What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-01 compared with 2020-03-16 · 99 added, 93 removed, 170 unchanged (53% of the section changed)

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Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section of this Annual Report on Form 10-K

This discussion and analysis generally covers our financial condition and results of operations for the year ended December 31, 2020, including year-over-year comparisons versus the year ended December 31, 2019.

Our Annual Report on Form 10-K for the year ended December 31, 2019 includes a discussion and analysis of our financial condition and results of operations for the year ended December 31, 2018 in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We are a clinical stage biopharmaceutical company pioneering a novel disease-modifying therapeutic approach to treat what we believe to be a key underlying cause of Alzheimer’s and other degenerative diseases.

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gingivalis infection causes Alzheimer’s pathology in animal models, and these effects have been successfully treated with a gingipain inhibitor in preclinical studies.

Our proprietary lead drug candidate, COR388, is an orally administered, brain-penetrating small molecule gingipain inhibitor.

COR388 was well-tolerated with no concerning safety signals in our Phase 1a and Phase 1b clinical trials conducted to date, which enrolled a total of 67 subjects, including nine patients with mild to moderate Alzheimer’s disease.

We initiated a global Phase 2/3 clinical trial of COR388, called the GAIN trial, in mild to moderate Alzheimer’s patients in April 2019 in the United States and in September 2019 in Europe and expect top-line results by the end of 2021.

Our proprietary lead drug candidate, atuzaginstat (COR388), is an orally administered, brain-penetrating small molecule gingipain inhibitor.

Atuzaginstat was well-tolerated with no concerning safety signals in our Phase 1a and Phase 1b clinical trials conducted to date, which enrolled a total of 67 subjects, including nine patients with mild to moderate Alzheimer’s disease.

We initiated a global Phase 2/3 clinical trial of atuzaginstat, called the GAIN trial, in mild to moderate Alzheimer’s patients in April 2019 in the United States and in September 2019 in Europe and expect top-line results by the end of 2021.

Partial Clinical Hold

On February 12, 2021 the Company received a letter from the FDA stating that a partial clinical hold has been placed on atuzaginstat (COR388) impacting the open-label extension (OLE) phase of the company’s ongoing Phase 2/3 study, the GAIN Trial.

Under the hold, no new participants will be enrolled in the OLE and currently enrolled OLE participants will be discontinued.

Participants in the fully enrolled (N=643) double-blind, placebo-controlled randomized phase of the GAIN Trial will continue to receive study drug at their assigned dose.

The partial clinical hold was initiated following the review of hepatic adverse events in the atuzaginstat trial by the FDA.

These events have been reversible and without any known long-term adverse effects for the participants.

Cortexyme will continue to collaborate with the FDA on the overall development program for atuzaginstat.

For additional information on the various risks posed by the partial clinical hold, please read Item 1A.

Risk Factors included in this report.

Business Update Regarding COVID-19

The current COVID-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting our employees, patients, communities and business operations, as well as the U.S.

economy and financial markets.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets.

To date, our employees, vendors and clinical trial sites have been able to advance our GAIN clinical trial, complete enrollment and continue the Open Label Extension for eligible patients completing the GAIN trial.

At this time the impact of the COVID-19 pandemic has not resulted in changes to our previously stated analysis timelines for the GAIN trial.

We are continuing to assess the potential impact of the COVID-19 pandemic on our business and operations, including our expenses, preclinical operations and clinical trials.

Our office-based employees have been working primarily from home since mid-March 2020, while ensuring essential staffing levels in our operations remain in place, including maintaining key personnel in our lab facility.

We have developed plans to enable all employees to voluntarily return to work in our offices and lab facility which include safety protocols, such as face coverings, social distancing, frequent cleaning, and COVID-19 testing.

We continue to assess the risks which take into account

applicable public health authority and local government guidelines and are designed to ensure community and employee safety.

However, the effects of the COVID-19 pandemic continue to rapidly evolve and even if our employees more broadly return to work in our offices and lab facility, we may have to resume a more restrictive remote work model, whether as a result of spikes or surges in COVID-19 infection or hospitalization rates or public authority mandates.

We are not currently experiencing any significant supply chain disruptions and have drug supply for the full GAIN Trial on hand.

We have diversified our vendor relationships geographically for both starting materials and manufacturing.

However, in the future, the ongoing COVID-19 pandemic, may result in the inability of some of our suppliers to deliver drug supplies on a timely basis.

We have taken and continues to take proactive measures to maintain the integrity of its ongoing clinical trial.

To potentially mitigate some of the risks of COVID-19 and based on interest and the ability to maintain milestone timelines, we enrolled approximately an additional 70 subjects in the GAIN trial.

Despite these efforts, the COVID-19 pandemic could impact timelines, subject follow up visits and study completion.

We will continue to monitor the COVID-19 situation and its impact on the ability to continue the development of, and seek regulatory approvals for, our product candidates.

For additional information on the various risks posed by the COVID-19 pandemic, please read Item 1A.

Risk Factors included in this report.

Financial Overview

Since commencing material operations in 2014, we have devoted substantially all of our efforts and financial resources to building our research and development capabilities, establishing our corporate infrastructure and most recently, executing our Phase 1a, Phase 1b and Phase 2/3 clinical trials of COR388.

To date, we have not generated any revenue and we have never been profitable.

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From inception through December 31, 2020, we received net proceeds of approximately $294.9 million from the issuance of redeemable convertible preferred stock, convertible promissory notes and common stock.

In February 2020, we also received net proceeds of approximately $117.6 million from the issuance and sale of common stock in a private placement to certain accredited investors

This includes net proceeds of approximately $117.6 million from the issuance and sale of common stock in a private placement to certain accredited investors received in February 2020.

As of December 31, 2020 and 2019, we had cash, cash equivalents and short-term investments of $133.8 million and $99.9 million, respectively.

The balances exclude long-term investments of $16.8 million and $0 as of those same periods.

Our cash equivalents, short-term and long-term investments are held in money market funds, certificate of deposits, repurchase agreements, investments in corporate debt securities and government agency obligations.

The balances exclude long-term investments of $50.5 million and $16.8 million as of those same periods.

We believe that our existing cash, cash equivalents and short-term investments will be sufficient to fund our planned operations through 2023, including through the completion and the announcement of the top-line results of our Phase 2/3 GAIN trial.

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Non-refundable advance payments and deposits for services that will be used or rendered for future research and development activities are recorded as prepaid expenses and recognized as an expense as the related services are performed.

To date, substantially all of our research and development expenses have supported the advancement of COR388 and our other drug candidates are in early-stage preclinical development.

To date, substantially all of our research and development expenses have supported the advancement of atuzaginstat and our other drug candidates are in early-stage preclinical development.

As a result, we do not allocate our costs to individual drug candidates.

We expect that at least for the foreseeable future, a substantial majority of our research and development expense will support the clinical and regulatory development of COR388.

We expect our research and development expenses to increase substantially during the next few years as we seek to complete existing and initiate additional clinical trials, pursue regulatory approval of COR388 and advance other drug candidates into preclinical and clinical development.

We expect that at least for the foreseeable future, a substantial majority of our research and development expense will support the clinical and regulatory development of atuzaginstat.

We expect our research and development expenses to increase substantially during the next few years as we seek to complete existing and initiate additional clinical trials, pursue regulatory approval of atuzaginstat and advance other drug candidates into preclinical and clinical development.

Over the next few years, we expect our preclinical, clinical and contract manufacturing expenses to increase significantly relative to what we have incurred to date.

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We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Wh ile our significant accounting policies are described in the notes to our financial statements, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results.

While our significant accounting policies are described in the notes to our financial statements, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results.

Research and Development Expenses

Research and development costs are expensed as incurred.

Research and development expenses consist primarily of personnel costs for our research and product development employees.

Also included are non-personnel costs such as professional fees payable to third parties for preclinical and clinical studies and research services, laboratory supplies and equipment maintenance, product licenses, and other consulting costs.

Research and development expenses consist primarily of clinical trial and contract manufacturing expenses related to development of atuzaginstat.

Also included are personnel costs for our research and product development employees, non-personnel costs such as professional fees payable to third parties for preclinical studies and research services, laboratory supplies and equipment maintenance, product licenses, and other consulting costs.

We estimate preclinical and clinical study and research expenses based on the services performed, pursuant to arrangements with contract research organizations, or CROs that conduct and manage preclinical and clinical studies and research services on our behalf.

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Stock-Based Compensation Expense

Stock-based compensation expense represents the cost of the grant date fair value of employee and non-employee awards over the requisite service period of the awards (usually the vesting period) on a straight-line basis.

For stock awards for which vesting is subject to performance-based milestones, the expense is recorded over the remaining service period after the point when the achievement of the milestone becomes probable.

We estimate the fair value of all stock option grants using the Black-Scholes option pricing model and recognize forfeitures as they occur.

The fair value of a stock-based award is recognized over the period during which an optionee is required to provide services in exchange for the option award, known as the requisite service period (usually the vesting period) on a straight-line basis.

Stock-based compensation expense is recognized based on the fair value determined on the date of grant and is reduced for forfeitures as they occur.

Estimating the fair value of equity-settled awards as of the grant date using valuation models, such as the Black-Scholes option pricing model, is affected by assumptions regarding a number of complex variables.

Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized.

These inputs are subjective and generally require significant analysis and judgment to develop.

We estimate the fair value of stock-based compensation utilizing the Black-Scholes option-pricing model, which is impacted by the following variables:

We measure and record compensation expense using the applicable accounting guidance for share-based payments related to stock options and performance-based awards granted to our directors and employees.

The fair value of stock options is determined by using the Black-Scholes option-pricing model.

The fair value of performance stock option awards is estimated at the date of grant, using the Monte Carlo Simulation model.

The Black-Scholes and Monte Carlo Simulation valuation models incorporate assumptions as to stock price volatility, the expected life of options or awards, a risk-free interest rate and dividend yield.

In valuing our stock options and market-based stock awards, significant judgment is required in determining the expected volatility of our common stock and the expected life that individuals will hold their stock options prior to exercising.

Expected volatility for stock options is based on the historical volatility of our own stock and the stock of companies within our defined peer group.

Further, our expected volatility may change in the future, which could substantially change the grant-date fair value of future awards and, ultimately, the expense we record.

We expense stock-based compensation for stock options and performance awards over the requisite service period.

For awards with only a service condition, we expense stock-based compensation using the straight-line method over the requisite service period for the entire award.

For awards with a market condition, we expense over the vesting period regardless of the value that the award recipients ultimately receive.

We estimate the fair value of stock-based compensation utilizing the Black-Scholes and Monte Carlo Simulation option-pricing models, which are impacted by the following variables:

Expected Term —We have opted to use the “simplified method” for estimating the expected term of options, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option (generally 10 years).

Expected Volatility —Due to our limited operating history and a lack of company specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded.

Expected Volatility —Due to our limited operating history and a lack of company specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of our own stock and the stock of companies within our defined peer group.

The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards.

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Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.

As of December 31, 2019, our total deferred tax assets were $16.5 million.

A valuation allowance is established against the deferred tax assets to reduce their carrying value to an amount that is more likely than not to be realized.

As of December 31, 2020, our total net deferred tax assets were $35.0 million.

A valuation allowance is established against the net deferred tax assets to reduce their carrying value to an amount that is more likely than not to be realized.

The deferred tax assets and liabilities are classified as noncurrent along with the related valuation allowance.

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Interest income

Interest expense

Changes in fair value of derivative liability

Research and Development Expenses

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Year ended December 31,

(in thousands)

Direct research and development expenses:

Atuzaginstat (COR388)

Other direct research costs

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Total research and development expenses

Research and development expenses increased $20.1 million or 199.6% for the year ended December 31, 2019, primarily due to an increase of $17.4 million in expenses for our lead product candidate, COR388, which entered into our Phase 2/3 GAIN clinical trials.

Personnel-related expenses, including stock-based compensation, increased by $1.6 million due to an increase in headcount as we launched and scaled the GAIN clinical trial during 2019.

In addition, we had an increase of $1.1 million in research and development expenses related to other preclinical programs currently in development.

We expect the clinical trial expenses to continue to increase as the study progresses to full enrollment in 2020.

For the year ended December 31, 2020 research and development expenses increased $31.1 million or 102.9%, from 2019.

This was primarily due to an increase of $18.7 million in expenses for our lead product candidate, atuzaginstat, which is in our Phase 2/3 GAIN clinical trial.

This increase is attributed to expenses of $10.1 million in clinical trial expense, $7.0 million in drug manufacturing costs as we scaled production of atuzaginstat and other clinical costs of approximately $1.6 million in support of advancing atuzaginstat’s development through the study.

Personnel-related expenses, including stock-based compensation, increased by $9.4 million due to an increase in headcount as we scaled the GAIN clinical trial and our clinical manufacturing operating relationships and capabilities during 2020.

In addition, we had an increase of $2.5 million in research and development expenses related to other preclinical programs currently in development and $0.4 million increase in our facilities costs.

We expect our GAIN trial related expenses to decrease in 2021 as the trial concludes with top-line results being reported by the end of 2021.

This decrease will be offset to some extent as we start our Phase 2 PEAK trial and advance other pipeline indications through pre-clinical and the clinical trial process.

General and Administrative Expenses

General and administrative expenses increased $6.9 million, or 340.2 %, primarily due to an increase of $2.6 million in personnel costs, including stock-based compensation, as a result of an increase in our employee headcount and an increase of $4.3 million in insurance, legal, accounting, investor relations and other compliance cost associated with becoming a public company.

We anticipate these costs will increase as the full year effect of being a public company is realized in 2020.

For the year ended December 31, 2020, general and administrative expenses increased $8.6 million, or 96.4 %, from 2019 primarily due to an increase of $7.7 million in personnel costs, including stock-based compensation of $6.1 million, as a result of an increase in our employee headcount and an increase of $1.3 million in insurance, legal, accounting, investor relations and other compliance cost associated with becoming a public company offset by a decrease in travel and entertainment expense of $0.4 million due to travel restrictions related to COVID-19.

Interest Income

Interest income increased $1.4 million or 171.5% due to increased average cash balances and on our investment portfolio as a result of the receipt of proceeds from our IPO in May 2019.

Interest Expense

Interest expense decreased $1.0 million due to the retirement of all interest-bearing obligations in 2018.

Change in fair value of derivative liability

The change in fair value of derivative liability decreased $0.2 million due to the extinguishment of the liability upon the conversion of the convertible promissory note to redeemable convertible preferred stock in May 2018.

For the year ended December 31, 2020, interest income decreased $0.1 million or 6.6% due to a decrease in interest rate yields on the portfolio during the year.

Liquidity and Capital Resources

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As of December 31, 2020, we had cash, cash equivalents and investments of $184.3 million.

Based on our existing business plan, we believe that our existing cash, cash equivalents and investments will be sufficient to fund our anticipated level of operations through at least the next 12 months.

Based on our existing business plan, we believe that our existing cash, cash equivalents and investments will be sufficient to fund our anticipated level of operations through at least 2023.

We will continue to require additional capital to develop our drug candidates and fund operations for the foreseeable future.

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We anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including:

the progress, costs, trial design, results of and timing of our Phase 2/3 GAIN trial and other clinical trials of COR388, including for potential additional indications that we may pursue beyond Alzheimer’s disease;

the willingness of the FDA or EMA to accept our Phase 2/3 GAIN trial, as well as data from our completed and planned clinical and preclinical studies and other work, as the basis for review and approval of COR388 for Alzheimer’s disease;

the progress, costs, trial design, results of and timing of our Phase 2/3 GAIN trial and other clinical trials of atuzaginstat, including our Phase 2 PEAK trial for Parkinson’s disease and for potential additional indications that we may pursue beyond Alzheimer’s and Parkinson’s disease;

the outcome, costs and timing of seeking and obtaining FDA, EMA and any other regulatory approvals;

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Cash Used in Operating Activities

Net cash used in operating activities was $33.3 million for the year ended December 31, 2019 and $11.7 million for the year ended December 31, 2018.

Net cash used in operating activities was $50.8 million for the year ended December 31, 2020, $33.3 million for the year ended December 31, 2019.

Cash used in operating activities in the year ended December 31, 2020 was primarily due to our net loss for the period of $76.8 million, which included non-cash expenses of $15.8 million and changes to operating assets and liabilities of $10.2 million.

Cash used in operating activities in the year ended December 31, 2019 was primarily due to our net loss for the period of $37.0 million, which included non-cash expenses of $2.6 million and changes to operating assets and liabilities of $1.9 million offset by non-cash interest income of $0.8 million.

Cash used in operating activities in the year ended December 31, 2018 was primarily due to our net loss for the period of $12.5 million, and was also affected by changes to accrued interest, debt discount on conversion features, operating assets and liabilities, other current assets and long-term assets that totaled $1.5 million.

Cash used in operating activities was also affected by changes in operating assets and liabilities, a decrease in prepaids of $0.7 million and increase in accrued liabilities of $0.3 million, and non-cash charges relating to depreciation and amortization and stock-based compensation expense of $0.1 million.

Cash Used in Investing Activities

Cash used in investing activities was $52.4 million in the year ended December 31, 2020, primarily related to the purchase of investments of $187.1 million and maturities of debt investments of $134.8 million.

Cash used in investing activities was $46.8 million in the year ended December 31, 2018, primarily related to the purchase of investments of $55.2 million, and maturities of short-term investments of $8.7 million.

Cash used in investing activities was $17.7 million in the year ended December 31, 2019, primarily related to the purchase of investments of $135.4 million and maturities of debt investments of $117.7 million.

Cash Provided by Financing Activities

Cash provided by financing activities was $118.9 million in the year ended December 31, 2020, which consisted of net proceeds of $117.6 million from our private placement and $1.3 million from the exercise of stock options.

Cash provided by financing activities was $77.4 million in the year ended December 31, 2019, which consisted of net proceeds of $77.8 million from our IPO, $0.1 million from the exercise of stock options, less payment on our finance leases of $0.6 million.

Cash provided by financing activities was $75.9 million in the year ended December 31, 2018, which consisted primarily of net proceeds of $75.7 million from the issuance and sale of shares of our Series B redeemable convertible preferred stock.

Contractual Obligations and Commitments

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 for operating purposes.

We have contractual obligations from our operating and finance leases.

The following table summarizes our significant binding contractual obligations at December 31, 2020 (in thousands):

Payments due by period

Less than one year

More than 5 years

Operating and Finance Leases

The terms of certain third party contract organizations for clinical trials, non-clinical studies and testing, manufacturing, and other services and products for operating purposes require us to pay potential future payments based on milestone achievement by the vendor.

The amount and timing of the payments under these contracts varies based upon the timing of the services performed.

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Accordingly, we have not recorded any liabilities for these indemnification rights and agreements as of December 31, 2020 and December 31, 2019.

JOBS Act Accounting Election

The Jumpstart Our Business Startups Act of 2012 (the JOBS Act), permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies.

We have chosen to irrevocably opt out of the extended transition period for complying with certain new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

We will remain an emerging growth company until the earlier of (1) December 31, 2024, (2) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (3) the last day of the fiscal year 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 of the prior June 30th and (4) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820):

Recent Accounting Pronouncements Adopted

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):

Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.

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The disclosure framework project aims to improve the effectiveness of disclosures in the notes to the financial statements by focusing on requirements that clearly communicate the most important information to users of the financial statements.

This guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted.

The Company does not believe this pronouncement will have a material impact on its financial statements or disclosures.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”).

ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

ASU 2016-13 is effective for public business entities that are SEC filers, excluding smaller reporting companies for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

All other entities, including smaller reporting companies the effective date is for fiscal years beginning after December 15, 2022.

Accordingly, as a smaller reporting company, we will adopt the standard effective January 1, 2023.

We are currently evaluating the impact that the adoption of this standard will have on our financial statements .

The Company adopted this effective January 1, 2020.

The adoption of this pronouncement did not have a material impact on its financial statements or disclosures.

In August 2018, the FASB issued ASU No.

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Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which clarifies the accounting for implementation costs in cloud computing arrangements.

ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

We will adopt the standard prospectively on January 1, 2020.

We do not expect the adoption of ASU 2018-15 to result in a material change to our financial statements.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU No.

2016-02, Leases (Topic 842) .

This ASU requires that substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases.

The ASU is effective for interim and annual periods beginning after December 15, 2018.

Additionally, the FASB issued ASU No.

2018-11, Leases (Topic 842):

Targeted Improvements , which offers an additional transition method whereby entities may apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings rather than application of the new leases standard at the beginning of the earliest period presented in the financial statements.

The Company elected this transition method and adopted ASC 842 on January 1, 2019 and as a result, recorded a right-of-use asset of $0.9 million, a short-term lease liability of $0.3 million, and a long-term lease liability of $0.6 million and no cumulative effect adjustment was made to the retained earnings as of the adoption date.

The Company also elected the package of practical expedients under the transition guidance that will retain the historical lease classification and initial direct costs for any leases that exist prior to adoption of the new guidance and the practical expedient to not separate lease and nonlease components.

See Note 6 to our audited financial statements for further information.

In July 2017, the FASB issued ASU No.

2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) I.

Accounting for Certain Financial Instruments with Down Round Features II.

Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”).

Part I applies to entities that issue financial instruments such as warrants, convertible debt or redeemable convertible preferred stock that contain down-round features.

Part II replaces the indefinite deferral for certain mandatorily redeemable noncontrolling interests and mandatorily redeemable financial instruments of nonpublic entities contained within ASC Topic 480 with a scope exception and does not impact the accounting for these mandatorily redeemable instruments.

For public entities, ASU 2017-11 is required to be adopted for annual periods beginning after December 15, 2018, including interim periods within those fiscal years.

The adoption of ASU 2017-11 did not have any impact on the Company’s financial statements since we did not have any instruments subject to the scope of ASU 2017-11.

On December 18, 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application.

Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis.

The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted.

We early adopted ASU 2019-12 effective January 1, 2019.

The adoption did not have a material impact on the financial statements.

The Company adopted the standard prospectively on January 1, 2020.

The adoption of this pronouncement did not have a material impact on its financial statements.

Recent Accounting Pronouncements Not Yet Adopted

The following are new accounting pronouncements that the Company is evaluating for future impacts on its financial statements:

Financial Instruments—Credit Losses:

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments which amends the principles around the recognition of credit losses by mandating entities incorporate an estimate of current expected credit losses when determining the value of certain assets.

The guidance also amends reporting around allowances for credit losses on available-for-sale marketable securities.

In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842):

Effective Dates, which established that a one-time determination of the effective date for ASU 2016-13 would be based on the Company’s SEC reporting status as of November 15, 2019.

The Company was a Smaller Reporting Company as defined by the SEC, and therefore, ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

The Company is evaluating the impact of the guidance on its financial statements.

All other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis