APPLIED THERAPEUTICS, INC. 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. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and related financing, 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, our actual results could differ materially from the results described in or implied by these forward-looking statements.
Overview
We are a clinical-stage biopharmaceutical company developing a pipeline of novel
product candidates against validated molecular targets in indications of high
unmet medical need. We focus on molecules and pathways whose role in the disease
process is well known based on prior research, but have previously failed to
yield successful products due to poor efficacy and tolerability. Our unique
approach to drug development leverages recent technological advances to design
improved drugs, employs early use of biomarkers to confirm biological activity
and focuses on abbreviated regulatory pathways. Our first molecular target is
aldose reductase, or AR, an enzyme that converts glucose to sorbitol
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under oxidative stress conditions, and is implicated in multiple diseases. Prior attempts to inhibit this enzyme were hindered by nonselective, nonspecific inhibition, which resulted in limited efficacy and significant off-target safety effects. The detrimental consequences of AR activation have been well established by decades of prior research. Our AR program currently includes three small molecules, which are all potent and selective inhibitors of AR, but are engineered to have unique tissue permeability profiles to target different disease states, including diabetic complications, heart disease and rare metabolic diseases. Using similar strategies to our ARI program, we have also developed a program targeting selective inhibition of phosphatidylinositol 3-kinase, or PI3K, subunits, which has produced an early-stage oncology pipeline. The result of this unique multifaceted approach to drug development is a portfolio of highly specific and selective product candidates that we believe are significantly de-risked and can move quickly through the development process. AT-007 is a novel central nervous system, or CNS, penetrant ARI that we are developing for the treatment of rare metabolic diseases, including Galactosemia, a devastating rare pediatric metabolic disease that affects how the body processes a simple sugar called galactose, and for which there is no known cure or approved treatment available. TheU.S. Food and Drug Administration , or FDA, has granted both orphan drug designation and rare pediatric disease designation to AT-007 for the treatment of Galactosemia and inJune 2021 , the FDA granted Fast Track Designation to AT-007 for the treatment of Galactosemia. We have completed an adult study in healthy volunteers and Galactosemia patients, demonstrating that AT-007 is safe and well tolerated, and significantly reduces plasma galactitol levels vs. placebo. Galactitol is a toxic metabolite of galactose, which is formed in Galactosemia patients by aberrant activity of aldose reductase when galactose is present at high levels. A pediatric study is underway in children with Galactosemia, assessing the impact of AT-007 vs. placebo on safety, biomarker reduction of galactitol, and long-term functional outcomes. OnApril 13, 2021 , we presented data featuring a cross-sectional analysis of nineteen pediatric patients with Classic Galactosemia, providing meaningful insight on the progressive worsening of the central nervous system phenotype with age. OnOctober 18, 2021 we reported biomarker data from the pediatric ACTION-Galactosemia Kids study. The results demonstrate a substantial reduction in plasma galactitol of approximately 40%, which was statistically significant (p<0.001) vs. placebo. We previously reported a baseline analysis of the 47 children enrolled in the study which demonstrated a clear correlation between baseline galactitol levels and baseline clinical functional outcomes. The long-term functional outcomes portion of the pediatric study is ongoing. AT-007 is also being studied in a rare disease caused by Sorbitol Dehydrogenase deficiency, called SORD deficiency. Aldose Reductase is the first enzyme in the polyol pathway, converting glucose to sorbitol. AR is then followed by Sorbitol Dehydrogenase, which converts sorbitol to fructose. Patients with SORD deficiency accumulate very high levels of sorbitol in their cells and tissues as a result of the enzyme deficiency, which results in tissue toxicities such as peripheral neuropathy and motor neuron disease. Recent research in drosophila and cell models of SORD deficiency demonstrated that treatment with an ARI that blocks sorbitol production may provide benefit in this disease. Preclinical studies on AT-007 have demonstrated significant reduction in sorbitol levels in fibroblasts from SORD deficient patients. Treatment with AT-007 in the drosophila model of SORD prevented the disease phenotype and protected from neuronal degeneration. OnOctober 25, 2021 , we reported data from a pilot open-label study in 8 SORD Deficiency patients. AT-007 reduced blood sorbitol levels by approximately 66% from baseline through 30 days of treatment. AT-007 was safe and well tolerated in all treated patients. InDecember 2021 we initiated a Phase 2/3 registrational study in patients with SORD Deficiency, which will take place at multiple clinical sites in the US andEurope . We are in the process of discussing regulatory requirements for approval in SORD deficiency and plan to advance AT-007 towards registration for this indication. We also plan to initiate a clinical development program on AT-007 in another pediatric rare disease, called PMM2-CDG. PMM2-CDG is a glycosylation disorder caused by deficiencies in the enzyme phosphomannomutase 2, which leads to CNS symptoms similar to galactosemia, including low IQ, tremor, and speech and motor problems. Aldose Reductase is over-activated in this disease as a compensatory consequence of PMM2 deficiency, and a CNS penetrant ARI may be a compelling clinical option. Initial data in fibroblast cell lines derived from PMM2-CDG patients demonstrates that AT-007 treatment increases phosphomannomutase 2 activity. The FDA has granted pediatric rare disease designation and orphan designation for AT-007 in PMM2-CDG.
AT-001 is a novel ARI with broad systemic exposure and peripheral nerve permeability that we are developing for the treatment of diabetic cardiomyopathy, or DbCM, a fatal fibrosis of the heart, for which no treatments are
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available. We completed a Phase 1/2 clinical trial evaluating AT-001 in
approximately 120 patients with type 2 diabetes, in which no drug-related
adverse effects or tolerability issues were observed. In September 2019 , we
announced the initiation of a Phase 3 registrational trial of AT-001 in DbCM.
The study, called ARISE-HF, is designed to evaluate AT-001's ability to improve
or prevent the decline of functional capacity in patients with DbCM at high risk
of progression to overt heart failure. Although we did experience enrollment
delays in 2020 associated with the Covid-19 pandemic, modifications were made to
the trial to include additional sites and geographies to address
Covid-19-related issues.
AT-003 is a novel ARI designed to cross through the back of the eye when dosed
orally, and has demonstrated strong retinal penetrance, for the treatment of
diabetic retinopathy, or DR. DR is an ophthalmic disease that occurs in diabetic
patients and for which treatments are currently limited to high-cost biologics
requiring intravitreal administration. DR has been linked to AR activity,
including elevations in sorbitol and subsequent changes in retinal blood
vessels, which distorts vision and leads to permanent blindness.
AT-104 is a dual selective PI3K inhibitor in preclinical development for T Cell
Acute Lymphoblastic Leukemia ("T-ALL"). AT-104 has demonstrated significant
benefit in both in vitro and in vivo models of T-ALL. In
As we advance our product candidates forward in additional indications, such as SORD deficiency, PMM2-CDG and retinopathy, we anticipate potential moderate growth in our clinical development and operations teams to support the additional clinical trials, as well as addition of a medical affairs team to support the late stage indications and preparations for commercialization. Since inception in 2016, our operations have focused on developing our product candidates, organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio and conducting clinical trials. We do not have any product candidates approved for sale and have not generated any revenue. We have incurred significant operating losses since inception in 2016. Our ability to generate product revenue sufficient to achieve profitability will depend on the successful development and commercialization of one or more of our product candidates. Our net loss was$105.6 million for the year endedDecember 31, 2021 . As ofDecember 31, 2021 , we had an accumulated deficit of$266.3 million . We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future in connection with our ongoing activities. Furthermore, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses. As ofDecember 31, 2021 , we had cash and cash equivalents and short-term investments of$80.8 million .
InJanuary 2020 , we issued and sold 2,741,489 shares of our common stock at a public offering price of$45.50 per share, with an additional 411,223 shares sold pursuant to the underwriters' full exercise of their option to purchase additional shares in the Secondary Public Offering. We received aggregate proceeds, net of underwriting discounts and commissions and offering costs of$134.1 million .
InFebruary 2021 , we issued and sold 3,000,000 shares of common stock at a public offering price of$23.00 per share, with an additional 450,000 shares sold pursuant to the underwriters' full exercise of their option to purchase additional shares in the February Offering. We received aggregate proceeds, net of underwriting discounts and commissions and offering costs of$74.4 million . 83 Table of Contents
Components of Our Results of Operations
Revenue
Since inception, we have not generated any revenue and do not expect to generate any revenue from the sale of products in the near future. If our development efforts for our product candidates are successful and result in regulatory approval, or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from collaboration or license agreements.
Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts and the development of our product candidates, and include:
employee-related expenses, including salaries, related benefits and stock-based
? compensation expense for employees engaged in research and development
functions;
? fees paid to consultants for services directly related to our product
development and regulatory efforts;
expenses incurred under agreements with contract research organizations, or
? CROs, as well as contract manufacturing organizations, or CMOs, and consultants
that conduct and provide supplies for our preclinical studies and clinical
trials;
? costs associated with preclinical activities and development activities;
? costs associated with our technology and our intellectual property portfolio;
and
? costs related to compliance with regulatory requirements.
We expense research and development costs as incurred. Costs for external
development activities are recognized based on an evaluation of the progress to
completion of specific tasks using information provided to us by our vendors.
Payments for these activities are based on the terms of the individual
agreements, which may differ from the pattern of costs incurred, and are
reflected in our financial statements as prepaid or accrued research and
development expenses.
Research and development costs also include costs incurred in connection with
certain licensing arrangements. Before a compound receives regulatory approval,
we record upfront and milestone payments made by us to third parties under
licensing arrangements as expense. Upfront payments are recorded when incurred,
and milestone payments are recorded when the specific milestone has been
achieved. Once a compound receives regulatory approval, we will record any
milestone payments in Identifiable intangible assets, less accumulated
amortization and, unless the asset is determined to have an indefinite life, we
will amortize the payments on a straight-line basis over the remaining agreement
term or the expected product life cycle, whichever is shorter.
Research and development activities are central to our business model. We expect
that our research and development expenses will continue to increase for the
foreseeable future as we continue clinical development for our product
candidates and continue to discover and develop additional product candidates.
If any of our product candidates enter into later stages of clinical
development, they will generally have higher development costs than those in
earlier stages of clinical development, primarily due to the increased size and
duration of later-stage clinical trials. Historically, we have incurred research
and development expenses that primarily relate to the development of AT-007,
AT-001 and our ARI program. As we advance our product candidates, we expect to
allocate our direct external research and development costs across each of the
indications or product candidates.
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The following table summarizes our research and development expenses for the
years ended
Year Ended
December 31,
(in thousands) 2021 2020
Product pipeline research and development expenses
AT-001 $ 22,861 $ 26,897
AT-007 30,669 25,753
Personnel-related expenses 5,529 3,351
Stock-based compensation 2,759 2,580
Other expenses 752 3,207
Total research and development expenses $ 62,570 $ 61,788 General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, and commercial functions. General and administrative expenses also include professional fees for legal, accounting, auditing, tax and consulting services; travel expenses; and facility-related expenses, which include allocated expenses for rent and maintenance of facilities and other operating costs.
Commercial expenses consist of payroll expense for commercial personnel, as well as marketing, market research, market access, and other focused investments to support launch of drug candidates, generate evidence of commercial potential and value proposition, and maximize potential business development deal leverage. Commercial expenses are included in general and administrative expenses. We expect that our general and administrative expenses will increase in the future as we increase our general and administrative headcount to support our continued research and development and potential commercialization of our product candidates. We also expect to incur increased expenses associated with being a public company, including costs of accounting, audit, legal, regulatory and tax compliance services; director and officer insurance costs; and investor and public relations costs. Other Income (Expense), Net
Other income (expense), net consists of interest income (expense), net, and
other income (expense), net. Interest income (expense), net consists primarily
of our interest income on our cash and cash equivalents and marketable
securities. Other income (expense), net consists primarily of realized gains and
losses on sales of marketable securities.
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Results of Operations
The following table summarizes our results of operations:
Years Ended
December 31,
(in thousands) 2021 2020
Operating expenses:
Research and development $ 62,570 $ 61,788
General and administrative 43,048 32,678
Total operating expenses 105,618 94,466
Loss from operations (105,618) (94,466)
Other income (expense), net:
Interest income (expense), net 555 559
Other income (expense) (521) (54)
Other income (expense), net 34 505
Net loss $ (105,584) $ (93,961) Research and Development Expenses
The following table summarizes our research and development expenses:
Year Ended
December 31,
(in thousands) 2021 2020 Increase / (Decrease)
Clinical and pre-clinical $ 40,323 $ 28,736 $ 11,587Drug manufacturing and formulation 11,910 24,424
(12,514)
Personnel expenses 5,529 3,351 2,178
Stock-based compensation 2,759 2,580 179
Regulatory and other 2,049 2,697 (648)Total research and development expenses$ 62,570 $ 61,788 $ 782
Research and development expenses for the year ended
an increase in clinical and pre-clinical expense of
? related to the progression of the AT-007 ACTION-Galactosemia adult extension
and the AT-007 ACTION-Galactosemia Kids pediatric registrational study;
a decrease in drug manufacturing and formulation expenses of
? primarily related to the completion and release of AT-001 and AT-007 drug
product batches in the three months ended
? an increase in personnel expenses of
headcount in support of our clinical program pipeline;
an increase in stock-based compensation of
? and restricted stock unit grants, offset by forfeitures of stock option and
restricted stock unit grants;
? a decrease of regulatory and other expenses of
to the UM license fees recognized during the year ended
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General and Administrative Expenses
The following table summarizes our general and administrative expenses:
Year Ended
December 31,
(in thousands) 2021 2020 Increase / (Decrease)
Legal and professional fees $ 6,340 $ 8,451 $ (2,111)
Commercial expenses 11,341 5,746 5,595
Personnel expenses 6,617 5,651 966
Stock-based compensation 8,418 5,446 2,972
Insurance expenses 4,399 3,764 635
Other expenses 5,933 3,620 2,313Total general and administrative expenses$ 43,048 $ 32,678 $ 10,370
General and administrative expenses were
? a decrease in professional and legal fees of
consulting and legal fees;
? an increase of
? an increase in personnel expenses of
stock-based compensation of
? an increase of insurance expenses of
directors and officers liability insurance costs; and
? an increase in other expenses of
costs of rent and other office expenses.
Other Income (Expense), Net
Other income (expense), net was income of approximately$34,000 for the year endedDecember 31, 2021 , compared to income of$0.5 million for the year endedDecember 31, 2020 . The decrease was primarily related to realized losses incurred by our available-for-sale securities portfolio during the year endedDecember 31, 2021 .
Liquidity and Capital Resources
Since our inception throughDecember 31, 2021 , we have not generated any revenue and have incurred significant operating losses and negative cash flows from our operations. The accompanying financial statements have been prepared assuming the continuation of the Company as a going concern. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and is dependent on debt and equity financing to fund its operations. The report of our independent registered public accounting firm on our financial statements for the year endedDecember 31, 2021 includes an explanatory paragraph regarding the existence of substantial doubt about our ability to continue as a going concern. While we believe that our cash and cash equivalents of$80.8 million atDecember 31, 2021 will be sufficient to fund our operations through year end 2022, given our planned expenditures for the next several years, we have concluded and our independent registered public accounting firm has agreed with our conclusion that there is still a substantial doubt regarding our ability to continue as a going concern. 87 Table of Contents Cash Flows The following table summarizes our cash flows for each of the periods presented: Year Ended December 31, (in thousands) 2021 2020 Net cash used in operating activities$ (90,728) $
(78,209)
Net cash provided by/(used in) investing activities 12,433 (19,469) Net cash provided by financing activities
74,717 136,294
Net increase (decrease) in cash and cash equivalents
Operating Activities During the year endedDecember 31, 2021 , operating activities used cash of$90.7 million , due to our net losses of$105.6 million , a decrease in operating lease liability of$0.4 million , a decrease in financed insurance premium of$4.4 million , a decrease of$3.3 million in accrued expense, and a decrease in prepaid expenses of$1.7 million . This is partially offset by increases of$8.8 million in accounts payable,$11.2 million in non-cash stock-based compensation expense, and$4.3 million of amortization of insurance premium, and$0.4 million in amortization of operating lease right-of-use assets.
During the year ended
Investing Activities
Net cash provided by investing activities for the year endedDecember 31, 2021 was$12.4 million relating to our purchases of available-for-sale marketable securities for$121.6 million and proceeds from the sale and maturities of available-for-sale marketable securities for$134.0 million .
Net cash used in investing activities for the year ended
Financing Activities
During the year endedDecember 31, 2021 , net cash provided by financing activities was$74.7 million , primarily from the cash proceeds from the secondary offering of$74.4 million ,$0.5 million from the exercise of stock options for common stock under the 2019 Plan, and$69,000 from the exercise of warrants for common stock, and$4.4 million from the proceeds from financed insurance premium. This was partially offset by the repayment of short-term borrowings of$4.7 million . InJune 2020 , we entered into an equity distribution agreement (the "2020 Equity Distribution Agreement") withGoldman Sachs & Co. LLC as a sales agent, to sell shares of our common stock, from time to time, having an aggregate offering price of up to$100 million . As ofDecember 31, 2021 , we had received no proceeds from the sale of shares of common stock pursuant to the 2020 Equity Distribution Agreement. The 2020 Equity Distribution Agreement was terminated as ofJanuary 24, 2022 .
During the year ended
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Funding Requirements
We expect our expenses to increase substantially in connection with our ongoing
activities, particularly as we advance the preclinical activities and clinical
trials of our product candidates. We believe that our expenses may increase
significantly if and as we:
? continue the ongoing and planned development of our product candidates;? initiate, conduct and complete any ongoing, anticipated or future preclinical
studies and clinical trials for our current and future product candidates;
? seek marketing approvals for any product candidates that successfully complete
clinical trials;
establish a sales, marketing, manufacturing and distribution infrastructure to
? commercialize any current or future product candidate for which we may obtain
marketing approval;
? seek to discover and develop additional product candidates;
? continue to build a portfolio of product candidates through the acquisition or
in-license of drugs, product candidates or technologies;
? maintain, protect and expand our intellectual property portfolio;
? hire additional clinical, regulatory and scientific personnel; and
add operational, financial and management information systems and personnel,
? including personnel to support our product development and planned future
commercialization efforts.
Furthermore, we have and expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses.
Due to the numerous risks and uncertainties associated with the development of our product candidates and programs, and because the extent to which we may enter into collaborations with third parties for development of our product candidates is unknown, we are unable to estimate the timing and amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our future funding requirements, both near and long-term, will depend on many factors, including:
? the initiation, scope, progress, timing, costs and results of our ongoing and
planned clinical trials for our product candidates;
? the outcome, timing and cost of meeting regulatory requirements established by
the FDA and other comparable foreign regulatory authorities;
? the cost of filing, prosecuting, defending and enforcing our patent claims and
other intellectual property rights;
? the cost of defending potential intellectual property disputes, including
patent infringement actions;
? the achievement of milestones or occurrence of other developments that trigger
payments under the Columbia Agreements or other agreements we may enter into;
? the extent to which we are obligated to reimburse, or entitled to reimbursement
of, clinical trial costs under future collaboration agreements, if any;
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? the effect of competing technological and market developments;
? the cost and timing of completion of clinical or commercial-scale manufacturing
activities;
? the costs of operating as a public company;
? the extent to which we in-license or acquire other products and technologies;
? our ability to establish and maintain collaborations on favorable terms, if at
all;
the cost of establishing sales, marketing and distribution capabilities for our
? product candidates in regions where we choose to commercialize our product
candidates, if approved; and
? the initiation, progress, timing and results of the commercialization our
product candidates, if approved, for commercial sale.
A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate.
Until such time, if ever, that we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through offerings of securities, PIPE, debt financings, collaborations or other strategic transactions. The terms of financing may adversely affect the holdings or the rights of our stockholders. Funding may not be available to us on acceptable terms, or at all. If we are unable to obtain funding, we may be required to delay, limit, reduce or terminate some or all of our research and product development, product portfolio expansion or future commercialization efforts. 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.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as ofDecember 31, 2021 : Payments Due By Period Less Than More Than (in thousands) Total 1 Year 1 to 3 Years 4 to 5 Years 5 Years
Operating lease commitments(1)$ 1,446 $ 507 $ 939
$ - $ - Total$ 1,446 $ 507 $ 939 $ - $ -
(1) Represents future minimum lease payments under our operating leases for
office space.
Except as disclosed in the table above, we have no long-term debt or capital leases and no material non-cancelable purchase commitments with service providers, as we have generally contracted on a cancelable, purchase-order basis. We enter into contracts in the normal course of business with CROs, CMOs and other third parties for clinical trials, preclinical research studies and testing and manufacturing services. These contracts are cancelable by us upon prior notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to the date of cancellation. These payments are not included in the preceding table as the amount and timing of such payments are not known. We may incur potential contingent payments upon our achievement of clinical, regulatory and commercial milestones, as applicable, or royalty payments that we may be required to make under the 2016 and 2019 Columbia Agreements, the 2020 Miami License Agreement, the 2020 Miami Option Agreement, and the 2020 Miami Research Agreement, pursuant to which we have in-licensed certain intellectual property. Due to the uncertainty of the achievement and timing of the events requiring payment under these agreements, the amounts to be paid by us are
not
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fixed or determinable at this time and are excluded from the table above. See
the section titled "Business-Exclusive License Agreement with
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles, orU.S. GAAP. The preparation of our financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, costs and expenses and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in greater detail in Note 1 to our financial statements appearing elsewhere in this Annual Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.
We expense all costs incurred in performing research and development activities. Research and development expenses include materials and supplies, preclinical expenses, manufacturing expenses, contract services and other outside expenses. As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses. We make estimates of our accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known to us at that time. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or the amount of prepaid expenses accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed. Research and development costs also include costs incurred in connection with certain licensing arrangements. Before a compound receives regulatory approval, we record upfront and milestone payments made by us to third parties under licensing arrangements as expense. Upfront payments are recorded when incurred, and milestone payments are recorded when the specific milestone has been achieved. Once a compound receives regulatory approval, we will record any milestone payments in Identifiable intangible assets, less accumulated amortization and, unless the asset is determined to have an indefinite life, we will amortize the payments on a straight-line basis over the remaining agreement term or the expected product life cycle, whichever is shorter.
Stock-Based Compensation
We account for our stock-based compensation as expense in the statements of operations based on the awards' grant date fair values. We account for forfeitures as they occur by reversing any expense recognized for unvested awards.
We estimate the fair value of options granted using the Black-Scholes option
pricing model. The Black-Scholes option pricing model requires inputs based on
certain subjective assumptions, including (a) the expected stock price
volatility, (b) the calculation of expected term of the award, (c) the risk-free
interest rate and (d) expected dividends. Due
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to a historical lack of a public market for our common stock and a lack of company-specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. The computation of expected volatility is based on the historical volatility of a representative group of companies with similar characteristics to us, including stage of product development and life science industry focus. We use the simplified method as allowed by theSEC Staff Accounting Bulletin No. 107, Share-Based Payment, to calculate the expected term for options granted as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The expected dividend yield is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock. The fair value of stock-based payments is recognized as expense over the requisite service period which is generally the vesting period.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 1 to our financial statements appearing elsewhere in this Annual Report.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act of 2012 permits an "emerging growth company" such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to "opt out" of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.
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