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Item 7. Management’s Discussion and Analysis

2023-03-06 compared with 2022-03-10 · 120 added, 96 removed, 282 unchanged (43% of the section changed)

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On June 21, 2019, we completed an initial public offering (“IPO”), of our common stock and issued and sold 9,074,776 shares of common stock at a public offering price of $18.00 per share, which included 1,183,666 shares sold upon full exercise of the underwriters’ option to purchase additional shares of common stock resulting in net proceeds of $151.9 million after deducting underwriting discounts and commissions but before deducting offering costs of approximately $2.5 million.

In July 2020, the Company filed a universal Shelf Registration statement on Form S-3 (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”).

The Registration Statement was declared effective by the SEC on July 20, 2020, and contains two prospectuses:

a base prospectus, which covers the offering, issuance and sale by the Company of up to a maximum aggregate offering price of $400,000,000 of our common stock, preferred stock, debt securities, warrants to purchase our common stock, preferred stock or debt securities, subscription rights to purchase our common stock, preferred stock or debt securities and/or units consisting of some or all of these securities;

and a sales agreement prospectus covering the offering, issuance and sale by us of up to a maximum aggregate offering price of $150,000,000 of our common stock that may be issued and sold under a Controlled Equity Offering Sales Agreement (“Sales Agreement”).

In July 2020, we filed a universal Shelf Registration statement on Form S-3 (the “Prior Registration Statement”) with the Securities and Exchange Commission (the “SEC”).

On May 31, 2022, the Prior Registration Statement was deactivated upon the effectiveness of the Registration Statement (as defined below).

As of such date, we had issued approximately 2.2 million shares of common stock under the Prior Registration Statement for net proceeds of $45.3 million.

In May 2022, we filed an additional universal Shelf Registration statement on Form S-3 (the “Registration Statement”) with the SEC.

The Registration Statement was declared effective by the SEC on May 31, 2022, and contains two prospectuses:

a base prospectus, which covers the offering, issuance and sale by us of up to a maximum aggregate offering price of $400,000,000 of our common stock, preferred stock, debt securities, warrants to purchase common stock, preferred stock or debt securities, subscription rights to purchase common stock, preferred stock or debt securities and/or units consisting of some or all of these securities;

and a sales agreement prospectus covering the offering, issuance and sale by us of up to a maximum aggregate offering price of $150,000,000 of common stock that may be issued and sold under a Controlled Equity Offering Sales Agreement (“Sales Agreement”).

The specific terms of any securities to be offered pursuant to the base prospectus will be specified in a prospectus supplement to the base prospectus.

The $150,000,000 of common stock that may be offered, issued and sold under the sales agreement prospectus is included in the $400,000,000 of securities that may be offered, issued and sold by the Company under the base prospectus.

As of December 31, 2021, the Company had not issued any securities in connection with the Sales Agreement.

As of December 31, 2022, we had not issued any shares pursuant to the Sales Agreement.

Since December 31, 2022, we sold approximately 4.6 million shares of our common stock

and received $44.7 million after deducting commissions related to the Sales Agreement.

We may terminate this at-the-market program at any time, pursuant to its terms.

On November 24, 2020, we completed an underwritten public offering, of our common stock and issued and sold 2,875,000 shares of common stock at a public offering price of $39.00 per share, which included 375,000 shares sold upon full exercise of the underwriters’ option to purchase additional shares of common stock resulting in net proceeds of $104.9 million after deducting underwriting discounts and commissions and estimated offering expenses.

As of December 31, 2022 and December 31, 2021, we had $230.2 million and $220.4 million, respectively, in cash, cash equivalents, marketable securities, and restricted cash.

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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.

Based upon our current operating plan, we believe that our existing cash, cash equivalents, marketable securities, and restricted cash as of December 31, 2021, together with the proceeds from the $60 million upfront from Acadia, discussed further below, and the proceeds since December 31, 2021 from the Sales Agreement of $7.5 million, will enable us to fund our operating expenses and capital expenditure requirements into the second half of 2024.

Based upon our current operating plan, we believe that our cash, cash equivalents, marketable securities, and restricted cash of $230.2 million as of December 31, 2022, together with the proceeds since December 31, 2022 from the Sales Agreement of $44.7 million, will enable us to fund our operating expenses and capital expenditure requirements to the end of 2025.

To date, we have not had any products approved for sale and have not generated any product sales.

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Acadia agreed to fund the research to identify potential licensed products for MECP2 and the neurodevelopmental target, and we will equally fund with Acadia the research to identify potential licensed products for SYNGAP1.

We are eligible to receive up to $907,500,000 in potential total milestone payments based upon the achievement of certain development, regulatory, first commercial sales and sales milestone events across the programs for the three targets, assuming each milestone were achieved at least once.

We are eligible to receive up to $907.5 million in potential total milestone payments based upon the achievement of certain development, regulatory, first commercial sales and sales milestone events across the programs for the three targets, assuming each milestone were achieved at least once.

With respect to licensed products for MECP2 and the neurodevelopmental target, we are also eligible to receive tiered royalties at percentages ranging from the mid-single digits to the mid-teens on future net sales by Acadia of licensed products worldwide.

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Business Update Regarding COVID-19

The current COVID-19 pandemic, including variants thereof, continues to present 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.

We continue to monitor the impact of the COVID-19 pandemic in an effort to mitigate interruptions to our clinical programs, research efforts and other business activities and to monitor the safety and well-being of our employees, patients and communities, as well as its impact on 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, liquidity and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including the timing and effectiveness of global efforts to roll out vaccines, new information that may emerge concerning COVID-19 and COVID-19 variants, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets.

To date, our third party contract research organizations (“CROs”), contract manufacturing organizations (“CMOs”), and other third party vendors have been able to continue to provide services and supply reagents, materials, and products and currently do not anticipate any significant disruption in services or interruptions in supply.

We have pursued mitigation strategies to keep key research activities on track.

Our third-party CMOs continue to operate their manufacturing facilities at or near normal levels.

While we currently do not anticipate any significant interruptions in our manufacturing processes, it is possible that the COVID-19 pandemic and response efforts may have an impact in the future on our third-party suppliers and CMO’s ability to manufacture reagents, materials, or products that we need to use in our research and clinical trial.

However, we are continuing to assess the potential impact of the COVID-19 pandemic on our business and operations, including our expenses, our observational study, our clinical trials, and our ability to hire and retain employees.

Our ability to continue our clinical trials and our observational study may be adversely affected, directly or indirectly, by the COVID-19 pandemic.

Currently we are monitoring patient enrollment and participation in our clinical trials and our observational study, including the duration and degree to which we may see declines in enrollment, delays in conducting in-person follow-ups, and disruptions in our ability to monitor patients due to hospitals closing sites or diverting the resources that are necessary to conduct our clinical trials and our observational study.

While we continue to enroll and dose patients in our clinical trials at sites across the United States and the United Kingdom, we take into consideration that COVID-19 precautions may directly or indirectly impact the timeline for some of our clinical trial activities due to hospitals closing sites and/or diverting the resources that are necessary to conduct clinical trials.

We are pursuing approaches to help mitigate the impact to our clinical trials.

Currently we have not experienced any significant delays in our clinical trials due to COVID-19.

The COVID-19 pandemic has caused us to modify our business practices including but not limited to curtailing or modifying employee travel, moving to partial remote work, and minimizing some physical participation in meetings, events and conferences.

We continue to monitor our operations and applicable governmental recommendations, and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, patients and business partners.

Our office-based employees had been primarily working from home from early March 2020 through early September 2021.

Since then, our office-based staff have been working in a hybrid-model fluctuating between work from home and work from the office.

Throughout the pandemic, we continue to ensure that essential staffing levels in our operations remain in place, including maintaining key personnel in our laboratories

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations, liquidity 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 and COVID-19 variants, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets.

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

Risk Factors included in this Annual Report on Form 10-K.

Risk Factors included in this annual report.

Financial Operations Overview

We currently do not have any products approved for sale and have not generated any revenue since inception.

We currently do not have any products approved for sale and have not generated any product revenue since inception through December 2022.

If we are able to successfully develop, receive regulatory approval for and commercialize any of our current or future product candidates alone or in collaboration with third parties, we may generate revenue from the sales of these product candidates.

In January 2022, we entered into a license and collaboration agreement with Acadia Pharmaceuticals Inc.

(“Acadia”) for the discovery, development and commercialization of novel RNA-based medicines for the treatment of severe and rare genetic neurodevelopmental diseases of the central nervous system (the “CNS”).

The agreement focuses on the targets SYNGAP1, MECP2 (Rett syndrome), and an undisclosed neurodevelopmental target of mutual interest.

In connection with each target, we will collaborate with Acadia to identify potential treatments for further development and commercialization as licensed products.

With respect to SYNGAP1, we have agreed with Acadia to co-develop and co-commercialize licensed products for such target globally, and in connection therewith we granted to Acadia worldwide, co-exclusive (with us) licenses for such licensed products.

With respect to MECP2 and the neurodevelopmental target, we granted to Acadia worldwide, exclusive licenses to develop and commercialize licensed products for such targets.

Pursuant to the terms of the agreement, we received an upfront payment of $60 million from Acadia.

Royalties payable under the agreement are subject to standard royalty reductions.

For SYNGAP1 licensed products that we are co-developing and co-commercializing, we will be responsible for 50% of the development and commercialization costs and will receive 50% of the profits from global commercialization.

We are provided with a co-development and co-commercialization opt out option relating to the SYNGAP1 target indication at our discretion.

Such opt-out would reduce development and commercialization milestones but would provide us with royalties on an escalating basis attributable to net sales milestones.

See Note 8—License and Collaboration Agreement with Acadia Pharmaceuticals, Inc.

of the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Operating expenses

Certain operating expenses related to the prior period have been restated to conform to current period presentation.

Certain operating expenses related to the prior period have been reclassed to conform to current period presentation.

Research and development

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Other income (expense)

The decrease in our other income (expense) for the year ended December 31, 2021 as compared to the year ended December 31, 2020 reflects decreased interest income due to overall decreased market interest rates as well as a decreased cash and cash equivalents balance.

Our other income (expense), includes (i) interest income earned on cash reserves in our operating money market fund, investment accounts and on our marketable securities investments and (ii) other items of income (expense), net.

Results of Operations for the Years Ended December 31, 2022 and 2021

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Total research and development expenses

The increases in research and development expenses were primarily attributable to the increase of $11.2 million in personnel-related expenses, stock compensation expense and facilities costs resulting primarily from increased growth in our research and development personnel.

Increases of $10.8 million in our STK-001 and STK-002 programs were comprised primarily of third party services and scientific consulting fees.

The increase in research and development expenses were primarily attributable to an increase of $6.4 million in personnel costs resulting from an increase in headcount, an increase of $6.5 million in expenses related to our STK-001 program and $5.7 million related to our STK-002 program, which is comprised of third-party services and scientific consulting fees, an increase of $0.8 million in external third party expense related to SYNGAP1 and MECP2 and an increase of $4.2 million in expense related to facilities and other costs and non-project specific consulting and third-party services, materials and other costs.

The increases in expense reflect the accelerating pace of research and development activities and the increases in personnel, facilities and, third party services to support those activities.

General and administrative expenses

General and administrative expenses were $38.9 million for the year ended December 31, 2022 as compared to $31.9 million for the year ended December 31, 2021, an increase of $7.0 million.

The increases in general and administrative expenses were primarily attributable to an increase of $ 8.7 million in personnel costs resulting from an increase in headcount and compensation expense resulting from a higher stock price at the time that the annual options were granted , an increase of $ 0.3 million in D&O i nsurance expense due to increased premiums , an increase of $0.

4 million in consulting fees, and an increase of $ 1.6 million in third-party services to support our in-house personnel in various aspects of developing and supporting the business including human resources, information technology, audit, tax, public relations, communications and other general and administrative activities .

The increases in general and administrative expenses were primarily attributable to an increase of $5.1 million in personnel costs resulting from an increase in headcount and stock compensation expense resulting from an increase in the annual options award and an increase of $1.9 million in third-party services to support our in-house personnel in various aspects of developing and supporting the business including human resources, information technology, audit, tax, public relations, communications and other general and administrative activities.

Other income (expense)

The change in our other income (expense) for the year ended December 31, 2022 as compared to the year ended December 31, 2021 primarily reflects an increase in marketable securities balances as well as increased interest rates.

Liquidity and Capital Resources

Since our inception through December 31, 2021, our operations have been financed by net proceeds of $385.3 million from the sale of convertible notes payable and our convertible preferred stock as well as our IPO and follow-on offering.

Since our inception through December 31, 2022, our operations have been financed by net proceeds of $490.5 million from the sale of convertible notes payable and our convertible preferred stock, our initial public offering, follow-on offering, proceeds from the controlled equity offering sales agreements and the upfront payment from Acadia.

As of December 31, 2022, we had $230.2 million in cash, cash equivalents, marketable securities, and restricted cash.

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Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, third-party clinical research and development services, costs relating to the build-out of our headquarters and manufacturing facility, license payments or milestone obligations that may arise, laboratory and related supplies, clinical costs, manufacturing costs, legal and other regulatory expenses and general overhead costs.

Based upon our current operating plan, we believe that our existing cash, cash equivalents, marketable securities, and restricted cash as of December 31, 2021, together with the $60 million upfront from Acadia and the proceeds since December 31, 2021 from the Sales Agreement of $7.5 million, will enable us to fund our operating expenses and capital expenditure requirements into the second half of 2024.

Based upon our current operating plan, we believe that our cash, cash equivalents, marketable securities, and restricted cash of $2 3 0.

2 million as of December 31, 202 2 , together with the proceeds since December 31, 202 2 from the Sales Agreement of $ 44.7 million, will enable us to fund our operating expenses and capital expenditure requirements to the end of 2025 .

We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

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Financing activities

Net increase (decrease) in cash, cash equivalents and restricted cash

Net decrease in cash, cash equivalents and restricted cash

Operating activities

During the year ended December 31, 2021, cash used in operating activities was $66.9 million and was attributable to a net loss of $85.8 million partially offset by a net change of $1.3 million in our operating assets and liabilities, $0.1 million due to amortization and accretion of marketable securities, and by non-cash charges of $17.4 million for share-based compensation and depreciation.

During the year ended December 31, 2020, cash used in operating activities was $42.2 million and was attributable to a net loss of $52.2 million partially offset by a net change of $3.4 million in our operating assets and liabilities, and by non-cash charges of $6.7 million for share-based compensation and depreciation.

During the year ended December 31, 2022, cash used in operating activities was $31.9 million.

This was primarily attributable to a net loss of $101.1 million and by a net change of $8.7 million in our net operating assets and liabilities, offset by $51.7 million in deferred revenue received as part of the Acadia collaboration and to non-cash charges of $26.2 million for share-based compensation, depreciation, amortization and accretion of marketable securities, and reduction in the carrying amount of right of use assets.

During the year ended December 31, 2021, cash used in operating activities was $66.9 million and was attributable to a net loss of $85.8 million partially offset by $0.1 million of amortization and accretion of marketable securities, and by non-cash charges of $18.6 million for share-based compensation, depreciation, and reduction in the carrying amount of right of use assets.

Investing activities

Our investing activities during the year ended December 31, 2022 have consisted of purchases of property and equipment and net purchases of marketable securities.

Our investing activities during the year ended December 31, 2020 consisted principally of purchases of property and equipment.

Our investing activities during the year ended December 31, 2021 have consisted of purchases of property and equipment and net purchases of marketable securities.

Financing activities

Our financing activities during the year ended December 31, 2021 included $0.8 million in proceeds from the issuance of common stock upon exercise of stock options and $0.5 million in proceeds from our Employee Stock Purchase Plan.

Our financing activities during the year ended December 31, 2020 primarily included net proceeds of $104.9 million attributed to an underwritten public offering of our common stock, $2.8 million in proceeds from the issuance of common stock upon exercise of stock options, and $0.4 million in proceeds from our Employee Stock Purchase Plan.

Our financing activities during year ended December 31, 2022 consisted of $0.5 million from the exercise of stock options, $0.6 million in proceeds from our Employee Stock Purchase Plan and $45.3 million of net proceeds from the controlled equity offering sales agreements.

Our financing activities during the year ended December 31, 2021 consisted of $0.8 million in proceeds from the issuance of common stock upon exercise of stock options and $0.5 million in proceeds from our Employee Stock Purchase Plan.

Contractual Obligations and Commitments

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In September 2021, we entered into an agreement to extend the initial term of the 23,000 square foot lease for a period of three years ending December 31, 2024.

In addition, this agreement provides for the lease of an additional 15,000 square feet of rentable space beginning in April 2022 and ending on December 31, 2024.

In addition, this agreement provides for the lease of an additional 15,000 square feet of rentable space beginning on April 1, 2022 and ending on December 31, 2024.

Initial monthly lease payments are approximately $0.1 million with respect to the 23,000 square feet space, and $0.1 million with respect to the 15,000 square feet space, and in each case subject to annual rent escalations.

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In June 2021, we amended the agreement to extend the initial term of the 2,485 square foot lease for a period of three years ending April 30, 2025.

In addition, the amendment provided for the lease of an additional 2,357 square feet of rentable space beginning on July 6, 2021 and ending on April 30, 2025.

In addition, the amendment provided for the lease of an additional 2,357 square feet of rentable

space beginning on July 6, 2021 and ending on April 30, 2025.

The amended lease provides us with the option to extend the term of the lease for an additional two years with a base annual rent increase of 3%.

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

The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect

the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported expenses incurred during the reporting periods.

The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported expenses incurred during the reporting periods.

Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

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While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are the most critical in order to fully understand and evaluate our financial condition and results of operations.

Revenue Recognition

We recognize revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”).

This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, and financial instruments.

Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services.

To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five-step analysis:

(i) identify the contract(s) with a customer;

(ii) identify the performance obligations in the contract;

(iii) determine the transaction price;

(iv) allocate the transaction price to the performance obligations in the contract;

and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

We only apply the five-step analysis to contracts when it is probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the customer.

As part of the accounting for these arrangements, we must use significant judgment to determine:

(a) the number of performance obligations based on the determination under step (ii) above;

(b) the transaction price under step (iii) above;

and (c) the timing of satisfaction of performance obligations as a measure of progress in step (v) above.

For contracts determined to be within the scope of ASC 606, we assess whether the goods or services promised within each contract are distinct to identify those that are performance obligations.

This assessment involves subjective determinations and requires management to make judgments about the individual promised goods or services and whether such are separable from the other aspects of the contractual relationship.

Promised goods and services are considered distinct

provided that:

(i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer , and (ii) the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.

In assessing whether a promise or performance obligation is distinct from the other promises, we consider factors such as the research, development, manufacturing and commercialization capabilities of the customer and the availability of the associated expertise in the general marketplace.

In addition, we consider whether the customer can benefit from a promise for its intended purpose without the receipt of the remaining promise, whether the value of the promise is dependent on the unsatisfied promise, whether there are other vendors that could provide the remaining promise, and whether it is separately identifiable from the remaining promise.

For licenses that are combined with other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue.

The licenses of our intellectual property granted to Acadia were not determined to be distinct from the other promises or performance obligations, i.e., research and development services, identified in the arrangement.

Accordingly, such licenses are therefore combined with research and development services in the arrangement.

Payments or reimbursements resulting from our research and development efforts are recognized as the services are performed and presented on a gross basis because we are the principal for such efforts.

The transaction price (the amount of consideration we expect to be entitled to from a customer in exchange for the promised good or services) is determined and allocated to the identified performance obligations in proportion to their standalone selling prices (“SSP”) on a relative SSP basis.

SSP is determined at contract inception and is not updated to reflect changes between contract inception and when the performance obligations are satisfied.

We use significant judgment to determine whether milestone payments or other variable consideration, except for royalties, should be included in the transaction price.

The transaction price is allocated to each performance obligation based on the relative standalone selling prices of each performance obligation in the contract, and we recognize revenue based on those amounts when, or as, the performance obligations under the contract are satisfied.

Any variable consideration is constrained, and therefore, the cumulative revenue associated with this consideration is not recognized until it is deemed not to be at significant risk of reversal.

We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation(s) when (or as) each performance obligation is satisfied, either at a point in time or over time, and if over time recognition is based on the appropriate method of measuring progress for purposes of recognizing revenue.

We evaluate the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Amounts received prior to being recognized as revenue are recorded as deferred revenue.

Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current portion of deferred revenue in the accompanying consolidated balance sheets.

Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion.

Customer options:

If an arrangement is determined to contain customer options that allow the customer to acquire additional goods or services, the goods and services underlying the customer options are not considered to be performance obligations at the outset of the arrangement, as they are contingent upon option exercise.

We evaluate the customer options for material rights, that is, the option to acquire additional goods or services for free or at a discount.

If the customer options are determined to represent a material right, the material right is recognized as a separate performance obligation at the outset of the arrangement.

We allocate the transaction price to material rights based on the standalone selling price.

As a practical alternative to estimating the standalone selling price when the goods or services are both (i) similar to the original goods and services in the contract and (ii) provided in accordance with the terms of the original contract, we allocate the total amount of consideration expected to be received from the customer to the total goods or services expected to be provided to the customer.

Amounts allocated to any material right are not recognized as revenue until the option is exercised and the performance obligation is satisfied.

No such material rights were identified in the arrangement with Acadia.

If such material rights were identified, then we would allocate the transaction price to material rights based on the relative standalone selling price, which is determined based on the identified discount and the probability that the customer will exercise the option.

Amounts allocated to a material right are not recognized or begin to be recognized as revenue until, at the earliest, the option is exercised.

Milestone payments:

At the inception of each arrangement that includes milestone payments, we evaluate whether a significant reversal of cumulative revenue provided in conjunction with achieving the milestones is probable and estimate the amount to be included in the transaction price using the most likely amount method.

If it is probable that a significant reversal of cumulative revenue would not occur, the associated milestone value is included in the transaction price.

Milestone payments that are not within the control of us or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received.

For other milestones, we evaluate factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone in making this assessment.

There is considerable judgment involved in determining whether it is probable that a significant reversal of cumulative revenue would not occur.

At the end of each subsequent reporting period, we reevaluate the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the overall transaction price.

Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.

Accrued research and development expenses

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The comparable companies were chosen based on their similar size, stage in the life cycle or area of specialty.

Expected term — The expected term of our stock options has been determined utilizing the "simplified" method for awards.

Risk-free interest rate —The risk-free interest rate is based on the U.S.

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Net operating loss carryforwards

As of December 31, 2021 and 2020, we had federal net operating loss carryforwards of $191.1 million and $116.9 million, respectively, which may be available to reduce future taxable income, and expire at various dates beginning in 2034, for those net operating loss carryforwards generated prior to 2018.

As of December 31, 2022 and 2021, the Company had federal net operating loss carryforwards of $210.9 million and $191.1 million, respectively, which may be available to reduce future taxable income, and expire at various dates beginning in 2034, for those net operating loss carryforwards generated prior to 2018.

Net operating losses generated in 2018 and beyond have no expiration.

As of December 31, 2021 and 2020, we had state net operating loss carry forwards of $191.4 million and $118.8 million, respectively, which may be available to reduce future taxable income and expire at various dates beginning in 2034.

In addition, at December 31, 2021 and 2020, we had federal research and development tax credit carryforwards of $5.4 million and $2.0 million, respectively, and state research and development tax credit carry forwards of $3.0 million and $1.0 million, respectively.

As of December 31, 2022 and 2021, the Company had state net operating loss carry forwards of $212.8 million and $191.4 million, respectively, which may be available to reduce future taxable income and expire at various dates beginning in 2035.

In addition, at December 31, 2022 and 2021, the Company had federal research and development tax credit carryforwards of $9.2 million and $5.4 million, respectively, and state research and development tax credit carry forwards of $4.3 million and $3.0 million, respectively.

Both federal and state research and development tax credit carry forwards may be available to reduce future tax liabilities and expire at various dates beginning in 2030.

The CARES Act temporarily repealed the 80% taxable income limitation for tax years beginning before January 1, 2021.

Federal NOL carry forwards generated from 2018 or later and Federal NOL carryforwards to taxable years beginning after December 31, 2020 will be subject to the 80% limitation.

Also, under the CARES Act, federal NOLs arising in 2018,

2019 and 2020 can be carried back 5 years.

New legislation or regulation which could affect our tax burden could be enacted by any governmental authority.

The Company cannot predict the timing or extent of such tax related developments which could have a negative impact on our financial results.

Additionally, the Company uses its best judgment in attempting to quantify and reserve for these tax obligations.

In accordance with Statement of Accounting Standards Codification (ASC) 740, Accounting for Income Taxes , our management has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating loss carryforwards.

Management has determined that it is more likely than not that we will not recognize the benefits of federal and state deferred tax assets and, as a result, a full valuation allowance of $68.2 million and $37.2 million was established at December 31, 2021 and 2020, respectively.

In accordance with ASC 740, Accounting for Income Taxes, management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating loss carryforwards.

Management has determined that it is more likely than not that the Company will not recognize the benefits of federal and state deferred tax assets and, as a result, a full valuation allowance of $97.9 million and $66.0

million was established at December 31, 2022 and 2021, respectively.

The change in the valuation allowance was an increase of $31.8 million and $28.8 million in 2022 and 2021, respectively.

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These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income.

We have not conducted a formal study to assess whether a change of control has occurred or whether there have been multiple changes of control since inception due to the significant complexity and cost associated with such a study.

If we have experienced a change of control, as defined for purposes of Section 382 and 383 of the Code, at any time since inception, utilization of the net operating loss carryforwards or research and development tax credit carryforwards may be subject to an annual limitation under Section 382 and 383 of the Code, which is determined by first multiplying the value of our stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required.

The Company has not conducted a formal study to assess whether a change of control has occurred or whether there have been multiple changes of control since inception due to the significant complexity and cost associated with such a study.

If the Company has experienced a change of control, as defined for purposes of Section 382 and 383 of the Code, at any time since inception, utilization of the net operating loss carryforwards or research and development tax credit carryforwards may be subject to an annual limitation under Section 382 and 383 of the Code, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required.

Any limitation may result in expiration of a portion of the net operating loss carryforwards or research and development tax credit carryforwards before utilization.

We apply ASC 740 related to accounting for uncertainty in income taxes.

Our reserves related to income taxes are based on a determination of whether, and how much of, a tax benefit taken by us in our tax filings or positions is more likely than not to be realized following resolution of any potential contingencies present related to the tax benefit.

At December 31, 2021, and 2020 we had no unrecognized tax benefits.

Interest and penalty charges, if any, related to unrecognized tax benefits would be classified as income tax expense in the consolidated statements of operations and comprehensive loss.

The Company’s reserves related to income taxes are based on a determination of whether, and how much of, a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized following resolution of any potential contingencies present related to the tax benefit.

At December 31, 2022, and 2021 the Company had no unrecognized tax benefits.

Interest and penalty charges, if any, related to unrecognized tax benefits would be classified as income tax expense in the accompanying consolidated statements of operations and comprehensive loss.

Emerging Growth Company and Smaller Reporting Company Status

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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.

Recently issued accounting pronouncements

In February 2016, the FASB issued ASU No.

2016-02, Leases (Topic 842).

This standard established a right-of-use model that requires all lessees to recognize right-of-use assets and lease liabilities on their balance sheet that arise from leases as well as provide disclosures with respect to certain qualitative and quantitative information related to a company's leasing arrangements.

The Company adopted Topic 842 on January 1, 2020 using the modified retrospective approach and elected to apply the transition method that allows companies to continue applying guidance under the lease standard in effect at that time in the comparative period financial statements and recognize a cumulative-effect adjustment to the balance sheet on the date of adoption.

The Company elected the package of practical expedients to not reassess its prior conclusions about lease identification, lease classification and indirect costs and to not separate lease and non-lease components.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815):

Accounting for Certain Financial Instruments with Down Round Features;

Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.

Part I of this update addresses the complexity of accounting for certain financial instruments with down round features.

Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings.

Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option.

Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification.

This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests.

The amendments in Part II of this update do not have an accounting effect.

For public business entities, the amendments in Part I of ASU-2017-11 are effective for fiscal years and interim periods within those years beginning after December 15, 2018.

For all other entities, the amendments in Part I of this update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

We adopted Part I of this update on January 1, 2020, and the adoption did not have a material impact on our consolidated financial statements.

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”.

This ASU removed the following disclosure requirements:

(1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy;

(2) the policy for timing of transfers between levels;

and (3) the valuation processes for Level 3 fair value measurements.

Additionally, this update added the following disclosure requirements:

(1) the changes in unrealized gains and losses for the period included in other comprehensive income and loss for recurring Level 3 fair value measurements held at the end of the reporting period;

(2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.

ASU 2018-13 will be effective for all entities, for fiscal years beginning after December 15, 2019 with early adoption permitted.

We adopted this standard on January 1, 2020 and the adoption did not have a material impact on our consolidated financial statements.

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.

Recently I ssued A ccounting P ronouncements

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

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What changed 10-K

Item 7. Management’s Discussion and Analysis