The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report, and our Annual Report on Form 10-K for the year endedDecember 31, 2022 filed with theUnited States Securities and Exchange Commission , orSEC , onMarch 1, 2023 (the "2022 10-K"). 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, 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. Please also see the "Special Note Regarding Forward-Looking Statements" section of this Quarterly Report. OverviewOmega Therapeutics is a clinical-stage biotechnology company pioneering a new class of programmable epigenomic mRNA medicines. Our OMEGA platform harnesses the power of epigenetics and our deep understanding of genomic architecture to precisely target and controllably modulate gene expression at the pre-transcriptional level to treat or cure diseases. We have deciphered the three-dimensional architecture of the human genome. Genes and their accompanying regulators are organized into distinct and evolutionarily conserved structures called Insulated Genomic Domains, or IGDs. IGDs are the fundamental structural and functional units of gene control and cell differentiation and act as nature's innate control system for gene expression. Most diseases are caused by aberrant gene expression rooted in alterations in IGDs. The OMEGA platform has enabled us to systematically identify and validate thousands of novel DNA-sequence-based epigenomic "zip codes" associated with individual regulatory elements within IGDs. We call these epigenomic targets EpiZips. We rationally design and engineer our mRNA therapeutics, called Omega Epigenomic Controllers, or OECs, to target EpiZips for precision epigenomic control. This enables us to precisely tune genes to a desired level of expression and to control the duration of expression. Through this approach, we believe that the OMEGA platform has broad potential applicability across a range of diseases and conditions, including those with historically undruggable, intractable, and difficult-to-treat targets. Our pipeline currently consists of early-stage programs that span oncology, multigenic diseases including immunology, regenerative medicine, and select monogenic diseases. Since our inception, we have incurred significant operating losses. We have not commercialized any products and have never generated any revenue from product sales. We have devoted almost all of our financial resources to research and development, including our preclinical development activities and preparing for and initiating clinical trials of our product candidates. To date, we have funded our operations primarily with proceeds from sales of equity securities and borrowings under our loan and security agreement. As ofMarch 31, 2023 , we had cash, cash equivalents and marketable securities of$136.8 million . InAugust 2021 , we completed our initial public offering ("IPO") pursuant to which we issued and sold 8,300,976 shares of our common stock, including 900,976 shares pursuant to the partial exercise of the underwriters' option to purchase additional shares, at a public offering price of$17.00 per share, for aggregate gross proceeds of$141.1 million . We received approximately$128.1 million in net proceeds after deducting underwriting discounts and commissions and other offering expenses payable by us. InFebruary 2023 , we completed a registered direct offering of common stock pursuant to which we issued and sold 6,920,415 shares of our common stock at a purchase price of$5.78 per share and secured approximately$39.7 million in net proceeds after deducting estimated offering expenses. Our ability to generate product revenue will depend on the successful development, regulatory approval, and eventual commercialization of one or more of our product candidates. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operations through equity offerings, debt financings, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements, or other sources. Additional sources of financing might not be available to us on favorable terms, if at all. 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 product candidates that we would otherwise prefer to develop and market ourselves. We expect to continue to incur significant additional operating losses for the foreseeable future as we seek to advance product candidates through clinical development, continue preclinical development, expand our research and development activities, develop new product candidates, complete preclinical studies and clinical trials, seek regulatory 25 --------------------------------------------------------------------------------
approval and, if we receive regulatory approval, commercialize our products. Our expenses will also increase substantially if or as we:
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continue our research and development efforts and submit INDs for our product candidates;
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initiate and conduct clinical trials of our product candidates;
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continue to engineer and develop additional product candidates;
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continue to develop the OMEGA platform;
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seek regulatory and marketing approvals for product candidates that successfully complete clinical trials, if any;
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establish manufacturing and supply chain capacity sufficient to provide clinical and, if applicable, commercial quantities of product candidates, including building our own manufacturing facility;
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establish a sales, marketing, internal systems and distribution infrastructure to commercialize any products for which we may obtain regulatory approval, if any, in geographies in which we plan to commercialize our products ourselves;
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maintain, expand, protect and enforce our intellectual property estate;
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hire additional staff, including clinical, scientific, technical, regulatory, operational, financial, commercial, and support personnel, to execute our business plan and support our product development and potential future commercialization efforts;
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enter into collaborations or licenses for new technologies;
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make royalty, milestone, or other payments under our current and any future in-license agreements;
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incur additional legal, accounting, and other expenses in operating our business; and
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continue to operate as a public company.
Development Programs
OTX-2002
In
InOctober 2022 , we announced the first patient was dosed in the MYCHELANGELOTM I clinical trial. The Phase 1/2 MYCHELANGELO I trial is designed to evaluate the safety, tolerability, pharmacokinetics, pharmacodynamics, and preliminary antitumor activity of OTX-2002 as a monotherapy (Part 1) and in combination with standard of care therapies (Part 2) in patients with relapsed or refractory HCC and other solid tumor types known for association with the MYC oncogene. The study is expected to enroll patients at clinical trial sites inthe United States ,Asia , andEurope . Patient enrollment in the trial continues and we expect to share preliminary data from the monotherapy dose escalation portion of the study in 2023.
In
InMarch 2023 , we entered into a Clinical Supply Agreement with Roche to evaluate OTX-2002 in combination with Roche's anti-PD-L1 therapy, atezolizumab, in patients with advanced MYC-driven hepatocellular carcinoma as part of our Phase 1/2 MYCHELANGELO I clinical trial. Under the terms of this agreement, Roche will supply atezolizumab and Omega will evaluate the combination as part of the overall conduct of the trial.
OTX-2101
In
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Other OEC programs
Beyond HCC and NSCLC, we continue to advance multiple OECs from the OMEGA platform through preclinical studies. The CXCL 1-8-targeting OEC has been characterized in preclinical studies and has potential in several indications including neutrophilic asthma, acute respiratory distress syndrome (including COVID-related), dermatological and rheumatological indications, and oncology, representing a potential franchise opportunity. Impact of COVID-19 on our business The worldwide COVID-19 pandemic, including the identification of new variants of the virus, may affect our ability to initiate and complete preclinical studies, delay the initiation and completion of our clinical trials, or have other adverse effects on our business, results of operations, financial condition, and prospects. In addition, the pandemic has caused substantial disruption in the financial markets and may adversely impact economies worldwide, both of which could adversely affect our business, operations and ability to raise funds to support our operations. To date, we have not experienced material business disruptions as a result of the pandemic. We are following, and plan to continue to follow, recommendations from federal, state and local governments regarding workplace policies, practices and procedures. The third-party contract research organizations, or CROs, and contract development and manufacturing organizations, or CDMOs, that we engage have faced in the past and may face in the future disruptions that could affect our ability to initiate and complete preclinical studies, including disruptions in procuring items that are essential for our research and development activities, such as, for example, raw materials used in the manufacture of our product candidates and laboratory supplies for our preclinical studies, for which there may be shortages because of ongoing efforts to address the COVID-19 pandemic.
We cannot be certain what the overall impact of the COVID-19 pandemic, or the variants of the virus, will be on our business, and the pandemic has the potential to adversely affect our business, financial condition, results of operations, and prospects.
Components of our results of operations
Revenue
To date, we have not generated any revenue from product sales, and do not expect to generate any revenue from the sale of products for the foreseeable future. Our revenue to date has been generated through our collaboration agreement withPM (CF) Explorations, Inc. , or PMCo, an affiliate of Flagship Pioneering ("Flagship"), in which we are entitled to receive reimbursement for the costs associated with our research activities performed.
Operating expenses
Research and development expenses
Research and development expenses consist primarily of costs incurred in performing research and development activities, which include:
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personnel-related expenses, including salaries, bonuses, benefits, and stock-based compensation for employees engaged in research and development functions;
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expenses incurred in connection with the discovery, preclinical development, and clinical development of our research programs, including under agreements with third parties, such as consultants, contractors, CROs and CDMOs that manufacture material for use in our discovery, preclinical development, and clinical development;
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laboratory supplies and research materials;
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costs of licensing technology; and
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facilities, depreciation, and other expenses which include direct and allocated expenses.
We expense research and development costs as incurred. Costs for research and development activities are recognized based on an evaluation of the progress to completion of specific tasks. Payments for these activities are 27 -------------------------------------------------------------------------------- based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our unaudited financial statements as prepaid or accrued research and development expenses. Nonrefundable advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses and expensed as the related goods are delivered or the services are performed. We do not allocate costs associated with our discovery efforts, laboratory supplies and facilities, including depreciation or other indirect costs, to specific programs because these costs are deployed across multiple programs and the OMEGA platform. We use internal resources primarily to conduct our research and discovery activities as well as for managing our preclinical development, process development, manufacturing and clinical development activities. These employees work across multiple programs and our technology platform and, therefore, we do not track these costs by program. We expect that our research and development expenses will continue to increase as we continue our current discovery and research programs, initiate new research programs, continue preclinical development of our product candidates and conduct clinical trials for OTX-2002 and any of our other product candidates.
General and administrative expenses
General and administrative expenses consist primarily of salaries and other related costs such as bonuses and benefits, including stock-based compensation, for personnel in our executive, finance, legal, human resources, corporate business development, and administrative functions. General and administrative expenses also include professional fees for legal, patent, accounting, information technology, auditing, tax, consulting services, insurance and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs. We expect that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research and development and potential commercialization of our product candidates. We also expect to continue to incur increased expenses associated with being a public company, including costs of accounting, audit, legal, regulatory, and tax compliance services, directors' and officers' liability insurance costs, and investor and public relations costs.
Related party expense, net
Related party expense, net consists primarily of fees paid to Flagship for reimbursement of certain expenses, including insurance and benefits, general consulting, and software licenses incurred on our behalf. Additionally, our principal office and laboratory space is leased with an affiliate of Flagship, and we also sublease our other office and laboratory space to two other parties which are affiliates of Flagship. The rent expense and costs related to our principal office and laboratory space, including real estate taxes, insurance, and normal maintenance costs, are considered as related party expenses. Such related party expenses are offset with sublease income received from our related parties, which is comprised of base rent and costs related to the subleased premises such as real estate taxes, cost of operations, maintenance, repair, replacement, and property management.
Other income (expense), net
Interest income (expense), net
Interest expense primarily consists of interest payments as well as the amortization of the debt discount related to our loan and security agreement. Interest income consists of interest earned from our marketable securities and money market accounts. Other expense, net Other expense, net primarily consists of foreign exchange gains and losses on invoices paid, as well as remeasurement gains and losses associated with changes in the fair value of the success fee obligation related to our loan and security agreement, as amended. Until settlement, fluctuations in the fair value of our success fee obligation are based on the remeasurement at each reporting period. 28 -------------------------------------------------------------------------------- Results of operations
Comparison for the three months ended
The following table summarizes the results of our operations for the three
months ended
Three Months EndedMarch 31 ,
$ Increase /
2023 2022 (Decrease) % Change Collaboration revenue from related party $ 516 $ 268 $ 248 100 % Operating expenses: Research and development 19,968 14,191 5,777 41 % General and administrative 5,954 5,406 548 10 % Related party expense, net 412 630 (218 ) (35 )% Total operating expenses 26,334 20,227 6,107 30 % Loss from operations (25,818 ) (19,959 ) 5,859 29 % Other income (expense), net: Interest income (expense), net 682 (155 ) (837 ) (540 )% Other expense, net (143 ) (50 ) 93 186 % Total other income (expense), net 539 (205 ) (744 ) (363 )% Net loss$ (25,279 ) $ (20,164 ) $ 5,115 Revenue Revenue of$0.5 million and$0.3 million for the three months endedMarch 31, 2023 andMarch 31, 2022 , respectively, consisted of reimbursement of research costs incurred in connection with the collaboration agreement with PMCo.
Research and development expenses
Research and development expenses increased by$5.8 million to$20.0 million for the three months endedMarch 31, 2023 , from$14.2 million for the three months endedMarch 31, 2022 . The$5.8 million increase was primarily driven by an increase of$3.2 million in personnel-related expenses, including stock-based compensation to support business growth, an increase of$1.4 million in external manufacturing costs and study costs in support of the advancement of our programs, and an increase of$1.2 million in clinical development costs.
General and administrative expenses
General and administrative expenses increased by$0.6 million to$6.0 million for the three months endedMarch 31, 2023 , from$5.4 million for the three months endedMarch 31, 2022 . The$0.6 million increase was primarily driven by an increase of$0.7 million in personnel-related expenses, including recruiting fees and stock-based compensation to support business growth and an increase in professional fees of$0.1 million , offset by a decrease in$0.2 million in facilities expense.
Related party expense, net
Related party expense, net was$0.4 million for the three months endedMarch 31, 2023 and$0.6 million for the three months endedMarch 31, 2022 . During the three months endedMarch 31, 2023 andMarch 31, 2022 , related party expense, net primarily consisted of lease expense and related costs incurred for our principal office and laboratory space, other reimbursable expenses to Flagship, and certain fees payable to our non-employee directors, offset by the income earned from our sublessees.
Interest income (expense), net
Interest income, net was$0.7 million for the three months endedMarch 31, 2023 and interest expense, net was$0.2 million for the three months endedMarch 31, 2022 . The$0.9 million increase in interest income was attributed to an increase in interest income earned on corporate debt securities during the three months endedMarch 31, 2023 . 29 --------------------------------------------------------------------------------
Other expense, net
Other expense, net was$0.1 million for the three months endedMarch 31, 2023 and less than$0.1 million in the three months endedMarch 31, 2022 . The increase in other expense was primarily due to the change in fair value of the success fee obligation. Liquidity and capital resources Sources of liquidity Since our inception, we have incurred significant operating losses. We expect to incur significant expenses and operating losses for the foreseeable future as we support our continued research activities and development of our programs and platform. We have not yet commercialized any products, and we do not expect to generate product revenue for several years, if at all. To date, we have funded our operations primarily with proceeds from sales of equity securities, including our IPO and registered direct offering, and borrowings under our loan and security agreement. InAugust 2021 , we completed our IPO pursuant to which we issued and sold 8,300,976 shares of our common stock, including 900,976 shares pursuant to the partial exercise of the underwriters' option to purchase additional shares, at a public offering price of$17.00 per share, for aggregate gross proceeds of$141.1 million . We received approximately$128.1 million in net proceeds after deducting underwriting discounts and commissions and other offering expenses payable by us. InFebruary 2023 , we completed a registered direct offering of common stock pursuant to which we issued and sold 6,920,415 shares of our common stock at a purchase price of$5.78 per share and secured approximately$39.7 million in net proceeds after deducting estimated offering expenses.
Cash flows
The following table summarizes our sources and uses of cash for each of the periods presented (in thousands):
Three Months
Ended
2023
2022
Net cash used in operating activities$ (28,111 ) $ (23,350 ) Net cash provided by (used in) investing activities 22,050 (57,567 ) Net cash provided by financing activities 39,987 83 Net change in cash, cash equivalents, and restricted cash 33,926 (80,834 ) Operating activities Net cash used in operating activities totaled$28.1 million for the three months endedMarch 31, 2023 compared to$23.4 million for the three months endedMarch 31, 2022 . The$4.7 million increase in operating cash outflows was primarily attributable to$5.1 million higher net loss recognized during the three months endedMarch 31, 2023 , partially offset by higher non-cash stock-based compensation expense.
Investing activities
Net cash provided by investing activities totaled$22.1 million for the three months endedMarch 31, 2023 compared to net cash used in investing activities of$57.6 million for the three months endedMarch 31, 2022 . The increase was primarily attributable to proceeds from maturities of marketable securities and lower purchases of marketable securities.
Financing activities
Net cash provided by financing activities for the three months endedMarch 31, 2023 consisted primarily of the proceeds from our registered direct offering inFebruary 2023 , net of issuance costs. Net cash provided by financing activities for the three months endedMarch 31, 2022 consisted primarily of the proceeds from the exercise of stock options. 30 --------------------------------------------------------------------------------
Loan and security agreement
In
InDecember 2021 , we entered into an amendment to the Loan Agreement, or Fourth Amendment, in which PWB made an additional term loan to us in an aggregate principal amount of$20.0 million . The proceeds of the Fourth Amendment were first applied to the repayment in full of all outstanding principal and accrued interest on the then outstanding term loan of$12.0 million , and the remaining cash proceeds of$8.0 million were used for general working capital and for capital expenditures purposes. The maturity date of the additional term loan isSeptember 30, 2025 , and it will be repaid beginning onSeptember 30, 2023 in twenty-four equal monthly installments, including interest at a floating annual rate equal to the greater of (i) 0.50% above the prime rate then in effect and (ii) 5.50%, due monthly starting the first month afterDecember 20, 2021 . As ofMarch 31, 2023 , the interest rate applicable to the term loan was 8.50% and the interest payment on the outstanding term loan was approximately$0.1 million per month.
Borrowings under the Loan Agreement, as amended, are collateralized by substantially all of our personal property, other than our intellectual property. There are no financial covenants associated with the Loan Agreement, as amended; however, we are subject to certain affirmative and negative covenants to which we will remain subject to until maturity.
Funding requirements
As ofMarch 31, 2023 , we had cash, cash equivalents and marketable securities of$136.8 million . We expect that our expenses will increase substantially in connection with our ongoing activities, particularly as we advance preclinical activities and conduct clinical trials for OTX-2002 and any other product candidates in development. In addition, we will continue to incur additional costs associated with operating as a public company. The timing and amount of our operating and capital expenditures will depend largely on:
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the scope, progress, results, and costs of our preclinical studies, and clinical trials of OTX-2002 and any future clinical trials;
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the timing of, and the costs involved in, obtaining marketing approvals for our current and future product candidates in regions where we choose to commercialize any products;
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the number of future product candidates and potential additional indications that we may pursue and their development requirements;
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the stability, scale, yield, and cost of our manufacturing process as we scale-up production and formulation of our product candidates for clinical trials, in preparation for regulatory approval and in preparation for commercialization, including our ability to build our own manufacturing facility;
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the costs of pre- and post-commercialization activities for any approved product, including the costs and timing of establishing product sales, marketing, distribution, and manufacturing capabilities;
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revenue, if any, received from commercial sales of our products, should any of our product candidates receive marketing approval;
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the costs and timing of changes in pharmaceutical pricing and reimbursement infrastructure;
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the costs and timing of changes in the regulatory environment and enforcement rules;
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our ability to compete with other therapeutics in the indications we target;
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the effect of competing technological and market developments;
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the extent to which we enter into collaborations or licenses for products, product candidates, or technologies;
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our headcount growth and associated costs as we expand our research and development capabilities and establish a commercial infrastructure;
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the costs of preparing, filing, and prosecuting patent applications and maintaining and protecting our intellectual property rights, including enforcing and defending intellectual property-related claims;
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the costs of operating as a public company; and
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the severity, duration, and impact of the COVID-19 pandemic, which may adversely impact our business.
We believe that our existing cash, cash equivalents and marketable securities will enable us to fund our operating expenses and capital expenditure requirements into the second half of 2024. We have based this estimate on assumptions that may prove to be incorrect, and we could utilize our available capital resources sooner than we expect. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operations through equity offerings, debt financings, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements, or other sources. Contractual obligations
There have been no material changes to our contractual obligations as of
Critical accounting policies and estimates Our management's discussion and analysis of our financial condition and results of operations are based on our unaudited financial statements, which have been prepared in accordance with accounting principles generally accepted in theU.S. , or GAAP. The preparation of these unaudited financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results and experiences may differ materially from these estimates. Our critical accounting policies are described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in our 2022 10-K and the notes to the unaudited financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. During the three months endedMarch 31, 2023 , there were no material changes to our critical accounting policies from those discussed in our 2022 10-K. Recently Issued Accounting Pronouncements We have reviewed all recently issued accounting pronouncements and have determined that, other than as disclosed in Note 2 - Summary of Significant Accounting Policies in the notes to the audited financial statements included in our 2022 10-K and the notes to the unaudited financial statements appearing elsewhere in this Quarterly Report on Form 10-Q, such standards will not have a material impact on our financial statements or do not otherwise apply to our current operations. Emerging growth company and smaller reporting company status We qualify as an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As a result, we may take advantage of specified reduced disclosure and other reporting requirements that are otherwise applicable generally to public companies. In particular, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. We have elected not to "opt out" of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we may adopt the new or revised standard at the time private companies adopt the new or revised standard and may do so until such time that we either (i) irrevocably elect to "opt out" of such extended transition period or (ii) no longer qualify as an emerging growth company. We are also a "smaller reporting company" as defined under the Securities Act and Exchange Act. We may continue to be a smaller reporting company so long as either (i) the market value of shares of our common stock held by non-affiliates is less than$250 million or (ii) our annual revenue was less than$100 million during the most recently completed fiscal year and the market value of shares of our common stock held by non-affiliates is less than$700 million . If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company, we may choose to present only the two most recent fiscal years of audited financial 32
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statements in our Annual Report on Form 10-K and have reduced disclosure obligations regarding executive compensation, and, similar to emerging growth companies, if we are a smaller reporting company under the requirements of (ii) above, we would not be required to obtain an attestation report on internal control over financial reporting issued by our independent registered public accounting firm.
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