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Form 8-K/A PROKIDNEY CORP. For: Jul 11

August 12, 2022 7:16 AM EDT

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

FORM 8-K/A

 

(Amendment No. 1)

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): August 12, 2022 (July 11, 2022)

 

 

PROKIDNEY CORP.

(Exact name of Registrant as Specified in Its Charter)

 

 

Cayman Islands

001-40560

98-1586514

(State or Other Jurisdiction
of Incorporation)

(Commission File Number)

(IRS Employer
Identification No.)

 

 

 

 

 

2000 Frontis Plaza Blvd.

Suite 250

 

Winston-Salem, North Carolina

 

27103

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s Telephone Number, Including Area Code: 336 999-7029

 

 

(Former Name or Former Address, if Changed Since Last Report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

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


Title of each class

 

Trading
Symbol(s)

 


Name of each exchange on which registered

Class A ordinary shares, $0.0001 par value per share

 

PROK

 

The Nasdaq Stock Market

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).

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.

 

 

 


 

Introductory Note

As previously reported in the Current Report on Form 8-K filed by the registrant on July 15, 2022 (the “Original Report”), on July 11, 2022 (the “Closing Date”), ProKidney Corp. (formerly Social Capital Suvretta Holdings Corp. III (“SCS”)), a Cayman Islands exempted company, consummated the previously announced Business Combination (as defined below) with ProKidney LP, a limited partnership registered under the laws of Ireland (“ProKidney”). In connection with the closing of the Business Combination, the registrant changed its name from “Social Capital Suvretta Holdings Corp. III” to “ProKidney Corp.” ProKidney Corp. will continue the existing business operations of ProKidney as a publicly traded company.

As used in this Amendment No. 1 to the Current Report on Form 8-K (“Amendment No. 1”), unless otherwise stated or the context clearly indicates otherwise, the terms the “registrant,” the “Company,” “we,” “us,” and “our” refer to ProKidney Corp., and its subsidiaries at and after the Closing Date and giving effect to the consummation of the Business Combination.

This Amendment No. 1 to the Original Report is being filed solely for the purpose of amending the disclosure under Item 2.01 - Completion of Acquisition or Disposition of Assets – Form 10 Information - Management’s Discussion and Analysis of Financial Condition and Results of Operations and the historical financial statements provided under Items 9.01(a) and 9.01(b) in the Original Report to include (i) Management’s Discussion and Analysis of Financial Condition and Results of Operations of ProKidney for the three and six months ended June 30, 2022, (ii) the unaudited condensed consolidated financial statements of ProKidney as of and for the three and six months ended June 30, 2022, and (iii) the unaudited pro forma condensed combined financial information of SCS and ProKidney as of and for the three and six months ended June 30, 2022.

Item 2.01 Completion of Acquisition or Disposition of Assets.



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

The information set forth in Exhibit 99.2 to this Amendment No. 1 is incorporated herein by reference.



Financial Statements, Supplementary Data and Exhibits

The information set forth in sections (a), (b) and (d) of Item 9.01 of this Amendment No. 1 is incorporated herein by reference

Item 9.01 Financial Statements and Exhibits.

(a) Financial statements of businesses acquired.



Included as Exhibit 99.1 and incorporated herein by reference is Management’s Discussion and Analysis of Financial Condition and Results of Operations of ProKidney LP and Subsidiaries for the three and six months ended June 30, 2022. The unaudited condensed consolidated financial statements of ProKidney LP and Subsidiaries, as of June 30, 2022 and for the three and six months ended June 30, 2022, and the related notes thereto are attached as Exhibit 99.2 and are incorporated herein by reference.

 

(b) Pro forma financial information.



The unaudited pro forma condensed combined financial information of ProKidney LP and Subsidiaries as of and for the three and six months ended June 30, 2022 is attached hereto as Exhibit 99.3 and is incorporated herein by reference.



(d) Exhibits.



 

 

2

 


 

The exhibits filed as part of this Current Report on Form 8-K are listed in the index to exhibits immediately preceding the signature page to this Current Report on Form 8-K, which index to exhibits is incorporated herein by reference.

 

Exhibit No.

 

Description of Exhibit

99.1*

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations of ProKidney LP and Subsidiaries for the three and six months ended June 30, 2022.

99.2*

 

Unaudited Condensed Consolidated Financial Statements of ProKidney LP and Subsidiaries as of June 30, 2022 and December 31, 2021 and for the three and six months ended June 30, 2022.

99.3*

 

Unaudited Pro Forma Condensed Combined Financial Information of the Company as of and for the six months ended June 30, 2022.

104

 

Cover Page Interactive Data File (embedded within Inline XBRL document)



—————————

* Filed herewith


 

 

 

3

 


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

PROKIDNEY CORP.

 

 

 

 

Date:

August 12, 2022

By:

/s/ James Coulston

 

 

 

Name: James Coulston
Title: Chief Financial Officer

 

 

4

 


Exhibit 99.1

PROKIDNEY’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the financial condition and results of operations of ProKidney LP (for purposes of this section, “ProKidney,” “Company,” “we,” “us” and “our”) should be read together with our unaudited condensed consolidated and combined financial statements as of and for the three and six months ended June 30, 2022 and for the three and six months ended June 30, 2021, together with the related notes thereto, included as Exhibit 99.2 to this Amendment No. 1 to the Current Report on Form 8-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Amendment No. 1 to the Current Report on Form 8-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the section entitled “Risk Factors” of the definitive proxy statement on Schedule 14A filed by ProKidney Corp. (formerly Social Capital Suvretta Holdings Corp. III) with the U.S. Securities and Exchange Commission (the “SEC”) on June 10, 2022, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a clinical-stage biotechnology business with a transformative proprietary cell therapy platform capable of treating multiple chronic kidney diseases using a patient’s own cells isolated from the patient intended for treatment. Our approach seeks to redefine the treatment of chronic kidney disease (“CKD”), shifting the emphasis away from management of kidney failure, to the restoration or improvement of kidney function to stop or delay progression of CKD. Our lead product candidate, which we refer to as REACT, is designed to stabilize or improve kidney function in a CKD patient’s diseased kidneys. REACT is a product that includes selected renal cells (“SRCs”) prepared from a patient’s own, autologous, renal cells. SRCs are formulated into a product for reinto the patient’s kidneys using a minimally invasive outpatient procedure that can be repeated if necessary. Because REACT is a personalized treatment composed of cells prepared from a patient’s kidney, there is no need for treatment with immunosuppressive therapies, which are required during a patient’s lifetime when a patient receives a kidney transplant from another, allogeneic donor.

We are currently conducting a Phase 3 development program and multiple Phase 2 clinical trials for REACT in subjects with moderate to severe diabetic kidney disease. We are also conducting a Phase 1 clinical trial for REACT in subjects with congenital anomalies of the kidney and urinary tract (“CAKUT”). REACT has been well tolerated by subjects with moderate to severe diabetic kidney disease in Phase 1 and 2 clinical testing to date. It has also been shown, in Phase 1 and 2 clinical testing, to stabilize renal function in subjects based on measurements of iohexol renal clearance and urinary albumin-to-creatinine ratio (“UACR”). REACT has received Regenerative Medicine Advanced Therapy (“RMAT”) designation from the United States Food and Drug Administration (the “FDA”).

Incorporated as ProKidney LLC (“ProKidney Bermuda”) under the laws of Bermuda in December 2018, we were initially capitalized with $75.0 million to finance the purchase of ProKidney-KY and ProKidney-US, and to fund the clinical development of REACT. In December 2014, Tengion, Inc. (“Tengion”), whose assets were purchased in March 2015 by RegenMedTX, LLC, a predecessor to ProKidney, commenced a bankruptcy proceeding (the “Chapter 7 Case”) by filing a voluntary petition for relief under the provisions of chapter 7 of title 11 of the United States Code, 11 U.S.C. §§ 101 et seq. in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). As a result of the filing of the Chapter 7 Case, a Chapter 7 trustee was appointed by the Bankruptcy Court to assume control of Tengion.

On August 5, 2021, ProKidney LP was formed as a limited partnership under the laws of Ireland, with ProKidney Bermuda becoming a wholly owned subsidiary of ProKidney LP. Any references to “ProKidney” or the “Company” following this reorganization refer to ProKidney LP.

The Business Combination

We entered into the business combination agreement, dated as of January 18, 2022 (the “Business Combination Agreement”) with Social Capital Suvretta Holdings Corp. III (“SCS”), a special purpose acquisition

 


 

company, on January 18, 2022 (the “Business Combination”). Pursuant to the Business Combination Agreement, and upon the close of the transaction on July 11, 2022, SCS acquired ProKidney LP and its subsidiaries. As a result of the closing (the “Closing”) of the Business Combination, SCS’s name was changed to ProKidney Corp. After the Closing, the combined company is organized in an umbrella partnership-C corporation (a so called “Up-C”) structure, and ProKidney Corp.’s direct assets consist of Post-Combination ProKidney Common Units and all of the issued and outstanding equity interests of ProKidney Corp. GP Limited (“New GP”), which became the general partner of ProKidney upon the Closing. Substantially all of the operating assets and business of ProKidney Corp. is held indirectly through ProKidney.

 

The Business Combination will be accounted for as a common control transaction in accordance with GAAP. Under the guidance in ASC 805, SCS will be treated as the “acquired” company for financial reporting purposes. Accordingly, the Business Combination will be reflected as the equivalent of ProKidney issuing shares for the net assets of SCS, accompanied by a recapitalization whereby no goodwill or other intangible assets are recorded. Operations following the Business Combination will be those of ProKidney Corp. The Business Combination will have a significant impact on our future reported financial position and results as a consequence of the reverse capitalization.

The Business Combination resulted in gross proceeds of approximately $596,537,000. This amount reflects a contribution of $21,737,000 of cash held in SCS’ trust account, net of redemptions, and a $574,800,000 concurrent private placement of Class A ordinary shares of the combined company, priced at $10.00 per share (the “PIPE Placement”). Upon close, these proceeds were used to repay the outstanding balance of $35,000,000 under the Company’s two promissory note agreements with certain holders of its Class A Units (the “Promissory Notes”) and related accrued interest. Additionally, the proceeds were used to pay those expenses previously incurred by SCS related to the business combination of approximately $21,029,000 as well as advisory and placement fees of approximately $29,389,000 incurred in connection with the PIPE Placement.

Business Impact of the COVID-19 Pandemic

The global COVID-19 pandemic continues to rapidly evolve, and we will continue to monitor the COVID-19 situation closely. To date, our financial condition and operations have not been significantly impacted by the COVID-19 pandemic. However, we cannot, at this time, predict the specific extent, duration or full impact that the COVID-19 pandemic will have on our financial condition and operations, including our ongoing and planned clinical trials. The extent of the impact of COVID-19 on our business, operations and clinical development timelines and plans remains uncertain and will depend on certain developments, including the duration and spread of the outbreak and its impact on our clinical trial enrollment, trial sites, contract research organizations (“CROs”), and other third parties with whom we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel as some of our employees are working remotely. We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business. The development of our product candidates could be disrupted and materially adversely affected in the future by the COVID-19 pandemic. Our planned clinical trials also could be delayed due to government orders and site policies on account of the pandemic, and some patients may be unwilling or unable to travel to study sites, enroll in our trials or be unable to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services, which would delay our ability to conduct clinical trials or release clinical trial results and could delay our ability to obtain regulatory approval and commercialize REACT or any future product candidates. Furthermore, COVID-19 could affect our employees or the employees of research sites and service providers on whom we rely, including CROs, as well as those of companies with which we do business, including our suppliers, thereby disrupting our business operations. Quarantines and travel restrictions imposed by governments in the jurisdictions in which we and the companies with which we do business operate could materially impact the ability of employees to access clinical sites, laboratories, manufacturing sites and offices. These and other events resulting from the COVID-19 pandemic could disrupt, delay, or otherwise adversely impact our business.

 

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Financial Operations Overview

Revenue

We have not generated any revenue since our inception and do not expect to generate any revenue from the sale of products in the near future, if at all. If our development efforts for REACT or any other product candidates are successful and result in marketing approval, or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from such agreements.

Expenses

Research and Development Expenses

Research and development expenses consist primarily of costs incurred in connection with our research and development activities, including the development of REACT.

Research and development costs include:

 

 

 

external research and development expenses incurred under agreements with CROs and other scientific development services;

 

 

 

costs of other outside consultants, including their fees and related travel expenses;

 

 

 

costs related to compliance with quality and regulatory requirements;

 

 

 

costs of laboratory supplies and acquiring and developing clinical trial materials;

 

 

 

payments made under third-party licensing agreements;

 

 

 

personnel-related expenses, including salaries, bonuses, benefits and share-based compensation expenses, for individuals involved in research and development activities; and

 

 

 

facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent, insurance and other internal operating costs.

We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our consolidated balance sheets as prepaid clinical or as a component of total accrued expenses and other. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized, even when there is no alternative future use for the research and development. The capitalized amounts are recorded as prepaid clinical and are expensed as the related goods are delivered or the services are performed.

Research and development activities are central to our business model. We expect that our research and development expenses will increase significantly for the foreseeable future as REACT moves into later stages of clinical development.

The successful development of REACT and any product candidates we may develop in the future is highly uncertain. Therefore, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development and commercialization of any of our product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from the sale of REACT or potential future product candidates, if approved. This is due to the numerous risks and uncertainties associated with developing product candidates, many of which are outside of our control, including the uncertainty of:

 

 

 

the timing and progress of non-clinical and clinical development activities;

 

 

 

the number and scope of non-clinical and clinical programs we decide to pursue;

 

 

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our ability to maintain our current research and development programs and to establish new ones;

 

 

 

establishing an appropriate safety profile;

 

 

 

the number of sites and patients including clinical trials;

 

 

 

the countries in which the clinical trials are conducted;

 

 

 

per patient trial costs;

 

 

 

successful patient enrollment in, and the initiation of, clinical trials, as well as drop out or discontinuation rates, particularly in light of the current COVID-19 pandemic environment;

 

 

 

the successful completion of clinical trials with safety, tolerability and efficacy profiles that are satisfactory to the FDA and comparable foreign regulatory authorities;

 

 

 

the number of trials required for regulatory approval;

 

 

 

the timing, receipt and terms of any regulatory approvals from applicable regulatory authorities;

 

 

 

our ability to establish new licensing or collaboration arrangements;

 

 

 

the performance of our future collaborators, if any;

 

 

 

establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;

 

 

 

significant and changing government regulation and regulatory guidance;

 

 

 

the impact of any business interruptions to our operations or to those of the third parties with whom we work, particularly in light of the current COVID-19 pandemic environment;

 

 

 

obtaining, maintaining, defending and enforcing patient claims or other intellectual property rights;

 

 

 

the potential benefits of REACT over other therapies;

 

 

 

launching commercial sales of REACT, if approved, whether alone or in collaboration with others; and

 

 

 

maintaining a continued acceptable safety profile of REACT, should it obtain regulatory approval.

Any changes in the outcome of any of these variables could mean a significant change in the costs and timing associated with the development of our product candidates. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in our clinical trials due to patient enrollment or other reasons, we would be required to expend significant additional financial resources and time on the completion of clinical development. We may never obtain regulatory approval for any of our product candidates.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel-related costs, including salaries, bonuses, benefits and equity-based compensation expenses for individuals involved in our executive, finance, corporate and administrative functions, as well as expenses for outside professional services, including legal, audit, accounting and tax-related services and other consulting fees, facility-related expenses, which include depreciation costs and other allocated expenses for rent and maintenance of facilities, insurance costs, recruiting costs, travel expenses and other general administrative expenses.

We expect that our general and administrative expenses will increase significantly for the foreseeable future as our business expands and we hire additional personnel to support our operations. We also anticipate increased expenses associated with being a public company, including costs for legal, audit, accounting, investor and public relations, tax-related services, director and officer insurance, and regulatory costs related to compliance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) as well as listing standards applicable to companies listed on a national securities exchange.

 

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Other Income (Expense)

Other income consists of interest income earned on cash and cash equivalents held in financial institutions. We expect our interest income to increase following the completion of the Business Combination as we invest the net proceeds from the Business Combination pending their use in our operations.

Income Tax (Expense) Benefit

Income tax expense reflects federal and state taxes on income earned by our subsidiary that is organized as a C corporation for U.S. income tax purposes.

Results of Operations

Comparison of Three Months Ended June 30, 2022 and 2021

The following table summarizes our results of operations for the three months ended June 30, 2022 and 2021 (in thousands):

 

 

 

Three Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

Change

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

$

11,558

 

 

$

10,969

 

 

$

589

 

General and administrative

 

 

9,180

 

 

 

1,748

 

 

 

7,432

 

Total operating expense

 

 

20,738

 

 

 

12,717

 

 

 

8,021

 

Loss from operations

 

 

(20,738

)

 

 

(12,717

)

 

 

(8,021

)

Interest income

 

 

 

 

 

2

 

 

 

(2

)

Interest expense

 

 

(170

)

 

 

 

 

 

(170

)

Net loss before taxes

 

 

(20,908

)

 

 

(12,715

)

 

 

(8,193

)

Income tax expense

 

 

1,223

 

 

 

10

 

 

 

1,213

 

Net loss

 

$

(22,131

)

 

$

(12,725

)

 

$

(9,406

)

Research and development expenses

The increase in research and development expenses of approximately $0.6 million for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, was primarily driven by a $1.3 million increase in cost related to equity-based compensation related to awards granted during 2022. Further, cash-based compensation costs increased by $1.1 million, driven primarily by the hiring of additional personnel. Other research and development costs related to professional fees, quality control, manufacturing improvements and depreciation have also increased by approximately $1.9 million. These costs were offset by decreases in clinical trial cost of approximately $3.9 million related primarily to decreased costs for the Phase 3 trials which were incurring start-up costs during the three-month period ended June 30, 2021.

General and administrative expenses

The increase in general and administrative expenses of approximately $7.4 million for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, was primarily driven by a $6.5 million increase in equity-based compensation relating to the expense for awards granted in 2022 as well as the sale of Class B-1 Units to service providers at less than their fair value. Additionally, there was a $0.7 million increase in cash-based compensation expense which was driven by the hiring of additional personnel.

Income tax expense

The increase in income tax expense of approximately $1.2 million for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, was driven primarily by the impact of a provision of the Tax Cuts and Jobs Act of 2017 (the “TCJA”) which became effective for tax years beginning after December 31, 2021. This provision requires specified research and development expenses to be capitalized and amortized ratably over a

 

5


 

five-year period and is the primary driver of the income tax expense recognized during the three months ended June 30, 2022.

Comparison of Six Months Ended June 30, 2022 and 2021

The following table summarizes our results of operations for the six months ended June 30, 2022 and 2021 (in thousands):

 

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

Change

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

$

40,048

 

 

$

20,828

 

 

$

19,220

 

General and administrative

 

 

47,152

 

 

 

3,492

 

 

 

43,660

 

Total operating expense

 

 

87,200

 

 

 

24,320

 

 

 

62,880

 

Loss from operations

 

 

(87,200

)

 

 

(24,320

)

 

 

(62,880

)

Interest income

 

 

 

 

 

2

 

 

 

(2

)

Interest expense

 

 

(184

)

 

 

 

 

 

(184

)

Net loss before taxes

 

 

(87,384

)

 

 

(24,318

)

 

 

(63,066

)

Income tax expense

 

 

2,233

 

 

 

16

 

 

 

2,217

 

Net loss

 

$

(89,617

)

 

$

(24,334

)

 

$

(65,283

)

Research and development expenses

The increase in research and development expenses of approximately $19.2 million for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, was primarily driven by a $14.1 million increase in cost related to equity-based payments for services rendered by a third-party in prior periods, as the cost of those payments was adjusted to the fair value of the awards issued upon their grant date in the six months ended June 30, 2022. Additionally, equity-based compensation costs increased approximately $4.6 million for the six months ended June 30, 2022, due to additional awards granted to employees during the period and the modification of existing awards. Further, cash-based compensation costs increased by $2.0 million, driven primarily by the hiring of additional personnel. Other research and development costs related to professional fees, quality control, manufacturing improvements and depreciation have also increased by approximately $3.5 million. These costs were offset by decreases in clinical trial cost of approximately $5.0 million related primarily to decreased costs for the Phase 3 trials which were incurring start-up costs in the six-month period ended June 30, 2021 and decreases in spending for the Phase 2 trials.

General and administrative expenses

The increase in general and administrative expenses of approximately $43.7 million for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, was primarily driven by a $33.0 million increase in equity-based compensation for Class B-1 Units sold at less than their fair value to employees, board members and other service providers of the Company. Additionally, there was a $8.6 million increase in equity-based compensation expense which was driven by a modification to the existing awards as well as the grant of additional awards during the six months ended June 30, 2022. Cash-based compensation has also increased by approximately $1.5 million driven by the hiring of additional personnel.

Income tax expense

The increase in income tax expense of approximately $2.2 million for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, was driven primarily by the impact of a provision of the TCJA which became effective for tax years beginning after December 31, 2021. This provision requires specified research and development expenses to be capitalized and amortized ratably over a five-year period and is the primary driver of the income tax expense recognized during the six months ended June 30, 2022.

 

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Liquidity and Capital Resources

Sources of liquidity

Since our inception, we have not recognized any revenue and have incurred operating losses and negative cash flows from our operations. We have not yet commercialized any product and we do not expect to generate revenue from sales of any products for several years, if at all. From our inception through June 30, 2022, we funded our operations primarily through capital contributions and the Promissory Notes and received aggregate net proceeds from these transactions of $186.5 million and $35.0 million, respectively.

 

We expect that the net proceeds from the Business Combination, together with our existing cash and cash equivalents at June 30, 2022, will enable us to fund our operating expenses and capital expenditure requirements through 2024. We have based this estimate on assumptions that may prove to be wrong and we could exhaust our capital resources sooner than we expect.

We expect our expenses to increase substantially if, and as, we:

 

 

 

initiate and continue research and clinical development of our product candidates, including in particular our clinical trials for REACT;

 

 

 

incur third-party manufacturing costs to support our non-clinical studies and clinical trials of our product candidate and, if approved, its commercialization;

 

 

 

seek to identify and develop additional product candidates;

 

 

 

make investment in developing internal manufacturing capabilities; and

 

 

 

seek regulatory and marketing approvals for our product candidates.

In addition, we expect to incur additional costs associated with operating as a public company, including significant legal, audit, accounting, investor and public relations, regulatory, tax-related, director and officer insurance premiums and other expenses that we did not incur as a private company. Developing pharmaceutical products, including conducting clinical trials, is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval for any product candidates or generate revenue from the sale of any product candidate for which we may obtain marketing approval. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of product that we do not expect to be commercially available for at least several years, if ever.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the public or private sale of equity, government or private party grants, debt financings or other capital sources, including potential collaborations with other companies or other strategic transactions. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our shareholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our unitholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we are unable to obtain additional funding, we could be forced to delay, reduce or eliminate some or all of our research and development programs, product portfolio expansion or any commercialization efforts, which could adversely affect our business prospects, or we may be unable to continue operations. If we raise funds through strategic collaborations or other similar arrangements with third parties, we may have to relinquish valuable rights to our technology, future revenue streams, research programs or product candidates or may have to grant licenses on terms that may not be favorable to us and/or may reduce the value of our units. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic or otherwise. Because of the numerous risks and uncertainties associated with product development, we cannot predict the timing or amount of increased expenses, and there is no assurance that we will ever be profitable or generate positive cash flow from operating activities.

 

7


 

Cash Flows

Cash Flows for the Six Months Ended June 30, 2022 and 2021

The following table provides information regarding our cash flows for the six months ended June 30, 2022 and 2021 (in thousands):

 

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

Net cash flows used in operating activities

 

$

(38,485

)

 

$

(19,095

)

Net cash flows used in investing activities

 

 

(1,225

)

 

 

(3,393

)

Net cash flows provided by financing activities

 

 

41,034

 

 

 

29,985

 

Net change in cash and cash equivalents

 

$

1,324

 

 

$

7,497

 

Operating Activities

Net cash used in operating activities was approximately $38.5 million for the six months ended June 30, 2022, reflecting a net loss of approximately $89.6 million and uses driven by changes in working capital of approximately $11.0 million. Such uses were partially offset by non-cash charges of $62.1 million. The non-cash charges primarily consisted of equity-based compensation expense of $60.7 million and depreciation and amortization expense of $1.5 million. The changes in working capital primarily relate to the timing of payments made to our vendors for services performed particularly as significant prepayments were made during the six months ended June 30, 2022.

Net cash used in operating activities was approximately $19.1 million for the six months ended June 30, 2021, reflecting a net loss of $24.3 million, partially offset by non-cash charges of $1.2 million and a net change of $4.0 million in our net working capital. The non-cash charges primarily consisted of depreciation and amortization of $0.9 million and equity-based compensation expense of $0.4 million.

The approximately $19.4 million increase in cash used in operating activities for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 was primarily driven by the increased use of cash related to the timing of payments to our vendors and the net loss incurred during the period, after adjusting for the non-cash charges.

Investing Activities

Net cash used in investing activities were approximately $1.2 million and $3.4 million for the six months ended June 30, 2022 and 2021, respectively, which was due to purchases of equipment and facility expansion.

Financing Activities

Net cash provided by financing activities was $41.0 million and $30.0 million for the six months ended June 30, 2022 and 2021, respectively, which was due to the borrowing of funds under the Promissory Notes and sales of Legacy Class B-1 Units in the 2022 period and due to proceeds received from the issuance of the Legacy Class A Units in the 2021 period.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements. Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and

 

8


 

assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in Note 2 to our unaudited condensed consolidated financial statements included in Exhibit 99.2 of this Amendment No. 1 to the Current Report on Form 8-K.

Recent Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our audited consolidated financial statements included in Exhibit 99.1 of this Amendment No. 1 to the Current Report on Form 8-K.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

JOBS Act Accounting Election

ProKidney Corp. is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, as amended (the “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 applicable to public companies, allowing them to delay the adoption of those standards until those standards would otherwise apply to private companies. ProKidney Corp. has elected to use this extended transition period under the JOBS Act. As a result, our consolidated financial statements may not be comparable to the financial statements of companies that are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make our ordinary shares less attractive to investors.

 

9


Exhibit 99.2

ProKidney LP and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands)

 

June 30, 2022

 

 

December 31, 2021

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

$

21,882

 

 

$

20,558

 

Prepaid assets

 

682

 

 

 

588

 

Prepaid clinical

 

11,350

 

 

 

6,100

 

Other current assets

 

 

 

 

25

 

Total current assets

 

33,914

 

 

 

27,271

 

 

 

 

 

 

 

Fixed assets, net

 

10,857

 

 

 

11,358

 

Right of use assets, net

 

1,962

 

 

 

1,241

 

Deferred offering costs

 

6,905

 

 

 

 

Intangible assets, net

 

320

 

 

 

428

 

Total assets

$

53,958

 

 

$

40,298

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

$

2,513

 

 

$

2,834

 

Lease liabilities

 

377

 

 

 

267

 

Accrued expenses and other

 

6,184

 

 

 

9,213

 

Income taxes payable

 

1,730

 

 

 

 

Related party notes payable

 

35,000

 

 

 

 

Total current liabilities

 

45,804

 

 

 

12,314

 

 

 

 

 

 

 

Lease liabilities, net of current portion

 

1,617

 

 

 

1,067

 

 

 

 

 

 

 

Members’ equity:

 

 

 

 

 

Class A Units (186,500,000 issued and outstanding as of
    June 30, 2022 and December 31, 2021)

 

186,500

 

 

 

186,500

 

Class B Units (27,100,937 and 7,767,122 issued and outstanding as
   of June 30, 2022 and December 31, 2021, respectively)

 

71,164

 

 

 

1,927

 

Accumulated deficit

 

(251,127

)

 

 

(161,510

)

Total members’ equity

 

6,537

 

 

 

26,917

 

Total liabilities and equity

$

53,958

 

 

$

40,298

 

 

(The accompanying notes are an integral part of the consolidated financial statements.)

 

 


 

ProKidney LP and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except for share and per share data)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

11,558

 

 

$

10,969

 

 

$

40,048

 

 

$

20,828

 

General and administrative

 

 

9,180

 

 

 

1,748

 

 

 

47,152

 

 

 

3,492

 

Total operating expenses

 

 

20,738

 

 

 

12,717

 

 

 

87,200

 

 

 

24,320

 

Operating loss

 

 

(20,738

)

 

 

(12,717

)

 

 

(87,200

)

 

 

(24,320

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

2

 

 

 

 

 

 

2

 

Interest expense

 

 

(170

)

 

 

 

 

 

(184

)

 

 

 

Net loss before income taxes

 

 

(20,908

)

 

 

(12,715

)

 

 

(87,384

)

 

 

(24,318

)

Income tax expense

 

 

1,223

 

 

 

10

 

 

 

2,233

 

 

 

16

 

Net and comprehensive loss

 

$

(22,131

)

 

$

(12,725

)

 

$

(89,617

)

 

$

(24,334

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average Class A Units outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

186,500,000

 

 

 

140,109,890

 

 

 

186,500,000

 

 

 

131,160,221

 

Net loss per Class A Unit:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.12

)

 

$

(0.09

)

 

$

(0.48

)

 

$

(0.19

)

 

(The accompanying notes are an integral part of the consolidated financial statements.)

 

 

 

2


 

ProKidney LP and Subsidiaries

Unaudited Condensed Consolidated Statements of Changes in Members’ Equity

(in thousands, except for share data)

 

 

 

For the Three Months Ended June 30, 2022

 

 

 

Class A

 

 

Class B

 

 

Accumulated

 

 

Total Members'

 

 

 

Units

 

 

Amount

 

 

Profits Interests

 

 

Deficit

 

 

Equity

 

Balance as of March 31, 2022

 

 

186,500,000

 

 

 

186,500

 

 

 

62,663

 

 

 

(228,996

)

 

 

20,167

 

Capital contribution

 

 

 

 

 

 

 

 

500

 

 

 

 

 

 

500

 

Equity-based payments

 

 

 

 

 

 

 

 

8,001

 

 

 

 

 

 

8,001

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(22,131

)

 

 

(22,131

)

Balance as of June 30, 2022

 

 

186,500,000

 

 

$

186,500

 

 

$

71,164

 

 

$

(251,127

)

 

$

6,537

 

 

 

 

For the Three Months Ended June 30, 2021

 

 

 

Class A

 

 

Class B

 

 

Accumulated

 

 

Total Members'

 

 

 

Units

 

 

Amount

 

 

Profits Interests

 

 

Deficit

 

 

Equity

 

Balance as of March 31, 2021

 

 

135,000,000

 

 

 

135,000

 

 

 

1,403

 

 

 

(117,973

)

 

 

18,430

 

Capital contribution

 

 

10,000,000

 

 

 

10,000

 

 

 

 

 

 

 

 

 

10,000

 

Equity-based payments

 

 

 

 

 

 

 

 

175

 

 

 

 

 

 

175

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(12,725

)

 

 

(12,725

)

Balance as of June 30, 2021

 

 

145,000,000

 

 

$

145,000

 

 

$

1,578

 

 

$

(130,698

)

 

$

15,880

 

 

 

 

(The accompanying notes are an integral part of the consolidated financial statements.)

 

 

 

3


 

 

ProKidney LP and Subsidiaries

Unaudited Condensed Consolidated Statements of Changes in Members’ Equity

(in thousands, except for share data)

 

 

For the Six Months Ended June 30, 2022

 

 

 

Class A

 

 

Class B

 

 

Accumulated

 

 

Total Members'

 

 

 

Units

 

 

Amount

 

 

Profits Interests

 

 

Deficit

 

 

Equity

 

Balance as of December 31, 2021

 

 

186,500,000

 

 

 

186,500

 

 

 

1,927

 

 

 

(161,510

)

 

 

26,917

 

Capital contribution

 

 

 

 

 

 

 

 

6,050

 

 

 

 

 

 

6,050

 

Equity-based payments

 

 

 

 

 

 

 

 

63,187

 

 

 

 

 

 

63,187

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(89,617

)

 

 

(89,617

)

Balance as of June 30, 2022

 

 

186,500,000

 

 

$

186,500

 

 

$

71,164

 

 

$

(251,127

)

 

$

6,537

 

 

 

 

For the Six Months Ended June 30, 2021

 

 

 

Class A

 

 

Class B

 

 

Accumulated

 

 

Total Members'

 

 

 

Units

 

 

Amount

 

 

Profits Interests

 

 

Deficit

 

 

Equity

 

Balance as of December 31, 2020

 

 

115,000,000

 

 

 

115,000

 

 

 

1,228

 

 

 

(106,364

)

 

 

9,864

 

Capital contribution

 

 

30,000,000

 

 

 

30,000

 

 

 

 

 

 

 

 

 

30,000

 

Equity-based payments

 

 

 

 

 

 

 

 

350

 

 

 

 

 

 

350

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(24,334

)

 

 

(24,334

)

Balance as of June 30, 2021

 

 

145,000,000

 

 

$

145,000

 

 

$

1,578

 

 

$

(130,698

)

 

$

15,880

 

 

(The accompanying notes are an integral part of the consolidated financial statements.)

 

 

 

4


 

ProKidney LP and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$

(89,617

)

 

$

(24,334

)

Adjustments to reconcile net loss to net cash flows

 

 

 

 

 

 

Depreciation and amortization

 

 

1,462

 

 

 

878

 

Equity-based compensation

 

 

60,685

 

 

 

350

 

Changes in operating assets and liabilities

 

 

 

 

 

 

Deferred offering costs

 

 

(6,905

)

 

 

 

Prepaid and other assets

 

 

(5,320

)

 

 

(4,896

)

Accounts payable and accrued expenses

 

 

(520

)

 

 

8,907

 

Income taxes payable

 

 

1,730

 

 

 

 

Net cash flows used in operating activities

 

 

(38,485

)

 

 

(19,095

)

 

 

 

 

 

 

 

Cash flows used in investing activities

 

 

 

 

 

 

Purchase of equipment and facility expansion

 

 

(1,225

)

 

 

(3,393

)

Net cash flows used in investing activities

 

 

(1,225

)

 

 

(3,393

)

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

Payments on finance leases

 

 

(16

)

 

 

(15

)

Borrowings under related party notes payable

 

 

35,000

 

 

 

 

Net cash contribution

 

 

6,050

 

 

 

30,000

 

Net cash flows provided by financing activities

 

 

41,034

 

 

 

29,985

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

1,324

 

 

 

7,497

 

Cash, beginning of period

 

 

20,558

 

 

 

4,578

 

Cash, end of period

 

$

21,882

 

 

$

12,075

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing activities:

 

 

 

 

 

 

Right of use assets obtained in exchange for lease obligations

 

$

878

 

 

$

 

Equipment and facility expansion included in accounts payable and
   accrued expenses

 

$

529

 

 

$

635

 

(The accompanying notes are an integral part of the consolidated financial statements.)

 

 

5


 

ProKidney LP and Subsidiaries

Notes to Unaudited Consolidated Financial Statements – Unaudited

 

Note 1: The Company

ProKidney LLC was formed as a Bermuda limited liability company on December 12, 2018 and funded with $75,000,000 on December 31, 2018. On January 9, 2019 (the “Acquisition Date”), ProKidney LLC acquired all of the equity interests in inRegen and Twin City Bio LLC (“TC Bio”) for $62,000,000. inRegen was duly incorporated under the Cayman Islands Companies Act (as amended) on December 21, 2015 as an exempted company. During 2020, inRegen’s name was changed to ProKidney (and is referred to herein as “ProKidney-KY”), and TC Bio’s name was changed to ProKidney, LLC (and is referred to herein as “ProKidney-US”). ProKidney-US was formed as a limited liability company under the laws of Delaware on December 18, 2015. In August 2021, ProKidney LP was organized as a limited partnership under the laws and regulations of Ireland, with ProKidney LLC becoming a wholly owned subsidiary of ProKidney LP (and is referred to herein as “ProKidney”). Following this reorganization on August 5, 2021, and for the purposes of these financial statements, the term “ProKidney” as used herein, refers to ProKidney LP following this reorganization, and the financial information presented herein is that of ProKidney LP and its wholly owned subsidiaries.

ProKidney acquired the equity interests in ProKidney-KY to develop its Renal Advanced Cell Therapy, which has the potential to stabilize or improve renal function in patients with chronic kidney disease or delay or eliminate the need for dialysis and organ transplantation. ProKidney acquired ProKidney-US to provide contractual development and manufacturing services to ProKidney-KY, which is ProKidney-US’s only customer.

Because ProKidney is a limited partnership, the debts, obligations and liabilities of the Company (as defined below), whether arising in contract, tort or otherwise, are solely the debts, obligations and liabilities of the Company, and no holder of equity interests in ProKidney (“members’ equity”) is obligated personally for any such debt, obligation or liability of the Company solely by reason of being a holder of members’ equity.

On January 18, 2022, the Company executed a definitive business combination agreement (the “Business Combination Agreement”), with Social Capital Suvretta Holdings Corp. III (“SCS”). Pursuant to the terms of the Business Combination Agreement, the Company would become a subsidiary of SCS and would be organized in an umbrella partnership corporation (“Up-C”) structure, would provide potential future tax benefits for SCS when the equity holders ultimately exchanged their pass-through interests for Class A ordinary shares. The transaction closed on July 11, 2022. Upon consummation of the transaction, SCS changed its name to ProKidney Corp.

The business combination between SCS and ProKidney LP (the “Business Combination”) resulted in gross proceeds of approximately $596,537,000. This amount reflects a contribution of $21,737,000 of cash held in SCS’ trust account, net of redemptions, and a $574,800,000 concurrent private placement of Class A ordinary shares of the combined company, priced at $10.00 per share (the “PIPE Placement”). Upon close, these proceeds were used to repay the outstanding balance of $35,000,000 under the Company’s two promissory note agreements with certain holders of its Class A Units (the “Promissory Notes”) and related accrued interest. Additionally, the proceeds were used to pay those expenses previously incurred by SCS related to the Business Combination of approximately $21,029,000 as well as advisory and placement fees of approximately $29,389,000 incurred in connection with the PIPE Placement.

 

Note 2: Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements reflect the operations of ProKidney and its wholly-owned subsidiaries consisting of ProKidney-KY and ProKidney-US (together, the “Company”). All intercompany transactions and accounts have been eliminated.

These unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the Company’s financial information. These interim results and cash flows for any interim period are not necessarily indicative of the results to be expected for the full year. Any reference in these notes to applicable guidance is meant to refer to the authoritative accounting principles generally accepted in the United States of America (“GAAP”) as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”). These unaudited consolidated financial statements are presented in U.S. Dollars.

 

6

 


 

Going Concern

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company performed an analysis of its ability to continue as a going concern. As of June 30, 2022, the Company had an accumulated deficit of $251,127,000. The Company has generated losses from operations for each year since its inception. The Company intends to continue to conduct significant additional research, development, and clinical study activities which, together with expenses incurred for general and administrative expenses, are expected to result in continuing operating losses for the foreseeable future. The amount of future losses and when, if ever, the Company will achieve profitability are uncertain. The Company’s ability to achieve profitability will depend, among other things, on successfully completing clinical studies, obtaining requisite regulatory approvals, establishing appropriate pricing for its product with payers, and raising sufficient funds to finance the Company’s activities. No assurance can be given that the Company’s clinical development efforts will be successful, that regulatory approvals will be obtained, or that the Company will be able to achieve appropriate pricing and market access or that profitability, if achieved, can be sustained.

These matters raised substantial doubt about the Company’s ability to continue as a going concern. As of June 30, 2022, the Company had cash and cash equivalents of $21,882,000, and remaining availability of $65,000,000 under the Promissory Notes. As of June 30, 2022, the Company believed that these sources of liquidity would not be sufficient to fund its obligations for the subsequent 12 months. However, the Closing of the Business Combination on July 11, 2022 provided additional liquidity to the Company totaling approximately $511,912,000. The Company’s liquidity after considering the proceeds from the Business Combination is considered sufficient to satisfy the Company’s operating liabilities for a period greater than 12 months following the issuance date of these financial statements. As such, management considers that the substantial doubt about the Company’s ability to continue as a going concern is alleviated by the inclusion of these additional funds in its available sources of liquidity.

Use of Estimates

The preparation of condensed consolidated financial statements, in accordance with GAAP, requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the amounts of expenses during the reported periods. Certain estimates in these condensed consolidated financial statements have been made in connection with the calculation of research and development expenses, equity-based compensation expense and the provision for or benefit from income taxes. The Company bases its estimates on historical experience and various other assumptions, including in certain circumstances future projections, which management believes to be reasonable under the circumstances. Actual results could differ from those estimates. Changes in estimates are reflected in reported results in the period in which they become known.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of 90 days or less on the date of purchase to be cash equivalents. The carrying value of cash and cash equivalents approximates fair value due to the short-term nature of these items.

Concentrations of Credit Risk

Cash and equivalents are financial instruments that are potentially subject to concentrations of credit risk. The Company’s cash and equivalents are deposited in accounts at large financial institutions, and such amounts may exceed federally insured limits.

Accrued Expenses

Accrued expenses as presented in the Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 consisted of the following (in thousands):

 

 

June 30, 2022

 

 

December 31, 2021

 

Compensation

$

1,545

 

 

$

1,832

 

Clinical study related costs

 

222

 

 

 

2,031

 

Accrued legal costs

 

3,193

 

 

 

964

 

Manufacturing improvement costs

 

652

 

 

 

4,164

 

Other accrued expenses

 

572

 

 

 

222

 

Total accrued expenses and other

$

6,184

 

 

$

9,213

 

 

 

7

 


 

 

Research and Development Costs

Research and development costs are expensed as incurred. Research and development expenses are comprised of costs incurred in performing research and development activities, including salaries, benefits, third party license fees, and external costs of outside vendors engaged to conduct manufacturing and preclinical development activities and clinical trials.

The Company records accruals based on estimates of services received, efforts expended, and amounts owed pursuant to contracts with numerous contract research organizations. In the normal course of business, the Company contracts with third parties to perform various clinical study activities in the ongoing development of potential products. The financial terms of these agreements are subject to negotiation and variation from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events and the completion of portions of the clinical study or similar conditions. The objective of the Company’s accrual policy is to match the recording of expenses in its financial statements to the actual services received and efforts expended. As such, expense accruals related to clinical studies are recognized based on the company’s estimate of the degree of completion of the event or events specified in the specific clinical study.

The Company records nonrefundable advance payments it makes for future research and development activities as prepaid expenses. Prepaid expenses are recognized as expense in the Condensed Consolidated Statement of Operations and Comprehensive Loss as the Company receives the related goods or services

Costs incurred in obtaining technology licenses are charged to research and development expense as purchased in-process research and development if the technology licensed has not reached technological feasibility and has no alternative future use.

Fixed Assets

Fixed assets are stated at cost, less accumulated depreciation. Generally, expenditures for maintenance and repairs are charged to expense and major improvements or replacements are capitalized. The Company computes depreciation and amortization using the straight-line method over the estimated useful life of the asset. Leasehold improvements are amortized over the lesser of, the life of the lease or the estimated useful life of the leasehold improvement. The estimated useful lives are as follows:

 

Computer equipment and software

3-5 years

Furniture and equipment

5-7 years

Leasehold improvements

remainder of lease term

 

Fixed assets consisted of the following (in thousands):

 

 

June 30, 2022

 

 

December 31, 2021

 

Furniture and equipment

$

2,367

 

 

$

2,180

 

Computer equipment and software

 

719