Prelude Therapeutics Inc 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this Form 10-K. Some of the information contained in this discussion and analysis contains forward-looking statements that involve risks and uncertainties. You should review the section titled “Risk Factors” in this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described below. Overview We are a clinical-stage fully integrated oncology company built on a foundation of drug discovery excellence to deliver novel precision cancer medicines to underserved patients. By leveraging our core competencies in cancer biology and medicinal chemistry, combined with our target class- and technology platform-agnostic approach, we have built an efficient, fully-integrated drug discovery engine to identify compelling biological targets and create new chemical entities, or NCEs, that we rapidly advance into clinical trials. We believe our approach could result in better targeted cancer therapies. Our discovery excellence has been validated by our rapid progress in creating a wholly-owned, internally developed pipeline. Since our inception in 2016, we have received clearance from the U.S. Food and Drug Administration, or the FDA, for six investigational new drug applications, or INDs, and successfully advanced these programs into clinical trials. In addition, we have two unique programs in various stages of preclinical development that we plan to advance into clinical development in 2022. By focusing on developing agents using broad mechanisms that have multiple links to oncogenic driver pathways in select patients, we have developed a diverse pipeline consisting of six distinct programs spanning methyltransferases, kinases, protein-protein interactions and targeted protein degraders. Our pipeline is geared towards serving patients with high unmet medical need where there are limited or no treatment options. We believe we can best address these diseases by developing therapies that target primary and secondary resistance mechanisms. Our most advanced candidates are designed to be oral, potent and selective inhibitors of protein arginine methyltransferase 5, or PRMT5. The potency and selectivity of our product candidates is supported by preclinical data demonstrating nanomolar inhibition of PRMT5 and no inhibition of related enzymes at 1,000 times higher concentration of our product candidates. PRT543, our first clinical candidate, is currently in a Phase 1 clinical trial in advanced solid tumors and select myeloid malignancies. As of an August 6, 2021 data cutoff date, the dose escalation portion of the ongoing Phase 1 trial of PRT543 enrolled a total of 49 patients across 18 unselected advanced solid tumors and lymphoma. Patients enrolled in the trial received an average of three prior lines of therapy. PRT543 demonstrated target engagement and inhibition of PRMT5 functional activity as evidenced by a 69% reduction in serum symmetric dimethylarginine, or sDMA, at a dose of 45 mg/5x per week. In addition, PRT543 demonstrated signs of preliminary clinical activity, including a durable complete response, or CR, maintained for over 18 months in a patient with HRD+ ovarian cancer who remains on treatment and prolonged stable disease, or SD, persisting for over six months in five patients, including four patients with ACC and one patient with uveal melanoma. A complete response is defined as the disappearance of all target lesions. PRT543 was generally well tolerated: the most common grade 3 or higher treatment-related adverse events, or AEs, occurring in at least 5% of patients were thrombocytopenia (27%) and anemia (12%), both of which were reversible upon treatment interruption. Patients were largely able to remain on therapy with few AE-related dose interruptions (27%), reductions (22%), or discontinuations (4%). We completed enrollment of certain dose expansion cohorts with PRT543 including adenoid cystic carcinoma (ACC) and HRD+ solid tumors and discontinued enrollment in select myeloid malignancy and lymphoma (DLBCL and MCL) cohorts with PRT543, in which patient enrollment has been challenging and sufficient evidence of clinical activity has yet to be obtained. We are continuing enrollment in select PRT543 dose expansion cohorts in those indications most likely to achieve proof-of-concept (“POC”) including splicing mutated solid tumors and myeloid malignancies. We anticipate presenting data from those expansion cohorts in the second half of 2022. PRT811, our second clinical candidate, is a PRMT5 inhibitor that we have optimized for high brain exposure. PRT811 is being studied in a Phase 1 clinical trial in unselected patients with solid tumors, including high-grade glioma. As of an August 13, 2021 data cutoff date, the dose escalation portion of the ongoing Phase 1 trial of PRT811 enrolled a total of 45 patients, including 27 patients across 16 unselected advanced solid tumors and 18 patients with high-grade gliomas, including 17 patients with glioblastoma multiforme. PRT811 demonstrated dose dependent inhibition of PRMT5 activity as evidenced by an 83% reduction in serum sDMA at a dose of 600 mg daily (QD). In addition, PRT811 demonstrated signs of preliminary 86 clinical activity, including an IDH1 mutated high grade glioma (glioblastoma ( GBM )) patient who experienced a partial response, or PR, that evolved into a durable CR for more than 13 months. In addition, a patient with splicing-mutant, or SF3B1, uveal melanoma demonstrated SD for more than six months with a 25% tumor regression. At a post data-cutoff on September 20, 2021, one additional patient (receiving a dose of 800 mg QD) with SF3B1 uveal melanoma had an unconfirmed PR and 47% decrease in target lesion, and a patient with triple negative breast cancer (receiving a dose of 800 mg QD) demonstrated a 27% decrease in target lesions. PRT811 was generally well-tolerated; the most common grade 3 or higher treatment-related AE was thrombocytopenia (7%), which was reversible upon treatment interruption. Patients were largely able to remain on therapy with few AE-related dose interruptions (13%), reductions (4%), or discontinuations (3%). Based on data from the ongoing Phase 1 dose expansion studies of both PRT543 and PRT811, we are concentrating our further development efforts on PRT811 in biomarker-selected patients in specific cancer types. While the Company believes that both PRT811 and PRT543 are high quality, clinically active compounds, PRT811 was selected based on its superior safety profile, higher level of target engagement, and unique brain penetrant properties. Specifically, we intend to: • Focus clinical development in select patient populations where clinical activity has been observed, including splicing mutated myeloid malignancies and solid tumors including uveal melanoma and IDH1 mutated high grade gliomas. • Complete data analysis of the ongoing expansion cohort of adenoid cystic carcinoma (ACC) by mid-year to determine further development. • Report data from the ongoing dose expansion cohorts in the second half of 2022. • Determine appropriate development options for PRT811 based on emerging data from ongoing expansion cohorts. PRT1419, our third clinical candidate, is designed to be a potent and selective inhibitor of the anti-apoptotic protein, MCL1. The potency and selectivity of PRT1419 is supported by preclinical data demonstrating nanomolar inhibition of MCL1 and no inhibition of related enzymes at 200 times higher concentration of our product candidate. We have begun enrolling patients with hematologic malignancies, including patients with myelodysplastic syndrome, or MDS, acute myeloid leukemia, or AML, non-Hodgkin’s lymphoma, or NHL, and multiple myeloma, or MM, into the Phase 1 clinical trial for the oral formulation of PRT1419. The dose escalation portion of the Phase 1 trial of both oral formulation and the IV formulation, which leverages the optimized physicochemical properties of PRT1419, are underway in patients with solid tumors and hematologic tumors. Based on the data to date, we intend to prioritize development of the IV formulation of PRT1419 which demonstrated a desirable pharmacokinetic, pharmacodynamic and safety profile with potential for differentiation from competitor compounds. We intend to initiate a combination trial with venetoclax by mid-year, with the goal of establishing safety, clinical activity and a recommended Phase 2 dose in the second half of 2022. PRT2527, our fourth clinical candidate, is designed to be a potent and selective Cyclin-dependent kinase 9, or CDK9, inhibitor. In preclinical studies, PRT2527 was shown to reduce MCL1 and MYC protein levels and was highly active in preclinical models at well-tolerated doses. PRT2527 has demonstrated high potency and kinase selectivity which may offer improved efficacy and safety compared to less selective CDK9 inhibitors. Preclinical data demonstrated that treatment with PRT2527 depleted oncogenic drivers with short half-lives, such as MYC and MCL1, and effectively induced apoptosis. PRT2527 treatment demonstrated robust efficacy in both hematological malignancies and solid tumor models with MYC dysregulation. A phase one trial is underway evaluating escalating IV doses of PRT2527 as a monotherapy in patients with selected solid tumors, including sarcoma, prostate cancer, lung cancer, and other cancers with genomic alterations that lead to MYC dependence. We anticipate completing enrollment in the Phase 1 dose escalation study of PRT2527 with the goal of identifying a recommended Phase 2 dose in the second half of 2022. In addition to our four clinical stage candidates, we are advancing two new preclinical programs. Our most advanced preclinical program has led to the identification of PRT3645, a brain penetrant molecule that potently and selectively targets CDK4/6. IND-enabling studies for PRT3645 are ongoing and we intend to complete IND-enabling studies, file an IND and initiate a Phase 1 clinical trial in the second half of 2022. Our second pre-clinical program targets Brahma homologue, or BRM, otherwise known as SMARCA2. We have identified SMARCA2 protein degraders that appear to be potent based on preclinical data demonstrating degradation of SMARCA2 at sub-nanomolar concentrations. Optimization of the lead compound, PRT-SCA2, is progressing, and we intend to complete IND-enabling studies and submit an IND application by year-end 2022. 87 We were incorporated in February 2016 under the laws of the State of Delaware. Since inception, we have devoted substantially all of our resources to developing product and technology rights, conducting research and development, organizing and staffing our company, business planning and raising capital. We have incurred recurring losses, the majority of which are attributable to research and development activities, and negative cash flows from operations. We have funded our operations primarily through the sale of convertible preferred stock and common stock. Our net loss was $ 111.7 million and $ 56.9 million for the years ended December 31, 2021 and 2020 , respectively. As of December 31, 2021 , we had an accumulated deficit of $ 219.1 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. Furthermore, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company. 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. As of December 31, 2021, we had $291.2 million in cash, cash equivalents, and marketable securities. We expect our existing cash, cash equivalents and marketable securities will enable us to fund our operating expense and capital expenditures into the second half of 2024. COVID-19 Impact We are continuing to proactively monitor and assess the COVID-19 pandemic. Since early March 2020 we have been monitoring the potential impact on our business that may result from this rapidly evolving crisis and to avoid any unnecessary potential delays to our programs. At this time, our lead programs and research activities remain on track. The safety and well-being of employees, patients and partners is our highest priority. See the Risk Factor “ The COVID-19 pandemic could adversely impact our business, including our clinical trials and clinical trial operations ” for additional information. Components of Results of Operations Revenue To date, we have not recognized any revenue from any sources, including from product sales, and we do not expect to generate any revenue from the sale of products in the foreseeable future. If our development efforts for our product candidates are successful and result in regulatory approval, or license agreements with third parties, we may generate revenue in the future from product sales. However, there can be no assurance as to when we will generate such revenue, if at all. Operating Expenses Research and Development Expenses Research and development expenses consist primarily of costs incurred in connection with the discovery and development of our product candidates. We expense research and development costs as incurred, including: • expenses incurred to conduct the necessary discovery-stage laboratory work, preclinical studies and clinical trials required to obtain regulatory approval; 88 • personnel expenses, including salaries, benefits and stock-based compensation expense for our employees engaged in research and development functions; • costs of funding research performed by third parties, including pursuant to agreements with clinical research organizations, or CROs, that conduct our clinical trials, as well as investigative sites, consultants and CROs that conduct our preclinical and nonclinical studies; • expenses incurred under agreements with contract manufacturing organizations, or CMOs, including manufacturing scale-up expenses and the cost of acquiring and manufacturing preclinical study and clinical trial materials; • fees paid to consultants who assist with research and development activities; • expenses related to regulatory activities, including filing fees paid to regulatory agencies; and • allocated expenses for facility costs, including rent, utilities, depreciation and maintenance. We track outsourced development costs and other external research and development costs to specific product candidates on a program-by-program basis, 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, early research and other costs 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 costs 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 increase significantly over the next several years as we increase personnel costs, including stock-based compensation, conduct our clinical trials, including later-stage clinical trials, for current and future product candidates and prepare regulatory filings for our product candidates. General and Administrative Expenses General and administrative expenses consist primarily of personnel expenses, including salaries, benefits and stock-based compensation expense, for employees and consultants in executive, finance and accounting, legal, operations support, information technology and human resource functions. General and administrative expense also includes corporate facility costs not otherwise included in research and development expense, including rent, utilities, depreciation and maintenance, as well as legal fees related to intellectual property and corporate matters and fees for accounting and consulting services. We expect that our general and administrative expense will increase in the future to support our continued research and development activities, potential commercialization efforts and increased costs of operating as a public company. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, legal support and accountants, among other expenses. Additionally, we anticipate increased costs associated with being a public company, including expenses related to services associated with maintaining compliance with the requirements of Nasdaq and the Securities and Exchange Commission, or SEC, insurance and investor relations costs. If any of our current or future product candidates obtains U.S. regulatory approval, we expect that we would incur significantly increased expenses associated with building a sales and marketing team. Other Income, Net Other income, net consists primarily of interest earned on our cash equivalents and marketable securities and grant income received from the State of Delaware. We anticipate re-applying for the grant from the State of Delaware from time to time as long as we maintain qualifying headcount levels in the State of Delaware. We expect our interest income, net to increase due to our investment of cash received from the sale of common stock. Income Taxes Since our inception, we have not recorded any income tax benefits for the net operating losses, or NOLs, we have incurred or for our research and development tax credits, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our NOLs and tax credits will not be realized. 89 Results of Operations Comparison of the Years Ended December 31, 2021 and 2020 The following table sets forth our results of operations for the years ended December 31, 2021 and 2020. Year ended December 31, (in thousands) 2021 2020 Change Operating expenses: Research and development $ 86,778 $ 48,177 $ 38,601 General and administrative 26,957 10,586 16,371 Total operating expenses 113,735 58,763 54,972 Loss from operations (113,735 ) (58,763 ) (54,972 ) Other income, net 2,041 1,834 207 Net loss $ (111,694 ) $ (56,929 ) $ (54,765 ) Research and Development Expenses Research and development expenses increased by $38.6 million to $86.8 million for the year ended December 31, 2021 from $48.2 million for the year ended December 31, 2020. The increase was mainly due to increased clinical research costs to support the advancement of our clinical programs, as well as an increase in discovery-stage program expenses. We also incurred an increase in chemistry, manufacturing and other costs for the trials. We track our external research and development expenses on a program-by-program basis, such as fees paid to CROs, CMOs and research laboratories in connection with our pre-clinical 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, early research and other costs which are deployed across multiple projects under development. Research and development expenses by program are summarized in the table below: Year ended December 31, (in thousands) 2021 2020 PRT543 $ 12,775 $ 10,641 PRT811 12,534 4,660 PRT1419 (Oral and IV) 8,442 8,258 Discovery programs 20,823 7,981 Internal costs, including personnel related 32,204 16,637 $ 86,778 $ 48,177 General and Administrative Expenses General and administrative expenses increased by $16.4 million to $27.0 million for the year ended December 31, 2021 from $10.6 million for the year ended December 31, 2020. The increase was primarily due to an increase in personnel related expense due to increases in employee headcount and an increase in our professional fees as we expanded our operations to support our research and development efforts and incurred additional costs as a result of being as a public company. Other Income, net Other income, net increased by $0.2 million to $2.0 million for the year ended December 31, 2021 from $1.8 million for the year ended December 31, 2020. Other income, net comprises primarily research and development tax credits from the State of Delaware as well as additional interest earned on the investment of our cash proceeds. Liquidity and Capital Resources Overview Since our inception, we have not recognized any revenue and have incurred operating losses and negative cash flows from our operations. We have not yet commercialized any product and we do not expect to generate revenue from sales of 90 any products for several years, if at all. Since our inception, we have funded our operations through the sale of convertible preferred stock and common stock. As of December 31, 2021 , we had $ 2 91.2 million in cash , cash equivalents , and marketable securities and had an accumulated deficit of $ 219.1 million. We expect our existing cash , cash equivalents, and marketable securities will enable us to fund our operating expense and capital expenditures into the second half of 202 4 . We have based these estimates on assumptions that may prove to be imprecise, and we could utilize our available capital resources sooner than we expect. 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. 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 costs 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 costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; • the costs and fees associated with the discovery, acquisition or in-license of additional product candidates or technologies; • expenses needed to attract and retain skilled personnel; • costs associated with being a public company; • the costs required to scale up our clinical, regulatory and manufacturing capabilities; • the costs 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, ownership interests will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of 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 product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our research, product development or future 91 commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Cash Flows The following table shows a summary of our cash flows for the periods indicated: Years ended December 31, (in thousands) 2021 2020 Cash used in operating activities $ (83,531 ) $ (46,177 ) Cash used in investing activities (263,803 ) (621 ) Cash provided by financing activities 164,897 246,228 Net increase in cash and cash equivalents $ (182,437 ) $ 199,430 Operating Activities During the year ended December 31, 2021, we used $83.5 million of cash in operating activities. Cash used in operating activities reflected our net loss of $111.7 million, offset by a $3.6 million net decrease in our operating assets and liabilities and noncash charges of $24.5 million, which consisted of $20.9 million in stock-based compensation, $1.4 million in amortization of premiums and discounts on marketable securities, $1.3 million noncash lease expense, and $0.9 million in depreciation. The primary use of cash was to fund our operations related to the development of our product candidates. During the year ended December 31, 2020, we used $46.2 million of cash in operating activities. Cash used in operating activities reflected our net loss of $56.9 million, offset by a $4.6 million net decrease in our operating assets and liabilities and noncash charges of $6.1 million, which consisted of $0.5 million in depreciation and amortization and $5.6 million in stock-based compensation. The primary use of cash was to fund our operations related to the development of our product candidates. Investing Activities During the year ended December 31, 2021 we used $261.5 million of cash to purchase marketable securities and $2.3 million of cash for the purchase of property and equipment. During the year ended December 31, 2020 we used $0.6 million of cash for the purchase of property and equipment. Financing Activities During the year ended December 31, 2021, financing activities provided $164.9 million, which reflected the receipt of net cash of $161.4 million from the sale of common stock as well as the receipt of $3.8 million from the exercise of stock options and purchases of stock under the Employee Stock Purchase Plan. During the year ended December 31, 2021, we also paid $0.3 million in deferred offering costs in connection with the sale of common stock. During the year ended December 31, 2020, financing activities provided $246.2 million. During the year ended December 31, 2020, we completed our IPO and received net cash of $166.6 million. We also received $49.8 million from the sale of our Series C convertible preferred stock, $29.9 million from the sale of our Series B convertible preferred stock and $0.1 million from the exercise of stock options. During the year ended December 31, 2020, we made $0.3 million in payments for our capital lease obligation. Contractual obligations and other commitments The following table summarizes our contractual obligations as of December 31, 2021 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods: Payments Due by Period (in thousands) Less than 1 year 1 to 3 years 3 to 5 years More than 5 years Total Operating leases $ 2,016 $ 2,981 $ 4,759 $ 26,098 $ 35,854 92 The Company leases office and laboratory space in Wilmington, Delaware under a noncancelable lease (the “Lease”), which expires in December 2022. The Lease was amended during the third quarter of 2021 to include additional office and laboratory space to accommodate the Company’s growth. The Company has an option to renew the Lease for an additional 1-year period. In November 2021, we entered into a lease agreement (the “Chestnut Run Lease”) with a commencement date of the earlier of (i) the Landlord Work Substantial Completion Date (as such term is defined in the Chestnut Run Lease), or (ii) the date the Company takes possession of the premises for the conduct of the Company’s business. The Chestnut Run Lease has an initial term of 162 months with 3 five-year extension options and certain expansion rights. The aggregate estimated rent payments due over the initial term of the Chestnut Run Lease is approximately $33.8 million and are included in the table above. In June 2021, the Company entered into a 12-month noncancelable lease, which commenced on July 1, 2021 and will expire on June 30, 2022, and has remaining lease payments of approximately $0.2 million in 2022. Critical Accounting Policies and Estimates While our significant accounting policies are described in more detail in Note 3 to our audited financial statements included elsewhere in this Annual Report on 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. Research and Development Expenses Research and development expenses consist primarily of costs incurred in connection with the development of our product candidates. We expense research and development costs as incurred. We accrue an expense for preclinical studies and clinical trial activities performed by our CROs and vendors based upon estimates of the proportion of work completed. We determine the estimates by reviewing contracts, vendor agreements and purchase orders, and through discussions with our internal clinical personnel and external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services. However, actual costs and timing of clinical trials are highly uncertain, subject to risks and may change depending upon a number of factors, including our clinical development plan. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known at that time. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the accrual accordingly. Nonrefundable advance payments for goods and services, including fees for clinical trial expenses, process development or manufacturing and distribution of clinical supplies that will be used in future research and development activities, are deferred and recognized as expense in the period that the related goods are consumed or services are performed. Share-Based Compensation We recognize compensation costs related to share-based awards granted to employees and directors, including stock options and vesting restricted stock, based on the estimated fair value of the awards on the date of grant. We estimate the grant date fair value of stock options, and the resulting stock-based compensation, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. We estimate the fair value of stock options using the Black-Scholes option-pricing model, which requires assumptions, including volatility, 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. Certain assumptions used in our Black-Scholes option-pricing model represent management’s best estimates and involve a number of variables, uncertainties and assumptions and the application of management’s judgment, as they are inherently subjective. If any assumptions change, our stock-based compensation expense could be materially different in the future. 93 These subjective assumptions are estimated as follows: Expected volatility —As a privately held company we did not have any trading history for our common stock; accordingly the expected volatility was estimated based on the average volatility for comparable publicly traded biotechnology companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on their similar size, stage in the life cycle or area of specialty. As a public company we have computed the historical volatility of our own stock price and will continue to use the average volatility for comparable publicly traded biotechnology companies until we have ample trading history of our own stock commensurate with the estimated expected term of our options. Expected Term  — The expected term represents the period that stock-based awards are expected to be outstanding. The expected term for option grants is determined using the simplified method. The simplified method deems the expected term to be the midpoint between the vesting date and the contractual life of the stock-based awards. 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 $1.07 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 30 th , (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. Recent Accounting Pronouncements See Note 3 to our financial statements included elsewhere in this Annual Report on Form 10-K for a description of recent accounting pronouncements applicable to our financial statements. Emerging Growth Company and Smaller Reporting Company Status In April 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption from complying with new or revised accounting standards and, therefore, will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. 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. Subject to certain conditions, as an emerging growth company, we may rely on certain other exemptions and reduced reporting requirements, including without limitation, exemption to the requirements for providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. We will remain an emerging growth company until the earlier to occur of (a) the last day of the fiscal year (i) following the fifth anniversary of the completion of our IPO, (ii) in which we have total annual gross revenues of at least $1.07 billion or (iii) in which we are deemed to be a “large accelerated filer” under the rules of the SEC, 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, or (b) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. 94 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 after 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. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.