You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes included elsewhere in this Annual Report on Form 10-K (this "report"). This discussion and analysis and other parts of this report contain forward-looking statements based upon current beliefs, plans and expectations related to future events and our future financial performance that involve risks, uncertainties and assumptions, such as statements regarding our intentions, plans, objectives, expectations, forecasts and projections. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under the section titled "Risk Factors" and elsewhere in this report. Overview We are a clinical-stage gene therapy company pioneering the development of product candidates using our targeted and evolved AAV vectors. We seek to unlock the full potential of gene therapy using our platform, Therapeutic Vector Evolution, which combines the power of directed evolution with our approximately one billion synthetic capsid sequences to invent evolved vectors for use in targeted gene therapy products. Our targeted and evolved vectors are invented with the goal of being delivered through clinically routine, well-tolerated and minimally invasive routes of administration, of transducing diseased cells in target tissues efficiently, of having reduced immunogenicity and, where relevant, of having resistance to pre-existing antibodies. We believe these key design features will help us to potentially create targeted gene therapy product candidates with improved therapeutic profiles, and address a broad range of diseases from rare to large patient populations, including those that other gene therapies are unable to address. Each of our product candidates is created with our targeted and evolved AAV vectors. Our platform is designed to be modular, in that an evolved vector invented for a given set of diseases can be equipped with different transgene payloads to treat other diseases affecting the same tissue types. We believe this modularity will help inform the clinical development of subsequent product candidates using the same vector. We have built a deep portfolio of gene therapy product candidates initially focused in three therapeutic areas: ophthalmology (intravitreal vector), cardiology (intravenous vector) and pulmonology (aerosol vector). We have three product candidates that are in clinical trials. We are developing 4D-125 for the treatment of X-linked retinitis pigmentosa ("XLRP"), currently in Phase 1/2 clinical trial with initial clinical data expected in the second half of 2021. We are advancing 4D-110 for the treatment of choroideremia, currently in a Phase 1 clinical trial with initial clinical data expected in 2022. Roche holds an exclusive worldwide license to 4D-110 and has the exclusive option to in-license 4D-125 prior to initiation of pivotal clinical trials. We received FDA Fast Track designation for 4D-310 for the treatment of Fabry disease, which is currently in a Phase 1/2 clinical trial, with initial clinical data expected in the second half of 2021. Our two IND candidates are 4D-150 for the treatment of wet age-related macular degeneration ("wet AMD"), and 4D-710 for the treatment of cystic fibrosis lung disease. We expect to file the IND and to initiate clinical trials for both of these programs in the second half of 2021. We have funded our operations primarily through the sale and issuance of equity securities and to a lesser extent from cash received pursuant to our collaboration and license agreements. InDecember 2020 , we completed our IPO and issued and sold 9,660,000 shares of common stock at a price to the public of$23.00 per share. The aggregate net proceeds from our IPO were$204.7 million after deducting underwriting discounts and commissions and other offering costs. As ofDecember 31, 2020 , we had cash and cash equivalents of$276.7 million . We have incurred significant operating losses and expect that our operating losses will increase significantly as we, among other things, continue to advance our product candidates through preclinical and clinical development, seek regulatory approval, and prepare for, and, if approved, proceed to commercialization; broaden and improve our platform; acquire, discover, validate and develop additional product candidates; maintain, protect and enforce our intellectual property portfolio; and hire additional personnel. In addition, we expect to incur additional costs associated with operating as a public company. 140 -------------------------------------------------------------------------------- Our net losses were$56.7 million and$49.3 million for the years endedDecember 31, 2020 and 2019, respectively. As ofDecember 31, 2020 , we had an accumulated deficit of$135.7 million . We do not expect positive cash flows from operations in the foreseeable future. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and our expenditures on other research and development activities. We do not have any products approved for sale and have not generated any revenue from product sales since our inception. Our ability to generate product revenue will depend on the successful development, regulatory approval and eventual commercialization of one or more of our product candidates, if approved. We will require substantial additional funding to support our continuing operations and further the development of our product candidates. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the sale of equity, debt financings, or other capital sources, which could include income from collaborations, strategic partnerships or other strategic arrangements, for the foreseeable future. Adequate funding may not be available when needed or on terms acceptable to us, or at all. If we are unable to raise additional capital as needed, we may have to significantly delay, scale back or discontinue development of our product candidates. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets inthe United States and worldwide resulting from the ongoing COVID-19 pandemic and otherwise. If we fail to obtain necessary capital when needed on acceptable terms, or at all, it could force us to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations. Insufficient liquidity may also require us to relinquish rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities. The global COVID-19 pandemic continues to rapidly evolve, and we will continue to monitor the COVID-19 situation closely. The extent of the impact of the COVID-19 pandemic on our business, operations and clinical development timelines and plans remains uncertain, and will depend on certain developments, including the duration and spread of the outbreak and its impact on our clinical trial enrollment, trial sites, CROs, third-party manufacturers, and other third parties with whom we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel and the majority of our employees working remotely. We will continue to actively monitor the rapidly evolving situation related to the COVID-19 pandemic and may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business. At this point, the extent to which the COVID-19 pandemic may affect our business, operations and clinical development timelines and plans, including the resulting impact on our expenditures and capital needs, remains uncertain. 141 --------------------------------------------------------------------------------
Components of Results of Operations
Revenue
Our revenue to date has been generated through payments from our collaboration and license agreements, primarily from upfront and milestone payments and expense reimbursement. We have not generated any revenue from the sale of approved products and do not expect to do so for the foreseeable future. The primary drivers for revenue consist of the following:
• Roche: In
agreement with
(together, "Roche"). We received an upfront payment of
2017 and are reimbursed for our internal and third-party costs and are entitled to contingent payments, including milestone payments. In 2020, we received milestone payments totaling$10.0 million , which was comprised of a$5.0 million milestone payment upon the release of clinical trial material for our Phase 1 clinical trial for 4D-110 to
treat choroideremia in the second quarter of 2020 and an additional
million milestone payment upon dosing our first patient in the trial in
the third quarter of 2020. We began recognizing revenue related to this in 2017 and expect to continue to recognize revenue over the next three
to four years. See Note 6 to our financial statements included elsewhere
in this report for further discussion regarding the accounting treatment
of this agreement.
• uniQure: InAugust 2019 , we amended our agreement with uniQure and entered into a separate new collaboration and license agreement with uniQure. Neither party was required to pay monetary consideration in connection with the amendment or new agreement. We determined the incremental transaction price of the amendment and new agreement to be$5.1 million and recorded the amount as deferred revenue. We began
recognizing revenue related to this in 2020 and expect to recognize
revenue over the next two to three years. See Note 6 to our financial
statements included elsewhere in this report for further discussion
regarding the accounting treatment of this transaction.
Future collaboration and license revenue is highly dependent on the successful development and commercialization of products by our collaboration partners, which is uncertain, and revenue may fluctuate significantly from period to period. Additionally, we may never receive the consideration from our license agreements that is contemplated for option fees, development and sales-based milestone payments or royalties on sales of licensed products, given the contingent nature of these payments. We expect that our collaboration and license revenue in 2021 will primarily be from Roche and uniQure. If our agreements with Roche or uniQure were terminated, it may materially impact the amount of license revenue we recognize in future periods. Operating Expenses Research and Development Our research and development expenses primarily consist of costs incurred for the discovery and preclinical and clinical development of our product candidates. These expenses include salaries and personnel-related costs, including stock-based compensation of our scientific personnel performing research and development activities; laboratory supplies; research materials; fees paid to CROs to execute preclinical studies and clinical trials; fees paid to CMOs to manufacture materials for preclinical studies and clinical trials; fees related to obtaining technology licenses; consulting costs; costs related to seeking regulatory approval of our product candidates; and allocated facility-related costs, information technology costs, depreciation expense and other overhead. We expense all research and development costs in the periods in which they are incurred. We have entered into various agreements with CROs and CMOs. Costs of certain activities are recognized based on an evaluation of the progress to completion of specific tasks. Payments made prior to the receipt of goods or services that will be used or rendered for future research and development activities are deferred and capitalized as prepaid expenses and other current assets on our balance sheet. The 142 --------------------------------------------------------------------------------
capitalized amounts are recognized as expense as the goods are delivered or the related services are performed.
We do not allocate our costs by product candidate, as a significant amount of research and development expenses includes 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, none of which are tracked by product candidate. In particular, with respect to internal costs, several of our departments support multiple product candidate research and development programs, and therefore the costs cannot be allocated to a particular product candidate or development program. At this time, we cannot reasonably estimate or know the nature, timing or estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates. We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, as our product candidates advance into later stages of development, as we begin to conduct larger clinical trials, as we seek regulatory approvals for any product candidates that successfully complete clinical trials, and incur expenses associated with hiring additional personnel to support our research and development efforts. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. See the section titled "Risk Factors" for additional risks regarding regulatory development and approval. General and Administrative Our general and administrative expenses consist primarily of personnel-related expenses, including salaries, employee benefit costs and stock-based compensation expense for our personnel in executive, finance and accounting, human resources, business development and other administrative functions. General and administrative expenses also include professional fees for legal, patent, consulting, accounting and tax services, allocated overhead, including rent, equipment, depreciation, information technology costs and utilities, and other general operating expenses not otherwise classified as research and development expenses. We expect our general and administrative expenses to increase as a result of increased personnel-related costs, patent costs for our product candidates, consulting, legal and accounting services associated with maintaining compliance with stock exchange listing and requirements of theSEC , investor relations costs, director and officer insurance premiums and other costs associated with being a public company. Other Income (Expense)
Our other income (expense) primarily consists of interest income earned on our cash equivalents and adjustments for the change in the fair value of our derivative liability which must be remeasured at each reporting period.
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Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations for the periods indicated (dollars in thousands):
Year Ended December 31, 2020 2019 $ Change % Change Revenue: Collaboration and license revenue$ 13,363 $ 6,960 $ 6,403 92 % Collaboration and license revenue, related parties 249 26 223 * Total revenue 13,612 6,986 6,626 95 % Operating Expenses: Research and development 53,038 38,718 14,320 37 % Acquired in-process research and development - 5,137 (5,137 ) * General and administrative 17,238 13,895 3,343 24 % Total operating expenses 70,276 57,750 12,526 22 % Loss from operations (56,664 ) (50,764 ) (5,900 ) 12 % Other Income (Expense) (29 ) 1,458 (1,487 ) * Net loss and comprehensive loss$ (56,693 ) $ (49,306 ) $ (7,387 ) 15 %
* Percentage is not meaningful
Revenue
Revenue increased$6.6 million , or 95%, from the year endedDecember 31, 2019 to the year endedDecember 31, 2020 due to a$6.6 million increase in revenue recognized under our collaboration and license agreement with Roche and a$0.7 million increase in revenue recognized under our collaboration and license agreement with uniQure, which was partially offset by a decline in revenue recognized from other collaboration and license agreements.
Research and Development Expenses
The following table provides a breakout of research and development expenses for the periods indicated (dollars in thousands):
Year Ended December 31, 2020 2019 $ Change % Change External expenses$ 29,455 $ 21,342 8,113 38 % Payroll and personnel expenses 16,064 12,206 3,858 32 %
Other research and development expenses 7,519 5,170 2,349
45 %
Total research and development expenses
37 % Research and development expense increased$14.3 million , or 37%, from the year endedDecember 31, 2019 to the year endedDecember 31, 2020 . The increase was due to the following: • an$8.1 million increase in external costs as we continue to develop novel vectors, identify potential product candidates and progress our preclinical studies and clinical trials; • a$3.9 million increase in payroll and personnel expenses due to
increased headcount of research and development personnel, including a
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• a
primarily for allocated overhead, including rent, equipment,
depreciation, information technology costs and utilities.
We recorded acquired in-process research and development expenses of$5.1 million in the year endedDecember 31, 2019 . This was due to the acquisition of in-process research and development from uniQure as a result of the execution of an Amended and Restated Collaboration and License Agreement and a separate Collaboration and License Agreement with uniQure. See Note 6 to our financial statements included elsewhere in this report for further discussion regarding the accounting treatment of this transaction. We did not incur any acquired in-process research and development expenses in 2020.
General and Administrative Expenses
General and administrative expenses increased$3.3 million , or 24%, from the year endedDecember 31, 2019 to the year endedDecember 31, 2020 . The increase was due to the following:
• a
increase in employee and nonemployee director stock-based compensation
expense;
• a
accounting and other advisory services; and • a$0.8 million increase for allocated overhead, including rent,
equipment, depreciation, information technology costs and utilities.
These increases were partially offset by a
Other Income (Expense)
Other income (expense) decreased$1.5 million from the year endedDecember 31, 2019 to the year endedDecember 31, 2020 primarily due to lower interest income because of lower interest rates.
Liquidity and Capital Resources
Sources of Liquidity
We have funded our operations primarily through the sale and issuance of our equity securities, including from the sale of our common stock in our IPO and the sale of our Series A, Series A-1, Series B and Series C redeemable preferred stock, and to a lesser extent from cash received pursuant to our collaboration and license agreements. InDecember 2020 , we completed our IPO. We issued and sold 9,660,000 shares of common stock at a price to the public of$23.00 per share. The aggregate net proceeds from our IPO were$204.7 million after deducting underwriting discounts and commissions and other offering costs. As ofDecember 31, 2020 , we had cash and cash equivalents of$276.7 million .
Future Funding Requirements
We have experienced recurring net losses and had an accumulated deficit of
145 -------------------------------------------------------------------------------- We expect that our research and development and general and administrative expenses will continue to increase for the foreseeable future. Additionally, we expect our capital expenditures will increase significantly in the future for costs associated with building additional manufacturing capacity. As a result, we will need significant additional capital to fund our operations, which we may obtain through one or more equity offerings, debt financings or other third-party funding, including potential strategic alliances and licensing or collaboration arrangements. Because of the numerous risks and uncertainties associated with the development and commercialization of gene therapy product candidates, we are unable to estimate the amount of increased capital we will need to raise to support our operations and the outlays and operating expenditures necessary to complete the development of our product candidates and build additional manufacturing capacity, and we may use our available capital resources sooner than we currently expect.
Our future capital requirements will depend on many factors, including:
• the progress of our current and future product candidates through
preclinical and clinical development;
• potential delays in our preclinical studies and clinical trials, whether
current or planned, due to the COVID-19 pandemic, or other factors; • expanding our manufacturing facilities and working with our contract
manufacturers to scale up the manufacturing processes for our product
candidates; • continuing our research and discovery activities; • continuing the development of our Therapeutic Vector Evolution platform; • initiating and conducting additional preclinical, clinical or other
studies for our product candidates; • changing or adding additional contract manufacturers or suppliers;
• seeking regulatory approvals and marketing authorizations for our product
candidates; • establishing sales, marketing and distribution infrastructure to commercialize any products for which we obtain approval;
• acquiring or in-licensing product candidates, intellectual property and
technologies;
• making milestone, royalty or other payments due under any current or
future collaboration or license agreements; • obtaining, maintaining, expanding, protecting and enforcing our intellectual property portfolio; • attracting, hiring and retaining qualified personnel; • potential delays or other issues related to our operations; • meeting the requirements and demands of being a public company;
• defending against any product liability claims or other lawsuits related
to our products; and
• the impact of the COVID-19 pandemic, which may exacerbate the magnitude
of the factors discussed above.
We believe that our existing cash and cash equivalents will allow us to fund our planned operations for at least one year from the date of the issuance of the financial statements for the year endedDecember 31, 2020 . We have based our estimates as to how long we expect we will be able to fund our operations on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect, in which case we would be required to obtain additional financing sooner than 146 -------------------------------------------------------------------------------- currently projected, which may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. See the section titled "Risk Factors" for additional risks associated with our substantial capital requirements. We do not have any committed external sources of funds. Accordingly, we will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources to complete the clinical development for the product candidates in treatment of Fabry disease, XLRP or choroideremia or any other indication we may pursue. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing into which we enter would result in fixed payment obligations and may involve agreements that include grants of security interests on our assets and restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, granting liens over our assets, redeeming stock or declaring dividends, that could adversely impact our ability to conduct our business. Any debt financing or additional equity that we raise may contain terms that could adversely affect our common stockholders. Further, additional funds may not be available when we need them, on terms that are acceptable to us, or at all. Our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to and volatility in the credit and financial markets inthe United States and worldwide resulting from the ongoing COVID-19 pandemic. If we are unable to obtain additional funding, we expect to delay, reduce or eliminate some or all of our research and development programs, product portfolio expansion or investment in internal manufacturing capabilities, which could adversely affect our business. If we raise additional funds through collaborations or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to future revenue streams or product candidates or grant licenses on terms that may not be favorable to us.
Summary Statement of Cash Flows
The following is a summary of cash flows for the periods indicated below (in thousands): Year EndedDecember 31, 2020 2019
Net cash used in operating activities
activities 278,983 (2,195 )
Net increase (decrease) in cash and cash
equivalents$ 227,074 $ (42,109 )
Net cash used in operating activities was$50.9 million for the year endedDecember 31, 2020 . This was primarily due to the net loss of$56.7 million and an increase in prepaid expenses of$2.6 million , which were partially offset by stock-based compensation expense of$5.0 million and depreciation and amortization expense of$1.4 million and an increase in accrued and other liabilities of$1.9 million .
Net cash used in operating activities was
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Net cash used in investing activities was
Net cash used in investing activities was
Net Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities was$279.0 million for the year endedDecember 31, 2020 , which was primarily due to$205.7 million of proceeds from our IPO net of paid underwriting discounts and commissions and offering costs and$72.5 million of net proceeds received from the issuance of our Series C redeemable convertible preferred stock in April andJune 2020 .
Net cash used in financing activities was
Contractual Obligations, Commitments and Contingencies
Our commitments include obligations under vendor contracts to provide research services and other purchase commitments with our vendors. In the normal course of business, we enter into services agreements with contract research organizations, contract manufacturing organizations and other third parties. Generally, these agreements provide for termination upon notice, with specified amounts due upon termination based on the timing of termination and the terms of the agreement. The actual amounts and timing of payments under these agreements are uncertain and contingent upon the initiation and completion of the services to be provided. These amounts are not fixed and determinable and therefore are not included in the table below.
The following table summarizes our contractual obligations, commitments and
contingencies as of
Payments Due by Period Less Than More Than Total 1 Year 1-3 Years 3-5 Years 5 Years Operating lease payments$ 27,389 $ 2,956 $ 6,150 $ 6,463 $ 11,820 Total contractual obligations$ 27,389 $ 2,956 $ 6,150 $ 6,463 $ 11,820 InOctober 2018 , we entered into a long-term lease for additional office and laboratory space inEmeryville, California , at a cost of$9.3 million over an 87-month term (the "Second Lease"). We concurrently amended our existing lease to extend the lease term to end at the same time as the Second Lease. InMay 2019 , we amended the Second Lease (the "Second Lease Amendment") to add 17,497 square feet to the space being leased pursuant to the Second Lease. The Second Lease Amendment extended the term of the Second Lease toDecember 31, 2029 .
Critical Accounting Policies and Significant Judgments and Estimates
Our financial statements have prepared in accordance with generally accepted accounting principles inthe United States . The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our financial statements, as well as the reported revenue and expenses during the reported periods. We evaluate these estimates and assumptions on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are 148 --------------------------------------------------------------------------------
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.
Our significant accounting policies are described in Note 2 to our financial statements included elsewhere in this report. We believe the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements and understanding and evaluating our reported financial results.
Revenue Recognition
We determine revenue recognition for arrangements within the scope of ASC 606 by performing the following five steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) we satisfy each performance obligation. Our revenue is primarily derived through our license, research, development and commercialization agreements. The terms of these types of agreements may include (i) licenses to our technology, (ii) research and development services, and (iii) services or obligations in connection with participation in research or steering committees. Payments to us under these arrangements typically include one or more of the following: nonrefundable upfront and license fees, research funding, milestone and other contingent payments to us for the achievement of defined collaboration objectives and certain preclinical, clinical, regulatory and sales-based events, as well as royalties on sales of any commercialized products. Arrangements that include upfront payments are recorded as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a future period until performance obligations are met. The event-based milestone payments, royalties and cost reimbursements represent variable consideration, and we use the most likely amount method to estimate this variable consideration. Royalty payments are recognized when earned or as the sales occur. We record cost reimbursements as accounts receivable when right to consideration is unconditional. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. We allocate the total transaction price to each performance obligation based on the estimated selling price and recognize revenue when, or as, the performance obligation is satisfied. We include the unconstrained amount of estimated variable consideration in the transaction price. At the end of each reporting period, we re-evaluate the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Significant management judgment is required to determine the level of effort required under an arrangement, and the period over which the Company expects to complete its performance obligations under the arrangement. Changes in these estimates can have a material effect on revenue recognized.
We estimate our accrued research and development expenses as of each balance sheet date. This process involves reviewing contracts and purchase orders with service providers, identifying services that have been performed on our behalf and estimating the level of service performed, the expected remaining period of performance and the associated expenses incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. Depending on the timing of payments to the service providers and the estimated expenses incurred, we may record net prepaid or accrued research and development expenses relating to these costs. 149
--------------------------------------------------------------------------------
Examples of estimated accrued research and development expenses include fees paid to:
• CROs in connection with preclinical development and clinical studies; and
• CMOs and other vendors related to process development and manufacturing
of materials for use in preclinical development and clinical studies.
Our understanding of the status and timing of services performed relative to the actual status and timing may vary and may result in us reporting changes in estimates in any particular period. To date, there have been no material differences from our estimates to the amounts actually incurred.
Stock-Based Compensation Expense
We use a fair value-based method to account for all stock-based compensation arrangements with employees and nonemployees including stock options and stock awards. Our determination of the fair value of stock options on the date of grant utilizes the Black-Scholes option pricing model. The fair value of the option granted is recognized on a straight-line basis over the period during which an optionee is required to provide services in exchange for the option award, known as the requisite service period, which usually is the vesting period. Prior toJanuary 1, 2020 , the stock-based compensation expense for nonemployees was subject to remeasurement until the related vesting conditions were met. EffectiveJanuary 1, 2020 , the measurement date for nonemployee awards is the date of grant without changes in the fair value of the award. We account for forfeitures as they occur for both employees and nonemployees.
Estimates of the fair value of equity awards as of the grant date using valuation models such as the Black-Scholes option pricing model are affected by assumptions with a number of complex variables.
Changes in the following assumptions can materially affect the estimate of fair value and ultimately how much stock-based compensation expense is recognized; and the resulting change in fair value, if any, is recognized in our statement of operations and comprehensive loss during the period the related services are rendered. These inputs are subjective and generally require significant analysis and judgment to develop:
• Expected Term-The expected term for employee options is calculated using
the simplified method as we do not have sufficient historical information
to provide a basis for estimate. The simplified method is based on the average of the vesting tranches and the contractual life of each grant.
• Expected Volatility-For all stock options granted to date, the expected
volatility was estimated based on a study of publicly traded industry
peer companies as we did not have sufficient trading history for our common stock. We selected the peer group based on similarities in industry, stage of development, size and financial leverage with our
principal business operations. For each grant, we measured historical
volatility over a period equivalent to the expected term.
• Risk-Free Interest Rate-The risk-free interest rate is based on the yield
available on
duration to the expected term of the respective stock option.
• Expected Dividend Yield-We have not paid and do not currently anticipate
paying any dividends on our common stock. Accordingly, we have estimated
the dividend yield to be zero.
As ofDecember 31, 2020 , the unrecognized stock-based compensation expense related to stock options was$19.4 million and is expected to be recognized as expense over a weighted-average period of approximately 3.1 years. The intrinsic value of all outstanding stock options as ofDecember 31, 2020 was approximately$97.1 million , of which approximately$44.8 million related to vested options and approximately$52.3 million related to unvested options. 150 --------------------------------------------------------------------------------
Common Stock Valuations
Prior to our IPO inDecember 2020 , the estimated fair value of the common stock underlying our stock options and stock awards was determined at each grant date by our board of directors, with assistance from management and external appraisers. All options to purchase shares of our common stock were intended to be exercisable at a price per share not less than the per-share fair value of our common stock underlying those options on the date of grant. The approach to estimate the fair value of our common stock was consistent with the methods outlined in theAmerican Institute of Certified Public Accountants' Practice Aid , Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Subsequent to our IPO, the fair value of our common stock is determined based on its closing market price as reported on the Nasdaq Global Select Market. Income Taxes We account for income taxes under the asset and liability method, which requires, among other things, that deferred income taxes be provided for temporary differences between the financial statement reporting and tax basis of our assets and liabilities. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards and are measured using the enacted tax rates and laws that will be in effect when such items are expected to reverse. A valuation allowance is provided against deferred tax assets unless it is more likely than not that they will be realized. We account for uncertain tax positions by assessing all material positions taken in any assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position's sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit. To date, there have been no interest or penalties charged in relation to the unrecognized tax benefits. NOLs and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service (IRS) and may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50% as defined under Sections 382 and 383 in the Internal Revenue Code, which could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on our value immediately prior to the ownership change. We have experienced ownership changes in the past. As a result of the ownership changes, we determined that$0.9 million of our NOLs will expire unutilized for federal income tax purposes and such amounts are excluded from our NOLs as ofDecember 31, 2020 . Subsequent ownership changes may result in additional limitations.
Off-Balance Sheet Arrangements
Since our inception, we have not engaged in any off-balance sheet arrangements
as defined in the rules and regulations of the
JOBS Act
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). Under the JOBS Act, emerging growth companies may delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, while we are an emerging growth company, we will not be subject to new or revised accounting standards at the same time that they become applicable to other public companies that are not emerging growth companies. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. 151 -------------------------------------------------------------------------------- We will remain an emerging growth company until the earlier of (i) the last day of the year following the fifth anniversary of the completion of our IPO, (ii) the last day of the year in which we have total annual gross revenue of at least$1.07 billion , (iii) the last day of the year in which we are deemed to be a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded$700.0 million as of the last business day of the second fiscal quarter of such year, or (iv) the date on which we have issued more than$1.0 billion in non-convertible debt securities during the prior three-year period. An emerging growth company may take advantage of specified reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company: • we will present only two years of audited financial statements for any interim period, and related management's discussion and analysis of financial condition and results of operations;
• we will avail ourselves of the exemption from the requirement to obtain
an attestation and report from our auditors on the assessment of our
internal control over financial reporting pursuant to the Sarbanes-Oxley
Act of 2002 (the "Sarbanes-Oxley Act"); • we will provide less extensive disclosure about our executive compensation arrangements;
• we will not require stockholder non-binding advisory votes on executive
compensation or golden parachute arrangements; and
• we will take advantage of extended transition periods to comply with new
or revised accounting standards, delaying the adoption of these
accounting standards until they would apply to private companies.
As a result, the information in this report in the future may be different than what you might receive from other public reporting companies.
Recent Accounting Pronouncements
See Note 2 to our financial statements included elsewhere in this report for information.
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