Unicycive Therapeutics, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this quarterly report and in our previously filed registration statement on Form S-1. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this quarterly report. See “Information Regarding Forward-Looking Statements.” All amounts in this report are in U.S. dollars, unless otherwise noted. Overview We are a biotechnology company dedicated to developing treatments for kidney disease that have the potential to offer medical benefit. Our development programs are focused on the development of two novel therapies: Renazorb, for treatment of hyperphosphatemia in patients with chronic kidney disease, and UNI 494, for treatment of acute kidney injury (AKI). Chronic kidney disease (CKD) is the gradual loss of kidney function that can get worse over time leading to lasting damage. Our initial focus is developing drugs and getting them approved in the US, and then look to partner with the other global biopharmaceutical companies in the rest of the world. According to estimates by The Centers for Disease Control and Prevention (CDC) in 2019, 37 million (approximately 15%) adults in the United States have CKD and, of these, approximately 2 million patients with CKD stage 3-5, and around 400 thousand patients with end-stage renal disease (ESRD) have hyperphosphatemia. In the European Union (EU), around 20 million (approximately 8%) adults have CKD, more than 1 million CKD stage 3-5 patients, and approximately 180 thousand patients with ESRD have hyperphosphatemia. The number of patients with ESRD is increasing steadily and is projected to reach between 971,000 and 1,259,000 in 2030. AKI is a sudden episode of kidney failure or kidney damage (within the first 90 days of injury). After 90 days, the patient is considered to have progressed into CKD. AKI affects over 2 million US patients and costs the healthcare system over $9 billion per year. AKI kills more than 300,000 patients per year in the US and is caused by multiple etiologies. Our business model is to license technologies and drugs and pursue development, regulatory approval, and commercialization of those products in global markets. Many biotechnology companies utilize similar strategies of in-licensing and then developing and commercializing drugs. We believe, however, that our management team’s broad network, expertise in the biopharmaceutical industry, and successful track record gives us an advantage in identifying and bringing these assets into the Company at an attractive price with limited upfront cost. Since our formation we have devoted substantially all of our resources to developing our product candidates. We have incurred significant operating losses to date. Our net losses were $0.7 million, $1.4 million, $5.2 million and $7.3 million for the three and nine months ended September 30, 2020 and 2021, respectively. As of December 31, 2020 and September 30, 2021, we had an accumulated deficit of $5.9 million and $13.2 million, respectively. We expect that our operating expenses will increase significantly as we advance our product candidates through pre-clinical and clinical development, seek regulatory approval, and prepare for and, if approved, proceed to commercialization; acquire, discover, validate and develop additional product candidates; obtain, maintain, protect and enforce our intellectual property portfolio; and hire additional personnel. In addition, upon the completion of this offering, we expect to incur additional costs associated with operating as a public company. We have funded our operations primarily from the sale and issuance of common stock, convertible promissory notes and from a loan, including cash and deferred salary from our Chief Executive Officer and principal stockholder. Our ability to generate product revenue will depend on the successful development, regulatory approval and eventual commercialization of our current product candidates and future product candidates. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through private or public equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. Adequate funding may not be available to us on acceptable terms, or at all. If we fail to raise capital or enter into agreements to raise capital as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of our current product candidates and future product candidates. We plan to continue to use third-party service providers, including contract manufacturing organization, to carry out our pre-clinical and clinical development and to manufacture and supply the materials to be used during the development and commercialization of our product candidates. 18 Recent Developments Between January 1, 2021 and May 19, 2021, we issued a series of convertible promissory notes in the aggregate principal amount of $1,098,000. These notes bear interest at a rate of 12% per annum and mature on the one year anniversary of their respective dates of issuance. These notes automatically converted into common stock upon consummation of our initial public offering at 70% of the public offering price per Unit. As a result of its initial public offering (“IPO”), on July 13, 2021 the Company began trading on the Nasdaq Capital Market under the symbol “UNCY”, and on July 15, 2021 received approximately $22,271,000 in net proceeds after deducting the underwriting discounts, commissions, and offering expenses. On July 15, 2021, in connection with the completion of the Company’s IPO, all outstanding convertible notes, including principal and accrued interest, were automatically converted into shares of common stock. The conversion was calculated based on 70% of the IPO price per unit and resulted in the issuance of 736,773 shares of common stock and 184,193 warrants to purchase additional shares of common stock. Renazorb Purchase Agreement On September 20, 2018, we entered into an Assignment and Asset Purchase Agreement (the “Renazorb Purchase Agreement”) with Spectrum Pharmaceuticals, Inc. (“Spectrum”), pursuant to which we purchased certain assets from Spectrum, including Spectrum’s right, title, interest in and intellectual property related to Renazorb RZB 012, also known as RENALAN™ (“Renalan”) and RZB 014, also known as SPI 014 (“SPI” and together with Renalan, the “Compounds”). Pursuant to the Renazorb Purchase Agreement, in consideration for the Compounds, we issued 313,663 shares of common stock to Spectrum. Additionally, the Renazorb Purchase Agreement provides that until the earlier of (i) 36 months from the first date on which our stock trades on a public market, or (ii) the date upon which we attain a public market capitalization of $50,000,000 or greater, we are required to issue additional shares of our common stock as may be needed to ensure Spectrum maintains a 4% ownership of our issued and outstanding common stock on a fully-diluted basis. Fully-diluted shares of common stock for purposes of the Renazorb Purchase Agreement assumes conversion of any security convertible into or exchangeable or exercisable for common stock or any combination thereof, including any common stock reserved for issuance under a stock option plan, restricted stock plan, or other equity incentive plan approved by the Board of Directors of the Company immediately following the issuance of additional shares of our common stock (but prior to the issuance of any additional shares of common stock to Spectrum). On July 13, 2021, the Company’s initial public offering resulted in a public market capitalization of at least $50 million, and as a result the Company was required to issue 438,374 anti-dilution shares of common stock. This issuance represents the final anti-dilution calculation required under the Spectrum Agreement, and no further anti-dilution shares will be issued. We are also required to pay Spectrum 40% of all of our sublicense income for any sublicense granted to certain sublicensees during the first 12 months after the Closing Date (as that term is defined in the Renazorb Purchase Agreement) and 20% of all other sublicense income. Our payment obligations to Spectrum will expire on the twentieth (20th) anniversary of the Closing Date of the Renazorb Purchase Agreement. 19 Components of Results of Operations Operating Expenses Research and Development Expenses Substantially all of our research and development expenses consist of expenses incurred in connection with the development of our product candidates. These expenses include fees paid to third parties to conduct certain research and development activities on our behalf, consulting costs, costs for laboratory supplies, product acquisition and license costs, certain payroll and personnel-related expenses, including salaries and bonuses, employee benefit costs and stock-based compensation expenses for our research and product development employees and allocated overheads, including information technology costs and utilities and expenses for the issuance of shares pursuant to the anti-dilution clause in the purchase of in process research and development technology (“IPR&D”). We expense both internal and external research and development expenses as they are incurred. We do not allocate our costs by product candidate, as a significant amount of research and development expenses include internal costs, such as payroll and other personnel expenses, laboratory supplies and allocated overhead, and external costs, such as fees paid to third parties to conduct research and development activities on our behalf, are not tracked by product candidate. We expect our research and development expenses to increase substantially for at least the next few years, as we seek to initiate additional clinical trials for our product candidates, complete our clinical programs, pursue regulatory approval of our product candidates and prepare for the possible commercialization of such product candidates. Predicting the timing or cost to complete our clinical programs or validation of our commercial manufacturing and supply processes is difficult and delays may occur because of many factors, including factors outside of our control. For example, if the FDA or other regulatory authorities were to require us to conduct clinical trials beyond those that we currently anticipate, we could be required to expend significant additional financial resources and time on the completion of clinical development. Furthermore, we are unable to predict when or if our product candidates will receive regulatory approval with any certainty. General and Administrative Expenses General and administrative expenses consist principally of payroll and personnel expenses, including salaries and bonuses, benefits and stock-based compensation expenses, professional fees for legal, consulting, accounting and tax services, including information technology costs and utilities, and other general operating expenses not otherwise classified as research and development expenses, as well as services incurred pursuant to a services agreement with Globavir Biosciences Inc., a related party. We anticipate that our general and administrative expenses will increase as a result of increased personnel costs, expanded infrastructure and higher consulting, legal and accounting services costs associated with complying with the applicable stock exchange and the SEC requirements, investor relations costs and director and officer insurance premiums associated with being a public company. Other Expenses Other expenses consist primarily of interest expense related to convertible notes and a loss on conversion of convertible notes. Results of Operations Comparison of the Three Months Ended September 30, 2020 and 2021 The following table summarizes our results of operations for the periods indicated (in thousands): Three Months Ended September 30, 2020 2021 Change % Change Operating expenses: Research and development $ 304 $ 3,776 $ 3,472 1,142 % General and administrative 322 939 617 192 % Total operating expenses 626 4,715 4,089 653 % Loss from operations (626 ) (4,715 ) (4,089 ) 653 % Other income (expenses): Interest expense (76 ) (55 ) 21 (28 )% Loss on debt conversion - (431 ) (431 ) 100 % Total other income (expenses) (76 ) (486 ) (410 ) 540 % Net loss $ (702 ) $ (5,201 ) $ (4,499 ) 641 % 20 Research and Development Expenses Research and development expenses increased by approximately $3,472,000, or 1,142%, from approximately $304,000 for the three months ended September 30, 2020 to approximately $3,776,000 for the three months ended September 30, 2021. The increase in research and development expenses was primarily due to a $2,191,000 increase in non-cash expense from the issuance of common stock pursuant to the anti-dilution clause in the purchase of in process research and development technology from Spectrum Pharmaceuticals, Inc. Non-cash stock compensation increased $111,000. In addition, development costs increased $766,000 due to product formulation and preclinical study services in the current period. New employee hires increased labor costs $374,000, and consulting and other costs increased $30,000 from the prior period. General and Administrative Expenses General and administrative expenses increased by $617,000, or 192%, from approximately $322,000 for the three months ended September 30, 2020 to approximately $939,000 for the three months ended September 30, 2021 primarily due to an increase of $342,000 in insurance expense for directors and officers. Labor costs increased $121,000 due to hiring of new employees. Consulting and professional services costs increased $79,000, and stock compensation, travel, and other costs increased $75,000. Other Income (Expenses) Other income (expenses) increased by $410,000, or 540% from approximately $76,000 for the three months ended September 30, 2020 to approximately $486,000 for the three months ended September 30, 2021. The increase was due primarily to the conversion to equity of our outstanding convertible notes as a result of our initial public offering which resulted in a non-cash loss on debt conversion of $431,000. The increase was partially offset by a decrease in interest expense of $21,000. Comparison of the Nine Months Ended September 30, 2020 and 2021 The following table summarizes our results of operations for the periods indicated (in thousands): Nine Months Ended September 30, 2020 2021 Change % Change Operating expenses: Research and development $ 633 $ 4,719 $ 4,086 646 % General and administrative 670 1,506 836 125 % Total operating expenses 1,303 6,225 4,922 378 % Loss from operations (1,303 ) (6,225 ) (4,922 ) 378 % Other income (expenses): Interest expense (81 ) (628 ) (547 ) 675 % Loss on debt conversion - (431 ) (431 ) 100 % Gain on extinguishment of debt - 19 19 (100 )% Total other income (expenses) (81 ) (1,040 ) (959 ) 1,184 % Net loss $ (1,384 ) $ (7,265 ) $ (5,881 ) 425 % 21 Research and Development Expenses Research and development expenses increased by approximately $4,086,000, or 646%, from approximately $633,000 for the nine months ended September 30, 2020 to approximately $4,719,000 for the nine months ended September 30, 2021. The increase in research and development expenses was primarily due to a $2,191,000 increase in non-cash expense from the issuance of common stock pursuant to the anti-dilution clause in the purchase of in process research and development technology from Spectrum Pharmaceuticals, Inc. Non-cash stock compensation costs increased $505,000. In addition, development costs increased $963,000 due to product formulation and preclinical study services in the current period. New employee hires increased labor costs $403,000, and consulting and other costs increased $24,000 from the prior period. General and Administrative Expenses General and administrative expenses increased by $836,000, or 125%, from approximately $670,000 for the nine months ended September 30, 2020 to approximately $1,506,000 for the nine months ended September 30, 2021 primarily due to an increase of $342,000 in insurance expense for directors and officers. Consulting and professional services costs increased $268,000. Labor costs increased $151,000 due to hiring of new employees. Stock compensation, travel, and other costs increased $75,000. Other Income (Expenses) Other income (expenses) increased by $959,000, or 1,184% from approximately $81,000 for the nine months ended September 30, 2020 to approximately $1,040,000 for the nine months ended September 30, 2021. The increase was due primarily to increased interest expense incurred on our convertible notes of $547,000 as well as conversion to equity of our outstanding convertible notes as a result of our initial public offering which resulted in a non-cash loss on debt conversion of $431,000. The increase was partially offset by a gain on extinguishment of our 2020 Paycheck Protection Plan loan of $19,000. Liquidity and Capital Resources Sources of Liquidity Since our formation through September 30, 2021, we have funded our operations with the sale of common stock, convertible notes and from a loan from our Chief Executive Officer and principal stockholder. During 2020, we raised additional funds through private placements by issuing common stock for $141,000 and by issuing $1,290,000 in convertible notes to investors. During the nine months ended September 30, 2021, we raised $1,098,000 through the issuance of convertible notes to investors. As a result of our initial public offering (“IPO”), on July 13, 2021 we began trading on the Nasdaq Capital Market under the symbol “UNCY”, and on July 15, 2021 we received approximately $22,271,000 in net proceeds after deducting the underwriting discounts, commissions and offering expenses. We intend to use the net proceeds from the IPO to complete pre-clinical and clinical studies, submit regulatory filings to the FDA, and for general and corporate purposes, including hiring additional management and conducting market research and other commercial planning. Future Funding Requirements We have incurred net losses since our inception. For the nine months ended September 30, 2021, we had a net loss of $7.3 million, and we expect to incur substantial additional losses in future periods. As of September 30, 2021, we had an accumulated deficit of $13.2 million. 22 We expect to continue incurring losses for the foreseeable future and will be required to raise additional capital in the future to complete our clinical trials, pursue product development initiatives and penetrate markets for the sale of our products. We believe that we will continue to have access to capital resources through possible equity offerings, debt financings, corporate collaborations or other means. There can be no assurance that we will be able to obtain additional financing on terms acceptable to us, on a timely basis or at all. If we are unable to secure additional capital, we may be required to curtail any clinical trials and development of new or existing products and take additional measures to reduce expenses in order to conserve our cash in amounts sufficient to sustain operations and meet our obligations. Based on the Company’s current level of expenditures, after receiving the net proceeds received on July 15, 2021 as a result of the Company’s IPO and given the Company’s cash balance of approximately $18.0 million as of September 30, 2021, the Company believes that it has sufficient resources to continue operations for at least one year after the date that these financial statements are to be issued. We anticipate that we will need to raise substantial additional capital, the requirements for which will depend on many factors, including: ● the scope, timing, rate of progress and costs of our drug discovery efforts, pre-clinical development activities, laboratory testing and clinical trials for our current product candidates and future product candidates; ● the number and scope of clinical programs we decide to pursue; ● the cost, timing and outcome of preparing for and undergoing regulatory review of our current product candidates and future product candidates; ● the scope and costs of development and commercial manufacturing activities; ● the cost and timing associated with commercializing our current product candidates and future product candidates, if they receive marketing approval; ● the extent to which we acquire or in-license other product candidates and technologies; ● the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; ● our ability to establish and maintain collaborations on favorable terms, if at all; ● our efforts to enhance operational systems and our ability to attract, hire and retain qualified personnel, including personnel to support the development of our current product candidates and future product candidates and, ultimately, the sale of our products, following FDA approval; ● the impact, if any, of the coronavirus pandemic on our business operations; ● our ability to access capital; ● our implementation of operational, financial and management systems; and ● the costs associated with being a public company. A change in the outcome of any of these or other variables with respect to the development of any of our current product candidates or future product candidates could significantly change the costs and timing associated with the development of that product candidate. Furthermore, our operating plans may change in the future, and we will continue to require additional capital to meet operational needs and capital requirements associated with such operating plans. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments or engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. 23 Adequate funding may not be available to us on acceptable terms or at all. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategies. If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials or we may also be required to sell or license to others rights to our product candidates in certain territories or indications that we would prefer to develop and commercialize ourselves. If we are required to enter into collaborations and other arrangements to supplement our funds, we may have to give up certain rights that limit our ability to develop and commercialize our product candidates or may have other terms that are not favorable to us or our stockholders, which could materially affect our business and financial condition. Related Party Payable We entered into a Service Agreement on July 1, 2017, as amended on April 6, 2020 (“Service Agreement”), with Globavir Biosciences, Inc. (“Globavir”). Our Chief Executive Officer is also the Chief Executive Officer of Globavir. Pursuant to the Service Agreement, we receive administrative, consulting services, shared office space and other services in connection with our drug development program. The initial amended term of the Service Agreement expired on December 31, 2020, and the agreement shall automatically renew for successive one month periods after the initial termination date. Pursuant to the Service Agreement, we paid Globavir $50,000 per month through December 31, 2019 and $10,000 per month commencing on January 1, 2020. As of September 30, 2021, and December 31, 2020, respectively, $58,000 was prepaid to and $9,000 was payable to Globavir for service fees. Service fee expenses were $90,000 and $90,000 for the nine months ended September 30, 2021 and 2020, respectively, and were recorded as general and administrative expenses in the statements of operations. Convertible Notes In January through May 2021, we issued convertible notes (the “2021 Notes”) in the aggregate principal amount of $1,098,000. The 2021 Notes bear interest at a rate of 12% per annum, payable at maturity, and mature between January and May, 2022. The 2021 Notes shall automatically convert into shares of common stock upon the closing of a financing pursuant to which we receive gross proceeds of at least $500,000 (a “Qualified Financing”) or upon a change of control. The 2021 Notes shall convert into such numbers of shares of common stock equal to the conversion amount divided by the Conversion Price. “Conversion Price” means (i) in the event of a Qualified Financing, 70% of the price per share (or conversion price, as applicable) of common stock (or securities convertible into common stock, as applicable) sold in such financing or (ii) in the event of a change of control, the price per share reflected in such transaction. We accounted for the 2021 Notes as stock-settled debt and we were accreting the carrying amount of the 2021 Notes to the settlement amount through maturity. In July and through November 2020, we issued convertible notes (the “2020 Notes”) in the aggregate principal amount of $1,290,000. The 2020 Notes bear interest at a rate of 12% per annum, payable at maturity, and mature between July and November 2021. The 2020 Notes shall automatically convert into shares of common stock upon the closing of a financing pursuant to which we receive gross proceeds of at least $500,000 (a “Qualified Financing”) or upon a change of control. The 2020 Notes shall convert into such numbers of shares of common stock equal to the conversion amount divided by the Conversion Price. “Conversion Price” means (i) in the event of a Qualified Financing, 70% of the price per share (or conversion price, as applicable) of common stock (or securities convertible into common stock, as applicable) sold in such financing or (ii) in the event of a change of control, the price per share reflected in such transaction. We accounted for the 2020 Notes as stock-settled debt and we are accreting the carrying amount of the 2020 Notes to the settlement amount through maturity. As of December 31, 2020, unpaid and accrued interest of $53,000 as well as debt discount accretion expense of approximately $186,000 was included with the convertible notes on the balance sheet. 24 Interest expense, including discount accretion expense for the 2021 and 2020 Notes was $81,000 and $628,000 for the nine months ended September 30, 2020 and 2021, respectively. As a result of our initial public offering on July 13, 2021, approximately $2,387,000 of principal and $191,000 of unpaid accrued interest related to the 2021 and 2020 Notes was converted into shares of common stock. The conversion resulted in a loss of $431,000 that is included as loss on debt conversion in the accompanying statements of operations for the three and nine months ended September 30, 2021.Interest expense was $81,000 and $628,000 for the nine months ended September 30, 2020 and 2021, respectively. In 2017 and 2018, we raised $550,000 from the issuance of twelve convertible promissory notes (the “2018 Notes”). The 2018 Notes bear interest at 10% per annum which was payable at maturity. The 2018 Notes’ principal and interest were due and payable on written demand by the majority of the 2018 Note holders on the two-year anniversary of the first 2018 Note issued. The first 2018 Note was issued on October 5, 2017 and, accordingly, all 2018 Notes would have matured on October 5, 2019. In the event we consummated an equity financing with an aggregate sales price of not less than $500,000, then the aggregate outstanding principal and unpaid interest would automatically convert into shares of common stock. The per-share price of the conversion would be equal to 75% of the price per share paid by the cash purchasers of the common stock sold in the financing. We accounted for the 2018 Notes as stock-settled debt and accreted the carrying amount of the 2018 Notes to the settlement amount through maturity. On July 31, 2019, all 2018 Notes principal and accrued interest were converted into 1,159,065 shares of common stock upon the consummation of a 2019 equity financing in excess of $500,000. Summary of Cash Flows The following table sets forth the primary sources and uses of cash for each of the periods presented below (in thousands): Nine Months Ended September 30, 2020 2021 (unaudited) (unaudited) Net cash (used in) provided by: Operating activities $ (921 ) $ (4,364 ) Financing activities 969 22,375 Net increase in cash $ 48 $ 18,011 Cash Flows from Operating Activities Net cash used in operating activities was $4.4 million for the nine months ended September 30, 2021. Cash used in operating activities was primarily due to the use of funds for director and officer insurance premiums, development costs associated with our drug candidates, labor costs, consulting and accounting services, and other corporate expenditures for investor relations, compliance, and legal services. We incurred a net loss of $7.3 million after including the effect of non-cash adjustments for stock issuance, stock compensation, and a loss on the conversion of our convertible debt. Net cash used in operating activities was $0.9 million for the nine months ended September 30, 2020. Cash used in operating activities resulted from a net loss of $1.4 million primarily driven by the use of funds in our operations to develop our product candidates as well as the deferral of the chief executive officer compensation of $0.3 million and an increase in accounts payable of $0.1 million. 25 Cash Flows from Financing Activities Net cash provided by financing activities was $22.4 million for the nine months ended September 30, 2021 and was primarily related to proceeds received from our initial public offering, net of issuance and deferred offering costs. In addition, we issued convertible notes to investors for $1.1 million as well as the receipt of $0.1 million in proceeds from the exercise of options. Net repayments on loans from our chief executive officer offset the cash inflows by $1.1 million. Net cash provided by financing activities was $1.0 million for the nine months ended September 30, 2020 and was primarily driven by proceeds received for convertible notes. Critical Accounting Policies, Significant Judgments and Use of Estimates Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider our critical accounting policies and estimates to be related to research and development, stock-based compensation and common stock valuations. There have been no material changes to our critical accounting policies and estimates during the three months ended September 30, 2021 from those used for the year ended December 31, 2020. The below policies are listed to provide a list of our policies for the most significant critical policies. Research and Development We expense costs when incurred related to the research and development associated with the design, development and testing of product candidates, as well as acquisition of product candidates or compounds. Research and development expenses include fees paid to third parties to conduct certain research and development activities on our behalf, consulting costs, costs for laboratory supplies, product acquisition and license costs, certain payroll and personnel-related expenses, including salaries and bonuses, employee benefit costs and stock-based compensation expenses for our research and product development employees and allocated overheads, including information technology costs and utilities and expenses for issuance of shares pursuant to anti-dilution clause in the purchase of IPR&D technology. We expense both internal and external research and development expenses as they are incurred. Stock-Based Compensation We account for stock-based compensation for all share-based payments made to employees and non-employees by estimating the fair value on the date of grant and recognizing compensation expense over the requisite service period on a straight-line basis. We recognize forfeitures related to stock-based compensation as they occur. We estimate the fair value of stock options using the Black-Scholes option-pricing model. The Black-Scholes model requires the input of subjective assumptions, including expected common stock volatility, expected dividend yield, expected term, risk-free interest rate, and the estimated fair value of the underlying common stock on the date of grant. 26 Common Stock Valuations We are required to periodically estimate the fair value of common stock when issuing stock options and computing their estimated stock-based compensation expense. The fair value of common stock prior to our initial public offering was determined on a periodic basis, with the assistance of an independent third-party valuation expert. The assumptions underlying these valuations represented management’s best estimates, which involved inherent uncertainties and the application of significant levels of management judgment. In order to determine the fair value, we considered, among other things, contemporaneous transactions involving the sale of our common stock to unrelated third parties; the lack of marketability of our common stock and the market performance of comparable publicly traded companies. JOBS Act Accounting Election On April 5, 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have chosen to take advantage of the extended transition periods available to emerging growth companies under the JOBS Act for complying with new or revised accounting standards until those standards would otherwise apply to private companies provided under the JOBS Act. As a result, our financial statements may not be comparable to those of companies that comply with public company effective dates for complying with new or revised accounting standards. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain of exemptions, including, without limitation, (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the completion of this offering; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC. Recent Accounting Pronouncements See the section titled “Summary of Significant Accounting Policies—Recent Accounting Pronouncements” in Note 2 to our financial statements included elsewhere in this quarterly report for additional information. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements as defined under SEC rules. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.