The following discussion and analysis is meant to provide material information relevant to an assessment of the financial condition and results of operations of our company, including an evaluation of the amounts and uncertainties of cash flows from operations and from outside resources, so as to allow investors to better view our company from management's perspective. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing at the end of this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Risk Factors" section of this Annual Report, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.
Overview
We are innovating genetic medicines to provide durable, redosable treatments for potentially hundreds of millions of patients living with rare and prevalent diseases. Our non-viral genetic medicine platform incorporates our high-capacity DNA construct called ceDNA; our ctLNP; and our highly scalable capsid-free manufacturing process that uses our proprietary cell-free RES to produce ceDNA. Using our approach, we are developing novel genetic medicines to provide targeted delivery of genetic payloads that include large and multiple genes to a range of cell types across a broad array of diseases. We are also engineering our genetic medicines to be redosable, which may enable individualized patient titration to reach the desired level of therapeutic expression and to maintain efficacy throughout a patient's life. We are advancing a broad portfolio of programs, including programs for rare and prevalent diseases of the liver. We are focused on diseases with significant unmet need for which our non-viral genetic medicine platform may substantially improve clinical efficacy relative to current gene therapy approaches. We are initially prioritizing rare monogenic diseases that result from mutations in a single gene, and which can be treated by delivering our ceDNA cargo to cells of the liver, called hepatocytes. We are focusing on indications like hemophilia A, which is our lead program, that have well-established biomarkers and clear clinical and regulatory pathways. We are at the preclinical research stage, and are currently optimizing our ctLNPs to improve hepatocyte delivery to treathemophilia A and other rare monogenic diseases. The biodistribution of our ctLNPs is driven by biological targeting molecules called ligands, which we believe will enable selective delivery to hepatocytes and ultimately to other cell types and tissues. We plan to expand our portfolio to include programs based on cell-targeted delivery of ceDNA to immune cells, tumors, retina, skeletal muscle, and to the CNS by developing discrete ctLNPs specifically engineered to reach each of these cell types or tissues. In addition, we believe that our non-viral genetic medicine platform may be used to develop therapies that deliver antibody genes to direct the liver to produce antibody therapies from patients' own cells for years at a time from a single dose in a process we refer to as ETAP. We plan to advance ETAP programs across multiple therapeutic areas, including prevalent diseases. We also believe that our platform may be used to develop other therapeutic modalities and are exploring ways to apply our platform technologies. For example, we are conducting early research into the development of potential ceDNA-based vaccines using our proprietary vaccine-optimized ctLNPs. We believe that, compared to currently approved mRNA vaccines, ceDNA-ctLNP vaccines could enable improved immune responses, more durable protection, and could be stored at ambient temperatures potentially allowing for greater shelf stability than currently approved mRNA-LNP vaccines, which currently must be stored at very low temperatures, limiting distribution. Since our inception inOctober 2016 , we have focused substantially all of our resources on building our non-viral genetic medicine platform, establishing and protecting our intellectual property portfolio, conducting research and development activities, developing our manufacturing process, organizing and staffing our company, business planning, raising capital and providing general and administrative support for these operations. We do not have any products approved for sale and have not generated any revenue from product sales. To date, we have funded our operations with proceeds from the sale of instruments convertible into convertible preferred stock (which converted into convertible preferred stock in 2017), the 112
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sales of convertible preferred stock (which converted into common stock in 2020) and, most recently, the sales of common stock in our public offerings. InJune 2020 , we completed our IPO pursuant to which we issued and sold 12,105,263 shares of our common stock, including 1,578,947 shares sold by us pursuant to the full exercise of the underwriters' option to purchase additional shares. We received net proceeds of$210.7 million , after deducting underwriting discounts and commissions and other offering expenses. InJanuary 2021 , we issued and sold 9,200,000 shares of our common stock, including 1,200,000 shares sold by us pursuant to the full exercise of the underwriters' option to purchase additional shares, in a follow-on public offering, resulting in net proceeds of$211.3 million after deducting underwriting discounts and commissions and other offering expenses. InAugust 2021 , we entered into an "at-the-market" sales agreement pursuant to which we may, from time to time, sell shares of our common stock having an aggregate offering price of up to$250.0 million . As ofFebruary 23, 2023 , the issuance date of these consolidated financial statements, we have issued and sold 1,795,524 shares of our common stock pursuant to this sales agreement resulting in net proceeds of$12.3 million . Historically, we have incurred significant operating losses. Our ability to generate any product revenue or product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more product candidates we may develop. For the years endedDecember 31, 2022 , 2021, and 2020, we reported net losses of$136.6 million ,$119.2 million , and$80.5 million , respectively. As ofDecember 31, 2022 , we had an accumulated deficit of$444.8 million . We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect that our expenses and capital requirements will increase substantially in connection with our ongoing activities, particularly if and as we:
? obtain, expand, maintain, defend and enforce our intellectual property
portfolio;
? continue our current research programs and conduct additional research
programs;
? expand the capabilities of our proprietary non-viral genetic medicine platform;
add operational, legal, compliance, financial and management information ? systems and personnel to support our research, product development, future
commercialization efforts and operations as a public company;
establish additional manufacturing sources and secure supply chain capacity ? sufficient to provide necessary quantities of any product candidates we may
develop for clinical or commercial use;
? hire additional clinical, regulatory and scientific personnel;
? advance any product candidates we identify into preclinical and clinical
development;
? seek marketing approvals for any product candidates that successfully complete
clinical trials; and
? ultimately establish a sales, marketing and distribution infrastructure to
commercialize any products for which we may obtain marketing approval.
We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for any product candidates we may develop. If we obtain regulatory approval for any product candidates we may develop, we expect to incur significant expenses related to developing our commercial capability to support product sales, marketing and distribution. Further, we expect to continue to incur additional costs associated with operating as a public company. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth 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, collaborations, strategic alliances and/or licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements when needed or on terms 113
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acceptable to us, we would be required to delay, limit, reduce or terminate our product development or future commercialization of one or more of our product candidates. Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability. Even if we are able to generate 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. We believe that our existing cash, cash equivalents, and marketable securities will enable us to fund our operating expenses and capital expenditures into 2025. We have based our estimates as to how long we expect we will be able to fund our operations on assumptions that may prove to be wrong. We could use our available capital resources sooner than we currently expect, in which case we would be required to obtain additional financing, which may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. See "-Liquidity and Capital Resources."
COVID-19
The COVID-19 pandemic continues to present a public health and economic challenge around the world. The length of time and full extent to which the COVID-19 pandemic may directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain, subject to change and difficult to predict. We, our CMOs, and our contract research organizations, or CROs, experienced temporary reductions in the capacity to undertake research-scale production and to execute some preclinical studies. While these operations have since normalized, we, together with our CMOs and CROs, are closely monitoring the impact of the COVID-19 pandemic on these operations. In addition, shortages, delays and governmental restrictions arising from the COVID-19 pandemic have disrupted and may continue to disrupt global supply chains and our vendors' ability to procure items, such as raw materials, that are essential for the manufacturing of our product candidates. We have taken steps to monitor and strengthen our supply chain to maintain an uninterrupted supply of our critical products and services. We continue to closely monitor the ongoing impact and effects of the COVID-19 pandemic on our employees and our other business operations. In an effort to provide a safe work environment for our employees, we have maintained our increased cadence of sanitization of our office and lab facilities. Additionally, we have maintained a company policy requiring COVID-19 vaccinations for all employees, with certain limited exceptions.
We expect to continue to take actions as may be required or recommended by government authorities or as we determine are in the best interests of our employees and other business partners in light of the pandemic.
Components of Our Results of Operations
Operating expenses
Research and development expenses
Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts, and the development of our programs, which include:
personnel-related costs, including salaries, benefits and stock-based ? compensation expense, for employees engaged in research and development
functions;
expenses incurred in connection with our research programs, including under ? agreements with third parties, such as consultants, contractors and CROs, and
regulatory agency fees; 114 Table of Contents
the cost of developing and scaling our manufacturing process and capabilities ? and manufacturing drug substance and drug product for use in our research and
preclinical studies, including under agreements with third parties, such as
consultants, contractors and CDOs;
? laboratory supplies and research materials;
facilities, depreciation and amortization and other expenses, which include ? direct and allocated expenses for rent and maintenance of facilities and
insurance; and
? payments made under third-party licensing agreements.
We expense research and development costs as incurred. Advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed. Our external research and development expenses consist of costs that include fees and other costs paid to consultants, contractors, CDOs and CROs in connection with our research, preclinical and manufacturing activities. We do not allocate our research and development costs to specific programs because costs are deployed across multiple programs and our platform and, as such, are not separately classified. We expect that our research and development expenses will increase substantially as we advance our programs into clinical development and expand our discovery, research and preclinical activities in the near term and in the future. At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any product candidates we may develop. The successful development of any of our product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development, including the following:
? the timing and progress of preclinical studies, including IND-enabling studies;
? the number and scope of preclinical and clinical programs we decide to pursue;
? raising additional funds necessary to complete preclinical and clinical
development of our product candidates;
the timing of the submission and acceptance of IND applications or comparable ? foreign applications that allow commencement of future clinical trials for our
product candidates;
? the successful initiation, enrollment and completion of clinical trials,
including under GCPs;
our ability to achieve positive results from our future clinical programs that ? support a finding of safety and effectiveness and an acceptable risk-benefit
profile in the intended patient populations of any product candidates we may
develop;
? our ability to scale RES to produce clinical and initial commercial supply;
? our ability to establish arrangements with third-party manufacturers for
preclinical and clinical supply;
? the availability of specialty raw materials for use in production of our
product candidates;
? our ability to establish new licensing or collaboration arrangements;
? the receipt and related terms of regulatory approvals from the FDA, and other
applicable regulatory authorities;
our ability to establish, obtain, maintain, enforce and defend patent, ? trademark, trade secret protection and other intellectual property rights or
regulatory exclusivity for any product candidates we may develop and our
technology; and 115 Table of Contents
? our ability to maintain a continued acceptable safety, tolerability and
efficacy profile of our product candidates following approval.
A change in the outcome of any of these variables with respect to any product candidates we may develop could significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any product candidates 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 employees engaged in executive, legal, finance and accounting and other administrative functions. General and administrative expenses also include professional fees for legal, patent, consulting, investor and public relations and accounting and audit services as well as direct and allocated facility-related costs. We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our programs and platform. We also anticipate that we will continue to incur substantial accounting, audit, legal, regulatory, compliance, director and officer insurance costs and investor and public relations expenses associated with operating as a public company.
Other income (expense)
Other income (expense) and interest income, net
Other income (expense) and interest income, net consists of interest income earned on our invested cash balances and other income (expense) income from miscellaneous expenses and income unrelated to our core operations.
Income taxes
Since our inception, we have not recorded any income tax benefits for the net losses we have incurred or for the research and development tax credits earned in each year, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss carryforwards and tax credit carryforwards will not be realized. As ofDecember 31, 2022 , we had federal net operating loss carryforwards of$328.2 million , which may be available to offset future taxable income, of which$8.2 million of the total net operating loss carryforwards begin to expire in 2036, while the remaining$320.0 million do not expire but may be limited in their usage to an annual deduction equal to 80% of annual taxable income. In addition, as ofDecember 31, 2022 , we had state net operating loss carryforwards of$326.5 million , which may be available to offset future taxable income and expire at various dates beginning in 2036. As ofDecember 31, 2022 , we also had federal and state research and development tax credit carryforwards of$10.4 million and$6.2 million , respectively, which may be available to reduce future tax liabilities and expire at various dates beginning in 2036 and 2033, respectively. Due to our history of cumulative net losses since inception and uncertainties surrounding our ability to generate future taxable income, we have recorded a full valuation allowance against our net deferred tax assets at
each balance sheet date. Results of Operations
The following table summarizes our results of operations:
116 Table of Contents Year Ended December 31, Change (in thousands) 2022 2021 2020 2022 vs 2021 2021 vs 2020 Operating expenses: Research and development$ 96,718 $ 85,247 $ 58,532 $ 11,471 $ 26,715 General and administrative 44,464 33,854 22,582 10,610 11,272 Total operating expenses 141,182 119,101 81,114 22,081 37,987 Loss from operations (141,182) (119,101) (81,114) (22,081) (37,987) Other income (expense): Other income (expense) and interest income, net 4,543 (50) 591 4,593 (641) Net loss$ (136,639) $ (119,151) $ (80,523) $ (17,488) $ (38,628)
Comparison of the Years Ended
Research and development expenses
Year Ended December 31, Change (in thousands) 2022 2021 2020 2022 vs 2021 2021 vs 2020 Personnel-related$ 29,693 $ 24,908 $ 17,461 $ 4,785 $ 7,447 Facilities 22,518 10,527 9,394 11,991 1,133 Preclinical and manufacturing 15,084 23,128 16,849
(8,044) 6,279 Stock-based compensation 12,405 9,316 4,301 3,089 5,015 Lab supplies 5,063 7,445 4,002 (2,382) 3,443
Consulting and professional services 3,357 3,164 3,031 193 133 Other 8,598 6,759 3,494 1,839 3,265
Total research and development expenses
Research and development expenses were$96.7 million for the year endedDecember 31, 2022 compared to$85.2 million for the year endedDecember 31, 2021 . The increase in facilities-related costs of$12.0 million was primarily driven by the recognition of a$5.1 million impairment related to the abandonment of leasehold improvements and rent expense related to the Seyon Lease. The increases in personnel-related costs of$4.8 million and stock-based compensation costs of$3.1 million were primarily due to increased headcount in our research and development function. These increases were partially offset by a decrease in preclinical and manufacturing costs of$8.0 million primarily due to a decrease in costs resulting from the transition of our manufacturing process from the use of Sf9 cells to RES in the second half of 2021.
General and administrative expenses
Year Ended December 31, Change (in thousands) 2022 2021 2020 2022 vs 2021 2021 vs 2020 Personnel-related$ 15,465 $ 13,609 $ 8,927 $ 1,856 $ 4,682 Stock-based compensation 12,047 8,541 4,111 3,506 4,430
Professional and consultant fees 7,909 7,819 6,987
90 832 Facilities 6,909 1,011 1,576 5,898 (565) Other 2,134 2,874 981 (740) 1,893 Total general and administrative expenses$ 44,464 $ 33,854 $ 22,582 $
10,610
General and administrative expenses were$44.5 million for the year endedDecember 31, 2022 , compared to$33.9 million for the year endedDecember 31, 2021 . The increases in stock-based compensation costs and personnel-related costs of$3.5 million and$1.9 million , respectively, were primarily a result of an increase in headcount in our general and administrative function. The increase in facilities-related costs of$5.9 million was primarily driven by rent expense related to the Seyon Lease. 117
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Other income (expense) and interest income, net
Other income (expense) and interest income, net for the year endedDecember 31, 2022 was$4.5 million in income compared to$0.1 million in expense for the year endedDecember 31, 2021 . The increase in other income (expense) and interest income, net during the year endedDecember 31, 2022 was primarily due to an increase of interest earned on our invested cash balances.
Results of Operations - Years Ended
For a discussion of our results of operations for the year endedDecember 31, 2021 and for a comparison of such results of operations to the results of operations for the year endedDecember 31,2020 , please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 that was filed with theSEC onFebruary 24, 2022 .
Liquidity and Capital Resources
Since our inception, we have incurred significant operating losses. We expect to incur significant expenses and operating losses for the foreseeable future as we support our continued research activities and development of our programs and platform. We have not yet commercialized any product candidates and we do not expect to generate revenue from sales of any product candidates for several years, if at all. To date, we have funded our operations with proceeds from the sales of instruments convertible into convertible preferred stock (which converted into convertible preferred stock in 2017), the sales of convertible preferred stock (which converted into common stock in 2020) and with proceeds from the sales of common stock in our public offerings. InJune 2020 , we completed our IPO, pursuant to which we issued and sold 12,105,263 shares of our common stock, including 1,578,947 shares sold by us pursuant to the full exercise of the underwriters' option to purchase additional shares. We received net proceeds of$210.7 million , after deducting underwriting discounts and commissions and other expenses. InJanuary 2021 , we issued and sold 9,200,000 shares of our common stock, including 1,200,000 shares sold by us pursuant to the full exercise of the underwriters' option to purchase additional shares, in a follow-on public offering, resulting in net proceeds of$211.3 million after deducting underwriting discounts and commissions and other offering expenses. InAugust 2021 , we entered into an "at-the-market" sales agreement pursuant to which we may, from time to time, sell shares of our common stock having an aggregate offering price of up to$250.0 million . As ofFebruary 23, 2023 , the issuance date of this Annual Report on Form 10-K, we have issued and sold 1,795,524 shares of our common stock pursuant to this sales agreement resulting in net proceeds of$12.3 million . As ofDecember 31, 2022 , we had cash, cash equivalents, and marketable securities of$279.1 million .
Cash flows
The following table summarizes our sources and uses of cash for each of the periods presented: Year Ended December 31, (in thousands) 2022 2021 2019 Net cash used in operating activities$ (102,448) $ (91,821) $ (70,142) Net cash (used in) provided by investing activities (192,515) 193,047 (205,196) Net cash provided by financing activities 12,989 214,671 323,095 Net (decrease) increase in cash, cash equivalents and restricted cash$ (281,974) $ 315,897 $ 47,757 Operating activities During the year endedDecember 31, 2022 , operating activities used$102.4 million of cash, primarily resulting from our net loss of$136.6 million , offset by non-cash charges of$33.1 million and changes in our operating assets and liabilities of$1.0 million . Net cash provided by changes in our operating assets and liabilities for the year endedDecember 31, 2022 consisted of a$1.3 million increase of other noncurrent assets, a$0.9 million increase in operating lease liability, a$0.6 million decrease of accrued expense and other current liabilities and accounts payable, a$3.5 million increase in prepaid expenses and other current assets, a$5.9 million decrease in operating lease right-of-use assets and a$0.4 million increase in tenant receivable. 118
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Changes in accounts payable, accrued expenses and other current liabilities and prepaid expenses and other current assets in all periods were generally due to growth in our business, the advancement of our research programs and the timing of vendor invoicing and payments.
Investing activities
During the year endedDecember 31, 2022 , net cash used by investing activities was$192.5 million , due to an increase in purchases of marketable securities of$323.7 million and property and equipment of$8.8 million during the year, offset by$140.0 million in maturities of marketable securities.
Financing activities
During the year endedDecember 31, 2022 , net cash provided by financing activities was$13.0 million , consisting primarily of net proceeds from the issuance of common stock pursuant to our "at-the-market" sales agreement of$12.4 million and$1.3 million in proceeds from the exercise of common stock options and other types of equity, net during the period, offset by payments for the repurchase of common stock for employee tax withholdings. For a discussion of our sources and uses of cash for the years endedDecember 31, 2021 and 2020 please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 that was filed with theSEC onFebruary 24, 2022 .
Funding requirements
We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance preclinical activities and initiate clinical trials for our product candidates in development. The timing and amount of our operating expenditures will depend largely on:
? the identification of additional research programs and product candidates;
? the scope, progress, costs and results of preclinical and clinical development
for any product candidates we may develop;
? the costs, timing and outcome of regulatory review of any product candidates we
may develop;
the cost and timing of completion of commercial-scale manufacturing activities, ? including the costs and resources required to manufacture our drug substance
and drug product using external cleanroom facilities and/or CMOs;
the costs and timing of future commercialization activities, including product ? manufacturing, marketing, sales and distribution, for any product candidates we
may develop for which we receive marketing approval;
? the costs and scope of the continued development of our non-viral genetic
medicine platform;
? the costs of satisfying any post-marketing requirements;
? the revenue, if any, received from commercial sales of product candidates we
may develop for which we receive marketing approval;
the costs and timing of preparing, filing and prosecuting applications for
patents; obtaining, maintaining, defending and enforcing our intellectual ? property rights and defending against any intellectual property-related claims,
including claims of infringement, misappropriation or other violation of
third-party intellectual property;
? the costs of operational, financial and management information systems and associated personnel; 119 Table of Contents
? the associated costs in connection with any acquisition of in-licensed
products, intellectual property and technologies; and
? the costs of operating as a public company.
As of
for our office and laboratory space that was entered into in
an approximately 104,000 square foot cGMP-compliant manufacturing facility that
was entered into
?
preclinical activities during 2023 and 2024.
We believe that our existing cash, cash equivalents and marketable securities will enable us to fund our operating expenses and capital expenditures into 2025. We have based our estimates as to how long we expect we will be able to fund our operations on assumptions that may prove to be wrong. We could use our available capital resources sooner than we currently expect, in which case we would be required to obtain additional financing, which may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We do not have any committed external source of funds. Accordingly, we will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing into which we enter would result in fixed payment obligations and may involve agreements that include grants of security interests on our assets and restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, granting liens over our assets, redeeming stock or declaring dividends, that could adversely impact our ability to conduct our business. Any debt financing or additional equity that we raise may contain terms that could adversely affect the holdings or the rights of our common stockholders. If we are unable to raise sufficient capital as and when needed, we may be required to significantly curtail, delay or discontinue one or more of our research or development programs or the commercialization of any product candidate we may develop, or be unable to expand our operations or otherwise capitalize on our business opportunities. If we raise additional funds through collaborations or licensing arrangements with third parties, we may have to relinquish valuable rights to future revenue streams or product candidates or grant licenses on terms that may not be favorable to us.
See "Risk Factors" for additional risks associated with our substantial capital requirements.
Critical accounting policies and significant judgments and estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles inthe United States of America , or GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
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Accrued research and development expenses
As part of the process of preparing our consolidated financial statements, we are required to estimate certain accrued research and development expenses. This process involves estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. We make estimates of our accrued expenses as of each balance sheet date in our consolidated 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 those related to fees paid to:
? vendors in connection with discovery and preclinical development activities;
? CROs in connection with preclinical studies and testing; and
? CDMOs in connection with the process development and scale up activities and
the production of 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 CROs and CDMOs that conduct services and supply materials. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. 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 accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses. While the majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; some require advance payments. 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. We record these as prepaid expenses on our consolidated balance sheet.
Stock-based compensation
We measure all stock-based awards granted to employees, non-employees and directors based on their fair value on the date of the grant using the Black-Scholes option-pricing model for options or the difference between the purchase price, if any, and the fair value of our common stock for restricted stock awards and units. Compensation expense for awards with service-based vesting is generally recognized over the vesting period of the award using the straight-line method to record the expense. We use the graded-vesting method to record the expense of awards with both service-based and performance-based vesting conditions, commencing once achievement of the performance condition becomes probable. We account for forfeitures of share-based awards as they occur. The Black-Scholes option-pricing model uses as inputs the fair value of our common stock and assumptions we make for the expected volatility of our common stock, the expected term of stock options, the risk-free interest rate for a period that approximates the expected term of our common stock options and our expected dividend yield. We determine the fair market value of our common stock using the closing price of our common stock as reported on the Nasdaq Global Select Market. Recently Issued and Adopted Accounting Pronouncements A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our consolidated financial statements included in this Annual Report. 121
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