SHATTUCK LABS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our audited financial statements and related notes appearing in this Annual Report on Form 10-K. This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this report entitled "Risk Factors." You should carefully read the "Cautionary Note About Forward-Looking Statements" and "Risk Factors" sections of this Annual Report on Form 10-K to gain an understanding of the important factors that could cause actual results to differ materially from the results described below.
Overview
We are an innovative clinical-stage biotechnology company pioneering the development of dual-sided fusion proteins as an entirely new class of biologic medicine. We have created a novel approach to immune modulation by designing biologics with structural characteristics that may not be achievable by existing therapeutic modalities, including monoclonal or bispecific antibodies. Compounds derived from our proprietary Agonist Redirected Checkpoint, or ARC®, platform simultaneously inhibit checkpoint molecules and activate costimulatory molecules with a single therapeutic. Our lead product candidate, SL-172154, is designed to simultaneously inhibit the CD47/SIRP? macrophage checkpoint interaction and activate the CD40 costimulatory receptor to induce an antitumor immune response. Coupling CD40 activation with CD47 inhibition differentiates SL-172154 from all other clinical-stage CD47/SIRP? inhibitors in development, and in our published preclinical studies, SL-172154 resulted in superior antitumor immunity as compared to certain CD47/SIRP? inhibitors. We are pursuing a broad clinical development strategy in both solid and hematologic tumors, with multiple ongoing clinical trials. SL-172154 is in an ongoing Phase 1 clinical trial for the treatment of patients with ovarian cancer. We are also evaluating SL-172154 in an ongoing Phase 1 clinical trial for the treatment of patients with certain hematologic malignancies, including acute myeloid leukemia, or AML, and higher-risk myelodysplastic syndromes, or HR-MDS. We believe our clinical development plan may provide both first-in-class and best-in-class development opportunities for SL-172154. We believe that data shared to date in human cancer patients have demonstrated that the unique protein engineering and physical properties of the ARC platform have led to a differentiated profile in terms of safety and on-target immune activation, demonstrated by unique pharmacodynamic findings, as compared to monoclonal or bispecific antibodies. In addition to our clinical-stage ARC product candidate, we possess a deep pipeline of potential product candidates in preclinical development. As an example, SL-9258, an ARC compound in preclinical development, is designed to inhibit the TIGIT/PVR checkpoint interaction while simultaneously activating HVEM and LT? costimulatory receptors. Furthermore, our expertise in dual-sided fusion proteins has led to the development of a second novel platform technology. We call this our gamma delta T cell engager, or GADLEN™, platform. The most advanced compounds from this platform are a CD20-directed GADLEN and a B7-H3-directed GADLEN.
Longer-term, we are pursuing additional disease areas, including autoimmune diseases, where our dual-sided fusion protein platforms may provide advantages over current treatment modalities.
51
--------------------------------------------------------------------------------Overview of Operations
Since our inception in 2016, we have devoted substantially all of our resources to conducting research and development activities, including undertaking nonclinical studies of our product candidates, conducting clinical trials of our most advanced product candidates, manufacturing our product candidates, developing and perfecting our intellectual property rights, organizing and staffing our company, business planning, and raising capital. We do not have any products approved for sale, and we have not generated any revenue from product sales. We have funded our operations as of the filing date of this Annual Report on Form 10-K through the net proceeds from our IPO of approximately$213.5 million , the sale of redeemable convertible preferred stock for approximately$152.9 million , the issuance of convertible notes for approximately$10.5 million and payments received pursuant to our collaboration agreements for approximately$82.7 million . For the years endedDecember 31, 2022 and 2021, our net loss was$101.9 million and$45.0 million , respectively. We have not been profitable since inception, and as ofDecember 31, 2022 , we had an accumulated deficit of$219.0 million and$161.3 million in cash and cash equivalents and investments. We expect to continue to incur significant expenses and operating losses in the near term in connection with our ongoing activities, as we:
•continue to advance the nonclinical and clinical development of our clinical-stage product candidate, SL-172154;
•initiate nonclinical studies and clinical trials for additional product candidates that we may identify in the future;
•manufacture sufficient quantities of bulk drug substance and drug product to support our ongoing and planned nonclinical studies and clinical trials;
•continue our process development efforts for our current and future product candidates;
•maintain our operational, financial, and management systems;
•retain key personnel and infrastructure to support our clinical development, research and manufacturing efforts;
•utilize our in-house process development and manufacturing capabilities;
•continue to develop, perfect, and defend our intellectual property portfolio; and
•incur additional legal, accounting, or other expenses in operating our
business, including the additional costs associated with operating as a public
company and expenses incurred in connection with ongoing and future litigation,
if any.
We do not expect to generate significant product revenue unless and until we
successfully complete development and obtain regulatory and marketing approval
of, and begin to sell, one or more of our product candidates, if ever, which we
expect will take several years. We expect to spend a significant amount in
development and marketing costs prior to such time. We may never succeed in
achieving regulatory and marketing approval for our product candidates. We may
obtain unexpected results from our nonclinical studies and clinical trials. We
may elect to discontinue, delay, or modify nonclinical studies and clinical
trials of our product candidates. We may be adversely affected by inflationary
pressures and the macroeconomic environment, which are beyond our control. A
change in the outcome of any of these variables with respect to the development
of a product candidate could mean a significant change in the costs and timing
associated with the development of that product candidate. Accordingly, until
such time as we can generate significant product revenue, if ever, we expect to
continue to seek private or public equity and debt financing, and/or additional
collaborations with third-parties, to meet our capital requirements. There can
be no assurance that such funding may be available to us on acceptable terms, or
at all, or that we will be able to commercialize our product candidates. In
addition, we may not be profitable even if we commercialize any of our product
candidates.
COVID-19 Pandemic
As a result of the COVID-19 pandemic, we have experienced, and expect to
continue to experience, delays in our clinical trials. Our manufacturing
operations have also been impacted, including delays with certain third-party
manufacturers and difficulties in obtaining raw materials needed to manufacture
material for our clinical trials. Additionally, we have experienced, and expect
to continue to experience, delays in enrolling patients, missed treatments for
enrolled patients, and performance delays from certain third-party vendors
supporting our clinical trials, although the significance of any future delays
is difficult to predict.
Certain of our research and development activities, including the conduct of
nonclinical studies, have been delayed and may be further delayed due to the
impact of the COVID-19 pandemic. The COVID-19 pandemic or local outbreaks
associated with the COVID-19 pandemic could result in difficulty manufacturing
our product candidates, securing clinical trial site locations, CROs; and/or
trial monitors and other critical vendors and consultants supporting our
clinical trials. In addition, outbreaks or the perception of an outbreak near a
clinical trial site location could impact our ability to enroll patients or to
complete all scheduled physician visits for currently enrolled patients. These
situations, or others associated with COVID-19
52
--------------------------------------------------------------------------------pandemic, could cause delays in our clinical trial plans and could increase expected costs, all of which could have a material and adverse effect on our business and its financial condition. At the current time, we are unable to quantify the potential effects of the COVID-19 pandemic on our future operations.
Global Economic Considerations
In addition, the global macroeconomic environment is uncertain, and could be negatively affected by, among other things, increasedU.S. trade tariffs and trade disputes with other countries, instability in the global capital and credit markets, supply chain weaknesses, and instability in the geopolitical environment, including as a result of the Russian invasion ofUkraine and other political tensions, and lingering effects of the COVID-19 pandemic. Such challenges have caused, and may continue to cause, recession fears, rising interest rates, foreign exchange volatility and inflationary pressures. At this time, we are unable to quantify the potential effects of this economic instability on our future operations.
Collaboration Agreement - Takeda
OnAugust 8, 2017 , we entered into the Collaboration Agreement with Takeda. The Collaboration Agreement was mutually terminated pursuant to the Termination Agreement. Under the terms of the Termination Agreement, we are not required to satisfy any remaining performance obligations, we will not make any payments to or receive any future milestone or royalty payments from Takeda, and all options to license and rights of first negotiation held by Takeda under the Collaboration Agreement were terminated.
Components of our Results of Operation
Collaboration Revenue
We have no products approved for commercial sale, and we have not generated any revenue from commercial product sales. Our total revenue to date has been generated from our Collaboration Agreement with Takeda, and a research agreement with another third-party pharmaceutical company that was initiated and completed in 2022.
Additionally, we have entered into the Clinical Trial Collaboration Agreement
with ImmunoGen, under which we expect to recognize up to
We continue to explore other potential collaborations and expect that collaboration revenue we may generate, if any, will fluctuate from period to period.
Operating Expense
Research and Development Expense
Our research and development expenses consist primarily of costs incurred in connection with the discovery and development of our current and potential future product candidates. These expenses include:
•expenses incurred to conduct our nonclinical studies and clinical trials;
•costs of manufacturing nonclinical study and clinical trial materials, including the costs of raw materials required for manufacturing;
•process development activities to optimize manufacturing processes;
•employee-related expenses, including salaries, benefits, and stock-based compensation;
•laboratory materials and supplies used to support our research activities;
•fees paid to third parties who assist with research and development activities;
•expenses relating to regulatory activities, including filing fees paid to regulatory agencies; and
•allocated expenses for facility-related costs.
53
--------------------------------------------------------------------------------
The following table summarizes our research and development expenses by product
candidate:
Year ended December
31,
(in thousands) 2022 2021
SL-172154 $ 38,609 $ 15,708
Other pipeline compounds 17,373 24,835
Internal costs, including personnel related benefits, facilities, and depreciation
26,917 16,020
$ 82,899 $ 56,563
Research and development activities are central to our business model. Product
candidates in later stages of clinical development generally have higher
development costs than those in earlier stages of clinical development,
primarily due to the increased size and duration of later-stage clinical trials,
including increased demand for clinical trial material. We expect to incur
significant research and development expenses throughout 2023. While it is
difficult for us to predict with certainty, we expect increasing year-over-year
operating expense over the next several years in the event that we conduct
additional nonclinical studies and clinical trials (beyond our currently planned
clinical trials), including later-stage clinical trials, for our current and
future product candidates, pursue regulatory approval of our product candidates,
or advance our preclinical pipeline.
The process of conducting the necessary nonclinical and clinical research to
obtain regulatory approval is costly and time consuming. The actual probability
of success for our product candidates may be affected by a variety of factors
including:
•the safety and efficacy of our product candidates;
•early clinical data for our product candidates;
•investment in our clinical programs;
•competition;
•manufacturing capability; and
•commercial viability.
We may never succeed in achieving regulatory approval for any of our product candidates due to the uncertainties discussed above. We are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of our product candidates, if ever.
General and Administrative Expense
General and administrative expense consists primarily of personnel expenses, including salaries, benefits, and stock-based compensation expense, for employees and consultants in executive, finance, accounting, legal, information technology, business development and human resource functions. General and administrative expense also includes corporate facility costs, including rent, utilities, depreciation, and maintenance, not otherwise included in research and development expense, as well as legal fees related to intellectual property, corporate, and litigation matters and fees for accounting and tax services. We expect that our general and administrative expense may increase in the future to support our ongoing research and development activities and as a result of the costs of operating as a public company. These increases may include increased costs related to the retention of personnel and fees paid to outside consultants, lawyers, and accountants, among other expenses. Additionally, we anticipate that we will continue to incur significant costs associated with being a public company, including expenses related to services associated with maintaining compliance with the requirements of Nasdaq and theSecurities and Exchange Commission , orSEC , insurance, and investor relations costs. If any of our current or future product candidates advances to later-stage clinical development or obtains regulatory approval, we expect that we would incur significantly increased expenses associated with building the appropriate general and administrative support for our increased research and development activities, or building a sales and marketing team, respectively.
Other Income
Other income consists of interest earned on our cash, cash equivalents and investments, which consists of amounts held in a money market fund and at various times in government and corporate obligations as well as investment fees and realized gain or losses on investments (if any).
54
--------------------------------------------------------------------------------Income Taxes
Since our inception, we have not recorded any income tax benefits for the net operating losses, or NOLs, we have incurred or for our research and development tax credits, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our NOLs and tax credits will not be realized. Our NOLs and tax credit carryforwards will begin to expire in 2024. We have recorded a full valuation allowance against our deferred tax assets at each balance sheet date. Results of Operations
Comparison of the Years Ended
The following table sets forth our results of operations for the years endedDecember 31, 2022 and 2021. Year Ended December 31, Change (in thousands) 2022 2021 Dollar Percentage Collaboration revenue $ 652$ 30,017 $ (29,365) (97.8) % Operating expenses: Research and development 82,899 56,563 26,336 46.6 % General and administrative 21,082 18,723 2,359 12.6 % Loss from operations (103,329) (45,269) (58,060) 128.3 % Other income 1,384 295 1,089 369.2 % Net loss$ (101,945) $ (44,974) $ (56,971) 126.7 % Collaboration Revenue Collaboration revenue decreased by$29.4 million , or (97.8)%, to$0.7 million for the year endedDecember 31, 2022 from$30.0 million for the year endedDecember 31, 2021 . This decrease is primarily attributable to the cessation of work with Takeda under the Collaboration Agreement, which was mutually terminated in the fourth quarter of 2021 and all remaining revenue was recognized at that time. In the second quarter of 2022, we executed a collaboration agreement with another third party. We completed the work in the fourth quarter of 2022 and have recognized all of the revenue associated with that agreement.
Research and Development Expense
Research and development expenses increased by$26.3 million , or 46.6%, to$82.9 million for the year endedDecember 31, 2022 from$56.6 million for the year endedDecember 31, 2021 . The increase was primarily due to an increase of$8.4 million in manufacturing costs related to the manufacture of clinical trial material for our ongoing clinical trials, an increase of$7.5 million as a result of an increase in headcount to expand our in-house research, manufacturing and clinical development capabilities, an increase of$4.3 million for facility and equipment expenses related to our increased lab space and related research activities, an increase of$3.2 million in clinical trial costs and an increase of$3.2 million in other operating expenses primarily related to fixed asset depreciation and impairment losses, offset by a decrease of$1.2 million in pharmacology costs.
General and Administrative Expense
General and administrative expenses increased by$2.4 million , or 12.6%, to$21.1 million for the year endedDecember 31, 2022 from$18.7 million for the year endedDecember 31, 2021 . The increase was primarily driven by a litigation settlement of$1.4 million and an increase of$0.6 million of costs associated with being a public company.
Liquidity and Capital Resources
Since our inception, our primary sources of liquidity have been generated by sales of our preferred stock and common stock, including our IPO, and collaboration agreements. As ofDecember 31, 2022 , we had an accumulated deficit of$219.0 million and$161.3 million of cash and cash equivalents and investments. InJuly 2022 , we entered into a sales agreement, or the Sales Agreement, withSVB Securities LLC , or the Sales Agent, pursuant to which we may offer and sell up to$75.0 million of shares of our common stock from time to time in the ATM Facility. The Sales Agent is generally entitled to compensation at a commission equal to 3.0% of the aggregate gross sales price per share sold under the Sales Agreement. As ofDecember 31, 2022 , there were no sales pursuant to the ATM Facility. 55 --------------------------------------------------------------------------------
Capital Resources and Funding Requirements
Our primary uses of cash and cash equivalents and investments are to fund our operations, which consist primarily of research and development expenditures related to our programs, product development costs, research expenses, administrative support, capital expenditures related to bringing in-house certain process development and manufacturing capabilities and working capital requirements. We anticipate incurring additional net losses and negative cash flows from operations in the near future until such time, if ever, that we can generate significant sales of our product candidates currently in development. Our future funding requirements will depend on many factors, including: •the scope, timing, progress and results of discovery, nonclinical development, laboratory testing, and clinical trials for our product candidates; •the costs of process development and scale up of a commercially ready manufacturing process to support registrational clinical trials; •the costs of manufacturing our product candidates for clinical trials and in preparation for marketing approval and commercialization; •the extent to which we enter into collaborations or other arrangements with additional third parties in order to further develop our product candidates; •the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending other intellectual property-related claims; •the costs and fees associated with the discovery, acquisition or in-license of additional product candidates or technologies; •the costs of future commercialization activities, if any, including establishing sales, marketing, manufacturing, distribution and storage capabilities, for any of our product candidates for which we receive marketing approval; and •revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval. Until we obtain regulatory approval to market our product candidates, if ever, we cannot generate revenues from sales of our products. Even if we are able to sell our products, we may not generate a sufficient amount of product revenues to finance our cash requirements. Accordingly, it will be necessary for us to seek to raise additional capital through equity offerings and/or debt financings or from other potential sources of liquidity, which may include new collaborations, licensing or other commercial agreements for one or more of our development programs or patent portfolios. There can be no assurance that such funding may be available to us on acceptable terms, or at all. The issuance of equity securities may result in dilution to stockholders and the issuance of debt securities may have rights, preferences and privileges senior to those of our common stock and the terms of any such debt securities could impose significant restrictions on our operations. The failure to raise funds as and when needed could have a negative impact on our financial condition and ability to pursue our business strategies. Additionally, if additional funding is not secured when required, we may need to delay or curtail our operations until such funding is received, which would have a material and adverse impact on our business prospects and results of operations.
We believe that our cash and cash equivalents and investments as of
Cash Flows
The following table shows a summary of our cash flows for the periods indicated:
Year ended December 31,
(in thousands) 2022 2021
Net cash used in operating activities $ (94,498) $ (57,116)
Net cash provided by (used in) investing activities 49,438 (10,443)
Net cash provided by financing activities 171
1,929
Net decrease in cash and cash equivalents$ (44,889)
During the year endedDecember 31, 2022 , net cash used in operating activities was$94.5 million and primarily reflected by our net loss of$101.9 million and a$4.5 million net change in our operating assets and liabilities, offset by noncash charges of$6.5 million in stock-based compensation,$4.7 million in depreciation expense, amortization of investments and non-cash operating lease expense and$0.7 million in losses on sale of assets. We expect to continue to use cash in our operating activities 56 --------------------------------------------------------------------------------
as we conduct our clinical trials and nonclinical studies, incur costs of manufacturing clinical trial and nonclinical study materials and continue process development activities to optimize our manufacturing processes.
During the year endedDecember 31, 2021 , net cash used in operating activities was$57.1 million and primarily reflected by our net loss of$45.0 million and a$22.0 million net change in our operating assets and liabilities, offset by noncash charges of$5.5 million in stock-based compensation and$4.4 million in depreciation expense and amortization of investments.
Net Cash Provided by (Used in) Investing Activities
During the year endedDecember 31, 2022 , net cash provided by investing activities was$49.4 million of which$60.9 million represents the net change in investments and$11.5 million represents purchases of property and equipment, net of sales, primarily attributable to our continued efforts to bring certain process development, manufacturing and laboratory capabilities in-house. During the year endedDecember 31, 2021 , net cash used in investing activities was$10.4 million of which$7.9 million was used to purchase property and equipment, primarily attributable to our continued efforts to bring certain process development, manufacturing and laboratory capabilities in-house and$2.5 million represents the net change in investments.
Net Cash Provided by Financing Activities
During the year ended
During the year ended
Contractual Obligations and Other Commitments
See Note 6 and Note 7 to our financial statements found elsewhere in this Annual Report on Form 10-K for additional disclosures.
Critical Accounting Policies
Our management's discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America , or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, the accrual for research and development expenses, and the valuation of stock-based awards. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our critical accounting policies are those policies which require the most significant judgments and estimates in the preparation of our financial statements. We believe that the assumptions and estimates associated with our most critical accounting policies are those relating to revenue, accrued research and development costs and stock-based compensation.
Revenue Recognition
We have and may continue to enter into collaboration agreements with other
companies. Arrangements with collaborators may include licenses to intellectual
property, research and development services, manufacturing services for clinical
and commercial supply, and participation on joint steering and patent
committees. We evaluate the promised goods or services in the contract to
determine which promises, or group of promises, represent performance
obligations. In contemplation of whether a promised good or service meets the
criteria required of a performance obligation, we consider the stage of
development of the underlying intellectual property, the capabilities and
expertise of the customer relative to the underlying intellectual property, and
whether the promised goods or services are integral to or dependent on other
promises in the contract. When accounting for an arrangement that contains
multiple performance obligations, we develop judgmental assumptions, which may
include market conditions, reimbursement rates for personnel costs, development
timelines, and probabilities of regulatory success to determine the stand-alone
selling price for each performance obligation identified in the contract.
Upon the amendment of an existing agreement, we evaluate whether the amendment
represents a modification to an existing contract that would be recorded through
a cumulative catch-up to revenue, or a separate contract. If it is determined
that it is a separate contract, we will evaluate the necessary revenue
recognition through the five-step process described below.
57
--------------------------------------------------------------------------------When we conclude that a contract should be accounted for as a combined performance obligation and recognized over time, we then determine the period over which revenue should be recognized and the method by which to measure revenue. We generally recognize revenue using a cost-based input method.
We recognize collaboration revenue in an amount that reflects the consideration that we expect to receive in exchange for those goods or services when our customer or collaborator obtains control of promised goods or services. To determine revenue recognition for such arrangements, we perform the following five steps:
i.identify the contract(s) with a customer;
ii.identify the performance obligations in the contract;
iii.determine the transaction price;
iv.allocate the transaction price to the performance obligations within the contract; and
v.recognize revenue when (or as) the entity satisfies a performance obligation.
We only apply the five-step model to contracts when we determine that it is probable we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer.
At contract inception, we assess the goods or services promised within the contract to determine whether each promised good or service is a performance obligation. The promised goods or services in the arrangement may consist of a license of, or options to license, our intellectual property and research, development and manufacturing services. We may provide options to additional items in such arrangements, which are accounted for as separate contracts when the customer elects to exercise such options, unless the option provides a material right to the customer. Performance obligations are promises in a contract to transfer a distinct good or service to the customer that (i) the customer can benefit from on its own or together with other readily available resources, and (ii) are separately identifiable from other promises in the contract. Goods or services that are not individually distinct performance obligations are combined with other promised goods or services until such combined group of promises meet the requirements of a performance obligation. We determine transaction price based on the amount of consideration we expect to receive for transferring the promised goods or services in the contract. Consideration may be fixed, variable, or a combination of both. At contract inception for arrangements that include variable consideration, we estimate the probability and extent of consideration we expect to receive under the contract utilizing either the most-likely amount method or expected amount method, whichever best estimates the amount expected to be received. We then consider any constraints on the variable consideration and includes variable consideration in the transaction price to the extent it is deemed probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We then allocate the transaction price to each performance obligation based on the relative standalone selling price and recognize revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) control is transferred to the customer and the performance obligation is satisfied. For performance obligations that consist of licenses and other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. We record amounts as accounts receivable when the right to consideration is deemed unconditional. When consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract, a contract liability is recorded as deferred revenue. Amounts received prior to satisfying the revenue recognition criteria are recognized as deferred revenue in our balance sheet. Deferred revenues expected to be recognized as revenue within the 12 months following the balance sheet date are classified as a current liability. Deferred revenues not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as non-current liabilities.
Research and Development Expense
Research and development expenses consist primarily of costs incurred in connection with the development of our product candidates. We expense research and development costs as incurred.
We accrue expenses for manufacturing, process development, nonclinical studies
and clinical trial activities performed by vendors based upon estimates of the
proportion of work completed. We determine the estimates by reviewing contracts,
vendor agreements and purchase orders, and through discussions with our internal
personnel and external service providers as to the progress or stage of
completion of trials or services and the agreed-upon fee to be paid for such
services. However, actual
58
--------------------------------------------------------------------------------costs and timing of clinical trials are highly uncertain, subject to risks and may change depending upon a number of factors, including our clinical development plan.
We make estimates of our prepaid and accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known at that time. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the accrual accordingly. Nonrefundable advance payments for goods and services, including fees for process development or manufacturing and distribution of clinical supplies that will be used in future research and development activities, are deferred and recognized as expense in the period that the related goods are consumed or services are performed.
Stock-Based Compensation
We measure compensation expense for all share-based awards based on the estimated fair value of the share-based awards on the grant date. We use the Black-Scholes option pricing model to value our stock option awards. The fair values of restricted stock units, or RSUs, are based on the fair value of the Company's common stock on the date of the grant. We recognize compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period of the award. We also grant stock options that vest upon achievement of certain market-based conditions. We use theMonte Carlo pricing model to estimate the fair value of options that have market-based conditions. The Black-Scholes andMonte Carlo option-pricing models require the use of subjective assumptions that include the expected stock price volatility and, for options granted prior to our IPO, the fair value of the underlying common stock on the date of grant. See Note 8 to our audited financial statements included elsewhere in this Annual Report on Form 10-K for information concerning certain of the specific assumptions we used in applying the Black-Scholes andMonte Carlo option pricing models to determine the estimated fair value of our stock options granted during the year endedDecember 31, 2022 .
Recent Accounting Pronouncements
See Note 2 to our financial statements found elsewhere in this Annual Report on Form 10-K for a description of recent accounting pronouncements applicable to our financial statements.
Emerging Growth Company and Smaller Reporting Company Status
We are an emerging growth company as defined in the JOBS Act. Under the JOBS Act, an emerging growth company can take advantage of the extended transition period for complying with new or revised accounting standards and delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption from complying with new or revised accounting standards and, therefore, will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. We have evaluated the benefits of relying on other exemptions and reduced reporting requirements under the JOBS Act. Subject to certain conditions, as an emerging growth company, we may rely on certain of these exemptions, including without limitation exemptions to the requirements for (1) providing an auditor's attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (2) complying with any requirement that may be adopted by thePublic Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an emerging growth company until the earlier of (a) the last day of the fiscal year (i) following the fifth anniversary of the completion of our IPO, (ii) in which we have total annual gross revenues of at least$1.07 billion or (iii) in which we are deemed to be a "large accelerated filer" under the rules of theSEC , which means the market value of our common stock that is held by non-affiliates exceeds$700.0 million as of the priorJune 30th , or (b) the date on which we have issued more than$1.0 billion in non-convertible debt during the prior three-year period. We are also a "smaller reporting company" as defined under the Securities Exchange Act of 1934, as amended, or the Exchange Act. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than$250.0 million or (ii) our annual revenue is less than$100.0 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than$700.0 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 statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation. 59
--------------------------------------------------------------------------------
© Edgar Online, source
