Summary of Significant Accounting Policies Basis of Presentation and Principles of Consolidation (Policies)

12 Months Ended

Dec. 31, 2021

Accounting Policies [Abstract]

IPO and Reorganization

IPO and Reorganization — As discussed in Note 1, in connection with the Reorganization, all of Rallybio Holdings' direct subsidiaries, other than Rallybio Corporation, became direct subsidiaries of the Company prior to the Liquidation of Rallybio Holdings. Prior to the completion of the Company's IPO, Rallybio Holdings liquidated and unitholders of Rallybio Holdings became the holders of common stock of Rallybio Corporation. Subsequent to the Reorganization and the Liquidation of Rallybio Holdings the consolidated financial statements are reported from Rallybio Corporation.

The capital structure of Rallybio Holdings prior to the Liquidation consisted of four classes of membership units: common units; Series A-1 preferred units; Series A-2 preferred units; Series B preferred units; and incentive common units ("incentive units"). The number of shares of common stock that the holders of each class of units received in the Liquidation was based on the value of Rallybio Holdings prior to the Liquidation, determined by reference to the initial public offering price per share of $13.00. The common stock of the Company was allocated to the holders of existing units in Rallybio Holdings as follows:

•holders of 33,478,255 Series A-1 preferred units and Series A-2 preferred units of Rallybio Holdings received an aggregate of 5,257,590 shares of common stock of the Company;

•holders of 104,442,965 Series B preferred units of Rallybio Holdings received an aggregate of 16,402,235 shares of common stock of the Company;

•holders of 4,500,000 common units and 1,200,000 of performance based incentive common units of Rallybio Holdings received an aggregate of 706,701 and 188,454, respectively, in shares of common stock of the Company. Shares of common stock issued in respect of unvested common units and performance based incentive common units as of the Liquidation are shares of restricted common stock and subject to vesting in accordance with the vesting schedule applicable to such units; and

•holders of 20,869,704 incentive units in Rallybio Holdings received an aggregate of 2,444,990 shares of common stock of the Company. Shares of common stock issued in respect of unvested incentive units as of the Liquidation are shares of restricted common stock and continue to be subject to vesting in accordance with the vesting schedule applicable to such incentive units.

As a result of the Liquidation, the holders of units in Rallybio Holdings collectively were issued an aggregate of 24,999,970 shares of common stock of the Company prior to the completion of the IPO.

The Reorganization and subsequent Liquidation resulted in a change in reporting entity as described in ASC 250. In accordance with the guidance applicable to these circumstances, the equity structure has been adjusted in all comparative periods up to the Liquidation to reflect the number of shares of the Company’s common stock, issued to Rallybio Holdings unitholders' in connection with the Liquidation. As such, historical Rallybio Holdings convertible redeemable preferred units, common units, and incentive units have been retroactively adjusted in these financial statements to shares and earnings per share in accordance with the ratio of common shares received by each membership unit class. Rallybio Holdings' convertible redeemable preferred units previously classified as mezzanine equity, including the Series B Preferred Unit Agreement executed during the year 2020 with a total aggregate purchase price of $145.2 million, have been retroactively adjusted in these financial statements, converted into common stock, and reclassified to permanent as a result of the retrospective application of the Liquidation and change in reporting entity.

Basis of Presentation

Basis of Presentation—The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States. 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 Updates (“ASU”) promulgated by the Financial Accounting Standards Board (“FASB”).

Principles of Consolidation

Principles of Consolidation—The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

Use of Estimates—The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. While management believes that estimates and assumptions used in the preparation of the consolidated financial statements are appropriate, actual results could differ from those estimates. The most significant estimates are those used in the determination of the fair value of its common units and incentive units awarded to employees prior to the Company's IPO, for purposes of recording stock-based incentive compensation, the fair value of stock options, as well as contracted research and development accruals.

Liquidity and Ability to Continue as a Going Concern

Liquidity and Ability to Continue as a Going Concern—The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Management has evaluated whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. Since its inception, the Company has incurred net losses and negative cash flows from operations.

During the years ended December 31, 2021 and 2020, the Company incurred a net loss of $47.0 million and $26.4 million, respectively. In addition, as of December 31, 2021, the Company had an accumulated deficit of $94.0 million. The Company expects to continue to generate operating losses and negative cash flows in the foreseeable future.

The Company currently expects that cash and cash equivalents of $175.3 million at December 31, 2021 will be sufficient to fund its operating expenses and capital requirements for more than 12 months from the date the consolidated financial statements are issued. However, we do not anticipate that the current cash and cash equivalents as of December 31, 2021 will be sufficient for us to fund any of our product candidates through regulatory approval, and we will need to raise substantial additional capital to complete the development and commercialization of our product candidates, if approved. We may satisfy our future cash needs through the sale of equity securities, debt financings, working capital lines of credit,

corporate collaborations or license agreements, grant funding, interest income earned on invested cash balances or a combination of one or more of these sources.

Variable Interest Entity

Variable Interest Entity—The Company evaluates its ownership, contractual, and other interests in entities to determine if it has any variable interest in a variable interest entity (“VIE”). These evaluations are complex, involve judgment, and the use of estimates and assumptions based on available historical information, among other factors. If the Company determines that an entity in which it holds a contractual, or ownership, interest is a VIE and that the Company is the primary beneficiary, the Company consolidates such entity in its consolidated financial statements. The primary beneficiary of a VIE is the party that meets both of the following criteria: (i) has the power to make decisions that most significantly affect the economic performance of the VIE; and (ii) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. Management performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s involvement with a VIE will cause the consolidation conclusion to change. Changes in consolidation status are applied prospectively. The Company evaluated its investment in REV-I (defined in Note 7) and concluded that it represented a VIE and was not deemed the primary beneficiary. If the Company is not deemed to be the primary beneficiary in a VIE, the Company accounts for the investment or other variable interests in a VIE in accordance with the applicable GAAP (See Note 7).

Equity Method Investments

Equity Method Investments—The Company accounts for investments for which it does not have a controlling interest in accordance with ASC 323, Investments – Equity Method and Joint Ventures. The Company recognizes its pro-rata share of income and losses in “loss on investment in joint venture” on the consolidated statements of operations and comprehensive loss, with a corresponding change to the investment in joint venture asset on the consolidated balance sheets.

Financial instruments

Financial Instruments—The Company’s principal financial instruments are comprised of cash and cash equivalents, accounts payable, and accrued liabilities. The carrying value of all financial instruments approximates fair value.

Concentrations of credit risk

Concentrations of Credit Risk—Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents. Periodically, the Company may maintain deposits in financial institutions in excess of government insured limits. Management believes that the Company is not exposed to significant credit risk as the Company’s deposits are held at financial institutions that management believes to be of high credit quality, and the Company has not experienced any losses on these deposits.

Cash and Cash Equivalents

Cash and Cash Equivalents—The Company classifies amounts on deposit in banks and cash invested temporarily in various instruments, primarily money market funds, with original maturities of three months or less at the time of purchase as cash and cash equivalents. The carrying amounts reported in the consolidated balance sheets represent the fair values of cash and cash equivalents.

Property and Equipment

Property and Equipment—Property and equipment are recorded at cost and consists of computer and other equipment, capitalized software, furniture and fixtures and leasehold improvements. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, or for leasehold improvements, over the remaining term of the lease, if shorter. The estimated useful life for each major asset classification are as follows:

Asset Classification	Estimated Useful Life
Computer and other equipment	3 years
Capitalized software	3 years
Furniture and fixtures	5 years
Leasehold improvements	lesser of lease life or useful life

Maintenance and repairs which do not extend the lives of the assets are charged directly to expense as incurred. Upon retirement or disposal, cost and related accumulated depreciation are removed from the related accounts, and any resulting gain or loss is recognized as a component of income or loss in the consolidated statements of operations and comprehensive loss.

Impairment of Long-Lived Assets

Impairment of Long-Lived Assets—When indications of potential impairments are present, the Company evaluates the carrying value of long-lived assets. The Company adjusts the carrying value of the long-lived assets if the sum of undiscounted expected future cash flows is less than the carrying value. No such impairments were recorded during the years ended December 31, 2021 or 2020.

Income Taxes

Income Taxes—The Company uses the asset and liability method of accounting for income taxes, as set forth in Accounting Standards Codification (ASC) 740, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequence of temporary differences between the carrying amounts and the tax basis of assets and liabilities and net operating loss carry forwards, all calculated using presently enacted tax rates. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company evaluates whether deferred tax assets are more likely than not of being realized in determining whether a valuation allowance is necessary. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies. As of December 31, 2021 or 2020, the Company determined that it is more likely than not that deferred taxes will not be realized and as a result recorded a valuation allowance against its deferred tax assets. Following the Reorganization the Company files a consolidated U.S. federal income tax return and has elected to include all subsidiaries owned more than 80%. Prior to the Reorganization, the LLCs owned 100% by the Company have each elected to be treated as and taxed as a corporation and each filed a separate U.S. federal income tax return.

Research and Development Expenses

Research and Development Expenses—Research and development expenses are comprised of costs incurred in performing research and development activities including personnel salaries, benefits, and equity-based compensation; external research and development expenses incurred under arrangements with third parties, such as contract research organization agreements, investigational sites, and consultants; the cost of developing and manufacturing clinical study materials, program regulatory costs, expenses associated with obligations under asset acquisitions, license agreements and other direct and indirect costs. Costs incurred in connection with research and development activities are expensed as incurred. Costs are considered incurred based on an evaluation of the progress to completion of each contract using information and data provided by the respective vendors, including the Company’s clinical sites. Depending upon the timing of invoicing by the service providers, the Company recognizes prepaid expenses or accrued expenses related to these costs. These prepaid expenses or accrued expenses are based on management’s estimates of the work performed under service agreements, milestones achieved, and experience with similar contracts. The Company monitors each of these factors and adjusts estimates accordingly.

Deferred Offering Costs

Deferred Offering Costs— The Company capitalizes incremental legal, professional accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such equity financings are consummated. After consummation of the equity financing, these costs are recorded in stockholders' equity as a reduction of additional paid-in-capital generated as a result of the offering. Should the planned equity financing no longer be considered probable of being consummated, the offering costs are expensed immediately as a charge to operating expense. Upon completion of the Company's IPO in August 2021, $3.2 million of deferred offering costs were charged against additional paid-in-capital. As a result, the Company did not have any deferred offering costs as of December 31, 2021.

Equity-Based Compensation

Share-Based Compensation—The Company accounts for share-based compensation in accordance with ASC 718, Compensation—Stock Compensation (“ASC 718”). Generally, share-based compensation is measured at the grant date for all equity-based awards made to employees based on the fair value of the awards and is recognized over the requisite service period, which is generally the vesting period. Share-based compensation for awards with performance conditions are recognized over the service period when achievement of the performance condition is probable. The Company has elected to recognize the actual forfeitures by reducing the share-based compensation in the same period as the forfeitures occur. The Company classifies share-based compensation in its consolidated statements of operations and comprehensive loss in the same manner in which the award recipients’ payroll costs are classified.

The Company estimates the fair value of options granted using the Black-Scholes option pricing model ("Black-Scholes") for stock option grants. The fair value of the Company’s common stock is used to determine the fair value of restricted stock awards. Black-Scholes requires inputs based on certain subjective assumptions, including the expected stock price volatility, the expected term of the award, the risk-free interest rate and expected dividends. Due to the lack of a public market for the Company’s common stock and lack of company-specific historical and implied volatility data, the Company has based its computation of expected volatility on the historical volatility of a representative group of public companies with similar characteristics to the Company. The historical volatility is calculated based on a period of time corresponding with expected term assumption. The Company uses the simplified method to calculate the expected term for options granted where the expected term equals the arithmetic average of the vesting term and the original contractual term of the options due to its lack of sufficient historical data. The risk-free interest rate is based on U.S. Treasury securities with a maturity date corresponding with the expected term of the associated award. The expected dividend yield is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on its common stock.

Fair Value Measurements

Fair Value Measurements—ASC Topic 820, Fair Value Measurement (“ASC 820”), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the assets or liabilities and are developed based on the best information available in the circumstances. ASC 820 identifies fair value as the price that would be received to sell an asset or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tiered value hierarchy that distinguishes between the following:

Level 1—Quoted market prices in active markets for identical assets or liabilities.

Level 2—Inputs other than Level 1 inputs that are either directly or indirectly observable, such as quoted market prices, interest rates and yield curves.

Level 3—Unobservable inputs for the asset or liability (i.e. supported by little or no market activity). Level 3 inputs include management’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).

To the extent the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair values requires more judgement. Accordingly, the degree of judgement exercised by the Company in determining fair value is greatest for instruments categorized as Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as considers counterparty credit risk in its assessment of fair value.

For the year ended December 31, 2021 and 2020 the Company held money market funds that are classified as cash and cash equivalents on the Company's consolidated balance sheets of $4.0 million and $2.5 million, respectively. These money market funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

There were no securities transferred between Level 1, 2 and 3 during the year ended December 31, 2021.

Segment information

Segment information—Operating segments are defined as components of an enterprise for which discrete financial information is regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing operating performance. The Company manages its operations as a single segment for the purposes of allocating resources, assessing performance, and making operating decisions. All tangible assets of the Company are held in the United States.

Basic and Diluted Net Loss Per Share

Basic and Diluted Net Loss Per Share—The Company calculates basic net loss per share by dividing the net loss by the weighted average number of common shares outstanding during the period, without consideration of potential dilutive securities. Unvested restricted common shares as of December 31, 2021 and 2020 are not considered participating securities and as such are excluded from the weighted average number of shares used for calculating basic and diluted net loss per share. Diluted net loss per share is computed by dividing the net loss by the sum of the weighted average number of common shares outstanding during the period plus the dilutive effects of potentially dilutive securities outstanding during the period. Potentially dilutive securities include restricted common shares and stock options. The Company has generated a net loss for all periods presented, therefore diluted net loss per share is the same as basic net loss per share since the inclusion of potentially dilutive securities would be anti-dilutive.

Recent Accounting Pronouncements

Recent Accounting Pronouncements—

The Company qualifies as an emerging growth company ("EGC") as defined in the Jumpstart Our Business Startups Act of 2012 and has elected not to “opt out” of the extended transition related to complying with new or revised accounting standards, which means that when a standard is issued or revised and it has different application dates for public and non-public companies, the Company can adopt the new or revised standard at the time non-public companies adopt the new or revised standard and can do so until such time that the Company either irrevocably elects to “opt out” of such extended transition period or no longer qualifies as an emerging growth company. The Company may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for non-public companies.

Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial statements and disclosures.

In February 2016, the FASB issued ASU 2016-02 "Leases" that requires lessees to recognize leases on-balance sheet and to make certain disclosures associated with their leasing arrangements. The new standard establishes a right-of-use ("ROU") model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than twelve months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The FASB issued an update that provided an additional transition option that allows companies to continue applying the guidance under the lease standard in effect at that time in the comparative periods presented in the consolidated financial statements. Companies that elect this option would record a cumulative-effect adjustment to the opening balance of retained earnings, if applicable, on the date of adoption, which the Company expects to elect. The Company also expects to elect the “package of practical expedients”, which permits the Company not to reassess under the new standard prior conclusions about lease identification, lease classification and initial direct costs. For the Company, as an EGC, ASU 2016-02, as amended, will be effective for annual reporting periods beginning after December 15, 2021 and interim periods within those fiscal years, with early adoption permitted.

The Company is in the process of finalizing the assessment of the standard which includes lease calculations, including the Company's discount rate assumptions. The Company is also continuing to establish new processes and internal controls that may be required to comply with the new lease accounting and disclosure requirements set by the new standard. The Company expects the impact of this standard will increase assets and liabilities within the Company's consolidated balance sheets by approximately $0.7 million in right of use assets and related lease liabilities when adopting the standard in the first quarter of 2022.

There were no changes to significant accounting policies of the Company during the year ended December 31, 2021.