Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read together with our audited financial statements and related notes included elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Annual Report, 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. You should carefully read the “Risk Factors” section of this Annual Report to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled “Special Note Regarding Forward-Looking Statements.”
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide material information relevant to an assessment of our financial condition and results of operations, including an evaluation of the amounts and certainty of cash flows from operations and from outside sources. This section is designed to focus on material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. This includes descriptions and amounts of matters that have had a material impact on reported operations, as well as matters that are reasonably likely based on management’s assessment to have a material impact on future operations.
Recent Developments
In November 2023, due to unforeseen operational challenges, setbacks in product development timelines and volatile market conditions, the Company decided to cease operations in its Redwood City, CA laboratory and office facility and consolidate operations to its Chicago facility and to consider strategic alternatives. In addition, on November 14, 2023, we announced that we have retained TD Cowen, an investment bank, to lead a comprehensive review of strategic alternatives focusing on maximizing stockholder value, including but not limited to, an acquisition, merger, reverse merger, divestiture of assets, licensing or other strategic transactions and a voluntary dissolution or liquidation of the Company. However, there is no set timetable for the overall process given the anticipated timelines for different strategic alternatives may vary, and there can be no assurance that this process will result in us pursuing a transaction or that any transaction, if pursued, will be completed on attractive terms or at all. If we are unable to complete a strategic transaction within a reasonable timeframe or at all, then we may all operations and seek stockholder approval to voluntarily dissolve and the Company. We do not expect to developments with respect to this process unless and until the evaluation of strategic alternatives has been completed or we have concluded that disclosure is appropriate or legally required.
In connection with the evaluation of strategic alternatives and in order to extend our cash, we implemented a cost-savings plan that includes a reduction in force of approximately 90% of our positions, with the remaining employees focusing primarily on supporting the exploration and potential completion of strategic alternatives as well as preserving limited manufacturing capabilities to have the ability to support minimal research and development functions throughout this process.
Overview
Prior to the November 2023 announcement to consider strategic alternatives, Talis aimed to transform diagnostic testing by developing and commercializing innovative products that are designed to enable accurate, reliable, low cost and rapid molecular testing for infectious diseases and other conditions at the point of care. While timely diagnosis of infectious diseases is critically important to enable effective treatment, currently, testing is primarily performed in centralized laboratories, which requires samples to be shipped for processing, delaying the return of results by days. Point-of-care testing solves this problem by delivering the timely information necessary for clinical care. We were developing the Talis One system, a sample-to-answer, cloud-enabled molecular diagnostic system that could be deployed to a variety of testing settings in the United States and around the world to diagnose infectious disease in the moment of need, at the point of care. The Talis One system comprises a compact instrument, single use test cartridges and software, supporting a central cloud database, which work together. The
system is designed to provide central laboratory levels of accuracy and be operated by an untrained user in less than 30 minutes.
Previous surveys of women’s and sexual health providers that we conducted confirmed continued and strong interest in adoption of point-of-care systems. We believe that the Talis One system was well positioned to meet this growing demand in both traditional and non-traditional care settings. Although there are several commercially available point-of-care systems, we believe that few, if any, sufficiently meet the needs of healthcare providers to drive broad adoption of, and transition to, point-of-care testing from central lab testing for a broad range of infectious diseases. We believe that the ideal point-of-care technology for diagnosing infectious diseases would not only be highly accurate and rapid, but would also be easy to use, low cost, cloud-compatible and enable multiplexing to detect multiple pathogens at the same time.
On July 19, 2023, we paused our COVID-19 clinical trials due to an increase in invalid rates and decided to terminate these clinical trials. We have also suspended all other planned clinical trials intended to support regulatory clearance and commercialization of our other tests.
We had been developing Talis One tests to address some of the most critical infectious diseases in women’s and sexual health with a targeted product menu and disciplined regulatory strategy to minimize risk and accelerate time to first commercial launch. However, on November 10, 2023, our Board of Directors decided to pursue strategic alternatives and cease continued development of our test menu, consisting of a respiratory panel for influenza A, influenza B and COVID-19; Chlamydia trachomatis, Neisseria gonorrhoeae, and Trichomonas vaginalis (CT/NG/TV); herpes simplex virus (HSV); and vaginal infections including bacterial vaginosis (Vaginal Infections Panel) and are focused primarily on pursuing strategic alternatives.
We invested in and increased the flexibility of our manufacturing capabilities to support the development and commercialization of the Talis One system. We automated cartridge manufacturing lines, currently located and operated by our contract manufacturing partners, to enable production advantages with quality, speed, and cost at full scale. We also established internal manufacturing lines to enable flexibility and stability in our ability to support our strategic efforts around research and development, clinical trials and commercialization. These internal lines allow us to (i) make process improvements and cost reductions in-house before transferring production back to our contract manufacturing partners, (ii) innovate more quickly to support internal test development and (iii) support cartridge inventory levels pre-commercialization. We intended to perform a cartridge stability study of cartridges from our internal manufacturing line to confirm the performance of our COVID-19 test on this manufacturing line. In order to drive further efficiency and cost reduction in the manufacturing process, we restructured our relationships with our contract manufacturing partners and streamlined our supply chain. Additionally, we have built several hundred instruments to date and invested in, and received, the raw materials to build thousands more to help ensure that we were positioned to support completion of any possible strategic transactions.
We outsourced a substantial portion of our manufacturing. Design work, prototyping and pilot manufacturing were performed in-house before outsourcing to third-party contract manufacturers. Our outsourced production strategy was intended to drive rapid scalability. Certain of our suppliers of components and materials were single source suppliers. During the twelve months ended December 31, 2023 we had one supplier that individually provided more than 10% of our materials and equipment purchases. To support a commercial launch, we have invested in automated cartridge manufacturing production lines for our Talis One cartridges. Those assets deemed to have an alternative future use have been capitalized as property and equipment while those assets determined to not have an alternative future use have been expensed.
Since our inception in 2013, we have devoted substantially all our efforts to research and development activities, manufacturing capabilities, raising capital, building our intellectual property portfolio, providing general and administrative support for these operations, and providing selling support as the need has arisen. We have principally financed our operations through the issuance and sale of shares of our convertible preferred stock to outside investors in private equity financings as well as the issuance of convertible promissory notes and receipts from government grants. Prior to our initial public offering, we received $351.5 million from investors in our preferred stock financings and the sale of convertible promissory notes that converted in such financings.
Additionally, on February 17, 2021, we raised $232.5 million (after deducting underwriting discounts, commissions and offering expenses) through an initial public offering.
We have incurred recurring losses since our inception, including net losses of $62.0 million and $113.0 million for the twelve months ended December 31, 2023 and 2022, respectively. As of December 31, 2023, we had an accumulated deficit of $540.0 million. We expect to continue to generate operating losses and negative operating cash flows for the foreseeable future if and as we:
consider strategic alternatives;
obtain, maintain, protect and enforce our intellectual property portfolio;
defend the stockholder litigation and any other litigation that may arise in the future; and
experience delays or encounter issues with any of the above.
As of December 31, 2023, we had unrestricted cash and cash equivalents of $76.7 million. Based on our planned operations, we expect that our unrestricted cash and cash equivalents of $76.7 million as of December 31, 2023 will be sufficient to fund our operations through at least the next 12 months from the date our financial statements are issued. We expect to finance our future operations with our existing cash and cash equivalents and through one or more possible strategic alternatives. However, there is no guarantee that any of these strategic opportunities will be executed or realized on favorable terms, if at all, and some could be dilutive to existing stockholders.
In March 2023, in order to support our long-term financial objectives, we terminated our former lease for laboratory and office space in Redwood City, CA and entered into a sublease for new laboratory and office space in Redwood City, CA. This move reduced our facilities footprint by two-thirds, and we expected approximately $9.0 million of cash savings on a discounted basis over the life of the lease. While the sublease is still in effect, in November 2023, we have decided to cease operations in our Redwood City laboratory and office facility and have consolidated all of our operations to our Chicago facility in 2024.
In November 2023, due to unforeseen operational challenges, setbacks in product development timelines and volatile market conditions, we decided to cease operations in our Redwood City, CA laboratory and office facility and consolidate operations to our Chicago facility in 2024 and to consider strategic alternatives. In order to further reduce costs and extend our remaining cash, we announced a reduction in force of approximately 90% of our work force on November 14, 2023 ("November 2023 RIF"). As part of these actions, we provided notices to the impacted employees under the Worker Adjustment and Retraining Act ("WARN Act") for job eliminations to occur through March 2024.
During the twelve months ended December 31, 2023, we incurred $3.4 million of expenses related to the November 2023 RIF which included payroll costs for salaries, wages and benefits paid or to be paid to employees during the minimum WARN act retention period and other costs. Expenses related to the November 2023 RIF are included in Selling, general and administrative and Research and development expenses in the statement of operations and comprehensive loss.
Depending on the outcome of our plans to consider strategic alternatives, we expect to incur approximately $0.5 million of additional expenses related to the November 2023 RIF, substantially all of which will consist of charges related to the staff reduction.
In 2022, in connection with our refocus on the women's health and STI markets, we implemented two separate reductions in force, designed to align our remaining resources to focus on (i) developing women's health and STI tests on the Talis One system, (ii) our internal manufacturing expertise to support our strategic plans and (iii) reducing costs and preserving cash to extend our runway to commercialize our women's health and STI tests. The 2022 reductions in force amounted to approximately 40% of our headcount.
Reverse Stock Split
On June 30, 2023, we filed a certificate of amendment to the our Amended and Restated Certificate of Incorporation (the “Certificate of Amendment”), with the Secretary of State of the State of Delaware to effect a 1-for-15 reverse stock split of the shares of the our common stock, par value $0.0001 per share, effective as of 5:00 p.m., Eastern
Time, on July 5, 2023 (the “Reverse Stock Split”). On this date, every 15 issued and outstanding shares of common stock were converted into one share of common stock, with any fractional shares resulting from the Reverse Stock Split rounded up to the nearest whole share. The number of outstanding shares of common stock was reduced from approximately 26.9 million shares to approximately 1.8 million shares.
The Reverse Stock Split did not change our authorized shares of common stock or Series 1 convertible preferred stock, which remained at 200,000,000 and 60,000,000 shares, respectively. The Reverse Stock Split did not change the par value of the common stock. Proportionate adjustments were made to the per share exercise price and/or the number of shares issuable upon the exercise of stock options and the settlement of restricted stock units and the number of shares authorized and reserved for issuance pursuant to the our equity incentive plans. Additionally, the Reverse Stock Split had no impact on the number of shares of our Series 1 convertible preferred stock issued and outstanding. However, the conversion ratio of the outstanding Series 1 convertible preferred stock increased and the number of shares of common stock issuable upon conversion of such preferred stock decreased in proportion to the 1-for-15 split ratio.
All share and per share amounts for common stock in this Annual Report on Form 10-K for the twelve months ended December 31, 2023 have been retroactively adjusted for all periods presented to give effect to the Reverse Stock Split, including reclassifying an amount equal to the reduction in the number of shares of common stock at par value to additional paid-in capital.
Components of our results of operations
Revenue
To date, we have not generated any revenue from sales of our Talis One system. As a result of the announcement in November 2023 to consider strategic alternatives, we no longer plan to commercialize the Talis One system.
Product revenue, net
In January 2022, we began distributing third party antigen tests (the "Antigen Tests"). We currently derive all of our product revenue from the sales of the Antigen Tests in accordance with the provisions of Accounting Standards Codifications (ASC), Topic 606, Revenue from Contracts with Customers . Our product revenue is recognized upon the transfer of control of the test kits to the customer. This program concluded as of December 31, 2022, as the majority of sales of Antigen Tests occurred during 2022. However, during the twelve months ended December 31, 2023, we earned $0.4 million of revenue from the remaining sales of Antigen Tests from existing inventory.
Grant revenue
For the twelve months ended December 31, 2023 and 2022, our revenue from government grants includes a May 2018 grant from the NIH to support our advancement of a Diagnostics via Rapid Enrichment, Identification, and Phenotypic Antibiotic Susceptibility Testing of Pathogens from Blood project (NIH grant), a July 2020 sub-award grant from the University of Massachusetts Medical School for Phase 1 of the NIH’s Rapid Acceleration of Diagnostics - Advanced Technology Platforms (RADx) initiative and a contract from the NIH directly for Phase 2 of the RADx initiative (NIH Contract).
Under the NIH grant, we recognized $1.7 million and $0.5 million during the twelve months ended December 31, 2023 and 2022. In April 2023, the Company exercised a one-year option under the grant, extending the term through April 2024. As of December 31, 2023 there is $0.4 million in additional funding available under the grant, which we do not expect to fully utilize.
The NIH Contract for the RADx initiative expired on January 30, 2022. The Company successfully met milestone requirements and recognized $0.7 million of grant revenue during the twelve months ended December 31, 2022. There is no additional funding available under the NIH Contract for the RADx initiative.
These grants are not in the scope of ASC 606 as the government entities and/or government-sponsored entities are not customers under the agreements.
Operating expenses
Cost of product sold
We began to recognize costs of product sold in January 2022 when we began selling the Antigen Tests. Costs of product sold include material costs, direct labor, provisions for inventory write-downs and shipping and handling costs incurred.
Research and development expenses
Research and development expenses consist primarily of internal and external costs incurred for our research activities, the development of our system, investment in manufacturing capabilities as well as costs incurred pursuant to our government grants and include:
salaries, benefits and other related costs, including stock-based compensation expense, for personnel engaged in research and development functions;
the cost of laboratory supplies and developing and manufacturing of our system;
contract services, other outside costs and costs to develop our technology capabilities;
facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs;
cost of outside consultants, including their fees and related travel expenses, engaged in research and development functions;
cost of performing clinical trials and
expenses related to regulatory affairs.
Until future commercialization is considered probable and the future economic benefit is expected to be realized, we do not capitalize pre-launch inventory costs and costs of property and equipment prior to completion of marketing authorization unless the regulatory review process has progressed to a point that objective and persuasive evidence of regulatory approval is sufficiently probable, and future economic benefit can be asserted. We record pre-launch inventory costs to research and development expenses, or if used in marketing evaluations, record such cost to selling, general and administrative expense. We record property and equipment costs to research and development expenses when the asset does not have an alternative future use. A number of factors are taken into consideration, based on management’s judgment, including the current status in the regulatory approval process, potential impediments to the approval process, anticipated research and development initiatives and risk of technical feasibility, viability of commercialization and marketplace trends.
Research and development activities were central to our historical operations. We previously focused our research and development efforts on the stand-alone Talis One COVID-19 test and developing tests for women’s and sexual health infections, including a respiratory panel consisting of tests for influenza A, influenza B and COVID-19; Chlamydia trachomatis, Neisseria gonorrhoeae, and Trichomonas vaginalis (CT/NG/TV); herpes simplex virus (HSV); and the Vaginal Infections Panel.
Selling, general and administrative expenses
Selling, general and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation and bonus, for personnel in our executive, finance, sales and product management, commercial operations, human resources and legal functions. Selling, general and administrative expenses also include professional fees for legal, auditing, tax and consulting services, insurance fees, information technology, and facility-related expenses, which include direct depreciation expenses and allocated expenses for rent and maintenance of facilities and other operating expenses.
Other income, net
Other income, net consists primarily of interest income on cash deposits held at financial institutions, gains and losses on holdings invested in money market funds, and unrealized and realized foreign exchange gains and losses.
Results of operations
Comparison for the twelve months ended December 31, 2023 and 2022
The following table summarizes our results of operations (in thousands):
Twelve Months Ended
December 31,
(in thousands)
Change
Revenue
Grant revenue
Product revenue, net
Total revenue, net
Operating expenses:
Cost of goods sold
Research and development
Selling, general and administrative
Total operating expenses
Loss from operations
Other income, net
Net loss and comprehensive loss
Grant revenue and product revenue, net
Grant revenue for the twelve months ended December 31, 2023, primarily relates to the NIH grant. During the twelve months ended December 31, 2023 and 2022, $1.7 million and $0.5 million of revenue was recognized related to NIH grant, respectively.
The NIH Contract for the RADx initiative expired on January 30, 2022. The Company successfully met milestone requirements and recognized $0.7 million of grant revenue during the twelve months ended December 31, 2022. There is no additional funding available under the NIH Contract.
We began to generate product sales during January 2022 after we entered into a distribution agreement to sell the Antigen Tests. The change in product revenue, net is driven by the conclusion of the program at the end of 2022.
During the twelve months ended December 31, 2023 we earned $0.4 million of revenue from the remaining sales of Antigen Tests from existing inventory.
Cost of products sold
The decrease in cost of product sold during the twelve months ended December 31, 2023 is due to higher volume in units sold during the twelve months ended December 31, 2022 whereas we did not conduct significant product revenue generating activities during the same period in 2023.
During the twelve months ended December 31, 2022, the Company also established a reserve against $4.4 million of inventory in excess of forecasted demand recorded within cost of product sold.
Research and development expenses
Research and development expenses for the twelve months ended December 31, 2023 and 2022 were $40.7 million and $70.8 million, respectively, a decrease of $30.1 million. Substantially all of our research and development expenses incurred were related to the development of and manufacturing scale-up for the Talis One system including tests to detect COVID-19 as well as other respiratory, women's health and sexual health tests. The decline of $30.1 million was driven by a reduction of $13.0 million in pre-launch inventory costs, a decrease of $8.0 million in depreciation expense as certain manufacturing equipment was fully depreciated by December 31, 2022, and a decrease of $5.0 million related to lower manufacturing costs and the costs related to the automation of consumables manufacturing as we completed our scale-up investments in 2022. Payroll and related expenses decreased by $5.0 million during the twelve months ended December 31, 2023 as a result of our March 2022 and August 2022 reductions in force which was partially offset by expenses of $2.4 million incurred during the fourth quarter of fiscal year 2023 related to the November 2023 RIF. Partially offsetting these declines was $2.0 million of expense
incurred in 2023 to purchase a license for patents, cartridge raw materials and components in connection with the termination of our supply agreement with a contract manufacturer.
Selling, general and administrative expenses
Selling, general and administrative expenses were $28.2 million for twelve months ended December 31, 2023, compared to $40.7 million for the twelve months ended December 31, 2022, a decrease of $12.5 million. The decline was primarily due to decreases in personnel-related expenses including salaries and benefits and stock-based compensation expenses as a result of our March 2022 and August 2022 reductions in force, which was partially offset by expenses of $1.0 million incurred during the fourth quarter of 2023 related to the November 2023 RIF. Lower insurance costs also contributed to the decrease in selling, general and administrative expenses for the twelve months ended December 31, 2023. Selling, general and administrative expenses also include an impairment expense related to our right-of-use assets of $2.8 million for the twelve months ended December 31, 2023 compared to $3.6 million for the twelve months ended December 31, 2022.
Liquidity and capital resources
Sources of liquidity
As of December 31, 2023, we had unrestricted cash and cash equivalents of $76.7 million. We have funded our operations primarily through public equity offerings, private placements of equity securities and through government grants. We believe our unrestricted cash and cash equivalents balance as of December 31, 2023 is sufficient to fund our operations for at least the next 12 months from the date our financial statements are issued. We expect to finance our future operations with our existing unrestricted cash and cash equivalents and through one or more possible strategic alternatives. However, there is no guarantee that any of these strategic opportunities will be executed or realized on favorable terms, if at all, and some could be dilutive to existing stockholders.
On February 17, 2021, we completed our initial public offering (IPO), pursuant to which we issued and sold 1,058,000 shares (15,870,000 shares pre-Reverse Stock Split) of our common stock, at a public offering price of $240 per share ($16.00 per share pre-Reverse Stock Split). The net proceeds from the IPO were $232.5 million after deducting underwriting discounts and commissions and other offering expenses.
In 2022, in connection with our refocus on the women's health and STI markets, we implemented two separate reductions in force, designed to align our remaining resources to focus on (i) developing women's health and STI tests on the Talis One system, (ii) our internal manufacturing expertise to support our strategic plans and (iii) reducing costs and preserving cash to extend our runway to commercialize our women's health and STI tests. The 2022 reductions in force amounted to approximately 40% of our headcount. We incurred $2.5 million of expenses related to these reductions in force during the twelve months ended December 31, 2022, substantially all of which consisted of one-time charges related to the staff reduction, including cash expenditures and other costs.
On November 14, 2023, in connection with our plans to consider strategic alternatives, reduce costs and preserve cash, we terminated approximately 90% of our work force. During the twelve months ended December 31, 2023, the Company incurred $3.4 million of expenses related to the November 2023 RIF which included payroll costs for salaries, wages and benefits paid or to be paid to employees during the minimum WARN act retention period and other costs. Expenses related to the November 2023 RIF are included in Selling, general and administrative and Research and development expenses in the statement of operations and comprehensive loss. Depending on the outcome of our plans to consider strategic alternatives, the Company expects to incur approximately $0.5 million of additional expenses related to the November 2023 RIF, substantially all of which will consist of charges related to the staff reduction.
Cash flows
The following table summarizes our cash flows for each of the periods presented (in thousands):
Year Ended December 31,
(in thousands)
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net decrease in cash, cash equivalents and restricted cash
Operating activities
During the twelve months ended December 31, 2023, net cash used in operating activities was $53.2 million, resulting from our net loss of $62.0 million, a $2.4 million decrease in accounts payable and a decrease of $3.1 million in accrued expenses and other liabilities. These outflows were partially offset by a decrease of $1.9 million in prepaid expenses and other current assets, as well as non-cash items including $4.4 million of stock-based compensation, a $2.8 million impairment of long-lived assets and $4.3 million of non-cash lease expense. The reduction in net cash used in operating activities from 2022 to 2023 was driven by the completion of our manufacturing scale-up investments in 2022 and the impact of lower employee compensation costs from the 2022 RIFs.
During the twelve months ended December 31, 2022, net cash used in operating activities was $100.1 million, resulting from our net loss of $113.0 million and a $8.9 million decrease in accounts payable, accrued expenses and other liabilities driven by the completion of our manufacturing scale-up project. These outflows were offset by non-cash items of $20.6 million, including $8.8 million of depreciation expense primarily driven by the acceleration of the useful life of certain lab equipment as a result of manufacturing changes brought about by the decision to changes in business strategy, $5.4 million of stock based compensation expense, $3.6 million impairment of long-lived assets and $2.8 million of non-cash lease expense.
Investing activities
During the twelve months ended December 31, 2023 and 2022, we used $0.5 million and $1.6 million of cash for investing activities related to purchases of property and equipment.
Financing activities
During the twelve months ended December 31, 2023, net cash provided by financing activities related to proceeds from stock purchases pursuant to the Company's employee stock purchase plan.
During the twelve months ended December 31, 2022, net cash provided by financing activities was $0.4 million, consisting of $0.3 million in proceeds from common stock issued pursuant to the Company’s employee stock purchase plan and $0.1 million in proceeds from stock option exercises.
Contractual obligations
Leases
See Note 6. Commitments and contingencies, to our audited financial statements included in Item 8 of this Annual Report for a summary of our operating lease commitments as of December 31, 2023.
In March 2023, the Company entered into a lease termination agreement with the landlord of our former Redwood City, CA facility. The Company incurred immaterial customary termination and broker fees during the twelve months ended December 31, 2023. The lease of our former Redwood City, CA facility was terminated on May 12, 2023.
In March 2023, the Company entered into a sublease for laboratory and office space in our current Redwood City, CA facility. The sublease will continue for a term of 7 years, with no option to extend. The minimum annual commitment under the new sublease is approximately $1.0 million with fixed escalations of 3.5% per annum. The sublease commenced for accounting purposes on May 1, 2023 and the Company recorded a lease liability and corresponding right-of-use asset and liability of $7.3 million.
Purchase commitments
Currently, we have no material long-term purchase commitments.
Critical accounting policies and estimates
This MD&A is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of our financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, costs and expenses and the disclosure of contingent assets and liabilities in our 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 assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in greater detail in Note 2 to our financial statements appearing within Item 8 of this Annual Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.
Research and development expenses
Capitalizing pre-launch inventory costs will not occur prior to obtaining an EUA or other FDA marketing authorization unless the regulatory review process has progressed to a point that objective and persuasive evidence of regulatory approval is sufficiently probable, commercialization is considered probable and future economic benefit can be asserted. We have incurred significant costs related to the scale-up of manufacturing activities for commercialization. We record such costs as research and development expenses, or if used in marketing evaluations costs are recorded as selling, general and administrative expenses. A number of factors are taken into consideration, based on our management’s judgment, including the current status in the regulatory approval process, potential impediments to the approval process, anticipated research and development initiatives and risk of technical feasibility, viability of commercialization and marketplace trends.
All materials, equipment, and external consulting costs associated with developing aspects of the production line that do not have an alternative future use are expensed as research and development costs until regulatory approval or clearance is obtained, and commercialization is probable. Materials, equipment, and external consulting costs associated with developing aspects of the production line that are deemed to have an alternative future use are capitalized as property and equipment, assessed for impairment and depreciated over their related useful lives. These research and development costs, including expenditures for property and equipment with no alternative future use, are classified as operating cash outflows within our statements of cash flows.
Stock-based compensation
We measure stock-based compensation expense for stock options and restricted stock units (RSUs) granted to our employees and directors on the date of grant and recognize the corresponding compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award, on a straight-line basis. We also recognize stock-based compensation expense associated with our employee stock purchase plan (ESPP) based on the grant date fair value required under authoritative guidance. Forfeitures are recorded as they occur.
From time to time, we may grant stock options to employees, including executive officers, that vest upon the satisfaction of service-based or performance-based vesting conditions. We recognize stock-based compensation over the requisite service period using the accelerated attribution method for awards with a performance condition if the performance condition is deemed probable of being met.
We estimate the fair value of stock options granted to our employees and directors on the grant date, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of subjective assumptions which determine the fair value of stock option awards. These assumptions include:
Expected term . The expected term of options represents the period of time that options are expected to be outstanding. Our historical stock option exercise experience does not provide a reasonable basis upon which to estimate an expected term due to lack of sufficient data. We estimate the expected term by using the simplified method, which calculates the expected term as the average of the time-to-vesting and the contractual life of the options.
Expected volatility . Prior to our IPO, there has been no public market for our common stock, and as a result we do not have any trading history of our common stock, expected volatility is estimated based on the average volatility for comparable publicly traded diagnostic companies over a period equal to the expected term of the stock option grants. The comparable companies are chosen based on their similar size, stage in the life cycle or area of specialty.
Risk-free interest rate . The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the stock option grants.
Expected dividend yield . We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we use an expected dividend yield of zero.
We determine the fair market value of our common stock based on its closing price as reported on the date of grant on the primary stock exchange on which our common stock is traded.
Leases
Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the remaining lease term. The present value of future lease payments are discounted using the interest rate implicit in lease contracts if that rate is readily determinable; otherwise we utilize our incremental borrowing rate (IBR), which reflects the fixed rate at which we could borrow on a collateralized basis over a similar term, the amount of the lease payments in a similar economic environment. After lease commencement and the establishment of a right-to-use asset and operating lease liability, lease expense is recorded on a straight-line basis over the lease term.
Recoverability of long-lived assets
We review the carrying amount of our long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset or an asset group may not be fully recoverable. If indicators of impairment exist, an impairment loss would be recognized when the estimated undiscounted future cash flows expected to result from the use of the asset or asset group and its eventual disposition are less than its carrying amount. The impairment charge is determined based upon the excess of the carrying value of the asset over its estimated fair value, reducing the carrying value of the related asset to no less than its fair value. Estimated fair value is determined based upon an estimate of discounted future cash flows or other appropriate measures of estimated fair value. Estimates in our fair value calculation may include estimates made for discount rate, rental rate and escalations or downtime periods associated with our right-of-use assets as well as others. A 5% change in the estimated rental rate, escalations or downtime periods would not materially impact the fair value of the right-of-use assets. In addition, a 200 basis point change in the selected discount rate would not materially impact the fair value of the right-of-use assets. For purposes of recognition of for long-lived assets, we group assets and liabilities at the lowest level for which cash flows are separately identifiable.
Recently issued accounting pronouncements
There are no accounting pronouncements pending at December 31, 2023 that we expect to have a material impact on our financial statements and disclosures.
Recently adopted accounting standards
We did not adopt any new accounting standards during the twelve months ended December 31, 2023.
Emerging growth company status
In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an emerging growth company may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Therefore, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected to avail ourselves of this extended transition period and, as a result, we may adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-public companies instead of the dates required for other public companies. However, we may early adopt these standards.
In addition, as an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:
reduced disclosure about the compensation paid to our executive officers;
not being required to submit to our stockholders’ advisory votes on executive compensation or golden parachute arrangements;
an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act; and
an exemption from new or revised financial accounting standards until they would apply to private companies and from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation.
We may take advantage of these exemptions for up to the last day of the fiscal year ending after the fifth anniversary of our initial public offering, which is December 31, 2026, or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company on the date that is the earliest of (1) the last day of the fiscal year in which we have total annual gross revenues of $1.24 billion or more; (2) the last day of our fiscal year following the fifth anniversary of the date of our initial public offering; (3) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (4) the date on which we are deemed to be a large accelerated filer under the rules of the SEC. We may choose to take advantage of some but not all of these exemptions.
We are also a “smaller reporting company” meaning that the market value of our stock held by non-affiliates is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
Item 7A. Quantitative and Qualitat ive Disclosures About Market Risk.
Not applicable.
Item 8. Financial Statement s and Supplementary Data
Index to Financial Statements and Notes
Report of independent registered public accounting firm
(Ernst & Young LLP; PCAOB ID: 42 )
Balance sheets
Statements of operations and comprehensive loss
Statements of stockholders’ equity
Statements of cash flows
Notes to the financial statements
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Talis Biomedical Corporation
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Talis Biomedical Corporation (the Company) as of December 31, 2023 and 2022, the related statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2016.
Chicago, Illinois
March 28, 2024
Talis Biomedical Corporation
Balance sheets
(in thousands, except for share and par value)
December 31,
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use-assets
Other long-term assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued compensation
Accrued liabilities
Operating lease liabilities, current portion
Total current liabilities
Operating lease liabilities, long-term portion
Total liabilities
Commitments and contingencies (Note 6)
Stockholders’ equity:
Series 1 convertible preferred stock, $ 0.0001 par value— 60,000,000 shares authorized as of December 31, 2023 and December 31, 2022; 29,863,674 shares issued and outstanding as of December 31, 2023 and December 31, 2022; aggregate liquidation preference of $ 3 as of December 31, 2023 and December 31, 2022
Common Stock, $ 0.0001 par value; 200,000,000 shares authorized as of
December 31, 2023 and December 31, 2022; 1,821,986 and 1,811,396 shares issued and outstanding as of December 31, 2023 and December 31, 2022, respectively
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to the financial statements
Talis Biomedical Corporation
Statements of operations and comprehensive loss
(in thousands, except for share and per share amounts)
Year ended December 31,
Revenue
Grant revenue
Product revenue, net
Total revenue, net
Operating expenses:
Cost of product sold
Research and development
Selling, general and administrative
Total operating expenses
Loss from operations
Other income
Net loss and comprehensive loss
Net loss per share, basic and diluted
Weighted average shares used in the calculation of net loss per
share, basic and diluted:
See accompanying notes to the financial statements
Talis Biomedical Corporation
Statements of stockholders’ equity
(in thousands, except for share amounts)
Series 1 Convertible
Preferred Stock
Common Stock
Additional
Paid-in
Accumulated
Stockholders’
Shares
Value
Shares
Value
Capital
Deficit
Equity
Balance at December 31, 2021
Issuance of common stock pursuant to equity incentive plan
Issuance of common stock pursuant to employee stock purchase plan
Stock-based compensation expense
Net loss
Balance at December 31, 2022
Issuance of Common Stock pursuant to equity incentive plan
Issuance of Common Stock pursuant to employee stock purchase plan
Stock-based compensation expense
Net loss
Balance at December 31, 2023
See accompanying notes to the financial statements
Talis Biomedical Corporation
Statements o f cash flows
(in thousands)
Year ended December 31,
Operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating
activities:
Stock-based compensation
Depreciation and amortization
Non-cash lease expense
Impairment of long-lived assets
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses and other current assets
Other long-term assets
Accounts payable
Accrued expenses and other liabilities
Net cash used in operating activities
Investing activities
Purchase of property and equipment, net
Net cash used in investing activities
Financing activities
Proceeds from stock option exercises
Proceeds from stock issuances pursuant to employee stock purchase plan
Net cash provided by financing activities
Net decrease in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of year
Cash, cash equivalents and restricted cash at end of year
Supplemental disclosure of noncash activities
Right-of-use assets obtained in exchange for operating lease liabilities
Remeasurement of operating lease right-of-use asset for lease modification
The following table provides a reconciliation of the cash, cash equivalents and restricted cash balances as of each of the periods shown above:
December 31,
Cash and cash equivalents
Restricted cash - other long-term assets
Total cash, cash equivalents and restricted cash
See accompanying notes to the financial statements
Talis Biomedical Corporation
Notes to the fina ncial statements
1. Organization and nature of business
Talis Biomedical Corporation (the Company) is a molecular diagnostic company focused on advancing health equity and outcomes through the delivery of accurate infectious disease testing in the moment of need, at the point of care. Prior to the announcement to consider strategic alternatives in November 2023, the Company planned to develop and commercialize innovative products on its sample-to-answer Talis One system to enable accurate, low cost, and rapid molecular testing. The Company was incorporated in 2013 under the general laws of the State of Delaware and is based in Chicago, Illinois (IL).
Liquidity
The Company has incurred significant losses and negative cash flows since inception, including a net loss of $ 62.0 million for the twelve months ended December 31, 2023.
Management expects to continue to incur additional losses in the foreseeable future while the Board of Directors considers strategic alternatives for the Company, including without limitation, equity or debt financing alternatives, an acquisition, merger, reverse merger, divestiture of assets, licensing or other strategic transactions and a voluntary dissolution or liquidation of the Company. The Company’s activities are subject to significant risks and uncertainties, including failing to secure a strategic alternative or additional funding to continue to develop the Company’s current technology and to achieve clinical approval of its products.
As of December 31, 2023, the Company had unrestricted cash and cash equivalents of $ 76.7 million and $ 1.5 million of restricted cash. The Company expects its existing unrestricted cash and cash equivalents will be sufficient to fund its operations through at least one year from the date these financial statements are issued. The Company expects to finance its future operations with its existing unrestricted cash and cash equivalents and through one or more possible strategic alternatives. However, there is no guarantee that any of these strategic opportunities will be executed or realized on favorable terms, if at all, and some could be dilutive to existing stockholders.
Reverse Stock Split
On June 30, 2023, the Company filed a certificate of amendment to the Company’s Amended and Restated Certificate of Incorporation (the “Certificate of Amendment”) with the Secretary of State of Delaware to effect a 1-for-15 reverse stock split of the shares of the Company’s common stock, par value $ 0.0001 per share, effective as of 5:00 p.m., Eastern Time, on July 5, 2023 (the “Reverse Stock Split”). On this date, every 15 issued and outstanding shares of common stock were converted into one share of common stock, with any fractional shares resulting from the Reverse Stock Split rounded up to the nearest whole share. The number of outstanding shares of common stock was reduced from approximately 26.9 million shares to approximately 1.8 million shares.
The Reverse Stock Split did not change the Company's authorized shares of common stock and Series 1 convertible preferred stock, which remained at 200,000,000 and 60,000,000 shares, respectively. The Reverse Stock Split did not change the par value of the common stock and, therefore, the Company reclassified an amount equal to the reduction in the number of shares of common stock at par value to additional paid-in capital. Proportionate adjustments were made to the per share exercise price and/or the number of shares issuable upon the exercise of stock options and the settlement of restricted stock units and the number of shares authorized and reserved for issuance pursuant to the Company’s equity incentive plans, see Note 8. Additionally, the Reverse Stock Split had no impact on the number of shares of the Company's Series 1 convertible preferred stock issued and outstanding. However, the conversion ratio of the outstanding Series 1 convertible preferred stock increased and the number of shares of common stock issuable upon conversion of such preferred stock decreased in proportion to the 1-for-15 split ratio, see Note 7.
All share and per share amounts for common stock in these financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to the Reverse Stock Split.
2. Summary of significant accounting policies
Basis of presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and the rules and regulations of the Securities and Exchange Commission (SEC) for reporting.
Segment information
Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer. The Company views its operations and manages its business in one operating segment.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company bases its estimates and judgments on historical experience and on various other assumptions, including knowledge about current events and expectations about actions the Company may take in the future, that the Company believes are reasonable under the circumstances. Actual results could vary from the amounts derived from management’s estimates and assumptions.
Fair value measurements
The Company's financial assets carried at fair value consist of cash equivalents held in money market accounts that are valued using quoted prices in active markets for identical instruments. Due to their short-term nature, the carrying values for cash, restricted cash, accounts receivable and accounts payable approximate fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable.
Level 1— Quoted prices in active markets for identical assets or liabilities.
Level 2— Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
Level 3— Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value of the instrument.
For nonfinancial assets, measurement at fair value in periods subsequent to their initial recognition is applicable if they are determined to be impaired. These assets generally include property and equipment and operating lease right-of-use assets. If measured at fair value in the balance sheets, these would generally be classified within Level 3 of the fair value hierarchy.
Concentration of credit risk and other risks and uncertainties
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, and accounts receivables. The Company’s cash and restricted cash are deposited in accounts at large financial institutions and its cash equivalents are primarily held in prime and U.S.
government money market funds. The Company believes it is not exposed to significant credit risk due to the financial strength of the depository institutions in which the cash, restricted cash and cash equivalents are held.
Property and equipment
Property and equipment are recorded at cost less accumulated depreciation. Depreciation is recorded using the straight-line method based on the estimated useful lives of the depreciable property or, for leasehold improvements, the remaining term of the lease, whichever is shorter. The useful lives of the assets are as follows:
Estimated Useful
Life (in years)
Lab equipment
5 years
Furniture and fixtures
5 years
Office and computer equipment
3 years
Leasehold improvements
Shorter of life of
the asset or remaining
lease term
Upon sale or retirement of assets, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is recognized in the statement of operations and comprehensive loss. Expenditures for maintenance and repairs are expensed as incurred.
Impairment of long-lived assets
A long-lived asset may be impaired when the undiscounted cash flows expected to be generated by the asset (or asset group) are less than the asset’s carrying amount. Any required impairment loss would be measured as the amount by which the asset or asset group's carrying value exceeds its fair value and would be recorded as a reduction in the carrying value of the related asset to its fair value and a charge to operating expense. The Company reviews the carrying amount of its long-lived assets, including property and equipment, for impairment whenever events indicate that the carrying amount of the assets may not be fully recoverable.
As the Company’s market capitalization is below the carrying value of equity, the Company regularly assesses if its long-lived assets are impaired by comparing the estimated fair value of the long-lived assets to their respective carrying amounts. The impairment of long-lived asset charge relates solely to the operating lease right-of-use assets and reduces the carrying value of the associated right-of-use assets to the estimated fair values. The fair values are estimated using a discounted cash flows approach on forecasted future cash flows derived from current market data including discount rate, rent and rent escalation rates, downtime and abatement assumptions. The fair value of our right-of-use assets may change as a result of a change in any of these inputs. During the twelve months ended December 31, 2023 and 2022, the Company recorded long-lived asset impairment charges related to right-of-use assets within selling, general and administrative expenses on the statement of operations and comprehensive loss of $ 2.8 million and $ 3.6 million, respectively.
Leases
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease. The Topic requires a lessee to determine if an arrangement is a lease or contains a lease at contract inception, to recognize right-of-use ("ROU") assets and lease liabilities arising from operating and financing leases with terms longer than 12 months on the balance sheets and to disclose key information about leasing arrangements. The Company's lease agreements may include variable lease payments which are not included in the initial measurement of the right-of-use asset or lease liability due to the uncertainty of the payment amount and is recorded as lease cost in the period incurred. Lease expense is recognized on a straight-line basis over the lease term.
For the Company's operating leases, the Company accounts for the lease and non-lease components as a single lease component, the lease liability is initially measured at the present value of the unpaid lease payments at lease commencement date. As most of the leases do not provide an implicit rate, the Company generally uses its incremental borrowing rate as the discount rate for the lease. The Company's incremental borrowing rate is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. The operating lease right-of-use asset includes any lease payments to be made and excludes lease
incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option.
Research and development costs
Research and development expenses include certain payroll and personnel expenses, laboratory supplies, consulting costs, external contract research and development expenses, allocated overhead and facility occupancy costs. Costs to develop the Company’s technologies, including software, are recorded as research and development expense except for costs that meet the criteria to be capitalized as internal-use software costs.
The Company does not capitalize pre-launch inventory costs until future commercialization is considered probable and the future economic benefit is expected to be realized. Capitalizing pre-launch inventory costs will not occur prior to obtaining an EUA or other FDA marketing authorization, commercialization is considered probable and future economic benefit can be asserted. The Company records such costs as research and development expenses, or if used in marketing evaluations records such costs as selling, general and administrative expenses. All materials, equipment, and external consulting costs associated with developing aspects of the production line that do not have an alternative future use are expensed as research and development costs until regulatory approval or clearance is obtained and commercialization is probable. Materials, equipment, and external consulting costs associated with developing aspects of the production line that are deemed to have an alternative future use are capitalized as property and equipment, assessed for impairment and depreciated over their related useful lives.
The Company makes estimates of its accrued research and development expenses as of each balance sheet date in its financial statements based on facts and circumstances at that time through discussions internally and with service providers to confirm the accuracy of progress and stage of completion. The Company’s understanding of the status and timing of services performed relative to the actual status and timing of services performed requires judgment and actual results may vary.
Preferred stock
The Company has classified its Series 1 convertible preferred stock as permanent equity within the accompanying balance sheet at December 31, 2023 and December 31, 2022 due to the immaterial liquidation value of the shares.
The Company also evaluates the features of its convertible pre ferred stock to determine if the features require bifurcation from the underlying shares by evaluating whether they are clearly and closely related to the underlying shares and if they do, or do not, meet the definition of a derivative.
Stock-based compensation
The Company maintains an equity incentive plan as a long-term incentive for employees, consultants, and directors. We generally issue new common shares upon exercise of options and vesting of RSUs. The Company accounts for all stock-based awards granted to employees and directors based on their fair value on the date of the grant and recognizes compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective award. The measurement date for stock awards, including stock options and restricted stock units (RSUs) is the date of grant. Awards granted by the Company are routine in nature including new hire, annual, and promotional grants that are not designed to be spring-loaded, and therefore the market price is not adjusted when estimating the grant-date fair value of these awards. From time to time, the Company may grant stock options to employees, including executive officers, and consultants that vest upon the satisfaction of service-based, performance-based or market-based vesting conditions.
For awards that vest based on multiple conditions, the Company estimates the fair value on its grant date using the Black-Scholes option valuation model or the Monte Carlo Simulation valuation model, depending on the terms and conditions of the particular award.
For awards where vesting occurs based on a service condition only, the Company recognizes compensation expense using the straight-line method over the requisite service period.
For awards where vesting occurs based on either a service condition or a performance condition, the Company recognizes stock-based compensation over the requisite service period using the accelerated attribution method for awards with a performance condition if the performance condition is deemed probable of being met.
For awards where vesting occurs based on either a service condition or a market condition, compensation expense is recognized over the requisite service period. If the market condition is satisfied prior to the completion of the requisite service period, any remaining unrecognized compensation expense will be accelerated at that time. The Company does not reverse compensation expense associated with these awards if the market condition is not met.
The Company recognizes stock-based compensation expense for the portion of awards that have vested. Forfeitures are accounted for as they occur.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes options-pricing model, which requires inputs based on certain subjective assumptions, including the expected stock price volatility, the expected term of the option, the risk-free interest rate for a period that approximates the expected term of the option, and the Company’s expected dividend yield. The fair value of each restricted stock unit is determined based on the number of shares granted and the value of the Company’s common stock on the date of grant.
Net loss per share attributable to common stockholders
Basic net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period, without consideration of potential dilutive securities. The Series 1 convertible preferred stock are participating securities but because they do not have the obligation to share in the loss of the Company, are excluded from the calculation of basic net loss per share. Stock options, unvested RSUs, Series 1 convertible preferred stock, and shares estimated to be purchased under the Company’s employee stock purchase plan (ESPP) are considered potentially dilutive common stock. The Company computes diluted net loss per share after giving consideration to all potentially dilutive common stock outstanding during the period, determined using the treasury-stock and if-converted methods, except where the effect of including such securities would be antidilutive.
For the years ended December 31, 2023 and 2022, the Company reported a net loss. The potentially dilutive common stock would have been anti-dilutive and therefore basic and diluted loss per share attributable to common stockholders were the same.
Comprehensive loss
Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company did not have any other comprehensive income or loss for either period presented, and therefore comprehensive loss was the same as the Company’s net loss.
Emerging growth company status
The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act, until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
New Accounting Pronouncements
Recently issued accounting pronouncements
There are no accounting pronouncements pending at December 31, 2023 that we expect to have a material impact on our financial statements and disclosures.
Recently adopted accounting standards
We did not adopt any new accounting standards during the twelve months ended December 31, 2023
3. Fair value measurements
The following table summarizes the Company's financial assets carried at fair value and measured on a recurring basis by level within the fair value hierarchy (in thousands):
December 31, 2023
Level 1
Level 2
Level 3
Total
Assets:
Cash equivalents (money market funds)
Total assets measured at fair value
December 31, 2022
Level 1
Level 2
Level 3
Total
Assets:
Cash equivalents (money market funds)
Total assets measured at fair value
4. Balance sheet components
Property and equipment, net
Property and equipment consisted of the following (in thousands):
December 31,
Lab equipment
Office and computer equipment
Furniture and fixtures
Leasehold improvements
Total
Less accumulated depreciation
Total
Construction in progress
Property and equipment, net
November 2023 RIF liability
In November 2023, due to unforeseen operational challenges, setbacks in product development timelines and volatile market conditions, the Company decided to cease operations in its Redwood City, CA laboratory and office facility and consolidate operations to its Chicago facility and to consider strategic alternatives. In order to further reduce costs and extend its remaining cash, the Company announced a reduction in force of approximately 90 % of its work force on November 14, 2023 ("November 2023 RIF"). As part of these actions, the Company provided notices to the impacted employees under the Worker Adjustment and Retraining Act ("WARN Act") for job eliminations to occur through March 2024.
During the twelve months ended December 31, 2023, the Company incurred $ 3.4 million of expenses related to the November 2023 RIF which included payroll costs for salaries, wages and benefits paid or to be paid to employees during the minimum WARN act retention period and other costs. Expenses related to the November 2023 RIF are
included in Selling, general and administrative and Research and development expenses in the statement of operations and comprehensive loss.
Depending on the outcome of our plans to consider strategic alternatives, the Company expects to incur approximately $ 0.5 million of additional expenses related to the November 2023 RIF, substantially all of which will consist of charges related to the staff reduction.
The following table summarizes the activity for the November 2023 RIF accrued liability (in thousands):
Twelve Months ended December 31, 2023
Balance at December 31, 2022
Charges
Cash Payments
Balance at December 31, 2023
The November 2023 RIF accrued liability is included in Accrued Compensation on the balance sheet.
In March 2022 and August 2022, the Company implemented two separate reductions in force (RIF) designed to reduce its operating expenses, preserve cash and align its remaining resources to focus on, among other things, developing women's health and sexual transmitted infection (STI) tests on the Talis One system and internal manufacturing expertise to support our strategic plans. During the twelve months ended December 31, 2022 , the Company incurred $ 1.0 million of expenses related to the March 2022 RIF and $ 1.5 million of expenses related to the August 2022 RIF.
5. Revenue
Product revenue, net
The Company currently operates in one reportable segment. There were no sales to customers outside of the United States during the twelve months ended December 31, 2023.
Grant Revenue
NIH grant
In May 2018, the Company was awarded a grant from the NIH for the Diagnostics via Rapid Enrichment, Identification, and Phenotypic Antibiotic Susceptibility Testing of Pathogens from Blood project. In April 2023, the Company exercised a one-year option under the grant, extending the term through April 2024. There is $ 0.4 million in additional funding available under the grant as of December 31, 2023, which the Company does not expect to fully utilize.
During each of the twelve months ended December 31, 2023 and 2022, the Company recognized $ 1.7 million and $ 0.5 million of revenue related to this grant, respectively.
NIH Rapid Acceleration of Diagnostics - RADx Initiative contracts
In July 2020, the Company was awarded a sub-award grant from the University of Massachusetts Medical School for Phase 1 of the NIH’s RADx initiative and a contract from the NIH directly for Phase 2 of the RADx initiative. The RADx initiative aims to speed the development, validation, and commercialization of innovative, rapid tests that can directly detect COVID-19. In 2021, the Company and the NIH amended the contract for the completion of
the RADx initiative, extending the term of the contract to January 30, 2022 and decreased the potential milestone payment from $ 4.0 million to $ 2.0 million. The contract expired on January 30, 2022.
During the twelve months ended December 31, 2022 , the Company recognized revenue of $ 0.7 million related to the RADx initiative.
6. Commitments and contingencies
Operating leases
In March 2023, the Company entered into a lease termination agreement with the landlord of its former Redwood City, CA facility. The original term of the lease commenced in June 2022 and was for an initial term of 10.5 years. As a result of this modification, the Company remeasured the lease liability and the corresponding right-of-use asset resulting in a reduction of each by $ 18.7 million. The Company incurred immaterial customary termination and broker fees during the twelve months ended December 31, 2023. The lease of our former Redwood City, CA facility was terminated on May 12, 2023.
In March 2023, the Company entered into a sublease for laboratory and office space in its current Redwood City, CA facility. The sublease will continue for a term of 7 years, with no option to extend . The minimum annual commitment under the new sublease is approximately $ 1.0 million with fixed escalations of 3.5 % per annum. The sublease commenced for accounting purposes on May 1, 2023 and the Company recorded a lease liability and corresponding right-of-use asset and liability of $ 7.3 million. While the sublease is still in effect, in November 2023, the Company decided to cease operations in its Redwood City laboratory and office facility and have consolidated all of its operations to its Chicago office during 2024.
The Company recorded long-lived asset impairment charges related to right-of-use assets of $ 2.8 million and $ 3.6 million during the twelve months ended December 31, 2023 and 2022, respectively. Refer to Note 2, "Long-lived asset impairment" for more information.
The components of the lease costs and supplemental cash flow information relating to the Company's leases were as follows (in thousands):
December 31,
Lease Costs
Operating lease costs
Variable lease costs
Total operating lease costs
Cash flows
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used for operating leases
December 31,
Weighted-average remaining lease term
7.8 years
9.8 years
Weighted-average discount rate
The undiscounted future lease payments for our Redwood City, CA and Chicago, IL operating leases as of December 31, 2023 were as follows (in thousands):
Year ending December 31,
Operating
Leases
2029 and thereafter
Total future minimum lease payments
Less: imputed interest
Present value of operating lease liabilities
Less: current portion of lease liabilities
Noncurrent portion of lease liabilities
Standby letters of credit
In January 2022, in conjunction with the Company’s former Redwood City, CA operating lease, the Company entered into a standby letter of credit (LOC) in the amount of $ 1.0 million to secure the lease through its expiration. In March 2023, the Company entered into a lease termination agreement with the landlord of its former Redwood City, CA facility, which accelerated the lease termination date to May 12, 2023. During the twelve months ended December 31, 2023 all the criteria in the termination agreement were met and the landlord released the LOC of $ 1.0 million, which is now classified within cash and cash equivalents on the balance sheet as of December 31, 2023.
In March 2023, the Company entered into a sublease for laboratory and office space in its current Redwood City, CA facility. The Company is required to hold a LOC in the amount of $ 0.7 million to secure this lease through expiration. The Company is required to maintain a cash balance of $ 0.7 million as collateral for the LOC, which has been classified in other long-term assets on the balance sheet as of December 31, 2023, because it is unavailable for a period longer than one year from the balance sheet date.
In conjunction with the Chicago, IL laboratory and office space lease, the Company is required to hold an additional LOC in the amount of $ 0.8 million to secure this lease through its expiration. The Company is required to maintain a cash balance of $ 0.8 million as collateral for the LOC, which is classified in other long-term assets on the balance sheet as of December 31, 2023, because it is unavailable for a period longer than one year from the balance sheet date.
The Company has not drawn upon any LOC through December 31, 2023.
Indemnification agreements
In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, customers and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. The Company also provides indemnification to directors and officers of the Company to the maximum extent permitted under applicable Delaware law. The maximum potential amount of future payments that the Company could be required to make under these indemnification agreements is, in many cases, unlimited. As December 31, 2023, the Company has not incurred any material costs as a result of such indemnifications and is not currently aware of any indemnification claims.
Contingencies
The Company is party to certain legal matters arising in the ordinary course of its business. In addition, third parties may, from time to time, assert claims against us in the form of letters and other communications. The Company records a provision for contingent losses when it is both probable that a liability has been incurred at the date of the
financial statements and the amount of the loss can be reasonably estimated. When management determines that it is not probable, but rather reasonably possible that a liability has been incurred at the date of the financial statements, management discloses such contingencies and the possible loss or range of loss if such estimate can be made. Any estimated range is based on currently available information and involves elements of judgment and significant uncertainties. Circumstances change over time and actual results may vary significantly from estimates.
On or about January 7, 2022, John Modrak filed a class action in the United States District Court for the Northern District of California against the Company, certain of its officers and directors, and J.P. Morgan Securities LLC, BofA Securities, Inc., Piper Sandler & Co., and BTIG, LLC, underwriters of the Company’s February 2021 initial public offering (“IPO”), captioned as Modrak v. Talis Biomedical Corp., et al., No. 3:22-cv-00105, purportedly on behalf of shareholders who purchased shares of the Company’s stock that were registered in the Company’s IPO. On February 18, 2022, Karen Mitcham filed a substantively identical lawsuit in the same court captioned as Mitcham v. Talis Biomedical Corp., et al., No. 3:22-cv-01039-JD, against the Company, and the same officers and directors as the Modrak lawsuit. These two cases were consolidated and co-lead plaintiffs were appointed as mandated by the applicable federal securities laws. On December 9, 2022, the Court granted the Company’s motion to dismiss and gave plaintiffs leave to amend their consolidated complaint. On January 13, 2023, the plaintiffs filed an amended , asserting for of Section 11 of the Securities Act of 1933 (“Securities Act”) all and Section 15 of the Securities Act the individual . The amended that the Company’s registration statement and prospectus issued in connection with the Company’s IPO was and , and to state material facts, related to (1) instrument manufacturing, (2) the reliability and accuracy of the Company’s Talis One COVID-19 test, and (3) the comparator test used in the Company’s primary study in support of its EUA application for the Talis One COVID-19 Test System. The amended seeks unspecified under Sections 11 and 15 of the Securities Act, reasonable attorneys’ fees, and other costs. The amended does not assert the above referenced underwriters. On April 28, 2023, the Court our motion to . On February 9, 2024, the Court certified the class and appointed Martin Dugan as class representative. Discovery is ongoing. Trial is currently set for February 24, 2025.
The Company has not recorded an accrual related to this matter as of December 31, 2023 as it determined that any such loss contingency was not probable or reasonably estimable.
Other than the litigation matters discussed above, the Company currently does not believe that the ultimate outcome of any of the matters is probable or reasonably estimable, or that these matters will have a material adverse effect on its business; however, the results of litigation and claims are inherently unpredictable. Regardless of the outcome, litigation and other negotiations can have an adverse impact on the Company because of litigation and settlement costs, diversion of management resources and other factors. Legal costs are expensed as incurred.
7. Stockholders’ equity
Common Stock
The Company’s February 2021 amended and restated certificate of incorporation authorized the issuance of up to 200,000,000 shares of common stock, each having a par value of $ 0.0001 and entitled to one vote per share . No dividends have been declared or paid during the years ended December 31, 2023 and 2022.
On July 27, 2022, the Company received a notice (Notice) from the Nasdaq Stock Market (Nasdaq) that the Company was not in compliance with the $ 1.00 minimum bid price requirement for continued listing, as set forth in Nasdaq Listing Rule 5450(a)(1) (Minimum Bid Price Requirement), as the minimum bid price of the Company’s common stock had been below $ 1.00 per share for thirty-one (31) consecutive business days as of the date of the Notice.
On January 24, 2023, the Company transferred the listing of its securities to the Nasdaq Capital Market (Capital Market) and received notice from Nasdaq indicating that, while the Company had not regained compliance with the Minimum Bid Price Requirement, Nasdaq determined that the Company was eligible for an additional 180-day
period, or until July 24, 2023, to regain compliance. We committed to effectuating a reverse stock split by the end of the second compliance period, if necessary, to regain compliance with the Minimum Bid Price Requirement. The Notice had no other immediate effect on the listing of the Company’s common stock, which trades on the Capital Market under the symbol “TLIS.”
Effective July 5, 2023, the Company completed a 1-for-15 reverse stock split of its issued and outstanding shares of common stock, as further described in Note 1. As a result of the Reverse Stock Split, every 15 shares of common stock issued and outstanding were converted into one share of common stock with any fractional shares resulting from the Reverse Stock Split rounded up to the nearest whole share. The rights and privileges of the holders of shares of common stock are unaffected by the Reverse Stock Split.
The common stock traded on an as-adjusted basis upon market open on July 6 , 2023 . The purpose of the Reverse Stock Split was to enable the Company to regain compliance with the requirements of Minimum Bid Price Requirement. On July 20, 2023, we received notice from Nasdaq that we had regained compliance with the Minimum Bid Price Requirement.
The Reverse Stock Split did not change the par value of the common stock or the authorized number of shares of common stock. All share and per share amounts for common stock in these financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to the Reverse Stock Split, including reclassifying an amount equal to the reduction in the number of shares of common stock at par value to additional paid-in capital.
Convertible preferred stock
Upon the closing of the IPO, 42,705,056 affiliated convertible preferred stock with a carrying value of $ 225.4 million were converted into 29,863,674 Series 1 convertible preferred stock. The remaining 10,804,295 outstanding historical convertible preferred stock were converted into 7,555,432 shares of common stock. As of December 31, 2023 and 2022, there were no shares of Series 2 non-voting convertible preferred stock outstanding. The Series 1 convertible preferred stock and Series 2 non-voting convertible preferred stock authorized and outstanding have various rights, privileges and features. The Company determined that none of the features required bifurcation from the underlying shares, either because they are clearly and closely related to the underlying shares or because they do not meet the definition of a derivative.
As of December 31, 2023 and December 31, 2022 , there were 29,863,674 shares of Series 1 convertible preferred stock issued and outstanding. There were 60,000,000 shares of Series 1 convertible preferred stock with a par value of $ 0.0001 per share authorized as of December 31, 2023 and December 31, 2022.
The Reverse Stock Split had no impact on the number of shares of the Company's Series 1 convertible preferred stock issued and outstanding. However, the conversion ratio of the outstanding Series 1 convertible preferred stock increased and the number of shares of common stock issuable upon conversion of such Series 1 convertible preferred stock decreased in proportion to the 1-for-15 ratio . The rights and privileges of the holders of shares of Series 1 convertible preferred stock are unaffected by the Reverse Stock Split.
The rights, preferences, and privileges of the Company’s Series 1 convertible preferred stock and Series 2 non-voting convertible preferred stock are as follows:
Voting
The holders of our Series 1 convertible preferred stock are entitled to one vote per share. Holders of shares of our common stock and Series 1 convertible preferred stock will vote together as a single class on all matters (including the election of directors) submitted to a vote of stockholders. The Series 1 convertible preferred stock does not have cumulative voting rights. Holders of our Series 2 non-voting convertible preferred stock have no voting rights except as required by law or as set forth in our amended and restated certificate of incorporation.
Conversion
The Series 1 convertible preferred stock is convertible, at the election of the holder, into Series 2 non-voting convertible preferred stock on a one -for-one basis at any time following the third anniversary of the closing of the IPO. Shares of Series 1 convertible preferred stock automatically convert to common stock on a one -for-one basis at any time at the discretion of the holder, or upon any sale or transfer of such shares of Series 1 convertible preferred stock.
Conversion of the Series 2 non-voting convertible preferred stock into common stock is prohibited if the holder exceeds a specified threshold of voting security ownership. The Series 2 non-voting convertible preferred stock is convertible into common stock on a one -for-one basis, subject to adjustment for events such as stock splits, combinations and the like; provided that such holder shall not be entitled to convert the Series 2 non-voting convertible preferred in excess of that number of convertible preferred stock which upon giving effect or immediately prior to such conversion would cause the holder to exceed 4.99 % ownership or voting power individually or in aggregate with its affiliated holders. The 4.99% can be increased to up to 19.99 % by the holders of such shares with 61 days’ notice to the Company. Shares of Series 2 non-voting convertible preferred stock automatically convert to common stock on a one-for-one basis upon any sale or transfer of such shares of Series 2 non-voting convertible preferred stock.
Dividends
The Series 1 convertible preferred stock and Series 2 non-voting convertible preferred stock have the right to receive dividends first or simultaneously with payment of dividends on common stock. As of December 31, 2023 , no such dividends had been declared or accrued.
Liquidation preference
In the event of any liquidation or dissolution of the Company, holders of the Series 1 convertible preferred stock and Series 2 non-voting convertible preferred stock are entitled to receive $ 0.0001 per share prior to the payment of any amount to any holders of our capital stock ranking junior to the Series 1 convertible preferred stock and Series 2 non-voting convertible preferred stock and thereafter shall participate on an as-if-converted-to-common-stock basis.
Protective provisions
Consent of the holders of a majority of the voting rights of the outstanding Series 1 convertible preferred stock and Series 2 non-voting convertible preferred stock is required for any amendment or change of the rights, preferences, privileges, or powers of, or the restrictions provided for the benefit of, the Series 1 convertible preferred stock and Series 2 non-voting convertible preferred stock, respectively.
Redemption rights
No shares of Series 1 convertible preferred stock and Series 2 non-voting convertible preferred stock are unilaterally redeemable by either the stockholders or the Company; however, the Company’s amended and restated certificate of incorporation provides that upon any liquidation event such shares shall be entitled to receive the applicable liquidation preference.
Registration rights
In March 2021, the Company entered into a registration rights agreement (the Registration Rights Agreement) with Baker Brothers Life Sciences, L.P. and 667, L.P. (the Baker Funds), holders of the Company’s Series 1 convertible preferred stock and related parties. The obligations of the Company regarding such registration rights include, but are not limited to, file a registration statement with the SEC for the registration of registrable securities, reasonable efforts to cause such registration statement to become effective, keep such registration statement effective for up to 30 days, prepare and file amendments and supplements to such registration statement and the prospectus used in connection with such registration statement, and notify each selling holder, promptly after the Company receives notice thereof, of the time when such registration statement has been declared effective or a supplement to any prospectus forming a part of such registration statement has been filed. The terms of the Registration Rights Agreement provide for the payment of certain expenses related to the registration of the shares, including a capped
reimbursement of legal fees of a single special counsel for the holders of the shares, but do not impose any obligations for the Company to pay additional consideration to the holders in case a registration statement is not declared effective. On May 10, 2022, the Company filed a registration statement on Form S-3 with the SEC to register the registrable securities pursuant to the Registration Rights Agreement, which registration statement was declared effective on May 24, 2022 (the “Resale Shelf Registration Statement”). Under the Registration Rights Agreement, the Baker Funds also have the right to one underwritten offering per calendar year, but no more than two underwritten offerings or block trades in any twelve-month period, to effect the sale or distribution of their registrable securities, subject to specified exceptions, conditions and limitations. The Registration Rights Agreement also includes customary indemnification obligations in connection with registrations conducted pursuant to the Registration Rights Agreement. In March 2024, the Resale Shelf Registration Statement was terminated because the Company was no longer eligible to register securities on Form S-3 and the Baker Funds waived their rights under the Registration Rights Agreement. This waiver of registration rights is effective for a period of thirty (30) days from the filing of this Form 10-K.
8. Stock-based compensation
Effective July 5, 2023 , the Company completed a 1-for-15 Reverse Stock Split of its issued and outstanding shares of common stock, as further described in Note 1 and Note 7. All stock options and restricted stock units outstanding immediately prior to the Reverse Stock Split, as well as strike price and fair value amounts, were adjusted pursuant to the terms of the Company's equity incentive plans to give effect to the Reverse Stock Split. The number of shares of common stock issuable upon the exercise of each stock option and the settlement of each restricted stock unit decreased in proportion to the 1-for-15 ratio and the number of shares authorized and reserved for issuance pursuant to the Company’s equity incentive plans was proportionately adjusted to give effect to the Reverse Stock Split.
2013 Equity Incentive Plan
The 2013 Equity Incentive Plan (2013 Plan) provides the Board of Directors the discretion to grant stock options and other equity-based awards to employees, directors, and consultants of the Company. The Board of Directors administers the 2013 Plan and has discretion to delegate some or all of the administration of the 2013 Plan to a committee or committees or an officer. To date, the Company has only granted Incentive Stock Options (ISOs) and Non-statutory Stock Options (NSOs) to employees, consultants, and directors. Following the completion of the Company’s IPO no additional shares have been granted under the 2013 Plan. However, the 2013 Plan will continue to govern outstanding equity awards granted thereunder. To the extent outstanding options granted under the 2013 Plan are cancelled, forfeited or otherwise terminated without being exercised and would otherwise have been returned to the share reserve under the 2013 Plan, the number of shares underlying such awards will be available for future grant under the 2021 Equity Incentive Plan.
2021 Equity Incentive Plan
In February 2021, the Board of Directors adopted the 2021 Equity Incentive Plan (2021 Plan), and our stockholders approved the 2021 Plan. The 2021 Plan is a successor to and continuation of the 2013 Plan. To date, the Company has only granted ISOs, NSOs and Restricted Stock Units (RSUs) to employees and directors. Therefore, the below discussion is limited to the terms applicable to ISOs and NSOs (collectively, stock options or options), and RSUs.
2021 Employee Stock Purchase Plan (ESPP)
In February 2021, the Company’s Board of Directors adopted the ESPP, and our stockholders approved the ESPP. The price at which stock is purchased under the ESPP is equal to 85 % of the fair market value of the Company's common stock on the first or the last day of the offering period, whichever is lower. Generally, each offering under the ESPP will be for a period of six months as determined by the Company's Board of Directors. Employees may invest up to 15 % of their qualifying gross compensation through payroll deductions. In no event may an employee purchase more than 4,750 shares of common stock during any six-month offering period.
The ESPP was terminated during the twelve months ended December 31, 2023.
The ESPP is a compensatory plan as defined by the authoritative guidance for stock compensation; therefore, stock-based compensation expense of $ 0.01 million and $ 0.3 million related to the ESPP has been recorded for the twelve months ended December 31, 2023 and 2022, respectively.
2021 Inducement Plan
In November 2021, the Company's Board of Directors adopted the 2021 Inducement Plan (Inducement Plan). The Inducement Plan was adopted without stockholder approval pursuant to Nasdaq Listing Rule 5635(c)(4). Under the Inducement Plan, the Company may grant nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance awards and other awards to individuals not previously employees or directors of the Company, as an inducement toward entering into employment with the Company. The maximum number of shares of common stock that may be issued under the Inducement Plan is 3,000,000 shares .
Stock option activity
A summary of option activity during the twelve months ended December 31, 2023 is as follows:
Number of
Units
Outstanding
Weighted
Average
Exercise Price
per Unit
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
(in thousands)
Outstanding at December 31, 2022
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2023
Options vested and expected to vest at December 31, 2023
Options vested and exercisable at December 31, 2023
As of December 31, 2023 , the total unrecognized stock-based compensation related to stock options was $ 5.5 million, which is expected be recognized over a weighted-average period of approximately 2 years . During January 2024, $ 1.2 million of unrecognized stock-based compensation expense was cancelled as a result of stock option forfeitures related to the November 2023 RIF. See Note 4 for more information. Total options vested during the year were 126,596 with a total fair value of $ 4.0 million.
As of December 31, 2023, the Company has granted service-based stock option awards which may accelerate vesting upon performance-based or market-based conditions.
The weighted-average assumptions that the Company used in Black-Scholes option pricing model to determine the grant date fair value of stock options granted to employees and non-employee directors were as follows:
Twelve months ended December 31,
Expected term (in years)
Expected Volatility
Risk-free interest rate
Expected Dividend yield
The weighted-average grant date fair value per share was $ 5.05 and $ 11.78 for stock options granted during the twelve months ended December 31, 2023 and 2022, respectively.
The Company historically has been a private company and lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility based on the historical volatility of a publicly traded set of guideline companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The simplified
method deems the term to be the average of the time-to-vesting and the contractual life of the stock-based awards. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.
Restricted stock units
A summary of RSU activity during the twelve months ended December 31, 2023 is as follows:
Number of
Units
Outstanding
Weighted
Average
Grant Date Fair Value
Outstanding at December 31, 2022
Granted
Vested
Forfeited
Outstanding at December 31, 2023
As of December 31, 2023 , the total unrecognized stock-based compensation related to RSUs was $ 0.5 million, which is expected to be recognized over a weighted average period of approximately 2 years. During January 2024, $ 0.4 million of unrecognized stock-based compensation expense was cancelled as a result of RSU forfeitures related to the November 2023 RIF. See Note 4 for more information. Outstanding RSUs as of December 31, 2023 includes 10 RSUs that were vested, but not yet delivered.
Stock-based compensation expense
The following table summarizes the components of stock-based compensation expense recorded in the Company’s statement of operations and comprehensive loss (in thousands):
Twelve months ended December 31,
Research and development
Selling, general and administrative
Total stock-based compensation
9. Related-party transactions
In March 2021, the Company entered into the Registration Rights Agreement with the Baker Funds, holders of Series 1 convertible preferred stock and related parties (see Note 7, Stockholders Equity - Registration Rights).
10. Income taxes
The Company had no income tax expense for the twelve months ended December 31, 2023 and 2022, due to its history of operating losses. During the twelve months ended December 31, 2023 and 2022 , the Company recorded a net loss of $ 62.0 million and $ 113.0 million, respectively.
The effective tax rate for the twelve months ended December 31, 2023 and 2022 is different from the federal statutory rate primarily due to the tax benefit of the Company’s net loss and comprehensive loss not being more likely than not to be realized. The following is a reconciliation of the statutory federal income tax rate to the Company's effective tax rate:
December 31,
Effective income tax rate:
Expected income tax benefit at the federal statutory rate
State taxes, net of federal benefit
Research and development tax credits
Permanent differences
Change in valuation allowance
Total provision for income taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred income taxes are as follows (in thousands):
December 31,
Deferred tax assets:
Federal and state operating loss carryforwards
Research and development tax credits
Lease liabilities
Manufacturing line and production equipment
Inventory related costs
Compensation related items
Capitalized research and development costs
Property and equipment
Other
Total gross deferred tax asset
Valuation allowance
Net deferred tax asset
Deferred tax liabilities:
Operating lease right-of-use asset
Total deferred tax liabilities
Net deferred tax asset
The Company determines its valuation allowance on deferred tax assets by considering both positive and negative evidence in order to ascertain whether it is more likely than not that deferred tax assets will be realized. Realization of deferred tax assets is dependent upon the generation of future taxable income. Because of the Company's history of operating losses, the Company believes that the realization of its deferred tax assets is not more likely than not to be realized and, accordingly, has provided a valuation allowance. The valuation allowance increased by $ 20.4 million and $ 29.4 million for the twelve months ended December 31, 2023 and 2022, respectively, primarily due to the increase in the Company's net loss and comprehensive loss.
NOLs and tax credit carryforwards as of December 31, 2023 are as follows (in thousands):
Amount
Expiration
Years
NOLs, federal (post December 31, 2017)
Do not expire
NOLs, federal (pre January 1, 2018)
NOLs, state
Research and development tax credits, federal
Research and development tax credits, state
Do not expire
Utilization of the NOL carryforwards and research and development tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 as amended (Section 382) due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 % over a three-year period. The
Company has not conducted a study to assess whether a change of control has occurred or whether there have been multiple changes of control since inception due to the significant complexity and cost associated with such a study. If the Company has experienced a change of control, as defined by Section 382, at any time since inception, utilization of the NOL carryforwards or research and development tax credit carryforwards would be subject to an annual limitation under Section 382, which is determined by first multiplying the value of the Company's stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the NOL carryforwards or research and development tax credit carryforwards before utilization. Until a study is completed no limitations have been recorded.
Uncertain tax positions
A reconciliation of the beginning and ending balance of total gross unrecognized tax benefits is as follows (in thousands):
December 31,
Unrecognized tax benefits at the beginning of the period
Additions for current tax positions
Changes for previous tax positions
Unrecognized tax benefits at the end of the period
During the twelve months ended December 31, 2023 and 2022 , the Company recognized no interest and penalties associated with unrecognized tax benefits. There are no tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date.
The Company files income tax returns in the U.S. federal and various tax jurisdictions. The federal and state income tax returns from inception through December 31, 2023 remain subject to examination by federal and state authorities, where applicable. There are currently no pending income tax examinations.
11. Net loss per share
Net loss per share
The following table sets forth the computation of the basic and diluted net loss per share (in thousands, except for share and per share data):
December 31,
Numerator:
Net loss - basic and diluted
Denominator:
Weighted-average number of shares of common stock outstanding - basic and diluted
Net loss per share - basic and diluted
Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all potential common shares outstanding would have been anti-dilutive. The Company’s Series 1 convertible preferred stock are participating securities but, because they do not have the obligation to share in the loss of the Company, they are excluded from the calculation of basic net loss per
share. Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows:
As of December 31,
Series 1 convertible preferred stock (1)
Options to purchase common stock (2)
Shares estimated to be purchased under 2021 ESPP
Unvested RSUs (3)
Total
(1) The conversion ratio of the Company's Series 1 convertible preferred stock has been adjusted to proportionally reflect the 1-for-15 Reverse Stock Split upon conversion . See Note 1.
(2) During January 2024, 149,026 unvested stock options were forfeited due to the November 2023 RIF. See Note 4 for more information.
(3) During January 2024, 10,183 unvested RSUs were forfeited due to the November 2023 RIF. See Note 4 for more information.
12. Employee benefit plans
The Company has a qualified deferred compensation plan under Section 401(k) of the Internal Revenue Code of 1986, as amended (401(k) Plan). Under the 401(k) Plan, employees may elect to defer a percentage of their salary, subject to Internal Revenue Service limits. The 401(k) Plan follows the Safe Harbor Deferral provisions, met with a Company Basic Matching Provision in which we provide an automatic matching contribution as follows: one-for-one with respect to the first 3 % of an employee’s contributions, and 50 cents on the dollar for the next 2 % of the employee’s contributions, up to a maximum company match of 4 %. The matching contribution under this provision totaled $ 0.6 million and $ 0.9 million for the twelve months ended December 31, 2023 and 2022.
The Company, at its sole discretion, may make discretionary profit-sharing contributions to the accounts of qualifying participants. There were no discretionary contributions to the 401(k) Plan for the twelve months ended December 31, 2023 and 2022 .
