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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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 March 31, 2024

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: 001-40560

 

ProKidney Corp.

(Exact Name of Registrant as Specified in its Charter)

 

 

Cayman Islands

98-1586514

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

2000 Frontis Plaza Blvd., Suite 250

Winston-Salem, NC

27103

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (336) 999-7019

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Class A ordinary shares, $0.0001 par value per share

 

PROK

 

The Nasdaq Stock 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, 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

 

Class of Stock

 

Shares Outstanding as of May 10, 2024

Class A ordinary shares, par value $0.0001 per share

 

63,923,230

Class B ordinary shares, par value $0.0001 per share

 

167,774,809

`

 


 

Table of Contents

 

Page

PART I.

Financial Information (Unaudited)

2

Item 1.

Financial Statements

2

Condensed Consolidated Balance Sheets

2

Condensed Consolidated Statements of Operations

3

 

Condensed Consolidated Statements of Comprehensive Loss

4

 

Condensed Consolidated Statements of Changes in Redeemable Noncontrolling Interest and Shareholders’ Deficit

5

Condensed Consolidated Statements of Cash Flows

7

Notes to Unaudited Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

Item 4.

Controls and Procedures

27

PART II.

Other Information

28

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

Item 3.

Defaults Upon Senior Securities

28

Item 4.

Mine Safety Disclosures

28

Item 5.

Other Information

28

Item 6.

Exhibits

28

Signatures

30

 

i


 

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

ProKidney Corp.

Condensed Consolidated Balance Sheets

(in thousands, except share data)

 

 

March 31, 2024

 

 

December 31, 2023

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents

$

84,389

 

 

$

60,649

 

Marketable securities

 

244,609

 

 

 

302,301

 

Interest receivable

 

1,903

 

 

 

1,375

 

Prepaid assets

 

3,106

 

 

 

3,399

 

Prepaid clinical

 

6,151

 

 

 

6,413

 

Other current assets

 

 

 

 

9

 

Total current assets

 

340,158

 

 

 

374,146

 

 

 

 

 

 

 

Fixed assets, net

 

41,937

 

 

 

42,143

 

Right of use assets, net

 

5,668

 

 

 

4,263

 

Total assets

$

387,763

 

 

$

420,552

 

 

 

 

 

 

 

Liabilities and Shareholders' Deficit

 

 

 

 

 

Accounts payable

$

3,376

 

 

$

5,098

 

Lease liabilities

 

1,092

 

 

 

803

 

Accrued expenses and other

 

13,263

 

 

 

17,665

 

Income taxes payable

 

1,570

 

 

 

1,472

 

Total current liabilities

 

19,301

 

 

 

25,038

 

 

 

 

 

 

 

Income tax payable, net of current portion

 

568

 

 

 

568

 

Lease liabilities, net of current portion

 

4,859

 

 

 

3,610

 

Total liabilities

 

24,728

 

 

 

29,216

 

Commitments and contingencies

 

 

 

 

 

Redeemable noncontrolling interest

 

1,459,097

 

 

 

1,494,732

 

 

 

 

 

 

 

Shareholders’ deficit

 

 

 

 

 

Class A ordinary shares, $0.0001 par value; 500,000,000 shares
   authorized;
61,621,330 and 59,880,347 issued and outstanding as
   of March 31, 2024 and December 31, 2023, respectively

 

6

 

 

 

6

 

Class B ordinary shares, $0.0001 par value; 500,000,000 shares
   authorized;
167,723,553 and 168,297,916 issued and outstanding as
   of March 31, 2024 and December 31, 2023, respectively

 

17

 

 

 

17

 

Additional paid-in capital

 

53,114

 

 

 

36,114

 

Accumulated other comprehensive (loss) gain

 

(44

)

 

 

130

 

Accumulated deficit

 

(1,149,155

)

 

 

(1,139,663

)

Total shareholders' deficit

 

(1,096,062

)

 

 

(1,103,396

)

Total liabilities and shareholders' deficit

$

387,763

 

 

$

420,552

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

2


 

ProKidney Corp.

Condensed Consolidated Statements of Operations - Unaudited

(in thousands, except for share and per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Operating expenses

 

 

 

 

 

 

Research and development

 

$

27,233

 

 

$

25,617

 

General and administrative

 

 

12,843

 

 

 

15,259

 

Total operating expenses

 

 

40,076

 

 

 

40,876

 

Operating loss

 

 

(40,076

)

 

 

(40,876

)

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

Interest income

 

 

4,843

 

 

 

5,297

 

Interest expense

 

 

(2

)

 

 

(3

)

Net loss before income taxes

 

 

(35,235

)

 

 

(35,582

)

Income tax expense

 

 

98

 

 

 

1,327

 

Net loss before noncontrolling
   interest

 

 

(35,333

)

 

 

(36,909

)

Net loss attributable to noncontrolling interest

 

 

(25,841

)

 

 

(27,244

)

Net loss available to Class A ordinary shareholders

 

$

(9,492

)

 

$

(9,665

)

 

 

 

 

 

 

 

Weighted average Class A ordinary shares outstanding:

 

 

 

 

 

 

Basic and diluted

 

 

60,951,721

 

 

 

61,540,231

 

Net loss per share attributable to Class A ordinary shares:

 

 

 

 

 

 

Basic and diluted

 

$

(0.16

)

 

$

(0.16

)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3


 

ProKidney Corp.

Condensed Consolidated Statements of Comprehensive Loss - Unaudited

(in thousands, except for share and per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Net loss including noncontrolling interest

 

$

(35,333

)

 

$

(36,909

)

Other comprehensive income:

 

 

 

 

 

 

Unrealized loss on marketable securities

 

 

(647

)

 

 

(72

)

Other comprehensive income

 

 

(647

)

 

 

(72

)

Total comprehensive loss including noncontrolling interest

 

 

(35,980

)

 

 

(36,981

)

Less: Total comprehensive loss attributable to noncontrolling interest

 

 

(26,314

)

 

 

(27,297

)

Total comprehensive loss attributable to Class A ordinary shareholders

 

$

(9,666

)

 

$

(9,684

)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4


 

ProKidney Corp.

Condensed Consolidated Statements of Changes in Redeemable Noncontrolling Interest and Shareholders’ Deficit - Unaudited

(in thousands, except for share and per share data)

 

 

 

For the Three Months Ended March 31, 2024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Ordinary Shares

 

 

Class B Ordinary Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable Noncontrolling Interest

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Additional Paid-in Capital

 

 

Accumulated Other Comprehensive Loss

 

 

Accumulated Deficit

 

 

Total Shareholders' Deficit

 

Balance as of December 31, 2023

 

$

1,494,732

 

 

 

 

59,880,347

 

 

$

6

 

 

 

168,297,916

 

 

$

17

 

 

$

36,114

 

 

$

130

 

 

$

(1,139,663

)

 

$

(1,103,396

)

Equity-based compensation

 

 

1,640

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,039

 

 

 

 

 

 

 

 

 

6,039

 

Issuance of Class A ordinary shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of Class B restricted stock rights

 

 

 

 

 

 

 

 

 

 

 

 

1,166,620

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exchange of Class B ordinary shares for Class A ordinary shares

 

 

(2,289

)

 

 

 

1,740,983

 

 

 

 

 

 

(1,740,983

)

 

 

 

 

 

2,289

 

 

 

 

 

 

 

 

 

2,289

 

Repurchase of Class A ordinary shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of equity transactions on redeemable noncontrolling interest

 

 

(8,672

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,672

 

 

 

 

 

 

 

 

 

8,672

 

Unrealized loss on marketable securities

 

 

(473

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(174

)

 

 

 

 

 

(174

)

Net loss

 

 

(25,841

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,492

)

 

 

(9,492

)

Change in redemption value of noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2024

 

$

1,459,097

 

 

 

 

61,621,330

 

 

$

6

 

 

 

167,723,553

 

 

$

17

 

 

$

53,114

 

 

$

(44

)

 

$

(1,149,155

)

 

$

(1,096,062

)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

5


 

ProKidney Corp.

Condensed Consolidated Statements of Changes in Redeemable Noncontrolling Interest and Shareholders’ Deficit - Unaudited

(in thousands, except for share and per share data)

 

 

 

For The Three Months Ended March 31, 2023

 

 

 

 

 

 

Class A Ordinary Shares

 

 

Class B Ordinary Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable Noncontrolling Interest

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Additional Paid-in Capital

 

 

Accumulated Other Comprehensive Loss

 

 

Accumulated Deficit

 

 

Total Shareholders' Deficit

 

Balance as of January 1, 2023

 

$

1,601,555

 

 

 

61,540,231

 

 

$

6

 

 

 

171,578,320

 

 

$

18

 

 

$

7,476

 

 

$

 

 

$

(1,104,116

)

 

$

(1,096,616

)

Equity-based compensation

 

 

2,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,563

 

 

 

 

 

 

 

 

 

10,563

 

Vesting of Class B restricted stock rights

 

 

 

 

 

 

 

 

 

 

 

1,866,541

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of equity transactions on redeemable noncontrolling interest

 

 

(3,753

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,753

 

 

 

 

 

 

 

 

 

3,753

 

Unrealized loss on marketable securities

 

 

(53

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(19

)

 

 

 

 

 

(19

)

Net loss

 

 

(27,244

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,665

)

 

 

(9,665

)

Change in redemption value of noncontrolling interest

 

 

509,526

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(509,526

)

 

 

(509,526

)

Balance as of March 31, 2023

 

$

2,082,488

 

 

 

61,540,231

 

 

$

6

 

 

 

173,444,861

 

 

$

18

 

 

$

21,792

 

 

$

(19

)

 

$

(1,623,307

)

 

$

(1,601,510

)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

6


 

ProKidney Corp.

Condensed Consolidated Statements of Cash Flows – Unaudited

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Cash flows from operating activities

 

 

 

 

 

 

Net loss before noncontrolling interest

 

$

(35,333

)

 

$

(36,909

)

Adjustments to reconcile net loss before noncontrolling interest to net cash flows used
   in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

1,102

 

 

 

832

 

Equity-based compensation

 

 

7,679

 

 

 

13,020

 

Gain on marketable securities, net

 

 

(2,313

)

 

 

(492

)

Loss on disposal of equipment

 

 

28

 

 

 

3

 

Changes in operating assets and liabilities

 

 

 

 

 

 

Interest receivable

 

 

(529

)

 

 

(5,476

)

Prepaid and other assets

 

 

564

 

 

 

3,483

 

Accounts payable and accrued expenses

 

 

(5,942

)

 

 

(601

)

Income taxes payable

 

 

98

 

 

 

148

 

Net cash flows used in operating activities

 

 

(34,646

)

 

 

(25,992

)

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

Purchases of marketable securities

 

 

(55,415

)

 

 

(198,038

)

Sales and maturities of marketable securities

 

 

114,774

 

 

 

6,412

 

Purchase of equipment and facility expansion

 

 

(960

)

 

 

(986

)

Net cash flows provided by (used in) investing activities

 

 

58,399

 

 

 

(192,612

)

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

Payments on finance leases

 

 

(13

)

 

 

(13

)

Net cash flows used in financing activities

 

 

(13

)

 

 

(13

)

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

23,740

 

 

 

(218,617

)

Cash, beginning of period

 

 

60,649

 

 

 

490,252

 

Cash, end of period

 

$

84,389

 

 

$

271,635

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

Right of use assets obtained in exchange for lease obligations

 

$

1,674

 

 

$

714

 

Exchange of Class B ordinary shares

 

$

2,289

 

 

$

 

Impact of equity transactions and compensation on redeemable noncontrolling interest

 

$

7,507

 

 

$

1,352

 

Change in redemption value of noncontrolling interest

 

$

 

 

$

509,526

 

Equipment and facility expansion included in accounts payable and
   accrued expenses

 

$

305

 

 

$

744

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

7


 

ProKidney Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 1: Description of Business and Basis of Presentation

 

Description of Business

ProKidney Corp. (the “Company” or “ProKidney”) was originally incorporated as Social Capital Suvretta Holdings Corp. III (“SCS”). SCS was a blank check company incorporated as a Cayman Islands exempted company on February 25, 2021. SCS was incorporated for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses.

On January 18, 2022, SCS executed a definitive business combination agreement (the “Business Combination Agreement”), with ProKidney LP (“PKLP”), a limited partnership under the laws and regulations of Ireland. Pursuant to the terms of the Business Combination Agreement, PKLP became a subsidiary of SCS and was organized in an umbrella partnership corporation (“Up-C”) structure, which would provide potential future tax benefits for SCS when the equity holders ultimately exchanged their pass-through interests for Class A ordinary shares. The business combination between SCS and PKLP (the “Business Combination”) closed (the “Closing”) on July 11, 2022 (the “Closing Date”). Upon consummation of the transaction, SCS changed its name to ProKidney Corp.

The Business Combination was accounted for as a reverse recapitalization transaction between entities under common control, through which PKLP was considered the accounting acquiror and predecessor entity. The Business Combination was reflected as the equivalent of PKLP issuing stock for the net assets of SCS accompanied by a recapitalization with no goodwill or intangible assets recognized.

ProKidney Corp., through its operating subsidiaries, ProKidney, which is incorporated under the Cayman Islands Companies Act (as amended) as an exempted company (“ProKidney-KY”) and ProKidney LLC, a limited liability company under the laws of Delaware (“ProKidney-US”) is focused on the development of rilparencel, which has the potential to preserve kidney function in patients with chronic kidney disease or delay or eliminate the need for dialysis and organ transplantation.

Principles of Consolidation

ProKidney is a holding company, and its principal asset is a controlling equity interest in PKLP and its wholly-owned operating subsidiaries ProKidney-KY and ProKidney-US. The Company has determined that PKLP is a variable-interest entity for accounting purposes and that ProKidney is the primary beneficiary of PKLP because (through its managing member interest in PKLP and the fact that the senior management of ProKidney is also the senior management of PKLP) it has the power and benefits to direct all of the activities of PKLP, which include those that most significantly impact PKLP’s economic performance. The Company has therefore consolidated PKLP’s results pursuant to Accounting Standards Codification Topic 810, “Consolidation” in its Condensed Consolidated Financial Statements. As of March 31, 2024, various holders own non-voting interests in PKLP, representing a 73.1% economic interest in PKLP, effectively restricting ProKidney’s interest to 26.9% of PKLP’s economic results, subject to increase in the future, should ProKidney purchase additional non-voting common units (“PKLP Units”) of PKLP, or should the holders of PKLP Units decide to exchange such units (together with shares of Class B ordinary shares) for Class A ordinary shares (or cash) pursuant to the Exchange Agreement (as defined in Note 6). The Company will not be required to provide financial or other support for PKLP. However, ProKidney will control its business and other activities through its managing member interest in PKLP, and its management is the management of PKLP. Nevertheless, because ProKidney will have no material assets other than its interests in PKLP and its subsidiaries, any financial difficulties at PKLP could result in ProKidney recognizing a loss.

All intercompany transactions and balances have been eliminated.


.

 

Note 2: Significant Accounting Policies

Unaudited Interim Financial Statements

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying Condensed Consolidated Balance Sheet as of March 31, 2024, Condensed Consolidated Statements of Operations for the three months ended March 31, 2024 and 2023, Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2024 and 2023, Condensed Consolidated Statement of Changes in

8


 

Redeemable Noncontrolling Interest and Shareholders’ Deficit for the three months ended March 31, 2024 and 2023 and Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2024 and 2023 are unaudited. These unaudited financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of March 31, 2024, the results of operations for the three months ended March 31, 2024 and 2023 and cash flows for the three months ended March 31, 2024 and 2023. Certain prior year amounts have been reclassified to conform to the current year presentation. The December 31, 2023 Condensed Consolidated Balance Sheet included herein was derived from the audited financial statements but does not include all disclosures or notes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the audited financial statements and the accompanying notes for the year ended December 31, 2023, contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 22, 2024.

Any reference in these notes to applicable guidance is meant to refer to GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”). These unaudited consolidated financial statements are presented in U.S. Dollars.

Interim results are not necessarily indicative of results for an entire year.

Use of Estimates

The preparation of unaudited condensed consolidated financial statements, in accordance with GAAP, requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the condensed consolidated financial statements, and the amounts of expenses during the reported periods. Certain estimates in these condensed consolidated financial statements have been made in connection with the calculation of research and development expenses, equity-based compensation expense and the provision for or benefit from income taxes. The Company bases its estimates on historical experience and various other assumptions, including in certain circumstances future projections, which management believes to be reasonable under the circumstances. Actual results could differ from those estimates. Changes in estimates are reflected in reported results in the period in which they become known.

Cash Equivalents and Marketable Securities

The Company considers all highly liquid investments with an original maturity of 90 days or less on the date of purchase to be cash equivalents. The carrying value of cash and cash equivalents approximates fair value due to the short-term nature of these items.

The Company’s investments in marketable debt securities have been classified and accounted for as available-for-sale. The Company classifies its marketable debt securities as short-term due to its availability for use in its current operations. The cost of securities sold is determined using the specific identification method.

The Company considers all available evidence to evaluate if a credit loss exists, and if so, recognizes an allowance for credit loss.

Concentrations of Credit Risk

Cash and equivalents are the primary financial instruments held by the Company that are potentially subject to concentrations of credit risk. The Company’s cash and equivalents are deposited in accounts at large financial institutions, and such amounts may exceed federally insured limits.

9


 

Accrued Expenses

Accrued expenses as presented in the Condensed Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023 consisted of the following (in thousands):

 

 

March 31, 2024

 

 

December 31, 2023

 

Compensation

$

3,405

 

 

$

5,237

 

Severance

 

1,690

 

 

 

2,283

 

Clinical study related costs

 

597

 

 

 

1,658

 

Facility related costs

 

387

 

 

 

693

 

Accrued legal costs

 

370

 

 

 

1,015

 

Manufacturing improvement costs

 

4,365

 

 

 

4,365

 

Accrued consulting and professional fees

 

505

 

 

 

878

 

Other accrued expenses

 

1,944

 

 

 

1,536

 

Total accrued expenses and other

$

13,263

 

 

$

17,665

 

 

Research and Development Costs

Research and development costs are expensed as incurred. Research and development expenses are comprised of costs incurred in performing research and development activities, including salaries, benefits, third party license fees, and external costs of outside vendors engaged to conduct manufacturing and preclinical development activities and clinical trials.

The Company records accruals based on estimates of services received, efforts expended, and amounts owed pursuant to contracts with numerous contract research organizations. In the normal course of business, the Company contracts with third parties to perform various clinical study activities in the ongoing development of potential products. The financial terms of these agreements are subject to negotiation and variation from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events and the completion of portions of the clinical study or similar conditions. The objective of the Company’s accrual policy is to match the recording of expenses in its financial statements to the actual services received and efforts expended. As such, expense accruals related to clinical studies are recognized based on the company’s estimate of the degree of completion of the event or events specified in the specific clinical study.

The Company records nonrefundable advance payments it makes for future research and development activities as prepaid expenses. Prepaid expenses are recognized as expense in the Condensed Consolidated Statement of Operations and Comprehensive Loss as the Company receives the related goods or services

Costs incurred in obtaining technology licenses are charged to research and development expense as purchased in-process research and development if the technology licensed has not reached technological feasibility and has no alternative future use.

Fixed Assets

Fixed assets are stated at cost, less accumulated depreciation. Generally, expenditures for maintenance and repairs are charged to expense and major improvements or replacements are capitalized. The Company computes depreciation and amortization using the straight-line method over the estimated useful life of the asset. Leasehold improvements are amortized over the lesser of, the life of the lease or the estimated useful life of the leasehold improvement. The estimated useful lives are as follows:

 

Buildings

25-30 years

Computer equipment and software

3-5 years

Furniture and equipment

5-7 years

Leasehold improvements

remainder of lease term

 

10


 

Fixed assets consisted of the following (in thousands):

 

 

March 31, 2024

 

 

December 31, 2023

 

Land

$

3,067

 

 

$

3,067

 

Buildings

 

22,490

 

 

 

22,490

 

Leasehold improvements

 

10,823

 

 

 

10,950

 

Furniture and equipment

 

4,011

 

 

 

3,690

 

Computer equipment and software

 

904

 

 

 

847

 

Construction in progress

 

9,077

 

 

 

8,741

 

Less: accumulated depreciation

 

(8,435

)

 

 

(7,642

)

Total fixed assets, net

$

41,937

 

 

$

42,143

 

 

Depreciation expense for the three months ended March 31, 2024 and 2023 was $832,000 and $626,000, respectively.

Impairment of Long-Lived Assets

Long-lived assets such as fixed assets and intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. No impairment charges have been recorded for the three months ended March 31, 2024 and 2023.

Income Taxes

The Company uses the liability method in accounting for income taxes as required by ASC Topic 740 — Income Taxes, under which deferred tax assets and liabilities are recorded for the future tax consequences attributable to the differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, available taxes in the carryback periods, projected future taxable income and tax planning strategies in making this assessment. Accordingly, the Company has provided a full valuation allowance to offset the net deferred tax assets at March 31, 2024 and December 31, 2023.

Interest and penalties related to income taxes are included in the expense for income taxes in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss. The Company has not incurred any significant interest or penalties related to income taxes in any of the periods presented.

 

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three‑level fair value hierarchy that prioritizes the inputs used to measure fair value is described below. The three levels of inputs used to measure fair value are as follows:

 

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2 – Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable through correlation with market data
Level 3 – Unobservable inputs that are supported by little or no market data, which require the reporting entity to develop its own assumptions

For assets and liabilities recorded at fair value, it is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy. Fair value measurements for assets and liabilities where there exists limited or no observable market data are based primarily upon estimates and are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, fair value measurements cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique and changes in the

11


 

underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the calculated current or future fair values. The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.

The carrying values of cash equivalents, accounts payable, and accrued liabilities approximate fair value due to the short‑term nature of these instruments.

Leases

The Company determines if an arrangement is a lease at inception. Balances recognized related to the Company’s operating and finance leases are included in right-of-use assets, net and lease liabilities in the Condensed Consolidated Balance Sheets. Right of use assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Lease terms may include options to extend or terminate the lease if it is reasonably certain that the Company will exercise the option. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. The right of use asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The Company has elected a practical expedient to not separate its lease and non-lease components and instead account for them as a single lease component. Leases with a term of 12 months or less are not recorded on the balance sheet.

Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Lease payments for short-term leases are recorded to operating expense on a straight-line basis and variable lease payments are recorded in the period in which the obligation for those payments is incurred.

Contingent Liabilities

The Company records reserves for contingent liabilities when it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements, and the amount of the loss can be reasonably estimated.

Equity-Based Compensation

Compensation expense for equity-based compensation awards issued is based on the fair value of the award at the date of grant, and compensation expense is recognized for time-vested awards earned over the service period on a straight-line basis. The Company recognizes equity-based compensation for options containing performance-based vesting conditions over the requisite service period if it is probable that the performance conditions will be satisfied. The Company records forfeitures of equity-based compensation awards as they occur.

The grant date fair value of time and performance-based stock option awards is estimated using the Black-Scholes option pricing formula. Due to the lack of sufficient historical trading information with respect to its own shares, the Company estimates expected volatility based on a portfolio of selected stocks of companies believed to have market and economic characteristics similar to its own. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. Due to a lack of historical exercise data, the Company estimates the expected life of its outstanding stock options using the simplified method specified under Staff Accounting Bulletin Topic 14.D.2.

Segments

The Company operates in only one segment.

Recently Issued Accounting Pronouncements

In March 2024, the Financial Accounting Standards Board (“FASB”) issued a new standard that provides additional guidance for determining whether profits interests and similar awards should be accounted for in accordance with Topic 718, Compensation - Stock Compensation, of the Accounting Standards Codification. The standard will be effective for the Company beginning with our annual reporting for fiscal year 2025 and interim periods in that year, with early adoption permitted. We are currently evaluating the impact of this standard.

12


 

Note 3: Investments

Cash equivalents and marketable securities are measured at fair value and within Level 2 in the fair value hierarchy, because we use quoted market prices to the extent available or alternative pricing sources and models utilizing market observable inputs to determine fair value.

The following tables summarize our cash equivalents and marketable securities measured at fair value on a recurring basis as of March 31, 2024 (in thousands):

 

 

Fair Value Hierarchy

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Fair Value

 

 

Cash Equivalents

 

 

Marketable Securities

 

Money market funds

Level 2

 

$

5,011

 

 

$

 

 

$

 

 

$

5,011

 

 

$

5,011

 

 

$

 

Time deposits

Level 2

 

 

26,289

 

 

 

38

 

 

 

(1

)

 

 

26,326

 

 

 

 

 

 

26,326

 

Commercial paper

Level 2

 

 

63,624

 

 

 

62

 

 

 

(322

)

 

 

63,364

 

 

 

1,289

 

 

 

62,075

 

Asset backed securities

Level 2

 

 

1,134

 

 

 

 

 

 

 

 

 

1,134

 

 

 

 

 

 

1,134

 

Government bonds

Level 2

 

 

48,368

 

 

 

6

 

 

 

(25

)

 

 

48,349

 

 

 

21,828

 

 

 

26,521

 

Corporate debt securities

Level 2

 

 

128,769

 

 

 

147

 

 

 

(55

)

 

 

128,861

 

 

 

308

 

 

 

128,553

 

Total

 

 

$

273,195

 

 

$

253

 

 

$

(403

)

 

$

273,045

 

 

$

28,436

 

 

$

244,609

 

The following table shows the fair value of the Company’s cash equivalents and marketable securities, by contractual maturity, as of March 31, 2024 (in thousands):

 

 

March 31, 2024

 

Due in 1 year or less

$

253,599

 

Due in 1 year through 5 years

 

19,446

 

Total

$

273,045

 

 

The following table shows fair values and gross unrealized losses recorded to accumulated other comprehensive income, aggregated by category and the length of time that individual securities have been in a continuous loss position as of March 31, 2024 (in thousands):

 

 

Less than 12 months

 

 

12 Months or Greater

 

 

Total

 

 

Fair Value

 

 

Unrealized Loss

 

 

Fair Value

 

 

Unrealized Loss

 

 

Fair Value

 

 

Unrealized Loss

 

Time deposits

$

2,496

 

 

$

(1

)

 

$

 

 

$

 

 

$

2,496

 

 

$

(1

)

Commercial paper

 

17,714

 

 

 

(322

)

 

 

 

 

 

 

 

 

17,714

 

 

 

(322

)

Asset backed securities

 

664

 

 

 

 

 

 

 

 

 

 

 

 

664

 

 

 

 

Government bonds

 

7,884

 

 

 

(25

)

 

 

 

 

 

 

 

 

7,884

 

 

 

(25

)

Corporate debt securities

 

34,418

 

 

 

(55

)

 

 

 

 

 

 

 

 

34,418

 

 

 

(55

)

Total

$

63,176

 

 

$

(403

)

 

$

 

 

$

 

 

$

63,176

 

 

$

(403

)

 

The Company holds debt securities of companies with high credit quality and has determined that there was no material change in the credit risk of its debt securities during the three months ended March 31, 2024. As such, the Company has not recognized an allowance for credit losses related to our marketable debt securities during the three months ended March 31, 2024 and 2023.

Note 4: Income Taxes

ProKidney is considered to be an exempted Cayman Islands company and is presently not subject to income taxes or income tax filing requirements in the Cayman Islands or the United States.

The Company’s subsidiary, PKLP, is organized as a limited partnership and is classified as a partnership for U.S. income tax purposes, and as such, only records a provision for federal and state income taxes on its subsidiaries organized as C corporations or which have elected to be treated as corporations for U.S. federal income tax purposes.

The Company’s subsidiary, ProKidney-US, is treated as a C corporation, and therefore a provision for federal and state taxes has been recorded. The difference between the Company’s effective tax rates and the U.S. statutory rate of 21% is primarily attributable to PKLP and ProKidney-KY being treated as partnerships for income tax purposes.

The Company’s subsidiary, ProKidney-KY, has been granted, by the Government in Council of the Cayman Islands, tax concessions under an undertaking certificate exempting it from any tax levied on profits, income, gains or appreciations in relation to

13


 

its operations or in the nature of estate duty or inheritance tax for a period of twenty years from January 20, 2016. ProKidney-KY elected to be treated as an entity disregarded from its owner for U.S. tax purposes, and as a result, it has not recorded an income tax provision.

As discussed in Note 6, the Company is party to a tax receivable agreement with a related party which provides for the payment by the Company to holders of PKLP prior to the Closing (“Closing ProKidney Unitholders”) of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that the Company actually realizes (or, in some circumstances, the Company is deemed to realize) as a result of certain transactions. As no transactions have occurred which would trigger a liability under this agreement, the Company has not recognized any liability related to this agreement as of March 31, 2024.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, available taxes in the carryback periods, projected future taxable income and tax planning strategies in making this assessment.

There were no net unrecognized tax benefits as of March 31, 2024 which, if recognized, would affect our effective tax rate. We expect none of the gross unrecognized tax benefits will decrease within the next year.

There were no significant changes in the Company’s uncertain tax positions during the three months ended March 31, 2024.

Note 5: Leases

The Company has operating leases for real estate (primarily its operating facilities) and certain equipment with various expiration dates. The Company also has one finance lease for certain equipment. Rent expense was $422,000 and $212,000, for the three months ended March 31, 2024 and 2023, respectively. Cash paid for operating leases during the three months ended March 31, 2024, was $279,000.

The following table summarizes the classification of operating and finance lease assets and obligations in the Company's Condensed Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023 (in thousands):

 

 

March 31, 2024

 

 

December 31, 2023

 

Operating leases:

 

 

 

 

 

 

Right of use assets

 

$

5,534

 

 

$

4,116

 

 

 

 

 

 

 

 

Operating lease liabilities, current

 

$

1,039

 

 

$

751

 

Operating lease liabilities, noncurrent

 

 

4,769

 

 

 

3,506

 

Total operating lease liabilities

 

$

5,808

 

 

$

4,257

 

 

 

 

 

 

 

 

Finance leases:

 

 

 

 

 

 

Right of use assets

 

$

134

 

 

$

147

 

 

 

 

 

 

 

 

Finance lease liabilities, current

 

$

53

 

 

$

52

 

Finance lease liabilities, noncurrent

 

 

90

 

 

 

104

 

Total finance lease liabilities

 

$

143

 

 

$

156

 

 

Maturities of lease liabilities for the Company’s operating and finance leases are as follows as of March 31, 2024 (in thousands):

 

 

Operating Leases

 

 

Finance Leases

 

 

Total

 

 2024 (remaining nine months)

 

$

1,173

 

 

$

47

 

 

$

1,220

 

 2025

 

 

1,648

 

 

 

32

 

 

 

1,680

 

 2026

 

 

1,743

 

 

 

22

 

 

 

1,765

 

 2027

 

 

1,436

 

 

 

22

 

 

 

1,458

 

 2028

 

 

1,060

 

 

 

22

 

 

 

1,082

 

Thereafter

 

 

361

 

 

 

22

 

 

 

383

 

Total lease payments

 

 

7,421

 

 

 

167

 

 

 

7,588

 

Less: imputed interest

 

 

(1,613

)

 

 

(24

)

 

 

(1,637

)

Present value of lease liabilities

 

$

5,808

 

 

$

143

 

 

$

5,951

 

 

14


 

 

The weighted average remaining lease term for operating leases is 4.2 years, and 4.5 years for finance leases. The weighted average discount rate for operating leases is 10.6% and 6.4% for finance leases.

Note 6: Related Party Transactions

Exchange Agreement

On the Closing Date, the Company entered into an exchange agreement with PKLP and certain Closing ProKidney Unitholders (the “Exchange Agreement”) pursuant to which, subject to the procedures and restrictions therein, from and after the waiver or expiration of any contractual lock-up period (including pursuant to the Lock-Up Agreement (as defined below)) the holders of Post-Combination ProKidney Common Units as defined in the Exchange Agreement (or certain permitted transferees thereof) have the right from time to time at and after 180 days following the Closing to exchange their Post-Combination ProKidney Common Units and an equal number of Class B ordinary shares of the Company on a one-for-one basis for Class A ordinary shares of the Company (the “Exchange”); provided, that, subject to certain exceptions, the Company, at its sole election, subject to certain restrictions, may, other than in the case of certain secondary offerings, instead settle all or a portion of the Exchange in cash based on a volume weighted average price (“VWAP”) of a Class A ordinary share. The Exchange Agreement provides that, as a general matter, a holder of Post-Combination ProKidney Common Units will not have the right to exchange Post-Combination ProKidney Common Units if the Company determines that such exchange would be prohibited by law or regulation or would violate other agreements with the Company and its subsidiaries to which the holder of Post-Combination ProKidney Common Units may be subject, including the Second Amended and Restated ProKidney Limited Partnership Agreement and the Exchange Agreement.

Lock-Up Agreement

On the Closing Date, the Company, SCS Sponsor III LLC and certain Closing ProKidney Unitholders entered into a lock-up agreement (the “Lock-Up Agreement”). The Lock-Up Agreement contains certain restrictions on transfer with respect to the SCS Sponsor III LLC and the Closing ProKidney Unitholders party thereto. Such restrictions began at the Closing and end on the earlier of (i) the date that is 180 days after the Closing and (ii)(a) for 33% of the Lock-Up Shares (other than the Earnout Shares and the PIPE Shares), the date on which the last reported sale price of a Class A ordinary share of the Company equals or exceeds $12.50 per share for any 20 trading days within any 30-trading day period commencing at least 30 days after the Closing and (b) for an additional 50% of the Lock-Up Shares (other than the Earnout Shares and the Private Placement Shares (as each such term is defined in the Lock-Up Agreement)), the date on which the last reported sale price of a Class A ordinary share of the Company equals or exceeds $15.00 per share for any 20 trading days within any 30-trading day period commencing at least 30 days after the Closing. Notwithstanding the above, (i) the lock-up period for any Earnout Shares will expire not earlier than 180 days after such Earnout Shares are issued; (ii) 50% of the Lock-Up Shares held by certain Closing ProKidney Unitholders and their affiliates will remain locked up until the earlier of four years following the Closing and the date that PKLP receives notice of any regulatory market authorization, including full or conditional authorization, to market its lead product candidate, rilparencel (but, in any event, not earlier than 180 days following the Closing or (in the case of Earnout Shares) the date of issuance); and (iii) the lock-up period for the Private Placement Shares expired 30 days after the Closing. The restrictions on transfer set forth in the Lockup Agreement are subject to customary exceptions.

During January 2023, the lock-up period for 50% of the shares held by the Closing ProKidney Unitholders (other than the Earnout Shares) expired.

Tax Receivable Agreement

On the Closing Date, the Company entered into a tax receivable agreement (the “Tax Receivable Agreement”) with the Closing ProKidney Unitholders. Pursuant to the Tax Receivable Agreement, among other things, the Company will be required to pay the Closing ProKidney Unitholders party thereto 85% of certain tax savings recognized by the Company, if any, as a result of the increases in tax basis attributable to exchanges by the Closing ProKidney Unitholders of Post-Combination ProKidney Common Units for Class A ordinary shares of the Company or, subject to certain restrictions, cash, pursuant to the Exchange Agreement and certain other tax attributes of PKLP and tax benefits related to entering into the Tax Receivable Agreement.

Earnout Rights

At the Closing, certain shareholders were issued an aggregate of 17,500,000 Earnout Restricted Common Units and 17,500,000 Earnout Restricted Stock Rights (collectively, the “Earnout Rights”). The Earnout Rights vest in three equal tranches if, during the five-year period after Closing, the VWAP of a Class A ordinary share reaches $15.00 per share, $20.00 per share and $25.00 per share. Likewise, the Earnout Rights will vest upon a change of control with a per share price exceeding those same VWAP thresholds

15


 

within a five-year period immediately following the Closing. Upon vesting, the Earnout Rights will automatically convert into Post Combination ProKidney Common Units and Class B ordinary shares.

Consulting Services Agreement between ProKidney-KY and Nefro Health

 

On January 1, 2020, ProKidney-KY (formerly known as inRegen) entered into a consulting services agreement with Nefro Health (“Nefro”), an Irish partnership controlled and majority-owned by Mr. Pablo Legorreta, a director of the Company, ProKidney GP Limited, a private limited company incorporated under the laws of Ireland (“Legacy GP”) and a holder of over 5% of Class A Units in PKLP, pursuant to which Nefro provides consulting services for the research and development of the Company’s product candidates, including the conduct of clinical trials in North America and the European Union, the design and manufacturing of ProKidney’s product candidates as well as pre-commercialization activities, which are primarily performed by Mr. Legorreta. Under the agreement, Nefro receives $25,000 per quarter and is reimbursed for any out-of-pocket expenses incurred in connection with activities Nefro conducted under the agreement. ProKidney-KY has paid Nefro an aggregate of $25,000 for the each of the three month periods ended March 31, 2024 and 2023, respectively. The initial term of the consulting services agreement continued through December 31, 2020 and was renewed pursuant to the provision allowing for automatic renewals for additional periods of one year each unless terminated by either party by providing written notice to the other party at least ninety (90) days prior to the scheduled termination date. Either party may terminate this agreement upon the occurrence of a material breach by the other party in the performance of its obligations under the agreement or in respect of any provision, representation, warranty or covenant if such breach has not been cured within thirty (30) days after receiving written notice from the non-breaching party. Additionally, either of the parties may terminate the consulting services agreement for any reason upon giving thirty (30) days’ advance notice of such termination to the other party. In the event of such termination, ProKidney-KY will be obligated to pay Nefro any earned but unpaid consulting fee as of the termination date.

Consulting Services Agreement between ProKidney-US and Nefro Health

On January 1, 2020, ProKidney-US (formerly known as Twin City Bio, LLC) entered into a consulting services agreement with Nefro, pursuant to which Nefro provides consulting services for the research and development of the Company’s product candidates, including the conduct of clinical trials in North America and the European Union, the design and manufacturing of the Company’s product candidates as well as pre-commercialization activities, which are primarily performed by Mr. Legorreta. Under the agreement, Nefro receives $25,000 per quarter and is reimbursed for any out-of-pocket expenses incurred in connection with activities Nefro conducted under the agreement. ProKidney-US has paid Nefro an aggregate of $25,000 for each of the three month periods ended March 31, 2024 and 2023, respectively. The initial term of the consulting services agreement continued through December 31, 2020 and was renewed pursuant to the provision allowing for automatic renewals for additional periods of one year each unless terminated by either party by providing written notice to the other party at least ninety (90) days prior to the scheduled termination date. Either party may terminate this agreement upon the occurrence of a material breach by the other party in the performance of its obligations under the agreement or in respect of any provision, representation, warranty or covenant if such breach has not been cured within thirty (30) days after receiving written notice from the non-breaching party. Additionally, either of the parties may terminate the consulting services agreement for any reason upon giving thirty (30) days’ advance notice of such termination to the other party. In the event of such termination, ProKidney-US will be obligated to pay Nefro any earned but unpaid consulting fee as of the termination date.

Note 7: Redeemable Noncontrolling Interest

The Company is subject to the Exchange Agreement with respect to the Post-Combination ProKidney Common Units representing the outstanding 73.1% noncontrolling interest in PKLP (see Note 1). The Exchange Agreement requires the surrender of an equal number of Post-Combination ProKidney Common Units and Class B ordinary shares for (i) Class A ordinary shares on a one-for-one basis or (ii) cash (based on the fair market value of the Class A ordinary shares as determined pursuant to the Exchange Agreement), at the Company’s option (as the managing member of PKLP), subject to customary conversion rate adjustments for share splits, share dividends and reclassifications. The exchange value is determined based on a five-day VWAP of the Class A ordinary shares as defined in the Exchange Agreement, subject to customary conversion rate adjustments for share splits, share dividends and reclassifications.

The redeemable noncontrolling interest is recognized at the higher of (1) its initial fair value plus accumulated earnings/losses associated with the noncontrolling interest or (2) the redemption value as of the balance sheet date. At March 31, 2024, the redeemable noncontrolling interest was recorded based on its initial fair value plus accumulated losses associated with the noncontrolling interest which was higher than the redemption value as of the balance sheet date.

16


 

Changes in the Company’s ownership interest in PKLP while the Company retains its controlling interest in PKLP are accounted for as equity transactions, and the Company is required to adjust noncontrolling interest and equity for such changes. The following is a summary of net income attributable to the Company and transfers to noncontrolling interest (in thousands):