Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes included elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, 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 Annual Report, our actual results could differ materially from the results described in or implied by these forward-looking statements. You should carefully read the “Risk Factors” section of this Annual Reports to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled “Special Note Regarding Forward-Looking Statements.”
Overview
Since our inception in 2006, we have devoted substantially all our resources to research and development, raising capital, building our management team and building our intellectual property portfolio. To date, we have financed our operations primarily through sales of our common stock, Series A convertible preferred stock and warrants, warrant exercises, the issuance of convertible promissory notes, the Paycheck Protection Program loan, or the PPP loan, that was forgiven in May 2021, and strategic partnerships with AbbVie and the Department of Defense, or the DoD. In January 2023, we received a $30.0 million upfront payment from AbbVie under the Collaboration Agreement. In addition, we received $17.6 million in expense reimbursement from the DoD under the OTA Agreement through December 31, 2022.
To date, we have not generated any revenue from product sales and do not expect to generate revenue from the sale of products for the foreseeable future. Since inception we have incurred significant operating losses. Our net losses were $36.9 million and $24.7 million for the years ended December 31, 2022 and 2021, respectively.
As of December 31, 2022, we had a cash and cash equivalent balance of $20.3 million, which does not include the $30.0 million upfront payment that we received in January 2023 from AbbVie under the Collaboration Agreement. We expect to continue to incur losses for the foreseeable future. We expect to continue to incur significant expenses and increasing operating losses in connection with ongoing research and development activities related to our portfolio of programs as we continue advancement of our programs and development candidates. We also plan to perform research activities as we seek to discover and develop additional programs and development candidates; carry out maintenance, expansion, enforcement, defense, and protection of our intellectual property portfolio; and hire research and development, clinical and administrative personnel. If we cannot obtain the necessary funding to support these activities on favorable terms, if at all, we will need to delay, scale back or eliminate some or all of our research and development programs. We may also need to consider other various strategic alternatives, including a merger or sale of the Company; or reduce or cease operations. If we engage in collaborations, we may receive lower consideration upon commercialization of such products or technologies than if we had not entered into such arrangements or if we entered into such arrangements at later stages in the research and development process. Other than the current and potential future sources of funding under the Collaboration Agreement with AbbVie, we currently have no other sources of revenue, and our ability to continue to fund our future business plans is dependent on our ability to raise capital to fund our present and future business plans. Additionally, volatility in the capital markets, the competitive landscape and general economic conditions in the United States may be a significant obstacle to raising the required funds.
We expect to continue to incur significant expenses and increasing operating losses in connection with ongoing activities, particularly if and as we:
● continue research and development activities;
● pursue regulatory approvals and implement other regulatory strategies for our programs and development candidates;
● take additional steps to advance our discovery engine and our existing and future pipeline;
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● obtain, maintain, expand and protect our intellectual property portfolio;
● hire additional research and development, clinical and administrative personnel;
● scale up and expand our clinical and regulatory capabilities; and
● add operational, financial and management information systems and infrastructure to support our research and development programs, and any future commercialization efforts.
As a result of these anticipated expenditures and potential unanticipated expenditures, we will need substantial additional financing to support our continuing operations and pursue our growth strategy. Until such time as we 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. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of any stockholder will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or drug 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 financings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our research, product development or future commercialization efforts, or grant rights to develop and market programs and development candidates that we would otherwise prefer to develop and market ourselves. We may be unable to raise additional funds or enter into such other agreements when needed on favorable terms or at all. The inability to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.
Through December 31, 2022, we raised an aggregate of $125.1 million in gross proceeds from sales of our common stock, Series A convertible preferred stock and warrants, warrant and stock option exercises, the issuance of convertible promissory notes, and the PPP loan. In addition, in July 2020, the Company entered into an Other Transaction Authority for Prototype Agreement, or the OTA Agreement, with the Department of Defense, or the DoD, to fund the Company’s efforts in developing an antibody cocktail therapeutic to treat COVID-19. As of December 31, 2022, the Company has received $17.6 million in expense reimbursement from the DoD under the OTA Agreement.
On October 1, 2021, we entered into an Open Market Sale Agreement, or the ATM Agreement, with Jefferies Group LLC, which provides that, upon the terms and subject to the conditions and limitations in the ATM Agreement, we may elect, from time to time, to offer and sell shares of common stock under our existing shelf registration statement having an aggregate offering price of up to $75.0 million through Jefferies Group LLC acting as sales agent. The Company has not sold any shares under the ATM Agreement or the shelf registration statement as of December 31, 2022.
In addition, on January 4, 2023, we entered into the Collaboration Agreement with AbbVie directed to the discovery of up to 10 novel target-antibody pairs leveraging our discovery engine. The Company is potentially eligible to receive up to $2.8 billion from AbbVie under the Collaboration Agreement from the sources described in Note 15 to the financial statements. We have received the $30.0 million upfront payment in January 2023. There are no assurances that we will receive additional payments from AbbVie beyond the $30.0 million upfront payment.
We expect that our cash as of December 31, 2022, together with the $30.0 million upfront payment that we received in January 2023 from AbbVie under the Collaboration Agreement, will be sufficient to fund our operations at least 12 months from the filing date of this Annual Report on Form 10-K. We have based these estimates on assumptions that may prove to be imprecise, and we may exhaust our available capital resources sooner than we currently expect. See “Liquidity and capital resources.” Due to the numerous risks and uncertainties associated with the research and development of our programs, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the research and development of our programs and development candidates.
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Our current programs and strategic collaborations
Oncology (IMM-ONC-01)
Our lead oncology program targets IL-38, which we believe is a novel, negative regulator of inflammation capable of promoting tumor evasion of the immune system. IL-38 was identified as the target of an antibody isolated from a hybridoma library generated from the memory B cells of a patient with squamous head and neck cancer. Query of public and proprietary (Tempus) databases of cancer gene expression revealed over-expression of IL-38 in multiple solid tumors. Further, a correlation with low levels of tumor-infiltrating immune effector cells, a hallmark of immune suppression in some of these patients’ tumors, and high IL-38 expression was also observed, suggesting a role for IL-38 as an immune modulator. Data obtained from preclinical testing indicated that blocking IL-38 function using inhibitory antibodies increased the immune response to the tumor and resulted in anti-tumor activity in select animal models, suggesting that anti-IL-38 antibodies could have therapeutic utility as single agents or in combination with other therapeutic modalities. Our recent analysis further confirms IL-38 expression is frequently elevated in samples of select patient tumor subtypes, in cancers such as head and neck, lung and gastroesophageal. We believe that this information could potentially guide patient selection for early clinical testing and may improve the overall probability of demonstrating clinical utility, thereby improving the probability of clinical success. We plan to submit our IND application for the IMM-ONC-01 program by mid-2023.
SARS-CoV-2 (IMM-BCP-01)
We are developing an antibody cocktail derived from the B cells of COVID-19 patients who exhibited high neutralizing titers. IMM-BCP-01 targets non-overlapping regions of the Spike protein of SARS-CoV-2 which include highly conserved, subdominant epitopes. The cocktail promotes both ACE2 and non-ACE2 dependent neutralization and induces natural viral clearance mechanisms such as antibody dependent cellular cytotoxicity, complement activation and phagocytosis in pre-clinical testing. We are conducting this program in collaboration with the DoD. The IMM-BCP-01 program is broadly focused on the emerging variants of SARS-CoV-2. We submitted an IND application for the IMM-BCP-01 program to the U.S. FDA in November 2021 and initiated the Phase 1b study of IMM-BCP-01 in patients infected with SARS-CoV-2 in June 2022 . On January 6, 2023, the Company announced that it successfully completed dosing of the first cohort of patients in a Phase 1b study with no significant treatment-related adverse events. The Company has decided to seek a partner in order to continue the trial and for any further development activities.
Other Programs and Platforms
In addition to the already described current programs, we will continue to invest in our proprietary discovery engine to expand our pipeline. The high output of antibody-target pairs resulting from our discovery engine may provide us with additional insights into the immune response against cancer and other diseases. We intend to continue to invest in this platform, to evaluate novel antibody-target pairs and to develop a pipeline of antibody therapeutics as single agents or in combination with other therapeutics or technologies to yield programs and development candidates, such as Antibody-Drug Conjugates (ADCs).
Additionally, we plan to expand our intellectual property estate and infrastructure needed to discover and advance our programs and development candidates. We may in-license or acquire complementary intellectual property as needed or required, and we may continue to build our know-how and trade secrets. We may pursue both therapeutic and diagnostic applications of our antibodies through composition of matter and/or method of use patents. While our initial focus areas are in oncology and other diseases, we may invest in intellectual property in other therapeutic areas as well.
Collaboration with AbbVie
On January 4, 2023, the Company and AbbVie entered into the Collaboration Agreement, pursuant to which the Company will use its proprietary discovery engine to discover and validate targets derived from patients with three specified tumor types, and antibodies that bind to such targets, which may be the subject of further development and commercialization by AbbVie. For a more comprehensive discussion regarding the Collaboration Agreement, please see Note 15 to the financial statements.
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COVID-19 pandemic
The ongoing COVID-19 pandemic continues to affect economies and businesses around the world. The extent and duration of such effects remain uncertain and difficult to predict, particularly as virus variants continue to spread. We are actively monitoring and managing our response and assessing actual and potential impacts to our operating results and financial condition, as well as developments in our business, which could further impact the developments, trends and expectations described below. See the risk factor related to the impact of the COVID-19 pandemic, “A pandemic, epidemic, or outbreak of an infectious disease, such as the COVID-19 pandemic, could materially and adversely affect our business and our financial results and cause a disruption to our research, development and commercialization efforts,” described in “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.
Components of our results of operations
Research and development expenses
Research and development expenses consist of costs incurred in performing research and development activities, which include:
● personnel-related expenses, including salaries, bonuses, benefits and share-based compensation for employees engaged in research and development functions;
● expenses incurred in connection with the advancement of our programs and development candidates, including under agreements with consultants, contractors, contract research organizations and other third-party vendors and suppliers;
● expenses to conduct clinical trials including regulatory and quality assurance;
● the cost of developing and validating our manufacturing process for use in our preclinical studies and clinical trials;
● laboratory supplies and research materials and other infrastructure-related expenses; and
● facilities, depreciation and amortization and other expenses which include direct and allocated expenses.
We expense research and development costs as incurred. Advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the benefits are consumed.
Research and development activities are central to our business model. We expect that our research and development expenses will increase substantially in connection with the continuation of our activities.
In July 2020, we entered into the OTA Agreement with the DoD to fund the development of IMM-BCP-01 to treat COVID-19. The OTA Agreement was modified in May 2021 to increase such funding. In connection with the OTA Agreement, we record expense reimbursements received from the DoD as contra-research and development expenses in the same period the underlying expenses are incurred.
Under the provisions of the CARES Act signed into law on March 27, 2020 and the subsequent extension of the CARES Act, the Company was deemed eligible to receive the employee retention credit subject to certain criteria. The Company recognized the employee retention credit as contra-expense to personnel related costs in research and development expenses in the statements of operations.
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General and administrative expenses
General and administrative expenses consist primarily of salaries and other related costs, including share-based compensation for personnel in our executive, business development, and administrative functions. General and administrative expenses also include legal fees relating to intellectual property and corporate matters, professional fees for accounting, auditing, tax and consulting services, insurance costs, travel, direct and allocated facility related expenses and other operating costs.
We anticipate that our general and administrative expenses will increase in the future to support increased and progressed research and development activities.
Under the provisions of the CARES Act signed into law on March 27, 2020 and the subsequent extension of the CARES Act, the Company was eligible for a refundable employee retention credit subject to certain criteria. The Company recognized the employee retention credit as contra-expense to personnel related costs in general and administrative expenses in the statements of operations.
Interest income (expense), net
Interest expense consists of interest expense related to our equipment loan payable. Interest income consists of interest income earned on our cash.
Other income
In April 2020, the Company received a $0.5 million loan, or the PPP Loan, pursuant to the Paycheck Protection Program, or the PPP, under the Coronavirus Aid, Relief, and Economic Security Act implemented by the U.S. Small Business Administration. The loan was forgiven on May 21, 2021 and recorded as other income in the statement of operations.
Results of operations
The ultimate extent of the impact of any epidemic, pandemic, outbreak, or other public health crisis on our results of operations will depend on future developments, which are highly uncertain, including new information that may emerge concerning the severity of COVID-19 and its variants or other public health crisis and actions taken to contain or prevent the further spread, among others. Accordingly, we cannot fully predict the extent to which our business and results of operations will be affected by the pandemic.
Comparison of the years ended December 31, 2022 and 2021:
YEAR ENDED
DECEMBER 31,
2022
2021
Change
(in thousands)
Operating expenses:
Research and development
$
23,272
$
14,110
$
9,162
General and administrative
13,629
11,094
2,535
Total operating expenses
36,901
25,204
11,697
Loss from operations
(36,901)
(25,204)
(11,697)
Other income (expense):
Other income
—
503
(503)
Interest income (expense), net
5
(10)
15
Total other income
5
493
(488)
Net loss
$
(36,896)
$
(24,711)
$
(12,185)
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Research and development expenses
Research and development expenses were $23.3 million and $14.1 million, net of DoD reimbursement of $0.6 million and $15.2 million for the years ended December 31, 2022 and 2021, respectively.
Research and development expenses increased by $9.2 million for the year ended December 31, 2022. Of the $9.2 million increase in research and development expenses, BCP-01 program related expenses increased by $6.8 million as a result of receiving the maximum reimbursement amount of $17.6 million from the DoD under the OTA Agreement during 2022 and using our own funds to support our clinical activities. Prior to receiving the maximum reimbursement amount, contra-research and development expenses offset the expenses recognized for the period under the DoD agreement. ONC-01 program related expenses increased by $2.3 million in connection with the advancement of our program. Personnel-related costs increased by $0.7 million due to an increase of $0.5 million in share-based compensation and $0.2 million in personnel compensation. These increases were offset by $0.6 million decrease in general expenses and facility related costs.
General and administrative expenses
General and administrative expenses increased by $2.5 million from $11.1 million for the year ended December 31, 2021 to $13.6 million for the year ended December 31, 2022. This increase is primarily as a result of a $2.5 million increase in personnel-related costs due to an increase of $1.4 million in share-based compensation and $1.1 million in personnel-related costs. Personnel-related costs increased as a result of an increase in wages and issuance of annual share-based awards.
Other income
Other income for the year ended December 31, 2021 primarily consists of the forgiveness of the PPP Loan.
Interest income (expense), net
Interest expense, net consists of interest expense related to our equipment loan payable which were paid in full as of December 31, 2021. Interest income consists of interest earned on our cash balances held with financial institutions.
Liquidity and capital resources
Since our inception, we have incurred significant operating losses. We expect to incur significant expenses and operating losses for the foreseeable future as we continue advancement of our programs and development candidates. Through December 31, 2022, we raised an aggregate of $125.1 million in gross proceeds from sales of our common stock, Series A convertible preferred stock and warrants, warrant and stock option exercises, the issuance of convertible promissory notes, and the PPP loan that was forgiven in May 2021. As of December 31, 2022, we had $20.3 million in cash and cash equivalents which does not include the $30.0 million that we received from AbbVie under the Collaboration Agreement.
On October 1, 2021, we entered into an Open Market Sale Agreement, or the ATM Agreement, with Jefferies Group LLC, which provides that, upon the terms and subject to the conditions and limitations in the ATM Agreement, we may elect, from time to time, to offer and sell common shares under the registration statement having an aggregate offering price of up to $75.0 million through Jefferies Group LLC acting as sales agent. We filed a shelf registration statement on Form S-3, which was declared effective by the SEC on October 14, 2021, pursuant to which we may issue from time-to-time securities with an aggregate value of up to $200.0 million. The Company has not sold any shares under the ATM Agreement or the shelf registration statement as of December 31, 2022.
In addition, on January 4, 2023, we entered into the Collaboration Agreement with AbbVie directed to the discovery of up to 10 novel target-antibody pairs leveraging our discovery engine. Under the terms of the Collaboration Agreement, Immunome will grant AbbVie the option to purchase worldwide rights for up to 10 novel target-antibody pairs arising from the selected tumors. AbbVie will pay the Company an option exercise fee in the low single digit
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millions for each of the validated target pairs for which it exercises an option. We received an upfront payment of $30.0 million in January 2023 and will be eligible to receive additional platform access payments in the aggregate amount of up to $70.0 million based on AbbVie’s election for us to continue research using our discovery engine. We are also eligible to receive development and first commercial sale milestones of up to $120.0 million per target with respect to certain products derived from target-antibody pairs that AbbVie elects to purchase, sales-based milestones based on achievement of specified levels of net sales of products up to $150.0 million in the aggregate per target, and tiered low single digit royalties on net sales of products. The Company is potentially eligible to receive up to $2.8 billion from AbbVie under the Collaboration Agreement from the sources described above. There are no assurances that we will receive additional payments from AbbVie beyond the $30.0 million upfront payment.
We will need to raise additional capital before we exhaust our current cash to continue to fund our research and development, including our plans to continue advancement of our programs and product candidates and new product development, as well as to fund operations. As and if necessary, we will seek to raise additional funds through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. We can give no assurances that we will be able to secure such additional sources of funds to support our operations, or, if such funds are available to us, that such additional financing will be sufficient to meet our needs.
Cash flows
The following table summarizes our sources and uses of cash for the years ended December 31, 2022 and 2021:
YEARS ENDED
DECEMBER 31,
2022
2021
(in thousands)
Cash used in operating activities
$
(28,690)
$
(18,226)
Cash used in investing activities
(248)
(79)
Cash provided by financing activities
32
27,768
Net (decrease) increase in cash and cash equivalents and restricted cash
$
(28,906)
$
9,463
Operating activities
Net cash used in operating activities for the year ended December 31, 2022 was $28.7 million, consisting primarily of our net loss of $36.9 million and decreases in accrued expenses and other liabilities, accounts payable, and other long-term liabilities of $2.8 million, offset by net noncash charges of $6.0 million for depreciation and amortization expense and share-based compensation expense and a $5.1 million decrease in prepaids expenses and other assets.
Net cash used in operating activities for the year ended December 31, 2021 was $18.2 million, consisting primarily of our net loss of $24.7 million and increases of prepaid expenses and other assets of $4.3 million, offset by net noncash charges of $3.7 million for depreciation and amortization expense, share-based compensation expense, and forgiveness of PPP loan, and an increase in accounts payable and accrued expenses and other liabilities of $7.1 million due to our growth in expenditures.
Investing activities
During the years ended December 31, 2022 and 2021, we used $0.2 million and $0.1 million, respectively, for the purchase of property and equipment.
Financing activities
During the year ended December 31, 2022, financing activities provided $32,000 from exercise of stock options.
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During the year ended December 31, 2021, cash provided by financing activities was $27.8 million, consisting primarily of $26.7 million of net proceeds received from the private investment in public equity (PIPE) funding, $1.4 million of proceeds from the exercise of common stock warrants and stock options, offset by $0.2 million of offering costs in connection with the Company’s shelf registration statement and $0.1 million for payments related to our equipment loan payable.
Funding requirements
Our operating expenses are expected to increase substantially as we continue to advance our discovery engine and programs.
Specifically, our expenses will increase if and as we:
● further develop our discovery engine;
● continue our research and development programs for our programs and development candidates from our current programs;
● seek to identify additional programs and development candidates;
● maintain, expand, enforce, defend, and protect our intellectual property portfolio and provide reimbursement of third-party expenses related to our patent portfolio;
● seek marketing approvals for any of our programs and development candidates that successfully complete clinical trials;
● establish a sales, marketing, and distribution infrastructure to commercialize any medicines for which we may obtain marketing approval;
● hire additional personnel including research and development, clinical and administrative personnel;
● add operational, financial, and management information systems and personnel, including personnel to support our product development;
● acquire or in-license products, intellectual property, and technologies; and
● continue to operate as a public company.
We expect that our existing cash at December 31, 2022, together with the $30.0 million upfront payment we received in January 2023 from AbbVie under the Collaboration Agreement, will enable us to fund our current and planned operating expenses and capital expenditures at least 12 months from the filing date of this Annual Report on Form 10-K. The Company will need additional financing to support its continuing operations and pursue its research and development strategy. We have based these estimates on assumptions that may prove to be imprecise, and we may exhaust our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development of our programs, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the research and development of our programs and development candidates.
Our future funding requirements will depend on many factors including:
● the costs of continuing to develop our discovery engine;
● the costs of acquiring licenses, should we choose to do so, for the expansion of product development;
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● the scope, progress, results, and costs of discovery, preclinical development, laboratory testing, manufacturing and clinical trials for programs and development candidates;
● the costs of preparing, filing, and prosecuting patent applications, maintaining and enforcing our intellectual property and proprietary rights, and defending intellectual property-related claims and the success of our intellectual property portfolio;
● the costs, timing, and outcome of regulatory review of the programs and development candidates we may develop;
● the costs of future activities, including product sales, medical affairs, marketing, manufacturing, distribution, coverage and reimbursement for any programs or development candidates for which we receive regulatory approval;
● the success of our license agreements and our collaborations;
● our ability to establish and maintain additional collaborations on favorable terms, if at all;
● the achievement of milestones or occurrence of other developments that trigger payments under any additional collaboration agreements we obtain;
● the extent to which we acquire or in-license products, intellectual property, and technologies; and
● the costs of operating as a public company.
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 do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of any purchaser will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or drug 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 financings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our research, product development or future commercialization efforts, or grant rights to develop and market programs and development candidates that we would otherwise prefer to develop and market ourselves.
Critical accounting policies and significant judgments
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 2 to our audited financial statements appearing elsewhere in this Annual Report, we believe that the following accounting policies are the most critical to the judgments and estimates used in the preparation of our financial statements.
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Share-based compensation
We recognize the grant-date fair value of share-based awards issued as compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period of the award. The fair value of stock options is estimated at the time of grant using the Black-Scholes option pricing model, which requires the use of inputs and assumptions such as the fair value of the underlying common stock, exercise price of the option, expected term, risk-free interest rate, expected volatility and dividend yield.
The inputs and assumptions used to estimate the fair value of share-based payment awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different inputs and assumptions, our share-based compensation expense could be materially different for future awards.
Expected volatility is a subjective assumption based on the historical stock volatility of several of our comparable publicly traded companies over a period of time equal to the expected term.
Accrued research and development expenses
As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders and communicating with 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 actual costs. The majority of our service providers invoice us on a pre-determined schedule or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of these estimates with the service providers and make adjustments, if necessary. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.
Recently adopted accounting standards
ASC Topic 842, Leases
On January 1, 2022, the Company adopted ASC 842, which supersedes the lease accounting guidance under ASC 840. The standard generally requires lessees to recognize operating and finance lease liabilities and corresponding right-of-use (ROU) assets in the balance sheets and provide enhanced disclosures on the amount, timing, and uncertainty of cash flows arising from lease arrangements. The Company adopted ASC 842 using the modified retrospective approach. The Company elected the package of practical expedients available for existing contracts, which allowed the Company to carry forward its historical assessments of lease identification, lease classification, and initial direct costs. The Company also elected a policy to not apply the recognition requirements of ASC 842 for short-term leases with a term of 12 months or less.
As of January 1, 2022, the effective date, the Company identified one operating lease arrangement relating to the Company’s headquarters facility and one short-term lease relating to laboratory equipment. The adoption of ASC 842 resulted in a recognition of an ROU asset and lease liability of $0.5 million in the Company’s balance sheets relating to the lease as of January 1, 2022. The adoption of the standard did not have a material effect on the Company’s statements of operations and statements of cash flows.
ASU Topic 832, Government Assistance
In November 2021, the FASB issued ASU 2021-10, Government Assistance , or Topic 832, which requires enhanced disclosures of transactions with governments that are accounted for by applying a grant or contribution model. The new
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pronouncement requires entities to provide information about the nature of the transaction, terms and conditions associated with the transaction and financial statement line items affected by the transaction. The Company adopted the standard for the annual period beginning January 1, 2022. The DoD expense reimbursement contract and the employee retention credit received under the CARES Act qualify as government assistance programs under Topic 832 and resulted in enhanced required disclosures, as described in Note 5.
ASU 2021-04, Earnings Per Share
In May 2021, the FASB issued ASU 2021-04 Earnings Per Share (Topic 260), Debt— Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40) , or ASU 2021-04, that requires the issuer to treat a modification of an equity-classified written call option (i.e., a warrant) that does not cause the option to become liability-classified as an exchange of the original option for a new option. An issuer should measure the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange. The Company adopted the standard for interim periods beginning January 1, 2022. As described in Note 11, in September 2022, the Company modified its Series B Warrants which resulted in a reduction in exercise price from $45.00 per share to $10.00 per share. The Company recognized a deemed dividend of $0.6 million which was recorded in the Company’s statement of operations as an increase to the net loss attributable to common stockholders for purposes of computing net loss per share, basic and diluted. The net impact to the statements of changes in stockholders’ equity was zero because the warrants were equity classified before and after the modification.
JOBS Act
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies, including reduced disclosure about our executive compensation arrangements, exemption from the requirements to hold non-binding advisory votes on executive compensation and golden parachute payments and exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting.
We may take advantage of these exemptions until the last day of the fiscal year following the fifth anniversary of our initial public offering or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company earlier if we have more than $1.07 billion in annual revenue, we have more than $700.0 million in market value of our stock held by non-affiliates (and we have been a public company for at least 12 months and have filed one annual report on Form 10-K) or we issue more than $1.0 billion of non-convertible debt securities over a three-year period. For so long as we remain an emerging growth company, we are permitted, and intend, to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. We may choose to take advantage of some, but not all, of the available exemptions. In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected not to “opt out” of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time private companies adopt the new or revised standard and will do so until such time that we either (i) irrevocably elect to “opt out” of such extended transition period or (ii) no longer qualify as an emerging growth company. Therefore, the reported results of operations contained in our financial statements may not be directly comparable to those of other public companies.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required.