DECIBEL THERAPEUTICS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes thereto appearing elsewhere in this Annual Report on Form 10-K, or Annual Report. Some of the information contained in this discussion and analysis includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the section entitled "Risk Factors," our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Please also see the section entitled "Cautionary Note Regarding Forward-Looking Statements and Industry Data" of this Annual Report.
Overview
We are a clinical-stage biotechnology company dedicated to discovering and developing transformative treatments for hearing and balance disorders, one of the largest areas of unmet need in medicine. We aim to restore and improve hearing and balance through the restoration and regeneration of functional hair cells and non-sensory support cells within the inner ear. We have built a proprietary platform that integrates single-cell genomics and bioinformatics analyses, precision gene therapy technologies and our expertise in inner ear biology. We are leveraging our platform to advance our pipeline of clinical and preclinical gene therapy programs that are designed to selectively replace genes for the treatment of congenital, monogenic hearing loss and to regenerate inner ear hair cells for the treatment of acquired hearing and balance disorders. We are developing our lead gene therapy product candidate, DB-OTO, to provide durable, high quality, physiological hearing to individuals with profound, congenital hearing loss caused by mutations of the otoferlin, or OTOF, gene. In addition to DB-OTO, we are advancing AAV.103 to restore hearing in individuals with mutations in the gap junction beta-2, or GJB2, gene, AAV.104 to restore hearing in individuals with mutations in the stereocilin, or STRC, gene and AAV.105 to restore hearing in individuals with another single gene mutation. We also have gene therapy programs to convert supporting cells, the cells adjacent to hair cells, into either cochlear or vestibular hair cells in order to restore hearing or balance function. In addition to our gene therapy programs, we are developing DB-020 for the prevention of cisplatin-induced hearing loss. We ceased enrolling patients in our Phase 1b clinical trial of DB-020, subsequent to announcing the positive results from the interim analysis from the first 19 patients enrolled in the trial. We are in the safety follow-up portion of the clinical trial, which we anticipate to be completed in the first half of 2023.
Since inception, we have devoted substantially all of our resources to organizing and staffing, business planning, raising capital, establishing our intellectual property portfolio and performing research and development of our product candidates, programs and platform.
On
To date, we have financed our operations primarily with proceeds from sales of
our convertible preferred stock (including borrowings under convertible
promissory notes, which converted into convertible preferred stock in 2015),
payments received under our license and collaboration agreement with Regeneron
Pharmaceuticals, Inc., or Regeneron, and from the sale of common stock in our
IPO and from the sale of common stock under our "at-the-market offering"
program. We have not generated any revenue from product sales, and do not expect
to generate any revenue from product sales for at least the next several years.
All of our programs are still in preclinical and early-stage clinical
development. Our ability to generate product revenue sufficient to achieve
profitability will depend heavily on the successful development and eventual
commercialization of one or more of our product candidates, if approved. Since
inception, we have incurred significant operating losses. Our net losses were
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initiate and conduct our planned Phase 1/2 clinical trial of DB-OTO for the treatment of profound hearing loss caused by mutations of the OTOF gene;
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continue our current research programs and our preclinical development of AAV.103, AAV.104, AAV.105, our vestibular hair cell regeneration programs and our cochlear hair cell regeneration program and any product candidates that may arise from our current or future research programs;
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continue the clinical development of DB-020;
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advance additional product candidates into preclinical and clinical development;
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expand the capabilities of and invest in our platform;
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seek marketing approvals for any product candidates that successfully complete clinical trials;
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ultimately establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval;
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expand, maintain and protect our intellectual property portfolio;
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hire additional clinical, research, development, scientific, regulatory and quality control personnel;
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establish and maintain agreements with manufacturers for our product candidates; and
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add operational, legal, compliance, financial and management information systems and personnel, including personnel to support our research, product development and future commercialization efforts and support our operations as a public company.
In addition, as we progress toward marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution.
As a result, we will need substantial additional funding to support our continuing operations and pursue our strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings and other sources of capital, which may include collaborations with other companies or other strategic transactions. We may be unable to raise additional funds or enter into other collaborations, strategic alliances or licensing arrangements with third parties when needed or on favorable terms, or at all. If we are unable to raise additional funds through equity or debt financings or enter into such other agreements when needed, we may have to significantly delay, reduce or eliminate some or all of our product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve profitability. Even if we are able to generate revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.
As of
Macroeconomic and Geopolitical Impacts on Our Business
The worldwide COVID-19 pandemic has affected and may affect in the future our ability to initiate and complete preclinical studies, initiate and conduct clinical trials and engage in regulatory activities and may cause other adverse effects on our business, results of operations, financial condition and prospects. In addition, the pandemic has caused substantial disruption to global supply chains and may adversely impact economies worldwide, both of which could adversely affect our business, operations and ability to raise funds to support our operations.
We cannot be certain what the overall impact of the COVID-19 pandemic will be on our business. The extent of the impact of COVID-19 on us will depend on the length and severity of the pandemic, including the extent there is any resurgence of the COVID-19 virus or any variant strains of the virus, the availability and effectiveness of vaccines and the
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impact of the foregoing on our preclinical studies, current and planned clinical trials, employees and vendors, which is uncertain and cannot be predicted. The pandemic has the potential to adversely affect our business, financial condition, results of operations and prospects.
In addition,
License and Collaboration Agreement with Regeneron
In
Pursuant to the Regeneron Agreement, Regeneron paid us an upfront fee of
Under the Regeneron Agreement, we are required to pay Regeneron tiered royalties on the worldwide net sales of collaboration products at percentages which range from mid-single digit to mid-thirties, with the exact royalty rate depending on the extent to which Regeneron shared in the funding of the collaboration product, the level of net sales of the collaboration product, the nature of any intellectual property contributed by Regeneron included in the collaboration product and whether the product is sold inside or outside the field. In the case of collaboration products for which Regeneron does not opt-out, our obligation to pay tiered royalties on the worldwide net sales ranges from percentages in the mid-twenties to mid-thirties. In the case of collaboration products for which Regeneron opts-out, our obligation to pay tiered royalties on the worldwide net sales ranges from percentages in the mid-single digits to mid-twenties. Our obligation to make royalty payments to Regeneron on account of worldwide net sales of collaboration products continues so long as we, our affiliates, licensees or sublicensees sell collaboration products. To date, we have not made any royalty or other payments to Regeneron under the Regeneron Agreement.
Pursuant to the first amendment to the Regeneron Agreement, Regeneron agreed to
pay us
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the last patent covering DB-ATO in such country, the expiration of all applicable regulatory exclusivities for DB-ATO in such country and the tenth anniversary of the first commercial sale of DB-ATO in such country.
Because we consider Regeneron a collaborative partner that is subject to the
significant risks and rewards under the Regeneron Agreement, we have accounted
for the Regeneron Agreement under FASB ASC Topic 808, Collaborative
Arrangements, or ASC 808. Under ASC 808, we view all consideration received from
Regeneron as reimbursement of our costs under the Regeneron Agreement. These
costs are accounted for as research and development expenses in our consolidated
statements of operations and comprehensive loss. As such, we are recognizing
total consideration of
Financial Operations Overview
Revenue
We have not generated any revenue since inception and do not expect to generate any revenue from the sale of products for at least the next several years. If our development efforts for our current or future product candidates are successful and result in marketing approval or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from product sales or payments from third-party collaborators or licensors.
Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research activities and development of our programs and product candidates. These expenses include:
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personnel-related expenses, including salaries, benefits and stock-based compensation expense for employees engaged in research and development functions;
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expenses incurred under agreements with third parties, such as consultants and investigative sites that conduct our preclinical studies and clinical trials and in-licensing arrangements;
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costs incurred to maintain compliance with regulatory requirements;
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costs incurred with third-party CDMOs to acquire, develop and manufacture materials for preclinical and clinical studies;
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costs associated with our technology and development of our intellectual property portfolio;
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expenses incurred for the procurement of materials, laboratory supplies and non-capital equipment used in the research and development process; and
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depreciation, amortization and other direct and allocated expenses, including rent, insurance and other operating costs, incurred as a result of our research and development activities.
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We use our employee and infrastructure resources for the advancement of our platform and for discovering and developing programs and product candidates. We track direct research and development costs, consisting primarily of external costs, such as fees paid to CDMOs, CROs and consultants in connection with our preclinical studies, clinical trials and experiments by program after a development candidate has been identified. Due to the number of ongoing programs and our ability to use resources across several projects, personnel-related expenses and indirect or shared operating costs incurred for our research and development programs are not recorded or maintained on a program-by-program basis, nor are our external program costs incurred for our programs prior to the identification of a development candidate for such program.
The following table reflects our research and development expense, including
direct program-specific expense summarized by program, personnel-related
expenses and indirect or shared operating costs recognized during each period
presented (in thousands):
Year Ended December 31,
2022 2021
DB-OTO $ 19,252 $ 18,007
DB-020 2,232 1,831
Personnel-related (including stock-based compensation) 13,903 9,425
Regeneron Agreement contra-expense (8,402 ) (10,960 )
Other indirect research and development expenses 13,345 11,544
Total research and development expenses $ 40,330 $ 29,847 Consideration we receive under the Regeneron Agreement is being recognized as a reduction to research and development expense (contra-research and development expense) in our consolidated statements of operations and comprehensive loss based on our progress towards completion of our research activities under the research plan for the collaboration.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will continue to increase for the foreseeable future as we advance our programs and product candidates into and through the development phase, and as we continue to develop additional product candidates. We also expect our discovery research efforts and our related personnel costs will increase and, as a result, we expect our research and development expenses will increase above historical levels. In addition, we may incur additional expenses related to milestone and royalty payments payable to third parties with whom we may enter into license, acquisition and option agreements to acquire the rights to future product candidates.
At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates or programs. This is due to the numerous risks and uncertainties associated with drug development, including the uncertainty of:
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the timing and progress of preclinical and clinical development activities;
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the number and scope of preclinical and clinical programs we decide to pursue;
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our ability to successfully complete clinical trials with safety, potency and purity profiles that are satisfactory to the FDA or any comparable foreign regulatory authority;
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our ability to successfully develop, obtain regulatory approval for, and then successfully commercialize, our product candidates;
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our ability to hire and retain key research and development personnel;
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our successful enrollment in and completion of clinical trials;
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the costs associated with the development of any additional product candidates we develop or acquire through collaborations;
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our ability to establish and maintain agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if our product candidates are approved;
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the terms and timing of any collaboration, license or other arrangement, including the terms and timing of any milestone payments thereunder;
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our ability to obtain and maintain patent, trade secret and other intellectual property protection and regulatory exclusivity for our product candidates if and when approved;
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our receipt of marketing approvals from applicable regulatory authorities;
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our ability to commercialize products, if and when approved, whether alone or in collaboration with others;
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the continued acceptable safety profiles of the product candidates following approval; and
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the effects of the COVID-19 pandemic on our research and development employees, contractors and those who may participate in our studies.
A change in any of these variables with respect to the progress of any of our product candidates would significantly change the costs, timing and viability associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any product candidate we may develop.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related costs, including salaries, benefits and stock-based compensation, for personnel in our executive, finance, legal, business development, human resources and administrative functions. General and administrative expenses also include legal fees relating to corporate matters and costs to secure and defend our intellectual property; professional fees for accounting, auditing, tax, human resources and administrative consulting services; insurance costs; administrative travel expenses and facility-related expenses, which include direct depreciation costs and allocated expenses for office rent and other operating costs. General and administrative expenses also reflect sublease income that is used to offset the cost for office rent and other operating costs. These costs relate to the operation of the business, unrelated to the research and development function, or any individual program.
We anticipate that our general and administrative expenses will increase in the
future as we increase our headcount to support the expected growth in our
research and development activities and the potential commercialization of our
product candidates. We also expect to continue to incur significant expenses
associated with being a public company, including costs for accounting, audit,
legal, regulatory and tax-related services associated with maintaining
compliance with exchange listing and
Interest Income
Interest income consists of interest income earned from our cash, cash equivalents and available-for-sale securities.
Other Income, net
Other income, net for the year ended
Income Taxes
Since our inception, we have not recorded any
Income taxes are determined at the applicable tax rates adjusted for non-deductible expenses, research and development tax credits and other permanent differences. Our income tax provision may be significantly affected by changes to our estimates.
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Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations for each period
presented (in thousands):
Year Ended December 31,
2022 2021 Change
Operating expenses:
Research and development $ 40,330 $ 29,847 $ 10,483
General and administrative 23,627 20,384 3,243
Total operating expenses 63,957 50,231 13,726
Loss from operations (63,957 ) (50,231 ) (13,726 )
Other income:
Interest income 1,192 193 999
Other income - 12 (12 )
Total other income, net 1,192 205 987
Net loss before provision for income taxes (62,765 ) (50,026 ) (12,739 )
Provision for income taxes (240 ) (1,797 ) 1,557
Net loss $ (63,005 ) $ (51,823 ) $ (11,182 ) Research and Development Expenses
The following table summarizes our research and development expenses for each period presented (in thousands):
Year Ended December 31,
2022 2021 Change
DB-OTO $ 19,252 $ 18,007 $ 1,245
DB-020 2,232 1,831 401
Personnel-related (including stock-based
compensation) 13,903 9,425 4,478
Regeneron Agreement contra-expense (8,402 ) (10,960 ) 2,558
Other indirect research and development
expenses 13,345 11,544 1,801
Total research and development expenses
Research and development expenses for the year ended
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•
•
•
•
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General and Administrative Expense
General and administrative expenses for the year ended
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•
•
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Interest Income
The increase in interest income for the year ended
Other Income, net
Other income, net for the year ended
Provision for Income Taxes
The provision for income taxes for the year ended
Liquidity and Capital Resources
Sources of Liquidity and Capital
Since our inception, we have incurred significant operating losses and negative
cash flows from operations. We have not yet commercialized any of our product
candidates, which are in various phases of preclinical and clinical development,
and we do not expect to generate revenue from sales of any products for several
years, if at all. Through
In
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Cash Flows
The following table provides information regarding our cash flows for each period presented (in thousands):
Year Ended December 31,
2022 2021
Net cash provided by (used in):
Operating activities $ (56,898 ) $ (43,150 )
Investing activities 55,097 (100,995 )
Financing activities (213 ) 152,510
Net (decrease) increase in cash, cash equivalents and
restricted cash $ (2,014 ) $ 8,365
Operating Activities
Our cash flows from operating activities are greatly influenced by our use of cash for operating expenses and working capital requirements to support the business. We have historically experienced negative cash flows from operating activities as we invested in developing our pipeline, platform, drug discovery efforts and related infrastructure. The cash used in operating activities resulted primarily from our net losses adjusted for non-cash charges, which are generally attributable to stock-based compensation, depreciation and amortization and accretion of discounts on available-for-sale securities, as well as changes in components of operating assets and liabilities, which are generally attributable to increased expenses, timing of vendor payments and performance under the Regeneron Agreement.
During the year ended
During the year ended
Investing Activities
During the year ended
During the year ended
Financing Activities
During the year ended
During the year ended
Funding Requirements
We expect our expenses to increase substantially in connection with our ongoing research and development activities, particularly as we advance the preclinical activities and clinical trials of our product candidates. In addition, we expect to continue to incur increased costs associated with operating as a public company. As a result, we expect to incur substantial operating losses and negative operating cash flows for the foreseeable future.
As of
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expenses and capital expenditure requirements into the first half of 2024. We
have incurred recurring losses since our inception, including a net loss of
Because of the numerous risks and uncertainties associated with product development, and because the extent to which we may enter into collaborations with third parties for the development of our product candidates is unknown, we may incorrectly estimate the timing and amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our funding requirements and timing and amount of our operating expenditures will depend on many factors, including, but not limited to:
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the progress, costs and results of our planned Phase 1/2 clinical trial of DB-OTO and any future clinical development of DB-OTO;
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the approach we determine for the advancement of DB-020, including further potential clinical development;
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the scope, progress, costs and results of preclinical and clinical development for our other product candidates and programs, including AAV.103, AAV.104, AAV.105, our vestibular hair cell regeneration program and our cochlear hair cell regeneration program;
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the number of, and development requirements for, other product candidates that we may identify and develop;
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the scope, costs, timing and outcome of regulatory review of our product candidates;
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the cost and timing of completion of commercial-scale manufacturing activities;
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the success of our collaboration with Regeneron;
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the payment or receipt of milestones and of other collaboration-based revenues, if any;
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our ability to establish and maintain additional strategic collaborations, licensing or other arrangements and the financial terms of such arrangements;
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the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval;
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the amount and timing of revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;
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the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property and proprietary rights and defending any intellectual property-related claims;
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the extent to which we may acquire or in-license other products, product candidates and technologies;
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the impacts of the COVID-19 pandemic;
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the impact of continued increases in inflation rates or interest rates;
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the ability to receive additional non-dilutive funding, including grants from organizations and foundations; and
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the costs of operating as a public company.
Identifying potential product candidates and conducting preclinical testing and clinical trials is a time consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for several years, if ever. Accordingly, we will need to obtain substantial additional funds to achieve our business objectives.
Our expectation with respect to our ability to fund current planned operations is based on estimates that are subject to risks and uncertainties. Our operating plan may change as a result of many factors currently unknown to management and there can be no assurance that the current operating plan will be achieved in the time frame anticipated by us, and we may need to seek additional funds sooner than planned.
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Adequate additional funds may not be available to us on acceptable terms, or at all. We do not have any committed external source of funds, other than amounts we are entitled to under the Regeneron Agreement. Market volatility or other factors could also adversely impact our ability to access capital as and when needed. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of holders of our common stock. Additional debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may require the issuance of warrants, which could potentially dilute the ownership interests of holders of our common stock.
We may be unable to raise additional funds or enter into other collaborations, strategic alliances or licensing arrangements with third parties when needed on favorable terms, or at all. If we are unable to raise additional funds through equity or debt financings or enter into such agreements when needed, we may have to significantly delay, reduce or eliminate some or all of our product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves or on terms that may not be favorable to us.
We have concluded that the above circumstance raises substantial doubt about our ability to continue as a going concern. See Note 1 of our consolidated financial statements appearing elsewhere in this Annual Report on Form 10K for additional information on our assessment.
Material Cash Requirements
The following discussion summarizes our material cash requirements from contractual and other obligations.
We lease and sublease, as sublessee, office and laboratory space at
In
In
In
In
We have agreements with certain vendors for various services, including services related to preclinical and clinical operations and support, for which we are not contractually able to terminate for convenience and avoid any and all future obligations to the vendors. Certain agreements provide for termination rights subject to termination fees or wind down costs. Under such agreements, we are contractually obligated to make certain payments to vendors to reimburse them for their
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unrecoverable outlays incurred prior to cancellation. The exact amounts of such obligations are dependent on the timing of termination and the exact terms of the relevant agreement and cannot be reasonably estimated.
In addition, we enter into standard indemnification agreements and/or indemnification sections in other agreements in the ordinary course of business. Pursuant to these agreements, we agree to indemnify, hold harmless and reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally our business partners. The term of these indemnification agreements is generally perpetual upon execution of the agreement. The maximum potential amount of future payments we could be required to make under these indemnification agreements cannot be reasonably estimated.
Critical Accounting Estimates and Significant Judgments
Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated 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 consolidated 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.
We believe the following accounting estimates used in the preparation of our consolidated financial statements have the most significant level of estimation uncertainty and are reasonably likely to have a material impact on our financial condition and results of operations. For a more detailed description of our significant accounting policies, see Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report.
Collaboration Agreements
While we account for the Regeneron Agreement in accordance with ASC 808, Collaborative Arrangements, we analogize to the guidance under FASB ASC Topic 606, Revenue with contracts from customers, to measure progress under the collaboration over time. We measure progress using a proportional performance measure based on actual research and development costs incurred relative to total estimated research and development costs to be incurred by us under the Regeneron Agreement. We account for the consideration we receive under the Regeneron Agreement as a reduction to research and development expense (contra-research and development expense) in our consolidated statements of operations and comprehensive loss based on our progress towards completion of our research activities under the research plan. Actual costs incurred are discussed in more detail below. The unrecognized portion of consideration received under the Regeneron Agreement is recorded as a deferred collaboration liability in our consolidated balance sheets.
The critical estimate in measuring such progress is the estimation of the total costs to complete our remaining obligations under the Regeneron Agreement. This includes a number of estimates and assumptions which contemplate both objective and subjective factors. Primary inputs to the estimate to complete our remaining performance obligations include the estimated internal personnel costs and third-party costs to support research and development activities through IND acceptance of multiple potential targets. Following IND acceptance, the same inputs are utilized to estimate the performance obligations for the target candidates' potential clinical trials. We forecast personnel costs based on a fully burdened full-time equivalent, or FTE, rate and the expected FTE required as the research plan progresses. This assumption considers our contractual minimum diligence effort measured based on a minimum number of FTE, actual FTE's incurred and trends therein that may be indicative of future effort, and forecasted changes in FTE based on the requirements under the research plan as well as any anticipated changes in headcount we expect to experience. We forecast third-party costs to support research and development activities based on the requirements under the research plan, historical experience and negotiated rates with vendors. Finally, we forecast third-party costs related to IND-enabling studies and clinical trials based on historical experience and estimates directly from third-party vendors.
Our estimates may vary relative to actual costs incurred for various reasons including number of targets being pursued, changes in scope, feedback from regulators, developments in the science over the term of the research plan and changes in costs for supplies, consumables and other materials needed for the collaboration. We actively monitor these estimates relative to actual costs incurred and update our forecasts when and as necessary. These variances represent changes in estimate and may result in material changes in recognition of contra-research and development expense over the term of the collaboration.
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Research and Development Expenses and Related Accruals
Research and development expenses are comprised of costs incurred in performing research and development activities, including salaries, stock-based compensation and benefits, laboratory supplies, depreciation on and maintenance of research equipment, manufacturing expenses and external costs of outside vendors engaged to conduct preclinical and clinical development activities and the allocable portions of facility costs, such as rent, utilities, repairs and maintenance, depreciation, and general support services. Research and development expenses comprise a significant portion of our operating expenses and are a primary input in the measurement of progress under our license and collaboration agreement with Regeneron. All costs associated with research and development activities are expensed as incurred.
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advanced payments. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of the estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to:
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CROs and investigative sites in connection with performing research services, preclinical studies and clinical trials;
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vendors, including research laboratories, in connection with preclinical and clinical development activities; and
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vendors, including CDMOs, related to product manufacturing, development and distribution of preclinical studies and clinical trial materials.
We base the expense recorded related to contract research and manufacturing on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple CDMOs and CROs that supply materials and conduct services. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. 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 prepaid expense 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.
Stock-Based Compensation
We issue stock-based awards to employees, directors and non-employees, generally in the form of stock options, restricted stock and restricted stock units. We measure all stock-based awards granted to employees, directors and non-employees as stock-based compensation expense at fair value in accordance with FASB ASC Topic 718, Compensation-Stock Compensation.
We issue stock-based awards with service-based and performance-based vesting conditions. Compensation expense related to awards to employees, directors and non-employees with service-based vesting conditions is recognized on a straight-line basis based on the grant date fair value over the associated requisite service period of the award, which is generally the vesting term. Compensation expense related to awards to employees, directors and non-employees with performance-based vesting conditions is recognized when it becomes probable that the performance conditions will be met using the accelerated attribution method. We have no awards with market-based conditions. We recognize forfeitures as they occur.
We classify stock-based compensation expense in the consolidated statements of operations and comprehensive loss in the same manner in which the award recipient's salary and related costs are classified or in which the award recipient's service payments are classified, as applicable.
We determine the fair value of restricted stock and restricted stock units in reference to the fair value of our common stock less any applicable purchase price. We estimate the fair value of our stock options granted using the Black-Scholes option pricing model, which requires inputs of subjective assumptions, including: (i) the expected volatility of our common stock, (ii) the expected term of the award, (iii) the risk-free interest rate, (iv) expected dividends and (v) the fair value of our
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common stock. Due to the lack of a public market for the trading of our common stock prior to the completion of our IPO, and a lack of company-specific historical and implied volatility data, we base the estimate of expected volatility on the historical volatilities of a representative group of publicly traded guideline companies. For these analyses, we select companies with comparable characteristics and with historical share price information that approximates the expected term of the stock-based awards. We compute the historical volatility data using the daily closing prices for the selected companies' shares during the equivalent period that approximates the calculated expected term of our stock options. We will continue to apply this method until a sufficient amount of historical information regarding the volatility of our own stock price becomes available. We estimate the expected term of our stock options granted to employees and directors using the simplified method, whereby the expected term equals the average of the vesting term and the original contractual term of the option. We utilize this method as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The expected dividend yield is assumed to be zero as we have no current plans to pay any dividends on common stock. We have elected to use the expected term for stock options granted to non-employees, using the simplified method, as the basis for the expected term assumption. However, we may elect to use either the contractual term or the expected term for stock options granted to non-employees on an award-by-award basis.
Subsequent to the completion of our IPO, the fair value of the common stock underlying our stock-based awards is determined based on the trading price of our common stock on the Nasdaq Global Select Market on the date of grant.
Leases
Effective
Upon adoption, we elected the package of practical expedients which allows entities to not reassess (i) whether an arrangement is or contains a lease, (ii) the classification of its leases, and (iii) the accounting for initial direct costs. Further, we elected, by class of underlying asset, the short-term lease exception for leases with terms of twelve months or less. In doing so, we did not recognize a lease liability or right-of-use asset on its balance sheets for such short-term leases. Finally, we elected, by class of underlying asset, the practical expedient to not separate lease and non-lease components.
Under ASC 842 we evaluate whether an arrangement is or contains a lease at contract inception. If a contract is or contains a lease, lease classification is determined at lease commencement, which represents the date at which the underlying asset is made available for use by us. Our lease terms are generally measured as the respective lease's noncancelable term and exclude any optional extension terms as we are not reasonably certain to exercise such options. We elected the short-term lease exemption and therefore do not recognize lease liabilities and right-of-use assets for lease arrangements with original lease terms of twelve months or less.
Lease liabilities represent our obligation to make lease payments under a lease arrangement. Lease liabilities are measured as the present value of fixed lease payments, discounted using an incremental borrowing rate, as interest rates implicit in our lease arrangements are generally not readily determinable. We elected the practical expedient to not separate lease and non-lease components for its real estate leases and therefore both are considered when determining the lease payments in a lease arrangement. Variable lease costs are expensed as incurred.
The incremental borrowing rate represents the interest rate at which we could borrow a fully collateralized amount equal to the lease payments, over a similar term, in a similar economic environment. We determine the incremental borrowing rate at lease commencement, generally using a synthetic credit rating based on our financial position and negative cash flows, factoring in adjustments for additional risks based on our economic condition, a survey of comparable companies with similar credit and financial profiles, as well as additional market risks, as may be applicable.
Right-of-use assets represent our right to use an underlying asset over its lease term. Right-of-use assets are initially measured as the associated lease liability, adjusted for prepaid rent and tenant incentives. We remeasure right-of-use assets and lease liabilities when a lease is modified, and the modification is not accounted for as a separate contract. A modification is accounted for as a separate contract if the modification grants us an additional right of use not included in the original lease agreement and the increase in lease payments is commensurate with the additional right of use. We assess our right-of-use assets for impairment consistent with its policy for impairment of long-lived assets held and used in operations.
Emerging Growth Company and Smaller Reporting Company Status
We are an "emerging growth company" as defined in the Jumpstart Our Business
Startups Act, or the JOBS Act, enacted in
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transition period for complying with new or revised accounting standards. We have elected not to "opt out" of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we can adopt the new or revised standard at the time private companies adopt the new or revised standard and may do so until such time that we either (1) irrevocably elect to "opt out" of such extended transition period or (2) no longer qualify as an emerging growth company.
We are also a "smaller reporting company" as defined in Rule 12b-2 under the
Securities and Exchange Act of 1934, as amended. We may continue to be a smaller
reporting company if either (i) the market value of our shares held by
non-affiliates is less than
Recently Issued Accounting Pronouncements
We have reviewed all recently issued accounting pronouncements and have determined that, other than as disclosed in Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report, such standards will not have a material impact on our financial statements or do not otherwise apply to our current operations.
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