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 financial statements and related notes appearing elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intention, beliefs and projections. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth in the section titled “Risk Factors” under Part I, Item 1A and elsewhere in this Annual Report. See “Special Note Regarding Forward-Looking Statements” in this Annual Report. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “should,” “will” or the negative of these terms or other similar expressions.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or
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incomplete, and our statements should not be read to indicate we have conducted exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
Overview
We are a clinical stage biopharmaceutical company focused on discovering and developing novel therapies for the treatment of fibrosis and related diseases. Our initial focus is on treating fibrosis by inhibiting integrin-mediated activation of TGF-β. We have applied our deep understanding of fibrosis biology, along with our medicinal chemistry and translational medicine expertise to develop a set of proprietary tools designed to discover and de-risk product candidates quickly and efficiently. Our wholly-owned lead product candidate, bexotegrast (PLN-74809), is an oral, small molecule, dual selective inhibitor of αvß6 and αvß1 integrins that we are developing for the treatment of idiopathic pulmonary fibrosis, or IPF, and primary sclerosing cholangitis, or PSC. We are currently conducting three Phase 2a trials in our lead indications: two in IPF and one in PSC. We announced positive interim data from our first Phase 2a INTEGRIS-IPF trial in July 2022 and January 2023. We expect to release final data from the INTEGRIS-IPF trial in the second quarter of 2023.
We have also developed a second product candidate, PLN-1474, a Phase 2-ready oral, small molecule selective inhibitor of αvß1 for the treatment of advanced liver fibrosis associated with nonalcoholic steatohepatitis, or NASH. PLN-1474 was licensed to Novartis in 2019, and as part of a broad strategic realignment, Novartis has discontinued clinical development in NASH and, as a result, discontinued development of PLN-1474. In February 2023, Novartis returned global rights to PLN-1474 to Pliant.
In December 2022, we filed an investigational new drug (IND) application for our third clinical program, PLN-101095, a dual inhibitor of integrins αvß8 and αvß1 for the treatment of solid tumors resistant to immune checkpoint inhibitors. In January 2023, we received FDA clearance for our IND and expect to initiate a Phase 1 trial of PLN-101095 in the second quarter of 2023.
In addition to our clinical programs, we are currently advancing a preclinical integrin-based program targeting muscular dystrophies.
Recent Highlights
Bexotegrast Highlights
• INTEGRIS-IPF Phase 2a clinical data from bexotegrast 320 mg dose at 12-weeks showed bexotegrast was well tolerated and demonstrated statistically significant forced vital capacity (FVC) increase in patients with idiopathic pulmonary fibrosis (IPF). Bexotegrast at 320 mg was well tolerated with no drug-related severe or serious adverse events and showed dose-proportional increases in plasma concentrations, consistent with prior studies. Exploratory efficacy endpoints demonstrated strong treatment effects on FVC, Quantitative Lung Fibrosis (QLF) imaging and biomarkers over 12 weeks. In addition, no bexotegrast-treated patients experienced disease progression as defined by FVC percent predicted (FVCpp) decline of greater than or equal to 10%, a risk factor associated with increased mortality in IPF patients.
• INTEGRIS-IPF Phase 2a trial on track for final 24-week data readout from the bexotegrast 320 mg dose group in the second quarter of 2023. This randomized, double-blind, placebo-controlled trial is evaluating bexotegrast at a once-daily dose of 320 mg administered for at least six months and up to 48 weeks in approximately 28 patients with IPF. The trial will evaluate primary and secondary endpoints of safety, tolerability, and pharmacokinetics. Exploratory efficacy endpoints will include effect on FVC and QLF, as well as serum biomarkers.
• INTEGRIS-PSC topline Phase 2a data expected in the third quarter of 2023. This 12-week randomized, dose-ranging, double-blind, placebo-controlled trial is evaluating the safety, tolerability, and pharmacokinetics of bexotegrast in primary sclerosing cholangitis (PSC) patients. The trial is also evaluating exploratory efficacy endpoints including fibrosis biomarkers such as PRO-C3 and enhanced liver fibrosis (ELF), changes in alkaline phosphatase (ALP), and liver imaging.
• EMA Orphan Drug designation received for bexotegrast for the treatment of IPF. European Medicines Agency’s (EMA’s) Orphan Drug designation is designed to encourage the development of new treatments for rare conditions. The benefits of Orphan Drug
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designation include trial design assistance, a centralized EU approval process, and 10 years of market exclusivity. Bexotegrast received Orphan Drug designation from the United States Food and Drug Administration (FDA) in 2018.
Early-Stage Development Programs
• IND open for PLN-101095 for the treatment of solid tumors resistant to immune checkpoint inhibitors. In January 2023, the U.S. Food and Drug Administration (FDA) cleared the company’s Investigational New Drug (IND) application for PLN-101095, an oral, small molecule, dual selective inhibitor of αvβ8 and αvβ1 integrins. Initiation of a Phase 1 trial of PLN-101095 in patients with solid tumors that are resistant to immune checkpoint inhibitors is expected in the second quarter of 2023.
• Muscular dystrophy program progressing through IND enabling activities. IND submission for this program is expected in 2023.
Corporate Highlights
• Closing of underwritten public offering of $287.5 million in common stock. The Company closed a public offering in January 2023, yielding $269.9 million in net proceeds to the Company, which included the underwriter’s exercise in full of their option to purchase additional shares. Pliant intends to use the net proceeds from the offering, together with its existing cash, cash equivalents and investments, to develop its ongoing and future preclinical and clinical programs including bexotegrast and PLN-101095, further develop its integrin targeting platform, to fund working capital, operating expenses and capital expenditures, and for other general corporate purposes.
• Appointment of Lily Cheung as Chief Human Resources Officer. Ms. Cheung brings over 25 years of Human Resources experience across the technology and biopharmaceutical industries, including more than 15 years of commercial-stage experience.
• Appointments of Darren Cline and Thomas McCourt to the Company’s Board of Directors. Mr. Cline and Mr. McCourt each bring over 30 years of strategic and operational experience in building commercial organizations to the Company. Mr. Cline currently serves as Chief Executive Officer and President of Epygenix Therapeutics. Mr. McCourt currently serves as Chief Executive Officer of Ironwood Pharmaceuticals.
• Work has completed under the Novartis collaboration. During the three-year term of the collaboration, Pliant achieved successful validation of a novel integrin receptor as a potential next generation target for treatment of fibrotic diseases and is in the process of developing candidates against the target. As part of a broad strategic realignment, Novartis has discontinued clinical development in NASH. As a result, Novartis has terminated development of PLN-1474, an inhibitor of αvβ1 targeting NASH-associated advanced liver fibrosis, which they licensed in 2019 and returned global rights to Pliant. PLN-1474 is a phase 2-ready asset, having shown a favorable safety and pharmacokinetic profile in Phase 1 trials.
2023 Anticipated Milestones
• 24-week data from the 320 mg dose group of the INTEGRIS-IPF Phase 2a trial in patients with IPF is expected in the second quarter of 2023.
• Initiation of a Phase 2b trial of bexotegrast in patients with IPF is expected in mid-2023.
• Initiation of a Phase 1 trial of PLN-101095 in patients with solid tumors resistant to immune checkpoint inhibitors is expected in the second quarter of 2023.
• Topline data from the 40, 80 and 160 mg dose groups of the INTEGRIS-PSC Phase 2a trial in patients with PSC is expected in the third quarter of 2023.
Since inception, we have had significant operating losses. Our net loss was $123.3 million, $97.3 million and $41.5 million for the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, we had an accumulated deficit of $338.4 million and cash, cash equivalents and short-term investments of $331.2 million. We expect to continue to incur net losses for the foreseeable future, and we expect our research and development expenses,
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general and administrative expenses, and capital expenditures will increase in connection with our ongoing activities, as we:
• perform research and development activities to identify and develop product candidates;
• advance product candidates into and through clinical development;
• require the manufacture of supplies to support research and development, preclinical studies and clinical trials;
• seek regulatory approvals for any product candidates that successfully complete clinical trials;
• expand our operational, financial and management systems and increase personnel to support our clinical development, manufacturing and commercialization efforts and our operations as a public company;
• maintain, expand and protect our intellectual property portfolio; and
• invest in or in-license other technologies or product candidates.
COVID-19 Pandemic
The novel coronavirus, or COVID-19, continues to spread throughout the United States and worldwide. We have been, and in the future could be, materially and adversely affected by the risks, or the public perception of the risks, related to an epidemic, pandemic, outbreak, or other public health crisis, such as the outbreak of COVID-19. While difficult to predict or quantify the overall impact of the pandemic to our operations, among other things, our clinical trials have experienced delays, and may experience additional delays in the future, extending the timelines and increasing the overall costs to finish the clinical trials, as our fixed costs are not substantially reduced while the clinical trials are delayed. The ultimate extent of the impact of any epidemic, pandemic, outbreak, or other public health crisis on our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of such epidemic, pandemic, outbreak, or other public health crisis and actions taken to contain or prevent the further spread, among others. Accordingly, we cannot predict the extent to which our business, financial condition and results of operations have been and will be affected. We remain focused on maintaining a strong balance sheet, liquidity and financial flexibility and continue to monitor developments as we deal with the continued disruptions and uncertainties from a business and financial perspective relating to COVID-19.
Financial Operations Overview
Revenue
We have not generated any revenue from product sales and do not expect to do so in the near future. Our revenue to date is derived from a Collaboration and License Agreement with Novartis, or the "Novartis Agreement," that was executed in 2019.
The Novartis Agreement is for the development and commercialization of PLN-1474 and up to three additional integrin research targets. Under the terms of the Novartis Agreement, we received an upfront license fee payment of $50.0 million for the worldwide, exclusive license to PLN-1474 and an additional $29.0 million upon the achievement of specified research and development milestones. As part of a broad strategic realignment, Novartis has discontinued clinical development in NASH and, as a result, discontinued development of PLN-1474. In February 2023, Novartis issued a termination notice for the collaboration and license agreement, and returned global rights to Pliant for PLN-1474.
Upon termination, we are no longer eligible to receive additional milestone or royalty payments under the arrangement, however, we will continue to earn research and development services revenues, up to $20.0 million and up to $18.4 million for the research and development activities associated with PLN-1474 and integrin research targets, respectively. As of December 31, 2022, we estimate an additional $1.4 million of aggregate research and development funding remains available for use under the arrangement.
Revenues for the years ended December 31, 2022 and 2021 were $9.7 million and $7.6 million, respectively.
Operating Expenses
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Research and Development
Our research and development expenses consist of expenses incurred in connection with the development of our product candidates. Research and development expenses include:
• employee-related expenses, which include salaries, benefits and stock-based compensation for our research and development personnel;
• expenses incurred under agreements with third-party contract organizations for pre-clinical studies, clinical trials and consultants that conduct research and development activities on our behalf;
• costs associated with the manufacture of supplies to support research and development, preclinical studies and clinical trials;
• depreciation of laboratory equipment and costs of equipment and supplies;
• costs associated with technology and intellectual property licenses; and
• facilities and other allocated expenses, which include expenses for rent and other facility related costs and other supplies.
The following table summarizes our research and development expenses for the years ended December 31, 2022 and 2021 (in thousands):
Year Ended December 31,
2022 2021
Employee-related expenses $ 30,316 $ 20,730
Outside and consulting services for preclinical studies and research and development activities by third party contract organizations
25,402 15,674
Clinical trials expenses 26,032 29,263
Depreciation of lab equipment and costs of equipment and supplies 5,859 5,968
Technology and intellectual property licenses 85 33
Facilities and other allocated expenses 9,242 5,880
Total research and development expenses $ 96,936 $ 77,548
We expense all research and development costs in the periods in which they are incurred. We do not allocate our internal costs by product candidates or by preclinical programs as these are in early stages of development. Additionally, although external third-party costs are allocable between product candidates and programs, we do not perform this allocation.
We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates and our preclinical programs and as they advance into later stages of development. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.
General and Administrative
Our general and administrative expenses consist primarily of salaries, benefits and stock-based compensation for our general and administrative personnel, allocated facilities costs, insurance and other expenses for outside professional services, including legal, marketing, investor relations, human resource and accounting services. We expect general and administrative expenses to increase for the foreseeable future as does the size of our administrative function to support the growth of our business. In addition, if we obtain regulatory approval for any of our product candidates and do not enter into a third-party commercialization collaboration, we expect to incur significant expenses related to building a sales and marketing team to support product sales, marketing and distribution activities.
Interest and Other Income (Expense), net
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Our interest and other income (expense), net consists of interest income earned on cash and cash equivalents, money market funds and short-term investments, realized gains and losses on investments.
Interest Expense
Our interest expense is derived from a term loan executed under the Oxford Loan Agreement that we entered into in May 2022. Borrowings under the Oxford Loan Agreement bear interest at a rate per annum equal to 1-month term Secured Overnight Financing Rate (SOFR) plus 8.5%, subject to an agreed upon floor and cap.
Results of Operations
Comparison of the Years Ended December 31, 2022 and 2021
(In thousands, except percentages) Year Ended December 31,
2022 2021 $ Change % Change
Revenue $ 9,685 $ 7,572 $ 2,113 27.9 %
Operating expenses:
Research and development (96,936) (77,549) (19,387) 25.0 %
General and administrative (39,949) (27,558) (12,391) 45.0 %
Total operating expenses (136,885) (105,107) (31,778) 30.2 %
Loss from operations (127,200) (97,535) (29,665) 30.4 %
Interest and other income (expense), net 4,670 272 4,398 1,616.9 %
Interest expense (791) — (791) NM
Net loss $ (123,321) $ (97,263) $ (26,058) 26.8 %
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NM: Results not meaningful
Revenue
Revenue was $9.7 million and $7.6 million for the years ended December 31, 2022 and 2021, respectively. The increase of $2.1 million was primarily due to the recognition of a $4.0 million milestone payment in the second quarter of 2022 as Novartis exercised their right to opt-in to a research program and secured an exclusive license to compounds associated with an integrin research target. This increase was partially offset by a decrease in research and development services revenues associated with PLN-1474 given our most significant contribution to the development plan concluded upon transfer of the IND to Novartis in the first quarter of 2021.
We expect our revenue to be derived from the Novartis Agreement for remainder of the term of our collaboration for which we received a termination notice in February 2023. Unless we enter into additional contracts with customers, we do not expect to generate revenues beyond the second quarter of 2023.
Research and Development Expenses
Research and development expenses were $96.9 million and $77.5 million for the years ended December 31, 2022 and 2021, respectively. The increase of $19.4 million was primarily due to:
• $9.6 million increase in employee-related costs owing to the increase in our research and development workforce and stock-based compensation;
• $9.7 million increase in outside and consulting services for preclinical studies and research and development activities by third party contract organizations for the advancement of our preclinical programs;
• $3.2 million decrease in clinical trial expenses largely due to decreased expenses associated with Phase 1 clinical trials, partially offset by an increase in expenses for our Phase 2 trials of bexotegrast.
• $0.1 million decrease in depreciation of lab equipment and costs of equipment and supplies;
• $0.1 million increase in technology and intellectual property licenses; and
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• $3.4 million increase in facilities and other allocated expenses
General and Administrative Expenses
General and administrative expenses was $39.9 million and $27.6 million for the years ended December 31, 2022 and 2021, respectively. The increase of $12.4 million was primarily due to a $9.1 million increase in employee-related costs, including stock-based compensation, and a $3.3 million increase in legal, accounting and other professional services.
Interest and other income (expense), net
Interest and other income (expense), net was $4.7 million and $0.3 million for the years ended December 31, 2022 and 2021, respectively. The increase of $4.4 million was due to higher average investment balances in 2022 compared to 2021 resulting from significant financing activities occurring mid-year 2022 coupled with an increase in the yield on our short-term investment portfolio.
Interest Expense
Interest expense, net was $0.8 million and zero for the years ended December 31, 2022 and 2021, respectively. The increase of $0.8 million was due to the interest incurred from the Oxford Financing Term Loan, which was issued in the second quarter of 2022.
Liquidity and Capital Resources
Overview
As of December 31, 2022, we had cash, cash equivalents and short-term investments of $331.2 million. Our cash, cash equivalents and short-term investments consist of U.S. Treasury securities, U.S. Government agency securities and highly rated, investment-grade corporate debt securities.
In May 2022, as amended in October 2022, we entered into a Loan and Security Agreement (the “Oxford Loan Agreement”) with Oxford Finance LLC (or "Oxford"). Upon closing of the Oxford Loan Agreement, we drew $10.0 million and decided to forego drawing on the additional $40.0 million currently available to us. A further $50.0 million may become available to us, $25.0 million upon the achievement of a pre-determined development milestone and $25.0 million at Oxford's discretion.
In July 2022, we completed an underwritten public offering of 12,432,432 shares of common stock, including the exercise in full of the underwriters' option to purchase 1,621,621 additional shares of common stock. The shares were offered at a price to the public of $18.50 per share, resulting in aggregate proceeds of approximately $215.4 million, net of underwriting discounts, commissions and offering expenses.
In January 2023, we completed an underwritten public offering of 9,583,334 shares of common stock, including the exercise in full of the underwriters' option to purchase 1,250,000 additional shares of common stock. The shares were offered at a price to the public of $30.00 per share, resulting in aggregate proceeds of approximately $269.9 million, net of underwriting discounts, commissions and offering expenses.
We believe that our existing capital resources, together with the proceeds our January 2023 public offering, will be sufficient to meet our projected operating requirements into the second half of 2026. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for product development and commercialization sooner than planned.
Our operations have been financed primarily through the issuance and sale of convertible preferred stock, issuance of common stock and our collaboration with Novartis. In July 2021, we entered into a Controlled Equity Offering SM Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co., as sales agent, pursuant to which we may issue and sell up to $150.0 million of shares of common stock from time to time. On July 2, 2021, we filed a registration statement on Form S-3 (File No. 333-257684), as amended, which included a sales agreement prospectus registering the offer and sale of shares under the Sales Agreement (the “Sales Agreement Prospectus”). From July 2, 2021 to January 23, 2023, no shares of common stock were sold pursuant to the Sales Agreement or the Sales Agreement Prospectus. We terminated the Sales Agreement Prospectus on January 23, 2023 in connection with our January 2023 public offering, but the Sales Agreement remains in full force and effect. We will not make any sales of shares of our common stock pursuant to the Sales Agreement unless and until a new sales agreement prospectus or prospectus supplement is filed. We have not issued any shares pursuant to any at-the-market offerings, including pursuant to the Sales Agreement, but may do so at a future date.
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Funding Requirements
Our primary use of cash is to fund operating expenses, primarily 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.
Our future funding requirements will depend on many factors, including the following:
• the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our product candidates;
• the clinical development plans we establish for these product candidates;
• the timelines of our clinical trials and the overall costs to conduct and complete the clinical trials, which may be impacted by the COVID-19 pandemic;
• the number and characteristics of product candidates that we develop;
• the outcome, timing and cost of meeting regulatory requirements established by the U.S. Food and Drug Administration, or FDA, and other comparable foreign regulatory authorities including but not limited to the European Medicines Agency (EMA), the UK Medicines and Healthcare products Regulatory Agency (MHRA);
• whether we enter into any collaboration agreements and the terms of any such agreements;
• the cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights;
• the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us or our product candidates;
• the effect of competing technological and market developments;
• the cost and timing of completion of commercial-scale outsourced manufacturing activities;
• the cost and timing of achieving favorable pricing and reimbursement agreements with the pricing authorities in each market of interest, including of securing a positive recommendation after undergoing a health technology assessment by health technology authorities;
• the cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval in regions where we choose to commercialize our products on our own; and
• the cost of operating as a public company.
Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development expenditures. If we need to raise additional capital to fund our operations, funding may not be available to us on acceptable terms, or at all. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of or suspend one or more of our preclinical studies, clinical trials, research and development programs or commercialization efforts. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, collaborations and other licensing arrangements. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain valuable rights to our product candidates, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us.
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Cash Flows
The following summarizes our cash flows for the periods indicated (in thousands):
Year Ended December 31,
2022 2021
Net cash used in operating activities $ (94,631) $ (75,443)
Net cash provided by (used in) investing activities (150,204) 73,699
Net cash provided by financing activities 226,854 2,527
Net increase (decrease) in cash and cash equivalents $ (17,981) $ 783
Cash Used in Operating Activities
Net cash used in operating activities was $94.6 million for the year ended December 31, 2022 compared to $75.4 million for the year ended December 31, 2021. The increase in cash used in operating activities of $19.2 million between the year ended December 31, 2022 and 2021 was primarily due to an increase in our net loss of $26.1 million which was driven by an increase in operating expenses of $31.8 million.
Cash Provided by (Used in) Investing Activities
Net cash used in investing activities during the year ended December 31, 2022 was $150.2 million compared to net cash provided by in investing activities of $73.7 million during the year ended December 31, 2021. The increase in cash used by investing activities of $223.9 million between the year ended December 31, 2022 and 2021 is primarily due to the investment purchases following our July 2022 public offering plus regular variation year over year regarding the timing of investment purchases versus maturities in our short-term investment portfolio.
Cash Provided by Financing Activities
Net cash provided by financing activities was $226.9 million during the year ended December 31, 2022 as compared to $2.5 million during the year ended December 31, 2021. The increase in cash provided by financing activities of $224.3 million between the year ended December 31, 2022 and 2021 is attributable to the July 2022 public offering and term loan entered into under the Oxford Loan Agreement.
Off-Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements or holdings in any variable interest entities.
Material Cash Requirements
The following table summarizes our material cash requirements as of December 31, 2022 (in thousands):
Payments Due by Period
Less than
1 Year 1 to 3
Years 3 to 5
Years More Than
5 Years Total
Operating lease $ 2,836 $ 3,624 $ 0 $ — $ 6,460
Total obligations $ 2,836 $ 3,624 $ 0 $ — $ 6,460
We enter into contracts in the normal course of business with third-party contract organizations for clinical trials, non-clinical studies and testing, manufacturing and other services and products. These contracts generally provide for termination following a certain period after notice and therefore we believe that our cancellable obligations under these agreements are not material and they are not included in the table above.
We have not included milestone or royalty payments or other contractual payment obligations in the table above if the timing and amount of such obligations are unknown or uncertain.
Critical Accounting Polices and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with United States generally accepted accounting principles.
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The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value 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 2 to our financial statements appearing elsewhere in this Annual Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
As of December 31, 2022, all of our revenue to date has been generated from the Novartis Agreement. We recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, ("Topic 606") we perform the following five steps: (i) identification of the contract(s) with the customer, (ii) identification of the promised goods or services in the contract and determination of whether the promised goods or services are performance obligations, (iii) measurement of the transaction price, (iv) allocation of the transaction price to the performance obligations, and (v) recognition of revenue when (or as) we satisfy each performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to our customer.
Identification of the Contracts with the Customers
We evaluate every contract to determine whether it in its entirety or in part represent a contract with a customer, or a collaboration agreement and, based on this determination, apply appropriate accounting guidance.
We account for a contract with a customer that is within the scope of Topic 606 when all of the following criteria are met: (i) the arrangement has been approved by the parties and the parties are committed to perform their respective obligations, (ii) each party’s rights regarding the goods or services to be transferred can be identified, (iii) the payment terms for the goods or services to be transferred can be identified, (iv) the arrangement has commercial substance and (v) collection of substantially all of the consideration to which we will be entitled in exchange for the goods or services that will be transferred to the customer is probable.
Identification of the Performance Obligations
The promised goods or services in our collaboration and option arrangements consist of license and research and development services. The arrangements also have options for additional items (i.e., license rights). Options are considered to be marketing offers and are to be accounted for as separate contracts when the customer elects such options, unless we determine the option provides a material right which would not be provided without entering into the contract. The determination as to whether such options are material rights requires significant management judgment, and management considers factors such as other similar arrangements, market data and the terms of the contractual arrangement to make such conclusion. Performance obligations are promised goods or services in a contract to transfer a distinct good or service to the customer. Promised goods or services are considered distinct when: (i) the customer can benefit from the good or service on its own or together with other readily available resources and (ii) the promised good or service is separately identifiable from other promises in the contract. In assessing whether promised goods or services are distinct, we consider factors such as the stage of development of the underlying intellectual property, the capabilities of our customer to develop the intellectual property on their own and whether the required expertise is readily available.
Determination of the Transaction Price
We estimate the transaction price based on the amount of consideration we expect to receive for transferring the promised goods or services in the contract. The consideration may include both fixed consideration and variable consideration. At the inception of each arrangement that includes variable consideration, we evaluate the amount of the potential payments and the likelihood that the payments will be received. We utilize either the most likely amount method or expected value method to estimate the transaction price based on which method better predicts the amount of consideration expected to be received. If it is probable that a significant revenue reversal would not occur, the variable consideration is included in the transaction price.
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All contingent future payments, which include research, development, regulatory, and sales-based royalty payments, have not been considered in the initial analysis, as they are contingent upon option(s) being exercised or are subject to significant risk of achievement.
Allocation of Transaction Price
We allocate the transaction price based on the estimated standalone selling price. We must develop assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract. We utilize key assumptions to determine the standalone selling price, which may include other comparable transactions, pricing considered in negotiating the transaction, and the estimated costs. Certain variable consideration is allocated specifically to one or more performance obligations in a contract when the terms of the variable consideration relate to the satisfaction of the performance obligation and the resulting amounts allocated to each performance obligation are consistent with the amounts we would expect to receive for satisfying each performance obligation.
Recognition of Revenue
We recognize revenue at the point in time when distinct, functional licenses are transferred to the licensee and/or over the period of time which we perform research and development services. We utilize a cost-based input method to measure proportional performance, as such costs have direct relationship between our effort and the progress made towards satisfying its performance obligations to Novartis.
Accrued and Prepaid Research and Development Expenses
We record accrued expenses for estimated costs of our research and development activities which include the conduct of clinical studies and preclinical studies by third-party service providers. We record the estimated costs of research and development activities based upon the estimated amount of services provided but not yet invoiced and include these costs in accrued liabilities in the balance sheets and within research and development expenses in the statements of operations and comprehensive loss. These costs are a significant component of our research and development expenses. We record accrued expenses for these costs based on factors such as estimates of the work completed and in accordance with agreements established with these third-party service providers. Any payments made in advance of services provided are recorded as prepaid assets, which are expensed as the contracted services are performed.
We estimate the amount of work completed through review of detailed budgets and timelines included in our contracts and agreements, and update these estimates with information obtained from third-party service providers and internal personnel on a quarterly basis. We make significant judgments and estimates in determining the accrued and/or prepaid balance in each reporting period. As actual costs become known, we adjust our estimates. Our accrued expenses and prepaid research and development expenses are dependent, in part, upon the receipt of timely and accurate reporting from clinical research organizations, other third-party service providers and internal research and development personnel. If we under estimate or over-estimate the level of services performed or the costs of these services, our accrued expenses could differ from our estimates. For the periods presented, we have experienced no material differences between our accrued expenses and actual expenses.
Emerging Growth Company Status and JOBS Act Accounting Election
Based on the market value of our common stock held by our non-affiliates as of June 30, 2021, we were considered a “large accelerated filer” on December 31, 2021 and thus lost, and will not regain, our status as an emerging growth company. Additionally, based on the market value of our common stock held by our non-affiliates as of June 30, 2022, we were considered a "non-accelerated filer" and “smaller reporting company” on December 31, 2022, and thus will not be subject to filing deadlines applicable to "accelerated filers," nor the requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002.
Recent Accounting Pronouncements
The information set forth under Note 2 to the financial statements under the caption “Recently Issued Accounting Pronouncements” is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
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