Item 7. Management’s Discussion and Analysis
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing in Part II, Item 8 of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in Part I, Item IA. ‘‘Risk Factors’’ of this Annual Report on Form 10-K, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.
Overview
We are a clinical-stage oncology company developing medicines for broad populations of cancer patients. Our initial aim is to develop a universal-RAS therapy, an approach designed to include patients with solid tumors driven by any mutation in KRAS, NRAS, or HRAS. Our inclusive approach differentiates us from narrowly targeted precision therapies, which are limited to patients with tumors harboring select mutations.
We are currently evaluating our lead product candidate, IMM-1-104, in a Phase 1/2a clinical trial in patients with advanced solid tumors harboring RAS mutations. IMM-1-104 is being developed as a once-daily oral monotherapy that aims to achieve universal-RAS activity through deep cyclic inhibition of the MAPK pathway. Deep cyclic inhibition is a novel approach that aims to deprive tumor cells of the sustained proliferative signaling required for rapid growth, while sparing healthy cells through a cadenced, normalized level of signaling. This cyclic inhibition was engineered using our proprietary informatics-based discovery platform. The development of our pipeline is translationally guided by our
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proprietary, human-aligned 3D tumor modeling platform that we combine with bioinformatics-driven patient profiling, which we believe has the potential to increase the probability of success in clinical development versus traditional drug development approaches. Our second product candidate, IMM-6-415, aims to achieve universal-MAPK activity with an accelerated twice-daily oral dosing cadence, also through deep cyclic inhibition of the MAPK pathway. IMM-6-415 is currently in Investigational New Drug application, or IND, enabling studies. Our pipeline also includes Trifecta MEK, RAS modulators, and other small molecule drug discovery programs.
In November 2022, we commenced dosing in our Phase 1/2a clinical trial of IMM-1-104 for the treatment of advanced RAS mutant solid tumors. The Phase 1/2a clinical trial is designed to assess the safety, tolerability, pharmacokinetics, or PK, pharmacodynamics, or PD, and preliminary anti-tumor activity of IMM-1-104. The Phase 1 portion of the clinical trial includes a dose escalation and expansion portion and will evaluate IMM-1-104 using a Bayesian modified toxicity probability interval, or mTPI-2, statistical design to establish an optimized recomm ended Phase 2 dose in solid tumor patients with evidence of any RAS mutation. The planned Phase 2a portion will evaluate IMM-1-104 at the recommended Phase 2 dose in an expanded cohort of solid tumor patients with certain RAS mutated cancers, including potentially pancreatic, melanoma, colorectal and lung. IMM-1-104 is currently in the dose escalation portion of the trial. We anticipate reporting initial PK and safety data from Phase 1 portion of the clinical trial in mid-2023, and additional safety and PK and initial PD modeling data in the second half of 2023. Subject to results from the Phase 1 portion of the trial, including safety and tolerability data, we anticipate initiating the Phase 2a portion of the trial in mid-2024. In addition, we plan to submit an IND, for IMM-6-415 to the U.S. Food and Drug Administration, or FDA, in the fourth quarter of 2023. In February 2023, we suspended our neuroscience programs, which was in the early stages of drug discovery, in order to focus on advancing our core oncology pipeline.
For the period from inception through 2017, we devoted substantially all of our efforts to business planning, service revenue generation, developing tools to aid in drug discovery, and recruiting management and technical staff. Since 2018, we have also focused significant effort on our own internal research and development programs. We have financed our operations through service revenues, the issuance of convertible debt and the sale of convertible preferred stock and common stock.
On December 22, 2021, we completed the acquisition of all outstanding shares of capital stock of BioArkive, Inc., a California corporation (“BioArkive”) for a market value of $8.75 million.
BioArkive is a San Diego based contract research organization that has previously provided preclinical research services and biosample storage to us and other biotechnology companies. BioArkive was fully integrated into our operations following the acquisition and exclusively supports our internal preclinical research activities for our oncology pipeline. In connection with the acquisition, we assumed the obligations under BioArkive’s three lease agreements.
Our operations have been financed primarily by service revenues and aggregate net proceeds of approximately $81.4 million from the issuance of convertible notes payable, convertible preferred stock (Series A and B) including gross proceeds of approximately $24.8 million from the issuance of shares in the second tranche of Series B Preferred in April and May 2021, common stock, and exercise of stock options. On August 3, 2021, we completed our IPO pursuant to which we issued and sold 8,625,000 shares of Class A common stock, inclusive of 1,125,000 shares sold by us pursuant to the full exercise of the underwriters’ option to purchase additional shares. We received aggregate net proceeds of approximately $120.3 million from the IPO, after deducting underwriting discounts and commissions, but before deducting offering costs payable by us, which were $2.1 million.
Since inception, we have had significant annual operating losses. Our net loss was approximately $50.5 million and $33.5 million for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, we had an accumulated deficit of approximately $109.8 million and approximately $105.5 million in cash and cash equivalents and marketable securities.
Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our accounts payable and accrued expenses. We expect to continue to incur net losses for the foreseeable future, and we expect our research and development expenses, general and administrative expenses, and capital expenditures will continue to increase. In particular, we expect our expenses to increase as we continue our development of, and seek
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regulatory approvals for, our internally developed product candidates as well as add operational, financial and management informational systems and personnel to support our product development. In addition, if and when we seek and obtain regulatory approval to commercialize any product candidate, we will also incur increased expenses in connection with commercialization and marketing of any such product. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and our expenditures on other research and development activities.
Based upon our current business plans, we believe that our existing cash and cash equivalents and marketable securities will be sufficient to fund our development activities and other operations into the fourth quarter of 2024. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. To finance our operations beyond that point we will need to raise additional capital, which cannot be assured.
We have not had any internally developed products approved for sale. We do not expect to generate any product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our internally developed product candidates. If we obtain regulatory approval for any of our internally developed product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. As a result, until such time, if ever, that we can generate substantial product revenue, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including collaborations, licenses or similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed or on favorable terms, if at all. Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies, including our research and development activities. If we are unable to raise capital, we will need to delay, reduce or terminate planned activities to reduce costs.
Components of Our Results of Operations
Revenue
Our revenue has historically been generated by providing computational biology professional services to pharmaceutical and biotechnology companies. We charged an agreed upon rate per hour based on the aggregate level of personnel assigned to work on the project or a fixed fee for a defined scope of work. Our contracts specified the period of time over which these professional services would be provided. We recognized revenue over time by measuring the progress toward complete satisfaction of the performance obligation using a single method of measuring progress, which depicts the performance in transferring control of the associated services to the customer. We used input methods to measure the progress toward the complete satisfaction of performance obligations and evaluate the measure of progress each reporting period and, if necessary, adjusted the measure of performance and related revenue recognition. Any such adjustments were recorded on a cumulative catch-up basis, which would affect revenue and net loss in the period of adjustment.
We have ceased accepting new services contracts in order to focus on developing our wholly-owned internal pipeline. In September 2022, we completed our last remaining services contract associated with the computational biology professional services business. At this time, we do not anticipate entering into any new service contracts or agreements.
We have also discontinued our biosample storage business, which was acquired through the BioArkive transaction, to external parties. In December 2022, we completed our last remaining contract. The revenue earned associated with the biosample storage business for the year ended December 31, 2022 is immaterial to the financial statements.
Cost of Revenue
Historically, our cost of revenue has primarily consisted of expenses related to providing professional services to our customers. These costs include salaries, bonuses, benefits, stock-based compensation expense, depreciation, facilities, and other outside services.
Operating Expenses
Our operating expenses consist of (i) research and development expenses and (ii) general and administrative expenses.
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Research and Development
Research and development expenses account for a significant portion of our total operating expenses. Our research and development expenses consist primarily of direct and indirect costs incurred in connection with the development of our research platform, product candidates, discovery efforts and preclinical and clinical activities related to our program pipeline.
Our direct costs include:
● expenses incurred under agreements with third-party contract research organizations, or CROs, and other vendors that conduct our preclinical and clinical activities on our behalf; including clinical trial sites that conduct research and development activities on our behalf;
● laboratory expenses related to the execution of discovery programs, preclinical studies and clinical trials;
● costs related to production of clinical and preclinical materials, including fees paid to contract manufacturers; and
● consulting fees and expenses related to preparation of initiation of clinical trials.
Our indirect costs include:
● personnel-related expenses, consisting of employee salaries, bonuses, benefits and stock-based compensation expense and recruiting costs for personnel engaged in research and development activities; and
● facility and equipment related expenses, consisting of indirect and allocated expenses for rent, depreciation, maintenance of facilities, insurance, and other supplies.
We expense research and development costs in the periods in which they are incurred.
Our direct research and development expenses are tracked on a program-by-program basis once they are in Phase 1 and consist of external costs and fees paid to consultants, contractors, contract manufacturing organizations, or CMOs, and CROs in connection with our preclinical and clinical development and manufacturing activities. Such program costs also include the external costs of laboratory and consumable materials and costs of raw materials that are directly attributable to and incurred for any single program. We do not allocate employee costs, costs associated with our platform development and discovery efforts, payments made under third-party licensing agreements, costs of laboratory supplies and consumable materials that are not directly attributable to any single program, and facilities expenses, including rent, depreciation and other indirect costs, to specific product development programs because these costs are deployed across multiple programs and our platform technology and, as such, are not separately classified.
Due to the inherently unpredictable nature and numerous risks and uncertainties associated with product development and the current stage of development of our product candidates and programs, we cannot reasonably estimate or know the nature, timing and estimated costs necessary to complete the remainder of the development of our product candidates or programs. We are also unable to predict if, when, or to what extent we will obtain approval and generate revenues from the commercialization and sale of any of our product candidates.
The duration, costs and timing of preclinical studies and clinical trials and development of our product candidates will depend on a variety of factors, such as:
● successful completion of preclinical studies and initiation of clinical trials for future product candidates;
● successful enrollment and completion of clinical trials for our current product candidates;
● data from our clinical programs that support an acceptable risk-benefit profile of our product candidates in the intended patient populations;
● acceptance by the FDA or other applicable regulatory agencies of IND applications, clinical trial applications and/or other regulatory filings for our product candidates;
● expansion and maintenance of a workforce of experienced scientists and others to continue to develop our product candidates;
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● successful application for and receipt of marketing approvals from applicable regulatory authorities;
● obtainment and maintenance of intellectual property protection and regulatory exclusivity for our product candidates;
● making of arrangements with contract manufacturing organizations for, or establishment of, commercial manufacturing capabilities;
● establishment of sales, marketing and distribution capabilities and successful launch of commercial sales of our product candidates, if and when approved, whether alone or in collaboration with others;
● acceptance of our product candidates, if and when approved, by patients, the medical community and third-party payors;
● effective competition with other therapies;
● obtainment and maintenance of coverage, adequate pricing and adequate reimbursement from third-party payors, including government payors;
● maintenance, enforcement, defense and protection of our rights in our intellectual property portfolio;
● avoidance of infringement, misappropriation or other violations with respect to others ’ intellectual property or proprietary rights; and
● maintenance of a continued acceptable safety profile of our products following receipt of any marketing approvals.
A change in the outcome of any of these variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate.
The process of conducting the necessary preclinical and clinical research to obtain regulatory approval is costly and time-consuming. The actual probability of success for our product candidates may be affected by a variety of factors.
We may never succeed in achieving regulatory approval for any of our product candidates. Further, a number of factors, including those outside of our control, could adversely impact the timing and duration of our product candidates’ development, which could increase our research and development expense. We may obtain unexpected results from our preclinical studies and clinical trials. We may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. A change in the outcome of any of these factors could mean a significant change in the costs and timing associated with the development of our current and future preclinical and clinical product candidates. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development, or if we experience significant delays in execution of or enrollment in any of our preclinical studies or clinical trials, we could be required to expend significant additional financial resources and time on the completion of preclinical and clinical development.
We expect that our research and development expenses will substantially increase for the foreseeable future as we continue to implement our business strategy, which includes advancing our product candidates through clinical development, expanding our research and development efforts, including hiring additional personnel to support our research and development efforts, and seeking regulatory approvals for our product candidates that successfully complete clinical trials. In addition, product candidates in later stages of clinical development generally incur higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. As a result, we expect our research and development expenses to increase as our product candidates advance into later stages of clinical development. As of the date of this Annual Report on Form 10-K, we cannot reasonably determine or accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development.
General and Administrative
Our general and administrative expenses consist primarily of personnel-related expenses, including employee salaries, bonuses, benefits, stock-based compensation, and recruiting costs for personnel in executive, finance, and other administrative functions. Other significant general and administrative expenses include legal fees relating to intellectual
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property and corporate matters, professional fees for accounting, tax and consulting services, insurance costs, travel expenses and facility related expenses not otherwise included in research and development expenses.
We expect our general and administrative expenses will substantially increase for the foreseeable future as we continue to increase our general and administrative headcount to support our continued research and development activities and, if any product candidates receive marketing approval, commercialization activities, as well as to support our operations generally. As we expand our operations, we also expect to incur increased expenses associated with operating as a public company, including costs related to accounting, audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing and rules and regulations of the Securities and Exchange Commission (“SEC”), Sarbanes-Oxley Act, director and officer insurance costs, and investor and public relations costs.
Amortization of intangible asset
Amortization of intangible asset relates to the technology acquired in the BioArkive acquisition.
Other Income (Expense)
Interest income
Interest income consists of interest earned on our cash and cash equivalents balances and our marketable securities. The primary objective of our investment policy is capital preservation.
Other income (expense)
Other income (expense) consists of the amortization of premiums or accretion of discounts related to our marketable securities.
Income tax benefit
Income tax benefit in 2021 is due to a release of a valuation reserve because of the business combination.
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Results of Operations
Comparison of the Years Ended December 31, 2022 and 2021
The following table summarizes our results of operations for the periods indicated:
Year Ended December 31,
Change
2022
2021
$
%
(in thousands, except percentages)
Revenue
$
317
$
2,080
$
(1,763)
(84.8)
%
Cost of revenue
158
1,153
(995)
(86.3)
%
Gross profit
159
927
(768)
(82.8)
%
Operating expenses
Research and development
36,267
26,541
9,726
36.6
%
General and administrative
15,607
8,272
7,335
88.7
%
Amortization of intangible asset
30
—
30
N/M
%
Total operating expenses
51,904
34,813
17,091
49.1
%
Loss from operations
(51,745)
(33,886)
(17,859)
52.7
%
Other income (expense)
Interest income
1,014
170
844
496.5
%
Other income (expense)
217
(127)
344
(270.9)
%
Loss before income taxes
(50,514)
(33,843)
(16,671)
49.3
%
Income tax benefit
—
307
(307)
(100.0)
%
Net loss
$
(50,514)
$
(33,536)
N/M – Not meaningful
Revenue
The following table summarizes the revenue recognized for the periods indicated:
Year Ended December 31,
Change
2022
2021
$
%
(in thousands, except percentages)
Revenue
$
317
$
2,080
$
(1,763)
(84.8)
%
Revenue decreased by approximately $1.8 million, or 84.8% to approximately $0.3 million for the year ended December 31, 2022 compared to approximately $2.1 million for the year ended December 31, 2021. The decrease in revenue was due to the wind down of our computational biology professional services and completion of existing customer services contracts during the year compared to the year ended December 31, 2021.
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Cost of Revenue
Cost of revenue decreased by approximately $1.0 million, or 86.3%, to approximately $0.2 million for the year ended December 31, 2022 compared to approximately $1.2 million for the year ended December 31, 2021. The decrease was primarily due to decreased employee-related costs of approximately $1.0 million related to services contracts that were completed during this year.
Research and Development
The following table summarizes the components of our research and development expenses for the periods indicated:
Year Ended December 31,
Change
2022
2021
$
%
(in thousands, except percentages)
Direct research and development expenses by program:
IMM-1-104
$
1,374
$
—
$
1,374
N/M
%
Other Programs
18,387
17,307
1,080
6.2
%
Unallocated research and development expenses:
Employee related costs
13,957
8,001
5,956
74.4
%
Stock-based compensation expense
1,978
769
1,209
157.2
%
Facilities and other allocated expenses
413
434
(21)
(4.8)
%
Depreciation
158
30
128
426.7
%
Total research and development
$
36,267
$
26,541
$
9,726
36.6
%
Research and development expenses increased by approximately $9.7 million, or 36.6%, to approximately $36.3 million for the year ended December 31, 2022 as compared to approximately $26.5 million for the year-ended December 31, 2021. The increase of approximately $9.7 million was primarily due to an increase of approximately $2.5 million related to direct research and development expenses, of which $1.4 million related to IMM-1-104 and $1.1 million for earlier stage programs. The remaining increase was driven by unallocated research and development costs of approximately $7.2 million, of which $6.0 million related to additional employee-related costs and $1.2 million related to stock-based compensation expense. Depreciation, facilities and other allocated expense also increased by approximately $0.1 million in the aggregate.
General and Administrative
The following table summarizes the components of our general and administrative expenses for the periods indicated:
Year Ended December 31,
Change
2022
2021
$
%
(in thousands, except percentages)
Employee related costs
$
8,123
$
4,506
$
3,617
80.3
%
Stock-based compensation expense
2,077
931
1,146
123.1
%
Professional fees
3,096
1,803
1,293
71.7
%
Public relations
—
262
(262)
(100.0)
%
Outside consultants
68
75
(7)
(9.3)
%
Facilities and other allocated expenses
1,513
125
1,388
1,110.4
%
Other
730
570
160
28.1
%
Total general and administrative
$
15,607
$
8,272
$
7,335
88.7
%
General and administrative expenses increased by approximately $7.3 million, or 88.7%, to approximately $15.6 million for the year ended December 31, 2022 compared to approximately $8.3 million for the year ended December 31, 2021. The increase of approximately $7.3 million was primarily due to increased employee-related costs of approximately $3.6
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million as a result of increased headcount, increased professional fees incurred for accounting, auditing, legal, public relations and tax services of approximately $1.0 million, increased facilities expenses of approximately $1.4 million, approximately $1.1 million increase in stock-based compensation expense.
Amortization of Intangible Asset
Amortization of intangible asset of $30 thousand in the year ended December 31, 2022 is related to the technology acquired for the BioArkive acquisition completed in December 2021.
Other Income (expense)
Interest income increased by approximately $0.8 million due to the interest earned on our cash and cash equivalents and marketable securities balances due to the increased in the interest rates during 2022 as compared to 2021.
Other income (expense) increased by $0.3 million, primarily driven by the amortization of premiums related to our marketable securities.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have financed our operations through service revenues, the issuance of convertible notes payable, convertible preferred stock, common stock, and the exercise of stock options. As of December 31, 2022, we had an accumulated deficit of $109.8 million and $105.5 million in cash and cash equivalents and marketable securities. Cash and cash equivalents are comprised of deposits at major financial banking institutions and highly liquid investments with an original maturity of three months or less at the date of purchase. Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures, and to a lesser extent, general and administrative expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, reflected in the change in our outstanding accounts payable and accrued expenses.
Since our inception, we have incurred significant operating losses. We have not yet commercialized any of our product candidates, and we do not expect to generate revenue from sales of any product candidates for the next several years, if at all. To date, our operations have been financed primarily by service revenues and proceeds from sales of our debt and equity securities.
On August 10, 2022, we entered into an Equity Distribution Agreement, or the Sales Agreement, with Piper Sandler & Co, or the Sales Agent, to sell shares of our common stock with aggregate gross proceeds of up to $50 million, from time to time, through an “at the market” equity offering program. For the year ended December 31, 2022, we did not sell any shares of common stock under the Sales Agreement.
As of December 31, 2022, we have contractual obligations related to various leases of $0.8 million for 2023, $0.7 million for 2024, $0.7 million for 2025, $0.8 million for 2026, $0.8 million for 2027 and $3.7 million for the periods thereafter.
We have no off-balance sheet arrangements that have a material current effect or that are reasonably likely to have a material future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
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Cash Flows
The following table summarizes our sources and uses of cash for the periods indicated:
Year Ended December 31,
2022
2021
(in thousands)
Net cash (used in) provided by:
Operating activities
$
(44,101)
$
(30,851)
Investing activities
41,831
(75,616)
Financing activities
19
144,265
Net increase (decrease) in cash and cash equivalents
$
(2,251)
$
37,798
Net Cash Used in Operating Activities
During the year ended December 31, 2022, operating activities used approximately $44.1 million of cash, primarily resulting from our net loss of approximately $50.5 million and net amortization of premium (accretion of discount) on marketable securities of $0.2 million, partially offset by stock-based compensation expense of approximately $4.1 million, cash provided by changes in our operating assets and liabilities of approximately $1.7 million, and $0.8 million for right of use amortization and depreciation.
During the year ended December 31, 2021, operating activities used approximately $30.9 million of cash, primarily resulting from our net loss of approximately $33.5 million, deferred tax benefit of $0.3 million, and cash provided by changes in our operating assets and liabilities of approximately $0.9 million, partially offset by stock-based compensation expense of approximately $1.8 million, net amortization of premium (accretion of discount) on marketable securities of $0.1 million, and $0.2 million for right of use amortization and depreciation.
Net Cash Used in Investing Activities
During the year ended December 31, 2022, cash provided from investing activities was approximately $41.8 million, primarily related to maturities of marketable securities of $92.7 million, offset by purchases of marketable securities of $50.1 million and $0.7 million for purchases of property and equipment.
During the year end December 31, 2021, cash used from investing was approximately $75.6 million, primarily related to purchases of marketable securities of approximately $75.6 million, $0.1 million for the purchases of property and equipment offset by cash acquired in business combination of approximately $0.1 million.
Net Cash Provided by Financing Activities
During the year ended December 31, 2022, net cash provided by financing activities was approximately $19 thousand, consisting primarily of approximately $0.3 million in net proceeds from the exercise of stock options, offset by approximately $0.3 million from the payment of deferred offering costs.
During the year ended December 31, 2021, net cash provided by financing activities was approximately $144.3 million, consisting primarily of approximately $24.8 million in net proceeds received from the issuance of Series B preferred stock, approximately $118.2 million from the net proceeds from our initial public offering, approximately $0.9 million in net proceeds from the exercise of warrants and approximately $0.4 million from the exercise of stock options.
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Future Funding Requirements
We expect that our expenses will increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities and clinical trials for our product candidates in development. The timing and amount of our operating and capital expenditures will depend largely on:
● the costs and results of our ongoing clinical trial for IMM-1-104 and potential future clinical trials for our other product candidates;
● the scope, progress, results and costs of discovery research, preclinical development, laboratory testing and clinical trials for our other product candidates;
● the costs, timing and outcome of regulatory review of our product candidates;
● our ability to enter into contract manufacturing arrangements for supply of active pharmaceutical ingredient, or API, and manufacture of our product candidates and the terms of such arrangements;
● the payment or receipt of milestones and receipt of other collaboration-based revenues, if any;
● the costs and timing of any future commercialization activities, including product manufacturing, sales, marketing and distribution, for any of our product candidates for which we may receive marketing approval;
● the amount and timing of revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;
● the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property and proprietary rights and defending any intellectual property related claims;
● the extent to which we acquire or in-license other products, product candidates, technologies or data referencing rights;
● our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such arrangements;
● our ability to access the private and public capital markets or to obtain financing at commercially reasonable rate;
● the ability to receive additional non-dilutive funding, including grants from organizations and foundations;
● the costs of operating as a public company; and
● the impacts of the pandemic related to COVID-19 and its variants and potential future pandemics.
We believe that our existing cash, cash equivalents and marketable securities, will enable us to fund our operating expenses and capital expenditure requirements for at least the next twelve months and into the fourth quarter of 2024. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect.
Critical Accounting Policies and Use of Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs 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 consolidated financial statements appearing at the end of this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.
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Research and Development Costs
We incur substantial expenses associated with manufacturing and clinical trials. Accounting for clinical trials relating to activities performed by contract research organizations, or CROs, and other external vendors requires management to exercise significant estimates in regard to the timing and accounting for these expenses. We estimate costs of research and development activities conducted by service providers, which include the conduct of sponsored research, preclinical studies and contract manufacturing activities. The diverse nature of services being provided under CROs and other arrangements, the different compensation arrangements that exist for each type of service and the lack of timely information related to certain clinical activities complicates the estimation of accruals for services rendered by CROs and other vendors in connection with clinical trials. Because payments of research and development activities do not always line up with the provision of such services, the balance sheet may reflect either an accrued or prepaid position. In estimating the duration of a clinical study, we evaluate the start-up, treatment and wrap up periods, compensation arrangements and services rendered attributable to each clinical trial and fluctuations are regularly tested against payment plans and trial completion assumptions.
We estimate these costs based on factors such as estimates of the work completed and budget provided and in accordance with agreements established with our collaboration partners and third-party service providers. We make significant judgments and estimates in determining the accrued liabilities and prepaid expense balances in each reporting period. As actual costs become known, we adjust our accrued liabilities or prepaid expenses. We have not experienced any material differences between accrued costs and actual costs incurred since our inception.
Our expenses related to clinical trials are based on estimates of patient enrollment and related expenses at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that are used to conduct and manage clinical trials on our behalf. We accrue expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis.
Stock-Based Compensation
We measure stock-based awards granted to employees, non-employees and directors based on their fair value on the date of the grant using the Black-Scholes option-pricing model for options or the difference between the purchase price per share of the award, if any, and the fair value of our common stock on the date of grant for restricted stock awards. Compensation expense for those awards is recognized over the requisite service period, which is generally the vesting period of the award for employees and directors and the period during which services are performed for non-employees. We use the straight-line method to record the expense of awards with service-based vesting conditions.
The Black-Scholes option-pricing model uses as inputs, the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options, and our expected dividend yield.
Off-balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements as defined in the rules and regulations of the SEC.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in Note 2 to our consolidated financial statements appearing at the end of this Annual Report on Form 10-K.
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Emerging Growth Company Status
As an emerging growth company, or EGC, under the Jumpstart Our Business Startups Act of 2012, or JOBS Act, we may delay the adoption of certain accounting standards until such time as those standards apply to private companies. Other exemptions and reduced reporting requirements under the JOBS Act for EGCs include presentation of only two years of audited consolidated financial statements, an exemption from the requirement to provide an auditor’s report on internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act, an exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board, and less extensive disclosure about our executive compensation arrangements.
In addition, the JOBS Act provides that an EGC can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an EGC to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
We may remain classified as an EGC until the end of the fiscal year following the fifth anniversary of our IPO, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30 of any year before that time, or if we have annual gross revenues of $1.235 billion or more in any fiscal year, we would cease to be an EGC as of December 31 of the applicable year. We also would cease to be an EGC if we issue more than $1.0 billion of non-convertible debt over a three-year period.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
As a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, we are not required to provide this information.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.