| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The consolidated financial statements and accompanying notes include the accounts of the Company’s wholly-owned subsidiaries EQRx International, Inc., EQRx Securities Holding Corporation, and an immaterial wholly -owned foreign subsidiary, after elimination of intercompany balances and transactions. Functional Currency The functional currency of the Company’s foreign operating subsidiary is the local currency. Foreign currency assets and liabilities held by the subsidiary are translated into U.S. Dollars at the exchange rate in effect at the end of the applicable fiscal reporting period, and all foreign currency revenues and expenses are translated at the average monthly exchange rates. Translation adjustments are reflected in equity as a component of Accumulated other comprehensive income (loss) in the consolidated balance sheets and included as a component of Comprehensive loss in the consolidated statements of operations and comprehensive loss. Gains and losses on foreign currency transactions are reflected in other income (expense) in the consolidated statements of operations and comprehensive loss. Use of Estimates The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions, based on judgments considered reasonable, which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. The Company bases its estimates and assumptions on historical experience, known trends and events and various other factors that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are recorded in the period in which they become known. Due to the risks and uncertainties involved in the Company’s business and evolving market conditions and, given the subjective element of the estimates and assumptions made, actual results may differ from estimated results. Cash, Cash Equivalents and Restricted Cash The Company considers all highly liquid investments with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents and reports them at fair value. Cash equivalents as of December 31, 2022 consisted of U.S. government money market funds, U.S. agency securities and commercial paper (see note 4). Cash equivalents as of December 31, 2021 consisted of U.S. government money market funds and commercial paper. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amount shown in the consolidated statement of cash flows (in thousands): December 31, 2022 2021 Cash and cash equivalents $ 494,136 $ 1,678,542 Restricted cash 633 633 Total cash, cash equivalents and restricted cash $ 494,769 $ 1,679,175 Amounts included in restricted cash as of December 31, 2022 and 2021 consisted of cash held to collateralize a letter of credit issued as a security deposit in connection with the Company’s lease of its corporate facility located in Cambridge, MA (see note 12). Short-term Investments Short-term investments consist of investments in U.S. treasury bills and agency securities, and commercial paper and corporate notes of publicly traded companies that are classified as available-for-sale pursuant to ASC Topic 320, Investments—Debt and Equity Securities . The Company classifies investments available to fund current operations as current assets on its consolidated balance sheets. Investments are carried at fair value with unrealized gains and losses included as a component of accumulated other comprehensive income (loss), which is a separate component of stockholders’ equity, until such gains and losses are realized. The fair value of these securities is based on quoted prices for identical or similar assets. The Company estimates the expected credit losses on its securities only when the fair value of an available-for-sale debt security is below its amortized cost basis, and credit losses are limited to the amount by which the security’s amortized cost basis exceeds its fair value. Credit-related impairment is recognized as an allowance for credit losses on the balance sheet with a corresponding adjustment to earnings. Any impairment that is not credit related is recognized in other comprehensive income (loss), net of applicable taxes. The Company adjusts the cost of available-for-sale securities for amortization of premiums and accretion of discounts to maturity. The Company includes such amortization and accretion in interest income. Concentrations of Credit Risk and Significant Suppliers Financial instruments that potentially subject the Company to concentration of credit risk consist of cash, cash equivalents and short-term investments. The Company mitigates this risk by maintaining its cash, cash equivalents and short-term investments with high quality, accredited financial institutions. The Company generally invests its excess capital in money market funds, U.S. treasury bills, U.S. treasury bonds and agency securities, all of which are subject to minimal credit and market risk, as well as in commercial paper and corporate notes. The investment portfolio is maintained in accordance with the Company’s investment policy, which defines allowable investments, specifies credit quality standards and limits the credit exposure of any single issuer. The Company is exposed to credit risk in the event of a default by the financial institutions holding the Company’s cash, cash equivalents and short-term investments to the extent recorded on the balance sheet. As of December 31, 2022, the Company’s cash and cash equivalents were deposited at two financial institutions, and it had no significant off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements. The Company has not experienced any losses on its deposits of cash and cash equivalents and does not believe that it is exposed to any unusual credit risk beyond the normal credit risk associated with commercial banking relationships. For more information on short-term investments, see note 5. The Company is dependent on third-party manufacturers to supply products for research and development activities of its programs, including preclinical and clinical testing. These programs could be adversely affected by a significant interruption to the supply of such drug substance and drug products. Fair Value Measurements Certain assets and liabilities are carried at fair value under GAAP. 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 — Non-observable 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. Lease Agreements Under ASC Topic 842, Leases (“ASC 842”), the Company determines if an arrangement is or contains a lease at inception. For leases with a term of 12 months or less, the Company does not recognize a right-of-use asset or lease liability. The Company’s operating leases are recognized on its consolidated balance sheets as noncurrent assets, current liabilities and noncurrent liabilities. The Company does not have any finance leases. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As the Company’s leases typically do not provide an implicit rate, the Company uses an estimate of its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. Operating lease right-of-use assets also include the effect of any lease payments made prior to commencement and excludes lease incentives. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. The Company has a lease agreement with lease and non-lease components, which are accounted for as a combined element. Property and Equipment Property and equipment consist of leasehold improvements, furniture, computer equipment, and capitalized website development costs. The Company capitalizes certain costs incurred during the application development stage related to the development of internal-use software and websites when it is probable the project will be completed. Capitalized costs include internal and external costs, if direct and incremental, and deemed by management to be significant. The Company expenses costs related to the planning and post-implementation phases of software and website development as these costs are incurred. Maintenance and enhancement costs (including those costs in the post-implementation stages) are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements to the website or software resulting in added functionality, in which case the costs are capitalized. Property and equipment are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the respective assets. Expenses for repairs and maintenance are charged to operations as incurred. Upon retirement or sale, the cost of the disposed asset and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized. The Company reviews its long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying value of assets may not be recoverable. Recoverability is measured by comparison of the asset’s book value to future net undiscounted cash flows that the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the book value of the assets exceed their fair value, which is measured based on the projected discounted future net cash flows arising from the assets. No impairment losses have been recorded through December 31, 2022. Other Investments From time-to-time the Company may make minority investments in other biotechnology companies. Where the Company has no significant influence, these investments are accounted for under the measurement alternative for equity securities without readily determinable fair values provided for under Accounting Standards Codification ("ASC") Topic 321, Equity Investments . The investments are measured at cost less impairment, adjusted for observable price changes and are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. As of December 31, 2022 and 2021, the Company held one investment in equity securities without readily determinable fair values valued at $4.0 million. As of December 31, 2022, no impairment has been recorded. Contingent Earn-Out Liability In connection with the Business Combination, holders of Legacy EQRx equity securities and options (“Earn-Out Service Providers”) are entitled to receive as additional merger consideration of up to 50,000,000 shares of the Company’s common stock (the “Earn-out Shares”), comprised of two separate tranches, for no consideration upon the occurrence of certain triggering events. Earn-Out Shares allocated to Earn-Out Service Providers who held equity securities not subject to any vesting conditions or restrictions as of the Closing Date of the Business Combination are accounted for in accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”), as the Earn-Out Shares are not indexed to the Company’s common stock. Pursuant to ASC 815, these Earn-Out Shares were accounted for as a liability at the Closing Date of the Business Combination and subsequently remeasured at each reporting date with changes in fair value recorded as a component of other income (expense), net in the consolidated statements of operations and comprehensive loss. The Earn-Out Shares accounted for under ASC 815 are categorized as a Level 3 fair value measurement (see Fair Value Measurements accounting policy and note 4) because the Company estimates the liability utilizing unobservable inputs. Contingent earnout payments involve certain assumptions requiring judgment and actual results can differ from assumed and estimated amounts. Earn-Out Shares allocated to Earn-Out Service Providers who held shares of common stock or options to purchase common stock that are subject to service-based vesting conditions or restrictions as of the Closing Date of the Business Combination are accounted for in accordance with ASC Topic 718, Share-Based Compensation (ASC 718), as the Earn-Out Shares are subject to forfeiture based on the satisfaction of certain service conditions. Warrant Liabilities The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC Topic 480, Distinguishing Liabilities from Equity and ASC 815. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. The Company assumed 11,039,957 publicly-traded warrants (“Public Warrants”) and 8,693,333 private placement warrants issued in connection with CMLS III’s initial public offering (“Private Warrants” and, together with the Public Warrants, the “Warrants”). The Warrants contain provisions that require them to be classified as derivative liabilities in accordance with ASC 815. Accordingly, at the end of each reporting period, changes in fair value during the period are recognized as a change in fair value of warrant liabilities within the consolidated statements of operations and comprehensive loss. The Company adjusts the warrant liability for changes in the fair value until the earlier of (a) the exercise or expiration of the Warrants or (b) the redemption of the Warrants, at which time the Warrants will be reclassified to additional paid-in capital. Derivative warrant liabilities are classified as non-current liabilities, as their liquidation is not reasonably expected to require the use of current assets or require the creation of current liabilities. Research and Development Expenses Research and development expenses for the years ended December 31, 2022 and 2021, consisted of salaries and benefits, including associated stock-based compensation, third-party license fees, and other operational costs related to the Company’s research and development activities, including allocated facility-related expenses and fees paid to other entities that conduct certain research and development activities on the Company’s behalf. Research and development costs are expensed as incurred. The Company estimates preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions, contract research organizations, clinical manufacturing organizations, and companies with whom we have a collaboration or in-licensing agreement that conduct and manage preclinical studies and clinical trials on the Company’s behalf based on actual time and expenses incurred by them. The Company accounts for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when the services have been performed or when the goods have been received rather than when the payment is made. Payments made in advance of services incurred result in prepaid expenses, which are classified as current or long-term based on the expected timing of the related services. At December 31, 2022 and 2021, the Company had prepaid research and development expenses of $21.1 million and $18.7 million included in prepaid expenses and other current assets, respectively and $13.7 million and $12.2 million included in other non-current assets, respectively, on the Company’s consolidated balance sheets. Stock-Based Compensation The Company recognizes stock-based compensation expense for stock options based upon the fair value of the awards on the grant date and recognizes the expense on a straight-line basis over the requisite service period of the award, which is typically the vesting period. Compensation expense is measured using the fair value of the award at the grant date and is adjusted to reflect actual forfeitures as they occur. The Company estimates the fair value of stock options using the Black-Scholes option pricing model that takes into account the fair value of its common stock, the exercise price, the expected term of the option, the expected volatility of the Company’s common stock, expected dividends on the Company’s common stock, and the risk-free interest rate over the expected life of the option. Expected Term — The Company uses the simplified method described in the Securities and Exchange Commission Staff Accounting Bulletin Topic 14.D.2 to calculate the expected term as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term for options granted to employees. Expected Volatility — The Company estimates expected volatility based on the historical volatility of publicly traded peer companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its traded stock price. Risk Free Interest Rate — The risk-free rate assumption is based on the U.S. Treasury yield curves whose terms are consistent with the expected term of the stock options. Expected Dividend — The Company has not issued any dividends and does not expect to issue dividends over the life of the options. As a result, the Company has estimated the dividend yield to be zero . The Company recognizes stock-based compensation expense for restricted common stock based upon the difference between the fair value of the Company’s common stock on the grant date of the restricted common stock and the price per share paid by the purchasers and recognizes the expense on a straight-line basis over the requisite service period of the award. The Company recognizes stock-based compensation expense for Earn-Out Shares accounted for in accordance with ASC 718 based upon the fair value of the awards on the grant date and recognizes the expense over the time-based vesting period using the accelerated attribution method with a credit to additional paid-in-capital. The Earn-Out Shares were measured at fair value at the grant date (the Closing Date) using a Monte Carlo simulation valuation model. The Company recognizes stock-based compensation expense for restricted stock units based upon the fair value of the Company’s common stock on the grant date and recognizes the expense on a straight-line basis over the requisite service period of the award, which is typically the vesting period. The Company classifies stock-based compensation expense in its statement of operations and comprehensive loss in the same manner in which the award recipient’s payroll costs or service payments are classified. Income Taxes The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. The Company accounts for uncertainty in income taxes recognized. If the tax position is deemed more-likely-than-not to be sustained it would then be assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. To date the Company has no uncertain tax positions and there have been no interest and penalties. Comprehensive Loss Comprehensive loss includes net loss as well as other changes in stockholders’ equity that result from transactions and economic events other than those with stockholders. During the year ended December 31, 2022, the Company’s comprehensive loss reflects unrealized holding gains (losses) on short-term investments and foreign currency translation adjustments. During the year ended December 31, 2021 the Company’s comprehensive loss reflects foreign currency translation adjustments. Net Loss Per Share The Company’s net loss is equivalent to net loss attributable to common stockholders for all periods presented. Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the sum of the weighted average number of common shares outstanding during the period and the effect of dilutive securities. The Company applies the two-class method to calculate its basic and diluted net loss per share as the Company has issued shares that meet the definition of participating securities. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders. The Company’s participating securities contractually entitle the holders of such shares to participate in dividends but do not contractually require the holders of such shares to participate in losses of the Company. Accordingly, in periods in which the Company reports a net loss, diluted net loss per share is the same as basic net loss per share, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. License Agreements The Company has acquired the exclusive licenses for the research, development, and commercialization of certain new product candidates. The Company evaluates license agreements under ASC 805 to determine if the new product candidates also include processes or activities that would constitute a “business” as defined under GAAP. For asset acquisitions, upfront payments and pre-commercial milestone payments, are immediately expensed as research and development in the period in which they are incurred, provided that the product candidate has not achieved regulatory approval for marketing and, absent obtaining such approval, has no established alternative future use. Collaborative Arrangements The Company analyzes its collaboration arrangements to assess whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities and therefore within the scope of ASC 808, Collaborative Arrangements (“ASC 808”). This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. For collaboration arrangements within the scope of ASC 808 that contain multiple elements, the Company first determines which elements of the collaboration are deemed to be within the scope of ASC 808 and which elements of the collaboration are more reflective of a vendor-customer relationship and therefore within the scope of ASC 606, Revenue from Contracts with Customers. If the Company concludes that some or all aspects of the arrangement are within the scope of ASC 808 and do not represent a transaction with a customer, the Company recognizes its allocation of the shared costs incurred with respect to the jointly conducted activities as a component of the related expense in the period incurred. Segment Information Operating segments are defined as components of an enterprise about which separate discrete information is available and regulatory reviewed by the chief operating decision maker (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one operating segment as the CODM manages operations on a consolidated basis for purposes of allocating resources and assessing performance. The Company’s focus is to develop and expand access to innovative medicines for some of the most prevalent disease areas, including cancer and immune-inflammatory conditions. All of the Company’s long-lived assets reside in the United States. Recently Adopted Accounting Pronouncements There were no new material accounting standards adopted in the year ended December 31, 2022. |
