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, 2022 and 2021, 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 pre-commercial ophthalmic technology company developing the Optejet® delivery system for use both in combination with our own drug-device therapeutic programs as well as out-licensing for additional indications. Our aim is to improve the delivery of topical ophthalmic medication through ergonomic design that facilitates ease-of-use, delivery of more physiologically appropriate medication volume, with the goal to reduce side effects and improve tolerability, and introduce digital health technology to improve therapy compliance and ultimately medical outcomes.
The ergonomic and functional design of the Optejet® allows for horizontal drug delivery and eliminates the need to tilt the head back or the manual dexterity to squeeze a bottle, to administer medications. Drug is delivered in a microscopic array of droplets faster than the blink reflex to help ensure instillation success. The precise delivery of a low-volume columnar spray by the Optejet® device minimizes contamination with a non-protruding nozzle and self-closing shutter. In clinical trials, the Optejet® has demonstrated that its targeted delivery achieves a high rate of successful administration, with 98% of sprays being accurately delivered upon first attempt compared to the established rate reported with traditional eye drops of ~ 50%.
A more physiologically appropriate volume of medication in the range of seven to nine microliters is delivered by the Optejet, approximately one fifth of the 35 to 50 microliter dose typically delivered in a single eye drop. Lower volume of medication exposes the ocular surface to less active ingredient and preservatives, potentially reducing ocular stress and surface damage and improving tolerability. The lower volume also minimizes the potential for drug to enter systemic circulation, with the goal of avoiding some common side effects that are related to overdosing of the eye.
Versions of the Optejet are being developed with on-board digital technology to provide reminders via Bluetooth to smart devices and date and time stamp device use. This information can then be used by practitioners and health care systems to measure treatment compliance and improve medical decision making. In this way, the Optejet could serve as an extension of the physician’s office by providing information that is not currently possible to collect except through the use of diaries.
Our drug-device therapeutic programs include MicroPine, MicroLine and Mydcombi™. 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 high risk for progressive myopia. In February 2019, the FDA accepted our IND to initiate the CHAPERONE study to reduce the progression of myopia in children. The first patient was enrolled in the CHAPERONE study in June 2019.
On October 9, 2020, we entered into the Bausch License Agreement with Bausch + Lomb, pursuant to which Bausch + Lomb 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 + Lomb also will pay royalties to Eyenovia 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 + Lomb assumed sponsorship of the IND as well as ownership and the costs related to the ongoing CHAPERONE study.
We have also successfully expanded our manufacturing capabilities through a partnership with Coastline International, Inc. located in Tijuana, Mexico, and the construction of our own fill and finish facility in Redwood City, California. As of the date of filing, we are up-to-date supplying clinical product for this study.
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MicroLine 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. Allergan recently launched Vuity™, a pilocarpine drug product for the treatment of presbyopia. Our second Phase III study, VISION-2, used the same drug, delivered with the advantages of our Optejet® device. We released positive top-line results from VISION-2 in the fourth quarter of 2022.
Mydcombi™ is our fixed combination formulation of tropicamide-phenylephrine for mydriasis and a novel approach for the over 100 million office-based comprehensive and diabetic eye exams performed every year in the United States. We 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 had 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 resubmitted the NDA on November 8, 2022, and announced on December 13, 2022 that the FDA has accepted the resubmission. The FDA has assigned the resubmitted NDA a standard review with a Prescription Drug User Fee Act (PDUFA) target action date of May 8, 2023.
On August 10, 2020, we entered into the Arctic Vision License Agreement with Arctic Vision, which was amended on September 14, 2021, 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, as amended, we received an upfront payment of $4.25 million before any payments to Senju. In addition, we may receive up to a total of $39.7 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 Eyenovia or, for such products not supplied by Eyenovia, pay 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 an exclusive license agreement with Senju dated March 8, 2015, as amended. 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.
We are in active discussions with manufacturers of existing and late-stage ophthalmic medications to explore whether development with the Optejet technology can solve unmet medical and business needs. Some of those business needs could include extension of exclusivity under the Optejet patents, improvement in a drug’s tolerability profile, or potential improvement in treatment compliance.
Historically, we have financed our operations principally through equity offerings. We have also generated cash through licensing arrangements and our credit facilities with SVB and Avenue. However, based 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 $28.0 million and $12.8 million for the years ended December 31, 2022 and 2021. As of December 31, 2022, we had working capital and an accumulated deficit of approximately $23.1 million and $118.2 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
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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, 2022 and 2021.
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, 2022 Compared with Year Ended December 31, 2021
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. 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 for the year ended December 31, 2021 (see Note 10 – Related Party Transactions in the accompanying financial statements for the years ended December 31, 2022 and 2021). On September 14, 2021, we executed Amendment 1 to the Arctic Vision License Agreement, 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. We did not recognize revenue for the $250,000 upfront payment because it was passed through to Senju pursuant to our agreement with them.
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.
No revenue was earned or recognized during the year ended December 31, 2022.
Research and Development Expenses
Research and development expenses for the year ended December 31, 2022 totaled $13.4 million, a decrease of $1.5 million, or 10%, as compared to $14.9 million recorded for the year ended December 31, 2021. Research and development expenses consisted of the following:
For the Year Ended
December 31,
2022
2021
Personnel-related expenses
$
6,070,577
$
5,393,241
Supplies and materials
2,731,743
1,271,234
Non-cash stock-based compensation expenses
1,809,305
1,612,942
Direct clinical and non-clinical expenses
1,005,661
5,045,518
Facilities expenses
994,069
1,153,337
Other expenses
767,325
374,602
Total research and development expenses
$
13,378,680
$
14,850,874
The increase in personnel-related expenses and non-cash stock-based compensation expenses was primarily due to new hires. The increase in supplies and materials was primarily due to costs expended for clinical dispenser cartridge supplies in 2022. The decrease in direct clinical and non-clinical expenses resulted from the sharp decrease in expenses resulting from Bausch + Lomb assuming full control of its clinical trial in December 2021 and the Vision 2 study in 2022 costing less than the Vision 1 study completed in 2021. The increase in other expense primarily reflects additional travel expenses due to the easing of COVID-19 restrictions.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2022 totaled $13.5 million, an increase of $2.9 million, or 27%, as compared to $10.6 million recorded for the year ended December 31, 2021. General and administrative expenses consisted of the following:
For the Year Ended
December 31,
2022
2021
Salaries and benefits
$
3,842,993
$
2,875,884
Professional fees
3,427,450
1,963,233
Stock-based compensation
1,956,059
1,273,160
Other
1,260,732
1,151,678
Sales and marketing
1,203,767
1,964,192
Insurance expense
1,061,505
917,548
Director fees and expense
398,125
318,250
Facilities expense
382,204
105,707
$
13,532,835
$
10,569,652
The increase in salaries and benefits and stock-based compensation was primarily attributable to new hires as we ramp up for the commercialization stage. The increase in professional fees was primarily due to higher legal and professional recruiting expenses related to the addition of new directors in 2022. The decrease in sales and marketing primarily related to the Mydcombi promotional campaign and trade show expenses incurred for the anticipated launch in late 2021. The timing of that launch has been delayed.
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Other Income (Expense)
Other income (expense) for the year ended December 31, 2022 totaled approximately $1.1 million of net other expense, a change of approximately $1.3 million, as compared to $0.2 million of net other income for the year ended December 31, 2021. Net other expense for the year ended December 31, 2022 primarily consisted of approximately $1.4 million of interest expense related to the SVB loan payoff and the Avenue loan, primarily offset by $0.2 million of income from the sale of clinical supplies and $0.1 million of interest income. Net other income for the year ended December 31, 2021 primarily consisted of an approximately $0.5 million gain on extinguishment of the PPP (7a) loan, primarily offset by approximately $0.4 million of interest expense primarily related to a loan we entered into with SVB in 2021.
Liquidity and Going Concern
We measure our liquidity in a number of ways, including the following:
December 31,
2022
2021
Cash and Cash Equivalents
$
22,863,520
$
19,461,850
Restricted Cash
—
7,875,000
Total
$
22,863,520
$
27,336,850
Working Capital
$
23,130,178
$
10,829,363
Notes Payable (Gross)
$
10,425,000
$
7,500,000
Cash Flow
Since inception, we have experienced negative cash flows from operations and our operations have primarily been funded by proceeds received in equity and debt financings. At December 31, 2022, our accumulated deficit since inception was approximately $118.2 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, 2022 and 2021, our sources and uses of cash were as follows:
Net cash used in operating activities for the year ended December 31, 2022 was approximately $25.1 million, which includes cash used to fund a net loss of $28.0 million, reduced by $2.3 million of net cash used by changes in the levels of operating assets and liabilities, offset by $5.2 million of non-cash expenses. 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 net non-cash expenses.
Net cash used in investing activities was approximately $0.9 million and $1.6 million for the years ended December 31, 2022 and 2021, respectively, which was attributable to purchases of property and equipment.
Net cash provided by financing activities for the year ended December 31, 2022 totaled approximately $21.5 million, which was primarily attributable to $14.9 million of net proceeds from the sale of common stock and warrants from a registered direct offering, $5.3 million of net proceeds from the sale of common stock and warrants in our at-the-market offering pursuant to the Sales Agreement with SVB Securities LLC, or SVB Securities (formerly known as SVB Leerink LLC), and $9.5 million of net proceeds from the credit facility with Avenue, offset by $8.2 million from the repayment of notes payable. 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, $2.1 million of proceeds from exercises of stock warrants, $7.4 million of net proceeds from the credit facility with SVB Securities, $0.2 million of proceeds from the exercise of stock options, offset by $0.7 million from the repayments of notes payable.
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Contractual Obligations and Commitments
During the next twelve months we have commitments to pay (a) $3.7 million to settle our December 31, 2022 accounts payable, accrued expenses and other current liabilities, (b) $0.5 million relating to our non-cancelable operating lease commitments; (c) $1.0 million of potential executive severance pay; and (d) $0.4 million of gross payments due under our notes payable and convertible notes payable (if not previously converted).
After twelve months we have commitments to pay (a) an additional $0.9 million relating to our non-cancelable operating lease commitments, and $10.0 million of gross payments due in connection with notes payable and convertible notes payable (if not previously converted).
Avenue Loan Agreement
On November 22, 2022, we entered into a Loan and Security Agreement, or the Avenue Loan with Avenue Venture Opportunities Fund, L.P., or Avenue 1 and Avenue Venture Opportunities Fund, L.P. II, or Avenue 2, for an aggregate principal amount of up to $15,000,000. The initial tranche of the Avenue Loan is $10,000,000, consisting of $4,000,000 from Avenue 1 and $6,000,000 from Avenue 2. Up to $5,000,000 of the principal amount outstanding may be converted at the option of the lender into shares of the Company’s common stock at a conversion price of $2.148 per share, subject to typical anti-dilution adjustments. The Avenue Loan bears interest at an annual rate equal to the greater of (A) 7.0% and (B) the prime rate as reported in The Wall Street Journal plus 4.45%. The Avenue Loan maturity date is November 1, 2025. We may request an additional $5,000,000 of gross funding between April 1, 2023 and July 31, 2023, subject to agreed-upon conditions. We must also make an incremental final payment equal to 4.25% of the aggregate funding.
We are required to make monthly interest-only payments during the first twelve months of the Avenue Loan, which could be increased to up to eighteen months upon the achievement of specified performance milestones. Following the interest-only period, we will make equal monthly payments of principal until the maturity date, plus interest. If we prepay the Avenue Loan, we will be required to pay a prepayment fee of 3% if the Avenue Loan is prepaid during the first year, 2% if the Avenue Loan is prepaid during the second year and 1% if the Avenue Loan is repaid during the third year.
The Avenue Loan requires us to make and maintain representations and warranties and other agreements that are customary in loan agreements of this type. The Avenue Loan is secured by all of our assets globally, including intellectual property. The Avenue Loan also contains customary events of default, including non-payment of principal or interest, violations of covenants, bankruptcy and material judgments. Upon the occurrence of an event of default, all interest and principal will be accelerated and immediately become due and payable. In addition, Avenue will have the right to exercise any other right or remedy provided by applicable law.
Going Concern
As of December 31, 2022, we had unrestricted cash and cash equivalents of approximately $22.9 million and an accumulated deficit of approximately $118.2 million. For the years ended December 31, 2022 and 2021, we incurred net losses of approximately $28.0 million and $12.8 million, respectively, and used cash in operations of approximately $25.1 million and $20.9 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.
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Risks and Uncertainties
As of March 15, 2023, the amount of our assets held on deposit with SVB is immaterial with respect to our total cash, cash equivalents and marketable securities. We do not expect that SVB’s liquidity concern will have a significant adverse impact on our operations due to our limited exposure to SVB and the Federal Reserve’s decision to make all of SVB’s depositors whole. We will continue to monitor the situation with SVB as it evolves.
The continuing worldwide implications of the war between Russia and Ukraine remain difficult to predict at this time. The imposition of sanctions on Russia by the United States and other countries and 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 Policies
The following represent our most critical accounting policies:
Use of Estimates
Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or 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.
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.
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,” or 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,” or 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;
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● 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.
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.
Operating Leases
We adopted the Accounting Standards Update, or ASU 2016-02,“Leases (Topic 842)” as of December 31, 2022, effective January 1, 2022. We lease our facilities under non-cancellable operating leases. We evaluate the nature of each lease at the inception of an arrangement to determine whether it is an operating or financing lease and recognizes the ROU asset and lease liabilities based on the present value of future minimum lease payments over the expected lease term. We recognize a liability to make lease payments, the “lease liability”, and an asset representing the right to use the underlying asset during the lease term, the “right-of-use asset”. The lease liability is measured at the present value of the remaining lease payments, discounted at our incremental borrowing rate. Our leases do not generally contain an implicit interest rate and therefore the we use the incremental borrowing rate it would expect to pay to borrow on a similar collateralized basis over a similar term in order to determine the present value of its lease payments. The right-of-use asset is measured at the amount of the lease liability adjusted for the remaining balance of any lease incentives received, any cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term, any unamortized initial direct costs, and any impairment of the right-of-use-asset. Operating lease expense consists of a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis, variable lease payments not included in the lease liability, and any impairment of the right-of-use asset.
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.
As a smaller reporting company, we 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.
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not applicable.