You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial statements and related notes included elsewhere in this Annual Report. In addition to historical financial information, the following discussion contains forward-looking statements that involve risks and uncertainties. You should carefully read the sections entitled "Special Note Regarding Forward-Looking Statements" and "Risk Factors" to gain an understanding of the important factors that could cause our actual results to differ materially from those expressed or implied in any forward-looking statements.
Overview
We are a clinical-stage biopharmaceutical company focused on developing transformative medicines for the treatment of diseases of the retina and optic nerve. Our novel proprietary technologies are designed to release drugs in ocular tissue at a controlled rate for up to 12 months in order to improve patient compliance, reduce healthcare burdens and, ultimately, deliver better clinical outcomes. Our lead product candidate, GB-102, is an intravitreal injection of a microparticle depot formulation of sunitinib, a potent inhibitor of neovascular growth and permeability, which are leading causes of retinal disease. We are developing GB-102 as a once-every-six months intravitreal injection for the treatment of wet age-related macular degeneration, or wet AMD, and diabetic macular edema, or DME. In our Phase 1/2a clinical trial, GB-102 administered as a single 1 mg dose was well-tolerated in wet AMD patients and demonstrated durable clinical evidence of disease control of at least six months in approximately 88% of patients in this cohort. GB-102 has completed the treatment phase of a dose-ranging, controlled and masked safety and efficacy Phase 2b clinical trial in patients with wet AMD. We expect to report topline data from this trial in March of 2021. We are also using our proprietary technologies to develop GB-103, a once-a-year formulation of GB-102, for the treatment of diabetic retinopathy, or DR, as well as GB-401, an intravitreally injectable depot formulation of a beta-adrenergic blocking agent prodrug with a dosing regimen of once-every-six months or longer for the treatment of primary open-angle glaucoma, or POAG. We believe that our product candidates could significantly improve clinical outcomes versus the respective standards of care for several ocular diseases. We were incorporated inMay 2011 and our operations to date have been financed primarily by gross proceeds of approximately$134.0 million from the issuance of convertible promissory notes and convertible preferred stock, and$92.0 million in net proceeds from our initial public offering of our common stock, or IPO, after deducting underwriters' discounts and commissions of$7.2 million and offering costs of$4.2 million . Since inception, we have had significant operating losses. Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures and, to a lesser extent, general and administrative expenditures. Our net loss was$27.5 million and$37.0 million for the years endedDecember 31, 2020 and 2019, respectively. As ofDecember 31, 2020 , we had an accumulated deficit of$133.4 million and cash, cash equivalents and short-term investments of$95.0 million . We expect to continue to incur net losses for the foreseeable future, and we expect our research and development expenses, general and administrative expenses, and capital expenditures to continue to increase. In particular, we expect our expenses to increase as we continue our development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products, as well as hire additional personnel, develop commercial infrastructure, pay fees to outside consultants, lawyers and accountants, and incur increased costs associated with being a public company, such as expenses related to services associated with maintaining compliance with Nasdaq listing rules andSEC reporting requirements, insurance and investor relations. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending upon the timing of our clinical trials and our expenditures on other research and development activities. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our accounts payable and accrued research and development and other current liabilities. Recent Developments Initial Public Offering OnSeptember 29, 2020 , we completed our IPO. As a result of the IPO, we issued and sold an aggregate of 6,468,750 shares of our common stock (inclusive of 843,750 shares issued and sold pursuant to the exercise of the underwriters' option to purchase additional shares onOctober 22, 2020 ) at a price of$16.00 per share for net proceeds of$92.0 million , after deducting underwriting discounts, commissions and offering expenses. Prior to the completion of the IPO, all 117,809,883 shares of our redeemable convertible preferred stock then outstanding were converted into 13,085,913 shares of common stock.
Business Effects of COVID-19
The current COVID-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting our employees, patients, clinicians, communities and business operations, as well as theU.S. economy and financial markets. To date, our financial condition and operations have not been significantly impacted by the COVID-19 outbreak; however, the full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations, liquidity and financial 77 -------------------------------------------------------------------------------- condition will depend on future developments, which are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets. To date, our contract research organizations, or CROs, contract manufacturing organizations, or CMOs, and other vendors have been able to continue to provide services and supply reagents, materials, and products and currently do not anticipate any disruption in services or interruptions in supply. Our CMOs continue to operate their manufacturing facilities at or near normal levels. While we currently do not anticipate any interruptions in our manufacturing process, it is possible that the COVID-19 pandemic and response efforts may have an impact in the future on our third-party suppliers' and contract manufacturing partners' ability to manufacture reagents, materials or products that we need to use in our research and upcoming clinical trials. However, we are continuing to assess the potential impact of the COVID-19 pandemic on our business and operations, including our expenses, our clinical trials, and our ability to hire and retain employees. While we are currently continuing to monitor patients in our ALTISSIMO clinical trial at sites acrossthe United States , we expect that COVID-19 precautions may directly or indirectly impact the timeline for some of our clinical trial activities due to the inability of patients to come to their monitoring visits, the closing of eye clinics, and/or diversion of resources that are necessary to conduct our observational study to care for COVID-19 patients. The COVID-19 pandemic has caused us to modify our business practices including, but not limited to, curtailing or modifying employee travel, moving to partial remote work, and cancelling physical participation in meetings, events and conferences. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, patients, clinicians, and business partners. The majority of our office-based employees have been working from home sinceMarch 2020 , while ensuring essential staffing levels to support our operations remain in place, including maintaining key personnel in our laboratories.
For additional information on the various risks posed by the COVID-19 pandemic, please read Item 1A. Risk Factors.
Components of Operating Results
Research and Development Expenses
Our research and development expenses include:
• personnel costs, which include salaries, benefits and stock-based compensation;
• expenses incurred under agreements with consultants and third-party
contract organizations that conduct research and development activities on
our behalf; • costs related to sponsored research service agreements;
• costs related to production of preclinical and clinical materials,
including fees paid to contract manufacturers;
• laboratory and vendor expenses related to the execution of preclinical
studies and planned clinical trials;
• milestones and royalty expense from our Johns Hopkins University Exclusive
License Agreement; • laboratory supplies and materials used for internal research and development activities; and • facilities and equipment costs. Most of our research and development expenses have been related to the preclinical and clinical development of GB-102. We have not reported program costs since inception because we have not historically tracked or recorded our research and development expenses on a program-by-program basis. We use our personnel and infrastructure resources across the breadth of our research and development activities, which are directed toward identifying and developing product candidates. We expense all research and development costs in the periods in which they are incurred. Costs for certain research and development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and third-party service providers. We expect our research and development expenditures to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, including investments in manufacturing, as we 78
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advance our programs and conduct clinical trials. 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.
Because of the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration and completion costs of the current or future preclinical studies and clinical trials or if, when, or to what extent we will generate revenues from the commercialization and sale of our product candidates. We may never succeed in achieving regulatory approval for our product candidates. The duration, costs and timing of preclinical studies and clinical trials and development of our product candidates will depend on a variety of factors, including:
• successful completion of preclinical studies and clinical trials to the
satisfaction of the
• that our product candidates are safe and effective for any of their
proposed indications;
• acceptance of our products, if and when approved, by patients, the medical
community and third-party payors; • effectively competing with other therapies; • maintaining a continued acceptable safety profile of our products following approval;
• obtaining and maintaining coverage and adequate reimbursement from
third-party payors;
• applying for and receiving marketing approvals from applicable regulatory
authorities for our product candidates;
• scaling up our manufacturing processes and capabilities to support
additional or larger clinical trials of our product candidates and
commercialization of any of our product candidates for which we obtain
marketing approval;
• developing, validating and maintaining a commercially viable manufacturing
process that is compliant with current good manufacturing practices;
• developing and expanding our sales, marketing and distribution
capabilities and launching commercial sales of our product candidates, if
and when approved, whether alone or in collaboration with others;
• minimizing and managing any delay or disruption to our ongoing or planned
clinical trials, and any adverse impacts to the
pharmaceutical products, including as a result of the current COVID-19
pandemic; • obtaining and maintaining patent and trade secret protection and regulatory exclusivity; • protecting our rights in our intellectual property portfolio; and
• the impact of the COVID-19 pandemic and the corresponding responses of
businesses and governments.
We may never succeed in achieving regulatory approval for any of our product candidates. We may obtain unexpected results from our preclinical studies and clinical trials. We may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. A change in the outcome of any of these factors could mean a significant change in the costs and timing associated with the development of our current and future preclinical and clinical product candidates. For example, if the FDA, or another regulatory authority, were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development, or if we experience significant delays in the execution of or enrollment in any of our preclinical studies or clinical trials, we could be required to expend significant additional financial resources and time on the completion of preclinical and clinical development.
General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel costs, costs related to maintenance and filing of intellectual property, and other expenses for outside professional services, including legal, human resources, audit, and accounting services. Personnel costs consist of salaries, benefits and stock-based compensation expense. We expect our general and administrative expenses to increase over the next several years to support our expanding headcount and operations, increased costs of operating as a public company, the development of a commercial infrastructure to support the potential commercialization of our product candidates, and the use of outside service providers such as insurers, consultants, lawyers, and accountants.
Interest Income
Our interest income principally reflects interest earned on our investments. Our investments includeU.S. government-backed money-market funds, corporate debt securities, commercial paper and government agency bonds. We place cash in excess of immediate requirements into a custodial account and invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. 79
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Preferred Stock Tranche Obligation
We provided investors in our Series C preferred stock the option to buy additional shares upon our achievement of certain development milestones, or the Preferred Stock Tranche Obligation. The fair value of the Preferred Stock Tranche Obligation was remeasured and adjusted to fair value each reporting period until its expiration using an option pricing valuation methodology. InSeptember 2020 , our board of directors and the Series C investors amended the Series C stock purchase agreement such that the option to purchase additional shares of our Series C preferred stock would no longer be exercisable and would expire upon the effectiveness of our IPO registration statement. As a result, the Preferred Stock Tranche Obligation expired upon the effectiveness of our IPO registration statement onSeptember 24, 2020 .
Results of Operations
Comparison of the Years Ended
The following sets forth our results of operations (dollars in thousands):
Year Ended December 31, Change 2020 2019 Amount % Operating expenses: Research and development$ 20,962 $ 30,580 $ (9,618 ) (31 )% General and administrative 8,870 6,922 1,948 28 % Total operating expenses 29,832 37,502 (7,670 ) (20 )% Loss from operations (29,832 ) (37,502 ) 7,670 20 % Interest income 143 393 (250 ) (64 )% Change in fair value of preferred stock tranche obligation 2,158 72 2,086 NM Net loss$ (27,531 ) $ (37,037 ) $ 9,506 26 % NM = Not meaningful
Research and Development Expenses
Research and development expenses comprised (dollars in thousands):
Year Ended December 31, Change 2020 2019 Amount %
CRO, CMO, nonclinical and other services
$ (8,250 ) (44 )% Personnel costs 6,485 5,854 631 11 % Consulting 1,332 886 446 50 % Materials and supplies 723 2,793 (2,070 ) (74 )% Facility costs, travel and other 2,016 2,391 (375 ) (16 )% Total research and development expenses$ 20,962 $ 30,580 $ (9,618 ) (31 )%
As of
Our research and development activities consist primarily of costs associated with the development of GB-102 for which we are conducting oneU.S. Phase 2 clinical trial in patients with wet AMD, and oneU.S. Phase 2 trial for DME, which was completed in 2020. Research and development expenses were$21.0 million in 2020 compared to$30.6 million in 2019. The decrease was primarily due to the completion in 2019 of manufacturing the clinical supplies required for the commencement of our Phase 2b, or ALTISSIMO, trial for GB-102, and the fact that we did not engage in any primary manufacturing activities in the year endedDecember 31, 2020 . 80
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General and Administrative Expenses
General and administrative expenses to support our business activities comprised (dollars in thousands): Year Ended December 31, Change 2020 2019 Amount % Personnel costs$ 3,283 $ 2,813 $ 470 17 % Professional services 3,031 1,829 1,202 66 % Patent filing and portfolio costs 1,125 1,482 (357 ) (24 )% Facility costs, travel and other expenses 1,431 798 633 79 %
General and administrative expenses
$ 1,948 28 %
As of
General and administrative expenses were$8.9 million in 2020 compared to$6.9 million in 2019. The increase was primarily due to additional professional services, related in part to preparation for our IPO, and the increased cost of additional D&O insurance as a result of becoming a public company.
Interest Income
Interest income was
Preferred Stock Tranche Obligation
The change in fair value of Preferred Stock Tranche Obligation for the year endedDecember 31, 2020 relates to the fair value adjustments of$2.2 million primarily due to the$2.1 million gain recognized upon the expiration of this instrument in connection with our IPO. InSeptember 2020 , the Preferred Stock Tranche Obligation expired upon the effectiveness of the IPO registration statement onSeptember 24, 2020 , resulting in a corresponding elimination of the associated liability.
Liquidity and Capital Resources
Overview
To date, we have incurred loss and negative cash flow from operations. As ofDecember 31, 2020 , we had available cash, cash equivalents and short-term investments of$95.0 million and an accumulated deficit of$133.4 million . Prior to our IPO, our operations had been financed primarily by gross proceeds of approximately$134.0 million from the sale of convertible promissory notes and our convertible preferred stock. In connection with our IPO, we issued and sold an aggregate of 6,468,750 shares of common stock (inclusive of 843,750 shares of common stock issued and sold pursuant to the exercise of the underwriters' option to purchase additional shares) at a price of$16.00 per share for net proceeds of$92.0 million , after deducting underwriters' discounts and commissions and offering costs.
Funding Requirements
Any product candidates we may develop may never achieve commercialization and we anticipate that we will continue to incur losses for the foreseeable future. We expect that our research and development expenses, general and administrative expenses, and capital expenditures will continue to increase. As a result, until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings or other capital sources, including potentially collaborations, licenses and other similar arrangements. Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, third-party clinical research, manufacturing and development services, costs relating to the build-out of our headquarters, laboratories and manufacturing facility, license payments or milestone obligations that may arise, laboratory and related supplies, clinical costs, manufacturing costs, legal and other regulatory expenses and general overhead costs. Our current operating plan, which includes initiating two Phase 3 clinical trials in the fourth quarter of 2021, raises substantial doubt that our existing cash, cash equivalents and short-term investments will be sufficient for us to fund our operating expenses and capital expenditure requirements for the next 12 months.
Based upon our current operating plan, we believe our existing cash, cash equivalents and short-term investments will enable us to fund our operating expenses and capital expenditure requirements into the first quarter of 2022. We base this estimate on assumptions
81 -------------------------------------------------------------------------------- that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. As noted in our audited financial statements, there are conditions that raise substantial doubt about our ability to continue as a going concern for a period of one year from the date of the issuance of our financial statements. Our ability to continue as a going concern is dependent upon our ability to successfully secure sources of financing and ultimately achieve profitable operations. Our independent registered public accounting firm included an explanatory paragraph in their audit report on the financial statements as of and for the years endedDecember 31, 2020 and 2019 stating that our recurring losses from operations and negative cash flows since inception and our need to raise additional funding to finance our operations raise substantial doubt about our ability to continue as a going concern. We will continue to require additional financing to advance our current product candidates through clinical development, to develop, acquire or in-license other potential product candidates and to fund operations for the foreseeable future. We will continue to seek funds through equity offerings, debt financings or other capital sources, potentially including collaborations, licenses and other similar arrangements. We may, however, be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. If we do raise additional capital through public or private equity 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. Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to raise capital, we will need to delay, reduce or terminate planned activities to reduce costs.
Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:
• the scope, progress, results and costs of researching, developing and
manufacturing our product candidates or any future product candidates, and
conducting preclinical studies and clinical trials;
• the timing of, and the costs involved in, obtaining regulatory approvals
or clearances for our product candidates or any future product candidates;
• the number and characteristics of any additional product candidates we
develop or acquire;
• the cost of manufacturing our product candidates or any future product
candidates and any products we successfully commercialize, including costs
associated with building-out our manufacturing capabilities;
• our ability to establish and maintain strategic collaborations, licensing
or other arrangements and the financial terms of any such agreements that
we may enter into; • the expenses needed to attract and retain skilled personnel; • the costs associated with being a public company;
• the timing, receipt and amount of sales of any future approved or cleared
products, if any; and
• the impact of the COVID-19 pandemic and the corresponding responses of
businesses and governments.
Further, our operating plans may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development activities. We currently have no credit facility or committed sources of capital. 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 and operating expenditures associated with our current and anticipated product development programs. Cash Flows
The following table summarizes our cash flows for the periods indicated:
Year Ended December 31, 2020 2019 (in thousands) Net cash (used in) provided by: Operating activities$ (32,064 ) $ (31,215 ) Investing activities (42,560 ) (20,620 ) Financing activities 92,172
54,871
Net increase in cash and cash equivalents
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Operating Activities
Cash used in operating activities of
Cash used in operating activities of$31.2 million during the year endedDecember 31, 2019 was attributable to our net loss of$37.0 million , partially offset by a$4.9 million decrease in our working capital and non-cash charges of$0.9 million principally with respect to stock-based compensation and depreciation expense.
Investing Activities
Cash used in investing activities of
Cash used in investing activities of
Financing Activities
Cash provided by financing activities of$92.2 million for the year endedDecember 31, 2020 consisted of$96.3 million of proceeds, net of the underwriters' discounts and commissions, from the issuance of common stock in connection with our IPO and$0.1 million received from the exercise of stock options, partially offset by$4.2 million related to the payments of offering costs. Cash provided by financing activities of$54.9 million for the year endedDecember 31, 2019 consisted of$54.8 million of net proceeds upon the issuance of our Series C convertible preferred stock, and$0.1 million received from the exercise of stock options.
Critical Accounting Policies and Significant Judgments and Estimates
Management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance withU.S. Generally Accepted Accounting Principles. The preparation of these 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 the financial statements, as well as 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 and any such differences may be material.
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.
Research and Development Expense and Accruals
We record research and development expenses to operations as incurred. Research and development expenses represent costs incurred by us for the discovery and development of our product candidates and the development of our technology and include: employee-related expenses, including salaries, benefits, travel and non-cash stock-based compensation expense; external research and development expenses incurred under arrangements with third parties, such as CROs, preclinical testing organizations, CMOs, academic and non-profit institutions and consultants; license fees; and other expenses, which include direct and allocated expenses for laboratory, facilities and other costs. As part of the process of preparing financial statements, we are required to estimate and accrue expenses. We estimate costs of research and development activities conducted by service providers, which include the conduct of sponsored research, preclinical studies and contract manufacturing activities. Payments made prior to the receipt of goods or services to be used in research and development are deferred and recognized as expense in the period in which the related goods are received or services are rendered. If the costs have been prepaid, this expense reduces the prepaid expenses on the balance sheet, and if not yet invoiced, the costs are included in accrued liabilities on the balance sheet. We classify such prepaid assets as current or non-current assets based on our estimates of the timing of when the goods or services will be realized or consumed. These costs are a significant component of our research and development expenses. 83 -------------------------------------------------------------------------------- We estimate these costs based on factors such as estimates of the work completed and budget provided and in accordance with agreements established with our collaboration partners and third-party service providers. We estimate the amount of work completed through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. We make significant judgments and estimates in determining the accrued balance in each reporting period. As actual costs become known, we adjust our accrued estimates. 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 may vary from our estimates and could result in us reporting amounts that are too high or too low in any particular period. Our accrued expenses are dependent, in part, upon the receipt of timely and accurate reporting from external CROs and other third-party service providers. Amounts ultimately incurred in relation to amounts accrued for these services at a reporting date may be substantially higher or lower than our estimates. Our expenses related to clinical trials are based on estimates of patient enrollment and related expenses at clinical investigator sites as well as estimates for the services provided and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that may be used to conduct and manage clinical trials on our behalf. We generally accrue expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis. We have and may continue to enter into license agreements to access and utilize certain technology. We evaluate if the license agreement is an acquisition of an asset or a business. To date none of our license agreements have been considered to be an acquisition of a business. For asset acquisitions, the upfront payments to acquire such licenses, as well as any future milestone payments made before product approval, will be immediately recognized as research and development expense when due, provided there is no alternative future use of the rights in other research and development projects. These license agreements may also include contingent consideration in the form of cash. We assess whether such contingent consideration meets the definition of a derivative.
Preferred Stock Tranche Obligation
Convertible preferred stock that includes features we have determined are not clearly and closely related to the equity host are bifurcated and accounted for separately as freestanding derivative assets or liabilities on the balance sheet at their estimated fair value. We recognized a derivative liability as a result of certain investors' having rights to purchase from us, on the same terms as the Series C Preferred Stock Purchase Agreement executed inJuly 2019 , additional shares of our Series C preferred stock in subsequent tranches based on the achievement of certain development milestones, or the Preferred Stock Tranche Obligation. At initial recognition, we recorded the liability for the Preferred Stock Tranche Obligation on the balance sheet at its estimated fair value. This liability was subject to remeasurement at each balance sheet date until the expiration of the Preferred Stock Tranche Obligation inSeptember 2020 , with changes in fair value recognized in our statements of operations. The liability for the Preferred Stock Tranche Obligation was measured at fair value using an option pricing valuation methodology that included inputs not observable in the market and thus represents a Level 3 measurement. The option pricing valuation methodology utilized requires inputs based on certain subjective assumptions, including (a) expected stock price volatility, (b) calculation of an expected term, (c) a risk-free interest rate and (d) expected dividends. Significant judgment was used in determining these assumptions at initial recognition and at each subsequent reporting period.
Stock-based Compensation
We recognize compensation costs related to stock-based awards to employees and non-employees based on the estimated fair value of the awards on the date of grant. We estimate the grant date fair value, and the resulting stock-based compensation, using the Black-Scholes option-pricing model, or Black-Scholes. The grant date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards.
Black-Scholes requires the use of subjective assumptions to determine the fair value of stock-based awards including:
• Fair Value of Common Stock- see subsection entitled "Common Stock Valuations" below.
• Expected Term-The expected term represents the period that stock-based
awards are expected to be outstanding. The expected term for option grants
is determined using the simplified method. The simplified method deems the
expected term to be the midpoint between the vesting date and the contractual life of the stock-based awards.
• Expected Volatility-Since we were a privately held company until September
2020, and do not yet have sufficient trading history for our common stock,
the expected volatility is estimated based on the average volatility for
comparable publicly traded biotechnology companies over a period equal to
the expected term of the stock option grants. The comparable companies
were chosen based on their similar size, stage in the life cycle or area
of specialty. We will continue to apply this method until a sufficient
amount of historical information over a period equal to the expected term
of the stock-based awards becomes available. 84
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• Risk-Free Interest Rate-The risk-free interest rate is based on the
corresponding with the expected term of the option.
• Expected Dividend-We have never paid dividends on our common stock and
have no plans to pay dividends on our common stock. Therefore, we used an
expected dividend yield of zero.
We will continue to use judgment in evaluating the assumptions utilized for our stock-based compensation expense calculations on a prospective basis. In addition to the assumptions used in Black-Scholes, the amount of stock-based compensation expense we recognize in our financial statements includes stock option forfeitures as they occur. Such assumptions 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 stock-based compensation could be materially different.
Common Stock Valuations
Historically, for all periods prior to our IPO, the fair value of the shares of common stock underlying our stock-based awards was estimated on each grant date by our board of directors. In the absence of a public trading market for our common stock, our board of directors exercised their judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including contemporaneous valuations, our stage of development, important developments in our operations, the prices at which we sold shares of our preferred stock, the rights, preferences and privileges of our preferred stock relative to those of our common stock, actual operating results and financial performance, the conditions in the biotechnology industry and the economy in general, the stock price performance and volatility of comparable public companies, and the lack of liquidity of our common stock, among other factors. In determining the fair value of our common stock, the methodologies used to estimate our enterprise value were performed using methodologies, approaches and assumptions consistent with the guidance outlined in theAmerican Institute of Certified Public Accountants Technical Practice Aid , Valuation of Privately Held Company Equity Securities Issued as Compensation. The grant date fair value of our common stock was determined using valuation methodologies incorporating a number of assumptions including probability weighting of events, volatility, time to liquidation, a risk-free interest rate and an assumption for a discount for lack of marketability (Level 3 inputs). The methodology to determine the fair value of our common stock included estimating the fair value of the enterprise using a hybrid-method market approach, which estimates the fair value of the company by including an estimation of the value of the business based on scenarios in a probability-weighted expected return method, or PWERM, framework. Under the hybrid-method market approach, the per share value calculated under the scenarios are weighted based on expected exit outcomes and the quality of the information specific to each allocation methodology to arrive at a final estimated fair value per share value of the common stock before a discount for lack of marketability is applied. Following the closing of our IPO, our board of directors determines the fair market value of our common stock based on its closing price as reported on The Nasdaq Global Market on the date of grant.
Emerging Growth Company and Smaller Reporting Company Status
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act. Under the JOBS Act, emerging growth companies can 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 use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. 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. We are also a "smaller reporting company," meaning that the market value of our stock held by non-affiliates is less than$700 million and our annual revenue is less than$100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than$250 million or (ii) our annual revenue is less than$100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than$700 million . If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation. 85
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Recently Adopted Accounting Pronouncements
For a full discussion of recently adopted accounting pronouncements, see Note 2 to the financial statements included elsewhere in this Annual Report on Form 10-K for more information.
Contractual Obligations and Other Commitments
Contractual Obligations
Refer to Note 5 to our financial statements included within Item 8 of this
Annual Report on Form 10-K for a description of our contractual obligations as
of
We are party to license agreements pursuant to which we have in-licensed various intellectual property rights. The license agreements obligate us to make certain milestone payments related to achievement of specified events, as well as royalties in the low-single digits based on sales of licensed products. None of these events had occurred as ofDecember 31, 2020 , and no royalties were due from the sales of licensed products. We enter into contracts in the normal course of business with CROs for clinical trials and CMOs for clinical supply manufacturing and with vendors for equipment, preclinical research studies, research supplies and other services and products for operating purposes. As ofDecember 31, 2020 , these commitments were approximately$7.7 million due within 3 to 15 months. These contracts generally provide for termination on notice of 60 to 90 days, and therefore we believe that our non-cancelable obligations under these agreements are not material.
Off-Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have, any
off-balance sheet arrangements as defined under
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