LONGBOARD PHARMACEUTICALS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report and our audited consolidated financial statements and related notes included in the final prospectus datedMarch 11, 2021 that forms a part of our Registration Statement on Form S-1, as amended (File No. 333-253329), as filed with theSecurities and Exchange Commission ("SEC"), pursuant to Rule 424(b) under the Securities Act of 1933, as amended ("Securities Act"), onMarch 12, 2021 (the "Prospectus"). Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Risk Factors" section of this Quarterly 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. You should carefully read the "Risk Factors" section of this Quarterly Report to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Overview We are a clinical-stage biopharmaceutical company focused on developing novel, transformative medicines for neurological diseases. We were formed inJanuary 2020 by Arena Pharmaceuticals, Inc. ("Arena") to advance a portfolio of centrally acting product candidates designed to be highly selective for specific G protein-coupled receptors ("GPCRs"). Our small molecule product candidates were discovered out of the same platform at Arena that represents a culmination of more than 20 years of GPCR research. Our pipeline includes: ? LP352, an oral, centrally acting, 5-hydroxytryptamine 2c receptor subtype ("5-HT2c") superagonist, that recently completed a multiple-ascending dose ("MAD") Phase 1 clinical trial. We plan to initiate a Phase 1b/2a clinical trial for the treatment of developmental and epileptic encephalopathies ("DEEs"), including Dravet syndrome and Lennox-Gastaut syndrome, among others, in the first quarter of 2022; ? LP143, a centrally acting, full cannabinoid type 2 receptor ("CB2") agonist in investigational new drug ("IND") application enabling studies for neurodegenerative diseases associated with neuroinflammation caused by microglial activation, including amyotrophic lateral sclerosis ("ALS"); and ? LP659, a centrally acting, sphingosine-1-phosphate (S1P) receptor subtypes 1 and 5 ("S1P1,5") receptor modulator in IND-enabling studies for CNS neuroinflammatory diseases.
We also have additional earlier discovery stage compounds.
InOctober 2020 , we entered into a License Agreement with Arena (the "Arena License Agreement"), pursuant to which Arena granted us an exclusive, royalty bearing, sublicensable, worldwide license to develop and commercialize LP352, LP143 and LP659 (pharmaceutical products containing any such compounds, the Licensed Products). 20
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The following table provides an overview of our current programs:
[[Image Removed: img7673250_0.jpg]]* We hold worldwide rights to our product candidates in our therapeutic areas of focus for such compounds through the Arena License Agreement.
We were incorporated inJanuary 2020 . Since our inception, we have devoted substantially all of our resources to organizing and staffing our company, research and development activities, business planning, raising capital, in-licensing intellectual property rights and establishing our intellectual property portfolio, and providing general and administrative support for these operations. We have principally financed our operations to date through the private placement of convertible preferred stock and the completion of our initial public offering (the "IPO") of our common stock inMarch 2021 . To date, we have raised gross proceeds of approximately$56.0 million from the issuance of our convertible preferred stock and$84.8 million from our IPO. As ofSeptember 30, 2021 , we had cash, cash equivalents and short-term investments of$112.6 million . We have incurred net losses since our inception. Our net losses were$19.0 million and$4.3 million for the nine months endedSeptember 30, 2021 and the period fromJanuary 3, 2020 (inception) throughSeptember 30, 2020 , respectively. As ofSeptember 30, 2021 , we had an accumulated deficit of$33.4 million . Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and preclinical studies and our expenditures on other research and development activities. We expect that our expenses and operating losses will increase substantially as product candidates advance through preclinical studies and clinical trials, and as we expand our clinical, regulatory, quality and manufacturing capabilities, incur significant commercialization expenses for marketing, sales, manufacturing and distribution, if we obtain marketing approval for any of our product candidates, and incur additional costs associated with operating as a public company. We expect that our existing cash, cash equivalents and short-term investments will be sufficient to fund our operations for at least the next 12 months. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We base our estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect. We do not expect to generate any revenues from product sales unless and until we successfully complete development and obtain regulatory approval for one or more product candidates, which will not be for many years, if ever. Accordingly, until such time as we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements when needed would have a negative impact on our financial condition and could force us to delay, reduce or terminate our research and development programs or other operations, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. The global COVID-19 pandemic continues to rapidly evolve. As a result of the COVID-19 pandemic, we have faced and may continue to face delays in meeting our anticipated timelines for our ongoing and planned clinical trials. Specifically, the initiation of the MAD portion of the Phase 1 clinical trial of LP352 was delayed, in part, as a result of the impact of the COVID-19 pandemic on the clinical site in theUnited Kingdom that conducted the single-ascending dose ("SAD") portion of the Phase 1 clinical trial for LP352, and subsequently we modified the protocol and relocated the MAD portion of such trial to a new clinical site inthe United States . The extent of the impact of COVID-19 on our business, operations and development timelines and plans remains uncertain, and will depend on certain developments, including the duration and spread of the outbreak and its impact on our development activities, planned clinical trial enrollment, future trial sites, contract research organizations ("CROs"), third-party manufacturers, and 21 -------------------------------------------------------------------------------- other third parties with whom we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel and work locations. We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business. At this point, the extent to which the COVID-19 pandemic may affect our business, operations and development timelines and plans, including the resulting impact on our expenditures and capital needs, remains uncertain. Agreements with Arena
Below is a summary of the key terms for our license and other agreements with Arena.
License Agreement InOctober 2020 , we entered into the Arena License Agreement, pursuant to which we obtained an exclusive, worldwide license of certain intellectual property for the Licensed Products. As consideration for the rights granted to us under the Arena License Agreement, we will be required to pay to Arena a mid-single digit royalty on net sales of Licensed Products of LP352, and a low-single digit royalty on net sales of all other Licensed Products, by us, our affiliates or our sublicensees, subject to standard reductions. Our royalty obligations continue on a Licensed Product-by-Licensed Product and country-by-country basis until the later of the (i) tenth anniversary of the first commercial sale of such product in such country or (ii) expiration of the last-to-expire valid claim of the patents licensed to us under the Arena License Agreement covering the manufacture, use or sale of such product in such country. Royalty Purchase Agreement InOctober 2020 , we entered into a Royalty Purchase Agreement with Arena and 356Royalty Inc. , a wholly owned subsidiary of Arena (356 Royalty), pursuant to which we purchased the right to receive all milestone payments, royalties, interest and other payments relating to net sales of lorcaserin, in all countries and territories of the world (Territory) owed or otherwise payable to 356 Royalty by Eisai pursuant to a Transaction Agreement datedDecember 28, 2016 , as amended (Transaction Agreement), by and among 356 Royalty and Eisai, for an upfront payment of$0.1 million . Lorcaserin is currently in a Phase 3 clinical trial for Dravet syndrome. Services Agreement InOctober 2020 , we entered into the Services Agreement under which Arena agreed to perform certain research and development services, general administrative services, management services and other mutually agreed services for us and receive service fees therefor on an hourly rate based on an annual full time equivalent rate agreed upon by the parties.
Components of Our Results of Operations
Operating Expenses
Our operating expenses consist of (i) research and development expenses and (ii) general and administrative expenses.
Research and Development
Our research and development expenses consist primarily of direct and indirect
costs incurred in connection with the preclinical and clinical development of
our product candidates.
Direct costs include:
?
external research and development expenses incurred under agreements with CROs,
investigative sites, consultants and Arena to conduct our preclinical studies
and clinical trials; and
?
costs related to manufacturing our product candidates for preclinical studies
and clinical trials, including fees paid to third-party manufacturers.
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--------------------------------------------------------------------------------Indirect costs include:
? personnel-related costs, which include salaries, payroll taxes, employee benefits, and other employee-related costs, including stock-based compensation, for personnel engaged in research and development functions; and ? facilities and other various expenses. Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received. We track direct costs by stage of program, clinical or preclinical. However, we do not track indirect costs on a program specific or stage of program basis because these costs are deployed across multiple programs and, as such, are not separately classified. As described above, Arena charges us for certain expenses associated with these research and development functions under the Services Agreement. We have assumed responsibility for some of the research and development functions and expect to assume additional responsibility from Arena for these functions as we continue to grow our business and build our internal capabilities. We expect that our research and development expenses will increase substantially for the foreseeable future as we continue the development of our product candidates, particularly as product candidates in later stages of development generally have higher development costs than those in earlier stages of development. We cannot determine with certainty the timing of initiation, the duration or the completion costs of future clinical trials and preclinical studies of our product candidates due to the inherently unpredictable nature of clinical and preclinical development. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. We anticipate that we will make determinations as to which product candidates and development programs to pursue and how much funding to direct to each product candidate or program on an ongoing basis in response to the results of ongoing and future preclinical studies and clinical trials, regulatory developments and our ongoing assessments as to each product candidate's commercial potential. We will need to raise substantial additional capital in the future. 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.
Our research and development expenses may vary significantly based on a variety of factors, such as:
?
the scope, rate of progress, expense and results of our preclinical development
activities;
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the phase of development of our product candidates;
?
per patient clinical trial costs;
?
the number of clinical trials required for approval;
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the number of sites included in our ongoing and planned clinical trials;
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the number of patients that participate in our ongoing and planned clinical
trials;
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the countries in which our clinical trials are conducted;
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uncertainties in clinical trial design and patient enrollment or drop out or
discontinuation rates, particularly in light of the current COVID-19 pandemic
environment;
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potential additional safety monitoring requested by regulatory agencies;
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the duration of patient participation in our ongoing and planned clinical trials
and follow-up;
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the efficacy and safety profile of our product candidates;
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the timing, receipt, and terms of any approvals from applicable regulatory
authorities including the FDA and foreign regulatory authorities;
?
significant and changing government regulation and regulatory guidance;
?
potential additional trials requested by regulatory agencies;
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?
the cost and timing of manufacturing our product candidates;
?
establishing clinical and commercial manufacturing capabilities or making
arrangements with third-party manufacturers in order to ensure that we or our
third-party manufacturers are able to make product successfully;
?
the extent to which we establish additional strategic collaborations or other
arrangements;
?
the impact of any business interruptions to our operations or to those of the
third parties with whom we work, including Arena, particularly in light of the
current COVID-19 pandemic environment; and
?
maintaining a continued acceptable safety profile of our product candidates
following approval, if any, of our product candidates.
A change in the outcome of any of these variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate.
General and Administrative General and administrative expenses consist primarily of personnel-related costs, which include salaries, payroll taxes, employee benefits, and other employee-related costs, including stock-based compensation, for personnel in executive, finance and other administrative functions. Other significant costs include legal fees relating to corporate matters, professional fees for accounting and consulting services and facility-related costs. As described above, Arena charges us for certain expenses associated with these general and administrative functions under the Services Agreement. We expect that our ongoing general and administrative expenses will increase substantially for the foreseeable future to support our increased research and development activities and increased costs of operating as a public company and in building our internal resources to become less reliant on Arena. These increased costs will include increased expenses related to audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing andSEC requirements, director and officer insurance premiums and investor and public relations costs associated with operating as a public company.
Financial Operations Overview
Results of Operations
The following table summarizes our results of operations for the three and nine months endedSeptember 30, 2021 , the three months endedSeptember 30, 2020 and the period fromJanuary 3, 2020 (inception) throughSeptember 30, 2020 : Period from January 3, 2020 Nine Months (Inception) Ended through Three Months Ended September 30, September 30, September 30, (in thousands) 2021 2020 2021 2020 Operating expenses: Research and development $ 4,093 $ 1,603$ 13,406 $ 2,462 General and administrative 2,262 947 5,639 1,829 Total operating expenses 6,355 2,550 19,045 4,291 Loss from operations (6,355 ) (2,550 ) (19,045 ) (4,291 ) Interest income, net 23 - 40 - Other expense (13 ) - (19 ) - Net loss$ (6,345 ) $ (2,550 ) $ (19,024 ) $ (4,291 ) 24
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Research and Development Expenses
The following table summarizes our research and development expenses for the three and nine months endedSeptember 30, 2021 , the three months endedSeptember 30, 2020 and the period fromJanuary 3, 2020 (inception) throughSeptember 30, 2020 : Period from Nine Months January 3, 2020 Ended (Inception) September through Three Months Ended September 30, 30, September 30, (in thousands) 2021 2020 2021 2020 Direct costs: LP352 $ 1,332 $ 299$ 5,815 $ 299 Preclinical programs 1,265 782 4,134 1,309 Indirect costs: Personnel-related 1,315 522 2,937 853 All other 181 - 520 1
Total research and development expenses $ 4,093 $ 1,603
Research and development expenses were$4.1 million for the three months endedSeptember 30, 2021 . These expenses include$1.3 million in preclinical and clinical trial expenses related to LP352,$1.3 million in preclinical expenses related to advancing LP143 and LP659 and$1.3 million in personnel-related expenses. Research and development expenses for the three months endedSeptember 30, 2020 were$1.6 million , including$0.3 million in preclinical and clinical trial expenses related to LP352,$0.8 million related to preclinical expenses for LP143 and LP659 and$0.5 million in personnel-related expenses. Research and development expenses were$13.4 million for the nine months endedSeptember 30, 2021 . These expenses include$5.8 million in preclinical and clinical trial expenses related to LP352,$4.1 million in preclinical expenses related to advancing LP143 and LP659 and$2.9 million in personnel-related expenses. Research and development expenses for the period fromJanuary 3, 2020 (inception) throughSeptember 30, 2020 were$2.5 million , including$0.3 million in preclinical and clinical trial expenses related to LP352,$1.3 million related to preclinical expenses for LP143 and LP659 and$0.9 million in personnel-related expenses.
General and Administrative Expenses
General and administrative expenses were$2.3 million for the three months endedSeptember 30, 2021 . These expenses include$1.0 million of personnel-related costs,$0.5 million of professional services and consulting expenses and$0.5 million of insurance expense. General and administrative expenses for the three months endedSeptember 30, 2020 were$0.9 million , with$0.6 million related to personnel costs and$0.3 million in professional services and consulting expenses. General and administrative expenses were$5.6 million for the nine months endedSeptember 30, 2021 . These expenses include$2.7 million of personnel-related costs,$1.4 million of professional services and consulting expenses and$1.0 million of insurance expense. General and administrative expenses for the period fromJanuary 3, 2020 (inception) throughSeptember 30, 2020 were$1.8 million , with$1.4 million related to personnel costs and$0.4 million in professional services and consulting expenses.
Liquidity and Capital Resources
We have incurred net losses and negative cash flows from operations since our inception and anticipate we will continue to incur net losses for the foreseeable future. As ofSeptember 30, 2021 , we had cash, cash equivalents and short-term investments of$112.6 million .
Initial Public Offering
In connection with our IPO, we issued and sold 5,298,360 shares of common stock, which included 298,360 shares of its common stock issued pursuant to the over-allotment option granted to the underwriters to purchase additional shares of common stock, at a public offering price of$16.00 per share. We raised$76.2 million in net proceeds from the IPO after deducting underwriters' discounts and commissions of$5.9 million and issuance costs of$2.6 million .
Funding Requirements
We expect that our existing cash and cash equivalents will be sufficient to fund
our operations for at least the next 12 months. However, our forecast of the
period of time through which our financial resources will be adequate to support
our operations is a forward-looking statement that involves risks and
uncertainties, and actual results could vary materially. We have based our
estimate
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on assumptions that may prove to be wrong, and we could deplete our capital
resources sooner than we expect. Additionally, the process of testing product
candidates in clinical trials is costly, and the timing of progress and expenses
in these trials is uncertain.
Our future capital requirements will depend on many factors, including:
?
the type, number, scope, progress, expansions, results, costs and timing of, our
preclinical studies and clinical trials for our current and any future product
candidates and the potential indications which we are pursuing or may choose to
pursue in the future;
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the outcome, timing and costs of regulatory review of our product candidates;
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the costs and timing of manufacturing for our product candidates, including
commercial manufacturing;
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our efforts to enhance operational systems and hire additional personnel to
satisfy our obligations as a public company, including enhanced internal
controls over financial reporting;
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the costs associated with hiring additional personnel and consultants as our
preclinical and clinical activities increase;
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the timing and amount of the payments we must make under the Arena License
Agreement;
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the costs and timing of establishing or securing sales and marketing and
distribution capabilities, whether alone or with third parties, to commercialize
product candidates for which we may obtain regulatory approval, if any;
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our ability to achieve sufficient market acceptance, coverage and adequate
reimbursement from third- party payors and adequate market share and revenue for
any approved products;
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patients' willingness to pay out-of-pocket for any approved products in the
absence of coverage and/or adequate reimbursement from third-party payors;
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the terms and timing of establishing and maintaining collaborations, licenses
and other similar arrangements;
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the costs of obtaining, expanding, maintaining and enforcing our patent and
other intellectual property rights;
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costs associated with any product candidates, products or technologies that we
may in-license or acquire; and
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if we experience any delays or encounter any issues with any of the above,
including the risk of each of which may be exacerbated by the ongoing COVID-19
pandemic.
Developing pharmaceutical products, including conducting preclinical studies 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 for any product candidates or generate
revenue from the sale of any product candidate for which we may obtain marketing
approval. 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 at least
several years, if ever. As a result, we will need substantial additional
financing to support our continuing operations and further the development of
and commercialize our product candidates.
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Until such time as we can generate significant revenue from sales of our product
candidates, if ever, we expect to finance our cash needs through public or
private equity or debt financings or other capital sources, including potential
collaborations, licenses and other similar arrangements. However, we may be
unable to raise additional funds or enter into such other arrangements when
needed on favorable terms or at all. Our ability to raise additional funds may
be adversely impacted by potential worsening global economic conditions and the
recent disruptions to, and volatility in, the credit and financial markets in
the United States and worldwide resulting from the ongoing COVID-19 pandemic and
otherwise. To the extent that we raise additional capital through the sale of
equity or convertible debt securities, the ownership interest of our
stockholders will be or could 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 and 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. If we raise funds through collaborations,
or other similar arrangements with third parties, we may have to relinquish
valuable rights to our product candidates, future revenue streams or research
programs or may have to grant licenses on terms that may not be favorable to us
and/or may reduce the value of our common stock. If we are unable to raise
additional funds through equity or debt financings when needed, we may be
required to delay, limit, reduce or terminate our product development or future
commercialization efforts or grant rights to develop and market our product
candidates even if we would otherwise prefer to develop and market such product
candidates ourselves.
Cash Flows
The following table sets forth a summary of our cash flows for the nine months
ended September 30, 2021 and the period from January 3, 2020 (inception) through
September 30, 2020 :
Period from
January 3, 2020
Nine Months Ended (Inception) through
(in thousands) September 30, 2021 September 30, 2020
Cash used in operating activities $ (19,030 ) (1,983 )
Cash used in investing activities (37,276 ) -
Cash provided by financing activities 76,451 2,200
Net increase in cash and cash equivalents $ 20,145 $ 217
Operating Activities
Net cash used in operating activities was $19.0 million and $2.0 million for the
nine months ended September 30, 2021 and the period from January 3, 2020
(inception) through September 30, 2020 , respectively. Net cash used in operating
activities during the nine months ended September 30, 2021 was primarily due to
our net loss of $19.0 million , adjusted for $1.4 million of stock-based
compensation expense and $1.5 million from changes in operating assets and
liabilities. Net cash used in operating activities during the period from
January 3, 2020 (inception) through September 30, 2020 was primarily due to our
net loss of $4.3 million , adjusted for $1.1 million of stock-based compensation
expense and $1.2 million from changes in operating assets and liabilities.
Investing Activities
Net cash used in investing activities was$37.3 million and none for the nine months endedSeptember 30, 2021 and the period fromJanuary 3, 2020 (inception) throughSeptember 30, 2020 , respectively. Net cash used in investing activities during the nine months endedSeptember 30, 2021 was primarily due to$37.3 million of short-term investment purchases.
Financing Activities
Net cash provided by financing activities was$76.5 million and$2.2 million for the nine months endedSeptember 30, 2021 and the period fromJanuary 3, 2020 (inception) throughSeptember 30, 2020 , respectively. Net cash provided by financing activities during the nine months endedSeptember 30, 2021 was comprised of net proceeds of$76.5 million from our IPO, which excludes$0.2 million of IPO expenses that were paid in 2020. Net cash provided by financing activities during the period fromJanuary 3, 2020 (inception) throughSeptember 30, 2020 was comprised of capital contributions from Arena. 27 --------------------------------------------------------------------------------
Critical Accounting Policies and Significant Judgments and Estimates
Our financial statements are prepared in accordance with generally accepted accounting principles inthe United States . The preparation of our 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 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 a periodic basis. Our actual results may differ from these estimates. While our significant accounting policies are described in more detail in the notes to our financial statements appearing in the Prospectus, we believe that the following accounting policies are critical to understanding our historical and future performance, as the policies relate to the more significant areas involving management's judgments and estimates used in the preparation of our financial statements.
As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses as of each balance sheet date. 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 cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, based on a pre-determined schedule or when contractual milestones are met, but some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known to us at that time. If timelines or contracts are modified based upon changes in the protocol or scope of work to be performed, we modify our estimates and accruals accordingly on a prospective basis. We base our expenses related to external research and development services on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors that conduct research and development on our behalf. 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 the amount of prepaid expenses accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material differences between our estimates of such expenses and the amounts actually incurred.
Emerging Growth Company and Smaller Reporting Company Status
We are an "emerging growth company" under the Jumpstart Our Business Startups
Act of 2012 ("JOBS Act"), and as such, we can take advantage of an extended
transition period for complying with new or revised accounting standards. This
provision allows an emerging growth company to delay the adoption of accounting
standards that have different effective dates for public and private companies
until those standards would otherwise apply to private companies. We have
elected to avail ourselves of this exemption from new or revised accounting
standards, and therefore we will not be subject to the same requirements to
adopt new or revised accounting standards as other public companies that are not
emerging growth companies.
We will cease to be an emerging growth company prior to the end of December 31,
2026 if certain earlier events occur, including if we become a "large
accelerated filer" as defined in Rule 12b-2 under the Securities Exchange Act of
1934 (the "Exchange Act"), our annual gross revenues exceed $1.07 billion or we
issue more than $1.0 billion of non-convertible debt in any three-year period.
We are also a "smaller reporting company" as defined in the Exchange Act. We may
continue to be a smaller reporting company even after we are no longer an
emerging growth company. We may take advantage of certain of the scaled
disclosures available to smaller reporting companies and will be able to take
advantage of these scaled disclosures for so long as our voting and non-voting
common stock held by non-affiliates is less than $250.0 million measured on the
last business day of our second fiscal quarter, or our annual revenue is less
than $100.0 million during the most recently completed fiscal year and our
voting and non-voting common stock held by non-affiliates is less than $700.0
million measured on the last business day of our second fiscal quarter.
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