |
|
|
|
309 |
|
|
|
— |
|
|
|
— |
|
|
|
309 |
|
|
Other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(69 |
) |
|
|
— |
|
|
|
(69 |
) |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,913 |
) |
|
|
(4,913 |
) |
|
Balance, March 31, 2020 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
31,009,250 |
|
|
$ |
31 |
|
|
$ |
238,634 |
|
|
$ |
(15 |
) |
|
$ |
(73,801 |
) |
|
$ |
164,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018 |
|
|
41,857,005 |
|
|
$ |
38,224 |
|
|
|
10,000 |
|
|
$ |
9 |
|
|
|
62,528,507 |
|
|
$ |
46,694 |
|
|
|
10,000 |
|
|
$ |
8 |
|
|
$ |
3,773 |
|
|
|
|
2,084,710 |
|
|
$ |
2 |
|
|
$ |
804 |
|
|
$ |
— |
|
|
$ |
(49,088 |
) |
|
$ |
(48,282 |
) |
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
49 |
|
|
|
— |
|
|
|
— |
|
|
|
49 |
|
|
Issuance of Series B convertible preferred stock |
|
|
288,991 |
|
|
|
266 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Issuance of common stock upon exercise of stock options |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
131,488 |
|
|
|
— |
|
|
|
76 |
|
|
|
— |
|
|
|
— |
|
|
|
76 |
|
|
Other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
70 |
|
|
|
— |
|
|
|
70 |
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,826 |
) |
|
|
(5,826 |
) |
|
Balance, March 31, 2019 |
|
|
42,145,996 |
|
|
$ |
38,490 |
|
|
|
10,000 |
|
|
$ |
9 |
|
|
|
62,528,507 |
|
|
$ |
46,694 |
|
|
|
10,000 |
|
|
$ |
8 |
|
|
$ |
3,773 |
|
|
|
|
2,216,198 |
|
|
$ |
2 |
|
|
$ |
929 |
|
|
$ |
70 |
|
|
$ |
(54,914 |
) |
|
$ |
(53,913 |
) |
See accompanying notes
7
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(4,913 |
) |
|
$ |
(5,826 |
) |
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
Stock based compensation |
|
|
2,164 |
|
|
|
49 |
|
|
Depreciation expense |
|
|
215 |
|
|
|
167 |
|
|
Non-cash lease expense |
|
|
75 |
|
|
|
— |
|
|
Deferred lease incentives |
|
|
— |
|
|
|
(39 |
) |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accounts receivable, prepaid expenses and other current assets |
|
|
247 |
|
|
|
(112 |
) |
|
Accounts payable |
|
|
1,432 |
|
|
|
94 |
|
|
Deferred revenue |
|
|
(7,264 |
) |
|
|
— |
|
|
Accrued expenses |
|
|
(1,319 |
) |
|
|
(483 |
) |
|
Net cash used in operating activities |
|
|
(9,363 |
) |
|
|
(6,150 |
) |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(343 |
) |
|
|
(459 |
) |
|
Purchase of available for sale securities |
|
|
— |
|
|
|
(34,882 |
) |
|
Redemption of available for sale securities |
|
|
14,031 |
|
|
|
— |
|
|
Net cash provided by (used in) investing activities |
|
|
13,688 |
|
|
|
(35,341 |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
Proceeds from issuance of Series B convertible preferred stock, net of issuance costs |
|
|
— |
|
|
|
266 |
|
|
Proceeds from issuance of common stock |
|
|
309 |
|
|
|
76 |
|
|
Net cash provided by financing activities |
|
|
309 |
|
|
|
342 |
|
|
Net increase (decrease) in cash, cash equivalents and short-term investments |
|
|
4,634 |
|
|
|
(41,149 |
) |
|
Cash, cash equivalents, short-term investments and restricted cash at beginning of period |
|
|
200,259 |
|
|
|
42,290 |
|
|
Cash, cash equivalents, short-term investments, and restricted cash at end of period |
|
$ |
204,893 |
|
|
$ |
1,141 |
|
|
Non-cash items |
|
|
|
|
|
|
|
|
|
Right-of-use assets in exchange for lease liabilities |
|
$ |
(2,163 |
) |
|
$ |
— |
|
See accompanying notes
8
Notes to Unaudited Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
1. Organization and basis of presentation
Frequency Therapeutics, Inc., together with its wholly owned subsidiaries, Frequency Therapeutics, PTY, LTD, Frequency Therapeutics Securities Corporation and Frequency Therapeutics Japan KK (Frequency Japan) (the Company), headquartered in Woburn, Massachusetts, was incorporated in November 2014 as a Delaware corporation. The Company is a clinical-stage biotechnology company focused on harnessing the body’s innate biology to repair or reverse damage caused by a broad range of degenerative diseases.
On September 20, 2019, the Company effected a 1-for-6.7355 reverse stock split of its common stock. The par value of the common stock was not adjusted as a result of the reverse stock split and the authorized capital was amended to 100,000,000 shares of common stock and 148,724,922 shares of $0.001 par value preferred stock (the Preferred Stock). The reverse stock split resulted in an adjustment to the Series A Convertible Preferred Stock (Series A Preferred), Series B Convertible Preferred Stock (Series B Preferred) and Series C Convertible Preferred Stock (Series C Preferred) conversion prices to reflect a proportional decrease in the number of shares of common stock to be issued upon conversion. The accompanying consolidated financial statements and notes to the consolidated financial statements give retroactive effect to the reverse stock split for all periods presented. Shares of common stock underlying outstanding stock options were proportionately reduced and the respective exercise prices, if applicable, were proportionately increased in accordance with the terms of the appropriate securities agreements.
In October 2019, the Company completed the initial public offering of its common stock (the “IPO”). In the IPO, the Company issued and sold 6,325,000 shares of its common stock at a price to the public of $14.00 per share, inclusive of the underwriters’ exercise in part of their over-allotment option. The Company received approximately $79.7 million in net proceeds, after deducting underwriting discounts and commissions and other offering expenses. In connection with the IPO, on October 7, 2019 all Preferred Stock and the preferred stock of Frequency Japan converted into 22,077,627 shares of common stock and all outstanding shares of Series A-1 Preferred Stock and B-1 Preferred Stock were forfeited.
Uncertainties
The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to secure additional capital to fund operations. Product candidates currently under development will require significant additional research and development efforts, including preclinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize revenue from product sales.
On January 30, 2020, the World Health Organization declared the coronavirus outbreak a "Public Health Emergency of International Concern" and on March 11, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. The coronavirus and actions taken to mitigate it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in
which the Company operates. While it is unknown how long these conditions will last and what the complete financial effect will be to the Company, it is reasonably possible that estimates made in the consolidated financial statements, including the estimated time and costs necessary to complete our performance obligations under the Astellas Agreement, will be materially and adversely impacted in the near term as a result of these conditions.
9
Frequency Therapeutics, Inc.
Notes to Unaudited Consolidated Financial Statements –(continued)
(Amounts in thousands, except share and per share amounts)
Liquidity and capital resources
The Company has funded its operations primarily with proceeds from the sale of its capital stock, convertible notes and amounts received under a collaboration agreement. The Company has incurred recurring losses since its inception. In addition, as of March 31, 2020, the Company had an accumulated deficit of $73,801. The Company expects to continue to generate operating losses for the foreseeable future. The future viability of the Company is dependent on its ability to raise additional capital to finance its operations. The Company’s inability to raise capital as and when needed could have a negative impact on its financial condition and ability to pursue its business strategies. There can be no assurances that additional funding will be available on terms acceptable to the Company, or at all. The Company believes that existing resources will be sufficient to fund planned operations for at least 12 months from the date the financial statements were available to be issued.
2. Summary of significant accounting policies
Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting standards set by the Financial Accounting Standards Board (FASB). The FASB sets generally accepted accounting principles (GAAP) that the Company follows to ensure its financial condition, results of operations, and cash flows are consistently reported. References to GAAP issued by the FASB in these notes to the consolidated financial statements are to the FASB Accounting Standards Codification (ASC).
Principles of consolidation
The consolidated financial statements include the accounts of Frequency Therapeutics, Inc. and its wholly owned subsidiaries Frequency Therapeutics Securities Corporation, Frequency Therapeutics PTY, LTD and Frequency Japan. All intercompany transactions and balances have been eliminated.
Unaudited interim financial information
The accompanying consolidated balance sheet as of March 31, 2020 and the consolidated statements of operations, the consolidated statement of comprehensive loss, the consolidated statements of convertible preferred stock, and stockholders’ deficit and cash flows for the three months ended March 31, 2020 and 2019 are unaudited. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of March 31, 2020, the results of its operations and its cash flows for the three months ended March 31, 2020 and 2019. The financial data and other information disclosed in these notes related to the three months ended March 31, 2020 and 2019 are also unaudited. The results for the three months ended March 31, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020, any other interim periods, or any future year or period. The consolidated balance sheet as of December 31, 2019 included herein was derived from the audited consolidated financial statements as of that date. These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2019 included in the Company’s Form 10K.
10
Frequency Therapeutics, Inc.
Notes to Unaudited Consolidated Financial Statements –(continued)
(Amounts in thousands, except share and per share amounts)
The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of expenses during the reporting period. On an ongoing basis, the Company’s management evaluates its estimates, which include but are not limited to management’s judgments of accrued expenses, revenue, fair value of common stock, valuation of share-based awards and income taxes. Actual results could differ from those estimates.
The Company utilizes significant estimates and assumptions in determining the fair value of its common stock in periods prior to the IPO. The Company had 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 (the Practice Aid), to estimate the fair value of its common stock. Each valuation methodology includes estimates and assumptions that require the Company’s judgment. These estimates and assumptions included a number of objective and subjective factors, including external market conditions, the prices at which the Company sold shares of preferred stock, the superior rights and preferences of securities senior to the Company’s common stock at the time of, and the likelihood of, achieving a liquidity event, such as an initial public offering or sale. Significant changes to the key assumptions used in the valuations could have resulted in different fair values of common stock at each valuation date.
Comprehensive income (loss)
Components of comprehensive income or loss, including net loss, are reported in the financial statements in the period in which they are recognized. Other comprehensive income or loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net loss and other comprehensive income (loss) are reported net of any related tax effect to arrive at comprehensive income (loss). Comprehensive loss includes net loss as well as other changes in stockholders’ equity that result from transactions and economic events other than those with stockholders which for the three months ended March 31, 2020 and 2019 consists of unrealized gain (loss) on marketable securities.
Segment information
Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision-maker in deciding how to allocate resources and assess performance. The Company and the Company’s chief operating decision-maker, the Company’s chief executive officer, views the Company’s operations and manages its business as a single operating segment, which is in the business of discovering and developing small molecule drugs that activate progenitor cells within the body to create healthy tissue.
Foreign currency
All periods presented are reported in US dollars. The functional currency for entities outside the United States is the US dollar. Realized and unrealized gains and losses from foreign currency transactions are reflected in the consolidated statements of operations as other expense. During the three months ended March 31, 2020 and 2019 the Company recorded $1 and ($9) of foreign currency exchange gains (losses), respectively.
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of six months or less at acquisition to be cash equivalents which are stated at fair market value. Cash and cash equivalents at March 31, 2020 and December 31, 2019 consists entirely of cash held in banks and money market funds.
11
Frequency Therapeutics, Inc.
Notes to Unaudited Consolidated Financial Statements –(continued)
(Amounts in thousands, except share and per share amounts)
Short-term marketable debt securities
Short-term marketable securities represent holdings of available-for-sale marketable debt securities in accordance with the Company’s investment policy. Short-term marketable investments mature within one-year from the balance sheet date. Investments in marketable securities are recorded at fair value, with any unrealized gains and losses reported within accumulated other comprehensive loss as a separate component of stockholders’ equity (deficit) until realized or until a determination is made that an other-than-temporary decline in market value has occurred. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion, together with interest on securities sold is determined based on the specific identification method and any realized gains or losses on the sale of investments are reflected as a component of other income (expense).
Short-term marketable securities at March 31, 2020 and December 31, 2019 consist of investment in U.S. Treasury Securities.
Concentration of credit risk and off-balance sheet risk
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents and marketable securities. The Company maintains its cash and cash equivalents at several accredited financial institutions, in amounts that exceed federally insured limits. Marketable securities consist of U.S. Treasury securities with maturities of less than twelve months. Management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which its money market accounts are maintained.
The Company has no significant off-balance sheet risks such as foreign exchange contracts, option contracts, or other foreign hedging arrangements.
Significant suppliers
The Company is dependent on third-party manufacturers to supply products for research and development activities of its programs, including preclinical and clinical testing. In particular, the Company relies and expects to continue to rely on a single manufacturer of its product candidates for use in clinical trials. The Company would be adversely affected by a significant interruption in the supply of product for use in clinical programs.
Fair value measurements
Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability between market participants at measurement dates. ASC Topic 820, Fair Value Measurement (ASC 820), establishes a three-level valuation hierarchy for instruments measured at fair value. The hierarchy is based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The hierarchy defines three levels of valuation inputs, 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 |
Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable, such as quoted market prices, interest rates and yield curves. |
|
|
Level 3 |
Unobservable inputs developed using estimates or assumptions developed by the Company, which reflect those that a market participant would use in pricing the asset or liability. |
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 judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 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 measurement.
12
Frequency Therapeutics, Inc.
Notes to Unaudited Consolidated Financial Statements –(continued)
(Amounts in thousands, except share and per share amounts)
The carrying values of other current assets, accounts payable, accrued expenses, and deferred revenue approximate their fair values due to the short-term nature of these assets and liabilities.
Property and equipment
Property and equipment consist of lab equipment, computer equipment, furniture and office equipment and leasehold improvements recorded at cost. These amounts are depreciated using the straight-line method over the estimated useful lives of the assets as follows:
|
|
|
Estimated useful life |
|
Lab equipment |
|
3 years |
|
Computer equipment |
|
3 years |
|
Furniture and office equipment |
|
3 years |
|
Leasehold improvements |
|
Shorter of the estimated useful life or lease term |
Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are eliminated from the balance sheet and related gains or losses are reflected in the consolidated statements of operations.
Impairment of long-lived assets
The Company continually evaluates long-lived assets for potential impairment when events or changes in circumstances indicate the carrying value of the assets may not be recoverable. Recoverability is measured by comparing the book values of the assets to the expected future net undiscounted cash flows that the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the book values of the assets exceed their fair value. The Company did not recognize any impairment losses for the three months ended March 31, 2020 and 2019.
Research and development costs and accruals
Research and development expenses include salaries and benefits, materials and supplies, preclinical and clinical trial expenses, stock-based compensation expense, depreciation of equipment, contract services and other outside expenses. The Company has entered into various research and development-related contracts with research institutions, contract research organizations, contract manufacturers and other companies. These agreements are generally cancelable, and related payments are recorded as research and development expenses as incurred. Costs of certain development activities, such as manufacturing, pre-clinical and clinical trial expenses, are recognized based on an evaluation of the progress to completion of specific tasks. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the consolidated financial statements as prepaid or accrued research and development costs. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed. Costs incurred in obtaining technology licenses are charged to research and development expense as acquired in-process research and development if the technology licensed has not reached technological feasibility and has no alternative future use.
13
Frequency Therapeutics, Inc.
Notes to Unaudited Consolidated Financial Statements –(continued)
(Amounts in thousands, except share and per share amounts)
The Company elected to early adopt ASC 842 as of January 1, 2020 and elected the transition method under ASU 2016-02 whereby the Company records a right-to-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. The Company also elected to apply the practical expedients intended to ease transition. Accordingly, the Company has only applied ASC 842 to leases existing at January 1, 2020. The Company determines if an arrangement is, or contains, a lease at inception. Operating leases are included in operating lease right-of-issue (“ROU”) assets, other current liabilities, and operating lease liabilities on the consolidated balance sheets.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments to be made over the lease term. The ROU asset also includes any lease payments made at or before the lease commencement date and excludes lease incentives received. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term. The Company has elected to not apply the recognition requirements of ASC 842 for short-term leases, which is defined as a lease that, at the lease commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the Company is reasonably certain to exercise.
For real estate lease agreements entered into or modified after the adoption of ASC 842 that include lease and non-lease components, the Company has elected to account for the lease and non-lease components, such as common area maintenance charges, as a single lease component.
Collaborative arrangements
The Company analyzes its collaborative arrangements to assess whether they are within the scope of ASC 808, Collaborative Arrangements (“ASC 808”) to determine whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. For collaboration arrangements within the scope of ASC 808 that contain multiple elements, the Company first determines which elements of the collaboration are deemed to be within the scope of ASC 808 and those that are more reflective of a vendor-customer relationship (e.g., a licensing arrangement) where the contracted party has obtained goods or services that are an output of the Company’s ordinary activities in exchange for a consideration and therefore within the scope of Topic 606. For those elements of the arrangement that are accounted for pursuant to Topic 606, including those to which Topic 606 is applied by analogy, the Company applies the five-step model described in the Company’s revenue recognition policy. For elements of collaborative arrangements that are accounted for pursuant to ASC 808, an appropriate and rational recognition method is determined and applied consistently. Reimbursements from the counterparty that are the result of a collaborative relationship with the counterparty, instead of a customer relationship, such as co-development or clinical activities, are recorded as a reduction to research and development expense as the services are performed. Similarly, amounts that are owed to a collaboration partner related to the co-development clinical activities are recognized as research and development expense.
The Company enters into out-licensing agreements that are within the scope of Topic 606. The terms of such out-license agreements include licenses to functional intellectual property (IP), given the functionality of the intellectual property is not expected to change substantially as a result of the licensor’s ongoing activities. Such arrangements typically include payment of one or more of the following: non-refundable up-front license fees; reimbursement of certain costs; development and regulatory milestone payments and milestone payments based on the level of sales; and royalties on net sales of licensed products.
14
Frequency Therapeutics, Inc.
Notes to Unaudited Consolidated Financial Statements –(continued)
(Amounts in thousands, except share and per share amounts)
The Company considers the economic and regulatory characteristics of the licensed IP, research, development, manufacturing and commercialization capabilities of the licensee and the availability of the associated expertise in the general marketplace to determine if it has standalone value at the inception of the licensing arrangement, which would make the license distinct. In addition, the Company considers whether the licensee can benefit from a promise for its intended purpose without the receipt of any additional good or services promised in the contract, whether the value of the license is dependent on the remaining goods and services, whether there are other vendors that could provide the remaining promise, and whether the license is separately identifiable from the remaining good and services. For licenses that are combined with other goods and services, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of progress and related revenue recognition. The measure of progress, and thereby periods over which revenue should be recognized, are subject to estimates by management and may change over the course of the research and development and licensing agreement. Such a change could have a material impact on the amount of revenue the Company records in future periods.
Revenue is allocated to the licensed IP on a relative standalone selling price basis and, for functional IP, is recognized at a point when the licensed IP is made available for the customer’s use and benefit, which generally occurs at the inception of the arrangement. However, in cases, where the functionality of the IP is expected to substantively change as a result of activities of the Company that do not transfer additional promised goods or services, or in cases, where there is an expectation that the Company will undertake activities to change the standalone functionality of the IP and the customer is contractually or practically required to use the latest version of the IP, revenue for the license to functional IP is recognized over time.
Development and regulatory milestone fees, which are a type of variable consideration, are recognized as revenue to the extent that it is probable that a significant reversal will not occur. The Company recognizes royalty revenue and sales-based milestones at the later of (i) when the related sales occur, or (ii) when the performance obligation to which the royalty has been allocated has been satisfied.
The Company has entered into a collaboration arrangement with Astellas Pharma Inc. (“Astellas”), as further described in Note 11 of notes to unaudited consolidated financial statements.
Revenue recognition
The Company accounts for contracts with customers in accordance with Accounting Standards Codification (“ASC”), Topic 606, Revenue from Contracts with Customers (“Topic 606”), including all amendments thereto. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as collaborative arrangements and leases. The Company’s disclosure within the below sections or elsewhere within these consolidated financial statements reflects the Company’s accounting policies in compliance with this new standard.
Under Topic 606, an entity recognizes revenue when or as its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To recognize revenue for arrangements that an entity determines are within the scope of Topic 606, the entity 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, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies its performance obligations. The Company only applies the five-step model to contracts when it is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services it transfers to the customer. Once a contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and identifies as a performance obligation each promise to transfer to the customer either (a) a good or service (or bundle of goods and services) that is distinct, or (b) a series of distinct goods and services that are substantially the same and have been the same pattern of transfer to the customer.
15
Frequency Therapeutics, Inc.
Notes to Unaudited Consolidated Financial Statements –(continued)
(Amounts in thousands, except share and per share amounts)
The Company assesses whether each promised good or service is distinct for the purpose of identifying the performance obligations in the contract. This assessment involves subjective determinations and requires management to make judgments about the individual promised goods or services and whether such are separable from the other aspects of the contractual relationship. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (that is, the good or service is capable of being distinct) and (ii) the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (that is, the promise to transfer the good or service is distinct within the context of the contract). In assessing whether a promised good or service is distinct, the Company considers factors such as the research, manufacturing and commercialization capabilities of the collaboration partner (the “customer” in this type of arrangement) and the availability of the associated expertise in the general marketplace. The Company also considers the intended benefit of the contract in assessing whether a promised good or service is separately identifiable from other promises in the contract. If a promised good or service is not distinct, an entity is required to combine that good or service with other promised goods or services until it identifies a bundle of goods or services that is distinct. For each arrangement that results in revenues, the Company identifies all performance obligations, which may include, for example, a license to IP and know-how, research and development activities, and/or manufacturing services.
In addition to any upfront payment, if the consideration promised in a contract includes a variable amount, the Company estimates the amount of consideration to which it will be entitled in exchange for transferring the promised goods or services to a customer. The Company determines the amount of variable consideration by using the expected value method or the most likely amount method. The Company includes the estimated variable consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. At the end of each subsequent reporting period, the Company re-evaluates the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment.
If an arrangement includes development and regulatory milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur. If it is probable that a significant revenue reversal will not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or of the licensee such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.
For contracts that include sales-based royalties (including milestone payments based on the level of sales) promised in the exchange for licenses of intellectual property, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes royalty revenue and sales-based milestone payments at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied. In determining the transaction price, the Company adjusts the promised amount of consideration for the effects of the time value of money if the timing of payments provides the Company or the Company’s customer with a significant benefit of financing the transfer of goods and services. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensees and the transfer of the promised goods or services to the licensees will be one year or less. The Company assesses each of its revenue generating arrangements in order to determine whether a significant financing component exists. The Company recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) each performance obligation is satisfied, either at a point in time or over time. For performance obligations satisfied over time, the Company measures progress toward completion of its performance obligations using an input method based on the Company’s efforts and inputs to satisfy its performance obligations relative to total expected inputs to the satisfaction of that performance obligation.
16
Frequency Therapeutics, Inc.
Notes to Unaudited Consolidated Financial Statements –(continued)
(Amounts in thousands, except share and per share amounts)
Amounts received from a customer prior to revenue recognition are recorded as deferred revenue. Amounts received from a customer that are expected to be recognized as revenue within the 12 months following the balance sheet date are classified as a current liability in the accompanying consolidated balance sheets.
Patent costs
The Company expenses patent application and related legal costs as incurred and classifies such costs as general and administrative expenses in the accompanying consolidated statements of operations.
Stock-based compensation
The Company accounts for its stock-based compensation in accordance with ASC Topic 718, Compensation—Stock Compensation (ASC 718). ASC 718 requires all share-based payments to employees and directors to be recognized as expense in the consolidated statements of operations and comprehensive loss based on their grant date fair values. The Company adopted FASB Accounting Standards Update (ASU) 2016-09 which identifies areas for simplification of several areas of share-based payment transactions. The Company retroactively applied the mark to market approach on vesting to non-employee grants and the impact on the consolidated financial statements was not material and as such, the Company will treat non-employee grants the same as employee grants. The Company estimates the fair value of options granted using the Black-Scholes option pricing model for stock option grants to both employees and non-employees. The Company believes the fair value of the stock options granted to non-employees is more reliably determinable than the fair value of the services provided.
The Black-Scholes option pricing model requires inputs based on certain subjective assumptions, including (a) the expected stock price volatility, (b) the expected term of the award, (c) the risk-free interest rate and (d) expected dividends. Due to the lack of sufficient company-specific historical and implied volatility data, the Company has based its computation of expected volatility on the historical volatility of a representative group of public companies with similar characteristics to the Company, including stage of product development and life science industry focus. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. The Company uses the simplified method as prescribed by the SEC Staff Accounting Bulletin No. 107, Share-Based Payment, to calculate the expected term for options granted to employees as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The expected term is applied to the stock option grant group as a whole, as the Company does not expect substantially different exercise or post-vesting termination behavior among its employee population. For options granted to non-employees, the Company utilizes the contractual term of the share-based payment as the basis for the expected term assumption. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The expected dividend yield is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on its common stock.
There are significant judgments and estimates inherent in the determination of the fair value of the Company’s common stock prior to the IPO. These estimates and assumptions include a number of objective and subjective factors, including external market conditions, the prices at which the Company sold shares of preferred stock, the superior rights and preferences of securities senior to its common stock at the time of, and the likelihood of, achieving a liquidity event, such as an initial public offering or sale.
The Company expenses the fair value of its share-based compensation awards to employees and non-employees on a straight-line basis over the requisite service period, which is generally the vesting period.
17
Frequency Therapeutics, Inc.
Notes to Unaudited Consolidated Financial Statements –(continued)
(Amounts in thousands, except share and per share amounts)
The Company accounts for income taxes using the asset and liability method in accordance with ASC Topic 740, Income Taxes (ASC 740) which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies. At March 31, 2020 and December 31, 2019, the Company has concluded that a full valuation allowance is necessary for its deferred tax assets (see Note 10).
Net loss per share
Basic net loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed using the weighted-average number of shares of common stock outstanding during the period and, if dilutive, the weighted-average number of potential shares of common stock. Diluted net loss per share is the same as basic net loss per share for the three months ended March 31, 2020 and 2019 since all potential shares of common stock instruments are anti-dilutive as a result of the loss for such periods.
The Company’s convertible preferred stock contractually entitled the holders of such shares to participate in dividends but did not contractually require the holders of such shares to participate in losses of the Company. Accordingly, in periods in which the Company reported a net loss, such losses are not allocated to such participating securities. In periods where the Company reported a net, diluted net loss per share is the same as basic net loss per share, since dilutive shares of common stock are not assumed to have been issued if their effect is anti-dilutive. The Company reported a net loss for the three months ended March 31, 2020 and 2019.
Basic and diluted net loss per share was calculated as follows:
|
|
|
Three Months Ended March 31, |
|
|||||
|
(in thousands, except share and per share amounts) |
|
2020 |
|
|
2019 |
|
||
|
Numerator: |
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(4,913 |
) |
|
$ |
(5,826 |
) |
|
Denominator: |
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding-basic and diluted |
|
|
30,868,220 |
|
|
|
1,797,986 |
|
|
Net loss per share attributable to common stockholders-basic and diluted |
|
$ |
(0.16 |
) |
|
$ |
(3.24 |
) |
18
Frequency Therapeutics, Inc.
Notes to Unaudited Consolidated Financial Statements –(continued)
(Amounts in thousands, except share and per share amounts)
The Company excluded the following potential shares of common stock from the computation of diluted net loss per share because including them would have had an anti-dilutive effect.
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
Unvested restricted Common Stock |
|
|
5,600 |
|
|
|
225,951 |
|
|
Series B Preferred (as converted to common stock) |
|
|
— |
|
|
|
6,257,293 |
|
|
Series A Preferred (as converted to common stock) |
|
|
— |
|
|
|
9,283,425 |
|
|
Conversion of Frequency Japan preferred stock |
|
|
— |
|
|
|
673,605 |
|
|
Outstanding stock options (as converted to common stock) |
|
|
6,908,115 |
|
|
|
1,938,656 |
|
|
Total |
|
|
6,913,715 |
|
|
|
18,378,930 |
|
Recently adopted accounting pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), as amended by various subsequently issued ASUs. The standard requires lessees to recognize an operating lease with a term greater than one year on their balance sheets as a right-of-use asset and corresponding lease liability, measured at the present value of the lease payments. Lessees are required to classify leases as either finance or operating leases. If the lease is effectively a financed purchase by the lessee, it is classified as a financing lease, otherwise it is classified as an operating lease. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease.
In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”), which permits entities to continue applying legacy guidance in ASC 840, Leases, including its disclosure requirements, in the comparative periods presented in the year that the entity adopts the new leasing standard. The Company adopted the standard on January 1, 2020 using the optional transition method. As such, the consolidated balance sheets and statements of operations for prior periods will not be comparable in the year of adoption of ASC 842. The Company elected the package of practical expedients permitted under the transition guidance within the standard. Accordingly, the Company did not reassess the conclusion of whether the existing arrangements contain a lease, lease classification and initial direct costs under ASC 842. As a result of the adoption of ASC 842, the Company recorded $1.2 million of ROU assets and a total of $1.5 million of lease liabilities on the consolidated balance sheets as of January 1, 2020. In addition, in the first quarter of 2020 the Company expanded and amended the lease for its Woburn, Massachusetts facility and increased the ROU asset and lease liability by $1.0 million and $1.0 million respectively. As disclosed in Note 16, the Company has entered into a lease for a facility in Lexington Massachusetts which has an estimated commencement date of December 1, 2020. In accordance with ASU No. 2016-02, the Company will recognize a right-of-use asset and related lease liability at such time.
Recently issued accounting pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as of the specified effective date. The Company is an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, as amended (Jobs Act). The Jobs Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company elected to avail itself of this extended transition period and, as a result, we will not be required to adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.
19
Frequency Therapeutics, Inc.
Notes to Unaudited Consolidated Financial Statements –(continued)
(Amounts in thousands, except share and per share amounts)
In January 2016 the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This new standard amended certain aspects of accounting and disclosure requirements for financial instruments, including the requirement that equity investments with readily determinable fair values are to be measured at fair value with any changes in fair value recognized in a company's statements of operations. Prior to adoption of ASU 2016-01, companies recognized changes in fair value in accumulated other comprehensive income (loss), net. Equity investments that do not have readily determinable fair values may be measured at fair value or at cost minus impairment adjusted for changes in observable prices. In addition, a valuation allowance should be evaluated on deferred tax assets related to available- for-sale debt securities in combination with other deferred tax assets. The Company adopted this new standard on January 1, 2020, using the modified retrospective method, and determined that it did not have a material impact on its financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The FASB has subsequently issued amendments to ASU 2016-13, which have the same effective date and transition date of January 1, 2020. These standards require that credit losses be reported using an expected losses model rather than the incurred losses model that was previously used, and establishes additional disclosures related to credit risks. For available-for-sale debt securities with unrealized losses, this standard now requires allowances to be recorded instead of reducing the amortized cost of the investment. These standards limit the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. This standard will become effective for the Company on January 1, 2023. The Company is still evaluating the impact of this standard on its consolidated financial statements.
3. Fair value measurements
The Company’s financial assets measures at fair value on a recurring basis by level within the fair value hierarchy at March 31, 2020 and December 31, 2019 are summarized as follows:
|
|
|
|
|
March 31, 2020 |
|
|||||||||
|
|
|
Fair Value |
|
Amortization |
|
|
Unrealized |
|
|
Fair Market |
|
|||
|
|
|
Hierarchy |
|
Cost |
|
|
Gain |
|
|
Value |
|
|||
|
Money market funds |
|
Level 1 |
|
$ |
202,196 |
|
|
$ |
(17 |
) |
|
$ |
202,179 |
|
|
U.S. Government treasury securities |
|
Level 1 |
|
|
3,020 |
|
|
|
2 |
|
|
|
3,023 |
|
|
|
|
|
|
$ |
205,216 |
|
|
$ |
(15 |
) |
|
$ |
205,202 |
|
|
|
|
|
|
December 31, 2019 |
|
|||||||||
|
|
|
Fair Value |
|
Amortization |
|
|
Unrealized |
|
|
Fair Market |
|
|||
|
|
|
Hierarchy |
|
Cost |
|
|
Gain |
|
|
Value |
|
|||
|
Money market funds |
|
Level 1 |
|
$ |
200,131 |
|
|
$ |
(12 |
) |
|
$ |
200,119 |
|
|
U.S. Government treasury securities |
|
Level 1 |
|
|
17,131 |
|
|
|
66 |
|
|
|
17,197 |
|
|
|
|
|
|
$ |
217,262 |
|
|
$ |
54 |
|
|
$ |
217,316 |
|
The carrying amounts reflected in the consolidated balance sheet for prepaid expenses and other current assets, accounts payable and accrued expenses and other liabilities are shown at their historical values which approximate their fair values.
20
Frequency Therapeutics, Inc.
Notes to Unaudited Consolidated Financial Statements –(continued)
(Amounts in thousands, except share and per share amounts)
Prepaid expenses and other current assets consisted of the following:
|
|
|
March 31, |
|
|
December 31, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
Research and development expenses |
|
|
1,564 |
|
||||