The following discussion of the financial condition and results of operations ofKura Oncology, Inc. should be read in conjunction with the financial statements and the notes to those statements appearing in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks, assumptions and uncertainties. Important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis include, but are not limited to, those set forth in "Item 1A. Risk Factors" in this Annual Report. All forward-looking statements included in this Annual Report are based on information available to us as of the time we file this Annual Report and, except as required by law, we undertake no obligation to update publicly or revise any forward-looking statements. For the comparison of the financial results for the fiscal years endedDecember 31, 2019 and 2018, see Item 7, 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, 2019 , filed with theSEC onFebruary 25, 2020 .
References to "
Overview
We are a clinical-stage biopharmaceutical company committed to realizing the promise of precision medicines for the treatment of cancer. Our pipeline consists of small molecule product candidates that target cancer signaling pathways where there is a strong scientific and clinical rationale to improve outcomes, and we intend to pair them with molecular or cellular diagnostics to identify those patients most likely to respond to treatment. We presently have two clinical-stage product candidates for which we own global commercial rights, tipifarnib and KO-539, as well as additional programs that are at a discovery stage. We plan to advance our product candidates through a combination of internal development and strategic partnerships while maintaining significant development and commercial rights. Our first product candidate, tipifarnib, is a potent, selective and orally bioavailable inhibitor of farnesyl transferase that has been previously studied in more than 5,000 cancer patients and demonstrated compelling and durable anti-cancer activity in certain patients with a manageable side effect profile. We are currently evaluating tipifarnib in multiple solid tumor and hematologic indications. Our most advanced solid tumor indication for tipifarnib is in patients with head and neck squamous cell carcinoma, or HNSCC, that carry mutations in the HRAS gene. InSeptember 2017 , we reported that our ongoing proof-of-concept Phase 2 clinical trial of tipifarnib in patients with HRAS mutant relapsed or refractory HNSCC, or RUN-HN, achieved its primary efficacy endpoint. InOctober 2018 , we reported updated data from RUN-HN showing a significant association between tumor HRAS mutant allele frequency and clinical benefit from tipifarnib. Based upon these observations, we introduced a minimum HRAS mutant variant allele frequency as an entry criterion in the RUN-HN trial. Following feedback from theU.S. Food and Drug Administration , or the FDA, and other regulatory authorities, we initiated a global, multi-center, open-label, non-comparative registration-directed clinical trial of tipifarnib in HRAS mutant HNSCC inNovember 2018 . The clinical trial has two cohorts: a treatment cohort, which we call AIM-HN, and a non-interventional screening and outcomes cohort, which we call SEQ-HN. AIM-HN is designed to enroll at least 59 evaluable HNSCC patients with high HRAS mutant variant allele frequency who have received prior platinum-based therapy. InOctober 2019 , we reported updated data from the ongoing RUN-HN trial that we believe confirms the association between HRAS mutant variant allele frequency and anti-tumor activity, and we believe further supports the design of our amended AIM-HN registration-directed trial in HRAS mutant HNSCC. OnDecember 16, 2019 , we reported that the FDA granted Fast Track Designation to tipifarnib for the treatment of patients with HRAS mutant HNSCC after progression on platinum therapy. OnMay 29, 2020 , we announced updated clinical data for our RUN-HN study presented at theAmerican Society of Clinical Oncology Virtual Scientific Program , including data collected as part of the trial showing a median overall survival of 15.4 months, a median progression free survival of 5.9 months and an objective response rate, or ORR, of 50% observed in patients with recurrent/metastatic HRAS mutant HNSCC among the 18 patients on the RUN-HN study who were evaluable for efficacy. InJuly 2020 , we amended the AIM-HN trial protocol to enable enrollment of patients with any HRAS mutation in order to assess the potential for clinical benefit in the overall HRAS mutant HNSCC population. We also introduced a number of modifications to the protocol that seek to enable us to enroll patients in the study more efficiently as well as modifications that we believe better reflected the evolving standards of care for recurrent/metastatic HNSCC. While these amendments do not change the primary outcome measure of ORR in patients with high HRAS mutant variant allele frequency, the modifications will require us to enroll an increased number of evaluable HNSCC patients. As a result of the pandemic caused by the coronavirus disease 2019, or COVID-19, and the additional patients required for the trial, we 70 -------------------------------------------------------------------------------- anticipate we will face delays in our timelines and milestones for the AIM-HN trial and, accordingly, are unable to reasonably forecast when our AIM-HN trial will become fully enrolled. OnFebruary 24, 2021 , we announced that tipifarnib has been granted Breakthrough Therapy Designation from the FDA for the treatment of patients with recurrent or metastatic HRAS mutant head and neck squamous cell carcinoma with variant allele frequency ? 20% after disease progression on platinum-based chemotherapy. The Breakthrough Therapy Designation is based upon data from our Phase 2 RUN-HN trial, which has been accepted for publication in an upcoming issue of theJournal of Clinical Oncology . In addition to evaluating tipifarnib as a monotherapy in patients with recurrent or metastatic HRAS mutant HNSCC, we have also been evaluating the use of tipifarnib in combination with other oncology therapeutics to address larger patient populations and to pursue earlier lines of therapy. Among these potential combinations, we have prioritized the combination of tipifarnib and an inhibitor of the PI3 Kinase alpha enzyme for clinical evaluation in patients with HNSCC. In particular, we are planning to commence a Phase 1/2 open-label, biomarker-defined cohort study in the second half of 2021 to evaluate the safety and tolerability of the combination, determine the recommended dose and schedule for the combination, and assess early antitumor activity of tipifarnib and a PI3 kinase alpha inhibitor for the treatment of adult participants who have HRAS-overexpressing, PIK3CA-mutated and/or PIK3CA-amplified HNSCC. While we believe tipifarnib has potential to modulate the CXCR4-expressing primary tumor cells in AITL, PTCL and other diseases such as relapsed or refractory acute myeloid leukemia, or AML, chronic myelomonocytic leukemia, or CMML, diffuse large B-cell lymphoma, cutaneous T-cell lymphoma and pancreatic cancer, we suspended the initiation of a planned registration directed study for tipifarnib in T-cell lymphoma and of a planned Phase 2 clinical trial for tipifarnib in pancreatic cancer as a result of a strategic review conducted in the Spring of 2020. We have continued preclinical work to validate tipifarnib in the CXCR4 receptor pathway and to assess the timing and strategy for further development. Our second product candidate, KO-539, is a potent, selective, reversible and oral small molecule inhibitor of the mixed-lineage leukemia 1, or MLL1, gene (now renamed Lysine K-specific Methyltransferase 2A, or KMT2A), or menin-KMT2A, protein-protein interaction. We have generated preclinical data that support the potential anti-tumor activity of KO-539 in genetically defined subsets of acute leukemia, including those with rearrangements or partial tandem duplications in the KMT2A gene as well as those with oncogenic driver mutations in genes such as nucleophosmin 1, or NPM1. The novel mechanism of action targets epigenetic dysregulation and removes a key block to cellular differentiation to drive anti-tumor activity. We believe KO-539 has the potential to address approximately 35% of acute myeloid leukemia, or AML, including NPM1-mutant AML and KMT2A-rearranged AML. In the pediatric population, KMT2A-rearranged leukemias make up approximately 10% of acute leukemias in all age groups and in the case of infant leukemias, the frequency of KMT2A rearrangements is 70-80%. These pediatric leukemia sub-types portend a poorer prognosis and five-year survival rate that is lower than other leukemia sub-types and therefore represent significant unmet medical needs given the lack of curative therapeutic options. InApril 2020 , a competitor reported that its menin-KMT2A inhibitor showed potential anti-tumor activity in KMT2A-rearranged AML. We received orphan drug designation for KO-539 for the treatment of acute myeloid leukemia, or AML, from the FDA inJuly 2019 . We initiated our Phase 1/2 clinical trial of KO-539 in relapsed or refractory AML inSeptember 2019 and are actively recruiting at multiple sites inthe United States andFrance with the anticipation of expanding to additional sites inthe United States ,France and other countries during the expansion phase of the study. Our menin-KMT2A Phase 1/2 clinical trial, which we call the Kura Oncology MEnin-KMT2A Trial, or KOMET-001, has an accelerated design and seeks to determine a recommended Phase 2 dose and schedule, or RP2D, using a modified toxicity probability interval, or MTPI, model. OnDecember 5, 2020 , we announced preliminary results from our KOMET-001 Phase 1/2 clinical trial at an oral presentation at the 2020American Society of Hematology , or ASH. As of the data cutoff date for the ASH presentation,November 2, 2020 , the trial had enrolled 12 patients with relapsed or refractory AML, of whom ten were evaluable for safety and tolerability and eight were evaluable for efficacy. Clinical or biological activity was reported in six of the eight efficacy-evaluable patients, including two patients achieving a complete remission, one patient achieving a morphological leukemia-free state, and one patient experiencing a marked decrease in hydroxyurea requirements and having attained peripheral blood count stabilization. As presented at ASH, KO-539 has been well tolerated with a manageable safety profile to date. As of the data cutoff date, no drug discontinuations due to treatment-related adverse events and no evidence of QTc prolongation were reported. Treatment related adverse effects (grade ? 3) were reported to include pancreatitis, increased lipase, decreased neutrophil count, tumor lysis syndrome and deep venous thrombosis. 71
-------------------------------------------------------------------------------- OnFebruary 24, 2021 , we reported that we completed the 600 mg dose cohort of KOMET-001 without determining a RP2D and we are currently evaluating an 800 mg dose cohort. We also indicated that, based on guidance we received from the FDA, we may seek to determine a minimum safe and biologically effective dose for use in the Phase 2 portion of KOMET-001 by initiating Phase 1 expansion cohorts at lower doses in parallel to continuing the Phase 1 dose escalation portion of the study. Initiating Phase 1 expansion cohorts at lower doses requires a protocol amendment and additional patient recruitment.
Liquidity Overview
As ofDecember 31, 2020 , we had cash, cash equivalents and short-term investments of$633.3 million . InDecember 2020 andMay 2020 , we completed public offerings that resulted in net proceeds to us, after deducting underwriting discounts, commissions and offering expenses, of approximately$324.1 million and$134.9 million , respectively. We have an at-the-market issuance sales agreement withSVB Leerink LLC andStifel, Nicolaus & Company, Incorporated , or ATM facility, under which we may offer and sell, from time to time, at our sole discretion, shares of our common stock having an aggregate offering price of up to$75.0 million . We have not yet sold any shares of our common stock under the ATM facility. To date, we have not generated any revenues from product sales, and we do not have any approved products. Since our inception, we have funded our operations primarily through equity and debt financings. We anticipate that we will require significant additional financing in the future to continue to fund our operations as discussed more fully below under the heading "Liquidity and Capital Resources."
Financial Operations Overview
Research and Development Expenses
We focus on the research and development of our product programs. Our research and development expenses consist of costs associated with our research and development activities including salaries, benefits, share-based compensation and other personnel costs, clinical trial costs, manufacturing costs for non-commercial products, fees paid to external service providers and consultants, facilities costs and supplies, equipment and materials used in clinical and preclinical studies and research and development. All such costs are charged to research and development expense as incurred. Payments that we make in connection with in-licensed technology for a particular research and development project that have no alternative future uses in other research and development projects or otherwise and therefore, no separate economic values, are expensed as research and development costs at the time such costs are incurred. As ofDecember 31, 2020 , we have no in-licensed technologies that have alternative future uses in research and development projects or otherwise. We cannot determine with certainty the timing of initiation, the duration or the completion costs of current or future preclinical studies and clinical trials of our product candidates. At this time, due to the inherently unpredictable nature of preclinical and clinical development, we are unable to estimate with any certainty the costs we will incur and the timelines we will require in the continued development of our product candidates and our other pipeline programs. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. Our future research and development expenses will depend on the preclinical and clinical success of each product candidate that we develop, as well as ongoing assessments of the commercial potential of such product candidates. In addition, we cannot forecast which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements. Completion of clinical trials may take several years or more, and the length of time generally varies according to the type, complexity, novelty and intended use of a product candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others:
• managing the impact of COVID-19 pandemic and related precautions on the
operation of our clinical trials; • per patient clinical trial costs; • the number of clinical trials required for approval; • the number of sites included in the clinical trials; • the length of time required to enroll suitable patients; • the number of doses that patients receive; • the number of patients that participate in the clinical trials; 72
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• the drop-out or discontinuation rates of patients; • the duration of patient follow-up;
• potential additional safety monitoring or other studies requested by
regulatory agencies;
• the number and complexity of analyses and tests performed during the
clinical trial; • the phase of development of the product candidate; and • the efficacy and safety profile of the product candidate.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries, benefits, share-based compensation and other personnel costs for employees in executive, finance, business development and support functions. Other significant general and administrative expenses include the costs associated with obtaining and maintaining our patent portfolio, professional services for audit, legal, pre-commercial planning, investor and public relations, corporate activities and allocated facilities. Other Income (Expense) Other income (expense) consists primarily of management fee income, interest income and interest expense. Management fee income is earned in accordance with the management services agreement, as amended, withAraxes Pharma LLC . Interest expense mainly consists of interest on long-term debt.
Income Taxes
We have incurred net losses and have not recorded any
Results of Operations
Comparison of Fiscal Years Ended
The following table sets forth our results of operations for the years presented, in thousands: Years Ended December 31, 2020 2019 Change
Research and development expenses
19,653 11,849 Other income, net 2,274 4,339 (2,065 ) Research and Development Expenses. The following table illustrates the components of our research and development expenses for the years presented, in thousands: Years Ended December 31, 2020 2019 Change Tipifarnib-related costs$ 26,025 $ 26,517 $ (492 ) KO-539-related costs 6,629 2,496 4,133 KO-947-related costs 2,301 3,416 (1,115 ) Discovery stage programs 2,255 318 1,937 Personnel costs and other expenses 19,227 11,652
7,575
Share-based compensation expense 3,960 3,427
533
Total research and development expenses
73
-------------------------------------------------------------------------------- The increase in KO-539-related research and development expenses for the year endedDecember 31, 2020 compared to 2019 was primarily due to increases in costs related to our Phase 1/2 clinical trial of KO-539 which was initiated inSeptember 2019 and manufacturing development activities. The increase in discovery stage programs for the year endedDecember 31, 2020 compared to 2019 was primarily due to increased research activities for new programs. The increase in personnel costs and other expenses for the year endedDecember 31, 2020 compared to 2019 was to support our registration-directed clinical trial of tipifarnib and the Phase 1/2 clinical trial of KO-539. Personnel costs and other expenses include employee salaries and related expenses, facilities expense and overhead expenses. We expect our research and development expenses to increase in future periods as we continue clinical development activities for tipifarnib and KO-539. General and Administrative Expenses. The increase in general and administrative expenses for the year endedDecember 31, 2020 compared to 2019 was primarily due to increases of$2.9 million in each of non-cash share-based compensation expense, pre-commercial planning expenses and personnel expenses and an increase of$2.3 million in professional and legal services. We expect our general and administrative expenses to increase in future periods to support our planned increase in research and development activities.
Other income, net. The decrease in other income, net for the year ended
Liquidity and Capital Resources
Since our inception, we have funded our operations primarily through equity and debt financings. We have devoted our resources to funding research and development programs, including discovery research, preclinical and clinical development activities. InDecember 2020 , we completed a public offering in which we sold an aggregate of 9,326,500 shares of common stock at a price of$37.00 per share. Net proceeds from the public offering, after deducting underwriting discounts, commissions and offering expenses, were approximately$324.1 million . InMay 2020 , we completed a public offering in which we sold an aggregate of 10,465,000 shares of common stock at a price of$13.75 per share. Net proceeds from the public offering, after deducting underwriting discounts, commissions and offering expenses, were approximately$134.9 million . InMarch 2019 , we entered into the ATM facility under which we may offer and sell, from time to time, at our sole discretion, shares of our common stock having an aggregate offering price of up to$75.0 million . We have not yet sold any shares of our common stock under the ATM facility. InNovember 2018 , we entered into the SVB Loan Agreement, providing for up to$20.0 million in a series of term loans. Upon entering into the SVB Loan Agreement, we borrowed$7.5 million , or the Term Loan, the proceeds of which, in part, were used to pay off the outstanding balance of the debt under the loan and security agreement withOxford Finance LLC andSilicon Valley Bank datedApril 27, 2016 , as amended inMay 2017 andOctober 2017 , or the SVB-Oxford Term Loan. Net proceeds from the Term Loan, after payoff of the SVB-Oxford Term Loan, were approximately$0.6 million . Under the terms of the SVB Loan Agreement, we could, at our sole discretion, borrow from the lender up to an additional$12.5 million by a specified date. The draw period for the additional loan expired inNovember 2020 without us drawing down the additional loan. The Term Loan is due on the scheduled maturity date ofMay 1, 2023 , or Maturity Date. Repayment of the Term Loan was interest only throughNovember 30, 2020 , followed by 30 equal monthly payments of principal plus accrued interest which commenced onDecember 1, 2020 . The per annum interest rate for the Term Loan is the greater of (i) 5.50% and (ii) the sum of (a) the prime rate reported in The Wall Street Journal plus (b) 0.25%. In addition, a final payment of 7.75% of the amount of the Term Loan drawn will be due on the earlier of the Maturity Date, acceleration or prepayment of the Term Loan. If we elect to prepay the Term Loan, a prepayment fee equal to 1% of the then outstanding principal balance also will be due. See Note 7, Long-Term Debt, in the Notes to Financial Statements for further details of the term loan facility. Our obligations under the SVB Loan Agreement are secured by substantially all of our assets other than our intellectual property, but including proceeds from the sale, licensing or other disposition of our intellectual property. Our intellectual property is subject to negative covenants, which, among other things, prohibit us from selling, transferring, assigning, mortgaging, pledging, leasing, granting a security interest in or otherwise encumbering our intellectual property, subject to limited exceptions. 74 -------------------------------------------------------------------------------- We have incurred operating losses and negative cash flows from operating activities since inception. As ofDecember 31, 2020 , we had an accumulated deficit of$302.5 million . We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development of, continue and initiate clinical trials of, and seek marketing approval for, our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution to the extent that such sales, marketing and distribution are not the responsibility of potential collaborators. Furthermore, we expect to continue to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts. As ofDecember 31, 2020 , we had cash, cash equivalents and short-term investments of$633.3 million . Based on our current plans, we believe that our existing cash, cash equivalents and short-term investments will be sufficient to enable us to fund our operating expenses and capital expenditure requirements into 2024. Our future capital requirements will depend on many factors, including:
• the scope, progress, results and costs of drug discovery, preclinical
development, laboratory testing and clinical trials for our product candidates;
• the costs, timing and outcome of regulatory review of our product candidates;
• the costs of establishing or contracting for sales, marketing and
distribution capabilities if we obtain regulatory approvals to market our
product candidates;
• the costs of securing and producing drug substance and drug product
material for use in preclinical studies, clinical trials and for use as
commercial supply; • the costs of securing manufacturing arrangements for development activities and commercial production;
• the scope, prioritization and number of our research and development
programs; • the extent to which we are obligated to reimburse, or entitled to reimbursement of, clinical trial costs under future collaboration agreements, if any;
• the extent to which we acquire or in-license other product candidates and
technologies; • the success of our current or future companion diagnostic test collaborations for companion diagnostic tests; and
• the costs of preparing, filing and prosecuting patent applications,
maintaining and enforcing our intellectual property rights and defending
intellectual property-related claims.
To date, we have not generated any revenues from product sales, and we do not have any approved products. We do not know when, or if, we will generate any revenues from product sales. We do not expect to generate significant revenues from product sales unless and until we obtain regulatory approval of and commercialize one of our current or future product candidates. We are subject to all of the risks incident in the development of new therapeutic products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. We anticipate that we will need substantial additional funding in connection with our continuing operations. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of stock offerings, debt financings, collaborations, strategic partnerships or licensing arrangements. We do not have any committed external source of funds. Additional capital may not be available on reasonable terms, if at all. Subject to limited exceptions, our term loan facility also prohibits us from incurring indebtedness without the prior written consent of the Lender. To the extent that we raise additional capital through the sale of stock or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include increased fixed payment obligations and covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, declaring dividends, selling or licensing intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we raise additional funds through collaborations, strategic partnerships or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, including our other technologies, future revenue streams or research programs, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we may be unable to carry out our business plan. As a result, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and commercialize our product candidates even if we would otherwise prefer to develop and commercialize such product candidates ourselves, and our business, financial condition and results of operations would be materially adversely affected. 75 --------------------------------------------------------------------------------
The following table provides a summary of our net cash flow activities for the years presented, in thousands:
Years Ended December 31, 2020 2019 Change
Net cash used in operating activities
$ (15,070 ) Net cash used in investing activities (99,936 ) (46,325 ) (53,611 ) Net cash provided by financing activities 469,334 111,101 358,233 Operating Activities. The increase of$15.1 million in net cash used in operating activities for the year endedDecember 31, 2020 compared to 2019 was primarily due to the increase of$26.5 million in net loss, partially offset by increases of$4.8 million in changes in accounts payable and accrued expenses,$3.4 million in non-cash share-based compensation expense and$1.5 million in amortization of premiums and accretion of discounts on marketable securities. Investing Activities. The increase of$53.6 million in net cash used in investing activities for the year endedDecember 31, 2020 as compared to 2019 was primarily due to an increase of$93.4 million in purchases of marketable securities, partially offset by an increase of$42.0 million in maturities of marketable securities. Financing Activities. The increase of$358.2 million in net cash provided by financing activities for the year endedDecember 31, 2020 compared to 2019 was primarily due to increases of$351.2 million in proceeds from sale of common stock and$7.3 million in proceeds from exercise of stock options and purchases under our employee stock purchase plan.
Contractual Obligations
The following is a summary of our significant contractual obligations as of
Payments Due by Period Less than 1-3 3-5 More than Total 1 Year Years Years 5 Years Long-term debt, including current portion(1)$ 7,250 $ 3,000 $ 4,250 $ - $ - Interest payments on long-term debt(2) 1,086 327 759 - - Operating leases(3) 8,599 2,141 4,178 2,280 - Total$ 16,935 $ 5,468 $ 9,187 $ 2,280 $ - ______________________
(1) Principal payments on our term loan facility with SVB. (2) Interest payments on our term loan facility with SVB. The per annum
interest rate for the Term Loan is the greater of (i) 5.50% and (ii) the
sum of (a) the prime rate reported in The Wall Street Journal plus (b) 0.25%. The interest rate as ofDecember 31, 2020 was 5.50%. In addition, a final payment of 7.75% of the amount of the Term Loan drawn will be due on the earlier of the maturity date, acceleration or prepayment of the Term Loan.
(3) Future minimum lease payments under our operating leases in
We enter into agreements in the normal course of business with clinical sites and CROs for clinical research studies, professional consultants and various third parties for preclinical research studies, clinical supply manufacturing and other services. The nature of the work being conducted under these agreements is such that, in most cases, the services may be cancelled upon prior notice. Payments due upon cancellation generally consist only of payments for services provided and expenses incurred, including non-cancellable obligations of our service providers, up to the date of cancellation. These payments are not included in the table of contractual obligations above. Excluded from the table above are milestone or contractual payment obligations contingent upon the achievement of certain milestones or events if the amount and timing of such obligations are unknown or uncertain. Our license agreements are cancellable by us with written notice within 180 days or less. We may be required to pay up to approximately$80.2 million in milestone payments, plus sales royalties, in the event that regulatory and commercial milestones under the in-license agreements are achieved. 76 --------------------------------------------------------------------------------
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by applicable regulations of theSEC , that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Management Estimates
TheSEC defines critical accounting policies as those that are, in management's view, important to the portrayal of our financial condition and results of operations and demanding of management's judgment. Management's discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements required estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in the financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and share-based compensation. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be 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. 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 in the Notes to Financial Statements of this Annual Report, we believe the following accounting policies are critical to the judgments and estimates used in the preparation of our financial statements.
Research and Development Expenses
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. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the accrual accordingly. Non-refundable advance payments for goods and services, including fees for process development or manufacturing and distribution of clinical supplies that will be used in future research and development activities, are deferred and recognized as expense in the period that the related goods are consumed or services are performed. Payments that we make in connection with in-licensed technology for a particular research and development project that have no alternative future uses, in other research and development projects or otherwise, and therefore no separate economic values are expensed as research and development costs at the time such costs are incurred.
Clinical Trial Costs and Accruals
We accrue clinical trial costs based on work performed. In determining the amount to accrue, we rely on estimates of total costs incurred based on enrollment, the completion of clinical trials and other events. We follow this method because we believe reasonably dependable estimates of the costs applicable to various stages of a clinical trial can be made. However, the actual costs and timing of clinical trials are highly uncertain, subject to risks and may change depending on a number of factors. Differences between the actual clinical trial costs and the estimated clinical trial costs that we have accrued in any prior period are recognized in the subsequent period in which the actual costs become known. Historically, our estimated accrued expenses have approximated actual expenses incurred; however, material differences could occur in the future. Share-Based Payments We account for share-based compensation expense related to stock options granted to employees, members of our board of directors, and nonemployee consultants by estimating the fair value of each stock option on the date of grant using the Black-Scholes options-pricing model, or Black-Scholes model. The Black-Scholes model requires the use of subjective assumptions, including fair value of the underlying common stock, volatility, expected term, risk-free interest rate, and the expected dividend yield. The fair value of awards expected to vest are recognized and amortized on a straight-line basis over the requisite service period of the award less actual forfeitures.
Recently Adopted Accounting Pronouncements
See Note 3, Recent Accounting Pronouncements, in the Notes to Financial Statements of this Annual Report.
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