Akili(AKLI) - 2022 Q3 - Quarterly Report

Cautionary Statement Regarding Forward-Looking Statements This statement highlights the inherent risks and uncertainties associated with forward-looking statements, which are not guarantees of future performance - Forward-looking statements are not guarantees of performance and are subject to numerous risks and uncertainties, including achieving profitability, managing growth, accessing capital, market acceptance of EndeavorRx, and regulatory approvals[6][8] PART I. FINANCIAL INFORMATION This part presents the company's unaudited financial statements and management's analysis of financial condition and results of operations Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements and accompanying notes for the period Condensed Consolidated Balance Sheets The balance sheets show a significant increase in assets and a shift from deficit to equity due to the Business Combination Condensed Consolidated Balance Sheet Highlights (September 30, 2022 vs. December 31, 2021) | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $89,661 | $76,899 | $12,762 | 16.6% | | Short-term investments | $66,696 | $- | $66,696 | N/A | | Total current assets | $161,278 | $79,733 | $81,545 | 102.3% | | Total assets | $165,034 | $80,937 | $84,097 | 103.9% | | Total current liabilities | $13,140 | $8,041 | $5,099 | 63.4% | | Total liabilities | $41,162 | $15,175 | $25,987 | 171.2% | | Redeemable convertible preferred stock | $- | $291,876 | $(291,876) | -100.0% | | Total stockholders' equity (deficit) | $123,872 | $(226,114) | $349,986 | N/A | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) The statements detail revenues, expenses, and a significant net income swing driven by the change in fair value of earn-out liabilities Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) Highlights | Metric (in thousands) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $82 | $155 | $212 | $377 | | Cost of revenues | $123 | $83 | $316 | $243 | | Gross profit (loss) | $(41) | $72 | $(104) | $134 | | Research and development | $7,554 | $4,756 | $21,216 | $12,739 | | Selling, general and administrative | $16,911 | $13,292 | $47,250 | $28,675 | | Total operating expenses | $24,465 | $18,048 | $68,466 | $41,414 | | Operating loss | $(24,506) | $(17,976) | $(68,570) | $(41,280) | | Change in estimated fair value of earn-out liabilities | $77,892 | $- | $77,892 | $- | | Net income (loss) | $53,236 | $(18,137) | $8,851 | $(41,737) | | Net income (loss) per share - basic | $1.38 | $(16.67) | $(0.16) | $(77.09) | | Net income (loss) per share - diluted | $0.76 | $(16.67) | $(0.16) | $(77.09) | Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Deficit This statement illustrates the significant equity structure change following the conversion of preferred stock into common stock - The Business Combination led to the conversion of all Legacy Convertible Preferred Stock into Common Stock and reclassification to permanent equity, significantly altering the equity structure[19][72] Key Changes in Stockholders' Equity (Deficit) | Metric (in thousands) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Redeemable Convertible Preferred Stock Value (End of Period) | $- | $287,718 | | Common Stock Shares (End of Period) | 77,858,746 | 1,456,530 | | Additional Paid-in Capital (End of Period) | $347,330 | $- | | Accumulated Deficit (End of Period) | $(223,473) | $(203,828) | | Total Stockholders' Equity (Deficit) (End of Period) | $123,872 | $(203,828) | Condensed Consolidated Statements of Cash Flows The statements show increased cash used in operations and investing, offset by significant cash provided by financing activities Condensed Consolidated Statements of Cash Flows Highlights | Metric (in thousands) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(62,562) | $(35,933) | | Net cash used in investing activities | $(66,635) | $(480) | | Net cash provided by financing activities | $141,959 | $112,727 | | Net increase in cash, cash equivalents, and restricted cash | $12,762 | $76,314 | | Cash, cash equivalents, and restricted cash at end of period | $89,966 | $95,147 | Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed explanations of the accounting policies and financial statement line items Note 1. Nature of the Business and Basis of Presentation This note describes Akili's business, the reverse recapitalization accounting for the Business Combination, and its going concern status - Akili, Inc. develops a digital medicine platform for cognitive dysfunction, with EndeavorRx cleared by the FDA for ADHD[27] - The Business Combination with SCS on August 19, 2022, was accounted for as a reverse recapitalization, with Legacy Akili as the accounting acquirer[27] - The company has experienced negative operating cash flows and an accumulated deficit of $223.5 million, but believes current cash and investments will fund operations for at least one year[30] Note 2. Summary of Significant Accounting Policies This note outlines key accounting policies for preferred stock, earn-out liabilities, revenue recognition, and new accounting standards - Legacy Convertible Preferred Stock was converted to common stock and reclassified to permanent equity due to the Business Combination[34] - Earn-Out Liabilities are classified as liabilities and valued using a Monte Carlo Simulation Method, with changes in fair value recorded in other income (expense) or as stock compensation[35][36] Revenue by Type (in thousands) | Revenue Type | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Product revenue | $82 | $57 | $212 | $123 | | Collaboration revenue | $- | $98 | $- | $254 | | Total | $82 | $155 | $212 | $377 | Note 3. Business Combination This note details the reverse recapitalization with SCS, outlining net proceeds, transaction costs, and the accounting for Earn-Out Shares - The Business Combination was accounted for as a reverse recapitalization, with Legacy Akili as the accounting acquirer[41] - Earn-Out Shares (up to 7,536,461 shares) are contingent on stock price targets and are classified as liabilities, with fair value changes recorded in other income (expense)[46][48] Net Proceeds from Business Combination (Nine Months Ended Sep 30, 2022) | Item | Amount (in thousands) | | :--- | :--- | | Cash - SCS trust and cash (net of redemptions) | $2,283 | | Cash - PIPE investors | $162,000 | | Gross proceeds | $164,283 | | Transaction related expenses and other costs paid at Closing | $(30,989) | | Transaction related expenses and other costs paid after Closing | $(449) | | Net proceeds from the Business Combination | $132,845 | Fair Value of Earn-Out Liabilities (in thousands) | Item | Earn-Out Shareholders | Earn-Out Service Providers | Total | | :--- | :--- | :--- | :--- | | Initial fair value of earn-out liabilities at date of Business Combination | $87,512 | $13,467 | $100,979 | | Change in fair value | $(77,892) | $(11,987) | $(89,879) | | Fair value as of September 30, 2022 | $9,620 | $1,480 | $11,100 | Note 4. Prepaid Expenses and Other Current Assets This note details the components of prepaid expenses and other current assets, which increased primarily due to prepaid insurance Prepaid Expenses and Other Current Assets (in thousands) | Item | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Deferred issuance costs | $- | $572 | | Prepaid clinical trials | $829 | $872 | | Prepaid insurance | $2,107 | $81 | | Other current assets | $1,650 | $975 | | Total | $4,586 | $2,500 | Note 5. Property and Equipment This note details the composition of property and equipment, which decreased slightly due to accumulated depreciation and amortization - Depreciation and amortization expense increased to $231 thousand for the nine months ended September 30, 2022, from $198 thousand for the same period in 2021[53] Property and Equipment, Net (in thousands) | Item | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total property and equipment | $2,123 | $2,089 | | Less: accumulated depreciation and amortization | $(1,127) | $(896) | | Property and equipment, net | $996 | $1,193 | Note 6. Leases This note describes Akili's operating lease commitments and the impact of adopting the new lease accounting standard ASU 2016-02 - Akili leases office space in Boston (expiring Dec 2023) and Larkspur, CA (expiring Nov 2026)[54] - Adoption of ASU 2016-02 (Leases) on January 1, 2022, increased assets and liabilities by recognizing right-of-use assets and lease liabilities[40] Operating Lease Liabilities (in thousands) | Item | Sep 30, 2022 | | :--- | :--- | | Total undiscounted payments due | $4,067 | | Less imputed interest | $(563) | | Total | $3,504 | | Current operating lease liability | $803 | | Non-current operating lease liability | $2,701 | Note 7. Accrued Expenses and Other Current Liabilities This note provides a breakdown of accrued expenses, which increased due to higher accrued bonus and other expenses Accrued Expenses and Other Current Liabilities (in thousands) | Item | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Accrued bonus | $2,592 | $2,516 | | Accrued wages and benefits | $714 | $421 | | Other accrued expenses | $1,711 | $1,305 | | Total | $6,240 | $5,477 | Note 8. Corporate Bond This note describes the $5.0 million unsecured, non-interest-bearing corporate bond issued to Shionogi & Co., Ltd - Akili issued a $5.0 million unsecured corporate bond to Shionogi in March 2019, maturing November 2031, with no interest during its term[64] Corporate Bond Carrying Amount (in thousands) | Item | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Corporate Bond | $5,000 | $5,000 | | Unamortized discount on Corporate Bond | $(3,215) | $(3,362) | | Corporate Bond, net of discount | $1,785 | $1,638 | Note 9. Note Payable This note details the loan agreement with Silicon Valley Bank, including a recent drawdown and outstanding principal - Akili drew an additional $10.0 million from Silicon Valley Bank in June 2022, resulting in $15.0 million outstanding principal[66] - Interest-only payments are required through May 2023, followed by 24 equal monthly principal payments; the interest rate was 10.0% as of September 30, 2022[66] Note Payable Carrying Amount (in thousands) | Item | Sep 30, 2022 | | :--- | :--- | | Outstanding principal | $15,000 | | Note payable, short term | $(2,500) | | Final Payment | $750 | | Unamortized debt issuance costs | $(814) | | Note payable, long term (net of debt issuance costs) | $12,436 | Note 10. Capital Stock This note outlines Akili's capital structure, the conversion of preferred stock, and the adoption of a new employee stock purchase plan - As of September 30, 2022, Akili had 77,858,746 shares of Common Stock issued and outstanding, and no preferred stock[69] - All Legacy Convertible Preferred Stock was converted to Common Stock and reclassified to permanent equity as a result of the reverse recapitalization[72] - The 2022 ESPP was adopted, reserving 1,167,881 shares of Common Stock for employee purchases[75] Note 11. Stock-Based Compensation This note details Akili's stock-based compensation plans and related expenses, which increased significantly in 2022 - The 2011 Stock Incentive Plan was cancelled, and the 2022 Stock Option and Incentive Plan was approved, reserving 12,813,781 shares for grants[77][78] - Unrecognized compensation cost related to unvested stock options was $14.2 million as of September 30, 2022, to be recognized over a weighted-average period of 2.9 years[83] Stock-Based Compensation Expense (in thousands) | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Research and development | $1,312 | $408 | $2,762 | $920 | | Selling, general and administrative | $1,841 | $1,340 | $4,430 | $2,628 | | Total | $3,153 | $1,748 | $7,192 | $3,548 | Note 12. Fair Value of Financial Assets and Liabilities This note presents fair value measurements for financial assets and liabilities, categorized by hierarchy levels - Earn-out liabilities are classified as Level 3 and valued using a Monte Carlo Simulation Method, with key assumptions including stock price, volatility, and risk-free rate[86][87][89] Fair Value Measurements as of September 30, 2022 (in thousands) | Description | Level 1 | Level 2 | Level 3 | Total | | :--- | :--- | :--- | :--- | :--- | | Cash equivalents: Money market funds | $56,993 | $- | $- | $56,993 | | Short-term investments: United States treasuries | $66,696 | $- | $- | $66,696 | | Total assets | $123,689 | $- | $- | $123,689 | | Long-term liabilities: Earn-out liabilities | $- | $- | $11,100 | $11,100 | | Total liabilities | $- | $- | $11,100 | $11,100 | Note 13. Net Income (Loss) Per Share This note provides the computation of basic and diluted net income (loss) per share, reflecting the impact of the Business Combination - Potentially dilutive securities were excluded from diluted EPS computation if anti-dilutive or if contingent conditions were not met[92][95] Net Income (Loss) Per Share Attributable to Common Stockholders | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) attributable to common stockholders - basic | $50,839 | $(22,296) | $(2,224) | $(102,888) | | Net income (loss) per share - basic | $1.38 | $(16.67) | $(0.16) | $(77.09) | | Net income (loss) per share - diluted | $0.76 | $(16.67) | $(0.16) | $(77.09) | | Weighted average common stock outstanding - basic | 36,920,116 | 1,337,797 | 13,690,186 | 1,334,562 | | Weighted average common shares outstanding - diluted | 69,830,970 | 1,337,797 | 13,690,186 | 1,334,562 | Note 14. Subsequent Events This note discloses equity award grants made in November 2022 with both time-based and performance-based vesting conditions - In November 2022, Akili granted 2,844,059 stock options and 858,559 restricted stock unit awards with time-based vesting[96] - Additionally, 4,554,408 restricted stock unit awards were granted to senior executives, vesting upon the Common Stock achieving specified prices per share[96] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operational results, commercialization efforts, and liquidity for the reporting period Overview Akili is a digital medicine company developing cognitive treatments, with its first product, EndeavorRx, authorized for pediatric ADHD - Akili is a digital medicine company developing cognitive treatments through game-changing technologies[99] - EndeavorRx, the first product, received FDA marketing authorization in June 2020 as a prescription treatment for children ages 8-12 with ADHD[99] Recent Developments This section covers the commercial launch of EndeavorRx, pipeline developments, and the accounting impact of the Business Combination Commercial Launch of EndeavorRx and Key Commercial Metrics Akili initiated the first phase of its EndeavorRx commercial launch in Q3 2022, focusing on priority territories and key metrics - Akili launched the first phase of EndeavorRx commercialization in Q3 2022, targeting providers in 14 priority territories[100] EndeavorRx Key Commercial Metrics (Q3 2022 vs. Q2 2022) | Metric | Q3 2022 | Q2 2022 | Q3 2022 vs. Q2 2022 Change | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Rx Written | 1,317 | 772 | 71% | 2,757 | | New Rx | 1,072 | 602 | 78% | 2,177 | | Refill Rx | 245 | 170 | 44% | 580 | | Total Prescribers | 789 | 480 | 64% | 1,325 | | New Prescribers | 522 | 274 | 91% | 1,035 | | Conversion (Written to Dispensed) | 53% | 52% | 1% | 51% | | % of TRx Self Paid | 95% | 93% | 2% | 93% | | % of TRx Reimbursed | 4% | 3% | 1% | 3% | | ASP (excl. Patient Assistance Program) | $111 | $109 | 2% | $152 | Our Development Pipeline Akili plans to prioritize the commercialization of EndeavorRx and clinical development of its ADHD programs - Akili prioritizes commercialization of EndeavorRx and clinical development of ADHD programs, while advancing other pipeline programs through preclinical development[103] Closing of Business Combination The Business Combination with SCS closed on August 19, 2022, resulting in Akili, Inc. being listed on Nasdaq under "AKLI" - The Business Combination with SCS closed on August 19, 2022, leading to SCS being renamed Akili, Inc. and listed on Nasdaq (AKLI)[104] Accounting Impact of the Business Combination The Business Combination was accounted for as a reverse recapitalization, resulting in a capital infusion of $132.8 million net proceeds - The Business Combination was treated as a reverse recapitalization, with Akili as the accounting acquirer, meaning Akili's financial statements continue[105] - Net proceeds from the Business Combination totaled $132.8 million, derived from SCS's trust and PIPE investors, offset by $31.4 million in transaction costs[106] - Of the total $12.9 million in Akili's transaction costs, $3.0 million was allocated to Earn-Out Shares and expensed[106][107] Impact of COVID-19 Akili continues to monitor the uncertain impact of the COVID-19 pandemic on its business, employees, and operations - Akili is closely monitoring the uncertain impact of COVID-19 on all aspects of its business, including customers, employees, suppliers, and financial position[108] Factors Affecting Our Performance and Results of Operations Akili's performance is influenced by product and collaboration revenue, cost of revenue, and operating expenses like R&D and SG&A Product Revenue Product revenue from EndeavorRx is not yet significant and its future growth depends on adoption, pricing, and reimbursement - Product revenue from EndeavorRx is not yet significant and is difficult to predict, with future growth dependent on patient/clinician adoption, pricing, and reimbursement[110] Collaboration Revenue Akili has a collaboration agreement with Shionogi & Co., Ltd., and may generate future revenue from new agreements - Akili has a collaboration and licensing agreement with Shionogi & Co., Ltd., and may generate future revenue from new agreements if product candidates achieve regulatory approval[113] Cost of Product Revenue Cost of product revenue is expected to increase with commercialization and higher prescription volumes for EndeavorRx - Cost of product revenue, including pharmacy, software amortization, and hosting costs for EndeavorRx, is expected to increase with commercialization and higher prescription volumes[115] Research and Development Expenses R&D expenses are expected to increase due to investments in expanding EndeavorRx indications and developing pipeline candidates - R&D expenses are expected to increase due to investments in expanding EndeavorRx indications and developing pipeline candidates for ASD, MS, and MDD[116][118] - R&D costs are expensed as incurred and include personnel, clinical trials, regulatory submissions, external consultants, and facilities expenses[117][118] Selling, General and Administrative Expenses SG&A expenses are expected to increase due to expanded sales and marketing for EndeavorRx and costs of being a public company - SG&A expenses are expected to increase due to expanded sales and marketing for EndeavorRx, infrastructure growth, and costs associated with being a public company[119][120] Other income (expense) Other income fluctuates based on funds raised, while interest expense includes note payable interest and bond discount accretion - Other income fluctuates based on additional funds raised and expenditures, while interest expense includes note payable interest and corporate bond discount accretion[122] - Changes in the estimated fair value of earn-out liabilities related to Earn-Out Shareholders are recorded in other income (expense)[122] Income taxes Income tax expense was immaterial for 2022 and 2021 due to historical net operating losses and a full valuation allowance - Income tax expense was immaterial for 2022 and 2021 due to historical net operating losses and a full valuation allowance against deferred tax assets[123] Results of Operations This section provides a comparative analysis of financial performance for the three and nine months ended September 30, 2022 and 2021 Revenue Revenue decreased primarily due to the fulfillment of collaboration agreement obligations by the end of 2021 - Decrease in revenue primarily due to the fulfillment of all Collaboration Agreement obligations by the end of 2021, partially offset by increased product revenue[126] Revenue Performance (in millions) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $0.1 | $0.2 | $0.2 | $0.4 | | % Change (YoY) | -47% | N/A | -44% | N/A | Cost of revenue Cost of revenue increased due to the expansion of pharmacy capabilities for product delivery - Increase in product-related costs due to expansion of pharmacy capabilities, partially offset by decreased costs from the Collaboration Agreement[127] Cost of Revenue Performance (in millions) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Cost of revenues | $0.1 | $0.1 | $0.3 | $0.2 | | % Change (YoY) | 48% | N/A | 30% | N/A | Research and development R&D expenses increased significantly, driven by higher personnel costs, clinical study expenses, and earn-out liabilities - Primary drivers of increase: $5.0 million (9-month) in personnel costs, $2.1 million (9-month) in clinical studies, and increased software/consulting[128][129][131] Research and Development Expenses (in millions) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | R&D expenses | $7.6 | $4.8 | $21.2 | $12.7 | | % Change (YoY) | 59% | N/A | 67% | N/A | Selling, general and administrative SG&A expenses rose due to higher personnel costs, professional services for the Business Combination, and transaction costs - Key increases: $9.6 million (9-month) in personnel costs, $5.1 million (9-month) in professional services, and $3.0 million in transaction costs for Earn-Out Shares[132][133] Selling, General and Administrative Expenses (in millions) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | SG&A expenses | $17.0 | $13.3 | $47.3 | $28.7 | | % Change (YoY) | 27% | N/A | 65% | N/A | Other income Other income increased due to higher short-term investments and rising interest rates - Increase driven by higher short-term investments and rising interest rates[134] Other Income (in millions) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Other income | $0.3 | $0.0 | $0.4 | $0.0 | | % Change (YoY) | 3045% | N/A | 2369% | N/A | Interest expense Interest expense increased due to a higher outstanding principal on the note payable and rising variable interest rates - Increase primarily due to higher outstanding principal on the note payable and rising variable interest rates[134][135] Interest Expense (in millions) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Interest expense | $0.5 | $0.2 | $0.9 | $0.3 | | % Change (YoY) | 188% | N/A | 197% | N/A | Loss on the extinguishment of debt A $0.2 million loss on extinguishment of debt was recorded in May 2021 due to early repayment of a term loan - A $0.2 million loss on extinguishment of debt was recorded in May 2021 due to early repayment of an existing term loan[135] Change in estimated fair value of earn-out liabilities The change reflects the revaluation of earn-out liabilities for shareholders following the Business Combination - The change reflects the revaluation of earn-out liabilities for Earn-Out Shareholders after the Business Combination, recorded in other income (expense)[136] Change in Estimated Fair Value of Earn-Out Liabilities (in millions) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Change in estimated fair value of earn-out liabilities | $77.9 | $- | $77.9 | $- | Income taxes Income tax expenses were immaterial due to historical net operating losses and a full valuation allowance - Immaterial income tax expenses for 2022 and 2021 due to historical net operating losses and a full valuation allowance against deferred tax assets[138] Liquidity and Capital Resources Akili believes it has sufficient liquidity for at least one year but will require substantial additional funding for its growth strategy Cash and cash equivalents Cash and cash equivalents totaled $89.7 million as of September 30, 2022 - Cash and cash equivalents totaled $89.7 million as of September 30, 2022[144] - Future capital needs are subject to R&D spending, EndeavorRx commercialization, and other strategic business initiatives[144] Short-term investments Short-term investments were $66.7 million as of September 30, 2022, primarily in United States Treasuries - Short-term investments were $66.7 million as of September 30, 2022, primarily in United States Treasuries with maturities of 3-12 months[145] Liquidity Risks Akili expects continued net losses and substantial expenditures, requiring significant additional funding for growth - Akili expects substantial near-term expenditures and continued net losses, requiring significant additional funding for growth[146][147] - Future liquidity depends on revenue growth, third-party payer reimbursement, R&D efforts, and market acceptance of products[148] - Inability to raise additional capital on favorable terms could force delays, reductions, or termination of product development and commercialization plans[143] Cash Flows This section details the changes in cash flows from operating, investing, and financing activities Net Cash Used in Operating Activities Net cash used in operating activities increased to $62.6 million, driven by increased hiring for commercial and product pipeline activities - Net cash used in operating activities increased to $62.6 million (9M 2022) from $35.9 million (9M 2021), primarily due to increased hiring[152][154][155] - Non-cash adjustments in 2022 included $77.9 million change in estimated fair value of earn-out liabilities and $7.2 million stock-based compensation[154] Summary of Cash Flow Data (in millions) | Metric | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(62.6) | $(35.9) | | Net cash used in investing activities | $(66.6) | $(0.5) | | Net cash provided by financing activities | $142.0 | $112.7 | | Net increase in cash | $12.8 | $76.3 | Net Cash Used in Investing Activities Net cash used in investing activities increased significantly to $66.6 million due to purchases of short-term investments - Net cash used in investing activities increased to $66.6 million (9M 2022) from $0.5 million (9M 2021), mainly due to purchases of short-term investments[156] Net Cash Provided by Financing Activities Net cash provided by financing activities was $142.0 million, primarily from Business Combination proceeds and a note payable issuance - Net cash provided by financing activities was $142.0 million (9M 2022), primarily from $131.8 million Business Combination proceeds and $10.0 million note payable[157] - In 2021, financing activities provided $112.7 million, mainly from $109.7 million preferred stock issuance and $5.0 million note payable[157] Funding Requirements Akili needs substantial additional funding for growth and expects to rely on Business Combination proceeds and future financings - Akili needs substantial additional funding for growth, product development, and commercialization[143][158] - Failure to raise capital on favorable terms could lead to significant delays, reductions, or termination of development and commercialization plans[143] Corporate Bond Akili has a $5.0 million unsecured, non-interest-bearing corporate bond with Shionogi, maturing in November 2031 - Akili has a $5.0 million unsecured corporate bond with Shionogi, issued in March 2019, maturing November 2031, with no interest[159] Debt Financing and Covenants As of September 30, 2022, $15.0 million was outstanding under the SVB Term Loan, with an additional $15.0 million available - As of Sep 30, 2022, $15.0 million was outstanding under the SVB Term Loan, with $15.0 million undrawn available[160][141] - The loan's interest rate was 10.0% as of Sep 30, 2022, with interest-only payments until May 2023[160] - Akili was in compliance with all SVB Term Loan covenants as of September 30, 2022[162] Contractual Obligations Akili has non-cancelable operating leases for office space in Boston and Larkspur, California - Akili has non-cancelable operating leases for office space in Boston (expires Dec 2023) and Larkspur, CA (expires Nov 2026)[164] Off-Balance Sheet Arrangements Akili had no off-balance sheet arrangements during the periods presented - Akili had no off-balance sheet arrangements with unconsolidated organizations or financial partnerships during the periods presented[166] Emerging Growth Company Status (JOBS Act) Akili qualifies as an "emerging growth company" and intends to use the extended transition period for new accounting standards - Akili qualifies as an "emerging growth company" (EGC) under the JOBS Act[167] - Akili intends to use the extended transition period for new accounting standards and reduced regulatory requirements[167][168] Recent Accounting Pronouncements Details on recent accounting pronouncements and their potential impact can be found in Note 2 of the financial statements - Refer to Note 2 for details on recent accounting pronouncements, their adoption timing, and potential impact on financial statements[169] Summary of Critical Accounting Policies and Significant Judgements and Estimates This section details critical accounting policies requiring significant management judgment, including earn-out liabilities and revenue recognition Earn-Out Liabilities Akili classifies and values Earn-Out Liabilities using a Monte Carlo simulation, with fair value changes impacting operating results - Earn-Out Liabilities are classified as financial instruments or compensatory awards and valued using a Monte Carlo simulation with Level 3 inputs[173] - Changes in fair value are recorded in other income (expense) or as stock compensation, potentially causing volatility in operating results[173] Revenue Recognition Akili recognizes revenue under ASC Topic 606, with EndeavorRx subscription revenue recognized ratably over the subscription period - Revenue is recognized under ASC Topic 606 when customers obtain control of promised goods/services[174] - Product revenue from EndeavorRx subscriptions is recognized ratably over the subscription period as a single stand-ready performance obligation[175][177] Stock-Based Compensation Akili measures stock options at fair value on the grant date and recognizes compensation expense over the vesting period - Stock options are measured at fair value on grant date, with compensation expense recognized over the vesting period, typically using the straight-line method[178] - The Black-Scholes option-pricing model is used to estimate the fair value of each stock option grant[178] Legacy Akili Common Stock Valuations Prior to becoming public, Legacy Akili's common stock fair value was determined by its board using third-party valuations - Prior to public listing, Legacy Akili's common stock fair value was determined by the board, considering factors like financial position and lack of marketability[179] - Third-party valuations used Probability Weighted Expected Return Method (PWERM) and Option Pricing Method (OPM) to estimate enterprise value[180] Item 3. Quantitative and Qualitative Disclosures About Market Risk Akili is exposed to market risks from interest rate fluctuations, which it manages through regular operating and financing activities - Akili is exposed to market risks from interest rate fluctuations that may adversely affect operations and financial condition[183] - Risks are minimized through regular operating and financing activities[183] Item 4. Controls and Procedures This section addresses Akili's disclosure controls and procedures, their evaluation, and changes in internal control over financial reporting Disclosure Controls and Procedures Disclosure controls are designed to ensure timely recording, processing, and reporting of information for SEC filings - Disclosure controls ensure timely recording, processing, summarizing, and reporting of information for SEC filings to support management's disclosure decisions[184] Evaluation of Disclosure Controls and Procedures As of September 30, 2022, management concluded that the company's disclosure controls and procedures were effective - CEO and CFO concluded that disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2022[185] Changes in Internal Control over Financial Reporting No material changes were made to Akili's internal control over financial reporting during the quarter ended September 30, 2022 - No material changes to internal control over financial reporting occurred during the quarter ended September 30, 2022[186] Inherent Limitations on Effectiveness of Controls Management acknowledges that control systems provide only reasonable, not absolute, assurance against errors and fraud - Control systems provide only reasonable assurance, not absolute, due to inherent limitations such as faulty judgments, human error, or management override[187] PART II. OTHER INFORMATION This part covers legal proceedings, risk factors, and other required corporate disclosures Item 1. Legal Proceedings The company reports no current legal proceedings expected to have a material adverse effect on its business or financials - Akili does not believe current legal proceedings will have a material adverse effect on its business, financial position, results of operations, or cash flows[189] Item 1A. Risk Factors This section outlines significant risks related to the company's business, products, regulations, and financial position Risks Related to our Business and Industry Akili faces risks including significant losses, challenges in achieving market acceptance, intense competition, and managing growth - Akili has a history of significant losses ($223.5 million accumulated deficit as of Sep 30, 2022) and expects increased expenses and continued losses[191] - Market acceptance and adoption of PDTs by patients and physicians is crucial but uncertain, influenced by clinical evidence, regulatory status, and competition[192][193] - The market for prescription digital therapeutics is new, rapidly evolving, and competitive, making demand forecasting difficult[195][197] Risks Relating to our Products and Product Candidates Risks include ongoing regulatory obligations, potential clinical trial failures, and reliance on third-party infrastructure - Ongoing regulatory obligations for EndeavorRx and future products may result in significant additional expenses and potential market withdrawal[230] - Clinical trials may fail, suffer delays, or be impacted by patient enrollment difficulties, hindering marketing authorization[200][202] - Reliance on Apple App Store, Google Play Store, and AWS for product access and hosting poses risks of disruption or service termination[234][235][237] Risks Related to our Regulatory Compliance and Legal Matters Akili operates in a highly regulated industry, facing risks from complex laws where non-compliance could lead to significant penalties - Akili is subject to extensive and complex U.S. and foreign regulations (FDA, anti-kickback, data privacy), with non-compliance risking enforcement actions and penalties[252][253][254] - The evolving regulatory framework for digital health products could increase competition or create barriers to new product development[257] - Misuse or off-label promotion of products could harm reputation, lead to product liability suits, or result in costly investigations and sanctions[246] Risks Related to our Intellectual Property and Technology Akili's success depends on protecting its intellectual property, but it faces risks of infringement claims and changes in patent law - Akili's commercial success depends on adequately protecting and enforcing its intellectual property, which is expensive and uncertain[293] - Risks include potential infringement accusations from third parties, which could lead to costly litigation and divert management attention[296] - Failure to comply with open-source software licenses could lead to litigation or requirements to release proprietary source code[302] Risks Related to our Financial Reporting and Position Akili requires substantial additional funding, faces fluctuating operating results, and must maintain effective internal controls - Akili needs substantial additional funding for growth, with uncertainty regarding availability on acceptable terms[310][312] - Quarterly and annual operating results may fluctuate significantly due to clinical trial outcomes, market acceptance, and economic conditions[313][315] - Failure to maintain effective internal control over financial reporting could lead to inaccurate financial reports or fraud[316] Risks Related to the Business Combination Akili incurred significant costs from the Business Combination and faces disadvantages under SEC rules as a former shell company - Akili incurred significant nonrecurring transaction and transition costs from the Business Combination and operating as a public company[322] - As a former shell company, Akili faces disadvantages under SEC rules, including limitations on using Form S-3[323] - There is a risk of exposure to unknown or contingent liabilities from the Business Combination[324] Risks Related to the Consummation of the Domestication Delaware law's anti-takeover provisions and exclusive forum provisions in the Bylaws could limit stockholders' actions - Delaware law's anti-takeover provisions could delay or discourage favorable takeover attempts[329][331] - Exclusive forum provisions in the Bylaws for certain lawsuits may discourage actions against directors and officers[332] Risks Related to our Common Stock The market price of Akili's common stock could be volatile, and the company does not intend to pay dividends - The market price of Akili's common stock could be volatile due to industry changes, operating performance, and general economic conditions[333][335] - Akili does not intend to pay dividends on its common stock in the foreseeable future[336] - A recent drop in market values for growth-oriented companies poses potential downward pressure on Akili's stock price[338] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Information regarding unregistered sales of equity securities has been previously disclosed in a Form 8-K filing - Information on unregistered sales of equity securities and use of proceeds was previously disclosed in the Current Report on Form 8-K filed August 23, 2022[339] Item 3. Defaults Upon Senior Securities Akili reported no defaults upon senior securities - No defaults upon senior securities were reported[339] Item 4. Mine Safety Disclosures This item is not applicable to Akili - Mine Safety Disclosures are not applicable to Akili[339] Item 5. Other Information Akili reported no other information for this item - No other information was reported for this item[339] Item 6. Exhibits This section lists all exhibits filed as part of the Quarterly Report on Form 10-Q - The section lists all exhibits filed or furnished with the Quarterly Report on Form 10-Q, including various agreements, certificates, and certifications[341][342][343]