Enliven Therapeutics, Inc. 10-K

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 our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Form Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Overview We are a clinical-stage biopharmaceutical company dedicated to developing and commercializing novel therapeutics to treat patients suffering from rare inherited genetic disorders of hemoglobin, known as hemoglobinopathies. Our pipeline is built on the differentiated therapeutic potential of our initial product candidate, IMR-687, which is an oral, once-a-day, potentially disease-modifying treatment for sickle cell disease, or SCD, and ß-thalassemia. IMR-687 is a highly selective, potent small molecule inhibitor of phosphodiesterase-9, or PDE9, that has a multimodal mechanism of action that acts primarily on red blood cells, and has the potential to act on white blood cells, adhesion mediators and other cell types that are implicated in these disorders. We recently completed a Phase 2a clinical trial of IMR-687 in adult patients with SCD and are currently conducting an open label extension, or OLE, clinical trial, which allows patients from the Phase 2a clinical trial to continue into a long-term four-year trial to test safety and measure tolerability of IMR-687 . In the second quarter of 2020, we initiated a Phase 2b clinical trial of IMR-687 for the treatment of patients with SCD and a Phase 2b clinical trial of IMR-687 for the treatment of patients with ß-thalassemia. We are currently enrolling patients in each trial and expect to report interim data from each of these trials in the second half of 2021. We continue to evaluate the impact of the COVID-19 pandemic on these Phase 2b trials, as discussed below, and therefore, our estimated timelines for these clinical trials could be delayed. In addition, we recently completed preclinical research of IMR-687 in heart failure with preserved ejection fraction, or HFpEF, and are developing a Phase 2 protocol to support potential future clinical development of IMR-687 in this indication. Since our inception in 2016, our operations have focused on organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio and performing research and development of IMR-687. To date, we have funded our operations primarily through the sale of common stock in our initial public offering, or IPO, and the sale of convertible preferred stock. In March 2020, we completed an IPO of our common stock and issued and sold 4,700,000 shares of common stock at a public offering price of $16.00 per share, resulting in gross proceeds of $75.2 million. In April 2020, the underwriters exercised their option to purchase additional shares in full to purchase 705,000 additional shares of common stock for aggregate gross proceeds of $11.3 million. Inclusive of the underwriters’ option to purchase additional shares, we received approximately $76.5 million in net proceeds from the IPO after deducting $10.0 million of underwriting discounts and commissions and offering expenses. Upon completion of the IPO, all 70,378,661 shares of outstanding convertible preferred stock automatically converted into 11,172,955 shares of common stock. In February 2020 we effected a 1-for-6.299 reverse stock split of our common stock. All historical share and per share information shown herein and in our consolidated financial statements and related notes have been retroactively adjusted to give effect to the reverse stock split. We have incurred significant operating losses since inception. Our losses from operations were $24.1 million, and $41.7 million for the years ended December 31, 2019, and 2020, respectively. As of December 31, 2020, we had an accumulated deficit of approximately $96.1 million. We expect to continue to incur significant operating losses for the foreseeable future, as we advance IMR-687 and any product candidates we may develop in the future from discovery through preclinical development and clinical trials and seek regulatory approval of our product candidates. We expect to incur significant expenses related to maintaining and expanding our intellectual property portfolio, hiring additional research and development and business personnel and operating as a public company. In addition, our losses from operations may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and our expenditures on other research and development activities. We do not have any products approved for sale. We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for IMR-687 or any future product candidate. In addition, if we obtain regulatory approval for IMR-687 or any future product candidate and to the extent that we engage in 97 commercialization activities on our own, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing, manufacturing, and distribution activities. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. We may be unable to raise additional funds or enter into other arrangements when needed on acceptable terms, or at all. Our failure to raise capital or enter into such agreements as, and when, needed, could have a material adverse effect on our business, results of operations, and financial condition. We will need to generate significant revenue to achieve profitability, and we may never do so. Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. As of December 31, 2019 and December 31, 2020, we had $28.9 million and $88.2 million, respectively, in cash, cash equivalents and investments. We believe that our existing cash, cash equivalents and investments will enable us to fund our operating expenses and capital expenditure requirements into mid-2022. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect . See “—Liquidity and Capital Resources.” Impact of COVID-19 Pandemic On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The COVID-19 pandemic is ongoing and its impact continues to evolve as of the date of this Annual Report on Form 10-K. We are actively monitoring the impact of the COVID-19 pandemic on our financial condition, liquidity, operations, suppliers, industry and workforce . Although we have not experienced any significant adverse impact from the COVID-19 pandemic on our financial condition, results of operations or liquidity as of the date of this Annual Report on Form 10-K, the COVID-19 pandemic has resulted in disruptions to our clinical trial operations, including some missed and incomplete patient visits in our recently completed Phase 2a clinical trial of IMR-687 in SCD as well as site activation and enrollment delays and delays in review of our regulatory submissions with respect to our Phase 2b clinical trials of IMR-687 in SCD and ß-thalassemia. In addition, most of our employees are currently working remotely, and we are temporarily restricting travel and attendance at industry events by our employees. The COVID-19 pandemic has also resulted in significant financial market volatility. A continuation of the volatility could have an adverse effect on our ability to access capital, on our business, results of operations and financial condition and on the market price of our common stock. Our financial condition, results of operations and liquidity could be negatively impacted by the COVID-19 pandemic in future periods. The extent to which the COVID-19 pandemic impacts our business will depend on future developments, which remain uncertain and cannot be predicted, including new information that may emerge concerning the continued severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. As the COVID-19 pandemic continues, it may have an adverse effect on our results of future operations, financial position and liquidity, and even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future . Lundbeck License Agreement In April 2016, we entered into an agreement with H. Lundbeck A/S, or Lundbeck, for a worldwide license under certain patent rights and certain know-how owned or otherwise controlled by Lundbeck within the field of prevention, treatment or diagnosis of hemoglobinopathy disorders and/or other diseases or disorders, including those directly or indirectly related to hemoglobinopathies, which we refer to as the field. The agreement grants us an exclusive license under the licensed technology, including the right to grant sublicenses with certain restrictions, to research, develop, make, have made, use, sell, have sold, offer to sell, import, export and commercialize any product comprising or containing certain PDE9 inhibitors, in the field. The agreement also grants us a non-exclusive license under the licensed technology to research and develop, and make, have made, use, import and export for purposes of enabling such research and development, enhancements, 98 improvements, modifications or derivatives to licensed products, until but not beyond a specified pre-commercialization developmental stage with respect to each such enhancement, improvement, modification or derivative. Under the agreement, we have made cash payments totaling $1.8 million to date, consisting of an upfront payment and ongoing milestone payments, and also issued shares of our common stock as described in “ Note 1 4 – Related Party Transactions” of the notes to our consolidated financial statements in this Annual Report on Form 10-K . We are obligated to make milestone payments to Lundbeck aggregating up to $23.5 million upon the achievement of specified clinical, regulatory and first commercial sale milestones by any licensed product and $11.8 million upon the achievement of specified clinical, regulatory and first commercial sale milestones by any IMARA product that is or comprises a PDE9 inhibitor but is not a licensed product, or a PDE9 product, if any. We are obligated to pay tiered royalties of low-to-mid single-digit percentages to Lundbeck based on our, and any of our affiliates’ and sublicensees’, net sales of licensed products, and tiered royalties of low single-digit percentages to Lundbeck based on our, and any of our affiliates’ and sublicensees’, net sales of PDE9 products, if any. See “Business – Exclusive License Agreement” for a further description of the license agreement with Lundbeck . Financial Operations Overview Revenue We have not generated any revenue since our inception and do not expect to generate any revenue from the sale of products in the near future, if at all. If our development efforts for IMR-687 or additional product candidates that we may develop in the future are successful and result in marketing approval or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from such collaboration or license agreements. Operating Expenses Research and Development. Research and development expenses consist primarily of costs incurred in connection with the preclinical and clinical development and manufacture of IMR-687, and include: • personnel-related expenses, including salaries, benefits and stock-based compensation expenses, for individuals involved in research and development activities; • external research and development expenses incurred under agreements with contract research organizations, or CROs, investigative sites, and consultants that conduct our preclinical studies and clinical trials and other scientific development services; • costs incurred under agreements with contract manufacturing organizations, or CMOs, for developing and manufacturing material for our preclinical studies and clinical trials; • costs related to compliance with regulatory requirements; • milestone fees incurred in connection with our current license agreement with Lundbeck; and • facilities and other allocated expenses, which include direct and allocated expenses for rent, insurance and other operating costs. We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors and our clinical investigative sites. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our consolidated financial statements as prepaid expenses or accrued research and development expenses. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized, even when there is no alternative future use for the research and development. The capitalized amounts are expensed as the related goods are delivered or the services are performed. A significant portion of our research and development costs have been external costs, which we track after a clinical product candidate has been identified. Our internal research and development costs are primarily personnel-related costs and other indirect costs. Our research and development expenses to-date have been incurred in connection with our development of IMR-687 in SCD and β-thalassemia. We do not intend to track our internal research and development expenses on a program-by-program basis as our personnel are deployed across multiple projects under development. Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to 99 the increased size and duration of later-stage clinical trials. We expect research and development costs to increase significantly for the foreseeable future as we continue the development of IMR-687 and any product candidates we may develop in the future. However, we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of IMR-687 and any product candidates we may develop in the future, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development program and plans. The following table summarizes our research and development expenses for the periods indicated: Year Ended December 31, 2020 2019 (in thousands) IMR-687 $ 25,902 $ 14,598 Personnel expenses (including stock-based compensation) 5,566 3,089 Other expenses 686 1,322 Total research and development expenses $ 32,154 $ 19,009 The successful development of IMR-687 and any product candidates we may develop in the future is highly uncertain. Therefore, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development and commercialization of IMR-687 or any future product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from the sale of IMR-687 or potential future product candidates, if approved. This is due to the numerous risks and uncertainties associated with developing product candidates, including the uncertainty of: • the impact of the ongoing COVID-19 pandemic and our response to it; • the timing and progress of preclinical and clinical development activities; • the number and scope of preclinical and clinical programs we decide to pursue; • our ability to maintain our current research and development programs and to establish new ones; • establishing an appropriate safety profile with investigational new drug application, or IND, enabling studies; • successful patient enrollment in, and the initiation of, clinical trials; • the successful completion of clinical trials with safety, tolerability and efficacy profiles that are satisfactory to the U.S. Food and Drug Administration, or FDA, or any comparable foreign regulatory authority; • the timing, receipt and terms of any regulatory approvals from applicable regulatory authorities; • our ability to establish new licensing or collaboration arrangements; • the performance of our future collaborators, if any; • establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers; • obtaining, maintaining, defending and enforcing patent claims and other intellectual property rights; • launching commercial sales of our product candidates, if approved, whether alone or in collaboration with others; and • maintaining a continued acceptable safety profile of the product candidates following approval. Any changes in the outcome of any of these variables with respect to the development of IMR-687 or any future product candidates could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect, or if we experience significant delays in enrollment in any of our planned clinical trials, we could be required to expend significant additional financial resources and time to complete clinical development of that product candidate. We may never obtain regulatory approval for any of our product candidates. Drug commercialization will take several years and millions of dollars in development costs . 100 General and Administrative. General and administrative expenses consist primarily of personnel-related expenses, including salaries, benefits, and stock-based compensation expenses for personnel in executive, finance, accounting, human resources and other administrative functions. Other significant general and administrative expenses include legal fees relating to patent, intellectual property and corporate matters, and fees paid for accounting, consulting and other professional services. We anticipate that our general and administrative expenses will increase in the future as our business expands to support our continued research and development activities, including our future clinical programs. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, among other expenses. We also anticipate increased expenses associated with being a public company, including costs for audit, legal, regulatory, and tax-related services related to compliance with the rules and regulations of the Securities and Exchange Commission, or SEC, listing standards applicable to companies listed on a national securities exchange, director and officer insurance premiums and investor relations costs. In addition, if we obtain regulatory approval for IMR-687 or any future product candidate and to the extent that we engage in commercialization activities on our own, we expect to incur significant expenses related to building a sales and marketing team to support product sales, marketing and distribution activities . Total Other Income, Net Total Other Income, Net. Total other income, net primarily consists of interest earned on our cash, cash equivalents and investments, offset by amortization and accretion on investments and foreign currency translation adjustments . Results of Operations Comparison of the Years Ended December 31, 2020 and 2019 The following table summarizes our results of operations for the years ended December 31, 2020 and 2019 : Year Ended December 31, 2020 2019 (in thousands) Operating expenses: Research and development $ 32,154 $ 19,009 General and administrative 9,544 5,107 Total operating expenses 41,698 24,116 Loss from operations (41,698 ) (24,116 ) Total other income, net 338 653 Net loss $ (41,360 ) $ (23,463 ) Research and Development Expenses Research and development expenses increased by approximately $13.1 million from $19.0 million for the year ended December 31, 2019 to $32.2 million for the year ended December 31, 2020. The increase in research and development expenses was primarily attributable to the following: • a $11.3 million increase in costs related to the development and manufacturing of clinical materials, clinical research and oversight of our clinical trials and investigative fees for IMR-687; • a $2.5 million increase in personnel-related costs, including a $0.4 million increase in stock-based compensation expense, primarily due to an increase in headcount to support the growth of our research and development efforts; and • a $0.6 million decrease in other research and development operational costs, including facilities, supplies, and travel. 101 General and Administrative Expenses General and administrative expenses increased by approximately $4.4 million from $5.1 million for the year ended December 31, 2019 to $9.5 million for the year ended December 31, 2020. The increase in general and administrative expenses was primarily attributable to the following: • a $2.3 million increase in other general and administrative operational costs, including facilities, rent and increased insurance costs as a result of operating as a public company; • a $1.7 million increase in personnel costs, including a $0.9 million increase in stock-based compensation expense, primarily due to an increase headcount; and • a $0.4 million increase in legal and professional costs. Total Other Income, Net Total other income, net was $0.7 million for the year ended December 31, 2019, compared to total other income, net of $0.3 million for the year ended December 31, 2020. In June 2019, we invested our cash in money market funds and available-for-sale securities and in each of the years ended December 31, 2019 and December 31, 2020, our total other income, net consisted primarily of interest earned on our cash, cash equivalents and investments . Liquidity and Capital Resources Sources of Liquidity Since our inception, we have incurred significant losses in each period and on an aggregate basis. We have not yet commercialized IMR-687, which is in clinical development, and we do not expect to generate revenue from sales of IMR-687 or any product candidates we may develop in the future for several years, if at all. Through December 31, 2020, we have funded our operations primarily through the sale of common stock in our IPO and sale of convertible preferred stock. On February 25, 2020, we raised $17.1 million in gross proceeds from the issuance of 1,562,994 shares of Series B Preferred Stock upon a waiver of specified milestone conditions from the holders of a majority of the shares then held by the holders of Series B Preferred Stock. On March 16, 2020, we completed an IPO of our common stock and issued and sold 4,700,000 shares of common stock at a public offering price of $16.00 per share, resulting in gross proceeds of $75.2 million. On April 13, 2020, the underwriters exercised their option in full to purchase 705,000 additional shares of common stock for aggregate gross proceeds of $11.3 million. Inclusive of the underwriters’ option to purchase additional shares, we received approximately $76.5 million in net proceeds from the IPO after deducting $10.0 million of underwriting discounts and commissions and offering expenses . As of December 31, 2019 and December 31, 2020, we had $28.9 million and $88.2 million, respectively, in cash, cash equivalents and investments. While we do not currently expect that the COVID-19 pandemic will have a material adverse impact on our short-term or long-term liquidity, the impact of the COVID-19 pandemic on the global financial markets may reduce our ability to access capital, which could negatively impact our short-term and long-term liquidity. For additional information see “ — Impact of COVID-19 Pandemic .” Cash Flows The following table provides information regarding our cash flows for the periods indicated: Year Ended December 31, 2020 2019 (in thousands) Net cash used in operating activities $ (37,398 ) $ (21,877 ) Net cash used in investing activities (16,721 ) (24,060 ) Net cash provided by financing activities 96,881 43,579 Net increase (decrease) in cash, cash equivalents, and restricted cash $ 42,762 $ (2,358 ) 102 Net Cash Used in Operating Activities Net cash used in operating activities for the year ended December 31, 2020 was $37.4 million primarily due to our net loss of $41.4 million, partially offset by stock-based compensation expense of $2.2 million, depreciation expense of $0.1 million, amortization of $0.1 million on our short-term investments, and net cash inflows from the change in working capital of $1.7 million. Net cash used in operating activities for the year ended December 31, 2019 was $21.9 million primarily due to our net loss of $23.5 million, partially offset by stock-based compensation expense of $0.9 million and net cash inflows from the change in working capital of $0.7 million. Net Cash Used in Investing Activities Net cash used in investing activities for the year ended December 31, 2020 was $16.7 million primarily due to purchases of marketable securities of $64.2 million, partially offset by proceeds from sales and maturities of short-term investments of $47.5 million. Net cash used in investing activities for the year ended December 31, 2019 was $24.1 million for purchases of property and equipment related to our operating lease, under which we commenced occupancy in August 2019, and for purchases of short-term investments. Net Cash Provided by Financing Activities Net cash provided by financing activities for the year ended December 31, 2020 was $96.9 million, primarily due to $80.4 million of net proceeds received from our IPO, after deducting underwriting discounts and commissions, $17.1 million of cash inflow resulting from sale of Series B Preferred Stock in February 2020, and $1.0 million of proceeds from stock option exercises. The proceeds from our IPO were partially offset by payments of $1.7 million of issuance costs. Net cash provided by financing activities for the year ended December 31, 2019 was $43.6 million, primarily due to $45.6 million of cash inflow resulting from the issuance of our Series B Preferred Stock in March and May of 2019, which was partially offset by payments of $2.0 million in deferred offering costs. Funding Requirements We expect our expenses to increase substantially in connection with our ongoing research and development activities, particularly as we continue research and development, initiate clinical trials, and seek marketing approval for IMR-687 and any of our future product candidates. In addition, we expect to incur additional costs associated with operating as a public company. Our expenses will also increase if, and as, we: • navigate the impacts of COVID-19 and our response to it; • continue to advance clinical development of IMR-687, including our OLE clinical trial in patients with SCD and our ongoing Phase 2b clinical trials of IMR-687 in patients with SCD and β-thalassemia; • expand our planned research and development efforts for IMR-687 and potentially pursue clinical activities for IMR-687 in HFpEF; • continue to incur third-party manufacturing costs to support our clinical trials of IMR-687 and, if approved, commercialization; • seek regulatory and marketing approvals for IMR-687; • establish a sales, marketing and distribution infrastructure to commercialize IMR-687, if approved; • commence development activities for any additional product candidates we may identify; • acquire or in-license products, product candidates, technologies and/or data referencing rights; • maintain, expand, enforce, defend and protect our intellectual property; • hire additional clinical, quality control, manufacturing and other scientific personnel; 103 • add operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts and our operations as a public company; and • make any milestone payments to Lundbeck under our exclusive license agreement with Lundbeck, upon the achievement of specified clinical or regulatory milestones . Based on our current operating plan, we expect that our existing cash, cash equivalents and investments will enable us to fund our operating expenses and capital expenditure requirements into mid-2022. However, we have based this estimate on assumptions that may prove to be wrong and we could exhaust our capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of product candidates, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on many factors, including: • the impact of the COVID-19 pandemic and our response to it; • the time and cost necessary to complete our ongoing OLE and Phase 2b clinical trials of IMR-687 in patients with SCD, to initiate and complete one or more pivotal clinical trials of IMR-687 in SCD, and to pursue regulatory approvals for IMR-687 in SCD, and the costs of post-marketing studies that could be required by regulatory authorities; • the time and cost necessary to complete our Phase 2b clinical trial of IMR-687 in patients with β-thalassemia, to initiate and complete one or more pivotal clinical trials of IMR-687 in β-thalassemia, and to pursue regulatory approvals for IMR-687 in β-thalassemia, and the costs of post-marketing studies that could be required by regulatory authorities; • our ability to advance IMR-687 in HFpEF into and through clinical development, and the timing and scope of these development activities; • the costs of obtaining clinical and commercial supplies of IMR-687 and any other product candidates we may identify and develop; • our ability to successfully commercialize IMR-687 and any other product candidates we may identify and develop; • the manufacturing, selling and marketing costs associated with IMR-687 and any other product candidates we may identify and develop, including the cost and timing of establishing our sales and marketing capabilities; • the amount and timing of sales and other revenues from IMR-687 and any other product candidates we may identify and develop, including the sales price and the availability of coverage and adequate third-party reimbursement; • the time and cost necessary to respond to technological and market developments; • the extent to which we may acquire or in-license other product candidates and technologies; • our ability to attract, hire and retain qualified personnel; and • the costs of maintaining, expanding and protecting our intellectual property portfolio. A change in the outcome of any of these or other variables with respect to the development of IMR-687 or any product candidate we may develop in the future could significantly change the costs and timing associated with the development of that product candidate. Further, our operating plans may change in the future, and we may need additional funds to meet operational needs and capital requirements associated with such operating plans. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. We currently have no credit facility or committed sources of capital. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our existing stockholders may be diluted, and the terms of these securities may include liquidation or other preferences that could adversely affect the rights of such stockholders. Additional debt financing, if available, 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 raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research program or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt 104 financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves . Critical Accounting Policies and Estimates This management’s discussion and analysis is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reported periods. We base our estimates on historical experience, known trends and events, and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts, and experience. The effects of material revisions in estimates, if any, will be reflected in the consolidated financial statements prospectively from the date of change in estimates. While our critical accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies used in the preparation of our consolidated financial statements require the most significant judgments and estimates. See Note 2 of the notes to our annual consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a description of our other significant accounting policies. Accrued Research and Development Expenses As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued third-party research and development expenses as of each balance sheet date. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date 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. The significant estimates in our accrued research and development expenses include the costs incurred for services performed by our vendors in connection with research and development activities for which we have not yet been invoiced. We base our expenses related to research and development activities on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors that conduct research and development on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the research and development expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid balance accordingly. Non-refundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Although we do not expect our estimates to be materially different from amounts incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts incurred. Stock-Based Compensation We measure stock-based compensation issued to employees and non-employees based on the grant date fair value of the stock-based awards and recognize stock-based compensation expense on a straight-line basis over the requisite service period of the awards, which is generally the vesting period of the respective award. We have also granted stock-based awards with performance-based vesting conditions. We recognize compensation expense for awards with performance-based vesting conditions over the remaining service period using the accelerated attribution method when the performance condition is deemed to be probable. We account for forfeitures as they occur. 105 We classify stock-based compensation expense in our consolidated statements of operations in the same manner in which the award recipient’s salary and related costs are classified or in which the award recipient’s service payments are classified. In future periods, we expect stock-based compensation expense to increase, due in part to our existing unrecognized stock-based compensation expense and as we grant additional stock-based awards to continue to attract and retain our employees . We determine the fair value of stock-based awards based on the fair value of our common stock on the date of grant. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model, which requires inputs based on certain subjective assumptions, including the expected stock price volatility, the expected term of the option, the risk-free interest rate for a period that approximates the expected term of the option, and our expected dividend yield. Given our limited trading history as a public company, we determine the volatility for awards granted based on an analysis of reported data for a group of guideline companies that issued options with substantially similar terms. The expected volatility has been determined using a weighted-average of the historical volatility measures of this group of guideline companies. We expect to continue to do so until we have adequate historical data regarding the volatility of our own traded stock price. The expected term of our stock options granted to employees has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. Prior to our IPO, the expected term of our stock options granted to non-employees also used the “simplified” method. Following our IPO, the expected term of options granted to non-employees is determined by contractual term. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. We have not paid, and do not anticipate paying, dividends on our common stock; therefore, the expected dividend yield is assumed to be zero. As there was no public market for our common stock prior to our IPO, the estimated fair value of our common stock for awards made prior to the IPO was approved by our board of directors, with input from management, as of the date of each award grant, considering our most recently available independent third-party valuations of common stock and utilizing the valuation of our company’s enterprise value determined utilizing various methods including the back-solve method, OPM, or a hybrid of the probability-weighted expected return method, or PWERM, and the OPM. The total enterprise value was then allocated to the various outstanding equity instruments, including the underlying common stock, utilizing the option-pricing model. We believed the assumptions underlying these valuations represented our best estimates. The independent third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation . Following our IPO, we have determined the fair value of our common stock based on the quoted market price of our common stock on the Nasdaq Global Select Market. Emerging Growth Company Status We are an “emerging growth company,” or EGC, under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Section 107 of the JOBS Act provides that an EGC can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. Thus, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of delayed adoption of new or revised accounting standards and, therefore, we will be subject to the same requirements to adopt new or revised accounting standards as private entities. As an EGC, we may take advantage of certain exemptions and reduced reporting requirements under the JOBS Act. Subject to certain conditions, as an EGC: • we may present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations within registration statements; • we may avail ourselves of the exemption from providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; • we may avail ourselves of the exemption from complying with any requirement that may be adopted by the Public Company Accounting Oversight Board, or PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis; 106 • we may provide reduced disclosure about our executive compensation arrangements; and • we may not require nonbinding advisory votes on executive compensation or stockholder approval of any golden parachute payments. We will remain an EGC until the earliest of (i) December 31, 2025, (ii) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more, (iii) the date on which we have issued more than $1.0 billion in non-convertible debt during the previous rolling three-year period, or (iv) the date on which we are deemed to be a large accelerated filer under the Securities Exchange Act of 1934, as amended. Off-balance Sheet Arrangements We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable SEC rules.