10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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 September 30, 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: 001-38997

 

RAPT Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

47-3313701

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

561 Eccles Avenue, South San Francisco, California

 

94080

(Address of principal executive offices)

 

(Zip Code)

(650) 489-9000

(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 $0.0001 par value per share

RAPT

Nasdaq Global 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 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 November 7, 2023, there were 34,396,212 shares of the registrant’s common stock outstanding.

 

 

 


 

RAPT THERAPEUTICS, INC.

TABLE OF CONTENTS

 

 

 

 

Page No.

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

3

 

Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022

 

3

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three- and Nine-Months Ended September 30, 2023 and 2022

 

4

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three- and Nine-Months Ended September 30, 2023 and 2022

 

5

 

Condensed Consolidated Statements of Cash Flows for the Nine-Months Ended September 30, 2023 and 2022

 

6

 

Notes to Condensed Consolidated Financial Statements

 

7

Item 2.

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

 

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

22

Item 4.

Controls and Procedures

 

22

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

23

Item 1A.

Risk Factors

 

23

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

64

Item 3.

Defaults Upon Senior Securities

 

64

Item 4.

Mine Safety Disclosures

 

64

Item 5.

Other Information

 

64

Item 6.

Exhibits

 

65

Signatures

 

66

 

 

 


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

 

RAPT THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

54,135

 

 

$

38,946

 

Marketable securities

 

 

130,642

 

 

 

210,122

 

Prepaid expenses and other current assets

 

 

2,361

 

 

 

3,626

 

Total current assets

 

 

187,138

 

 

 

252,694

 

Property and equipment, net

 

 

2,704

 

 

 

2,539

 

Operating lease right-of-use assets

 

 

5,672

 

 

 

6,940

 

Other assets

 

 

4,207

 

 

 

4,036

 

Total assets

 

$

199,721

 

 

$

266,209

 

Liabilities and stockholders' equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

5,297

 

 

$

3,365

 

Accrued expenses

 

 

14,109

 

 

 

8,656

 

Operating lease liabilities, current

 

 

2,390

 

 

 

2,171

 

Other current liabilities

 

 

53

 

 

 

32

 

Total current liabilities

 

 

21,849

 

 

 

14,224

 

Operating lease liabilities, non-current

 

 

5,072

 

 

 

6,819

 

Total liabilities

 

 

26,921

 

 

 

21,043

 

Commitments and contingencies

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

 

Common stock

 

 

3

 

 

 

3

 

Additional paid-in capital

 

 

626,724

 

 

 

613,073

 

Accumulated other comprehensive loss

 

 

(121

)

 

 

(26

)

Accumulated deficit

 

 

(453,806

)

 

 

(367,884

)

Total stockholders' equity

 

 

172,800

 

 

 

245,166

 

Total liabilities and stockholders' equity

 

$

199,721

 

 

$

266,209

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

3


 

RAPT THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Revenue

 

$

 

 

$

 

 

$

 

 

$

1,527

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

27,022

 

 

 

16,599

 

 

 

74,238

 

 

 

47,628

 

General and administrative

 

 

6,897

 

 

 

5,079

 

 

 

19,607

 

 

 

15,263

 

Total operating expenses

 

 

33,919

 

 

 

21,678

 

 

 

93,845

 

 

 

62,891

 

Loss from operations

 

 

(33,919

)

 

 

(21,678

)

 

 

(93,845

)

 

 

(61,364

)

Other income, net

 

 

2,548

 

 

 

443

 

 

 

7,923

 

 

 

477

 

Net loss

 

$

(31,371

)

 

$

(21,235

)

 

$

(85,922

)

 

$

(60,887

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

 

 

 

366

 

 

 

(655

)

 

 

715

 

Unrealized gain (loss) on marketable securities

 

 

59

 

 

 

(74

)

 

 

560

 

 

 

(962

)

Total comprehensive loss

 

$

(31,312

)

 

$

(20,943

)

 

$

(86,017

)

 

$

(61,134

)

Net loss per share, basic and diluted

 

$

(0.82

)

 

$

(0.63

)

 

$

(2.24

)

 

$

(1.93

)

Weighted average number of shares used in computing net loss
   per share, basic and diluted

 

 

38,358,032

 

 

 

33,684,261

 

 

 

38,322,773

 

 

 

31,481,948

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

4


 

RAPT THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2022

 

 

34,254,314

 

 

$

3

 

 

$

613,073

 

 

$

(26

)

 

$

(367,884

)

 

$

245,166

 

Issuances of common stock under employee stock plans

 

 

35,417

 

 

 

 

 

 

116

 

 

 

 

 

 

 

 

 

116

 

Stock-based compensation

 

 

 

 

 

 

 

 

4,094

 

 

 

 

 

 

 

 

 

4,094

 

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

365

 

 

 

 

 

 

365

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(29,271

)

 

 

(29,271

)

Balance at March 31, 2023

 

 

34,289,731

 

 

 

3

 

 

 

617,283

 

 

 

339

 

 

 

(397,155

)

 

 

220,470

 

Issuances of common stock under employee stock plans

 

 

62,345

 

 

 

 

 

 

767

 

 

 

 

 

 

 

 

 

767

 

Stock-based compensation

 

 

 

 

 

 

 

 

4,239

 

 

 

 

 

 

 

 

 

4,239

 

Foreign currency translation loss

 

 

 

 

 

 

 

 

 

 

 

(655

)

 

 

 

 

 

(655

)

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

136

 

 

 

 

 

 

136

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25,280

)

 

 

(25,280

)

Balance at June 30, 2023

 

 

34,352,076

 

 

$

3

 

 

$

622,289

 

 

$

(180

)

 

$

(422,435

)

 

$

199,677

 

Issuances of common stock under employee stock plans

 

 

8,278

 

 

 

 

 

 

106

 

 

 

 

 

 

 

 

 

106

 

Stock-based compensation

 

 

 

 

 

 

 

 

4,329

 

 

 

 

 

 

 

 

 

4,329

 

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

59

 

 

 

 

 

 

59

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(31,371

)

 

 

(31,371

)

Balance at September 30, 2023

 

 

34,360,354

 

 

$

3

 

 

$

626,724

 

 

$

(121

)

 

$

(453,806

)

 

$

172,800

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2021

 

 

29,555,119

 

 

$

3

 

 

$

470,629

 

 

$

(206

)

 

$

(284,046

)

 

$

186,380

 

Issuances of common stock under employee stock plans

 

 

37,640

 

 

 

 

 

 

132

 

 

 

 

 

 

 

 

 

132

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,702

 

 

 

 

 

 

 

 

 

2,702

 

Foreign currency translation loss

 

 

 

 

 

 

 

 

 

 

 

(201

)

 

 

 

 

 

(201

)

Unrealized loss on marketable securities

 

 

 

 

 

 

 

 

 

 

 

(710

)

 

 

 

 

 

(710

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,468

)

 

 

(20,468

)

Balance at March 31, 2022

 

 

29,592,759

 

 

 

3

 

 

 

473,463

 

 

 

(1,117

)

 

 

(304,514

)

 

 

167,835

 

Proceeds from sale of pre-funded warrants in private placement, net of issuance costs

 

 

 

 

 

 

 

 

49,784

 

 

 

 

 

 

 

 

 

49,784

 

Issuances of common stock under employee stock plans

 

 

56,698

 

 

 

 

 

 

654

 

 

 

 

 

 

 

 

 

654

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,672

 

 

 

 

 

 

 

 

 

2,672

 

Foreign currency translation gain

 

 

 

 

 

 

 

 

 

 

 

550

 

 

 

 

 

 

550

 

Unrealized loss on marketable securities

 

 

 

 

 

 

 

 

 

 

 

(178

)

 

 

 

 

 

(178

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(19,184

)

 

 

(19,184

)

Balance at June 30, 2022

 

 

29,649,457

 

 

$

3

 

 

$

526,573

 

 

$

(745

)

 

$

(323,698

)

 

$

202,133

 

Issuances of common stock in “at the market” offerings, net of issuance costs

 

 

209,349

 

 

 

 

 

 

4,979

 

 

 

 

 

 

 

 

 

4,979

 

Issuances of common stock under employee stock plans

 

 

27,356

 

 

 

 

 

 

272

 

 

 

 

 

 

 

 

 

272

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,865

 

 

 

 

 

 

 

 

 

2,865

 

Foreign currency translation gain

 

 

 

 

 

 

 

 

 

 

 

366

 

 

 

 

 

 

366

 

Unrealized loss on marketable securities

 

 

 

 

 

 

 

 

 

 

 

(74

)

 

 

 

 

 

(74

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21,235

)

 

 

(21,235

)

Balance at September 30, 2022

 

 

29,886,162

 

 

$

3

 

 

$

534,689

 

 

$

(453

)

 

$

(344,933

)

 

$

189,306

 

 

 

See accompanying notes to condensed consolidated financial statements.

5


 

RAPT THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2023

 

 

2022

 

Operating activities

 

 

 

 

 

 

Net loss

 

$

(85,922

)

 

$

(60,887

)

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

 

 

 

 

 

 

(Accretion of discounts) amortization of premium on marketable securities

 

 

(4,512

)

 

 

359

 

Depreciation and amortization

 

 

893

 

 

 

795

 

Stock-based compensation expense

 

 

12,662

 

 

 

8,239

 

Gain (loss) on foreign currency translation

 

 

(655

)

 

 

715

 

Non-cash operating lease expense

 

 

1,751

 

 

 

1,282

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

1,094

 

 

 

712

 

Accounts payable, accrued expenses and other current liabilities

 

 

7,406

 

 

 

3,973

 

Deferred revenue

 

 

 

 

 

(1,527

)

Operating lease liabilities

 

 

(2,011

)

 

 

(1,583

)

Net cash used in operating activities

 

 

(69,294

)

 

 

(47,922

)

Investing activities

 

 

 

 

 

 

Purchase of marketable securities

 

 

(106,238

)

 

 

(112,718

)

Proceeds from maturities of marketable securities

 

 

190,790

 

 

 

109,294

 

Purchase of property and equipment

 

 

(1,058

)

 

 

(796

)

Net cash provided by (used in) investing activities

 

 

83,494

 

 

 

(4,220

)

Financing activities

 

 

 

 

 

 

Proceeds from equity offerings, net of issuance costs

 

 

 

 

 

49,784

 

Proceeds from issuances of common stock in “at the market” offerings, net of issuance costs

 

 

 

 

 

4,979

 

Proceeds from issuance of common stock under employee stock plans

 

 

989

 

 

 

1,058

 

Net cash provided by financing activities

 

 

989

 

 

 

55,821

 

Net increase in cash and cash equivalents

 

 

15,189

 

 

 

3,679

 

Cash and cash equivalents at beginning of period

 

 

38,946

 

 

 

24,027

 

Cash and cash equivalents at end of period

 

$

54,135

 

 

$

27,706

 

Supplemental disclosures of non-cash information

 

 

 

 

 

 

Right-of-use asset obtained in exchange for lease obligation

 

$

 

 

$

(6,585

)

 

 

 

See accompanying notes to condensed consolidated financial statements.

6


 

RAPT THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

Description of the Business

RAPT Therapeutics, Inc. (“RAPT” or the “Company”) is a clinical stage, immunology-based therapeutics company focused on discovering, developing and commercializing oral small molecule therapies for patients with significant unmet needs in inflammatory diseases and oncology. Utilizing its proprietary drug discovery and development engine, the Company develops highly selective small molecules that are designed to modulate the critical immune responses underlying these diseases. The Company is located in South San Francisco, California.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and pursuant to Article 10 of Regulation S‑X of the Securities Act of 1933, as amended (the “Securities Act”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. These unaudited condensed consolidated financial statements include only normal and recurring adjustments that the Company believes are necessary to fairly state the Company’s financial position and the results of its operations and cash flows. Interim-period results are not necessarily indicative of results of operations or cash flows for a full year or any subsequent interim period. The condensed consolidated balance sheet at December 31, 2022 has been derived from the audited financial statements at that date but does not include all disclosures required by U.S. GAAP for complete financial statements. Because all of the disclosures required by U.S. GAAP for complete financial statements are not included herein, these unaudited condensed consolidated financial statements and the notes accompanying them should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2022 filed on March 14, 2023 with the Securities and Exchange Commission (“SEC”).

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and include the consolidated accounts of the Company and its wholly-owned subsidiary, RAPT Therapeutics Australia Pty Ltd., which was established in 2018 and deregistered during the quarter ended June 30, 2023. All intercompany balances and transactions have been eliminated in consolidation.

Revenue

License and collaborative agreements revenue consists of license, milestone and royalty payments generated through agreements with strategic partners for the development and commercialization of certain product candidates. The terms of an agreement may include a non-refundable upfront fee, payments based upon achievement of milestones and royalties on net product sales. If a portion of the nonrefundable upfront fee or other payments received is allocated to continuing performance obligations under the terms of an agreement, such portion is recorded as deferred revenue and recognized as revenue when or as the underlying performance obligation is satisfied.

The Company recognizes revenue when it transfers promised goods or services to customers or counterparties in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. In determining the appropriate amount of revenue to be recognized, the Company performs the following steps: (i) identification of the promised goods or services in the agreement; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the agreement; (iii) measurement of the transaction price, including any constraint on variable consideration; (iv) allocation of the transaction price to performance obligations based on estimated selling prices; and (v) recognition of revenue when or as the Company satisfies each performance obligation.

Licenses: If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in an agreement, the Company will recognize revenue from the nonrefundable, upfront fee allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. If a license is bundled with other performance obligations, the Company utilizes judgment to assess the nature of the combined performance obligations to determine whether the combined performance obligations are 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 performance and related revenue recognition.

7


 

Milestone payments: If an agreement includes event-based or milestone payments, the Company evaluates whether the events or milestones are considered likely to be achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is unlikely that a significant revenue reversal of cumulative revenue recognized would occur, the value of the associated event-based or milestone payments is included in the transaction price. Event-based or milestone payments that are not within the control of the Company are not included in the transaction price until they are likely to be achieved.

Royalties: If an agreement includes sales-based royalties and the license is deemed to be the predominant item to which the royalties relate, the Company will recognize revenue at the later of when (i) the related sales occur or (ii) the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied.

Stock-Based Compensation

The Company determines employee, nonemployee and director stock-based compensation expense for all stock-based awards based on their grant date fair value using the Black-Scholes option-pricing model. For stock-based awards with service conditions only, stock-based compensation expense is recognized over the requisite service period using the straight-line method. Forfeitures are recognized as they occur.

The fair value of restricted stock awards granted is determined based on the stock price on the date of grant. The estimated fair value is amortized as compensation expense over the service period of the award.

Net Loss Per Share

Basic net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period, without consideration of potential dilutive securities. Diluted net loss per common share is computed by dividing the net loss by the sum of the weighted average number of common shares outstanding during the period plus the number of potential dilutive securities outstanding during the period calculated in accordance with the treasury stock method. Diluted net loss per share is the same as basic net loss per share since the effect of potentially dilutive securities is anti-dilutive.

Marketable Securities

Marketable securities primarily consist of commercial paper, corporate debt securities and U.S. government agency securities. The Company has classified its marketable securities as available-for-sale and may sell these securities prior to their stated maturities. The Company views these marketable securities as available to support current operations and classifies marketable securities with maturities beyond 12 months as current assets. The Company’s marketable securities are carried at estimated fair value, which is derived from independent pricing sources based on quoted prices in active markets for similar securities. Unrealized gains and losses are reported as a component of accumulated other comprehensive income (loss). The cost of marketable securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in other income, net on the condensed consolidated statements of operations.

All of the Company's available-for-sale investments are subject to a periodic impairment review. For each available-for-sale investment whose fair value is below its amortized cost, the Company determines if the impairment is a result of a credit-related loss or other factors using both quantitative and qualitative factors, including the length of time and extent to which the market value has been less than amortized cost, the financial condition and near-term prospects of the issuer and the Company’s intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. If the impairment is a result of a credit-related loss, the Company recognizes an allowance for credit losses. If the impairment is not a result of a credit loss, the Company recognizes the loss in other comprehensive loss.

Leases

At inception of a contract, the Company determines whether an arrangement is or contains a lease. For all leases, the Company determines the classification as either operating leases or financing leases. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in the Company’s Condensed Consolidated Balance Sheets.

8


 

Lease recognition occurs at the commencement date and lease liability amounts are based on the present value of lease payments over the lease term. The lease term may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company uses an implicit rate when readily available, or its incremental borrowing rate based on the information available at lease commencement date, in determining the present value of lease payments. ROU assets represent our right to use underlying assets for the lease term and operating lease liabilities represent our obligation to make lease payments under the lease. ROU assets also include any lease payments made prior to the commencement date and exclude lease incentives received. Operating lease expense is recognized on a straight-line basis over the lease term. Lease agreements with both lease and nonlease components are generally accounted for together as a single lease component.

Accounting Pronouncements Recently Adopted

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the “FASB”) or other standard setting bodies and adopted by the Company as of the specified effective date. Under the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”), the Company meets the definition of an emerging growth company and has elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

In June 2016, the FASB issued Accounting Standard Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amended the guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. For available-for-sale debt securities, credit losses will be presented as an allowance rather than as a write-down. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates and ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which defer the effective date of ASU 2016-13 for smaller report companies. ASU 2016-13 is effective for the Company’s fiscal year beginning January 1, 2023. The adoption of ASU 2016-13 did not have a material impact on the Company's condensed consolidated financial statements and related disclosures.

3. Fair Value Measurements

Fair value accounting is applied for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Financial instruments include cash and cash equivalents, marketable securities, accounts payable and accrued expenses that approximate fair value due to their relatively short maturities.

Assets and liabilities recorded at fair value on a recurring basis in the balance sheet are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level 3—Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

The Company estimates the fair values of investments in corporate debt securities, commercial paper and U.S. government agency securities using valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities, prepayment/default projections based on historical data and other observable inputs.

9


 

Cash equivalents and marketable securities, all of which are classified as available-for-sale securities and measured at fair value on a recurring basis, consisted of the following (in thousands):

 

 

 

 

 

As of September 30, 2023

 

 

 

Fair Value
Hierarchy
Level

 

Amortized
Cost

 

 

Unrealized
Gains

 

 

Unrealized
Losses

 

 

Fair
Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

Level 1

 

$

10,775

 

 

$

 

 

$

 

 

$

10,775

 

Corporate debt

 

Level 2

 

 

35,862

 

 

 

 

 

 

(63

)

 

 

35,799

 

Commercial paper

 

Level 2