Unicycive Therapeutics, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements This Quarterly Report on Form 10-Q for the three and nine-month periods ended September 30, 2022 contains “forward-looking statements” within the meaning of the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements contain information about our expectations, beliefs or intentions regarding our product development and commercialization efforts, business, financial condition, results of operations, strategies or prospects, and other similar matters. These forward-looking statements are based on management’s current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. These statements may be identified by words such as “expects,” “plans,” “projects,” “will,” “may,” “anticipates,” “believes,” “should,” “intends,” “estimates,” and other words of similar meaning. Actual results could differ materially from those contained in forward-looking statements. Many factors could cause actual results to differ materially from those in forward-looking statements, including those matters discussed below. Readers are urged to read the risk factors set forth in the Company’s recent filings with the U. S. Securities and Exchange Commission (the “SEC”). These filings are available at the SEC’s website (www.sec.gov). Other unknown or unpredictable factors that could also adversely affect our business, financial condition and results of operations may arise from time to time. Given these risks and uncertainties, the forward-looking statements discussed in this report may not prove to be accurate. Accordingly, you should not place undue reliance on these forward-looking statements, which only reflect the views of the Company’s management as of the date of this report. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results or expectations, except as required by law. 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 Form 10-K. 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 clinical-stage biotechnology company dedicated to developing treatments for serious and life-threatening diseases. Currently, two of our programs are focused on kidney diseases that we believe have the potential to offer medical benefit. As we grow the Company and build our team, we intend to focus on identifying medical conditions within and outside of kidney disease. Our current development programs are focused on the development of two novel therapies: Renazorb, for treatment of hyperphosphatemia in patients with endstage renal disease (ESRD), a latestage chronic kidney disease, and UNI-494, for treatment of acute kidney injury (AKI). Based on the unique mechanism of action of UNI-494 to restore mitochondrial function, UNI-494 has potential applications in several indications in which mitochondrial dysfunction is implicated, such as chronic kidney disease (CKD), liver diseases and ophthalmic diseases. 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 to partner with 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 in the US is increasing steadily and is projected to reach between 971,000 and 1,259,000 in 2030. 19 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 drugs and technologies, 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 and extensive drug development 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 substantial resources to developing our product candidates. We have incurred significant operating losses to date. Our net losses were $7.3 million and $12.7 million for the nine months ended September 30, 2021, and for the nine months ended September 30, 2022, respectively. As of September 30, 2022, we had an accumulated deficit of $28.7 million. We expect that our operating expenses will increase significantly as we continue to 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 to execute our plans. In addition, 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 organizations, 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. The Impact of the COVID-19 Pandemic and Climate Change on Our Business In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. This pandemic could result in difficulty securing clinical trial site locations, CROs, and/or trial monitors and other critical vendors and consultants supporting our trial. These situations, or others associated with COVID-19, could cause delays in our clinical trial plans and could increase expected costs, all of which could have a material adverse effect on our business and financial condition. At the current time, we are unable to quantify the potential effects of this pandemic on our future financial statements. Our suppliers and service providers may also experience a disruption in their business as a result of natural or man-made disasters. A significant natural or man-made disaster, such as an earthquake, prolonged or repeated power outage, fire, drought or other extreme weather events and changing weather patterns, which are increasing in frequency due to the impacts of climate change, could severely damage our facilities or the facilities of our suppliers or service providers, which could have a material adverse effect on our business and financial condition. At the current time, we are unable to quantify the potential effects of climate change on our future financial statements. 20 Components of Results of Operations Revenues We recognize revenue from product sales or services rendered when control of the promised goods are transferred to a counterparty in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods and services. To achieve this core principle, we apply the following five steps: identify the contract with the client, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to performance obligations in the contract and recognize revenues when or as we satisfy a performance obligation. We may earn licensing revenue in the future if we negotiate business development arrangements with third parties. 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. 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 Income (Expenses) Other expenses consist primarily of interest expense related to convertible notes and a loss on conversion of convertible notes. 21 Results of Operations Comparison of the Three Months Ended September 30, 2021 and 2022 The following table summarizes our results of operations for the periods indicated (in thousands): Three Months Ended September 30, 2021 2022 Change % Change (unaudited) (unaudited) Licensing revenues: $ - $ 951 $ 951 100 % Operating expenses: Research and development 3,776 4,803 1,027 27 % General and administrative 939 1,702 763 81 % Total operating expenses 4,715 6,505 1,790 38 % Loss from operations (4,715 ) (5,554 ) (839 ) 18 % Other income (expenses): Interest expense (55 ) (3 ) 52 (95 )% Loss on debt conversion (431 ) - 431 (100 )% Total other income (expenses) (486 ) (3 ) 483 (99 )% Net loss $ (5,201 ) $ (5,557 ) $ (356 ) 7 % Licensing Revenues Licensing revenues of $1.0 million were recorded for the three months ended September 30, 2022 due to a licensing agreement entered into with Lee’s Pharmaceutical (HK) Limited in July 2022. We received an upfront payment of $1.0 million. There was no comparable revenue earned in the prior period. We may earn additional licensing revenue in the future if we negotiate business development arrangements with third parties. Research and Development Expenses Research and development expenses increased by approximately $1.0 million, or 27%, from approximately $3.8 million for the three months ended September 30, 2021 to approximately $4.8 million for the three months ended September 30, 2022. The increase in research and development expenses was primarily due to a $826,000 increase in drug development costs. Labor costs increased $213,000 from the prior period. Other costs increased $53,000. Non-cash stock compensation decreased $65,000. General and Administrative Expenses General and administrative expenses increased by $763,000, or 81%, from approximately $939,000 for the three months ended September 30, 2021 to approximately $1.7 million for the three months ended September 30, 2022 primarily due to an increase of $415,000 in consulting and professional services. Labor costs increased $151,000. Stock compensation increased $92,000, and travel, rent, and other costs increased $105,000. 22 Other Income (Expenses) Other income (expenses) decreased by $483,000, or 99% from approximately $486,000 for the three months ended September 30, 2021 to $3,000 for the three months ended September 30, 2022. The decrease was due primarily to the conversion to equity in July 2021 of our outstanding convertible notes, including accrued interest, as a result of our initial public offering. Comparison of the Nine Months Ended September 30, 2021 and 2022 The following table summarizes our results of operations for the periods indicated (in thousands): Nine Months Ended September 30, 2021 2022 Change % Change (unaudited) (unaudited) Licensing revenues: $ - $ 951 $ 951 100 % Operating expenses: Research and development 4,719 8,596 3,877 82 % General and administrative 1,506 5,082 3,576 238 % Total operating expenses 6,225 13,678 7,453 120 % Loss from operations (6,225 ) (12,727 ) (6,502 ) 104 % Other income (expenses): Interest expense (628 ) (3 ) 625 (99 )% Loss on debt conversion (431 ) - 431 (100 )% Gain on extinguishment of debt 19 - (19 ) (100 )% Total other income (expenses) (1,040 ) (3 ) 1,037 (99 )% Net loss $ (7,265 ) $ (12,730 ) $ (5,465 ) 75 % Licensing Revenues Licensing revenues of $1.0 million were recorded for the nine months ended September 30, 2022 due to a licensing agreement entered into with Lee’s Pharmaceutical (HK) Limited in July 2022. We received an upfront payment of $1.0 million. There was no comparable revenue earned in the prior period. We may earn additional licensing revenue in the future if we negotiate business development arrangements with third parties. Research and Development Expenses Research and development expenses increased by approximately $3.8 million, or 82%, from approximately $4.7 million for the nine months ended September 30, 2021 to approximately $8.6 million for the nine months ended September 30, 2022. The increase in research and development expenses was primarily due to a $2.7 million increase in drug development costs. Labor costs increased $1.4 million from the prior period. Other costs increased $74,000. Non-cash stock compensation decreased $320,000. General and Administrative Expenses General and administrative expenses increased by $3.6 million, or 238%, from approximately $1.5 million for the nine months ended September 30, 2021 to approximately $5.1 million for the nine months ended September 30, 2022 primarily due to an increase of $684,000 in insurance expense for directors and officers. Consulting and professional services costs increased $1.0 million, and labor costs increased $748,000 from the prior period. Stock compensation increased $435,000, and travel, rent, and other costs increased $666,000. 23 Other Income (Expenses) Other income (expenses) decreased by $1.0 million, or 99% from approximately $1.0 million for the nine months ended September 30, 2021 to $3,000 for the nine months ended September 30, 2022. The decrease was due primarily to the conversion to equity in July 2021 of our outstanding convertible notes, including accrued interest, as a result of our initial public offering. The decrease was partially offset by a gain on debt extinguishment of $19,000 during the nine months ended September 30, 2021. Liquidity and Capital Resources Sources of Liquidity Since our formation through September 30, 2022, we have funded our operations with the sale of common stock, convertible notes, a loan from our Chief Executive Officer and principal stockholder, and during 2022, with licensing revenue of $1.0 million. During 2020, we raised additional funds through private placements by issuing common stock for $141,000 and by issuing $1.3 million in convertible notes to investors. During the year ended December 31, 2021, we raised $1.1 million 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 $22.3 million 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, 2022, we had a net loss of $12.7 million, and we expect to incur substantial additional losses in future periods. As of September 30, 2022, we had an accumulated deficit of $28.7 million. 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 our current level of expenditures, after receiving the net proceeds of $22.3 million on July 15, 2021 as a result of our IPO and given our cash balance of approximately $7.0 million as of September 30, 2022, we believe that we will need funding before the end of the first quarter 2023 to continue operations, satisfy our obligations and fund the future expenditures that will be required to conduct the clinical and regulatory work to develop our product candidates. The accompanying financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. There is substantial doubt about our ability to continue as a going concern for one year after the date that these financial statements are available to be issued. The financial statements do not reflect any adjustments relating to the recoverability and reclassification of assets and liabilities that might be necessary from the outcome of this uncertainty. 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; 24 ● 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. 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 programs. The initial amended term of the Service Agreement expired on December 31, 2020, and the agreement automatically renews 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. During the fourth quarter of 2021, we determined that future services under the Service Agreement were no longer required, and we wrote off the $28,000 remaining prepaid balance due from Globavir as of December 31, 2021. During the nine months ended September 30, 2022, after determining that although a shared office space is no longer utilized, consulting services continued to be provided, we amended the Service Agreement to reflect the consulting services at a reduced service fee of $6,000 per month and a termination date of June 30, 2022. 25 Convertible Notes In January through May 2021, we issued convertible notes (the “2021 Notes”) in the aggregate principal amount of approximately $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 our 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 our 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 were accreting the carrying amount of the 2021 Notes to the settlement amount through maturity. In July 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 our 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 our 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 were 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. 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. Additionally, the noteholders were granted warrants equal to 25% of the conversion shares issued. The conversion resulted in a loss of $431,000 that was included as loss on debt conversion in the statement of operations for the three months ended September 30, 2021. 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, 2021 2022 (unaudited) (unaudited) Net cash (used in) provided by: Operating activities $ (4,364 ) $ (9,567 ) Investing activities - (2 ) Financing activities 22,375 - Net increase (decrease) in cash $ 18,011 $ (9,569 ) 26 Cash Flows from Operating Activities Net cash used in operating activities was $9.6 million for the nine months ended September 30, 2022. Cash used in operating activities was primarily due to the use of funds for development costs associated with our drug candidates, labor costs, consulting services, and other corporate expenditures for investor relations, compliance, and legal services. We incurred a net loss of $12.7 million after including the effect of non-cash adjustments for stock compensation and amortization of lease asset. The net loss was partially offset by $1.0 million of revenues received from a licensing agreement entered into with Lee’s Pharmaceutical (HK) Limited in July 2022. 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. Cash Flows from Investing Activities Net cash used in investing activities was $2,000 for the nine months ended September 30, 2022 and was due to the purchase of furniture and fixtures for our corporate office. There were no comparable fixed asset purchases during the prior year. Cash Flows from Financing Activities There were no cash flows provided by financing activities during the nine months ended September 30, 2022. 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. 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 accruals, stock-based compensation and common stock valuations. There have been no material changes to our critical accounting policies and estimates during the nine months ended September 30, 2022 from those used for the year ended December 31, 2021. The below policies are listed to provide a list of our policies for the most significant critical policies. Revenue Recognition We implemented ASC 606, Revenue from Contracts with Customers. This included the development of new policies based on the five-step model provided in the new revenue standard, ongoing contract review requirements, and gathering of information provided for disclosures. We recognize revenue from product sales or services rendered when control of the promised goods are transferred to a counterparty in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods and services. To achieve this core principle, we apply the following five steps: identify the contract with the client, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to performance obligations in the contract and recognize revenues when or as we satisfy a performance obligation. 27 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. We estimate progress achieved on material third party research and development contracts through a combination of direct and indirect interaction with the service providers as well as internal management assessment. 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. Common Stock Valuations Prior to our IPO, we were required to periodically estimate the fair value of common stock, with the assistance of an independent third-party valuation expert, when issuing stock options and computing their estimated stock-based compensation expense. 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. Subsequent to our IPO, we determine the fair value of our common stock from closing prices as quoted on the NASDAQ exchange. 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 these exemptions, including, without limitation, (i) providing an auditor’s attestation report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with the requirement adopted by the Public Company Accounting Oversight Board (“PCAOB”) regarding the communication of critical audit matters in the auditor’s report on financial statements. 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 our IPO; (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. 28 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.