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 in conjunction with our financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, this discussion and analysis contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as statements of our plans, objectives, expectations, intentions and beliefs. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” under Item 1A above.
Overview
We are a clinical stage genetic medicines company on a mission to improve the lives of patients with neurodegenerative diseases. Our primary focus is the development and advancement of cutting-edge, one-time therapies designed to target the underlying pathology of these conditions.
We were incorporated in July 2017 under the laws of the State of Delaware. Since inception, our operations have consisted primarily of conducting preclinical studies, developing licensed technology, conducting clinical trials, and manufacturing clinical supply to support clinical trials. We have incurred recurring losses, the majority of which are attributable to research and development activities, and negative cash flows from operations. Historically, we have funded our operations through the sale of convertible preferred stock and public offerings of common stock. Our net losses were $102.1 million and $136.1 million for the year ended December 31, 2023 and 2022, respectively. As of December 31, 2023, we had an accumulated deficit of $594.5 million. 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. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current or future product candidates. We expect to continue to incur significant expenses and operating losses for the foreseeable future as we advance our product candidates through all stages of development and clinical trials and, ultimately, seek regulatory approval. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. 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.
We will need to raise substantial additional capital to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we plan to finance our operations through the sale of equity, debt financings or other capital sources, which may include collaborations with other companies or other strategic transactions. There are no assurances that we will be successful in obtaining an adequate level of financing as and when needed to finance our operations on terms acceptable to us or 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. If we are unable to secure adequate additional funding, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more product candidates or delay our pursuit of potential in-licenses or acquisitions.
In July 2023, we implemented an organizational restructuring to better align our resources with our previously announced focused research and development strategy and further extend our cash runway. In connection with the organizational restructuring, we reduced our workforce by approximately 26 percent, primarily in our CMC group.
As of December 31, 2023, we had cash, cash equivalents and marketable securities of $114.3 million. We expect our existing cash, cash equivalents and marketable securities, will enable us to fund our operating expenses and capital expenditure requirements into the fourth quarter of 2025.
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Financial Operations Overview
License Agreement
University of Pennsylvania
We have a research, collaboration and licensing agreement with Penn, as amended, or the Penn Agreement, for research and development collaborations and exclusive license rights to patents for certain products and technologies. Under the Penn Agreement, we have the option to obtain exclusive licenses to, and to fund, certain research relating to the preclinical development of selected products in research programs in rare monogenic CNS indications. We have eight remaining options available to commence additional licensed programs for CNS indications until August 3, 2026.
The Penn Agreement includes an exploratory research program to identify targets and early product candidates in certain agreed upon non-monogenic, non-rare, or large, CNS indications. The initial term of the exploratory research program is three years, or until August 2024, which term can be extended by mutual agreement. During such term, we will have an exclusive right of first negotiation to include additional targets to the exploratory research program in the agreed upon large CNS indications. Under the exploratory research program, we will have the right to further develop and commercialize any gene therapy product candidates specific for those selected targets that arise from the exploratory research programs by exercising one of our remaining eight options. We currently do not have any active exploratory research programs.
If we were to exercise any of the remaining options, we would owe Penn a non-refundable aggregate fee of $1.0 million per product indication, with $0.5 million due upfront and another $0.5 million fee owed upon a further developmental milestone.
We also fund discovery research conducted by Penn through August 3, 2026 and will receive exclusive rights, subject to certain limitations, to platform technologies resulting from the discovery research for our products developed with GTP, such as novel capsids, toxicity reduction technologies and delivery and formulation improvements. This funding commitment for the discovery research is $5.0 million annually, paid in quarterly increments of $1.3 million through June 2026.
The Penn Agreement requires that we make payments of up to (i) $16.5 million per product candidate for rare, monogenic disorders in the aggregate and (ii) $39.0 million per product candidate in the aggregate arising from the exploratory program for large CNS indications. Each payment will be due upon the achievement of specific development milestone events by such licensed product for a first indication, reduced development milestone payments for the second and third indications and no development milestone payments for subsequent indications. In addition, on a product-by-product basis, we are obligated to make up to $55.0 million in sales milestone payments on each licensed product based on annual sales of the licensed product in excess of defined thresholds.
Upon successful commercialization of a product using the licensed technology, we are obligated to pay to Penn, on a licensed product-by-licensed product and country-by-country basis, tiered royalties (subject to customary reductions) in the mid-single digits on annual worldwide net sales of such licensed product. In addition, we are obligated to pay to Penn a percentage of sublicensing income, ranging from the mid-single digits to low double digits, for sublicenses under the Penn Agreement. The agreement will expire on a licensed product-by-licensed product and country-by-country basis upon the later of (i) the expiration of the last valid claim of the licensed patent rights that covers the exploitation of such licensed product in such country, and (ii) the expiration of the royalty period. In addition, we will pay a tiered transaction fee of 1-2% of the net proceeds upon certain change of control events.
Collaboration and Manufacturing and Supply Agreements
Catalent
In June 2019, we entered into a collaboration agreement, or the Collaboration Agreement, with Catalent. As part of the Collaboration Agreement, we were required to pay an annual fee for five years ending in 2025 for the exclusive use of a
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dedicated clean room suite, or the Clean Room Suite. In April 2020, we entered into a development services and clinical supply agreement, or the Manufacturing and Supply Agreement, with Catalent to secure clinical scale manufacturing capacity for batches of active pharmaceutical ingredients for our gene therapy product candidates. Under the terms of the Manufacturing and Supply Agreement, Catalent agreed to manufacture batches of drug product for our gene therapy product candidates at the Clean Room Suite at a Catalent facility provided for in the Collaboration Agreement. The Manufacturing and Supply Agreement provided for a term of five years. The Manufacturing and Supply Agreement also included minimum annual purchase commitments.
Under both the Collaboration Agreement and the Manufacturing and Supply Agreement, we had an annual minimum commitment of $10.6 million per year owed to Catalent for five years from November 2020 subject to certain inflationary adjustments.
On March 31, 2023, we entered into certain letter agreements, the Letter Agreements, amending each of (i) the Collaboration Agreement and (ii) the Manufacturing and Supply Agreement, together with the Collaboration Agreement, the Original Catalent Agreements. On November 9, 2023, to supersede and implement the terms of the Letter Agreements, we entered into an amended and restated collaboration agreement and an amended and restated manufacturing and supply agreement, together the Amended Catalent Agreements.
The Amended Catalent Agreements eliminate the minimum annual purchase obligation and the obligation to pay an annual fee for use of the Clean Room Suite, thereby eliminating the annual minimum commitment of $10.6 million per year owed to Catalent through November 2025 under the Original Catalent Agreements. In consideration of this, we have an obligation to make aggregate payments to Catalent of $6.0 million between June 30, 2023 and May 1, 2024.
The Amended Catalent Agreements extend the term of the Original Catalent Agreements until November 6, 2030, and establish a limited exclusive relationship between us and Catalent for the manufacture of bulk drug substance and drug product for our adeno-associated virus delivery therapeutic product candidates for the treatment of FTD and GM1. The limited exclusive relationship under the Amended Catalent Agreements converts to a non-exclusive relationship (i) in the event Catalent fails to meet certain performance standards and (ii) following certain conditional events related to the divestiture by us of either FTD or GM1, in which case, if such events occur, we would pay Catalent certain fees. In addition, in the event of certain transactions, we may terminate the Amended Catalent Agreements for convenience with respect to such products, in which case, we would pay to Catalent a certain termination fee.
Immediately prior to the execution of the Letter Agreements, we had a $5.3 million prepaid asset related to upfront payments made to secure the Clean Room Suite. In connection with the Letter Agreements, we no longer have exclusive access to the Clean Room Suite at Catalent and, as a result, we recognized an expense of $5.3 million related to the elimination of the prepaid asset during the year ended December 31, 2023.
We classified the $11.3 million of expenses, which comprises of $6.0 million in aggregate payments due to Catalent and the $5.3 million elimination of the prepaid asset, as general and administrative expense within the statement of operations for the year ended December 31, 2023, as both amounts do not directly relate to the future advancement of our research and development programs.
As of December 31, 2023, we made payments of $4.0 million under the Amended Catalent Agreements. The remaining $2.0 million of aggregate payments due to Catalent under the Amended Catalent Agreements are included in accrued expenses and other current liabilities.
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Components of Results of Operations
Research and Development and Acquired In-Process Research and Development
Research and development expenses consist primarily of costs incurred in connection with the development of our product candidates. These expenses include:
● expenses incurred to conduct the necessary preclinical studies and clinical trials required to obtain regulatory approval, including payments to clinical research organizations, or CROs, and payments to GTP for preclinical research and development;
● personnel expenses, including salaries, benefits and share-based compensation expense for employees engaged in research and development functions;
● expenses incurred under agreements with contract manufacturing organizations, or CMOs, including the cost of acquiring and manufacturing preclinical study and clinical trial materials;
● expenses and fees paid to consultants who assist with research and development activities; and
● expenses incurred at and for our lab facilities, including rent, utilities, depreciation, and maintenance.
Acquired in-process research and development expenses consist of expenses incurred in obtaining technology licenses related to technology that has not reached technological feasibility and has no alternative future use.
We track outsourced development expenses and other external research and development expenses to specific product candidates on a program-by-program basis, such as expenses incurred under our collaboration with Penn, fees paid to CROs, CMOs and research laboratories in connection with our preclinical development, process development, manufacturing and clinical development activities. However, we do not track our internal research and development expenses on a program-by-program basis as they primarily relate to compensation and other expenses which are deployed across multiple projects under development.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development expenses than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials.
We expect our research and development expenses to remain consistent or decrease in the near future. If our product candidate portfolio progresses into later-stage clinical trials, we expect that our research and development expenses will increase in the future to support our continued research and development activities and production of clinical supply.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel expenses, including salaries, benefits and share-based compensation expense, for employees and consultants in executive, finance, accounting, legal, information technology, product strategy, quality, regulatory, operations and human resource functions. General and administrative expenses also include corporate facility costs, including rent, utilities, depreciation and maintenance, legal expenses related to intellectual property, litigation and corporate matters, insurance expense, expenses related to contract modifications or terminations, software expenses, expenses incurred to engage with patient advocacy organizations, recruitment related expenses and expenses for other professional and consulting services. We expect our general and administrative expenses to remain consistent in the near future, after excluding the impacts of the Amended Catalent Agreements.
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If our product candidate portfolio progresses into later-stage clinical trials, we expect that our general and administrative expenses will increase in the future to support our continued research and development activities and potential commercialization efforts. These increases will likely include increased expenses related to the hiring of additional personnel in general and administrative functions, and expenses related to pre-commercialization efforts. If any of our current or future product candidates obtain regulatory approval, we expect that we would incur significantly increased expenses associated with building a commercial sales and marketing team.
Impairment of long-lived assets
Impairment of long-lived assets consists of non-cash impairment charges recorded to the Company’s assets. The Company reviews long-lived assets, such as the right of use assets or property and equipment, for impairments when events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. During the year ended December 31, 2023, we recognized impairment expense in connection with Sublease Agreement A and Sublease Agreement B. These impairment expenses represent the proportional allocation of total impairments recognized for the asset groups subject to impairment testing in connection with the Company’s sublease agreements.
Other income (expense), net
Other income (expense), net consists of interest earned on our cash equivalents and marketable securities, and amortization of premium and discount on our marketable securities. Additionally, in the year ended December 31, 2023, we recognized other income related to the sale of certain tax credits.
Results of Operations
Comparison of the Years Ended December 31, 2023 and 2022
The following table sets forth our results of operations for the years ended December 31, 2023 and 2022.
Year ended
December 31,
(in thousands)
2023
2022
Change
Operating expenses:
Research and development
$
61,419
$
86,053
$
(24,634)
Acquired in‑process research and development
—
3,000
(3,000)
General and administrative
41,580
49,341
(7,761)
Impairment of long-lived assets
5,390
—
5,390
Loss from operations
(108,389)
(138,394)
30,005
Other income (expense), net
6,327
2,269
4,058
Net loss
$
(102,062)
$
(136,125)
$
34,063
Research and Development Expenses
Research and development expenses decreased by $24.7 million to $61.4 million for the year ended December 31, 2023 from $86.1 million for the year ended December 31, 2022. The decrease was primarily due to the following:
● a decrease of $16.2 million in chemistry, manufacturing and control expenses primarily related to less activity in 2023 for external manufacturing expenses and internal lab operations expenses to support production of clinical supply, most significantly within our FTD- GRN program;
● a decrease of $6.9 million in wages and benefits related to reductions in headcount;
● a decrease of $2.7 million in share-based compensation expense related to reductions in headcount and lower fair value of awards granted during the year-ended December 31, 2023;
● a decrease of $0.9 million in professional fees related to our decision to stop further clinical development of our Krabbe and MLD programs; and
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● a decrease of $0.5 million for clinical operations expenses related to our decision in 2022 to stop further clinical development of our Krabbe and MLD programs, partially offset by additional patient enrollment in our FTD- GRN and GM1 programs;
These decreases were partially offset by:
● an increase of $2.2 million in Penn expenses. Expenses associated with the Penn Agreement will continue to vary from year to year based on our selection and prioritization of preclinical product candidates, the status of our preclinical pipeline and timing of preclinical work performed; and
● an increase of $0.3 million in facility and other expenses .
Acquired In-Process Research and Development Expenses
We did not incur acquired in-process research and development expenses for the year ended December 31, 2023. We made payments under the Penn Agreement for acquired in-process research and development of $3.0 million related to the achievement of development milestones during the year ended December 31, 2022.
General and Administrative Expenses
General and administrative expenses decreased by $7.7 million to $41.6 million for the year ended December 31, 2023 from $49.3 million for the year ended December 31, 2022. The decrease was primarily due to the following:
● a decrease of $9.0 million in wages and benefits expenses related to reductions in headcount;
● a decrease of $5.3 million in share-based compensation expense related to reductions in headcount and lower fair value of awards granted during the year-ended December 31, 2023 ; and
● a decrease of $4.7 million in professional fees, facilities, and other expenses;
These decreases were partially offset by:
● an increase of $11.3 million related to expenses incurred in conjunction with the Amended Catalent Agreements.
Impairment of Long-Lived Assets
During the year ended December 31, 2023, we recorded $5.4 million of impairment expenses in connection with Sublease Agreement A and Sublease Agreement B. The impairment charges consisted of $2.2 million and $3.2 million recorded to the right of use assets and property and equipment, net, respectively. During the year ended December 31, 2022, we did not record any impairment expense.
Other Income (Expense), net
Other income (expense), net increased by $4.0 million to $6.3 million for the year ended December 31, 2023 from $2.3 million for the year ended December 31, 2022. The increase was primarily due to the following:
● an increase of $0.5 million attributable to interest income earned on cash equivalents and marketable securities;
● an increase of $2.8 million attributable to the amortization of premium and discount on our marketable securities; and
● an increase of $0.7 million related to the sale of certain tax credits during the current year
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Liquidity and Capital Resources
Overview
As of December 31, 2023, we had $114.3 million in cash, cash equivalents and marketable securities and had an accumulated deficit of $594.5 million. We expect our existing cash, cash equivalents and marketable securities will enable us to fund our operating expense and capital expenditures into the fourth quarter of 2025.
Funding Requirements
Our primary use of cash is to fund operating expenses, most significantly research and development expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable, accrued expenses and prepaid expenses.
Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:
● the scope, timing, progress and results of discovery, preclinical development, laboratory testing and clinical trials for our product candidates;
● the expenses of manufacturing our product candidates for clinical trials and in preparation for marketing approval and commercialization;
● the extent to which we enter into collaborations or other arrangements with additional third parties in order to further develop our product candidates;
● the expenses of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
● the expenses and fees associated with the discovery, acquisition or in-license of additional product candidates or technologies;
● the expenses related to general and administrative functions to support our product candidates;
● our ability to establish additional collaborations on favorable terms, if at all;
● the expenses required to scale up our clinical, regulatory and manufacturing capabilities;
● the expenses of future commercialization activities, if any, including establishing sales, marketing, manufacturing and distribution capabilities, for any of our product candidates for which we receive marketing approval; and
● revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval.
We will need additional funds to meet operational needs and capital requirements for clinical trials, other research and development expenditures, and business development activities. We currently have no credit facility or committed sources of capital. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical studies.
Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, existing stockholders’ ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect existing stockholders’ rights as common 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.
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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, further reduce or terminate our research, product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
On March 5, 2021, we entered into a Sales Agreement, or the Sales Agreement, with Cowen and Company, LLC, or Cowen, pursuant to which we may, but are not obligated to, offer and sell, from time to time, shares of our common stock with an aggregate offering price up to $125.0 million through Cowen, as sales agent. No sales of common stock have been made pursuant to this Sales Agreement to date.
Cash Flows
The following table shows a summary of our cash flows for the periods indicated:
Year ended
December 31,
(in thousands)
2023
2022
Cash provided by (used in) operating activities
$
(78,264)
$
(118,210)
Cash provided by (used in) investing activities
65,237
25,199
Cash provided by (used in) financing activities
135
(1,353)
Net increase (decrease) in cash and cash equivalents
$
(12,892)
$
(94,364)
Net Cash Provided by (Used in) Operating Activities
During the year ended December 31, 2023, we used $78.3 million of net cash in operating activities, primarily to fund our operations related to the development of our product candidates and related general and administrative support activities. Cash used in operating activities reflected our net loss of $102.1 million, which was partially offset by a net decrease in our operating assets of $5.3 million and net non-cash charges of $18.5 million primarily related to share-based compensation, depreciation and amortization, impairment of long-lived assets, and amortization of premium and discount, net.
During the year ended December 31, 2022, we used $118.2 million of net cash in operating activities, primarily to fund our operations related to the development of our product candidates and related general and administrative support activities. Cash used in operating activities reflected our net loss of $136.1 million and a net decrease in our operating assets of $8.5 million. This was partially offset by net non-cash charges of $26.4 million primarily related to share-based compensation, depreciation and amortization, and amortization of premium and discount, net.
Net Cash Provided by (Used in) Investing Activities
During the year ended December 31, 2023, we purchased $129.4 million in marketable securities and had sales and maturities of $194.8 million in marketable securities. Additionally, we used $0.1 million for the purchase of property and equipment.
During the year ended December 31, 2022, we purchased $157.8 million in marketable securities and had sales and maturities of $188.3 million in marketable securities. Additionally, we used $2.3 million for the purchase of property and equipment and we used $3.0 million to purchase technology rights from Penn.
Net Cash Provided by (Used in) Financing Activities
During the year ended December 31, 2023, we received $0.1 million in proceeds from the issuance of common stock under the ESPP.
During the year ended December 31, 2022, we received $0.1 million from the exercise of stock options, received $0.3 million in proceeds from the issuance of common stock under the ESPP and paid $1.8 million for insurance premiums and insurance premium financing expenses under our short-term insurance premium financing arrangement.
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Contractual obligations and other commitments
We lease approximately 37,000 square feet of office space in Philadelphia, Pennsylvania, or the 2005 Market Street Lease Agreement. The lease will expire in December 2031. We have an option to extend the term of the lease by up to two additional five-year terms. The aggregate estimated rent payments due over the initial term of the lease is $11.8 million, with rent payments that began in 2022. Sublease Agreement A and Sublease Agreement B do not relieve us from our primary obligations under the 2005 Market Street Lease Agreement, however, we do expect cash inflows from the agreements to partially offset our future obligations for the duration of the sublease agreements.
We lease approximately 62,000 square feet of laboratory space in Hopewell, NJ, or the Laboratory Lease Agreement. The lease will expire in March 2036. The aggregate estimated rent payments due over the initial term of the lease is approximately $40.3 million, with rent payments that began in 2021.
As a result of the Amended Catalent Agreements, we no longer have an annual minimum commitment of $10.6 million per year owed to Catalent through November 2025. As of December 31, 2023, the Company made payments of $4.0 million under the Amended Catalent Agreements. In addition, the Company will make aggregate payments to Catalent of $2.0 million between January 1, 2024 and May 1, 2024.
Under the Penn Agreement, we agreed to fund discovery research conducted by GTP for five years, which began in May 2020. Our funding commitment is $5.0 million a year through June 2026.
These contractual obligations and commitments are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. Payments due upon cancellation consisting only of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to the date of cancellation are not included as the amount and timing of such payments are not known.
The contractual obligations and commitments above do not include any potential milestone or royalty payments that we may be required to make under the Penn Agreement.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to long-lived assets and accrued expenses. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be 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. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 3 to our annual financial statements included elsewhere in this Form 10-K, we believe 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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Long-Lived Assets
We assess long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of the assets or the asset group may not be recoverable. We measure the recoverability of assets that we will continue to use in our operations by comparing the carrying value of the asset groups to our estimate of the related total future undiscounted net cash flows. If an asset group’s carrying value is not recoverable through the related undiscounted cash flows, the asset group is considered to be impaired.
In the event the carrying value exceeds the future undiscounted net cash flows, we estimate the fair values using either the income approach, market approach, or a combination of the two. The income approach is based on the present value of future cash flows of each asset group, while the market approach is based on industry and economic conditions, including estimates on prevailing prices and rates for similar assets. The approaches are asset group specific and may incorporate a number of market participant assumptions in assessing fair value including future growth rates, discount rates, and market activity. We measure the impairment by comparing the difference between the asset group’s carrying value and its fair value. Long-lived assets are considered a non-financial asset and are recorded at fair value only if an impairment charge is recognized. Impairments are determined for groups of assets related to the lowest level of identifiable independent cash flows.
During the year ended December 31, 2023, we recorded impairments of long-lived assets (property and equipment and right of use assets) of $5.4 million based upon impairment testing in connection with Sublease Agreement A and Sublease Agreement B.
Actual future net cash flows are uncertain, subject to risks, and may change depending upon several factors, including industry or economic trends. If our estimates of future net cash flows differ from actual future net cash flows, our estimates of fair value could materially change. Additionally, future events or changes in circumstances could indicate that the carrying value of our long-lived assets may not be recoverable and lead to future impairments. As of December 31, 2023, we had property and equipment, net of $15.3 million and right of use assets of $16.9 million recorded on our balance sheet.
Research and Development Expenses
Research and development costs are expensed as incurred and consist primarily of expenses incurred with GTP, contract research organizations, contract manufacturing organizations, internal analytical and testing activities, and employee-related expenses, including salaries, benefits, and share-based compensation.
We make estimates of our external accrued research and development expenses, which primarily relates to activities performed by our contract research organizations and contract manufacturing organizations, as of each balance sheet date in our financial statements based on an estimate of progress to completion of specific tasks using facts and circumstances known to us at that time. We determine the estimates by reviewing contracts, vendor agreements and change orders, invoicing to date, reviewing vendor provided supporting documentation and through discussions with our internal personnel and external service providers as to the progress to completion of services and the agreed-upon fee to be paid for such services.
Actual costs and estimates of progress to completion of our contract research organizations and contract manufacturing organizations are uncertain, subject to risks and may change depending upon a number of factors, including our enrollment levels and status of our clinical trials, and timing of our manufacturing activities. Such estimates are uncertain given the level of visibility we have towards the activities of our contract research organizations and contract manufacturing organizations. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the accrual and related expenses accordingly.
Recent Accounting Pronouncements
See Note 3 to our financial statements found elsewhere in this Form 10-K for a description of recent accounting pronouncements applicable to our financial statements.
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JOBS Act Accounting Election
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards 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 financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
We will remain an emerging growth company until the earliest of (1) the last day of our first fiscal year (a) in which we have total annual gross revenues of at least $1.235 billion, or (b) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th, (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period and (3) December 31, 2025.
We are also a “smaller reporting company,” meaning that the market value of our stock held by non-affiliates is less than $700.0 million and our annual revenue is less than $100.0 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than $250.0 million or (ii) our annual revenue is less than $100.0 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700.0 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.