What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-05-16 compared with 2023-05-18 · 66 added, 67 removed, 252 unchanged (35% of the section changed)

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We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

We are a clinical-stage biotechnology company committed to applying our leading expertise in the field of oncolytic immunotherapy to transform the lives of cancer patients through our novel tumor-directed oncolytic immunotherapies.

proprietary tumor-directed oncolytic immunotherapy product candidates are designed and intended to maximally activate the immune system against cancer.

Our proprietary

oncolytic immunotherapy product candidates are designed and intended to maximally activate the immune system against cancer.

Oncolytic immunotherapy is an emerging drug class, which we intend to establish as the second cornerstone of immune-based cancer treatments, alongside checkpoint blockade.

Oncolytic immunotherapy exploits the ability of certain viruses to selectively replicate in and directly kill tumors, as well as induce a potent, patient-specific, anti-tumor immune response.

Our product candidates incorporate multiple mechanisms of action into a practical “off-the-shelf” approach that is intended to maximize the immune response against a patient’s cancer and to offer significant advantages over other approaches of inducing anti-tumor immunity, including personalized vaccine approaches.

We believe that the bundling of multiple approaches for the treatment of cancer into single therapies will simplify the development path of our product candidates, while also improving patient outcomes at a lower cost to the healthcare system than the use of multiple different drugs.

Our product candidates incorporate multiple mechanisms into a practical “off-the-shelf” approach that is intended to maximize the immune response against a patient’s cancer and to offer significant advantages over other approaches of inducing anti-tumor immunity, including personalized vaccine approaches.

We believe that the bundling of multiple approaches for the treatment of cancer into single therapies may improve patient outcomes and simplify the development path of our product candidates.

Since our inception, we have devoted substantially all of our resources to developing our proprietary RPx platform, building our intellectual property portfolio, conducting research and development of our product candidates, business planning, raising capital and providing selling, general and administrative support for our operations.

To date, we have incurred significant operating losses and we have financed our operations primarily with proceeds from the sale of equity securities and to a lesser extent the proceeds from the issuance of debt securities.

Our ability to generate product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more of our product candidates.

Our ability to generate product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization, if approved, of one or more of our product candidates.

We do not have any products approved for sale and have not generated any revenue from product sales.

Since our initial public offering, or IPO, on July 20, 2018, we have raised an aggregate of approximately $849.1 million in net proceeds to fund our operations, of which $101.2 million was from our IPO, $706.0 million was from four separate follow-on offerings, or the Public Offerings, that we closed in November 2019, June 2020, October 2020 and December 2022, respectively, and $41.9 million was from at-the-market offerings.

We sold 7,407,936 shares of common stock in our IPO, an aggregate of 20,430,480 shares of our common stock and pre-funded warrants to purchase 9,484,238 shares of common stock in the Public Offerings, and 2,313,997 shares of common stock through our at-the-market facilities.

Our net losses were $215.8 million and $174.3 million for the years ended March 31, 2024 and 2023, respectively.

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These losses have resulted primarily from costs incurred in connection with research and development activities and selling, general and administrative costs associated with our operations.

We expect to continue to incur significant expenses and increasing operating losses for the next several years and our ability to generate product revenue sufficient to achieve profitability will depend on the successful development and commercialization of one or more of our product candidates.

We anticipate that our expenses and capital requirements will increase substantially in connection with our ongoing activities, particularly as we advance the clinical trials, development and pre-commercial activities related to our RPx platform product candidates, and if and as we:

• conduct our current and future clinical trials with RP1, RP2 and RP3;

We expect to continue to incur significant expenses and increasing operating losses for at least the next several years.

We anticipate that our expenses and capital requirements will fluctuate from period to period depending upon the Company's development programs and priorities.

We expect to continue to incur costs in connection with our ongoing development activities, including further advancement of any preclinical activities and clinical trials of our product candidates across our platform, and if and as we:

• conduct our current and future clinical trials;

• further preclinical development of our platform;

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Even if we are able to generate product sales, we may not become profitable.

If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

If we fail to become profitable or are

unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

As of March 31, 2024, we had cash and cash equivalents and short-term investments of $420.7 million.

We believe that our existing cash and cash equivalents and short-term investments will enable us to fund our operating expenses and capital expenditure requirements through at least 12 months from the issuance of the consolidated financial statements included in this Annual Report on Form 10-K.

See “— Liquidity and capital resources” and “Risk factors — Risks related to our financial position and need for additional capital.”

The COVID-19 pandemic

We are continuing to monitor the global outbreak and spread of COVID-19 and, throughout the pandemic, have implemented measures designed to comply with applicable federal, state and local guidelines, as well as care for our employee's health and well-being.

We will continue to examine our protocols as the pandemic and health guidance evolves.

The COVID-19 pandemic continues to affect the United States and global economies and has affected and may continue to affect our operations and those of third parties on which we rely, including by causing disruptions in our raw material and anti-PD-1 supply, the manufacturing of our product candidates and our commercialization processes.

In addition, timing of patient enrollment and treatment in certain of our ongoing clinical studies has been impacted by the pandemic.

However, the extent of these delays is currently unknown and has and will likely continue to vary by clinical study.

In addition, we may incur unforeseen costs as a result of disruptions in raw material supplies, clinical product supplies, and preclinical studies or clinical trial delays.

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 in an effort to contain it or to potentially treat or continue to vaccinate against COVID-19 and the economic impact on local, regional, national and international markets.

We continue to actively monitor this situation and the possible effects on our financial condition, liquidity, operations, suppliers, supplies, industry and workforce.

Based on our current operating plan, we believe that our existing cash and cash equivalents and short-term investments will enable us to fund our operating expenses and capital expenditure requirements through at least 12 months from the issuance of the consolidated financial statements included in this Annual Report on Form 10-K.

See “ Results of Operations — Liquidity and capital resources ” and “ Risk factors — Risks related to our financial position and need for additional capital .”

Components of our results of operations

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Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts and the development of our product candidates, and include:

• expenses incurred under agreements with third parties, including clinical research organizations, or CROs, that conduct research, preclinical activities and clinical trials on our behalf as well as contract manufacturing organizations, or CMOs, that manufacture our raw materials and/or product candidates for use in our preclinical and clinical trials;

• expenses incurred under agreements with third parties, including CROs, that conduct research, preclinical activities and clinical trials on our behalf as well as CMOs that manufacture our raw materials and/or product candidates for use in our preclinical and clinical trials;

• salaries, benefits and other related costs, including stock-based compensation expense, for personnel engaged in research and development functions;

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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 that our research and development expenses will continue to increase for the foreseeable future as we continue enrollment and initiate additional clinical trials and continue to discover and develop additional product candidates.

develop additional product candidates.

The successful development and commercialization of our product candidates is highly uncertain.

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A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate.

enrollment or other reasons, we could be required to expend significant additional financial resources and time on the completion of clinical development.

For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant trial delays due to patient enrollment or other reasons, we could be required to expend significant additional financial resources and time on the completion of clinical development.

We may never succeed in obtaining regulatory approval for any of our product candidates.

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Other income (expense), net consists primarily of realized and unrealized foreign currency transaction gains and losses.

During the year ended March 31, 2023, the Company recorded an income tax provision of $0.3 million related to U.S.

During the year ended March 31, 2024 and 2023, the Company recorded an income tax provision of $0.4 million and $0.3 million, respectively, related to U.S.

current taxes primarily due to the transfer pricing arrangement between the U.S.

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taxable income reduced by certain prior year available net operating losses.

During the year ended March 31, 2022, the Company recorded no income tax benefit for the net operating losses incurred due to the uncertainty of the realization of such losses.

Results of operations

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Interest expense on debt obligations (4,497) (1,963) (2,534) 129 %

Other (expense) income (5,676) (1,059) (4,617) 436 %

Other income (expense) 771 (5,676) 6,447 (114) %

Total other income (expense), net 19,387 3,084 16,303 529 %

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Total research and development expenses $ 174,963 $ 126,527 $ 48,436 38 %

The change in our direct research and development expenses between our product candidates is primarily associated with technology transfer from RP2 to RP3, process development, qualification and comparability of our in-house manufactured materials compared to our third-party manufactured materials in readiness for utilizing our product candidates made at our in-house manufacturing facility in our clinical development programs and preparation for potential commercial manufacture, if approved.

The increase in RP1 is primarily the result of an increase in our number of clinical trial sites and patient enrollment as compared to the prior year, and a reduction of $5.7 million of costs sharing in the CERPASS trial from Regeneron during the current period as discussed in Note 12 to the consolidated financial statements appearing elsewhere in this Annual Report.

During the second half of the year, manufacturing shifted focus to validation batches for RP1, which is the driver of the change in program costs year over year.

The total increase of $48.4 million was due to an increase of approximately $18.7 million in direct research costs related to our ongoing clinical trials and increased patient enrollment for RP1, RP2 and RP3, including an increase of approximately $13.3 million in the areas of CRO costs, investigator costs, and imaging costs.

The costs for RP1 also increased compared to the prior year as we prepared the primary analysis and preparations for a potential BLA filing for CERPASS as well as the initial full data presentation for IGNYTE and preparations for a potential BLA submission for IGNYTE.

In addition, we focused on an updated data presentation on the ARTACUS trial.

Furthermore, we continued to ramp up activities to develop RP2 throughout the year ended March 31, 2024 as compared to the prior year, whereas activities for RP3 remained consistent year over year as a result of the deprioritization of development efforts on this product candidate during the later part of fiscal 2024.

The increase of $29.7 million in our unallocated expenses was due primarily to a $26.8 million increase in personnel-related costs, including a $22.1 million increase in payroll and fringe benefits and a stock-based compensation increase of $4.7 million.

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Personnel related costs for the years ended March 31, 2024 and 2023 included stock-based compensation expense of $14.7 million and $10.1 million, respectively.

Additionally, the increase in other expenses is primarily driven by an increase of $2.6 million in consulting costs across our platform and a $0.9 million of increased costs related to our manufacturing facility and related lease costs.

Selling, general and administrative expenses

Selling, general and administrative expenses were $59.8 million for the year ended March 31, 2024, compared to $50.6 million for the year ended March 31, 2023.

The increase of $11.8 million is primarily the result of an increase of $5.9 million in personnel related costs, including a stock-based compensation increase of $2.4 million, an increase of $3.5 million in payroll and fringe benefits.

The increase in personnel related costs was driven by the continued hiring of additional personnel in our selling, general and administrative functions, focusing on additional pre-launch planning and initial build of the Company's commercial infrastructure, which accounts for approximately $1.2 million of the increase compared to prior year.

Additionally, there is an increase of $4.9 million in other variable costs which is driven by external spend increases for sales and marketing programs, advertising and market research.

The increase of $9.3 million is primarily the result of an increase of $6.3 million in personnel related costs, including an increase of $5.0 million in payroll and fringe benefits and a stock-based compensation increase of $1.3 million.

The increase in personnel related costs was driven by the continued hiring of additional personnel within our selling, general and administrative functions, specifically focusing on commercial planning and building of our initial commercial infrastructure.

Personnel related costs for the year ended March 31, 2024 and 2023 included stock-based compensation expense of $19.4 million and $18.1 million, respectively.

Total other income (expense), net

Other income for the year ended March 31, 2024 was $19.4 million compared to $3.1 million for the year ended March 31, 2023.

The net change of $2.8 million is primarily attributable to an increase of $9.6 million in investment income in the current year as compared to the prior year.

This increase was somewhat offset by a $4.6 million increase in expense due to the changes in foreign exchange rates of the Great British Pound to United States Dollar, as well as an increase in expense of $2.0 million as a result of interest expense on debt obligations.

The net change of $16.3 million is primarily attributable to an increase of $13.4 million in investment income in the current year as compared to the prior year as a result of increases in interest rates throughout the year, as well as a $6.4 million decrease in expense due to the changes in foreign exchange rates of the Great British Pound to United States Dollar.

These increases were partially offset by an increase in expense of $2.5 million of interest expense on debt obligations, as the Company drew down an additional term loan advance of $15.0 million in December 2023 from the debt agreement with Hercules.

Income tax provision

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Net cash used in operating activities $ (185,467) $ (128,050)

Net cash (used in) investing activities (142,502) (1,806)

Net cash provided by (used in) investing activities

97,201 (142,502)

Net cash provided by financing activities 16,283 311,303

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Operating activities

During the year ended March 31, 2024, net cash used in operating activities was $185.5 million, primarily resulting from our net loss of $215.8 million, which was partially offset by non-cash charges of $24.8 million, consisting primarily of stock-based compensation expense of $34.1 million offset by $12.3 million related to the net amortization of premiums and discounts on short-term investments.

Additionally, there was an increase in cash of $5.5 million related to changes in our operating assets and liabilities.

Changes in our operating assets and liabilities for the year ended March 31, 2024 consisted primarily of a $9.2 million increase in accrued expenses and other current liabilities, a $2.8 million decrease in accounts payable, and a net $2.4 million change in operating and financing right-of-use assets and lease liabilities.

During the year ended March 31, 2023, net cash used in operating activities was $128.1 million, primarily resulting from our net loss of $174.3 million, partially offset by non-cash charges of $31.1 million, consisting primarily of stock-based compensation expense of $28.1 million, and an increase in cash of $15.1 million related to changes in our operating assets and liabilities.

Changes in our operating assets and liabilities for the year ended March 31, 2023 consisted primarily of a $11.4 million increase in accrued expenses and other current liabilities, a net $2.4 million change in operating and financing right-of-use assets and lease liabilities, and a $2.0 million increase in accounts payable.

During the year ended March 31, 2022, net cash used in operating activities was $82.2 million, primarily resulting from our net loss of $118.0 million, partially offset by non-cash charges of $28.6 million, consisting of stock-based compensation expense of $24.3 million and $4.4 million of expense related to depreciation and amortization and net amortization of premiums and discounts on short-term investments, and an increase in cash of $7.2 million related to changes in our operating assets and liabilities.

Changes in our operating assets and liabilities for the year ended March 31, 2022 consisted primarily of a $4.7 million increase in accrued expenses and other current liabilities, a net $2.5 million change in operating and financing right-of-use assets and lease liabilities, a $1.1 million increase in accounts payable and a $0.8 million increase in prepaid expenses and other current assets, as well as a $0.2 million increase in research and development incentives receivable from the United Kingdom government due to the timing and amount of qualifying expenditures.

Investing activities

During the year ended March 31, 2023, net cash used in investing activities was $142.5 million, consisting of $583.4 million in purchases of available for sale securities and $2.3 million in purchases of property, plant and equipment, offset by $443.2 million in proceeds from sales and maturities of short-term investments.

During the year ended March 31, 2024, net cash provided by investing activities was $97.2 million, consisting of $592.4 million in proceeds from sales and maturities of short-term investments, partially offset by $489.5 million in purchases of available for sale securities and $5.7 million in purchases of property, plant and equipment.

Financing Activities

During the year ended March 31, 2024, net cash provided by financing activities was $16.3 million, consisting primarily of $15.0 million in proceeds from the incurrence of debt under the Hercules Loan Agreement, as well as approximately $1.8 million in proceeds from the exercise of stock options.

During the year ended March 31, 2023, net cash provided by financing activities was $311.3 million, consisting primarily of $149.9 million in proceeds from the issuance of common stock, $92.8 million from the issuance of pre-funded warrants to purchase common stock, $37.4 million from the issuance of common stock through sales under our at-the-market facilities, $28.2 million in proceeds from the incurrence of debt under the Hercules Loan Agreement, as well as approximately $3.4 million in proceeds from the exercise of stock options.

During the year ended March 31, 2022, net cash provided by financing activities was $6.6 million, consisting primarily of $6.9 million in proceeds from the exercise of stock options.

Funding requirements

Our plan of operation is to continue implementing our business strategy, continue research and development of our RPx platform, and continue to expand our research pipeline and our internal research and development capabilities.

Our plan of operation is to continue implementing our business strategy, continue research and development of RP1 and our other product candidates and continue to expand our research pipeline and our internal research and development capabilities.

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities and clinical trials of our product candidates and if and as we:

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As of March 31, 2024, we had cash and cash equivalents and short-term investments of $420.7 million.

Based on our current operating plan, we believe that our existing cash, cash equivalents and short-term investments as of March 31, 2023, will enable us to fund operations into the second half of calendar year 2025.

Based on our current operating plan, we believe that our existing cash, cash equivalents and short-term investments as of March 31, 2024, will enable us to fund operations 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 expect.

Because of the numerous risks and uncertainties associated with the development of RP1 and other product candidates and programs, and because the extent to which we may enter into collaborations with third parties for development of our product candidates is unknown, we are unable to estimate the timing and amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates.

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Borrowings under the term loan agreement are repayable in monthly interest-only payments through September 2026, and the agreement has a maturity date of October 2027.

Our remaining commitments, based on our current draws, are due through October 2027, and include principal and interest payments of $43.8 million, and an additional fee upon

maturity of the loan of $1.5 million.

Our remaining commitments, based on our current draws, are due through October 2027, and include principal and interest payments of $62.2 million, and an additional fee upon maturity of the loan of $2.2 million.

See Note 7, Long term debt , of the "notes to Consolidated Financial Statements" contained in Part II, Item 8 of this Annual Report on Form 10-K for further discussion of the Hercules term loan.

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Each clinical trial will be conducted pursuant to an agreed study plan which, among other things, will identify the name of the sponsor and which party will manage the particular study, and include the protocol, the budget and a schedule of clinical obligations.

The first study plan related to the Phase 2 clinical trial in CSCC has been agreed.

Pursuant to the terms of the agreement, each party granted the other party a non-exclusive license of their respective intellectual property and agreed to contribute the necessary resources needed to fulfill their respective obligations, in each case, under the terms of agreed study plans.

Development costs of an agreed study plan will be split equally.

In July 2022, Regeneron informed the Company that the costs of the study have reached the initial budget for the initial study plan of June 2018 and that Regeneron's reimbursement of CERPASS study costs to the Company have completed in the period ending June 30, 2022 in relation to the initial study budget.

As a result of this notice from, and the ongoing communications with, Regeneron, we have not recorded any cost-sharing reimbursements from Regeneron in prepaid expenses and other current assets in the consolidated balance sheet or as an offset to research and development expense within the consolidated statement of operations since Regeneron informed us that Regeneron’s reimbursement of CERPASS study costs have completed.

The Company does not expect any further reimbursements from Regeneron related to the initial study plan of June 2018.

The Company does not expect any further reimbursements from Regeneron related to the initial study plan of June 2018 and the CERPASS trial.

The agreement contains representations, warranties, undertakings and indemnities customary for a transaction of this nature.

The agreement also contains certain time-based covenants that restrict us from entering into a third-party arrangement with respect to the use of our product candidates in combination with an anti-PD-1 therapy and that restrict Regeneron from entering into a third-party arrangement with respect to the use of cemiplimab in combination with an HSV-1 virus, in each case, for the treatment of a

tumor type that is the subject of a clinical trial to which the covenants apply.

Unless otherwise mutually agreed in a future study plan, these covenants are only applicable to our ongoing Phase 2 clinical trial in CSCC.

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In December 2022, we entered into a Master Clinical Trial Collaboration and Supply Agreement with Roche in relation to our RP2 and RP3 programs in colorectal cancer, or CRC, and hepatocellular carcinoma, or HCC.

Under the agreement, the companies will collaborate in 30 patient cohort signal finding studies in third-line, or 3L, CRC and in first- and second-line, or 1L and 2L, respectively, HCC.

Under the terms of the agreement, the companies will share costs and Roche will supply its currently approved drugs, atezolizumab and bevacizumab for 2L HCC and 3L CRC combined with RP3.

Roche will also supply atezolizumab and bevacizumab for 1L HCC combined with RP3, and for 3L CRC combined with RP2.

We have retained the responsibility of operating the clinical trials as well as retaining all the rights to the development and commercialization of our product candidates.

Under the agreement, the companies intended to collaborate in 30 patient cohort signal finding studies in third-line, or 3L, CRC and in first- and second-line, or 1L and 2L, respectively, HCC.

Following our re-prioritization of our product development portfolio in December 2023, we have agreed with Roche to terminate the CRC collaboration and pursue the 2L cohort in HCC with RP2 only.

Roche has expressed its intent to continue to supply its currently approved drugs, atezolizumab and bevacizumab for the 2L cohort in HCC but is unlikely to share costs following our re-prioritization.

We are in discussions with Roche about revising these agreements following our changes to our RP2 and RP3 development plans.

Under the terms of the initial agreement we retained the responsibility of operating the clinical trials as well as retaining all the rights to the development and commercialization of our product candidates.

The agreement may be terminated by either party upon sixty days prior written notice to the other party.

In July 2023, we entered into a Clinical Trial Collaboration and Supply Agreement with Incyte Corporation, or Incyte.

Under the agreement, the companies will collaborate in a signal finding study in which Incyte will initiate and sponsor a clinical trial of INCB99280 (oral PD-L1 inhibitor) and RP1 in approximately 40 patients with unresectable, high risk CSCC in the neoadjuvant setting.

Under the terms of the agreement, we will supply Incyte with RP1 for the study and share costs of the study equally with Incyte.

The agreement may be terminated by either party upon (i) a material breach not reasonably cured within thirty days;

(ii) the discontinuation of development of its clinical drug candidate;

(iii) the unethical or illegal business practices of the other party;

or (iv) if the parties have not agreed on the protocol or budget within ninety days of the effective date of the agreement.

In addition, the Company may terminate the agreement upon the inappropriate or unsafe use of the RP1 product candidate.

As of March 31, 2024, we and Incyte had not yet agreed on the protocol or budget.

However, we and Incyte continue to discuss a potential protocol and neither party has triggered termination of the agreement in accordance with the termination right described in clause (iv) above.

The parties are evaluating potential collaboration efforts pending further CERPASS data readout of RP1 in combination with cemiplimab and additional data for Incyte's product candidate INCB99280.

Critical accounting policies and estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States.

The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, costs and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements.

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Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones.

In accruing service fees, we

estimate the time period over which services will be performed and the level of effort to be expended in each period.

In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period.

If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or the amount of prepaid expenses accordingly.

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Stock-based compensation

We issue stock-based awards to employees, directors, consultants and non-employees in the form of stock options and restricted stock units.

We issue stock-based awards to employees, directors, consultants and non-employees in the form of stock options, restricted stock units, and performance-based restricted stock units, or PSUs.

We measure such stock-based awards in accordance with ASC 718, Compensation — Stock Compensation , which requires all stock-based awards to be recognized in the consolidated statements of operations and comprehensive loss based on their fair value on the date of the grant and the related compensation expense for those awards is recognized over the requisite service period, which is generally the vesting period of the respective award.

We have, to date, only issued stock-based awards with service-based vesting conditions and record the expense for these awards using the straight-line method.

We have, to date, issued stock-based awards with service-based and performance-based vesting conditions.

Expense for stock-based awards with service-based vesting conditions is recorded using the straight-line method and for PSUs with performance-based vesting conditions, the expense is recorded using the graded vesting method.

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model, which requires inputs based on certain subjective assumptions, including the expected stock price volatility, the expected term of the option, the risk-free interest rate for a period that approximates the expected term of the option, and our expected dividend yield.

See Note 10 of the "Notes to Consolidated Financial Statements" contained in Part II, Item 8 of this Annual Report on Form 10-K for more information.

See Note 10 of the "Notes to Consolidated Financial Statements" contained in Part II, Item 8 of this Annual Report on Form 10-K

for more information.

Forfeitures are accounted for as they occur.

The fair value of each stock-based award is estimated on the date of grant based on the fair value of our common stock on that same date.

The fair value of each RSU and PSU is estimated on the date of grant based on the fair value of our common stock on that same date.

We classify stock-based compensation expense in our consolidated statements of operations in the same manner in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified.

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Refer to Note 2, summary of significant accounting policies of the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K for a description of recent accounting pronouncements that are applicable to our business and may potentially have an impact on our financial position and results of operations.

Emerging growth company status

As an “emerging growth company,” the Jumpstart Our Business Startups Act of 2012 permits us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies.

We have irrevocably elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.

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