Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
The following discussion and analysis is based on, and should be read in conjunction with our financial statements for the years ended December 31, 2021 and 2020, which are included elsewhere in this Annual Report on Form 10-K. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties and other factors. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Actual results could differ materially because of the factors discussed in “Risk Factors” elsewhere in this Annual Report on Form 10-K, and other factors that we have not identified.
Overview
We are a clinical stage ophthalmic company developing a pipeline of advanced therapeutics based on our proprietary microdose array print (MAP™) platform technology. We aim to achieve clinical microdosing of next-generation formulations of novel and existing ophthalmic pharmaceutical agents using our high-precision targeted ocular delivery system, branded the Optejet®. Optejet µ-therapeutics have the potential to replace conventional eye dropper delivery and improve safety, tolerability, patient compliance and topical delivery success for ophthalmic eye treatments. In the clinic, the Optejet has demonstrated that its targeted horizontal microdose delivery can achieve a significantly higher rate of successful ocular topical delivery compared to the established rate reported with traditional eye drops (~ 90% vs. ~ 50%). Our technology is designed to achieve single-digit µl-volume physiologic drug delivery with up to a 75% reduction in ocular drug and preservative topical dosing and has demonstrated significant improvement in the therapeutic index in drugs used for presbyopia, mydriasis and IOP lowering through six Phase II and Phase III trials. Conventional eye formulations lack high-precision micro-volume delivery and expose the ocular surface to approximately 300% more medication and preservatives than are physiologically indicated leading to clinically recognized ocular and non-ocular side effects. Using the Optejet, we are developing the next generation of smart ophthalmic therapeutics targeting new indications or new combinations where there are currently none or few drug therapies approved by the U.S. Food and Drug Administration, (the “FDA”). Our microdose therapeutics follow the FDA’s regulatory and approval process for combination products. Our products are classified by the FDA as drug-device combination drug/-device products with drug primary mode of action, meaning that the Center for Drug Evaluation and Research, or CDER, is designated as the lead center with primary jurisdictional oversight. Accordingly, the product candidates are submitted to FDA CDER for premarket review and approval under new drug applications, or NDAs.
Our pipeline is currently focused on the late-stage development of novel, potential first-in-class therapeutic indications for an estimated 25 million potential pediatric patients with progressive myopia in the United States and an estimated over 100 million potential patients with age-related near vision impairment, or presbyopia – indications where there is tremendous unmet need and, to our knowledge, there exists only one known FDA-approved therapy, developed by Allergan. We are also developing the first microdose fixed combination ophthalmic pharmaceutical for mydriasis to address the estimated over 100 million annual comprehensive eye exams with pupil dilation.
MicroPine is our first-in-class topical therapy for the treatment of progressive myopia, a back-of-the-eye ocular disease associated with pathologic axial elongation and sclero-retinal stretching. In the United States, myopia is estimated to affect approximately 25 million children, with up to five million considered to be at risk for high myopia. In February 2019, the FDA accepted our investigational new drug application, or IND, to initiate a Phase III registration trial of MicroPine (the CHAPERONE study) to reduce the progression of myopia in children. We enrolled the first patient in the CHAPERONE study in June 2019. Due to the COVID-19 pandemic, there have been delays in trial enrollment as a result of supply chain issues with our third party suppliers, which in turn diminished our inventory supply.
On October 9, 2020, we entered into the Bausch License Agreement, pursuant to which Bausch Health may develop and commercialize MicroPine in the United States and Canada. Under the terms of the Bausch License Agreement, we received an upfront payment of $10.0 million and we may receive up to a total of $35.0 million in additional payments, based on the achievement of certain regulatory and launch-based milestones. Bausch Health also will pay us royalties on a tiered basis (ranging from mid-single digit to mid-teen percentages) on gross profits from sales of MicroPine in the United States and Canada, subject to certain adjustments. Under the terms of the Bausch License Agreement, Bausch Health assumed sponsorship of the IND as well as oversight and the costs related to the ongoing CHAPERONE study.
MicroLine (or Apersure) is our investigational pharmacologic treatment for presbyopia. Presbyopia is a non-preventable, age-related hardening of the lens, which causes the gradual loss of the eye’s ability to focus on near objects and impairs near visual acuity.
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Allergan recently received FDA approval for and launched Vuity TM , a pilocarpine solution for the treatment of presbyopia. We are currently enrolling our second Phase III study, VISION-2, using the same molecule, but with the advantages of our Optejet delivery system. We anticipate top-line results from VISION-2 in mid-2022.
Mydcombi™ (or MicroStat) is our fixed combination formulation of tropicamide-phenylephrine for mydriasis, designed to be a novel approach for the estimated over 100 million office-based comprehensive and diabetic eye exams performed every year in the United States. We have completed two Phase III trials for Mydcombi and announced positive results from these studies, known as MIST-1 and MIST-2, and have submitted an NDA to the FDA seeking approval to market the product in the U.S.. In October 2021, we received a CRL in response to our NDA, which in part informed us that pre-filled or co-packaged ophthalmic drug dispenser products like Mydcombi have been reclassified as drug-device combination products. This reclassification was based upon the U.S. Court of Appeals for the D.C. Circuit’s decision in Genus Medical Technologies v. FDA , not involving Eyenovia, which ordered that products meeting the statutory definition of a device but were previously classified by the FDA as drugs must be regulated as devices. Before this ruling, the FDA regulated pre-filled or co-packaged ophthalmic dispensers as part of the approved ophthalmic drug distributed and sold with the dispenser. After the ruling, however, the dispenser must be considered as a distinct device constituent part of a drug-device combination product. We are in the process of providing additional non-clinical device information and expect to file our NDA resubmission in the third quarter of 2022.
On August 10, 2020, we entered into the Arctic Vision License Agreement, which was amended on September 14, 2021, with Arctic Vision, pursuant to which Arctic Vision may develop and commercialize MicroPine, MicroLine and Mydcombi in Greater China (mainland China, Hong Kong, Macau and Taiwan) and South Korea. Under the terms of the Arctic Vision License Agreement, we received an upfront payment of $4.25 million before any payments to Senju. In addition, we may receive up to a total of $43.75 million in additional payments, based on various development and regulatory milestones, including the initiation of clinical research and approvals in Greater China and South Korea, and development costs. Arctic Vision also will purchase its supply of MicroPine, MicroLine and Mydcombi from us or, for such products not supplied by us, pay us a mid-single digit percentage royalty on net sales of such products, subject to certain adjustments. We will pay between 30 and 40 percent of such payments, royalties, or net proceeds of such supply to Senju pursuant to the Exclusive License Agreement with Senju dated March 8, 2015, as amended by the License Amendment 2, executed on September 14, 2021. See Note 2— Summary of Significant Accounting Policies—Arctic Vision License Agreement and Note 10—Related Party Transactions—Senju License Agreement to our audited financial statements included in this Annual Report on Form 10-K for further details.
Historically, we have financed our operations principally through equity offerings. We have also generated cash through licensing arrangements and our credit facility with Silicon Valley Bank (“SVB”). However, b ased upon our current operating plan, there is substantial doubt about our ability to continue as a going concern for at least one year from the date that these financial statements are issued. Our ability to continue as a going concern depends on our ability to complete additional licensing or business development transactions or raise additional capital, through the sale of equity or debt securities to support our future operations. If we are unable to secure additional capital, we may be required to curtail our research and development initiatives and take additional measures to reduce costs.
Our net losses were $12.8 million and $19.8 million for the years ended December 31, 2021 and 2020. As of December 31, 2021, we had working capital and an accumulated deficit of approximately $10.8 million and $90.2 million, respectively.
Financial Overview
Revenue and Cost of Revenue
In August and October 2020, we entered into the Arctic Vision License Agreement and Bausch License Agreement, respectively. Both of these agreements provide for the Company to earn revenue from an upfront licensing fee, the achievement of various development and regulatory milestones, and royalty income on sales of licensed products. Pursuant to the Senju License agreement, we will pay a percentage between 30 and 40 percent of such payments from the Arctic Vision License Agreement to Senju. See Note 10 – Related Party Transactions in the accompanying financial statements for the years ended December 31, 2021 and 2020.
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Research and Development Expenses
Research and development expenses are incurred in connection with the research and development of our microdose therapeutics and consist primarily of contract service expenses. Given where we are in our life cycle, we do not separately track research and development expenses by project. Our research and development expenses consist of:
● direct clinical and non-clinical expenses, which include expenses incurred under agreements with contract research organizations, contract manufacturing organizations, and costs associated with preclinical activities, development activities and regulatory activities;
● personnel-related expenses, which include expenses related to consulting agreements with individuals that have since entered into employment agreements with us as well as salaries and other compensation of employees that is attributable to research and development activities; and
● facilities and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, marketing, insurance and other supplies used in research and development activities.
We expense research and development costs as incurred. We record costs for some development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as subject enrollment, clinical site activations or other information our vendors provide to us.
We expect that our research and development expenses will increase with the continuation of the aforementioned initiatives.
General and Administrative Expenses
General and administrative expenses consist primarily of payroll and related expenses, legal and other professional services, insurance expense, and non-cash stock-based compensation expense. We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research and development and the potential commercialization of our product candidates.
Results of Operations
Year Ended December 31, 2021 Compared with Year Ended December 31, 2020
Revenue and Cost of Revenue
In August 2020, we received a non-refundable, upfront payment of $4.0 million under the terms of the Arctic Vision License Agreement, which was recorded as deferred license fees until such time that the related performance obligation was satisfied and the payment was earned. Payment is earned and revenue is recognized once certain trial data has been fully submitted to Arctic Vision, permitting Arctic Vision to seek regulatory approval with the National Medical Products Administration of China. The trial data for one of the two products (MicroPine) was fully submitted to Arctic Vision in March 2021 and trial data for the other product (MicroLine) was fully submitted to Arctic Vision in June 2021. As a result, we recognized the deferred license fees as revenue during the year ended December 31, 2021. On September 14, 2021, we executed Amendment 1 to the Arctic Vision License Agreement with Arctic Vision, which provides for a one-time upfront payment to us of $250,000 and milestone payments to us of $2.0 million based on the achievement of certain milestones. In December 2020, we satisfied the performance obligation which resulted in us recognizing $2.0 million of milestone revenues. We did not recognize revenue for the $250,000 upfront payment because it was passed through to Senju pursuant to our agreement with them. Pursuant to the terms of the Senju License Agreement, we are required to pay Senju a percentage of payments received from Arctic Vision. Accordingly, we accrued $1.6 million of license costs related to payments to Senju in connection with the upfront license fees received from Arctic Vision, which is reflected as cost of revenue on the accompanying statements of operations. See Note 10 – Related Party Transactions in the accompanying financial statements for the years ended December 31, 2021 and 2020.
In October 2020, we received a $10.0 million upfront payment under the Bausch Health License Agreement. We recorded this payment as a deferred license fee until certain trial data was fully submitted to Bausch Health and clinical trial supervisory oversight
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was transferred to Bausch Health. The required trial data and oversight functions were transferred to Bausch Health during the fourth quarter of 2021. Accordingly, the upfront payment was earned and recognized as revenue during the year ended December 31, 2021.
Research and Development Expenses
Research and development expenses for the year ended December 31, 2021 totaled $14.5 million, an increase of $1.1 million, or 9%, as compared to $13.4 million recorded for the year ended December 31, 2020. Research and development expenses consisted of the following:
For the Year Ended
December 31,
2021
2020
Direct clinical and non-clinical expenses
$
4,928,674
$
6,206,239
Personnel-related expenses
5,393,241
3,747,847
Supplies and materials
1,271,234
1,448,787
Non-cash stock-based compensation expenses
1,612,942
1,350,894
Facilities expenses
928,832
138,348
Other expenses
374,602
471,136
Total research and development expenses
$
14,509,525
$
13,363,251
The decrease in direct clinical and non-clinical expenses was primarily due to the Vision I Study having concluded in early 2021 and significantly higher cost reimbursements from Bausch Health and Arctic Vision. The cost reimbursements are booked as contra expense. The increase in personnel-related expenses is primarily due to new hires and 2021 salary increases in the R&D group in preparation for commercialization. The decrease in supplies and materials is primarily due to us producing the bulk of our current 2021 needs for clinical cartridge supply in 2020. The increase in stock-based compensation expense is primarily due to stock option grants for new hires and executives in 2021. The increase in facilities and other expenses was primarily due to rent and utilities related to the new Redwood City facility in preparation for commercialization. The increase in other expense primarily reflects the depreciation of additional equipment purchased for clinical trials.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2021 totaled $10.8 million, an increase of $3.2 million, or 42%, as compared to $7.6 million recorded for the year ended December 31, 2020. The increase was primarily attributable to increases of approximately $0.9 million in payroll related expenses due to new hires, bonuses, and salary raises, increases in stock-based compensation of approximately $0.1 million due to option grants to new hires and officers, an increase of approximately $1.5 million in sales and marketing, primarily related to the Mydcombi promotional campaign, an increase of approximately $0.3 million in insurance expenses, an increase of approximately $0.2 million in travel and conference expenses primarily due to a decreased impact of COVID-19 austerity measures, an increase of approximately $0.1 million due to a one-time fee paid towards a commercial product distribution wholesale service in 2021 and an increase of approximately $0.1 million in investor relations.
Other Income (Expense)
Other income (expense) for the year ended December 31, 2021 totaled approximately $125,000 of income, an increase of approximately $106,000, or 558%, as compared to $19,000 of income for the year ended December 31, 2020. The increase was primarily due to approximately $463,000 of other income recorded as a gain on extinguishment of the PPP (7a) loan, offset by an increase of approximately $371,000 of interest expense primarily related to a loan we entered into with SVB in 2021.
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Liquidity and Going Concern
We measure our liquidity in a number of ways, including the following:
December 31,
2021
2020
Cash and Cash Equivalents
$
19,461,850
$
28,371,828
Restricted Cash
7,875,000
—
Total
$
27,336,850
$
28,371,828
Working Capital
$
10,829,363
$
15,192,968
Notes Payable (Gross)
$
7,500,000
$
463,353
Cash Flow
Since inception, we have experienced negative cash flows from operations and our operations have primarily been funded through proceeds received in equity and debt financings. At December 31, 2021, our accumulated deficit since inception was approximately $90.2 million.
Our operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. Our future capital requirements and the adequacy of our available funds will depend on many factors, including our ability to successfully commercialize our products and services and competing market developments.
During the years ended December 31, 2021 and 2020, our sources and uses of cash were as follows:
Net cash used in operating activities for the year ended December 31, 2021 was approximately $20.9 million, which includes cash used to fund a net loss of $12.8 million, reduced by $10.7 million of net cash used by changes in the levels of operating assets and liabilities, offset by $2.6 million of non-cash expenses. Net cash used in operating activities for the year ended December 31, 2020 was approximately $6.4 million, which includes cash used to fund a net loss of $19.8 million, reduced by $2.6 million of non-cash expenses, offset by $10.8 million of net cash provided by changes in the levels of operating assets and liabilities.
Net cash used in investing activities was approximately $1.6 million and $0.3 million for the years ended December 31, 2021 and 2020, respectively, which was attributable to purchases of property and equipment.
Net cash provided by financing activities for the year ended December 31, 2021 totaled approximately $21.5 million, which was primarily attributable to $12.4 million of net proceeds from the sale of common stock and warrants in our at-the-market offering pursuant to the Sales Agreement, dated May 14, 2021, with SVB Securities LLC (formerly known as SVB Leerink LLC), $2.1 million of proceeds from exercises of stock warrants, $7.5 million of proceeds from the credit facility with SVB, $0.2 million of proceeds from the exercise of stock options, offset by $0.7 million from the repayment of notes payable and $0.1 million from the payment of loan issuance costs. Net cash provided by financing activities for the year ended December 31, 2020 totaled approximately $20.9 million, which was primarily attributable to $12.4 million of net proceeds from the sale of common stock in our August 2020 public offering, $5.6 million of net proceeds from the sale of common stock and warrants in our March 2020 private placement, $2.9 million of proceeds from the exercise of warrants issued in our March 2020 private placement and stock options held by certain employees, and $0.5 million from the proceeds of the PPP Loan, offset by $0.5 million from the repayment of notes payable.
In addition, on March 3, 2022, we raised approximately $15 million through the issuance and sale of 3,000,000 shares of common stock, pre-funded warrants to purchase an aggregate of 1,870,130 shares of common stock and warrants to purchase an aggregate of 4,870,130 shares of common stock at an exercise price of $3.54 per share.
Subsequent to December 31, 2021, we received approximately $0.9 million in gross and net proceeds from the sale of 252,449 shares of our common stock pursuant to an at-the-market offering.
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Contractual Obligations and Commitments
During the next twelve months we have commitments to pay (a) $4.0 million to settle our December 31, 2021 accounts payable and accrued expenses, (b) $0.5 million relating to our non-cancelable operating lease commitments; (c) $1.3 million of potential executive severance pay; and (d) $7.5 million of payments due under our notes payable.
After twelve months we have commitments to pay (a) an additional $0.3 million relating to our non-cancelable operating lease commitments.
SVB Loan Agreement
On May 7, 2021 (the “Effective Date”), we entered into a Loan and Security Agreement (the “Loan”) with SVB for an aggregate principal amount of up to $25.0 million. The Loan bears interest at an annual rate equal to the greater of (a) the sum of 1.25% plus the prime rate as reported in The Wall Street Journal and (b) 5.00%. The Loan is secured by all of our tangible assets. The Loan matures on May 1, 2025. The Loan requires monthly interest-only payments until June 1, 2022. The interest-only period can be extended to June 1, 2023, upon the occurrence of a milestone event. Upon the end of the interest-only period, we will make regular monthly amortizing payments of principal and interest through the maturity date. The Loan indicates a prepayment fee of 1.0% to 3.0%, as follows: (i) prepayment fee of 3.0% of the principal balance made on or prior to the first anniversary of the Effective Date; (ii) prepayment fee of 2.0% of the principal balance made on or prior to the second anniversary of the Effective Date; or (iii) prepayment fee of 1.0% of the principal balance made on or prior to the third anniversary of the Effective Date. The Loan also provides for a final payment in an amount equal to the original aggregate principal amount of the multiplied by 5.0%. The final payment is in addition to and not a substitution for the regular monthly payments of principal plus accrued interest and is due on the earliest to occur of the loan maturity date, the repayment of the loan in full or the termination of the Loan Agreement.
The initial tranche of the Loan, in the amount of $7.5 million was received on May 7, 2021. At our option, we have the ability to draw down the remaining $17.5 million in gross proceeds in two tranches over the next two years based upon the achievement of several milestones in accordance with the terms of the Loan.
On September 29, 2021, we executed the First Amendment to the Loan and Security Agreement (the “Amendment”) with SVB. In accordance with the Amendment, we must maintain a collateralized money market account in the amount of $7,875,000. We have recorded this amount as restricted cash. This account must be maintained until the Release Event occurs, which was defined as when we have received approval by the FDA of Mydcombi and have achieved the minimum equity raise under the terms of the amended agreement, on or prior to November 30, 2021.
On October 25, 2021, we announced the reclassification of Mydcombi as a drug-device combination product by the FDA in a CRL received on October 22, 2021. We have prepared the necessary documents for expedited filing of the NDA resubmission for Mydcombi in response to the CRL. Given the FDA’s recent reclassification of Mydcombi as a drug-device combination and the need to file an NDA resubmission in 2022, the restricted cash became callable on November 30, 2021, at SVB’s election, to satisfy the Loan obligations. On February 8, 2022, we issued a press release announcing that we successfully completed a Type A meeting with the FDA related to the refiling of the NDA for Mydcombi. Following the Type A meeting, we reached alignment on the path forward toward an NDA resubmission with the FDA. We expect to file the NDA resubmission during the third quarter of 2022.
On November 30, 2021, we entered into a Waiver Agreement, pursuant to which SVB waived the existing default related to the failure to comply with the minimum equity raise financial covenant set forth in the Loan. However, the Loan is currently callable by SVB, due to having not yet received FDA approval of Mydcombi.
In connection with the Loan, we issued warrants to SVB to purchase 91,884 shares of common stock at an exercise price per share equal to $4.76. The warrants are exercisable for a period of ten years from the date of issuance. We incurred $66,618 of debt issuance costs.
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Going Concern
As of December 31, 2021, we had unrestricted cash and cash equivalents of approximately $19.5 million and an accumulated deficit of approximately $90.2 million. For the years ended December 31, 2021 and 2020, we incurred net losses of approximately $12.8 million and $19.8 million, respectively, and used cash in operations of approximately $20.9 million and $6.4 million, respectively. We do not have recurring revenue and have not yet achieved profitability. We expect to continue to incur cash outflows from operations. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we will eventually need to generate significant product revenues to achieve profitability. These circumstances raise substantial doubt about our ability to continue as a going concern for at least one year from the date that these financial statements are issued. Implementation of our plans and our ability to continue as a going concern will depend upon our ability to generate sufficient recurring revenues or our ability to raise further capital, through the sale of additional equity or debt securities or otherwise, to support our future operations.
Our operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. Our future capital requirements and the adequacy of our available funds will depend on many factors, including our ability to successfully commercialize our products and services, competing technological and market developments, and the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product and service offerings. If we are unable to generate sufficient recurring revenues or secure additional capital, we may be required to curtail our research and development initiatives and take additional measures to reduce costs in order to conserve our cash.
On March 3, 2022, we raised approximately $15 million through the issuance and sale of 3,000,000 shares of common stock, pre-funded warrants to purchase an aggregate of 1,870,130 shares of common stock and warrants to purchase an aggregate of 4,870,130 shares of common stock at an exercise price of $3.54 per share.
Subsequent to December 31, 2021, we received approximately $0.9 million in gross and net proceeds from the sale of 252,449 shares of our common stock pursuant to an at-the-market offering.
Risks and Uncertainties
Due to the COVID-19 pandemic, there have been delays in trial enrollment as a result of supply chain issues with our third party suppliers, which in turn diminished our inventory supply.
The short- and long-term worldwide implications of Russia’s invasion of Ukraine are difficult to predict at this time. The imposition of sanctions on Russia by the United States or other countries and possible counter sanctions by Russia, and the resulting economic impacts on oil prices and other materials and goods, could affect the price of materials used in the manufacture of our product candidates. If the price of materials used in the manufacturing of our product candidates increase, that would adversely affect our business and the results of our operations.
Critical Accounting Estimates
The following represent our most critical accounting estimates
Use of Estimates
Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates, judgments and assumptions that affect the amounts reported in the financial statements and the amounts disclosed in the related notes to the financial statements. We base our estimates and judgments on historical experience and on various other assumptions that it believes are reasonable under the circumstances. The amounts of assets and liabilities reported in our balance sheets and the amounts of expenses reported for each of the periods presented are affected by estimates and assumptions, which are used for, but not limited to, fair value calculations for equity securities, establishment of valuation allowances for deferred tax assets, revenue recognition, the recoverability and useful lives of long-lived assets, the recovery of deferred costs and the deferral of revenues. Certain of our estimates could be affected by external conditions, including those unique to us and general economic conditions. It is reasonably possible that actual results could differ from those estimates.
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Impairment of Long-lived Assets
We review for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. An impairment would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount.
Deferred License Fee
We enter into license agreements which provides for the receipt of non-refundable, upfront licensing payments. These payments are recorded as deferred license fees and will be earned and recognized as revenue upon the satisfaction of performance obligations. See Revenue Recognition below for additional details.
Deferred License Costs
We enter into license agreements which provides for payment of license costs in connection with our receipt of license fees. These payments are recorded as deferred license costs and will be recorded as an expense when the related license fee revenue is recognized.
Revenue Recognition
Our revenues are generated primarily through research, development and commercialization agreements. The terms of such agreements may contain multiple promised goods and services, which may include (i) licenses to our intellectual property, and (ii) in certain cases, payment in connection with the manufacturing and delivery of clinical supply materials. Payments to us under these arrangements typically include one or more of the following: non-refundable, upfront license fees; milestone payments; payments for clinical product supply, and royalties on future product sales.
We analyze our arrangements to assess whether such arrangements involve joint operating activities. For collaboration arrangements that are deemed to be within the scope of ASC Topic 808, “Collaborative Arrangements” (“ASC 808”), we allocate the contract consideration between such joint operating activities and elements that are reflective of a vendor-customer relationship and, therefore, within the scope of ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”). Our policy is to recognize amounts allocated to joint operating activities as a reduction in research and development expense.
Under ASC 606, we recognize revenue when our customers obtain control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps:
● Step 1: Identify the contract with the customer;
● Step 2: Identify the performance obligations in the contract;
● Step 3: Determine the transaction price;
● Step 4: Allocate the transaction price to the performance obligations in the contract; and
● Step 5: Recognize revenue when the company satisfies a performance obligation.
We must make significant judgments in our revenue recognition process, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each performance obligation. In addition, arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally considered discretionary purchase options. We assess if these options provide a material right to the customer and if so, they are considered performance obligations.
For upfront license fees, we must consider how many performance obligations are in the contract and, if more than one, how to allocate the fee to those performance obligations upon satisfaction of the performance obligation(s). Milestone payments represent variable consideration that will be recognized when the performance obligation is achieved. Sales-based royalty payments derived from usage of intellectual property are recognized when those sales occur.
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Stock-Based Compensation
We measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. The fair value of the award is measured on the grant date and the fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Upon the exercise of an option, the Company issues new shares of common stock out of the shares reserved for issuance under its equity plans.
Recently Issued Accounting Standards
Our recently issued accounting standards are included in Note 2 – Summary of Significant Accounting Policies of our financial statements included within this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Smaller reporting companies such as us are not required to provide the information required by this Item.
Item 8. Financial Statements and Supplementary Data.
See the financial statements included at the end of this report beginning on page F-1.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not applicable.