| Summary of Significant Accounting Policies | 2.
Basis of Presentation and Consolidation The accompanying and follow the requirements of the Securities and Exchange Commission (the “SEC”) for annual reporting The consolidated financial statements include the accounts of Chinook Therapeutics, Inc. and our wholly-owned subsidiaries. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of expenses during the reporting periods. Such estimates include the valuation of intangible assets, acquired property and equipment, investments, contingent value rights (“CVR”) liability , contingent consideration liability, redeemable convertible preferred stock tranche liability, lease right-of-use assets, and lease obligations, as well as Segments We operate and manage our business as one reportable and operating segment, which is the business of discovering, developing and commercializing precision medicines for kidney diseases. Our President and Chief Executive Officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance. Risks and Uncertainties We are subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, protection of proprietary technology, dependence on key personnel, reliance on single-source vendors and collaborators, availability of raw materials, patentability of our products and processes and clinical efficacy and safety of our products under development, compliance with government regulations and the need to obtain additional financing to fund operations. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical studies, clinical trials and regulatory approval, prior to commercialization. These efforts will require significant amounts of additional capital, adequate personnel infrastructure and extensive compliance and reporting. Our product candidates are still in development and, to date, none of our product candidates have been approved for sale and, therefore, we ha ve not generated any revenue from product sales. There can be no assurance that our research and development will be successfully completed, that adequate protection for our intellectual property will be obtained or maintained, that any products developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. Even if our product development efforts are successful, it is uncertain when, if ever, we will generate revenue from product sales. We operate in an environment of rapid technological change and substantial competition from other pharmaceutical and biotechnology companies. In addition, we are dependent upon the services of our employees, consultants and other third parties. Moreover, the current COVID-19 pandemic, which is impacting worldwide economic activity, poses risk that we or our employees, contractors, suppliers, and other partners may be prevented from conducting business activities for an indefinite period of time which may delay the start-up and conduct of our clinical trials, and negatively impact manufacturing and testing activities performed by third parties. Any significant delays may Business Combination Accounting for acquisitions requires extensive use of estimates and judgment to measure the fair value of the identifiable tangible and intangible assets acquired, including in-process research and development and liabilities assumed. Additionally, we must determine whether an acquired entity is considered a business or a set of net assets because the excess of the purchase price over the fair value of net assets acquired can only be recognized as goodwill in a business combination. We accounted for the Merger with Aduro as a business combination under the acquisition method of accounting p ursuant to Accounting Standards Codification (“ASC”) Topic 805, Business Combinations . Cash and Cash Equivalents We consider all highly liquid investments with maturities of three months or less at the time of acquisition to be cash equivalents. Cash and cash equivalents consist of cash held in bank accounts, money market funds, commercial paper, corporate debt securities, and U.S. government and agency securities. Restricted Cash We maintain a letter of credit as security for a facility lease that expires in 2029. The letter of credit is collateralized by a certificate of deposit in the amount of $1.8 million, which is classified as long-term restricted cash in our consolidated balance sheets. Additionally, we maintain a letter of credit as a security deposit for a facility lease that expires in 2026. The letter of credit is collateralized by a certificate of deposit in the amount of $0.3 million, which is classified as long-term restricted cash which is classified as long-term restricted cash in our consolidated balance sheets. Marketable Securities We classify our marketable securities as available-for-sale, which are reported at estimated fair value with unrealized gains and losses included in accumulated other comprehensive loss in stockholders’ equity. Realized gains, realized losses and declines in the value of securities determined to be other-than-temporary, are included in investment and other income (expense), net. The cost of investments for purposes of computing realized and unrealized gains and losses is based on the specific identification method. Amortization of premiums and accretion of discounts are included in investment and other income (expense), net. Interest earned on all securities is included in investment and other income (expense), net. Accrued interest receivable is excluded from both the estimated fair value and the amortized cost basis of available-for-sale securities and included within prepaid expenses and other current assets in our consolidated balance sheets. Marketable securities with maturities of less than one year, where management’s intent is to use the investments to fund current operations, or to make them available for current operations, are classified as current. We regularly review our investments for declines in fair value below their amortized cost basis to determine whether the impairment is due to credit-related factors or noncredit-related factors. Our review includes the creditworthiness of the security issuers, the severity of the unrealized losses, whether we have the intent to sell the securities and whether it is more likely than not that we will be required to sell the securities before the recovery of their amortized cost bases. When we determine that a portion of the unrealized loss is due to an expected credit loss , we recognize the loss amount in investment and other income (expense), net, with a corresponding allowance against the carrying value of the security we hold . Concentration of Credit Risk Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash, cash equivalents, available-for-sale securities and accounts receivable. We are exposed to credit risk from our deposits of cash and cash equivalents in excess of amounts insured by the Federal Deposit Insurance Corporation. Substantially all of our cash, cash equivalents and available-for-sale securities are maintained at major financial institutions of high credit standing. We monitor the financial creditworthiness of the issuers of our investments and limit the concentration in individual securities and types of investments that exist within our investment portfolio. Generally, all of our investments carry high credit quality ratings, in accordance with our investment policy. At December 31, 2022, we do not believe there is a significant financial risk from non-performance by the issuers of our cash, cash equivalents, and marketable securities. We have no off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements. Fair Value of Financial Instruments We established the fair value of our assets and liabilities using the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and established a fair value hierarchy based on the inputs used to measure fair value. Cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued and liabilities are carried at cost, which approximates fair value due to their short maturities. Additionally, we have CVR and contingent consideration liabilities, which are recorded at fair value at the end of each reporting period with changes in estimated fair values recorded in the consolidated statements of operations and comprehensive loss. There were no assets or liabilities measured at fair value on a nonrecurring basis during the years ended December 31, 2022, 2021 and 2020 Redeemable Convertible Preferred Stock Tranche Liability We determined that our obligations to issue additional shares of redeemable convertible preferred stock upon the achievement of certain milestones or at the option of the respective holders of such shares represented freestanding financial instruments. These instruments were initially measured at fair value and were subject to remeasurement with changes in fair value recognized in the consolidated statements of operations and comprehensive loss until they were exercised or settled. Upon closing of the Merger, the outstanding redeemable convertible preferred stock tranche rights terminated and all redeemable convertible preferred stock issued converted to common stock. Refer to Note 12 “Commitments and Contingencies” for more information. Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Upon retirement or sale of assets, the cost and the related accumulated depreciation or amortization of the respective assets are removed from the consolidated balance sheet and any resulting gain or loss is reflected in the consolidated statements of operations and comprehensive loss. Additions and improvements that increase the value or extend the life of an asset are capitalized. Repairs and maintenance costs are expensed as incurred. The useful live of property and equipment are as follows:
Description
Estimated Useful Life (in years)
Research and lab equipment
5
Computer equipment and software
3
Furniture and fixtures
5
Leasehold improvements
Shorter of useful life or lease term Goodwill and Intangible Assets Goodwill represents the excess of the consideration transferred over the estimated fair value of assets acquired and liabilities assumed in a business combination. Intangible assets with indefinite useful lives are related to acquired in-process research and development (“IPR&D”) projects and are measured at their respective fair values as of the acquisition date. Our intangible assets include an acquired out-license agreement and indefinite-life IPR&D acquired in the Merger with Aduro. The acquired out-license agreement represents the estimated fair value of an agreement with Merck & Co., Inc. (“Merck”). The IPR&D represents the estimated fair value as of the acquisition date of two substantive in-process projects that have not reached technological feasibility. The fair value of an acquired out-licensed agreement and IPR&D acquired in a business combination is recorded on our consolidated balance sheets at the acquisition date fair value and is determined by estimating future revenue and expenses, probability of technological and regulatory success, revenue volatility and discount rates, and discounting the projected net cash flows to present value. Goodwill and intangible assets with indefinite useful lives are not amortized but are tested for impairment annually on October 1 or more frequently if we become aware of any events or changes that would indicate the fair values of the assets are below their carrying amounts. Intangible assets related to IPR&D projects are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. If and when development is complete, which generally occurs if and when regulatory approval to market a product is obtained, the associated assets are deemed finite-lived and are amortized based on their respective estimated useful lives at that point in time. Impairment of Long-Lived Assets We assess the impairment of long-lived assets, primarily property and equipment, whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable. When such events occur, we determine whether there has been an impairment in value by comparing the asset’s carrying value with its fair value, as measured by the anticipated undiscounted net cash flows of the asset. If an impairment in value exists, the asset is written down to its estimated fair value, as measured by anticipated discounted cash flows of the asset or market data. We have not recognized any impairment losses through December 31, 2022. Leases Leases related to our facilities are classified as operating leases. We determine if an arrangement is a lease at inception. We have made a policy election to not separate lease and non-lease components for our real estate leases to the extent they are fixed. Non-lease components that are not fixed are expensed as incurred as variable lease expense. Our facility leases typically include variable non-lease components, such as common-area maintenance costs. Assumptions made by us at the commencement date are re-evaluated upon occurrence of certain events, including a lease modification. A lease modification results in a separate contract when the modification grants the lessee an additional right of use not included in the original lease and when lease payments increase commensurate with the standalone price for the additional right of use. When a lease modification results in a separate contract, it is accounted for in the same manner as a new lease. We have subleased a substantial portion of our leased facilities under agreements considered to be operating leases according to ASC Topic 842, Leases Investment in Equity Securities Our investment in equity securities represents an ownership interest held by us in an unconsolidated entity, SanReno Therapeutics (“SanReno”). Refer to Note 9 “Investment in Equity Securities” for additional information. Accounting Standard Update (“ASU”) 2016-01 requires equity securities to be recorded at cost and adjusted to fair value at each reporting period. However, the guidance allows for a measurement alternative, which is to record investments at cost, less impairment, if any, and subsequently adjust for observable price changes of identical or similar investments of the same issuer. The measurement alternative is used when an investment does not qualify for the equity method of the practical expedient in ASC Topic 820, Fair Value Measurement Due to the lack of readily determinable fair values for such investment, we account for this investment under the measurement alternative at cost, less impairment. We perform a qualitative impairment assessment on our investment recorded under the measurement alternative quarterly. The investment is re-measured on a non-recurring basis as the investment is re-measured upon future observable price changes(s) in an orderly transaction(s), or upon impairment, if any. If the investment is determined to be other-than-temporarily impaired, an impairment charge is recorded against such investment and reflected in the consolidated statements of operations and comprehensive loss. We have not recognized any impairment losses through December 31, 2022. Dividends from our investment in equity securities, if declared, are reflected in the consolidated statements of operations and comprehensive loss. There were no dividends declared through December 31, 2022. Equity Method Investment We report our investments in unconsolidated entities, over whose operating and financial policies we have the ability to exercise significant influence but not control, under the equity method of accounting. Judgment regarding the level of influence over our equity method investment includes considering key factors such as ownership interest, representation on the board of directors, and participation in policy-making decisions. Our equity method investment is reported at cost and adjusted each period for our share of the investee’s income or loss, which is reported in our consolidated statements of operations and comprehensive loss on a one quarter lag. We evaluate our equity method investments for impairment whenever events or changes in circumstances indicate that the carrying value of our investment may not be recoverable. If it is determined that a decline in the fair value of our investment is not temporary, and if such reduced fair value is below its carrying value, an impairment is recorded. Determining fair value involves significant judgment. Our estimates consider available evidence including, but not limited, to general economic conditions and other relevant factors. We have not recognized any impairment losses through December 31, 2022. Revenue Recognition At inception, we determine whether contracts are within the scope of ASC Topic 606, Revenue from Contracts with Customers
(i)
identifying the contract with the customer;
(ii)
identifying the performance obligations in the contract;
(iii)
determining the transaction price;
(iv)
allocating the transaction price to the performance obligations in the contract; and
(v)
recognizing revenue when or as we satisfy a performance obligation. We only apply the five-step model to contracts when we determine that collection of substantially all consideration for goods and services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. Performance obligations promised in a contract are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct and are distinct in the context of the contract. To the extent a contract includes multiple promised goods and services, we apply judgment to determine whether promised goods and services are both capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised goods and services are accounted for as a combined performance obligation. Determining the transaction price requires significant judgment. The transaction price in the contract is measured at fair value and reflects the consideration we expect to be entitled to in exchange for the goods and services. In the transaction price, variable consideration is only included to the extent that it is highly probable that a significant future reversal in the amount of cumulative revenue recognized under the contract will not occur. The transaction price is allocated to each performance obligation according to their stand-alone selling prices ("SSP") and is recognized when control of the goods or services are transferred to the customer, either over time or at a point in time, depending on the specific terms and conditions in the contracts. Judgment is required to determine the SSP. In instances where the SSP is not directly observable, such as when a license or service is not sold separately, the SSP is determined using information that may include market conditions and other observable inputs. In November 2021, we entered into a License Agreement with SanReno (“China License Agreement”) . In addition, we assumed several existing collaboration agreements in conjunction with the Merger. These agreements may include the transfer of intellectual property rights in the form of licenses and obligations to provide research and development services, participate on certain development committees with the collaboration party and to provide manufacturing supply. The terms of such agreements generally include payment in the form of cash or equity securities to us for one or more of the following: development and commercialization licenses; research and development services; manufacturing supply; development, regulatory and commercial milestone fees; and royalties on net sales of licensed products. Judgment is required to determine whether the license to our intellectual property is distinct from the research and development services or participation on development committees. As of the closing of the Merger, we considered all remaining performance obligations under the assumed agreements to determine appropriate revenue recognition. For agreements that include development, regulatory or commercial milestone payments, we evaluated whether the milestones are considered probable of being reached and concluded that all such milestones are not within the control of us or the licensee, such as regulatory approvals, and are not considered probable of being achieved until those approvals are received or the underlying activity has been completed. Accordingly, any future milestone payments received under the assumed agreements will be analogized to ASC Topic 606 and recorded as revenue upon or over a period following receipt, if such milestone payments are received. We also assumed an existing out-license agreement with Merck under which all performance obligations of Aduro were completed prior to the Merger. We are eligible to receive future contingent payments pursuant to Merck’s achievement of certain development, commercial and net sales milestones for a product candidate. In addition, we are eligible to receive royalties based on net sales of the product. Any such milestones and royalties earned will be payable by us to the CVR holders, net of deductions permitted under the agreement with the CVR holders, including taxes and certain other expenses. Research and Development Expenses Research and development expenses represent costs incurred to conduct research, such as the discovery and development of our product candidates. Research and development costs include employee-related costs; licensing costs, materials and supplies, contracted research and manufacturing, consulting arrangements; allocated costs, such as facility costs; and other expenses incurred to advance our research and development activities. We recognize all research and development costs as they are incurred. In-licensing fees and other costs to acquire technologies that are utilized in research and development, and that are not expected to have alternative future use, are expensed when incurred. Clinical trial costs, contract manufacturing and other development costs incurred by third parties are expensed as the contracted work is performed. For service contracts that include a nonrefundable prepayment for future service, the upfront payment is deferred and recognized in the consolidated statements of operations and comprehensive loss as the services are rendered. Income Taxes Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the consolidated financial statement and tax bases of assets and liabilities at the applicable enacted tax rates. We establish a valuation allowance for deferred tax assets if it is more likely than not that these items will expire before we are able to realize its benefits or that future deductibility is uncertain. We recognize the tax benefit from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax position is measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. We recognize interest and penalties related to income tax matters in income tax expense if incurred. Fair value of Common Stock Prior to the Merger, management estimated the fair value of our common stock consistent with the methods outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation considered several factors, including our stage of development, equity market conditions affecting comparable public companies, significant milestones and progress of research and development efforts. Stock-Based Compensation Expense We measure and recognize compensation expense for all equity awards granted to employees and non-employees based on the estimated fair value of the award on the date of grant. The fair value of stock options is determined by using the Black-Scholes option pricing model. We make several estimates in determining stock-based compensation and these estimates generally require significant analysis and judgment to develop, including (i) the expected share price volatility, (ii) the expected term of the award, (iii) the risk-free interest rate and (iv) the expected dividend yield. Prior to the Merger, due to the lack of company-specific historical and implied volatility data, we based our estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded, which have characteristics similar to those of Private Chinook, including stage of product development and focus on the life science industry. For options granted after the Merger, we are using historical volatility of Aduro’s and our common stock, as it approximates the volatility of the formerly utilized peer group. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. The expected term for options granted to employees represents the weighted-average period the awards are expected to remain outstanding and our estimates were determined using the simplified method. The fair value of restricted stock units (“RSU”) and performance-based stock units (“PSU”) is determined on the date of grant based on the market price of our common stock on that date. Stock-based compensation expense for equity award with time-based vesting is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective award. Stock-based compensation expense for equity awards with performance-based vesting is recognized over the estimated service period once the achievement of the performance-based target is considered probable. At each reporting date, we assess the likelihood of achievement of the performance targets for any PSUs that are outstanding to determine the probability of vesting. Stock-based compensation expense is recognized based on the probability of vesting for the portion of the service period elapsed to date with any cumulative catch-up. We recognize the remaining stock-based compensation expense, if any, over the remaining estimated service period. Forfeitures for equity awards are recorded as incurred. Foreign Currency Our functional currency is the U.S. dollar and the functional currency of our foreign subsidiaries is either the Canadian dollar or the U.S. dollar. For subsidiaries with the functional currency of the Canadian dollar, assets and liabilities are translated to U.S. dollars using the exchange rates at the balance sheet date and expenses are translated using the monthly average exchange rates in effect during the period in which the transactions occur. Foreign currency translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity. Remeasurement adjustments are recorded in investment and other income (expense), net. The effect of foreign currency exchange rates on cash and cash equivalents was not material for any of the periods presented. Monetary assets and liabilities in the non-functional currency of our subsidiaries are remeasured using exchange rates in effect at the end of the period. Costs in the non-functional currency are remeasured using average exchange rates for the period, except for costs related to those balance sheet items that are remeasured using historical exchange rates. The resulting transaction gains and losses are included in the consolidated statements of operations and comprehensive loss as incurred and have not been material for all periods presented. Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815- 40) |
