NEUBASE THERAPEUTICS, INC. Disclosures Regarding Forward-Looking Statements
This Form 10-K includes "forward-looking statements" within the meaning of Section 21E of the Exchange Act. Those statements include statements regarding the intent, belief or current expectations of the Company and its subsidiaries and our management team. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those projected in the forward-looking statements. These risks and uncertainties include but are not limited to those risks and uncertainties set forth in Item 1A of this Form 10-K. In light of the significant risks and uncertainties inherent in the forward-looking statements included in this Form 10-K, the inclusion of such statements should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. Further, these forward-looking statements reflect our view only as of the date of this Form 10-K. Except as required by law, we undertake no obligations to update any forward-looking statements and we disclaim any intent to update forward-looking statements after the date of this Form 10-K to reflect subsequent developments. Accordingly, you should also carefully consider the factors set forth in other reports or documents that we file from time to time with theSEC . 84 Table of Contents Summary
NeuBase Therapeutics, Inc. ("NeuBase", "Company", "we", "us" and "our") is a biotechnology company focused on significantly reducing the burden of untreatable morbidity and mortality across the globe caused by rare and common diseases. To achieve this goal, we have designed, built, and validated a new precision genetic medicines platform technology able to uniquely drug the double-stranded human genome and address disease at the root of causality without many of the limitations of early precision genetic medicine technologies. We are poised to file our first Investigational New Drug ("INDs") applications with theU.S. Food and Drug Administration ("FDA") beginning in calendar year 2022 and intend to scale into additional indications with increasing speed
and
efficiency.
Overview
Most diseases remain undruggable with current therapeutic modalities, leaving
millions of patients with limited options. These include rare diseases, cancers,
common chronic and infectious diseases. Most diseases are genetic, in whole or
in part, underscoring the critical importance of new medicines that can drug the
human genome for the future of health. Yet the genome has been difficult to
target with therapies due to its double-stranded structure which evolved to
protect the fidelity of this essential blueprint of life.
Genes in the genome are "transcribed" into RNA which are then usually
"translated" into proteins. As a result of our historical inability to drug the
genome directly to address root causality, the pharmaceutical industry moved
downstream, initially working to drug the protein products of genes. The
complexity associated with drugging proteins, each of which is a unique and
often dynamic molecular entity, has resulted in a drug development process that
is commonly inefficient, time-consuming, and expensive with low probabilities of
success. This strategy has, in part, resulted in high drug prices and a high
remaining burden of unmet patient need.
These issues could potentially be resolved by targeting the genetic material
itself instead of downstream protein products. Precision genetic medicines
represent a relatively new class of therapies that target genetic sequences that
are the root cause of diseases. While early precision genetic medicines
companies have proven that human disease can be addressed at the genetic level,
the nascent field remains fragmented with most technologies only able to address
a single causal genetic mechanism (either gain-of-function, change-of-function,
or loss-of-function of a gene). Most technologies still act downstream at the
RNA level and exhibit limitations relating to delivery, tolerability,
selectivity, manufacturability, durability of effect and scalability.
We have designed, built, and validated a new technology platform that can
uniquely Drug the Genome™ to address the three disease-causing mechanisms (i.e.,
gain-of-function, change-of-function, or loss-of-function of a gene), without
the limitations of early precision genetic medicines. The technology is
predicated on synthetic peptide-nucleic acid ("PNA") chemistry and can directly
engage the genome in a sequence-specific manner and address root causality of
diseases. These compounds operate by temporarily engaging the genome (or single
and double-stranded RNA targets, if desired) and interfering with cellular
machinery that process mutant genes to halt their ability to manifest a disease.
We have repeatedly demonstrated, in proof-of-concept preclinical animal studies
across FY2020 and FY2021, the ability to address multiple disease-causing genes,
and different causal mechanisms, to resolve the disease state without the
limitations of early genetic medicine technologies. These limitations, and the
data that illustrates that we have likely engineered them out of our platform to
potentially unlock broad impact across many diseases, are:
Delivery. Most early precision genetic medicine technologies are large and
heavily negatively charged, making it difficult for them to broadly distribute
throughout the body to address tissues that are affected by many diseases. This
often requires them to be locally injected such as into the brain, likely
? limiting their ability for broad-based impact. We have designed and developed a
proprietary delivery technology that allows its small, neutral-charge and
water-soluble compounds to be administered using a patient-friendly route such
as subcutaneous injection and achieve broad biodistribution, including into the
deep brain and nuclei of cells.
Validating data. Pre-clinical non-human primate ("NHP") data presented in FY2020
illustrated the ability of a 5mg/kg systemic injection of the delivery shuttle
to distribute into every tissue examined at therapeutically relevant
concentrations, defined as concentrations which show activity in patient-derived
cell lines when coupled to a pharmacophore. More recently, in FY2021, we
presented data illustrating that the delivery shuttle conjugated to a NT-0200
program compound could be injected subcutaneously into the HSALR transgenic
animal model of myotonic dystrophy type 1 ("DM1") and achieve both molecular and
functional rescue of myotonia in the distant tibialis anterior muscle group in
the transgenic animal. Also, in FY2021, we presented data that illustrate that
subcutaneous injection of the same delivery shuttle conjugated to a compound for
the NT-
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0100 program into the zQ175 transgenic animal model ofHuntington's disease ("HD") could, within 7 days from first dose, cross the blood-brain barrier in sufficient concentrations to engage the mutant gene target and reduce the resultant protein levels from whole-brain isolates to a statistically significant degree. This delivery shuttle is now utilized in all the current therapeutic development programs to move payloads to various tissues that are affected by diseases after patient-friendly routes of systemic administration. Delivery of drugs across the blood-brain barrier and into muscle via a systemic route has been a significant challenge in the industry.
Tolerability. Most early precision genetic medicine technologies trigger the
innate and/or acquired immune system, limiting their ability to achieve
pharmacologic doses or to be used repeatedly. For example, delivery of
? negatively charged nucleic acid therapies often trigger the innate immune
system and delivery of proteins often trigger the acquired immune system. Our
technology is comprised of fully synthetic compounds that have been shown to be
"immunologically inert", potentially allowing them to be administered
chronically to temporarily Drug the Genome™ over a patient's lifetime.
Validating data. We have illustrated good tolerability of a variety of compounds across our various programs in rodent and NHP animal models across FY2020 and FY2021, with both single and multi-dose administration. This data includes a lack of an obvious acute immune response in NHPs which has been seen with other early precision genetic medicines. Exploratory multi-species toxicology data will be presented in our DM1 program in 1H2022 (calendar year).
Selectivity. Many technologies in the early precision genetic medicines
industry cannot discriminate between mutant gene sequences and their healthy
("wild-type") counterparts, nor between other highly similar target sequences
in the cell. This potentially limits these technologies in their ability to
address small disease-causing mutations such as single nucleotide changes
("point mutations"), which account for a large fraction of disease-causing
? mutations and functional variants. Our technology can discriminate point
mutations, which increases the opportunity space. This capability comes from
the "rigid" nature of the backbone which does not tolerate imperfect target
engagement. In addition, this single-base selectivity reduces the likelihood
that our compounds will engage with genes elsewhere in the genome that are
similar but not identical, potentially reducing any adverse events triggered by
off-target engagement ("OTEs").
Validating data. In FY2021 we presented data illustrating that we could achieve
near-perfect selectivity in engaging the mutant G12D copy of the KRAS gene vs.
the wild-type copy and inhibiting transcription and translation of the resultant
mutant protein production in vitro. When these compounds are delivered to
xenograft animal models with KRAS-mutation driven tumors, significant tumor
growth reductions and signaling through downstream effectors of the KRAS pathway
were measured while being well-tolerated as a gross measure of
allele-selectivity. In FY2021 we also presented data that illustrated
statistically significant allele-selective knock-down of mutant Huntingtin
("HTT") protein vs. healthy wild-type protein after subcutaneous injection into
the zQ175 transgenic animal model.
Manufacturability. Many technologies in the early precision genetic medicines
industry require significant investments in custom manufacturing
infrastructure, and thus are limited in their potential impact and scalability.
? Our technology utilizes established and fully commoditized manufacturing
processes, both for small molecule and synthetic peptide synthesis (the
combination of which are required to manufacture our compounds) that are
available with high redundancy and at commercial scale.
Validating data. In FY2021 we nominated a development candidate for our DM1
program and initiated manufacturing scale up with several contract manufacturing
organizations ("CMOs") across the globe. Within a period of months, for
relatively low cost compared to the investment required to build bespoke
manufacturing facilities, we established redundancy in manufacturing for GLP and
GMP materials at a scale sufficient for our work through Phase 1/2 clinical
trials.
Durability. Many technologies in the early precision genetic medicines industry
? can only be dosed a single time, are often cleared by the immune system, or are
otherwise not durable in their efficacy.
Validating data. We illustrated in preclinical studies in FY2020 that our
delivery shuttle when delivered systemically into NHPs, is rapidly taken up into
tissues across the body, and very slowly eliminated via the kidneys. Elimination
of the delivery shuttle occurred at approximately 4% of the administered dose
over the course of one week, promising an enduring response.
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Scalability. Many technologies in the early precision genetic medicines
industry are not truly scalable across a variety of indications, for thereasons described above. As our goal is to provide solutions to those suffering
from a wide variety of diseases across the globe, we have purpose-built a
scalable platform. We always address a single target type for all therapeutic
programs (the genome), utilize the same delivery shuttle enabling similar
? pharmacokinetics ("PK"), absorption distribution metabolism and excretion
("ADME"), dose, route and regimens across programs, utilize predominantly the
same chemistry yielding similar therapeutic indices, are able to predict OTEs a
priori using bioinformatics and engineer around them before beginning
development, and leverage manufacturing process development across programs
such that ongoing platform learnings have already created increasing speed and
efficiency.
Validating data. In FY2021 we launched a new set of programs in oncology targeting the most prevalent and currently undruggable KRAS mutations. The development of a series of hits was achieved with an order of magnitude higher efficiency that with our first two programs, based on a deeper understanding of the structure-activity relationships uncovered in our initial programs and use of the same delivery shuttle for seamless in vivo pharmacologic testing. As further validation of our PATrOL™ platform's capabilities, in FY2021, we described data illustrating that our first-in-class platform technology can address various types of causal insults by Drugging the Genome™ in animal models of a variety of human diseases after patient-friendly routes of administration and does so in a well-tolerated manner. Based on what we believe is a solid foundation, FY2021 marked a transition from a research-stage to a development-stage company. We established new research laboratories and administrative offices inPittsburgh, PA , expanded our pipeline to include both rare disease and oncology, recruited clinical development and Chemistry manufacturing and controls ("CMC") teams, established offices inCambridge, MA , nominated a development compound for our DM1 program, initiated good manufacturing practice ("GMP") manufacturing scale up finalized the formulation work for subcutaneous and intravenous routes, initiated PK/ADME studies with the DM1 development candidate, and initiated PK/pharmacodynamics ("PD") studies to define the dosing regimen for initial human studies. In addition, we have continued to optimize candidates for our HD and KRAS programs, illustrating pharmacology in vivo in appropriate animal models of each. Additionally, in FY2021 we developed a proprietary genetic disease database with utility in prioritization of pipeline expansion and partnership opportunities. We are developing precision genetic medicines targeting rare, monogenic diseases, for which there are no approved therapies, as well as more common genetic disorders, including cancers that are resistant to current therapeutic approaches. Our pipeline includes therapeutic candidates for the treatment of DM1, HD, and cancer-driving point mutations in KRAS, G12V and G12D, which are involved in many tumor types and have historically been "undruggable" (Figure 4). Based on compelling results from in vitro and in vivo preclinical studies, we plan to file an IND application for our DM1 investigational therapy in the fourth quarter of CY2022. We are targeting CY2023 to file an IND application for an investigational therapy to treatHuntington's disease. Both are devastating systemic diseases with no effective therapies. Our oncology program has recently been announced (FY2021) together with in vivo activity illustrating allele-selective engagement of mutant KRAS at the DNA and RNA levels, with abrogation of downstream hyperactive signaling through multiple RAS pathway members, resulting in anti-tumor activity. We continue to improve upon our platform while concurrently developing programs, resulting in next-generation compounds that continue to make their way through preclinical development in a parallel manner. We have recently finalized an analysis of the entire known mutational database and selected several additional high-value indications for screening and development. 87 Table of Contents [[Image Removed: Graphic]]
Figure 4. The initial pipeline in rare disease and oncology, with platform learnings increasing the efficiency and speed additional undisclosed programs, both internally developed and in discussions for co-development with partners.
We are poised to file a series of IND applications for indications with large
unmet needs such as DM1, which is expected to reach IND application filing by
the end of CY2022, HD expected to reach IND application in CY2023 and cancers
(KRAS G12V and G12D mutations) likely thereafter.
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In advance of our first IND application filing in the fourth quarter of CY2022
and our subsequent planned transition to a clinical stage company in our
combined Phase 1/2 clinical trial in DM1, the following data sets are planned to
be disseminated:
Program Calendar Year Data Set Relevance
DM1 1H2022 Development candidate PK Defines the exposures in muscle,
/ ADME and heart, and brain after systemic
bioavailability in administration to enable correct
wild-type model(s) dosing for a whole-body solution
Development candidate PK Defines the relationship between
/ PD in transgenic tissue exposures of the development
murine model(s) candidate and molecular / functional
rescue of the disease to enable dose,
route, and regimen in the clinic
Development candidate Illustrates the safety of the
exploratory toxicology development candidate and defines the
in murine and NHP models maximum tolerated dose; broader
platformtolerability validation for
other programs
2H2022 GLP toxicology Formalizes and extends upon the
exploratory toxicology work to enable
the IND filing
Mechanistic studies Articulates details of the mechanism
including blood-brain by which the development compound acts
barrier transit and is differentiated
4Q2022 IND filing with FDA We have confidence that the
pharmacology and tolerability data
warrant a review by the FDA ideally
enabling first-in-human studies within
30 days
HD 1H2022 Reduction in mutant HTT Further proves passage across the
aggregates in the brain blood-brain barrier in sufficient
of transgenic murine quantities and CNS distribution to
models(s) with systemic reduce or eliminate the
route disease-causing neuronal HTT
aggregates via a systemic route of
administration
2H2022 Functional rescue of Connects the reduction of mutant HTT
transgenic murine protein and reduction in neuronal
models(s) with systemic aggregates to a reduction in the
route progress of the disease after a
systemic route
Development candidate We believe the pharmacology and
nomination tolerability data support investment
into CMC scale up and IND-enabling
activities
2023 IND filing with FDA We have confidence that the
pharmacology and tolerability data
warrant a review by the FDA ideally
enabling first-in-human studies within
30 days
KRAS 2022 Optimization of The properties of target engagement
candidates and have been optimized for potency and
mechanistic studies selectivity including temporal
dynamics of mutant KRAS reduction
In vivo pharmacology in Articulates that systemic delivery
xenograft murine models confers beneficial pharmacologic and
tolerability profiles and sets the
stage for development candidate
nomination
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Results of Operations
Results of operations for the fiscal year ended
Year Ended September 30,
2021 2020 Change
OPERATING EXPENSESGeneral and administrative expenses$ 12,202,217 $ 10,123,298 $ 2,078,919 Research and development expenses 11,475,201 6,946,008 4,529,193 Research and development expense- license acquired 2,888,029
- 2,888,029
TOTAL OPERATING EXPENSES 26,565,447 17,069,306 9,496,141
LOSS FROM OPERATIONS (26,565,447) (17,069,306) (9,496,141)
OTHER INCOME (EXPENSE)
Interest expense (32,330) (7,686) (24,644)
Interest income 12,550 - 12,550Change in fair value of warrant liabilities 950,151 (453,808) 1,403,959 Equity in losses on equity method investment (224,534)
(262,861) 38,327 Other income 450,309 409,141 41,168 Total other expenses, net 1,156,146 (315,214) 1,471,360 NET LOSS$ (25,409,301) $ (17,384,520) $ (8,024,781)
Until we are able to generate revenues, our management expects to continue to incur net losses.
General and Administrative Expense
General and administrative expense consists primarily of legal and professional fees, wages and stock-based compensation. General and administrative expenses increased by$2.1 million for the fiscal year endedSeptember 30, 2021 , as compared to the fiscal year endedSeptember 30, 2020 , primarily due to an increase in employee head count and additional legal and professional services.
Research and Development Expense
Research and development expense consist primarily of professional fees, manufacturing expenses, wages and stock-based compensation. Research and development expenses increased by$4.5 million for the fiscal year endedSeptember 30, 2021 , as compared to the fiscal year endedSeptember 30, 2020 , primarily due to an increase in employee headcount and the ramp up of research and development activities.
Research and Development Expense - Vera Acquisition
Research and development expenses, Vera Acquisition consists of the fair value of acquired Vera assets that were determined to represent in-process research and development assets with no future alternative use. The in-process research and development assets were expensed under the guidance of ASC 730, Research and Development, upon the asset acquisition. No such expenses were incurred during the fiscal year endedSeptember 30, 2020 .
Interest Expense
Interest expense consists primarily of interest on notes payable and the loss on sale of marketable securities. Interest expense increased for the fiscal year endedSeptember 30, 2021 , as compared to the fiscal year endedSeptember 30, 2020 , primarily due to the sale of marketable securities prior to their maturity.
Change in Fair Value of Warrant Liabilities
Change in fair value of warrant liabilities reflects the changes in warrant
liabilities. The change in fair value of warrant liabilities was primarily due
to changes in our stock price and contractual term of the warrants, which are
reflected in the warrant valuation.
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Equity in losses on equity method investment
The Company accounts for its investment in DepYmed common shares using the equity method of accounting and records its proportionate share of DepYmed's net income and losses. Equity in losses for the years endedSeptember 30, 2021 and 2020 was approximately$0.2 million and$0.3 million , respectively.
Other income
Other income during the year endedSeptember 30, 2021 primarily reflects the sale of certain intellectual property to DepYmed in exchange for shares of Series A-4 preferred stock. Other income during the year endedSeptember 30, 2020 reflects the Company's license and transfer of certain clinical trial data during the year endedSeptember 30, 2020 .
Liquidity, Capital Resources and Financial Condition
We have no revenues from product sales and have incurred operating losses since inception. We historically have funded our operations through the sale of common stock and the issuance of convertible notes and warrants. We expect to continue to incur significant operating losses for the foreseeable future and may never become profitable. As a result, we will likely need to raise additional capital through one or more of the following: the issuance of additional debt or equity or the completion of a licensing transaction for one or more of our pipeline assets. Management believes that it has sufficient working capital on hand to fund operations through at least the next twelve months from the date these consolidated financial statements were issued. Net working capital increased from the fiscal year endedSeptember 30, 2020 to the fiscal year endedSeptember 30, 2021 by$21.1 million (to$50.7 million from$29.7 million ) primarily due to ourApril 2021 underwritten public offering of 9,200,000 shares of common stock, at a price to the public of$5.00 per share, offset, in part, by costs for the development of our PATrOL™ platform technology and lead programs. We received net proceeds from the offering of approximately$42.6 million , after deducting the underwriting discounts and commissions and other estimated offering expenses payable by us. Our quarterly cash burn has increased significantly compared to prior periods due to increased research and development activities. We anticipate that our cash needs will likely continue to increase relative to prior periods as we increase our research and development activities, and believe that our current cash balance will provide sufficient capital to continue operations into the first calendar quarter of 2023. At present, we have no bank line of credit or other fixed source of capital reserves. Should we need additional capital in the future, we will be primarily reliant upon a private or public placement of our equity or debt securities, or a strategic transaction, for which there can be no warranty or assurance that we may be successful in such efforts. If we are unable to maintain sufficient financial resources, our business, financial condition and results of operations will be materially and adversely affected. This could affect future development and business activities and potential future clinical studies and/or other future ventures. Failure to obtain additional equity or debt financing will have a material, adverse impact on the Company's business operations. There can be no assurance that we will be able to obtain the needed financing to achieve our goals on acceptable terms or at all.
Contractual Obligations and Commitments
Leases
InOctober 2020 , we entered into a ten-year operating lease agreement with annual escalating rental payments for approximately 14,189 square feet of office and laboratory space inPittsburgh, Pennsylvania . The leased premises serves as our headquarters. The first and second amendments to the lease agreement were executed inDecember 2020 andApril 2021 , respectively (collectively with the lease agreement, the "Lease"). The Lease commenced onMay 1, 2021 and will last for a period of ten years from delivery of the leased premises to the Company, unless earlier terminated in accordance with the Lease. We have the right to extend the term of the Lease for an additional five-year term. We will pay an escalating base rent over the life of the Lease of approximately$71,000 to$78,000 per month, and we will pay our pro rata portion of property expenses and operating expenses for the property. 91 Table of Contents Cash Flow Summary The following table summarizes selected items in our consolidated statements of cash flows: Year EndedSeptember 30, 2021 2020
Net cash used in operating activities
(2,563,467) (716,820)
Net cash provided by financing activities 42,338,255 33,105,208
Net increase in cash and cash equivalents
Operating Activities Net cash used in operating activities was approximately$18.9 million for the fiscal year endedSeptember 30, 2021 as compared to$10.7 million for the fiscal year endedSeptember 30, 2020 . Net cash used in operating activities in 2021 was primarily as a result of our net loss as well as the change in the fair value of warrant liabilities, gain on sale of intellectual property and cash used for the security deposit and prepaid insurance, other prepaid expenses and current assets, including prepayment of rent under our new operating lease for office and laboratory space, offset by the research and development costs for the Vera acquisition, stock-based compensation expense and other changes in operating assets and liabilities. Net cash used in operating activities in 2020 was primarily as a result of our net loss, offset by stock based compensation and changes in operating assets and liabilities.
Investing Activities
Net cash used in investing activities was approximately$2.6 million for the fiscal year endedSeptember 30, 2021 , as compared to$0.7 million for the fiscal year endedSeptember 30, 2020 . Net cash used in investing activities in the fiscal year endedSeptember 30, 2021 was due to cash paid for the Vera acquisition and the purchases of laboratory equipment. Net cash used in investing activities in the fiscal year endedSeptember 30, 2020 was the result of purchases of laboratory and office equipment.
Financing Activities
Net cash provided by financing activities was approximately$42.3 million for the fiscal year endedSeptember 30, 2021 , as compared to$33.1 million for the fiscal year endedSeptember 30, 2020 . Net cash provided by financing activities for the fiscal year endedSeptember 30, 2021 reflects the proceeds from the issuance of common stock of$42.6 million , net of issuance costs, and the principal payments of financed insurance. Net cash provided by financing activities for the fiscal year endedSeptember 30, 2020 reflects the proceeds from the issuance of common stock of$33.3 million , net of issuance costs, and the principal payments of financed insurance
Recent Accounting Standards
See Note 2 to our consolidated financial statements for a discussion of recent accounting standards and their effect, if any, on us.
Critical Accounting Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance withUnited States generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the balance sheet and the reported amounts of expenses during the reporting period. In accordance with GAAP, we evaluate our estimates and judgments on an ongoing basis. The most significant estimates relate to the valuation of share-based compensation, the valuation of licenses, the fair value of warrant liabilities and the valuation allowance of deferred tax assets resulting from net operating losses. We base our estimates and assumptions on current facts, our limited historical experience from operations 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 value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We define our critical accounting policies as those accounting principles that require it to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations, as well as 92
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the specific manner in which we apply those principles. While our significant accounting policies are more fully described in Note 2 to our financial statements appearing elsewhere in this Form 10-K, we believe the following are the critical accounting policies used in the preparation of our financial statements that require significant estimates and judgments:
Fair Value of Financial Instruments
In accordance with Accounting Standards Codification ("ASC") 820, the carrying
value of cash and cash equivalents, accounts payable and notes payable
approximates fair value due to the short-term maturity of these instruments.
ASC 820 clarifies the definition of fair value, prescribes methods for measuring
fair value, and establishes a fair value hierarchy to classify the inputs used
in measuring fair value as follows:
? Level 1 - Quoted prices in active markets for identical assets or liabilities
on the reporting date.
Level 2 - Pricing inputs are based on quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments in markets
? that are not active and model-based valuation techniques for which all
significant assumptions are observable in the market or can be corroborated by
observable market data for substantially the full term of the assets or liabilities.
Level 3 - Pricing inputs are generally unobservable and include situations
where there is little, if any, market activity for the investment. The inputs
into the determination of fair value require management's judgment or
? estimation of assumptions that market participants would use in pricing the
assets or liabilities. The fair values are therefore determined using factors
that involve considerable judgment and interpretations, including but not
limited to private and public comparable, third-party appraisals, discounted
cash flow models and fund manager estimates.
As ofSeptember 30, 2021 , the fair value of outstanding warrant liabilities measured at fair value on a recurring basis was$0 million . The warrant liabilities are valued using Level 3 valuation inputs. AtSeptember 30, 2020 , the fair value of outstanding warrant liabilities measured at fair value on a recurring basis was$1.0 million .
As of
Research and Development
Research and development expenses are expensed in the statement of operations as incurred in accordance with theFinancial Accounting Standards Board ("FASB") ASC 730, Research and Development. Research and development expenses consist of salaries and related benefits for personnel in research and development functions, including stock-based compensation and benefits and fees paid to consultants and contract research organizations for preclinical development work on our PATrOL™ platform and programs, as well as other costs. During the fiscal year endedSeptember 30, 2021 and 2020, we incurred$11.5 million and$6.9 million in research and development expenses.
Share-Based Compensation
We expense stock-based compensation to employees, non-employees and board
members over the requisite service period based on the estimated grant-date fair
value of the awards and actual forfeitures. We account for forfeitures as they
occur. Stock-based awards with graded-vesting schedules are recognized on a
straight-line basis over the requisite service period for each separately
vesting portion of the award.
We estimate the fair value of stock option grants using the Black-Scholes option
pricing model, and the assumptions used in calculating the fair value of
stock-based awards represent management's best estimates and involve inherent
uncertainties and the application of management's judgment. We were historically
a private company and in certain instances lack sufficient company-specific
historical and implied volatility information. Therefore, in instances where we
lack sufficient company-specific historical information we estimates our
expected stock volatility based on the historical volatility of a publicly
traded set of peer companies. The expected term assumption for employee grants
is based on a permitted simplified method, which is based on the vesting period
and contractual term for each tranche of awards. The mid-point between the
weighted-average vesting term and the expiration date is used
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as the expected term under this method. The risk-free interest rate is determined by reference to theU.S. Treasury yield curve in effect for time periods approximately equal to the expected term of the award. Expected dividend yield is zero based on the fact that we have never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.
All stock-based compensation costs are recorded in general and administrative or research and development costs in the consolidated statements of operations based upon the underlying individual's role at the Company.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income taxes are recorded for temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities reflect the tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax assets will not be realized. We also follow the provisions of accounting for uncertainty in income taxes which prescribes a model for the recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, disclosure and transition. In accordance with this guidance, tax positions must meet a more likely than not recognition threshold and measurement attribute for the financial statement recognition and measurement of tax position.
Our policy is to account for income tax related interest and penalties in income tax expense in the accompanying consolidated statements of operations.
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