Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with “Selected Financial Data” and our financial statements and the related notes appearing elsewhere in this report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this Annual Report on Form 10-K. All dollar amounts in the below Management’s Discussion and Analysis of Financial Condition and Results of Operations are presented in U.S. dollars, and all dollar and share amounts are presented in thousands, unless otherwise noted or the context otherwise provides.
Overview
We are a clinical stage biopharmaceutical company utilizing artificial intelligence approaches to develop transformative medicines in neuroscience and immuno-oncology. Our drug re-innovation approach leverages existing approved drugs and/or clinically validated product candidates together with big data and proprietary machine learning algorithms to identify new therapeutic indices. We believe that this differentiated approach has the potential to reduce the cost and time of drug development in diseases with a substantial unmet medical need.
Our two most advanced clinical development programs are BXCL501, a proprietary, orally dissolving, sublingual thin film formulation of the adrenergic receptor agonist dexmedetomidine (“Dex”), for the treatment of agitation resulting from neuropsychiatric disorders, and BXCL701, an investigational orally administered systemic innate immune activator for the treatment of a rare form of prostate cancer and advanced solid tumors that are refractory or treatment naïve to checkpoint inhibitors.
During the first quarter ended March 31, 2020, and continuing through December 31, 2021, COVID-19 was declared a pandemic and spread to multiple regions across the globe, including the United States and Europe. The outbreak and government measures taken in response have had a significant impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred; supply chains have been disrupted; facilities and production have been suspended; and demand for certain goods and services, such as medical services and supplies, has spiked, while demand for other goods and services, such as travel, has fallen.
To date, we have taken steps in line with guidance from the U.S. Centers for Disease Control and Prevention (“CDC”) and the State of Connecticut to protect the health and safety of our employees and the community. In particular, we implemented a work-from-home policy for all employees and have restricted on-site activities to certain chemical, manufacturing and control (“CMC”) and clinical trial activities. We continue to assess the impact of the COVID-19 pandemic to best mitigate risk and continue the operations of our business. Beginning late in the second quarter of 2020, we began to slowly bring our staff, in very limited numbers, back to our office. This modified return-to-work approach is continuing into 2022. We have taken steps to protect our workforce and have instituted strict work rules to protect our employees.
We continue to work closely with our clinical sites to monitor the potential impact of the evolving COVID-19 pandemic. We remain committed to our clinical programs and development plans. Other than our Phase 2 clinical trial evaluating BXCL501 in patients with delirium through December 31, 2021, we have not experienced any significant delays to our ongoing or planned clinical trials, except for challenges in accessing elderly care facilities and ICU settings; however, this could rapidly change.
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Our Clinical Programs
The following is a summary of the status of our clinical development programs as of the date of this Annual Report on Form 10-K:
Our Novel Drug Re-Innovation Approach
We are developing and implementing holistically throughout the drug development process an artificial intelligence (“AI”) eco system designed to rapidly identify drugs that engage novel targets related to indications in psychiatric and neurological rare diseases. In addition, we focus our development on those indications related to or caused by stress. This capability complements our existing work done with BioXcel LLC’s EvolverAI and the clinical development group by providing a rich source of new previously unexplored opportunities. We have constructed a labeled properties graph (also referred to as a knowledge graph) that visually relates neuropsychiatric symptoms, brain circuits, drug targets and existing drugs. By making these connections, new potential uses for existing drugs emerge. The knowledge graph may be queried to uncover not only single drugs but potentially new combinations of drugs that we believe may be more effective in treating disorders than lone agents. New combinations of drugs provide the opportunity to evaluate lower, potentially safer doses of drugs and also provide the basis for stronger intellectual property positions. The AI team works closely with business development to prioritize the most valuable external opportunities in a data-driven manner. These opportunities may be found in new potential uses for launched drugs, in drugs that are part of pharma company pipelines that are no longer being pursued, or within academic efforts to develop new drug candidates.
In addition to our AI approach to neuropsychiatric symptoms and neurological rare diseases, we are actively examining signaling pathways in tumors that we believe are potential targets for synergistic drug combinations. We believe synergistic drug combinations may allow more effective treatments by reducing the probability of drug adaptation by cancer cells. AI is useful in matching existing oncology drugs and their mechanism of action to specific types of cancer as well as identifying combinations that we believe may have a higher probability of success.
Traditional drug development is plagued with low success rates (13.8%, according to an MIT study of 186,000 trials from January 2000 to October 2015), long drug development cycles (10-15 years, according to PhRMA Key Facts 2016), and exorbitant development costs ($2.6 billion per drug, according to PhRMA Key Facts). Furthermore, many
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serious diseases continue to go unaddressed due to limitations of the current drug discovery paradigm. The pharmacological space spans more than 27,000 active pharmaceutical agents, and only approximately 4,000 are approved and marketed drugs benefiting patients. These marketed drugs may be applied to other indications, including rare diseases, and represent an untapped potential for meeting significant unmet medical need and recoupment of research and development investments. Many of the remaining agents are clinical candidates that are active, shelved, or have failed for reasons other than toxicity and that can potentially be re-engineered for different indications or patient segments. They potentially represent an unrealized investment of billions of research and development dollars by the private and public sectors, resulting in an immeasurable amount of patient suffering and sacrificing during clinical development. Also, these compounds usually have known pharmacokinetic properties allowing for a more data-driven selection of appropriate doses for development programs. Finally, with respect to neuropsychiatric indications, we prioritizes those compounds with structural design features that may contribute to high blood-brain barrier permeability, which may increase the likelihood of compound brain penetration. Lack of brain penetration is a common cause for failure of many drugs developed for neuropsychiatric indications. We are prioritizing compounds with available human safety data, acceptable pharmacokinetic results, and data that support a high probability of achieving reasonable brain concentrations after dosing. The compounds in our pipeline have been identified using this proprietary platform.
This drug re-innovation model has been exemplified by the successful development and commercialization of drugs such as Tecfidera ® (Biogen, Inc.), Thalomid ® (Celgene Corporation) and Viagra ® (Pfizer, Inc.) All of these drugs were identified by insights in biology and disease pathophysiology. The successful business models of biotech companies like Axsome-Therapeutics, Inc. and Karuna Therapeutics, Inc. are based on the re-innovation and combination of existing clinical candidates or marketed drugs to provide novel solutions for patients. Unfortunately, such discoveries have been severely limited in scope due to the lack of a genuinely integrated approach of mining big data and advanced analytics.
Our AI-based discovery and development process is the foundation of our drug re-innovation model for identifying the next wave of potential medicines. Our therapeutic area experts have over 150 years of combined experience across the drug discovery and development value chain. We believe that our method of finding potential product candidates gives us a higher probability of success because it combines the comprehensiveness and efficiency of machine learning and big data analytics with the expertise and intuition of human experience in drug development. We believe the combination of our therapeutic area expertise and our ability to generate therapeutic candidates in neuroscience and immuno oncology through our exclusive collaborative relationship in those areas with BioXcel LLC gives us a significant competitive advantage.
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Our approach is illustrated below:
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Basis of Presentation
The Company’s financial statements are prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”). All amounts are presented in thousands.
Components of Our Results of Operations
Revenues
We have not recognized any revenue since inception.
Operating Costs and Expenses
Research and Development
Our research and development expenses reflect costs incurred for the research and development of our clinical and pre-clinical product candidates, which includes payments to BioXcel LLC. Research and development expense primarily consist of salary, benefits and non-cash stock-based compensation for our research and development personnel, costs incurred under agreements with contract research organizations (“CROs”) and sites that conduct our non-clinical studies and clinical trials, costs of outside consultants engaged in research and development activities, including their fees, stock-based compensation and travel expenses, the cost of acquiring, developing and manufacturing pre-clinical and clinical trial materials and lab supplies, and depreciation and other expenses.
We expense research and development costs to operations as incurred.
Our research and development costs by program for the years ended December 31, 2021 and 2020 are as follows:
Year Ended
December 31,
2021
2020
Direct external costs
BXCL501
$
16,046
$
34,430
BXCL701
11,092
7,747
Other research and development programs
1,587
896
Total direct external costs
28,725
43,073
Internal personnel costs
21,282
13,700
Sub-total direct costs
50,007
56,773
Indirect costs and overhead
3,063
1,765
Research and development tax credit
(362)
(543)
Total research and development expenses
$
52,708
$
57,995
General and Administrative
General and administrative expenses primarily consist of salaries, benefits and non-cash stock-based compensation for our executive and administrative personnel. General and administrative expenses also include legal expenses to pursue patent protection of our intellectual property, professional fees for audit and tax and insurance charges.
We expect that our general and administrative expenses will increase as we expand our clinical programs. We also expect increased administrative costs resulting from our clinical trials and the potential commercialization of our product candidates. We believe that these increases will likely include increased costs for director and officer liability insurance, hiring additional personnel to support future market research and future product commercialization efforts and increased fees for outside consultants, attorneys and accountants. We may also incur increased costs to comply with corporate
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governance, internal controls, investor relations and disclosures and similar requirements applicable to public companies.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is set forth in Note 3 to the financial statements included in this Annual Report on Form 10-K.
Results of Operations
Comparison of the Years Ended December 31, 2021 and 2020
Revenues
We have not recognized any revenues since inception.
Research and Development Expense
Research and development expenses for the years ended December 31, 2021 and 2020 were $52,708 and $57,995, respectively. Research and development expenses for the years ended December 31, 2021 and 2020 were comprised as follows:
Year Ended
December 31,
2021
2020
Change
% Change
Personnel and related costs
$
14,624
$
8,408
$
6,216
74
%
Non-cash stock-based compensation
6,658
6,020
638
11
%
Professional fees
11,932
7,106
4,826
68
%
Clinical trials expense
14,226
30,808
(16,582)
(54)
%
Chemical, manufacturing and controls cost ("CMC")
3,506
5,109
(1,603)
(31)
%
Travel and other costs
2,124
1,087
1,037
95
%
Research and development tax credit
(362)
(543)
181
33
%
Total research and development expenses
$
52,708
$
57,995
$
(5,287)
(9)
%
The decrease of $5,287 for the year ended December 31, 2021 is primarily attributable to:
Decreased Clinical trial expenses resulting from the completion of our SERENITY I and II, TRANQUILITY, RELEASE and BXCL501 bioavailability clinical trials, partially offset by increased costs related to the 40mcg cohort expansion of our Tranquility trial. These decreases were further offset by increased costs in our BXCL701 prostate cancer and basket trials.
Lower CMC costs tracked the decrease in fewer BXCL501 manufacturing costs.
The decreases were partially offset by:
Increased personnel and related costs due to our efforts to enlarge our clinical and medical teams as we expanded our clinical and medical programs during the year in preparation of the potential commercial launch of BXCL501 in the U.S.
Increased non-cash stock-based compensation as result of the additional personnel hired during the year. However, the increase was moderated by a combination of reduced expense due to forfeitures and lower grant date fair values resulting from lower market prices of the Company’s common stock.
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The increase in professional fees was generally due to increased regulatory, consulting and toxicology fees related to the BXCL501 program.
Travel and other costs were higher due to increased headcount.
The State of Connecticut provides companies with the opportunity to exchange certain research and development credit carryforwards for cash in exchange for foregoing the carryforward of the research and development credit. The program provides for such exchange of the research and development credit at a rate of 65% of the annual research and development credit. The benefit for such exchange is recorded as a reduction of research and development expenditures. The credit decreased in 2021 as a result of lower clinical trial activity.
General and Administrative Expense
General and administrative expenses for the years ended December 31, 2021 and 2020 were $54,227 and $24,302, respectively. General and administrative expenses for the years ended December 31, 2021 and 2020 were comprised as follows:
Year Ended
December 31,
2021
2020
Change
% Change
Personnel and related costs
$
9,576
$
3,422
$
6,154
180
%
Non-cash stock-based compensation
12,798
8,591
4,207
49
%
Professional fees
10,647
5,473
5,174
95
%
Commercial
16,070
2,487
13,583
546
%
Insurance
2,136
1,611
525
33
%
Travel and other costs
3,000
2,718
282
10
%
Total general and administrative expenses
$
54,227
$
24,302
$
29,925
123
%
The increase of $29,925 for the year ended December 31, 2021 is primarily attributable to:
Increased personnel and related costs due to substantially higher headcount in 2021 in preparation of the potential commercial launch of BXCL501 in the U.S.
Increased non-cash stock-based compensation as result of the granting of awards to increased number of personnel hired during the year. However, the increase was moderated by a combination of reduced expense due to forfeitures and lower grant date fair values resulting from lower market prices of the Company’s common stock.
Increased professional fees due to the expanding growth of our operations and was primarily related to increased corporate patent legal fee and investor relations fees.
Significant commercial costs incurred due to the increased complexity and growth as we prepare for the potential commercial launch of BXCL501 in the U.S. We also experienced increased market research fees related to the potential commercial launch of BXCL501 in the U.S.
Increased insurance costs primarily related to an increase in Director and Officer liability premiums.
Travel and other expenses approximated the prior year.
Inflation
Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation has had a material effect on our results of operations during the periods presented.
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Liquidity and Capital Resources
As of December 31, 2021, we had cash and cash equivalents of $232,968, working capital of $220,145 and stockholders’ equity of $221,667. Net cash used in operating activities was $82,153 and $66,350 for the years ended December 31, 2021 and 2020, respectively. We incurred losses of approximately $106,931 and $82,169 for the years ended December 31, 2021 and 2020, respectively. We have not yet generated any revenues and we have not yet achieved profitability. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we will need to generate significant product revenues to achieve profitability. We believe that our existing cash and cash equivalents as of December 31, 2021 will enable us to fund our operating expenses and capital expenditure requirements for at least one year from the date of this Annual Report on Form 10-K.
We may obtain additional financing through sales of the Company’s equity securities, entering into strategic partnership arrangements and/or short-term borrowings from banks, stockholders or other related parties, if needed, or a combination of any of the foregoing. There are no assurances that we will be successful in obtaining an adequate level of financing as and when needed to finance our operations on terms acceptable to us or at all, particularly in light of the economic downturn and ongoing uncertainty related to the COVID-19 pandemic. If we are unable to secure adequate additional funding as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more product candidates. In addition, the magnitude and duration of the COVID-19 pandemic and its impact on our liquidity and future funding requirements is uncertain as of the filing date of this Annual Report on Form 10-K, as the pandemic continues to evolve globally. See “Risk Factors—The COVID-19 pandemic , or other pandemics, epidemics or outbreaks of an infectious disease may materially and adversely impact our business, including our preclinical studies and clinical trials.” in Part I, Item 1A. of this Annual Report on Form 10-K for a further discussion of the potential impact of the COVID-19 pandemic on our business.
Sources of Liquidity
We have focused our efforts on raising capital and building the products in our pipeline. Since our inception, our operations have been financed primarily by BioXcel LLC and from proceeds from the sale of equity securities, including stock issuances including our initial public offering, private placements of our common stock, and registered offerings of our common stock and an Open Market Sale Agreement (“ATM Program”). We have not yet established an ongoing source of revenue sufficient to cover our operating costs and will need to do so in future periods.
In May 2021, the Company entered into an Open Market Sale Agreement (the “Sale Agreement”) with Jefferies LLC (“Jefferies”) pursuant to which the Company could offer and sell shares of its common stock, par value $0.001 per share (the “Common Stock”), having an aggregate offering price of up to $100,000, from time to time, through an “at the marketing offering” program under which Jefferies will act as sale agent. The Company sold 124 shares under the Sale Agreement in June 2021. As of December 31, 2021, the Company received proceeds of $4,056, net of issuance costs of $500.
In June 2021, the Company sold in a registered offering 3,155 shares of its common stock at a public offering price of $31.70 per share. The Company received proceeds of $96,937, net of issuance costs of $3,042.
In February 2020, we sold in a registered offering 2,300 shares of our common stock at a public offering price of $32.00 per share for gross proceeds of $73,600 less underwriting discounts and commissions. We received net proceeds of approximately $68,811.
We received funds under the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in April 2020 in the amount of $537. On April 23, 2020 the Small Business Administration issued a new FAQ #31, which provided guidance on what it means to certify that: “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Following review of this new FAQ #31 we decided to withdraw from the Paycheck Protection Program and have repaid the loan in full together with all accrued interest.
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In July 2020, we sold in a registered offering 4,000 shares of our common stock at a public offering price of $50.00 per share for gross proceeds of $200,000 less underwriting discounts and commissions. We received net proceeds of approximately $186,974.
Cash Flows
Year Ended December 31,
(in thousands)
2021
2020
Cash provided by (used in)
Operating activities
$
(82,153)
$
(66,350)
Investing activities
(445)
(316)
Financing activities
102,447
247,359
Operating Activities
Cash used in operating activities was $82,153 for the year ended December 31, 2021 and was primarily attributable to our $106,931 net loss and a $130 increase in prepaid expense and other assets, partially offset by $19,455 in stock-based compensation and a $4,850 increase in accounts payable and accrued expenses.
Cash used in operating activities was $66,350 for the year ended December 31, 2020 and was primarily attributable to our $82,169 net loss and a $2,301 increase in prepaid expenses and other assets, partially offset by $14,611 in stock-based compensation and a $3,197 increase in accounts payable, accrued expenses and other liabilities.
Investing Activities
Cash used in investing activities was $445 for the year ended December 31, 2021 and was attributable to the purchase of furniture and leasehold improvements.
Cash used in investing activities was $316 for the year ended December 31, 2020 and was attributable to the purchase of equipment and leasehold improvements.
Financing Activities
Cash provided by financing activities was $102,447 for the year ended December 31, 2021 and was attributable to $96,937 in net proceeds from the issuance of common stock in our June 2021 public offering, and $4,056 in net proceeds from the sale of common stock under our ATM Program. Proceeds of $1,454 from the exercise of stock options provided the remainder.
Net cash provided by financing activities was $247,359 for the year ended December 31, 2020 and was primarily attributable to the net proceeds of $68,811 from our February 2020 offering combined with net proceeds of $186,974 from our July 2020 offering. Additionally, we received $598 in proceeds from the exercise of stock options. This amount was partially offset by $9,024 used for the purchase and cancellation of 300,000 shares of common stock owned by BioXcel LLC in February 2020.
Operating Capital and Capital Expenditure Requirements
We expect to continue to incur significant and increasing operating losses at least for the next several years as we expand our clinical trials of BXCL501 and BXCL701, seek marketing approval for our product candidates and pursue development of our other product candidates. We do not expect to generate revenue unless and until we successfully complete development and obtain regulatory approval for our product candidates. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our planned clinical trials and our expenditures on other research and development activities.
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We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. We anticipate that our expenses will increase substantially as we:
• continue our clinical development of BXCL501 and BXCL701;
• conduct additional research and development with our product candidates;
• seek to identify, acquire, license, develop and commercialize additional product candidates;
• integrate acquired technologies into a comprehensive regulatory and product development strategy;
• maintain, expand and protect our intellectual property portfolio;
• hire scientific, clinical, quality control and administrative personnel;
•
add operational, financial and management information systems and personnel, including personnel to support our drug development efforts;
• seek regulatory approvals for any product candidates that successfully complete clinical trials;
•
ultimately establish a sales, marketing and distribution infrastructure and scale up external manufacturing capabilities to commercialize any product candidates for which we may obtain regulatory approval; and
• continue to operate as a public company.
We believe that our existing cash and cash equivalents as of December 31, 2021 will be sufficient to enable us to fund operating expenses and capital expenditure requirements for at least the next 12 months from the date of the issuance of the financial statements included in this Annual Report on Form 10-K and will be sufficient to fund our ongoing research and development efforts and commercialization preparation through 2022. We expect that we will need to obtain substantial additional funding in order to fund our operations. To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, the ownership interests of our existing stockholders may be materially diluted and the terms of these securities could include liquidation or other preferences that could adversely affect the rights of our existing stockholders. In addition, debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business. If we are unable to raise capital when needed or on attractive terms, we could be forced to significantly delay, scale back or discontinue the development or commercialization of BXCL501, BXCL701 or other product candidates, seek collaborators at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available, and relinquish or license, potentially on unfavorable terms, our rights to BXCL501, BXCL701 or other product candidates that we otherwise would seek to develop or commercialize ourselves.
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with GAAP requires management to exercise its judgment. We exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets and liabilities, our recognition of revenues and expenses, and disclosure of commitments and contingencies at the date of the financial statements.
On an ongoing basis, we evaluate our estimates and judgments. We base our estimates and judgments on a variety of factors including our historical experience, knowledge of our business and industry, current and expected economic conditions, the attributes of our products and the regulatory environment. We periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are necessary.
While we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies, we cannot guarantee that the results will always be accurate. Since the determination of these estimates requires the exercise of judgment, actual results could differ from such estimates.
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A description of significant accounting policies that require us to make estimates and assumptions in the preparation of our financial statements is as follows:
Stock-based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718, “ Compensation—Stock Compensation, ” which requires the measurement and recognition of compensation expense based on estimated fair market values for all share-based awards made to employees and non-employee service providers, including stock options. The Company’s 2017 Equity Incentive Plan (the “2017 Plan”) became effective in August 2017. The Company’s 2020 Incentive Award Plan (the “2020 Plan”) became effective in May 2020. Following the effective date of the Company’s 2020 Plan, the Company ceased granting awards under the 2017 Plan; however the terms and conditions of the 2017 Plan continue to govern any outstanding awards granted thereunder.
The Company’s stock option awards are valued at fair value on the date of grant and that fair value is recognized over the requisite service period. The Company utilizes the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The Black-Scholes model requires the use of assumptions which determine the fair value of the stock-based awards. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected term of the stock options, the expected volatility of our stock and expected dividends. Prior to the IPO, significant judgement and estimates were used to estimate the fair value of these awards, as the shares of common stock underlying these awards were not then publicly traded. Stock awards granted by the Company subsequent to its IPO are valued using market prices at the date of grant. The Company has elected to account for forfeitures as they occur, by reversing compensation cost when the award is forfeited.
Research and Development Accruals
Research and development costs are expensed as incurred. Clinical study costs are accrued over the service periods specified in the contracts and adjusted as necessary based upon an ongoing review of the level of effort and costs actually incurred. The Company’s assessment of the completeness of the information is subject to variability and uncertainty. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In addition, in certain circumstances, the determination of the nature and amount of services that have been received during the reporting period requires judgment as the timing and pattern of vendor invoicing does not correspond to the level of services provided. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual accordingly.
The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary.
Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period.
Income Taxes
We use an asset and liability approach for financial accounting and reporting of income taxes. Deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax basis assets and liabilities and are measured by applying enacted rates and laws to taxable years in which differences are expected to be recovered or settled. Further, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that the rate changes. A valuation allowance is required when it is “more likely than not” that all or a portion of deferred tax assets will not be realized.
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We apply the provisions of ASC 740, Income Taxes, which prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return, including a decision whether to file or not file a return in a particular jurisdiction. Our financial statements reflect expected future tax consequences of such positions presuming the taxing authorities’ full knowledge of the position and all relevant facts.
We do not have any unrecognized tax benefits as of December 31, 2021. We review all tax positions to ensure the tax treatment selected is sustainable based on its technical merits and that the position would be sustained if challenged.
Contractual Obligations and Commitments
In August 2018, the Company entered into an agreement to lease approximately 11,040 square feet of space on the 12 th floor of the building located at 555 Long Wharf Drive, New Haven, Connecticut (the “12 th Floor Lease) which was effective February 22, 2019. The 12 th Floor Lease expires in February 2026.
In August 2020, the Company entered into an amendment to the 12 th Floor Lease wherein the Company leased an additional 7,245 square feet of space on the 12 th floor of the building located at 555 Long Wharf Drive, New Haven, Connecticut (the “12 th Floor Lease Amendment”). The 12 th Floor Lease Amendment expires in February 2026.
The following table summarizes our contractual obligations related our 12 th Floor Lease and the 12 th Floor Lease Amendment at December 31, 2021 and the effect such obligations are expected to have on our liquidity and cash flow in future periods:
Payments due by Period
Less Than
More Than
Total
1 year
1-3 years
3-5 years
5 years
Operating lease commitments
$
1,572
$
363
$
753
$
456
$
—
For additional details, see “Note 10 to Financial Statements – Leases.”
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of December 31, 2021 or 2020, as defined under SEC rules.