IGM BIOSCIENCES, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Risk Factors" section of this Annual Report on Form 10-K, our actual results could differ materially from the results described, in or implied, by these forward-looking statements.
Overview
We are a biotechnology company pioneering the development of engineered IgM antibodies for the treatment of cancer patients. IgM antibodies have inherent properties that we believe may enable them to bind more strongly to cancer cells than comparable IgG antibodies. We have created a proprietary IgM antibody technology platform that we believe is particularly well suited for developing T cell engagers, receptor cross-linking agonists and targeted cytokines. Our lead product candidate, IGM-2323, is a bispecific T cell engaging IgM antibody targeting CD20 and CD3 proteins, and inOctober 2019 we announced the dosing of the first patient in our Phase 1 clinical trial for the treatment of relapsed/refractory B cell Non-Hodgkin's lymphoma (NHL) patients. Our second product candidate, IGM-8444 is an IgM antibody targeting Death Receptor 5 (DR5) proteins, and we plan to file an investigational new drug application (IND) for the treatment of patients with solid and hematologic malignancies in 2020. Our third product candidate, IGM-7354, is a bispecific IgM antibody delivering interleukin-15 (IL-15) cytokines to PD-L1 expressing cells, and we plan to file an IND for the treatment of patients with solid and hematologic malignancies in 2021. We believe that we have the most advanced research and development program focused on engineered therapeutic IgM antibodies. We have created a portfolio of patents and patent applications, know-how and trade secrets directed to our platform technology, product candidates and manufacturing capabilities, and we retain worldwide commercial rights to all of our product candidates and the intellectual property related thereto. Since the commencement of our operations, we have focused substantially all of our resources on conducting research and development activities, including drug discovery, preclinical studies and clinical trials, establishing and maintaining our intellectual property portfolio, the manufacturing of clinical and research material, developing our in-house manufacturing capabilities, hiring personnel, raising capital and providing general and administrative support for these operations. Since 2010, such activities have exclusively related to the research, development and manufacture of IgM antibodies and to building our proprietary IgM antibody technology platform. We do not have any products approved for sale, and we have not generated any revenue from product sales. We have incurred significant net losses to date. Our ability to generate product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more of our current or future product candidates. Our net losses were$43.1 million ,$22.7 million , and$11.1 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. As ofDecember 31, 2019 , we had an accumulated deficit of$107.2 million . These losses have resulted primarily from costs incurred in connection with research and development activities and general and administrative costs associated with our operations. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future, and our net losses may fluctuate significantly from period to period, depending on the timing of and expenditures on our planned research and development activities. In addition, we expect to incur additional costs associated with operating as a public company.
We expect our expenses and capital requirements will increase substantially in connection with our ongoing activities as we:
? advance the development of IGM-2323, IGM-8444 and IGM-7354;
? expand our pipeline of IgM antibody product candidates;
? continue to invest in our IgM antibody technology platform;
? build out and expand our in-house manufacturing capabilities;
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? maintain, protect and expand our intellectual property portfolio,
including patents, trade secrets and know-how;
? seek marketing approvals for any product candidates that successfully
complete clinical trials;
? establish a sales, marketing, and distribution infrastructure tocommercialize any product candidate for which we may obtain marketing
approval and related commercial manufacturing build-out;
? implement operational, financial and management information systems; and
? attract, hire and retain additional clinical, scientific, management and
administrative personnel.
We plan to continue to use third-party service providers, including clinical research organizations (CROs) and clinical manufacturing organizations (CMOs), to carry out our preclinical and clinical development and manufacture and supply of our preclinical and clinical materials to be used during the development of our product candidates. We do not have any products approved for sale and have not generated any revenue since inception. Prior to the completion of our initial public offering (IPO) inSeptember 2019 , we had funded our operations primarily with an aggregate of approximately$162.0 million in gross cash proceeds from the sale of convertible preferred stock and issuance of unsecured promissory notes. InSeptember 2019 , we completed our IPO and sold and issued an aggregate of 12,578,125 shares of common stock, including 1,640,625 shares issues in connection with the full exercise by the underwriters of their option to purchase additional shares of common stock, at$16.00 per share for gross proceeds of$201.3 million . The aggregated net proceeds from our IPO, inclusive of the full exercise by the underwriters of their option to purchase additional shares of common stock, were approximately$183.0 million after deducting underwriting discounts and commissions and other offering costs. Immediately prior to the closing of our IPO, all shares of convertible preferred stock then outstanding automatically converted into 10,787,861 shares of common stock and 6,431,205 shares of non-voting common stock. We were incorporated inDelaware in 1993 under the namePalingen, Inc. From 1993 to 2010, we were principally engaged in research related to naturally occurring IgM antibodies. In 2010, we received an initial equity investment from Haldor Topsøe Holding A/S, changed our name toIGM Biosciences, Inc. and refocused our research and development efforts toward developing our IgM platform and engineering new IgM antibodies. InDecember 2017 , we established a Danish holding company-IGM Biosciences A/S (Holdco); inApril 2019 , we dissolved Holdco. The capitalization information included in this Annual Report on Form 10-K is consistently presented as that ofIGM Biosciences, Inc. even during the interim period when we had a holding company structure and our investors held their equity interests in Holdco.
Revenue
To date, we have not generated any revenue and do not expect to generate any revenue from the sale of products in the near future.
Operating Expenses
Research and Development
Research and development expenses consist primarily of costs incurred for the discovery and development of product candidates, which include:
Direct expenses consisting of:
? Fees paid to third parties such as consultants, contractors and CROs, for
animal studies and other costs related to preclinical studies and
clinical trials;
? Costs related to acquiring and manufacturing research and clinical trialmaterials, including under agreements with third parties such as CMOs and
other vendors;
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Table of Contents Index to Financial Statements ? Costs related to the preparation of regulatory submissions; and ? Expenses related to laboratory supplies and services;
Indirect expenses consisting of:
? Personnel-related expenses, including salaries, benefits and stock-based
compensation expense, for personnel in our research and development
functions; and
? Depreciation of equipment and facilities expenses.
We expense research and development costs in the periods in which they are
incurred. Nonrefundable advance payments for goods or services to be received in
future periods for use in research and development activities are deferred and
capitalized. The capitalized amounts are then expensed as the related goods are
delivered and as services are performed. All direct research and development
expenses are tracked by stage of development. We do not track our indirect
research and development costs by product candidate or program.
We expect our research and development expenses to increase substantially for
the foreseeable future as we continue to invest in research and development
activities to advance our product candidates and our clinical programs, expand
our product candidate pipeline and continue to build out and expand our in-house
manufacturing capabilities. The process of conducting the necessary preclinical
and clinical research to obtain regulatory approval is costly and
time-consuming. To the extent that our product candidates continue to advance
into clinical trials, as well as advance into larger and later stage clinical
trials, our expenses will increase substantially and may become more variable.
The actual probability of success for our product candidates may be affected by
a variety of factors, including the safety and efficacy of our product
candidates, investment in our clinical programs, manufacturing capability and
competition with other products. As a result of these variables, we are unable
to determine the duration and completion costs of our research and development
projects or when and to what extent we will generate revenue from the
commercialization and sale of our product candidates. We may never succeed in
achieving regulatory approval for any of our product candidates.
General and Administrative
Our general and administrative expenses consist primarily of personnel-related expenses for personnel in our executive, finance, corporate and other administrative functions, intellectual property, facilities and other allocated expenses, other expenses for outside professional services, including legal, human resources, audit and accounting services, and insurance costs. Personnel-related expenses consist of salaries, benefits and stock-based compensation. We expect our general and administrative expenses to increase for the foreseeable future as we increase our headcount to support our continued research activities and development of product candidates and as a result of operating as a public company, including compliance with the rules and regulations of theSecurities and Exchange Commission (SEC) and those of any national securities exchange on which our securities are traded, legal, auditing, additional insurance expenses, investor relations activities and other administrative and professional services. We also expect our intellectual property expenses to increase as we expand our intellectual property portfolio.
Other Income, Net
Other income, net includes sublease income, interest income earned on our cash,
cash equivalents, investments, and restricted cash balances and interest expense
incurred on unsecured promissory notes.
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Results of Operations
Comparison of the Years Ended
Year Ended December 31,
(in thousands) 2019 2018 ChangeOperating expenses:
Research and development
General and administrative 9,241 3,829 5,412
Total operating expenses 44,498 22,791 21,707
Loss from operations (44,498 ) (22,791 ) (21,707 )
Other income, net 1,365 80 1,285
Net loss $ (43,133 ) $ (22,711 ) $ (20,422 ) Research and Development Expenses
The following table summarizes our research and development expenses incurred during the periods indicated:
Year Ended December 31,
(in thousands) 2019 2018 Change
Direct expenses
Clinical stage program (1) $ 10,554 $
7,359
Preclinical stage programs 12,095 5,394 6,701
Indirect expenses
Personnel-related 9,546 4,743 4,803
Depreciation and facilities 3,062 1,466 1,596
Total research and development expenses
(1) Includes direct expenses related to our lead product candidate, IGM-2323,
for which we announced the dosing of the first patient in our Phase 1
clinical trial in October 2019 .
Research and development expenses were $35.3 million in 2019 compared to $19.0
million in 2018. The increase of $16.3 million was driven by advancement of our
product candidates, including $3.2 million of expenses related to our clinical
stage program, which consisted of preclinical, clinical and manufacturing
expense incurred in the development of our lead product candidate, IGM-2323, for
which we announced the dosing of the first patient in our Phase 1 clinical trial
in October 2019 , and $6.7 million related to our preclinical stage programs
which consisted of preclinical and manufacturing expenses incurred in the
development of our second product candidate, IGM-8444, and expenses related to
our discovery programs. Personnel-related expenses, including stock-based
compensation, increased by $4.8 million due to an increase in headcount.
Depreciation and facilities increased by $1.6 million primarily due to new lease
agreements for additional office, laboratory and manufacturing space in Mountain
View which commenced in 2019.
General and Administrative Expenses
General and administrative expenses were$9.2 million in 2019 compared to$3.8 million in 2018. The increase of$5.4 million was primarily due to a$2.3 million increase in personnel-related expenses, including stock-based compensation, due to an increase in headcount. Professional services increased by$1.8 million due to legal, accounting, consulting and other services in preparation for our public company status. Administrative expenses increased by$0.9 million primarily due to an increase in directors' and officers' liability insurance. Depreciation and facilities increased by$0.3 million primarily due to new lease agreements for additional office, laboratory and manufacturing space inMountain View which commenced in 2019. 95
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Other Income, Net
Other income, net was
Comparison of the Years Ended
Year Ended December 31,
(in thousands) 2018 2017 Change
Operating expenses:
Research and development $ 18,962 $
8,639
General and administrative 3,829 2,508 1,321
Total operating expenses 22,791 11,147 11,644
Loss from operations (22,791 ) (11,147 ) (11,644 )
Other income, net 80 93 (13 )
Net loss $ (22,711 ) $ (11,054 ) $ (11,657 ) Research and Development Expenses
The following table summarizes our research and development expenses incurred during the periods indicated:
Year Ended December 31,
(in thousands) 2018 2017 Change
Direct expenses
Clinical stage program (1) $ 7,359 $
1,168
Preclinical stage programs 5,394 3,229 2,165
Indirect expenses
Personnel-related 4,743 2,889 1,854
Depreciation and facilities 1,466 1,353 113
Total research and development expenses
(1) Includes direct expenses related to our lead product candidate, IGM-2323,
for which we announced the dosing of the first patient in our Phase 1
clinical trial in October 2019 .
Research and development expenses were $19.0 in 2018 compared to $8.6 million in
2017. The increase of $10.3 million was driven by an increase in expenses to
advance our product candidates, including $6.2 million of expenses related to
our clinical stage program, which consisted of preclinical and clinical expenses
and expenses incurred in the development of our lead product candidate, IGM-2323
and the preparation for its Phase 1 clinical trial, and $2.2 million related to
our preclinical stage programs. Personnel-related expenses, including
stock-based compensation, increased by $1.9 million due to an increase in
headcount.
General and Administrative Expenses
General and administrative expenses were
Other Income, Net
Other income, net was$80,000 in 2018 compared to$93,000 in 2017. The decrease of$13,000 was primarily due to an increase in interest expense resulting from an interest-bearing unsecured promissory note. 96
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Liquidity and Capital Resources
Liquidity
Due to our significant research and development expenditures, we have generated operating losses since our inception. We have funded our operations primarily through the sale of convertible preferred stock and common stock and the issuance of unsecured promissory notes. As ofDecember 31, 2019 , we had cash and investments of$236.6 million . As ofDecember 31, 2019 , we had an accumulated deficit of$107.2 million . We believe that our cash and investments will be sufficient to fund our planned operations into early 2022.
Future Funding Requirements
Our primary uses of cash are to fund operating expenses, which consist primarily of research and development expenditures related to our programs and related personnel costs. The timing and amount of our future funding requirements depends on many factors, including the following:
? the initiation, scope, rate of progress, results and cost of our
preclinical studies, clinical trials and other related activities for our
product candidates;
? the costs associated with manufacturing our product candidates, including
building out and expanding our own manufacturing facilities, and
establishing commercial supplies and sales, marketing and distribution
capabilities;
? the timing and cost of capital expenditures to support our research,
development and manufacturing efforts;
? the number and characteristics of other product candidates that we pursue;
? the costs, timing and outcome of seeking and obtaining
Administration (FDA) and non-
? our ability to maintain, expand and defend the scope of our intellectual
property portfolio, including the amount and timing of any payments we
may be required to make in connection with the licensing, filing, defense
and enforcement of any patents or other intellectual property rights;
? the timing, receipt and amount of sales from our potential products;
? our need and ability to hire additional management, scientific and
medical personnel;
? the effect of competing products that may limit market penetration of our
product candidates;
? our need to implement additional internal systems and infrastructure,
including financial and reporting systems;
? the economic and other terms, timing and success of any collaboration,
licensing, or other arrangements into which we may enter in the future,
including the timing of receipt of any milestone or royalty payments
under these agreements;
? the compliance and administrative costs associated with being a public
company; and
? the extent to which we acquire or invest in businesses, products ortechnologies, although we currently have no commitments or agreements
relating to any of these types of transactions.
In addition, we will continue to require additional funding in order to complete
development of our product candidates and commercialize our products, if
approved. We may seek to raise any necessary additional capital through a
combination of public or private equity offerings, debt financings,
collaborations, strategic alliances, licensing arrangements and other marketing
and distribution arrangements. There can be no assurance that, in the event we
require additional financing, such financing will be available at terms
acceptable to us, if at all. Failure to generate sufficient cash flows from
operations, raise additional capital and reduce discretionary spending should
additional capital not become available could have a material adverse effect on
our ability to achieve our intended business objectives. Because of the numerous
risks and uncertainties associated with the development and commercialization of
our product candidates we are unable to estimate the amounts of increased
capital outlays and operating expenditures associated with our current and
anticipated preclinical studies and clinical trials. To the
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Table of Contents Index to Financial Statements extent that we raise additional capital through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, future revenue streams or research programs at an earlier stage of development or on less favorable terms than we would otherwise choose or to grant licenses on terms that may not be favorable to us. If we do raise additional capital through public or private equity or convertible debt offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders' rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we are unable to obtain additional funding from these or other sources, it may be necessary to significantly reduce our rate of spending through reductions in staff and delaying, scaling back, or stopping certain research and development programs.
Summary Statement of Cash Flows
The following table sets forth the primary sources and uses of cash for each of
the periods presented below:
Year Ended December 31,
(in thousands) 2019 2018 2017
Net cash used in operating activities (45,116 ) (20,044 ) (10,357 )
Net cash used in investing activities (203,238 ) (788 ) (385 )
Net cash provided by financing activities 282,258 22,337 8,068
In 2019, net cash used in operating activities was$45.1 million , which consisted of a net loss of$43.1 million and a net change of$5.0 million in our net operating assets and liabilities, partially offset by$3.0 million in non-cash charges. The net change in our operating assets and liabilities was primarily due to an increase in prepaid expenses of$5.4 million , an increase in other assets of$0.3 million and a decrease in lease liabilities of$1.3 million , partially offset by an increase in accounts payable of$2.0 million . The non-cash charges primarily consisted of non-cash lease expense of$1.7 million , stock-based compensation of$1.0 million and depreciation expense of$0.6 million , partially offset by net amortization of premiums and accretion of discounts on investments of$0.3 million . In 2018, net cash used in operating activities was$20.0 million , which consisted of a net loss of$22.7 million , partially offset by a net change of$2.2 million in our net operating assets and liabilities and$0.5 million in non-cash charges. The net change in our operating assets and liabilities was primarily due to an increase in accrued liabilities of$2.8 million resulting from an increase in research and development activities. This was partially offset by an increase in prepaid expenses of$0.3 million primarily associated with prepayments made for ongoing research and development activities conducted by third-party service providers. The non-cash charges primarily consisted of depreciation of$0.3 million and stock-based compensation of$0.2 million . In 2017, net cash used in operating activities was$10.4 million , which consisted of a net loss of$11.1 million , partially offset by a net change of$0.4 million in our net operating assets and liabilities and$0.3 million in non-cash charges. The net change in our operating assets and liabilities was primarily due to an increase in accrued liabilities of$0.3 million resulting from an increase in research and development activities. The non-cash charges primarily consisted of depreciation of$0.2 million and stock-based compensation of$0.1 million .
In 2019, net cash used in investing activities was
Net cash used in investing activities was
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Net Cash Provided by Financing Activities
In 2019, net cash provided by financing activities was$282.3 million , which consisted primarily of$182.8 million of net proceeds from our IPO,$81.7 million of net proceeds from the issuance of shares of our Series C convertible preferred stock,$15.0 million of proceeds from the issuance of an unsecured promissory note to a related party which was subsequently settled as Series C convertible preferred stock inJune 2019 , the receipt of a$2.6 million receivable that was due from a related party, and$0.2 million from the issuance of common stock and exercise of stock options. In 2018, net cash provided by financing activities was$22.3 million , which consisted primarily of$17.3 million in proceeds from the issuance of shares of our Series B convertible preferred stock and$5.0 million from the issuance of an unsecured promissory note.
In 2017, net cash provided by financing activities was
Contractual Obligations and Commitments
The following table summarizes our contractual obligations and other commitments as ofDecember 31, 2019 : Payments Due by Period (in thousands) Less than 1 Year 1 to 3 Years 3 to 5 Years More than 5 Years Total Contractual obligations: Operating lease obligations (1) $ 3,002$ 6,258 $ 6,269 $ 733$ 16,262
(1) Payments due for our lease of office, laboratory and manufacturing spaces in
obligations.
In addition, we enter into agreements in the normal course of business with CROs, CMOs, and other vendors for the research and development services for operating purposes, which are generally cancelable upon written notice. These payments are not included in this table of contractual obligations.
We have not included milestone or royalty payments or other contractual payment obligations in the table above as the timing and amount of such obligations are unknown or uncertain. See Note 5 to our financial statements included in this Form 10-K.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements, as defined in the
rules and regulations of the
Critical Accounting Policies and Use of Estimates
Our financial statements have been prepared in accordance withU.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 believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. While our significant accounting policies are described in the notes to our financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results. 99
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The Company records accruals for estimated costs of research, preclinical studies, clinical trials, and manufacturing, which are significant components of research and development expenses. A substantial portion of the Company's ongoing research and development activities is conducted by third-party service providers, CROs and CMOs. The Company's contracts with the CMOs generally include fees such as initiation fees, reservation fees, costs related to animal studies and safety tests, verification run costs, materials and reagents expenses, taxes, etc. The Company's contracts with CROs generally include pass-through fees such as regulatory expenses, investigator fees, travel costs and other miscellaneous costs, including shipping and printing fees. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided to the Company under such contracts. The Company accrues the costs incurred under agreements with these third parties based on estimates of actual work completed in accordance with the respective agreements. The Company determines the estimated costs through discussions with internal personnel and external service providers as to the progress, or stage of completion or actual timeline (start-date and end-date) of the services and the agreed-upon fees to be paid for such services. In the event the Company makes advance payments, the payments are recorded as a prepaid expense and recognized as the services are performed. As actual costs become known, the Company adjusts its accruals. Although the Company does not expect its estimates to be materially different from amounts actually incurred, such estimates for the status and timing of services performed relative to the actual status and timing of services performed may vary and could result in us reporting amounts that are too high or too low in any particular period. The Company's accrual is dependent, in part, upon the receipt of timely and accurate reporting from CROs and other third-party vendors. Variations in the assumptions used to estimate accruals including, but not limited to, the number of patients enrolled, the rate of patient enrollment and the actual services performed, may vary from our estimates, resulting in adjustments to clinical trial expenses in future periods. Changes in these estimates that result in material changes to the Company's accruals could materially affect its financial condition and results of operations. ThroughDecember 31, 2019 , there have been no material differences from the Company's estimated accrued research and development expenses to actual expenses.
Stock-Based Compensation
We account for stock-based compensation by measuring and recognizing
compensation expense for all share-based awards made to employees and directors
based on estimated grant-date fair values. We use the straight-line method to
allocate compensation cost to reporting periods over the requisite service
period, which is generally the vesting period, and estimate the fair value of
share-based awards to employees and directors using the Black-Scholes
option-pricing valuation model. The Black-Scholes model requires the input of
subjective assumptions, including fair value of common stock, expected term,
expected volatility, risk-free interest rate and expected dividends, which are
described in greater detail below.
Fair Value of Common Stock-Prior to the IPO, there was no public market for our
common stock, the fair value of our common stock was determined by our board of
directors based in part on valuations of our common stock prepared by a
third-party valuation firm. Since the completion of our IPO, the fair value of
each share of common stock underlying stock option grants is based on the
closing price of our common stock on the Nasdaq Global Select Market as reported
on the date of grant.
Expected Term-The expected term of the options represents the average period the
stock options are expected to remain outstanding. As we do not have sufficient
historical information to develop reasonable expectations about future exercise
patterns and post-vesting employment termination behavior, the expected term of
options granted is derived from the average midpoint between the weighted
average vesting and the contractual term, also known as the simplified method.
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Table of Contents Index to Financial Statements Expected Volatility- Since we have only recently become a public company and have only a limited trading history for our common stock, the expected volatility was estimated based on the average historical volatilities of common stock of comparable publicly traded entities over a period equal to the expected term of the stock option grants. We selected companies with comparable characteristics, including enterprise value, risk profiles, position within the industry, and, where applicable, with historical share price information sufficient to meet the expected life of our stock-based awards. We will continue to apply this process until enough historical information regarding the volatility of our own stock price becomes available.
Risk-Free Interest Rate-The risk-free interest rate is based on the yield of
zero-coupon
Expected Dividends-The expected dividends assumption is based on our expectation of not paying dividends in the foreseeable future; therefore, we used an expected dividend yield of zero.
We account for forfeitures as they occur. Disclosures related to stock-based compensation have been included for employee stock-based compensation only. As a result of the adoption of ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, effectiveJanuary 1, 2019 , there is no change in the measurement and recognition of the compensation expense between employee and non-employee during the year endedDecember 31, 2019 . Stock-based compensation awarded to non-employees for the years endedDecember 31, 2019 , 2018, and 2017 was not material. The fair value of each purchase under the employee stock purchase plan (ESPP) is estimated at the beginning of the offering period using the Black-Scholes option pricing model.
Assumptions we used in applying the Black-Scholes option-pricing model to determine the estimated fair value of our stock options granted involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our equity-based compensation could be materially different.
Fair Value of Common Stock
Historically, for all periods prior to our IPO, the fair value of the shares of common stock underlying our share-based awards were estimated on each grant date by our board of directors. In order to determine the fair value of our common stock underlying option grants, our board of directors considered, among other things, timely valuations of our common stock prepared by an unrelated third-party valuation firm in accordance with the guidance provide by theAmerican Institute of Certified Public Accountants Practice Guide , Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Given the absence of a public trading market for our common stock prior to our IPO, our board of directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including our stage of development; progress of our research and development efforts; the rights, preferences and privileges of our convertible preferred stock relative to those of our common stock; equity market conditions affecting comparable public companies and the lack of marketability of our common stock. Since the completion of our IPO, the fair value of each share of common stock underlying stock option grants is based on the closing price of our common stock on the Nasdaq Global Select Market as reported on the date of grant. 101
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Leases
During 2019, we elected to early adopt Accounting Standard Update (ASU) No.
2016-02, Leases (ASC 842) and its associated amendments as of
Under ASC 842, we determine if an arrangement is a lease at inception. In addition, we determine whether leases meet the classification criteria of a finance or operating lease at the lease commencement date considering: (1) whether the lease transfers ownership of the underlying asset to the lessee at the end of the lease term, (2) whether the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise, (3) whether the lease term is for a major part of the remaining economic life of the underlying asset, (4) whether the present value of the sum of the lease payments and residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset, and (5) whether the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. As ofDecember 31, 2019 , our lease population consisted of real estate. As of the date of adoption of ASC 842 andDecember 31, 2019 , we did not have finance leases. Operating leases are included in operating lease right-of-use (ROU) assets, lease liabilities, current, and lease liabilities, non-current in our balance sheet. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, we use our incremental borrowing rate based on the information available at the lease commencement date if the rate implicit in the lease is not readily determinable. We determine the incremental borrowing rate base on an analysis of corporate bond yields with a credit rating similar ours. The determination of our incremental borrowing rate requires management judgment including the development of a synthetic credit rating and cost of debt as we currently do not carry any debt. We believe that the estimates used in determining the incremental borrowing rate are reasonable based upon current facts and circumstances. Applying different judgments to the same facts and circumstances could result in the estimated amounts to vary. The operating lease ROU assets also include adjustments for prepayments and accrued lease payments and exclude lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. Operating lease cost is recognized on a straight-line basis over the expected lease term. Lease agreements entered into after the adoption of ASC 842 that include lease and non-lease components are accounted for as a single lease component. Lease agreements with a noncancelable term of less than 12 months are not recorded on our balance sheet. For more information about the impact of adoption and disclosures on our leases, refer to "Note 10 - Commitments and Contingencies."
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