10-Q
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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
                    
to
                    
Commission File Number:
001-40431
 
 
DAY ONE BIOPHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in its Charter)
 
 
 
Delaware
 
83-2415215
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
   
395 Oyster Point Blvd., Suite 217
South San Francisco, CA
 
94080
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(650484-0899
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
  
Trading Symbol
  
Name of each exchange on which registered
Common Stock, par value $0.0001 per share
  
DAWN
  
The Nasdaq Stock Market LLC
(Nasdaq Select Global Market)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☐    No  ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  
 
☒  No  
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2
of the Exchange Act.
 
Large accelerated filer
 
  
Accelerated filer
 
       
Non-accelerated filer
 
  
Smaller reporting company
 
       
 
 
 
  
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2
of the Exchange Act).    Yes  ☐    No  
As of July 31, 2021, the registrant had 61,928,939 shares of common stock, $0.0001 par value per share, outstanding.
 
 
 

Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and section 27A of the Securities Act of 1933, as amended, or the Securities Act. All statements contained in this Quarterly Report other than statements of historical fact, including statements regarding our future results of operations and financial position, business strategy, market size, potential growth opportunities, nonclinical and clinical development activities, efficacy and safety profile of our product candidates, potential therapeutic benefits and economic value of our product candidates, use of net proceeds from our public offerings, our ability to maintain and recognize the benefits of certain designations received by product candidates, the timing and results of nonclinical studies and clinical trials, commercial collaboration with third parties, and our ability to recognize milestone and royalty payments from commercialization agreements, the expected impact of the
COVID-19
pandemic on our operations, and the receipt and timing of potential regulatory designations, approvals and commercialization of product candidates, are forward-looking statements. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “predict,” “target,” “intend,” “could,” “would,” “should,” “project,” “plan,” “expect,” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Item 1A, “Risk Factors” and elsewhere in this Quarterly Report. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law. You should read this Quarterly Report with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.
Unless the context indicates otherwise, as used in this Quarterly Report on Form
10-Q,
the terms “Day One,” “the Company,” “we,” “us,” and “our” refer to Day One Biopharmaceuticals, Inc., a Delaware corporation, and its consolidated subsidiaries taken as a whole, unless otherwise noted. “Day One” and all product candidate names are our common law trademarks. This Quarterly Report contains additional trade names, trademarks and service marks of other companies, which are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

Table of Contents
Table of Contents
 
        
Page
 
PART I.
       4  
Item 1.        4  
       4  
       5  
       6  
       8  
       9  
Item 2.        22  
Item 3.        40  
Item 4.        40  
PART II.
       41  
Item 1.        41  
Item 1A.        41  
Item 2.        110  
Item 3.        110  
Item 4.        110  
Item 5.        110  
Item 6.        111  
Signatures      113  
 
3

Table of Contents
PART I-FINANCIAL
INFORMATION
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
(unaudited)
 
    
June 30,
2021
   
December 31,
2020
 
Assets
                
Current assets:
                
Cash and cash equivalents
   $ 309,996     $ 43,728  
Prepaid expenses and other current assets
     6,029       1,343  
    
 
 
   
 
 
 
Total current assets
     316,025       45,071  
    
 
 
   
 
 
 
Property and equipment, net
     67       77  
Operating lease
right-of-use
asset
     319       406  
Deposits and other long-term assets
     126       107  
    
 
 
   
 
 
 
Total assets
     316,537       45,661  
    
 
 
   
 
 
 
Liabilities, redeemable convertible preferred shares,
redeemable convertible noncontrolling interest and stockholders’ equity/members’ (deficit)
                
Current liabilities:
                
Accounts payable
   $ 348     $ 202  
Accrued expenses and other current liabilities
     4,113       1,596  
Current portion of operating lease liabilities
     201       198  
    
 
 
   
 
 
 
Total current liabilities
     4,662       1,996  
    
 
 
   
 
 
 
Operating lease liabilities, long-term
     112       204  
    
 
 
   
 
 
 
Total liabilities
     4,774       2,200  
    
 
 
   
 
 
 
Commitments and contingencies (Note 8)
           
Redeemable convertible preferred shares, no par value; no shares authorized, issued and outstanding at June 30, 2021; 22,851,257 shares authorized, issued and outstanding at December 31, 2020
     —         91,964  
Redeemable convertible noncontrolling interest
     —         5,702  
Stockholders’
 
equity/members’ (deficit)
                
Preferred stock, 10,000,000 shares authorized, $0.0001 par value, no shares issued and outstanding at June 30, 2021; No shares authorized, issued, and outstanding at December 31, 2020
            
Common shares, no par value; no shares authorized, issued and outstanding at June 30, 2021; 28,887,127 shares authorized
 and 6,035,869
shares at December 31st, 2020
     —         2,000  
Common stock, 500,000,000 shares authorized, $0.0001 par value, 61,928,939 shares issued and outstanding at June 30, 2021; No shares authorized, issued, and
outstanding at December 31, 2020
     6       —    
Additional
paid-in-capital
     398,065       —    
Incentive shares, no par value; no shares authorized, issued and outstanding at June 30, 2021; 4,312,540 shares authorized and 4,112,012 shares issued and outstanding at December 31, 2020
     —         637  
Accumulated deficit
     (86,308     (56,842
    
 
 
   
 
 
 
Total stockholders’ equity/members’ (deficit)
     311,763       (54,205
    
 
 
   
 
 
 
Total liabilities, redeemable convertible preferred shares, redeemable convertible noncontrolling interest and members’ deficit
   $ 316,537     $ 45,661  
    
 
 
   
 
 
 
See accompanying notes to the condensed consolidated financial statements.
 
4

Table of Contents
Condensed Consolidated Statements of Operations and Comprehensive Loss
(
in thousands, except share and per share amounts)
(unaudited)
 
 
  
Three Months Ended
June 30,
 
 
Six Months Ended
June 30,
 
 
  
2021
 
 
2020
 
 
2021
 
 
2020
 
Operating expenses:
                                 
Research and development
   $ 9,914     $ 1,437      $ 22,547     $ 2,398  
General and administrative
     5,525       872        8,990       1,682  
    
 
 
   
 
 
    
 
 
   
 
 
 
Total operating expenses
     15,439       2,309        31,537       4,080  
    
 
 
   
 
 
    
 
 
   
 
 
 
Loss from operations
     (15,439     (2,309      (31,537     (4,080
    
 
 
   
 
 
    
 
 
   
 
 
 
Interest expense
     (7     (10      (14     (13
Other expense
     (27     —          (24     —    
Changes in fair value of derivative tranche liability
     —         (90      —         (308
    
 
 
   
 
 
    
 
 
   
 
 
 
Net loss and comprehensive loss
     (15,473     (2,409      (31,575     (4,401
Net loss attributable to redeemable convertible noncontrolling interests
     (1,191     (649      (2,109     (1,106
Exchange of redeemable noncontrolling interest shares – deemed dividend
     (99,994     —          (99,994     —    
    
 
 
   
 
 
    
 
 
   
 
 
 
Net loss attributable to common share members/common stockholders
   $ (114,276   $ (1,760    $ (129,460   $ (3,295
    
 
 
   
 
 
    
 
 
   
 
 
 
Net loss per share, basic and diluted
   $ (5.04   $ (0.32    $ (10.81   $ (0.61
    
 
 
   
 
 
    
 
 
   
 
 
 
Weighted-average number of common shares used in computing net loss per share, basic and diluted
     22,661,889       5,456,203        11,976,577       5,383,549  
    
 
 
   
 
 
    
 
 
   
 
 
 
See accompanying notes to the condensed consolidated financial statements.
 
5

Table of Contents
Condensed Consolidated Statements of Redeemable Convertible Preferred Shares, Redeemable Noncontrolling Interest and
Stockholders’ Equity/ Members’ (Deficit)
(in thousands, except share amounts)
(unaudited)
 
 
 
Redeemable Convertible
Preferred Shares
 
 
Redeemable
Noncontrolling

Interest
 
 
 
 
 
 
 
 
Common Stock
 
 
Common Shares
 
 
Incentive Shares
 
 
Additional
Paid-In

Capital
 
 
Accumulated

Deficit
 
 
Total
Members’

(Deficit)
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
Balance at December 31, 2020
    22,851,257     $ 91,964     $ 5,702  
 
 
 
 
 
 
 
 
 
         $          6,035,869     $ 2,000       4,112,012     $ 637     $        $ (56,842   $ (54,205
   
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Issuance of Series B redeemable convertible preferred shares for cash, net of issuance costs of $243
    9,638,141       129,757       —    
 
 
 
 
 
 
 
 
 
  —         —         —         —         —         —         —         —         —    
Share-based compensation expenses
    —         —         —    
 
 
 
 
 
 
 
 
 
  —         —         —         —         —         538       —         —         538  
Issuance of incentive shares
    —         —         —    
 
 
 
 
 
 
 
 
 
  —         —         —         —         874,335       —         —         —         —    
Net loss attributable to redeemable noncontrolling interest
    —         —         (919
 
 
 
 
 
 
 
 
 
  —         —         —         —         —         —         —         —         —    
Net loss attributable to Day One Biopharmaceuticals Holding Company, LLC members
    —         —         —    
 
 
 
 
 
 
 
 
 
  —         —         —         —         —         —         —         (15,182     (15,182
   
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at March 31, 2021
    32,489,398     $ 221,721     $ 4,783  
 
 
 
 
 
 
 
 
 
         $          6,035,869     $ 2,000       4,986,352     $ 1,175     $        $ (72,024   $ (68,849
   
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Issuance of incentive shares
    —         —         —    
 
 
 
 
 
 
 
 
 
  —         —         —         —         2,085,460       —         —         —         —    
Cancellations of incentive shares
    —         —         —    
 
 
 
 
 
 
 
 
 
  —         —         —         —         (265,596     —         —         —         —    
Net loss attributable to Day One Biopharmaceuticals Holding Company, LLC members
    —         —         (1,191
 
 
 
 
 
 
 
 
 
  —         —         —         —         —         —         —         —         —    
Conversion of redeemable convertible preferred, common, and incentive shares into common stock
    (32,489,398     (221,721     —    
 
 
 
 
 
 
 
 
 
  43,958,557       4       (6,035,869     (2,000     (6,806,216     (1,175     224,892       —         221,721  
Conversion of redeemable noncontrolling interest to common stock
    —         —         (3,592
 
 
 
 
 
 
 
 
 
  6,470,382       1       —         —         —         —         3,592       —         3,592  
Common stock issued in
IPO, net of issuance
 
costs
of $16,995
    —         —         —    
 
 
 
 
 
 
 
 
 
  11,500,000       1       —         —         —         —         167,044       —         167,045  
Share-based compensation expenses
    —         —         —    
 
 
 
 
 
 
 
 
 
  —         —         —         —         —         —         2,537       —         2,537  
Net loss attributable to common members/ stockholders
    —         —         —    
 
 
 
 
 
 
 
 
 
  —         —         —         —         —         —         —         (14,284     (14,284
   
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance
 
at
 
June 30,
 
2021
           $        $     
 
 
 
 
 
 
 
 
 
  61,928,939     $ 6              $                 $        $ 398,065     $ (86,308   $ 311,763  
   
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
6

 
 
Redeemable
Convertible
Preferred Shares
 
 
Redeemable
Noncontrolling
 
 
 
 
 
 
 
 
Common Shares
 
 
Incentive Shares
 
 
Additional
Paid-In

Capital
 
 
Accumulated

Deficit
 
 
Total
Members’

(Deficit)
 
 
 
Shares
 
 
Amount
 
 
Interest
 
 
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
Balance at December 31, 2019
 
 
12,502,752
 
 
$
30,504
 
 
$
5,487
 
 
 
 
 
 
 
 
 
 
 
6,035,869
 
 
$
2,000
 
 
 
1,488,421
 
 
$
111
 
 
$
  
 
 
$
(12,784
 
$
(10,673
   
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Issuance of incentive
 
shares
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
 
 
 
 
 
 
 
 
—  
 
 
 
—  
 
 
 
528,211
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
Cancellations of incentive
shares
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
 
 
 
 
 
 
 
 
—  
 
 
 
—  
 
 
 
(477,582
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
Share-based compensation expense
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
 
 
 
 
 
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
59
 
 
 
—  
 
 
 
—  
 
 
 
59
 
Net loss attributable to redeemable convertible noncontrolling interest
 
 
—  
 
 
 
—  
 
 
 
(457
 
 
 
 
 
 
 
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss attributable to Day
One Biopharmaceuticals
Holding Company, LLC
members
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
 
 
 
 
 
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(1,535
 
 
(1,535
   
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at March 31, 2020
 
 
12,502,752
 
 
$
30,504
 
 
$
5,030
 
 
 
 
 
 
 
 
 
 
 
6,035,869
 
 
$
2,000
 
 
 
1,539,050
 
 
$
170
 
 
$
  
 
 
$
(14,319
 
$
(12,149
   
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Issuance of incentive shares
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
 
 
 
 
 
 
 
 
—  
 
 
 
—  
 
 
 
21,419
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
Share-based compensation expenses
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
 
 
 
 
 
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
57
 
 
 
—  
 
 
 
—  
 
 
 
57
 
Net loss attributable to noncontrolling interests
 
 
—  
 
 
 
—  
 
 
 
(649
 
 
 
 
 
 
 
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss attributable to
common members/
stockholders
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
 
 
 
 
 
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(1,760
 
 
(1,760
   
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at June 30, 2020
 
 
12,502,752
 
 
$
30,504
 
 
$
4,381
 
 
 
 
 
 
 
 
 
 
 
6,035,869
 
 
$
2,000
 
 
 
1,560,469
 
 
$
227
 
 
$
  
 
 
$
(16,079
 
$
(13,852
   
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
See accompanying notes to the condensed consolidated financial statements.
 
7

Table of Contents
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
    
Six Months Ended
June 30,
 
    
2021
   
2020
 
Cash flows from operating activities
                
Net loss
   $ (31,575   $ (4,401
Adjustments to reconcile net loss to net cash used in operating activities:
                
Acquired
in-process
research and development assets
     8,000       —    
Share-based compensation expense
     3,075       116  
Depreciation and amortization expense
     10       5  
Amortization of operating
right-of-use
assets
     88       55  
Non-cash
interest expense
     14       13  
Changes in derivative tranche liabilities
     —         308  
Changes in operating assets and liabilities:
                
Prepaid expenses and other current assets
     (4,722     (206
Deposits and other long-term assets
     (19     (71
Accounts payable
     145       155  
Accrued expenses and other current liabilities
     1,937       126  
Operating lease liabilities
     (102     (73
    
 
 
   
 
 
 
Net cash used in operating activities
     (23,149     (3,973
    
 
 
   
 
 
 
Cash flows from investing activities
                
Purchases of property and equipment
     —         (93
Cash paid for acquired
in-process
research and development assets
     (8,000     —    
    
 
 
   
 
 
 
Cash used in investing activities
     (8,000     (93
    
 
 
   
 
 
 
Cash flows from financing activities
                
Proceeds from issuance of Series B redeemable convertible preferred shares, net of issuance costs
     129,757       —    
Proceeds from issuance of common stock, net
     167,660       —    
    
 
 
   
 
 
 
Net cash provided by financing activities
     297,417       —    
    
 
 
   
 
 
 
Net increase (decrease) in cash and cash equivalents
     266,268       (4,066
    
 
 
   
 
 
 
Cash and cash equivalents, beginning of period
     43,728       27,332  
    
 
 
   
 
 
 
Cash and cash equivalents, end of period
   $ 309,996     $ 23,266  
    
 
 
   
 
 
 
Supplemental disclosures of noncash activities
                
Exchange of 45,331,483 preferred, common, and incentive shares in connection with the Conversion (Note 1)
   $ 224,892          
Exchange of redeemable convertible noncontrolling interest to 6,470,382 shares of common stock
 (Note 13)
   $ 3,592          
Deferred offering costs not yet paid
 
$
 
615
 
 
 
 
 
Right of use asset capitalization
           $ 545  
See accompanying notes to the condensed consolidated financial statements.
 
8

Table of Contents
Notes to the Condensed Consolidated Financial Statements
 
1.
DESCRIPTION OF BUSINESS, ORGANIZATION AND LIQUIDITY
Organization and Business
Day One Biopharmaceuticals, Inc. (the “Company”), a successor to Day One Biopharmaceuticals Holding Company, LLC (“Day One Holding LLC), is a clinical-stage biopharmaceutical company dedicated to developing and commercializing targeted therapies for patients of all ages with genetically defined cancers. The Company’s lead product candidate, DAY101, has the potential to be a
first-in-class,
oral, brain-penetrant, highly-selective type II
pan-RAF
kinase inhibitor.
The Company started its operations in November 2018 under the name Hero Therapeutics Holding Company, LLC, a limited liability company under the laws of the State of Delaware. Subsequently, it changed its name to Day One Therapeutics Holding Company, LLC in December 2018 and to Day One Biopharmaceuticals Holding Company, LLC in March 2020. On May 26, 2021, the Company completed the conversion by filing a certificate of conversion with the Secretary of State of the State of Delaware and changed its name to Day One Biopharmaceuticals, Inc. As of June 30, 2021, the Company has two wholly owned subsidiaries: DOT
Therapeutics-2,
Inc. (“DOT-2”) (formerly Hero Therapeutics Inc. and Day One Biopharmaceuticals, Inc.), incorporated in Delaware in November 2018, and DOT
Therapeutics-1,
Inc. (“DOT-1”) , incorporated in Delaware in December 2019.
Initial Public Offering, Corporate Conversion and Exchange of Takeda’s shares
On June 1, 2021, the Company closed its initial public offering (the “IPO”) in which it sold an aggregate of 11,500,000 shares of common stock at a price to the public of $16.00 per share, which included 1,500,000 shares issued upon the full exercise by the underwriters of their option to purchase additional shares of common stock. The Company received aggregate net proceeds from the IPO of $167.0 million, after deducting underwriting discounts and commissions and offering costs, of $17.0 million. The common stock began trading on the Nasdaq Global Select Market on May 27, 2021, under the symbol “DAWN”.
In contemplation of the IPO, on May 26, 2021, the Company completed the conversion (the “Conversion”), which included the following: Day One Holding LLC, converted from a Delaware limited liability company to a Delaware corporation by filing a certificate of conversion with the Secretary of State of the State of Delaware; and changed its name to Day One Biopharmaceuticals, Inc.
As part of the Conversion:
 
   
holders of Series A redeemable convertible preferred shares of Day One Holding LLC received one share of Series A redeemable convertible preferred stock of the Company for each Series A redeemable convertible preferred share held immediately prior to the Conversion;
 
   
holders of Series B redeemable convertible preferred shares of Day One Holding LLC received one share of Series B redeemable convertible preferred stock of the Company for each Series B redeemable convertible preferred share held immediately prior to the Conversion;
 
   
holders of common shares of Day One Holding LLC received one share of common stock of the Company for each common share held immediately prior to the Conversion;
 
   
each outstanding incentive share in Day One Holding LLC converted into a number of shares of common stock of the Company based upon a conversion price determined by the board of directors. The conversion price was determined as a difference between the IPO price of $16.00 per share and
the
participating threshold for each incentive share. The Company issued 5,433,290 common stock shares upon the conversion of incentive shares of Day One Holding LLC, of which 4,719,605 common stock shares continue to vest as per the original vesting terms of the incentive shares awards.
In connection with the IPO and the Conversion, pursuant to the terms of the Millennium Stock Exchange Agreement and the Plan of Conversion, (“The Millennium Stock Exchange Agreement”) Millennium Pharmaceuticals, Inc. (“Takeda”) exchanged the 9,857,143 shares of Series A redeemable convertible preferred stock of DOT
-1,
 a subsidiary of Day One Holding LLC, for 6,470,382 shares of common stock of the
Company (the “Exchange”).
The Company continues to hold all property and assets of Day One Holding LLC and assumes all of the debts and obligations of Day One Holding LLC. Effective on the date of the Conversion, the member of the board of directors and officers of Day One Holding LLC became the member of the board of directors and officers of the Company. The Conversion was a
tax-free
reorganization, that included authorization to issue to capital stock consisting of 500,000,000 shares of common stock, $0.0001 par value per share, and 10,000,000 shares of undesignated preferred stock, $0.0001
par value per share.
 
9

Table of Contents
Upon the closing of the IPO, 32,489,398 shares of redeemable convertible preferred stock issued by the Company in the Conversion converted into an equal number of shares of common stock. The Company also granted options for 4,418,874 common stock shares at $16.00 per share upon the IPO date.
Shares Split
On May 23, 2021, Day One Holding LLC Board approved an amendment the Operating Agreement to effect a forward split of the Company’s shares at a
2.325-for-1
ratio (the “Stock Split”). The Stock Split became effective on May 23, 2021, upon approval by the members and execution of the amended LLC operating agreement. All issued and outstanding common shares, redeemable convertible preferred shares, incentive shares and per share amounts contained in these condensed consolidated financial statements have been retroactively adjusted to reflect this Stock Split for all periods presented. 
Liquidity
The Company has incurred significant operating losses since inception and has relied primarily on public and private equity to fund its operations. On June 30, 2021, the Company had an accumulated stockholders equity/members’ (deficit) of
 
$86.3 
million. The Company expects to continue to incur substantial losses, and its ability to achieve and sustain profitability will depend on the successful development, approval, and commercialization of product candidates and on the achievement of sufficient revenues to support its cost structure. The Company may never achieve profitability, and until then, the Company will need to continue to raise additional capital. As of June 30, 2021, the Company had cash and cash equivalents of
$
310.0
 
million. Based on current plans, the Company believes this will be sufficient to enable funding operations into 2023. Future requirements will depend on many factors and may prove to be wrong as available capital resources could be exhausted sooner than expected.
Risks and Uncertainties Related to
COVID-19
We are subject to risks related to public health crises such as the global pandemic associated with
COVID-19.
In December 2019, a novel strain of coronavirus,
COVID-19,
was first identified. The global spread of
COVID-19
resulted in the World Health Organization declaring the outbreak a “pandemic,” or a worldwide spread of a new disease, in early 2020. This virus eventually spread worldwide, and to all 50 states within the United States. In response, most countries around the world, imposed quarantines and restrictions on travel and mass gatherings to contain the spread of the virus. Employers worldwide were also required to increase the capacity and arrangement for employees to work remotely. More recently, many of the restrictions and travel bans have been eased or lifted completely as global society as a whole works to return to
pre-pandemic
business and personal practices. Although to date, these restrictions have not materially impacted our operations, the effect on our business, from the spread of
COVID-19
and the actions implemented by the governments of the United States and across the globe, may worsen over time and we are unable to predict the potential impact on our business.
Any outbreak of contagious diseases, or other adverse public health developments, could have a material and adverse effect on our business operations. These could include disruptions or restrictions on our ability to travel, pursue partnerships and other business transactions, receive shipments of biologic materials, as well as be impacted by the temporary closure of the facilities of suppliers. The spread of an infectious disease, including
COVID-19,
may also result in the inability of our suppliers to deliver supplies and services to us on a timely basis. In addition, health professionals may reduce staffing and reduce or postpone meetings with clients in response to the spread of an infectious disease. Though we have not yet experienced such events, if they would occur, they could result in a period of business disruption, and in reduced operations, any of which could materially affect our business, financial condition and results of operations. However, as of the date of this Form
10-Q,
we have not experienced a material adverse effect on our business nor the need for reduction in our work force; and, currently, we do not expect any material impact on our long-term activity. The extent to which
COVID-19
impacts our business will depend on future developments which are highly uncertain and cannot be predicted, including, but not limited to, new information which may emerge concerning the increased severity of the
COVID-19
virus, the actions to contain
COVID-19,
or treat its impact.
 
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no changes to the significant accounting policies as disclosed in Note 2 to the Company’s annual consolidated financial statements for the years ended December 31, 2020 and 2019 included in the Company’s final prospectus for its IPO filed pursuant to Rule 424(b)(4) under the Securities Act with the SEC on May 27, 2021, except as noted below.
 
10

Table of Contents
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and follow the requirements of the Securities and Exchange Commission (the “SEC”) for interim reporting. As permitted under those rules, certain notes and other financial information that are normally required by U.S. GAAP can be condensed or omitted. These unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments that are necessary for a fair statement of the Company’s financial information. The condensed consolidated balance sheet as of December 31, 2020 has been derived from audited consolidated financial statements as of that date but does not include all of the financial information required by U.S. GAAP for complete financial statements. Operating results for the six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”)
.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of expenses during the reporting period. Significant estimates and assumptions made in the accompanying condensed consolidated financial statements include, but are not limited to, the fair value of the redeemable convertible preferred shares, the fair value of the common shares, the fair value of the derivative tranche liability, the valuation of share-based awards, the valuation of deferred tax assets and income tax uncertainties, and accruals for research and development activities. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable. Actual results may differ from those estimates or assumptions.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less from the purchase date to be cash equivalents. As of June 30, 2021, cash equivalents include investments in money market funds. As of December 31, 2020, the Company did not have any cash equivalents and cash was held in checking accounts.
Deferred Finance Issuance Costs
Deferred finance issuance costs, consisting of legal, accounting, audit and filing fees relating to
in-process
equity financings, including the Company’s IPO, are capitalized. The deferred issuance costs will be offset against offering proceeds upon the completion of the financing or the offering. As of June 30, 2021, the Company did not have any deferred finance issuance costs related to the IPO. As of December 31, 2020, the Company had $36,000 in deferred issuance costs related to its Series B redeemable convertible preferred share private financing.
 
Share/Stock-Based Compensation
Prior to the IPO, the Company recognized share-based compensation expense based on the estimated fair value of all share-based awards, incentive shares and restricted common share shares, on the date of grant using the option-pricing model. The option-pricing model requires the input of subjective assumptions, including the fair value of the underlying common shares, the expected term of the award, the expected volatility, risk-free interest rates, and the dividend yield. In determining the fair value of common shares, the methodologies used to estimate the enterprise value were performed using methodologies, approaches, and assumptions consistent with the American Institute of Certified Public Accountants Accounting and Valuation Guide,
Valuation of Privately-Held-Company Equity Securities Issued as Compensation
. The participation threshold amounts are determined by the board of directors (the “Board”), at the time of grant. The expected life of the awards granted during the period was determined based on an expected time to the liquidation event. The Company applied the risk-free interest rate based on the U.S. Treasury yield in effect at the time of the grant consistent with the life of the award. The expected volatility is based on a peer group in the industry in which the Company does business consistent with the expected time to liquidity. The dividend yield was set at zero as the underlying security does not and is not expected to pay a
dividend.
 
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Subsequent to closing of the IPO, the Company uses the Black-Scholes valuation model to estimate the fair value of options granted to employees and
non-employees,
intrinsic value to estimate the fair value of restricted stock award, and fair value of the Company’s common stock at the grant date for restricted stock units.
The Black-Scholes option-pricing model, used to estimate fair value of stock options awards, requires the use of the following assumptions:
 
 
 
Fair Value of Common Stock
—The Company’s closing price on the Nasdaq market at the grant date.
 
 
 
Expected Term
—The expected term represents the period that the stock-based awards are expected to be outstanding. The expected term for stock options is calculated using simplified method, as the weighted-average vesting term of the award and the award’s contract period.
 
 
 
Expected Volatility
—Since the Company does not have sufficient trading history for its common stock, the expected volatility is estimated based on the average historical volatilities of common stock of comparable publicly traded entities over a period equal to the expected term of the stock option grants. The comparable companies are chosen based on their size, stage in the life cycle or area of specialty. The Company will continue to apply this process until sufficient historical information regarding the volatility of the common stock price becomes available.
 
 
 
Risk-Free Interest Rate
—The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of
grant for zero-coupon U.S. Treasury
notes with maturities approximately equal to the expected term of the awards.
 
 
 
Expected Dividend Yield
—The Company has never paid dividends on the common stock and has no plans to pay dividends on its common stock. Therefore, the expected dividend yield use is zero.
The Company uses the straight-line attribution method for recognizing share/stock-based compensation expense. The Company recognizes forfeitures by reducing the expense in the same period the forfeitures occur. The Company recognizes share/stock-based compensation expense for awards with performance conditions when it is probable that the condition will be met, and the award will vest. The Company classifies share/stock-based compensation expense in the Consolidated Statement of Operations and Comprehensive Loss in the same manner in which the award recipients’ payroll costs are classified or in which the award recipients’ service payments are classified.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU
No. 2016-13,
Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326).
ASU
2016-13
requires measurement and recognition of expected credit losses for financial assets. In April 2019, the FASB issued clarification to ASU
2016-13
within ASU
2019-04,
Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The guidance will become effective for the Company for fiscal years beginning after December 15, 2022, with early adoption permitted. Effective January 1, 2021, the Company adopted ASU
2016-13
and the adoption did not have any impact on the Company’s condensed consolidated financial statements.
In December 2019, the FASB issued ASU
No. 2019-12,
Simplifying the
 Accounting
 for Income Taxes
(“ASU
2019-12”),
which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU
2019-12
is effective for fiscal years beginning after December 15, 2021. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company is currently evaluating the impact that ASU
2019-12
will have on the condensed consolidated financial statements and related disclosures.
In August 2020, the FASB
issued ASU No. 2020-06 (“ASU
2020-06”)
 Debt—Debt with Conversion and Other Options (Subtopic
470-20)
and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic
815-40):
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.
 ASU
2020-06 will
simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred shares. Limiting the accounting models will result in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as
paid-in
capital. ASU
2020-06 also
amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. The guidance will become effective for the Company for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company adoption is not expected to have a significant impact on the Company’s condensed consolidated financial statements and related disclosures.
 
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3.
FAIR VALUE MEASUREMENTS 
The financial instruments of the Company measured at fair value on a recurring basis are included in cash and cash equivalents. U.S. government money market funds were valued by the Company based on quoted market prices, which represent a Level 1 measurement within the fair value hierarchy
.
Financial Assets and Liabilities Measured on a Recurring Basis
The following table sets forth the Company’s financial instruments as of June 30, 2021 and December 31, 2020, which are measured at fair value on a recurring basis by level within the fair value hierarchy. These are classified based on the lowest level of input that is significant to the fair value measurement (in thousands):
 
    
June 30, 2021
 
    
Total
    
Level 1
    
Level 2
    
Level 3
 
Money market funds, included in cash and cash equivalents
   $ 136,876      $ 136,876      $ —        $ —    
As of December 31, 2020,
 the Company did
no
t have any money market funds.
There were
no transfers between Level 1, Level 2 or Level 3 categories in the six months ended June 30, 2021 or 2020.
 
4.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid and other current assets consisted of the following (in thousands):
 
    
June 30,
2021
    
December 31,
2020
 
Prepaid insurance
   $ 4,578      $ 41  
Prepaid research and development expenses
     1,277        1,259  
Other prepaid expenses and other assets
     174        43  
    
 
 
    
 
 
 
Total prepaid expenses and other current assets
   $ 6,029      $ 1,343  
    
 
 
    
 
 
 
 
 
 
 
5.
PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of the following (in thousands):
 
    
June 30,
2021
    
December 31,
2020
 
Furniture and fixtures
   $ 78      $ 78  
Leasehold improvements
     15        15  
Less: accumulated depreciation and amortization
     (26      (16
    
 
 
    
 
 
 
Property and equipment, net
   $ 67      $ 77  
    
 
 
    
 
 
 
Depreciation and amortization expense was immaterial for the three and six months ended June 30, 2021 and 2020.
 
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6.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following (in thousands):
 
    
June 30,
2021
    
December 31,
2020
 
Accrued research and development expenses
   $ 1,642      $ 554  
Accrued professional service expenses
     913        298  
Accrued payroll related expenses
     849        717  
Accrued issuance costs
     615        —    
Other
     94        27  
    
 
 
    
 
 
 
Total accrued expenses and other current liabilities
   $ 4,113      $ 1,596  
    
 
 
    
 
 
 
 
7.
SIGNIFICANT AGREEMENTS
License agreement with Merck KGaA, Darmstadt, Germany
On February 10, 2021, DOT-2, the Company’s subsidiary, entered into a license agreement (the MRKDG License Agreement), with Merck KGaA, Darmstadt, Germany, a pharmaceutical corporation located in Darmstadt, Germany. Under the MRKDG License Agreement, Merck KGaA, Darmstadt, Germany granted to the Company an exclusive worldwide license, with the right to grant sublicenses through multiple tiers, under specified patent rights and
know-how
for the Company to research, develop, manufacture, and commercialize products containing and comprising the pimasertib and MSC2015103B compounds. The Company also received clinical inventories supplies to use in its research and development activities. The Company’s exclusive license grant is subject to a
non-exclusive
license granted by Merck KGaA, Darmstadt Germany’s affiliate to a cancer research organization and Merck KGaA, Darmstadt, Germany retains the right to conduct, directly or indirectly, certain ongoing clinical studies relating to pimasertib.
Under the MRKDG License Agreement, the Company has obligations to use commercially reasonable efforts to develop and commercialize at least two licensed products in at least two specified major market countries by the year 2029.
In consideration for the rights granted under the MRKDG License Agreement and clinical supplies, the Company made an upfront payment
of $8.0 million, which was recorded as research and development expenses, as the technology does not have an alternative future use and supplies are used for research activities. The Company may also be required to make additional payments of up to
 
$
367.0
 
million based upon the achievement of specified development, regulatory, and commercial milestones, as well a high, single-digit royalty percentage on future net sales of licensed products, if any. Milestones and royalties are contingent upon future events and will be recorded when the milestones are achieved and when payments are due. No milestones were achieved and due as of June 30, 2021.
The term of the MRKDG License Agreement will expire on a licensed
product-by-licensed
product and
country-by-country
basis upon the expiration of the Company’s obligation to pay royalties to the licensor with respect to such licensed product in such country and will expire in its entirety upon the expiration of all of the Company’s payment obligations with respect to all licensed products and all countries under the MRKDG License Agreement.
Takeda Assets Purchase Agreement
On December 16, 2019,
DOT-1
entered into an asset purchase agreement (the “Takeda Asset Agreement”), with Millennium Pharmaceuticals, Inc., an affiliate of Takeda Pharmaceutical Company Limited (“Takeda”). Pursuant to the Takeda Asset Agreement,
DOT-1
purchased certain technology rights and
know-how
related to
TAK-580
(which is now DAY101) that provides a new approach for treating patients with primary brain tumors or brain metastases of solid tumors.
DOT-1
also received clinical inventories supplies to use in the Company’s research and development activities of such RAF-inhibitor and an assigned investigator clinical trial agreement. Takeda also assigned to
DOT-1
its exclusive license agreement, or the Viracta License Agreement, with Sunesis Pharmaceuticals, Inc. (now Viracta Therapeutics, Inc. or Viracta). Takeda also granted
DOT-1
a worldwide, sublicensable exclusive license under specified patents and
know-how
and
non-exclusive
license under other patents and
know-how
generated by Takeda under the Takeda Asset Agreement. The Company also granted Takeda a grant back license, as defined in the agreement, which is terminable either automatically or by
DOT-1
in the event Takeda does not achieve specified development milestones within the applicable timeframes set forth under the Takeda Asset Agreement. This grant back license to Takeda was terminated at the time of Conversion in connection with the Millennium Stock Exchange Agreement.
In consideration for the sale and assignment of assets and the grant of the license under the Takeda Asset Agreement,
DOT-1
made an upfront payment of $1.0 million in cash and issued 9,857,143 shares of Series A redeemable convertible preferred stock in
DOT-1.
The fair value of issued shares was estimated as $9.9 million, based on the price paid by other investors for issued shares in the Series A financing of
DOT-1
Therapeutics, Inc. Pursuant to the terms of the Millennium Stock Exchange Agreement, Takeda agreed to exchange the 9,857,143 shares of Series A redeemable convertible preferred stock of
DOT-1,
Inc. for 6,470,382
shares of the Company’s common stock pursuant to and contingent upon the effectiveness of the Conversion (refer to Note 1). The Company recorded a total of
 
$10.9 
million consideration for license and clinical supplies as research and development expenses.
 
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The term of the Takeda Asset Agreement will expire on a country-by-country basis upon expiration of all assigned patent rights and all licensed patent rights in such country. Takeda may terminate the Takeda Asset Agreement prior to our first commercial sale of a product if we cease conducting any development activities for a continuous and specified period of time and such cessation is not agreed upon by the parties and is not done in response to guidance from a regulatory authority. Additionally, Takeda can terminate the Takeda Asset Agreement for our bankruptcy. In the event of termination of the Takeda Asset Agreement by Takeda as a result of our cessation of development or bankruptcy, all assigned patents, know-how and contracts (other than the Viracta License Agreement) will be assigned back to Takeda and Takeda will obtain a reversion license under patents and know-how generated to exploit all such terminated products.
Viracta License Agreement
On December 16, 2019,
DOT-1
amended and restated the Viracta License Agreement that was assigned pursuant to the Takeda Asset Agreement. Under the Viracta License Agreement,
DOT-1
received a worldwide exclusive license under specified patent rights and
know-how
to develop, use, manufacture, and commercialize products containing compounds binding the RAF protein family.
DOT-1
paid $2.0 million upfront in cash to Viracta, which was recorded as research and development expenses.
DOT-1
made a milestone payment of $3.0 million to Viracta in February 2021, which is recorded as research and development expense when the milestone was achieved in April 2021.
DOT-1
is also required to make additional milestone payments of up to $54 
million upon achievement of specified development and regulatory milestones for each licensed product in two indications, with milestones payable for the second indication to achieve a specified milestone event being lower than milestones payable for the first indication. Additionally, if
DOT-1
obtains a priority review voucher with respect to a licensed product and sell such priority review voucher to a third party or use such priority review voucher,
DOT-1
is obligated to pay Viracta a specified percentage in the
mid-teen
digits of all net consideration received from any such sale or of the value of such used priority review voucher, as applicable. Commencing on the first commercial sale of a licensed product in a country,
DOT-1
is obligated to pay tiered royalties ranging in the
mid-single-digit
percentages on net sales of licensed products, if any. The obligation to pay royalties will end on a
country-by-country
and licensed
product-by-licensed
product basis commencing on the first commercial sale in a country and continuing until the later of: (i) the expiration of the last valid claim of the Viracta licensed patents, jointly owned collaboration patents or specified patents owned by the Company covering the use or sale of such product in such country, (ii) the expiration of the last statutory exclusivity pertaining to such product in such country or (iii) the tenth anniversary of the first commercial sale of such product in such country. No other milestones, except as discussed above, were achieved and due as of June 30, 2021.
The term of the Viracta License Agreement will expire on a licensed
product-by-licensed
product and
country-by-country
basis upon the expiration of the Company’s obligation to pay royalties to Viracta with respect to such product in such country.
DOT-1
has the right to terminate the Viracta License Agreement with respect to any or all of the licensed products at will upon a specified notice period.
 
8.
COMMITMENTS AND CONTINGENCIES
Leases
The Company entered into a lease agreement for its corporate office facility in South San Francisco, California in March 2020, which expires in three years. The Company can extend the lease term for additional three years at market rates upon the notice of extension. The Company is obligated to pay monthly rent expense and its pro rata share of utilities, common area maintenance expenses and property taxes. The landlord also provided an allowance of $10,000 for any tenant improvements. The Company concluded that it is an operating lease. Common area expenses are a
non-lease
component and a variable consideration and included in operating expenses as incurred. The extension period has not been included in the determination of the Right of Use (“ROU”) asset or the lease liability for operating leases as the Company concluded that it is not reasonably certain that it would exercise this option.
The Company determined the lease incremental borrowing rate (“IBR”) based on the information available at the applicable lease commencement date as the Company’s lease did provide an implicit rate. The IBR is determined by using the rate of interest that the Company would pay to borrow on a collateralized basis an amount equal to the lease payments for a similar term and in a similar economic environment where the asset is located. The Company determined the amounts of its lease liabilities using an IBR of 8%. As of June 30, 2021, the remaining lease term was 1.67 years.
The Company’s lease does not require any contingent rental payments, impose financial restrictions, or contain any residual value guarantees.
Amortization of
right-of-use
assets is recognized on a straight-line basis over the applicable lease term. Amortization was $88,000 and $55,000 for the six months ended June 30, 2021 and 2020, respectively. Cash paid for amounts included in the measurement of operating lease liabilities was $102,000 and $73,000 for the six months ended June 30, 2021 and 2020, respectively. Variable payments expensed during the six ended June 30, 2021 and 2020 were
immaterial.
 
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As of June 30, 2021, the future lease obligations were as follows (in thousands):
 
Remaining six months in 2021
   $ 103  
2022
     212  
2023
     18  
Total future minimum lease payments
     333  
Less: Imputed interest
     (19
    
 
 
 
Present value of operating lease liabilities
   $ 314  
    
 
 
 
Research and Development Agreements
The Company enters into contracts in the normal course of business with clinical research organizations for clinical trials, with contract manufacturing organizations for clinical supplies manufacturing and with other vendors for preclinical studies, supplies and other services and products for operating purposes. These contracts generally provide for termination on notice, with the exception of one vendor with a potential termination fee if a purchase order is cancelled within a specified time and of another vendor where labor costs are
non-cancellable
after the approval of the project plan. As of June 30, 2021 and December 31, 2020, there were no amounts accrued related to termination and cancellation charges as these are not probable
.
License Agreements
The Company entered into the license agreements, as disclosed in
Note 7,
 pursuant to which the Company is required to pay milestones contingent upon meeting of specific events. The first milestone related to the Viracta License Agreement was achieved and recorded to research and development expense
 during the three months ended June 30, 2021. The Company may be required to pay royalties on sales of products developed under these agreements. All products are in development as of June 30, 2021 and December 31, 2020 and
no
such royalties were due.
Legal Proceedings
The Company, from time to time, may be party to litigation arising in the ordinary course of business. The Company is not subject to any material legal proceedings, and to the best of its knowledge, no material legal proceedings are currently pending or threatened.
Indemnification Agreements
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for indemnification for certain liabilities. The exposure under these agreements is unknown because it involves claims that may be made against it in the future but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations. The Company also has indemnification obligations to its directors and executive officers for specified events or occurrences, subject to some limits, while they are serving at its request in such capacities. There have been no claims to date and the Company believes the fair value of these indemnification agreements is minimal. Accordingly, the Company had not recorded any liabilities for these agreements as of June 30, 2021 and December 31, 2020.
 
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Notes to the Condensed Consolidated Financial Statements
9.
REDEEMABLE CONVERTIBLE PREFERRED SHARES
In June 2021, the Company completed its IPO, selling an aggregate of 11,500,000 shares of common stock. All outstanding redeemable convertible preferred shares were converted into 32,489,398 shares of common stock upon the completion of the IPO, June 1, 2021. As of June 30, 2021, the Company did not have any outstanding shares of redeemable convertible preferred shares.
In February 2021, the Company issued 9,638,141 Series B redeemable convertible preferred shares at a price of $13.488 per share for gross cash proceeds of $130.0 million. The Company incurred issuance costs of $243,000.
In December 2019, the Company issued 10,348,507 Series A redeemable convertible preferred shares at a price of $2.899 per share for gross cash proceeds of $30.0 million and issued 2,154,245 shares upon the conversion of the outstanding convertible note and accrued interest of $2.1 million. The Company incurred issuance costs of $95,000.
In connection with the initial issuance of the Series A redeemable convertible preferred shares, the Company had an obligation to sell an additional 10,348,505 Series A shares at $2.899 per share upon achievement of certain milestones in two tranche. The Company determined that the obligation to sell additional shares is a freestanding financing instrument and a liability. The Company estimated the fair value of the liability to be $1.5 million and recorded it as a reduction to redeemable convertible preferred shares and as a derivative tranche liability in its condensed consolidated balance sheet at the issuance date in December 2019. For the three months ended March 31, 2020, the Company remeasured the derivative tranche liability by $0.2 million.
In November and December 2020, the Board approved the settlement of tranche and the Company issued 10,348,505 shares for gross cash proceeds of $30.0 million. The Company incurred issuance costs of $22,000. As of December 31, 2020, no derivative tranche liabilities were outstanding.
The authorized, issued, and outstanding Series A redeemable convertible preferred shares as of December 31, 2020 were as follows:
 
 
  
December 31, 2020
 
 
  
Shares
Authorized
 
  
Shares
Issued and
Outstanding
 
  
Liquidation
Value
 
  
Carrying
Value
 
Series A redeemable convertible preferred shares
     22,851,257        22,851,257      $ 66,245,059      $ 91,964,055  
 
10.
COMMON SHARES/COMMON STOCK
Upon completion
 
of the IPO, the Company is authorized to issue
500
.0 million shares of common stock at a par value $
0.0001
. As of June 30, 2021,
61,928,939
shares of common stock were issued and outstanding.
As of December 31, 2020, the Company was authorized to issue 28,887,127 common shares. Common shares’ holders are entitled to vote and elect one Board member. As of December 31, 2020, the Company had 6,035,869 issued and outstanding common shares. As of December 31, 2020, the Company reserved 22,851,257 shares upon conversion of redeemable convertible preferred shares into common shares, respectively.
In November 2018, the Company entered into common shares purchase agreements with two founders of the Company. The individuals purchased a total of 2,790,000 common shares for a total purchase price of $300. Shares vest monthly for two and four years, respectively. Vesting for a certain number of shares was accelerated upon the Company’s closing of its Series A redeemable convertible preferred share financing. The Company also has an option for a period of ninety days after the individual’s employment is terminated either voluntarily or involuntarily to repurchase the unvested common shares at a price that is the lower
 
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of the original price per share paid by the founder for such stock or the fair value as of the date of such repurchase. As of December 31, 2020, there were 193,766 shares unvested. The founders’ shares were converted to common stock in the Conversion. As of June 30, 2021, all founders’ common stock were vested
.
 
11.
INCENTIVE SHARES AND SHARE/STOCK-BASED COMPENSATION
Prior to the Conversion, Day One Holding LLC granted incentive shares under the Incentive Share Plan and was authorized to issue 8,924,177 incentive shares. Incentive shares were a separate
non-voting
class of shares that participate in distributions only after incentive shares vest, unless it is approved by the Board and include at least two of the preferred members, and a participation threshold is met. The incentive shares represented profits interests in Day One Holding LLC, which is an interest in the increase in the Company’s value over the participation threshold, as defined in the Operating Agreement and as determined at the time of grant. A holder of incentive share had the right to participate in distributions of profits only in excess of the participation threshold. The participation threshold was based on the valuation of the Company’s common shares on or around the grant date.
Day
One
Holding LLC granted incentive shares to employees and
non-employees,
which generally vested over a four-year period with cliff vesting for the first year. The Board approved vesting terms and conditions of each award and could accelerate vesting of incentive shares on an
award-by-award
basis. Vesting of incentive shares would be accelerated for all unvested shares upon a termination of services without cause within 12 months after the consummation of a change of control transaction.
The fair value of the incentive shares was estimated using an option pricing model with the following assumptions:
 
  
Three Months Ended
June 30,
 
  
Six Months Ended
June 30,
 
 
  
2021
 
(through
May 26, 2021)
 
  
2020
 
  
2021
 
(through
May 26,
 
2021)
 
  
2020
 
Common share fair value
   $ 8.89     $ 0.89     $
6.36
 
8.89
    $ 0.81
 
-0.89
 
Participating threshold
   $ 7.51     $ 0.27     $ 6.36
 
- 7.51
    $ 0.27  
Risk free rate
     0.14
%
      0.18
%
      0.14
%
     
0.18% - 0.3
%
 
Volatility
     72.90%       80.00
%
      72.90
%
      78
 
- 80
%
 
Time to liquidity (in years)
    
0.20
 
1.80
      3.03       0.20
 
- 1.80
      3.03
 
- 3.30
 
Grant date fair value
   $ 4.24     $ 0.74     $ 4.24
 
4.52
    $ 0.71
 
- 0.74
 
The Company used the option pricing model to estimate the fair value of each incentive shares award on the date of grant. The members’ equity value was based on a recent enterprise valuation analysis performed and common share fair value. The participation threshold amounts are determined by the Board at the time of grant. The expected life of the awards granted during the period was determined based on an expected time to the liquidation event. The Company applied the risk-free interest rate based on the U.S. Treasury yield in effect at the time of the grant consistent with the life of the award. The expected volatility is based on a peer group in the industry in which the Company does business consistent with the expected time to liquidity. The dividend yield was set at zero as the underlying security does not and is not expected to pay a dividend.
Fair Value of Common Share
Prior to the IPO, management’s approach to estimate the fair value of the common share is 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
 (
the “Practice Aid”), considering a number of objective and subjective factors including: valuations of common shares performed with the assistance of independent third-party valuation specialists; the Company’s stage of development and business strategy, including the status of research and development efforts, and the material risks related to the business and industry; the Company’s results of operations and financial position, including levels of available capital resources; the valuation of publicly traded companies in the life sciences and biotechnology sectors, as well as recently completed mergers and acquisitions of peer companies; the lack of marketability of the common shares; the prices of redeemable convertible preferred shares sold to investors in arm’s length transactions and the rights, preferences, and privileges of the
 
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Company’s redeemable convertible preferred shares relative to those of common shares; the likelihood of achieving a liquidity event for the holders of the common and redeemable convertible preferred shares, such as an initial public offering or a sale, given prevailing market conditions. The fair value of the common shares was approved by the Board until such time as the Company shares are listed on an established stock exchange or national market system.
The incentive shares have been classified as equity awards and share-based compensation expense was based on the grant date fair value of the award.
The following table provides a summary of the incentive shares activity:
    
Number of
Shares
    
Weighted
 
Average
Grant Date
Fair Value
 
Outstanding as of December 31, 2020
     4,112,017     
$
1.26
 
Granted
     2,959,795      $ 4.32  
Forfeited
     (265,596    $ 1.67  
Converted to unvested common stock
     (6,806,216   
$
2.58
 
Outstanding as of June 30, 2021
                  
2021 Stock Incentive Plan
Immediately prior to consummation of the IPO, all of the outstanding incentive shares were converted into 5,433,290 shares of common stock, of which 4,719,605 were unvested common stock. The following table provides a summary of the unvested common stock grant activity during the six months ended June 30, 2021.
    
Number of
Shares
    
Weighted
 
Average
Grant Date
Fair Value
 
Unvested restricted stock as of December 31, 2020
            
$
  
 
Conversion of incentive shares
     4,719,605      $ 16.00  
Vested
     (36,489    $ 16.00  
Unvested restricted stock as of June 30, 2021
     4,683,116     
$
16.00
 
In May 2021, in connection with the IPO, the Board of Directors and stockholders approved the 2021 Equity Incentive Plan (the “2021 Plan”), which became effective on the day before the date of the effectiveness of the IPO. The 2021 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, awards of restricted stock, restricted stock units and other stock-based awards. The number of shares of common stock reserved for issuance under the 2021 Plan is equal to the sum of: (1) 6,369,000; plus (2) 4,719,605 shares of common stock issued in respect of the Conversion of incentive shares that were subject to vesting immediately prior to the effectiveness of the registration statement for the IPO that expire, terminate or are otherwise surrendered, canceled, forfeited or repurchased by us at their original issuance price pursuant to a contractual repurchase right. The number of shares available for grant and issuance under the 2021 Plan will be automatically increased on January 1 of each of 2022 through 2031, by the lesser of (a) 5% of the number of shares of all classes of the Company’s common stock, plus the total number of shares of Company common stock issuable upon conversion of any preferred stock or exercise of any warrants to acquire shares of Company common stock for a nominal exercise price issued and outstanding on each December 31 immediately prior to the date of increase or (b) such number of shares determined by the Board of Directors.
The Company issued 4,418,874 stock options with at weighted average fair value of $9.30 upon effectiveness of the IPO during the three months ended June 30, 2021. The intrinsic value of outstanding options is $29.9 million and remaining contractual life of 9.9 years as of June 30, 2021. The following table provides a summary of stock option activity under the 2021 Plan during the six months ended June 30, 2021.
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Number of
Shares
    
Weighted
 
Average
Grant Date
Fair Value
 
Outstanding at December 31, 2020
            
$
  
 
Granted
     4,418,874      $ 16.00  
Outstanding at June 30, 2021
     4,418,874      $ 16.00  
Exercisable at June 30, 2021
     21,622     
$
16.00  
2021 Employee Stock Purchase Plan
In May 2021, the Board of Directors adopted and the stockholders approved the 2021 Employee Stock Purchase Plan, (“the ESPP”), which became effective on May 26, 2021. A total of 603,000 shares of common stock were reserved for issuance under the ESPP. The number of shares of the common stock reserved for issuance under the ESPP will automatically increase on the first day of each fiscal year, beginning with the fiscal year commencing on January 1, 2021 and continuing for each fiscal year until, and including, the fiscal year commencing on January 1, 2031, by the lesser of: a) 1% of the total number of outstanding shares of common stock of the Company (on an as converted basis outstanding on the immediately preceding December 31 (rounded down to the nearest whole share); b) an amount determined by the Board of Directors. No shares have been issued under the ESPP as of June 30, 2021
.
Share/Stock-based compensation
The Company recorded share/stock-based compensation expense related to the issuance of incentive shares and stock options of $3.1 million and $0.1 million during the six months ended June 30, 2021 and 2020, respectively, and $2.5 million and $0.1 million during the three months ended June 30, 2021 and 2020, respectively. As of June 30, 2021, there was $39.6 million of unrecognized compensation cost related to unvested restricted stock and stock options that is expected to be recognized over a weighted-average period of approximately 3.0 years. As of June 30, 2020, there was $0.7 million of unrecognized compensation cost related to unvested incentive shares that is expected to be recognized over a weighted-average period of approximately 2.9 years.
 
The Company did not recognize incremental share-based compensation expense related to the conversion of the incentive shares to unvested common stock in accordance with the Conversion, as such exchange was at fair value.
The Company uses intrinsic value to value its unvested common stock and stock options, which is the difference between the Company’s common stock market value and the exercise price of a share and recognizes expense over the vesting term of the award. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option granted with the following assumption for awards granted in May 2021:
 
Common stock fair value
   $ 16.00  
Expected term (in years)
    
5.28
 
5.90
 
Expected volatility
    
64.91%
 
 66.51
%
 
Risk-free interest rate
    
0.86% - 1.00%
 
Expected dividend yield
    
 
 
 
 
2
0

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Share/stock-based compensation expense recorded in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss is as follows (in thousands):
 
 
  
Three Months Ended
June 30,
 
  
Six Months Ended
June 30,
 
 
  
2021
 
  
2020
 
  
2021
 
  
2020
 
Research and development expense
   $ 713      $ 55      $ 832      $ 69  
General and administrative expense
     1,824        2        2,243        47  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total share-based compensation expense
  
$
         2,537
 
  
$
                57
 
  
$
         3,075
 
  
$
            116
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
12.
NET LOSS PER SHARE
Net Loss Per Share
Basic and diluted net loss per share attributable to common shareholders/stockholders after the Conversion is calculated as follows (in thousands except share and per share amounts):
 
    
Three Months Ended
June 30,
    
Six Months Ended
June 30,
 
    
2021
    
2020
    
2021
    
2020
 
Net loss and comprehensive loss
   $ (15,473    $ (2,409    $ (31,575