You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing includes forward-looking statements that involve risks and uncertainties. Many factors, including those factors set forth in the "Risk Factors" section of this Annual Report on Form 10-K, may materially and adversely affect our actual results, which may differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a clinical-stage biotechnology company dedicated to improving the lives of patients, caregivers, and families affected by rare and common neurodegenerative diseases by pursuing the development of disease-modifying therapeutics to restore the vigilance of microglia. Microglia are the sentinel immune cells of the brain and play a critical role in maintaining central nervous system (CNS) health and responding to damage caused by disease. Leveraging recent research implicating microglial dysfunction in neurodegenerative diseases, we utilize a precision medicine approach to develop a pipeline of therapeutic candidates, initially addressing genetically defined patient subpopulations, that we believe will activate and restore microglial function. Our first therapeutic candidates are designed to activate Triggering Receptor Expressed on Myeloid Cells 2 (TREM2), a key microglial receptor protein that mediates responses to environmental signals in order to maintain brain health and whose dysfunction is linked to neurodegeneration. We have two main programs that are designed to target TREM2. Our lead product candidate, VGL101, is a fully human monoclonal antibody (mAb) TREM2 agonist (or activator) that is currently being studied in a Phase 2 proof-of-concept trial in patients with adult-onset leukoencephalopathy with axonal spheroids and pigmented glia (ALSP), a rare and fatal neurodegenerative disease. Our second program is focused on small molecule TREM2 agonists and is currently in investigational new drug (IND) enabling studies. We plan to develop our small molecule TREM2 agonist candidates for more common neurodegenerative diseases associated with microglial dysfunction, with an initial focus on Alzheimer's disease (AD) in genetically defined subpopulations. We believe that each of the therapeutic candidates in our pipeline has the potential to be developed for multiple neurodegenerative diseases. Our precision medicine approach begins with rare, genetically defined diseases for which microglial dysfunction is believed to be a key driver of disease pathology and then utilizes findings from these efforts to inform expansion into larger and more common neurodegenerative diseases. We believe our strategy has the potential to mitigate downstream translational risk as we seek to advance our programs through early development and into the clinic. We believe this iterative, sequential approach is a key differentiator, potentially allowing us to generate clinical proof-of-concept (PoC) efficiently and leverage our initial development programs as well as research by others, in pursuing additional neurodegenerative disease opportunities.
Recent Developments
Since our inception, we have devoted substantially all of our efforts to organizing and staffing our company, research and development activities, business planning, raising capital, building our intellectual property portfolio and providing general and administrative support for these operations. To date, we have funded our operations primarily through proceeds from our initial public offering (IPO) of our common stock, the sale of shares of our convertible preferred stock and a Simple Agreement for Future Equity, or SAFE. As ofDecember 31, 2022 , we had$186.6 million of cash and cash equivalents. As ofDecember 31, 2022 , we raised aggregate gross proceeds of$313.0 million from the sale of equity securities as follows:
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During the period fromJune 22, 2020 (inception) toDecember 31, 2021 , we raised$5.0 million gross proceeds from the SAFE which was subsequently converted to 1,963,093 shares of Series A convertible preferred stock,$45.0 million gross proceeds from the issuance of 17,667,840 shares of Series A convertible preferred stock at a purchase price of$2.547 per share, and$90.0 million gross proceeds from the issuance of 25,657,096 shares of Series B convertible preferred stock at$3.5078 per share. Costs associated with these issuances were approximately$0.6 million .
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During the twelve months endedDecember 31, 2022 , we completed the IPO of our common stock, in which we issued an aggregate of 7,000,000 shares of common stock at a price of$14.00 per share, for gross cash proceeds of$98.0 million , before underwriting discounts and commissions. We received approximately$88.0 million in net proceeds, after deducting underwriting discounts, commissions and offering expenses. We also completed a private placement in which we issued 7,293,084 shares of common stock at a price of$7.30 per share and 2,980,889 pre-funded warrants at a purchase price of$7.2999 , for gross proceeds of$75.0 million , before deducting fees to the placement agent and other offering expenses. Based on our current operating plan, we believe that our existing cash and cash equivalents will be sufficient to fund our planned operating expenses and capital expenditure requirements into the first quarter of 2025. 97 -------------------------------------------------------------------------------- We have incurred significant operating losses since the commencement of our operations. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current therapeutic candidates or any future therapeutic candidates. Our accumulated deficit was$71.8 million atDecember 31, 2021 and$140.1 million atDecember 31, 2022 , respectively. We expect to continue to incur significant losses for the foreseeable future as we advance our current and future therapeutic candidates through preclinical and clinical development, continue to build our operations and transition to operating as a public company. Our net losses may fluctuate significantly from period to period, depending on the timing of expenditures on our research and development activities. Our primary use of cash is to fund operating expenses, which consist primarily of research and development and general and administrative expenses. The timing of payment of these expenses has an effect on cash used to fund operating expenses, as reflected in the change in our outstanding accounts payable and accrued expenses. We expect to continue to incur net operating losses for at least the next several years, and we expect our research and development expenses, general and administrative expenses, and capital expenditures will continue to increase. We expect our expenses and capital requirements will increase significantly in connection with our ongoing activities as we:
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continue our ongoing and planned research and development of our VGL101 and small molecule TREM2 agonist program;
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initiate preclinical studies and clinical trials for any additional therapeutic candidates that we may pursue in the future;
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expand our product pipeline based on TREM2 and other microglia targets across multiple therapeutic modalities, through internal discovery and development, or through strategic collaborations or alliances with academic organizations, pharmaceutical or biotechnology companies;
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seek regulatory approvals for any therapeutic candidates that successfully complete clinical trials;
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invest in capital equipment in order to expand our research and development activities;
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attract, hire and retain additional clinical, scientific, quality control, and manufacturing management and administrative personnel;
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add clinical, operational, financial and management information systems and personnel, including personnel to support our product development;
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develop, maintain, expand, protect and enforce our intellectual property portfolio, including patents, trade secrets and know-how;
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acquire or in-license other therapeutic candidates and technologies;
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expand our operations in
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incur additional legal, accounting, investor relations and other general and administrative expenses associated with operating as a public company; and
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establish a sales, marketing and distribution infrastructure, either ourselves or in partnership with others, to commercialize any therapeutic candidates, if approved. We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for one or more of our therapeutic candidates. If we obtain regulatory approval for any of our therapeutic candidates, we expect to incur significant expenses related to product sales, marketing and distribution to the extent that such sales, marketing and distribution are not the responsibility of potential collaborators. We may also require additional capital to pursue in-licenses or acquisitions of other drug candidates. Further, we expect to incur additional costs associated with operating as a public company. We also expect to increase the size of our administrative function to support the growth of our business. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and our expenses related to other research and development activities. As a result, we will require substantial additional funding to develop our therapeutic candidates and support our continuing operations. Until such time that we can generate significant revenue from product sales or other sources, we expect to finance our operations through the sale of equity, debt financings or other capital sources, which could include proceeds 98 -------------------------------------------------------------------------------- from potential collaborations, strategic partnerships or marketing, distribution, licensing or other strategic arrangements with third parties. We may be unable to raise additional funds or to enter into such agreements or arrangements on favorable terms, or at all. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets inthe United States and worldwide resulting from the ongoing COVID-19 pandemic, theRussia /Ukraine military conflict and otherwise. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development or commercialization of our therapeutic candidates or grant rights to develop and market therapeutic candidates that we would otherwise prefer to develop and market ourselves. Our failure to obtain sufficient funds with acceptable terms could have a material adverse effect on our business, results of operations or financial condition, including requiring us to have to delay, reduce or eliminate our product development or future commercialization efforts. Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the amount of increased expenses or timing, or if we will be able to achieve or maintain profitability. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. We cannot provide assurance that we will ever be profitable or generate positive cash flow from operating activities. We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for one or more of our therapeutic candidates. If we obtain regulatory approval for any of our therapeutic candidates, we expect to incur significant expenses related to product sales, marketing and distribution to the extent that such sales, marketing and distribution are not the responsibility of potential collaborators. We may also require additional capital to pursue in-licenses or acquisitions of other drug candidates. Further, we expect to incur additional costs associated with operating as a public company.
Impact of COVID-19 on Our Operations
We are subject to a number of risks associated with the COVID-19 global pandemic, including potential delays associated with our ongoing preclinical studies and clinical trials. Site initiation, patient enrollment and patient follow-up visits may be delayed, for example, due to prioritization of hospital resources toward the COVID-19 outbreak, travel restrictions, the inability to access sites for initiation and monitoring, and difficulties recruiting or retaining patients in our planned clinical trials. COVID-19 may have an adverse impact on our operations, supply chains and distribution systems or those of our third-party vendors and collaborators, and increase expenses, including as a result of impacts associated with preventive and precautionary measures that are being taken, such as restrictions on travel and border crossings, quarantine polices and social distancing. We and our third-party vendors and collaborators may experience disruptions in supply of items that are essential for our research and development activities. The emergence of additional variants, as well as reduced efficacy of vaccines over time and the possibility that a large number of people decline to get vaccinated or receive booster shots, creates inherent uncertainty as to the future of our business, our industry and the economy in general in light of the pandemic. We cannot at this time predict the specific extent, duration, or full impact that the COVID-19 outbreak will have on our financial condition and operations. If we do not successfully commercialize any of our therapeutic candidates, we will be unable to generate product revenue or achieve profitability.
Exclusive License Agreement with Amgen Inc.
InJuly 2020 , we entered into an exclusive license agreement, or the Amgen Agreement, with Amgen Inc., or Amgen, pursuant to which we have been granted an exclusive, royalty-bearing license to certain intellectual property rights owned or controlled by Amgen, to commercially develop, manufacture, use, distribute and sell therapeutic products containing compounds that bind to TREM2. In addition, we are required to reimburse Amgen for amounts it paid to its contract manufacturers on our behalf. See "Business Section-Exclusive License Agreement with Amgen Inc." and Note 12 to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for more information on the Amgen Agreement. As initial consideration for the license, we paid an upfront payment of$0.5 million and also recognized an obligation to issue shares of Series A convertible preferred stock with an antidilution provision, or theRelated Party Antidilution Obligation. As additional consideration for the license, we are required to pay Amgen up to$80.0 million in the aggregate upon the achievement of specified regulatory milestones for the first mAb TREM2 agonist product and the first small molecule TREM2 agonist product and aggregate milestone payments of up to$350.0 million upon the achievement of specific commercial milestones across all mAb products and small molecule products. No regulatory or commercial milestones have been achieved to date under the Amgen Agreement. We are also required to pay tiered royalties of low to mid single-digit percentages on annual net sales of the products covered by the license. In the event that the exploitation of a product is not covered by a valid 99 -------------------------------------------------------------------------------- claim within the licensed patent rights, then the royalty rate with respect to the net sales shall be subject to a customary reduction by a certain percentage. The royalty term will terminate on a country-by-country basis on the later of (i) the expiration date of the last valid claim within the licensed patent rights and (ii) the tenth (10th) anniversary of the first commercial sale of such product in such country. In connection with the license agreement, Amgen entered into certain stockholder agreements related to this investment. See "Certain Relationships and Related Party Transactions-Series A Preferred Stock Financings."
Components of Our Results of Operations
Operating Expenses
Our operating expenses since inception have consisted solely of research and development expenses and general and administrative expenses.
Research and Development
Research and development expenses consist of costs incurred for our research activities, including our discovery efforts and the development of our programs. These expenses include:
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employee related expenses, including salaries, related benefits, and stock-based compensation expense for employees engaged in research and development functions;
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expenses incurred in connection with the manufacturing and clinical development of our VGL101 program;
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expenses incurred in connection with the discovery and preclinical development of our small molecule TREM2 agonist program;
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expenses incurred under agreements with third parties, such as consultants, clinical investigators, contractors and contract research organizations, or CROs, that assist with (i) the non-clinical and clinical studies of VGL101 and (ii) identification of additional potential therapeutic candidates in our small molecule TREM2 agonist program;
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the cost of developing and scaling our manufacturing process and manufacturing therapeutic candidates for use in our research and preclinical studies, including under agreements with third parties, such as consultants, contractors, and contract manufacturing organizations, or CMOs; and
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other expenses incurred as a result of research and development activities.
Research and development expenses account for a significant portion of our operating expenses. We expense research and development costs as incurred. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. When third-party service providers' billing terms do not coincide with our period-end, we are required to make estimates of our obligations to those third parties incurred in a given accounting period and record accruals at the end of the period. We base these estimates on our knowledge of the research and development programs, services performed for the period, past history for related activities and the expected duration of the third-party service contract, where applicable. If timelines or contracts are modified based upon changes in the scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis. Actual results could differ from our estimates. Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of external costs, such as fees paid to CROs, CMOs, central laboratories and outside consultants in connection with our research and discovery, preclinical development, process development, manufacturing, clinical development, regulatory and quality activities. We do not allocate employee costs or facility expenses, including depreciation or other indirect costs, to specific programs because these costs are deployed across multiple programs. Our internal resources conduct our research and discovery activities and manage our preclinical development and process development, manufacturing and clinical development activities. 100 -------------------------------------------------------------------------------- The table below summarizes our research and development expenses incurred by program:December 31 ,December 31, 2022 2021 ($
in thousands) Direct, external research and development expenses by program: VGL101
$ 17,343 $ 15,407 Small molecule TREM2 12,475 5,545 Unallocated research and development expenses: External costs and other 3,668 3,787 Facilities, personnel-related, and other 13,958 7,591 Total research and development expenses $
47,444
Research and development activities are central to our business model. Therapeutic candidates in later stages of clinical development generally have higher development costs than those in earlier stages, primarily due to the increased size and duration of later-stage clinical trials. As a result, we expect that our research and development expenses will increase over the next several years as we expect to (i) advance VGL101 and our small molecule TREM2 agonist programs' initial clinical trials, (ii) develop VGL101 for other indications, including other rare leukodystrophies, and leukoencephalopathies, and (iii) expand our modality agnostic product pipeline to other microglia targets beyond TREM2. The successful development and commercialization of our therapeutic candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our therapeutic candidates. This uncertainty is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:
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the timing, design and successful completion of preclinical studies and clinical development activities;
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the sufficiency of our financial and other resources to complete the necessary preclinical studies and clinical trials;
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effective INDs or comparable foreign applications that allow commencement of our planned clinical trials or future clinical trials for any therapeutic candidates we may develop;
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successful enrollment and completion of clinical trials, including under theFDA's Good Clinical Practices, Good Laboratory Practices, and any additional regulatory requirements from foreign regulatory authorities;
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positive results from our future clinical trials that support a finding of safety and effectiveness and an acceptable risk-benefit profile in the intended populations;
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the receipt of regulatory marketing approvals from applicable regulatory authorities;
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the establishment of arrangements with third-party manufacturers for clinical supply and, where applicable, commercial manufacturing capabilities;
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the establishment, maintenance, defense and enforcement of patent, trademark, trade secret and other intellectual property protection or regulatory exclusivity for any therapeutic candidates we may develop;
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patient recruitment and enrollment;
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commercial launch of any therapeutic candidates we may develop, if approved, whether alone or in collaboration with others;
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acceptance of the benefits and use of our therapeutic candidates we may develop, including method of administration, if and when approved, by patients, the medical community and third-party payors;
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our ability to compete effectively with other therapies and treatment options;
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maintenance of a continued acceptable safety, tolerability and efficacy profile of any therapeutic candidates we may develop following approval;
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establishment and maintenance of healthcare coverage and adequate reimbursement by payors;
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our ability to establish new licensing or collaboration arrangements;
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the performance of our future collaborators, if any;
101 --------------------------------------------------------------------------------
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development and timely delivery of commercial-grade drug formulations that can be used in our planned clinical trials and, if approved, for commercial launch;
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obtaining, maintaining, defending and enforcing patent claims and other intellectual property rights;
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launching commercial sales of our therapeutic candidates, if approved, whether alone or in collaboration with others; and
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maintaining a continued acceptable safety profile of the therapeutic candidates following approval.
Any changes in the outcome of any of these variables with respect to the development of our therapeutic candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these therapeutic candidates. For example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect, or if we experience significant delays in enrollment in any of our planned clinical trials, we could be required to expend significant additional financial resources and time to complete clinical development of that therapeutic candidate. We may never obtain regulatory approval for any of our therapeutic candidates, and, even if we do, drug commercialization takes several years and millions of dollars in development costs.
General and Administrative
General and administrative expenses consist primarily of personnel expenses, including salaries, benefits and stock-based compensation expense, for personnel in executive, accounting, business development, legal, human resources and administrative functions. General and administrative expenses also include corporate facility costs not otherwise included in research and development expenses, depreciation and other expenses, which include direct or allocated expenses for rent and maintenance of facilities and insurance, not otherwise included in research and development expenses, as well as professional fees for legal, consulting, investor and public relations, accounting and audit services. We expect that our general and administrative expenses will increase in the foreseeable future as we increase our headcount to support the continued research and development of our programs and the growth of our business. We also anticipate continuing to incur expenses associated with operating as a public company, including increased expenses related to audit, legal, regulatory, compliance, director and officer insurance, investor and public relations and tax-related services associated with maintaining compliance with the rules and regulations of theSecurities and Exchange Commission , orSEC , and standards applicable to companies listed on a national securities exchange, additional insurance expenses, investor relations activities and other administrative and professional services. Other Income (Expense)
Change in Fair Value of Related Party Antidilution Obligation
Pursuant to the Amgen Agreement, we agreed to issue Amgen equity in an amount equal to 25% of our capital stock on a fully diluted basis until such time as we have raised an aggregate of$45.0 million in net cash proceeds from financing activities relating to dilutive transactions including theRelated Party Antidilution Obligation. InSeptember 2020 , we completed the first closing pursuant to the Series A Convertible Preferred Stock Purchase Agreement, and as a result issued Amgen 6,928,566 shares of Series A convertible preferred stock such that Amgen's ownership represented 25% of the post-closing capitalization on a fully diluted basis. The Related Party Antidilution Obligation was separately exercisable from the Amgen Agreement and was classified as a liability and recorded at fair value in the consolidated balance sheet with a corresponding charge to research and development at inception of the license agreement in July of 2020. The Related Party Antidilution Obligation was remeasured at fair value at each reporting period, with changes in fair value recorded in change in fair value of Related Party Antidilution Obligation in the consolidated statement of operations and comprehensive loss. InSeptember 2020 , the Related Party Antidilution Obligation was partially settled through the issuance of 6,928,566 shares of Series A convertible preferred stock with a fair value of$17.5 million . InMay 2021 , we settled the remainingRelated Party Antidilution Obligation in full with the second closing pursuant to the Series A Convertible Preferred Stock Purchase Agreement. Amgen received an additional 1,963,093 shares of Series A convertible preferred stock with a fair value of$5.1 million .
Change in Fair Value of Series A Preferred Stock Tranche Obligation
InSeptember 2020 , we entered into the Series A Convertible Preferred Stock Purchase Agreement and issued 9,815,467 shares of Series A convertible preferred stock at a purchase price of$2.547 per share, for gross cash proceeds of$25.0 million . As part of theSeptember 2020 Series A Convertible Preferred Stock Purchase Agreement, the investors were contingently 102 -------------------------------------------------------------------------------- obligated to purchase 7,852,373 additional shares of Series A convertible preferred stock at$2.547 per share upon the satisfaction of specified research and development milestones, collectively, the Series A Preferred Stock Tranche Obligation. The Series A Preferred Stock Tranche Obligation was legally detachable and separately exercisable from the Series A convertible preferred stock. As such, we allocated the proceeds from theSeptember 2020 issuance between the Series A Preferred Stock Tranche Obligation and the Series A convertible preferred stock. As the Series A convertible preferred stock is redeemable upon a deemed liquidation event at the election of the holder controlled Board, and therefore outside of the control of our company, the Series A Preferred Stock Tranche Obligation was classified as a liability and recorded at its fair value. The Series A Preferred Stock Tranche Obligation was remeasured at fair value at each reporting period until its settlement inMay 2021 , with changes in fair value recorded in change in fair value of Series A Preferred Stock Tranche Obligation in the consolidated statement of operations and comprehensive loss. Interest Income, net Interest income primarily consists of interest earned from our cash and cash equivalents. We expect our interest income will increase slightly as we invest the cash received from net proceeds from our IPO and ourAugust 2022 private placement of our common stock.
Other Expense, net
Other expense, net primarily consists of gains and losses from the remeasurement of foreign currency transactions into our functional currency.
Income Taxes
Since our inception, we have not recorded any income tax benefits for the net losses we have incurred in each year 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 net operating loss, or NOL, carryforwards and tax credits will be realized. As ofDecember 31, 2022 , we had federal NOL carryforwards of approximately$68.4 million and state NOL carryforwards of approximately$67.7 million which may be available to offset future taxable income and begin to expire in 2040. The total federal NOL of$68.4 million are not subject to expiration. As ofDecember 31, 2022 , we also had federal and state tax research and development credit carryforwards of approximately$3.9 million and$1.2 million , respectively, to offset future tax liabilities, which begin to expire in 2040. We have recorded a full valuation allowance against our net deferred tax assets atDecember 31, 2022 . As ofDecember 31, 2022 , we had no unrecognized tax benefits. Results of Operations
Year Ended
The following table summarizes our results of operations for the year ended
December 31, December 31, 2022 2021 Change ($ in thousands) Operating expenses: Research and development$ 47,444 $ 32,330 $ 15,114 General and administrative 21,440 10,079 11,361 Total operating expenses 68,884 42,409 26,475 Loss from operations (68,884 ) (42,409 ) (26,475 ) Other income (expense): Change in fair value of the related party antidilution obligation - (836 ) 836 Change in fair value of Series A preferred stock tranche obligation - (28 ) 28 Interest income, net 623 3 620 Other expense, net (44 ) (13 ) (31 ) Total other expense, net 579 (874 ) 1,453 Net loss and comprehensive loss$ (68,305 ) $ (43,283 ) $ (25,022 ) 103
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Research and Development Expenses
Research and development expenses were$47.4 million for the year endedDecember 31, 2022 , as compared to$32.3 million for the year endedDecember 31, 2021 . The increase of$15.1 million consisted primarily of the following:
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$6.3 million of facilities, personnel-related and other expenses, of which$5.7 million related to personnel-related costs, including salaries, bonuses, and other compensation-related costs, including stock-based compensation of$1.5 million ; and
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$1.9 million of VGL101 program expenses, which is primarily driven by$6.5 million of clinical trial related expenses,$1.1 million in other research and development activity including consulting, lab, and patient advocacy related costs. These expenses are partially offset by$2.9 million decrease in VGL101 preclinical costs and$2.8 million decrease in external manufacturing expenses due to timing of manufacturing runs of VGL101.
General and Administrative Expenses
General and administrative expenses were
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•
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Change in Fair Value of Related Party Antidilution Obligation
The change in fair value of Related Party Antidilution Obligation was
Change in Fair Value of Series A Preferred Stock Tranche Obligation
The change in fair value of Series A Preferred Stock Tranche Obligation was$28 thousand for the year endedDecember 31, 2021 . This increase fair value related to the remeasurement to fair value of the Series A Preferred Stock Tranche Obligation associated with the Series A Convertible Preferred Stock Purchase Agreement. InMay 2021 , we settled the Series A Tranche Obligation with the issuance of 7,852,373 shares of our Series A Convertible Preferred Stock.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have not generated any revenue from product sales and have incurred significant operating losses and negative cash flows from our operations. We expect to incur significant expenses and operating losses for the foreseeable future as we advance the clinical development of our therapeutic candidates. Since our inception throughDecember 31, 2022 , we have funded our operations primarily with net proceeds from sales of our convertible preferred stock and common stock totaling gross proceeds of approximately$313.0 million . As ofDecember 31, 2022 , we had cash and cash equivalents of$186.6 million . InJanuary 2022 , we completed the initial public offering of our common stock, in which we issued an aggregate of 7,000,000 shares of common stock, at a price of$14.00 per share, for gross cash proceeds of$98.0 million , before underwriting discounts and commissions. We received approximately$88.0 million in net proceeds, after deducting underwriting discounts, commissions and offering expenses. 104 -------------------------------------------------------------------------------- InAugust 2022 , we also completed a private placement in which we issued 7,293,084 shares of common stock at a price of$7.30 per share and 2,980,889 pre-funded warrants at a purchase price of$7.2999 , for gross proceeds of$75.0 million , before deducting fees to the placement agent and other offering expenses. We received net proceeds of$71.3 million .
Based on our current operating plan, we expect our current cash and cash equivalents will be sufficient to fund our planned operating expenses and capital expenditure into the first quarter of 2025.
Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented: December 31, December 31, 2022 2021 ($ in thousands) Net cash used in operating activities$ (65,149 ) $ (39,347 ) Net cash used by investing activities (921 ) (204 ) Net cash provided by financing activities 161,255 107,747
Net increase in cash, cash equivalents and restricted cash
$ 68,196 Operating Activities During the year endedDecember 31, 2022 , operating activities consisted primarily of our net loss of$68.3 million and$3.3 million of changes in operating assets and liabilities, partially offset by$5.5 million stock-based compensation expense and$0.9 million change in operating lease expenses. The net loss primarily consisted of$47.4 million of research and development expenses,$21.4 million of general and administrative expenses partially offset by$0.6 million in interest income, net. During the year endedDecember 31, 2021 , operating activities consisted primarily of our net loss of$43.3 million , partially offset by (i)$0.6 million of changes in operating assets and liabilities, (ii)$0.8 million change in Related Party Antidilution Obligation, (iii)$2.1 million stock-based compensation expense, and (iv)$0.3 million change in operating lease expenses. The net loss primarily consisted of$32.3 million of research and development expenses,$10.1 million of general and administrative expenses and a$0.8 million unfavorable change in fair value of Related Party Antidilution Obligation.
Investing Activities
During the year ended
During the year ended
Financing Activities
During the year endedDecember 31, 2022 , net cash provided from financing activities consisted primarily of$89.9 million in net proceeds from our initial public offering,$50.6 million in net proceeds from theAugust 2022 private placement of our common stock,$20.7 million in net proceeds from the issuance of pre-funded warrants,$0.2 million from the exercise of options. We also spent$43 thousand in finance lease obligations. During the year endedDecember 31, 2021 , net cash provided by financing activities consisted primarily of$20.0 million gross proceeds from the issuance of 7,852,373 shares of Series A convertible preferred stock at a purchase price of$2.547 per share, and$90.0 million gross proceeds from the issuance of 25,657,096 shares of Series B convertible preferred stock at$3.5078 per share, offset by approximately$0.4 million of issuance costs. Our primary uses of cash are to fund our research and development activities related to our VGL101 and small molecule TREM2 agonist programs, hiring personnel, raising capital and providing general and administrative support for these operations. 105 -------------------------------------------------------------------------------- We currently have no ongoing material financing commitments that are expected to affect our liquidity over the next five years, other than our lease obligations and a$0.9 million standby letter of credit we entered into inSeptember 2021 , in connection with a lease for laboratory and office space inWatertown, Massachusetts . The standby letter of credit expires inDecember 2032 . See "Contractual Obligations and Commitments".
Funding Requirements
To date, we have not generated any revenue from product sales. We do not expect to generate revenue from product sales unless and until we successfully complete clinical development of, receive regulatory approval for, and commercialize, VGL101, and we do not know when, or if at all, that will occur. We expect our expenses and capital requirements to increase significantly in connection with our ongoing activities, particularly as we continue the research and development of and seek marketing approval for our VGL101 and small molecule TREM2 agonist program. In addition, if we obtain regulatory approval for any of our therapeutic candidates, we expect to incur significant expenses related to product sales, marketing, and distribution to the extent that such sales, marketing and distribution are not the responsibility of potential collaborators. We may also require additional capital to pursue in-licenses or acquisitions of other drug candidates. Further, we expect to incur additional costs associated with operating as a public company. Accordingly, we will require substantial additional funding to develop our therapeutic candidates and support our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our product development or future commercialization efforts.
Our future capital requirements will depend on many factors, including:
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the initiation, scope, progress, timing, results and costs of product discovery, preclinical studies and clinical trials for our therapeutic candidates or any future candidates we may develop;
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our ability to maintain our relationship with Amgen and any other key licensors or collaborators;
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the scope, prioritization and number of our research and development programs;
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the costs, timing and outcome of seeking and obtaining regulatory approvals from the FDA and comparable foreign regulatory authorities, including the potential for such authorities to require that we perform more preclinical studies or clinical trials than those that we currently expect or change their requirements on studies that had previously been agreed to;
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our ability to establish and maintain collaborations on favorable terms, if at all;
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the achievement of milestones or occurrence of other developments that trigger payments under any collaboration agreements we enter into;
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the extent to which we are obligated to reimburse, or entitled to reimbursement of, clinical trial costs under collaboration agreements, if any;
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the costs to establish, maintain, expand, enforce and defend the scope of our intellectual property portfolio, including preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
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the extent to which we acquire or in-license other therapeutic candidates and technologies;
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the costs of securing manufacturing arrangements for commercial production;
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the costs of establishing or contracting for sales and marketing capabilities if we obtain regulatory approvals to market our therapeutic candidates; and
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our need to implement additional internal systems and infrastructure, including financial and reporting systems.
Identifying potential therapeutic candidates and conducting preclinical studies and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain regulatory approval and commercialize our therapeutic candidates. In addition, our therapeutic candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all. 106 -------------------------------------------------------------------------------- Until such time, if ever, as we can generate significant revenue from product sales or other sources, we expect to finance our operations through the sale of equity, debt financings, or other capital sources, which could include proceeds from potential collaborations, strategic partnerships or marketing, distribution, licensing or other similar arrangements with third parties. However, we may be unable to raise additional funds or enter into such agreements or arrangements on favorable terms, or at all. Market volatility resulting from the COVID-19 pandemic or other factors could also adversely impact our ability to access capital as and when needed. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Any future debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, selling or licensing our assets, making capital expenditures, declaring dividends or encumbering our assets to secure future indebtedness. Such restrictions could adversely impact our ability to conduct our operations and execute our business plan. If we raise funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or therapeutic candidates or to grant licenses on terms that may not be favorable to us. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development or commercialization of our therapeutic candidates or grant rights to develop and market therapeutic candidates that we would otherwise prefer to develop and market ourselves. We expect our existing cash, and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements into the first quarter of 2025 at which point we would need to obtain substantial additional funding in connection with our continuing operations.
Contractual Obligations and Commitments
The following table summarizes our operating and finance lease commitments as ofDecember 31, 2022 : Payments Due by Period Less More than 1 - 3 3 - 5 than Description Total 1 year years years 5 years ($ in thousands)
Operating and finance leases
$ - Total$ 176 $ 176 $ - $ - $ - InSeptember 2021 , we entered into a lease for laboratory and office space inWatertown, Massachusetts with an initial term of ten years, and a five-year renewal option at the end of the initial lease term. The monthly lease payment is approximately$0.2 million with annual escalation of approximately 3%. The lease includes a$3.7 million construction allowance. TheWatertown lease commenced in the first quarter of 2023 when the lease space was made available for use, and as such, this lease is not included in the table above given the commencement date. The minimum base rent payment ranges from$1.9 million annually and increasing to$2.1 million annually over the next 5 years. From year 6 through the term end date of the lease the rent payments are approximately$11.4 million . InNovember 2021 , we entered into a statement of work with FUJIFILM for$3.8 million under our existing master services agreement for the manufacturing of VGL101. If we terminate the statement of work before completion, we may be required to pay fees ranging from 0% to 100%. The amount due upon an early termination depends on the length of time prior to the commencement of specific stages of the statement of work. As ofDecember 31, 2022 , no significant work had begun. The statement of work is expected to be incurred over approximately 2 years. Apart from the contracts with payment commitments noted above, we have entered into contracts in the normal course of business with CROs, CMOs and other third parties for preclinical research studies and testing, clinical trials and manufacturing services. These contracts do not contain any minimum purchase commitments and are cancelable by us upon prior notice and, as a result, are not included in the table of contractual obligations and commitments above. Payments due upon cancellation consist only of payments for services provided and expenses incurred, including non-cancelable obligations of our service providers, up to the date of cancellation. We may in the future incur potential royalty payments under license and collaboration agreements we have entered and will enter into with various entities pursuant to which we have in-licensed certain intellectual property, such as our exclusive license agreement with Amgen. Due to the uncertainty of the achievement and timing of the events requiring payment under these agreements, the amounts to be paid by us are not fixed or determinable at this time. 107 --------------------------------------------------------------------------------
Critical Accounting Policies and Significant Judgements and Estimates
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 withUnited States generally accepted accounting principles, or GAAP. The preparation of our financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses, and the disclosure of our contingent liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our audited financial statements.
Research and Development
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in the consolidated financial statements based on facts and circumstances known to us at that time. At each period end, we corroborate the accuracy of these estimates with the service providers and make adjustments, if necessary. Examples of estimated accrued research and development expenses include those related to fees paid to:
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vendors in connection with discovery and preclinical development activities;
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CROs in connection with preclinical and clinical studies and testing; and
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CMOs in connection with the process development and scale up activities and the production of materials.
We record the expense and accrual related to contract research and manufacturing based on our estimates of the services received and efforts expended considering a number of factors, including our knowledge of the progress towards completion of the research, development, and manufacturing activities; invoicing to date under contracts; communication from the CROs, CMOs, and other companies of any actual costs incurred during the period that have not yet been invoiced; and the costs included in the contracts and purchase orders. The financial terms of these agreements are subject to negotiation, vary from contract to contract, and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or the amount of prepaid expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses, however, there is no guarantee there will not be any such adjustments in the future. Stock Compensation Prior to our IPO inJanuary 2022 , we had limited public market historical information for our common stock. Prior to becoming a public company, the estimated fair value of our common stock had been determined by our board of directors as of the date of each option grant, with input from management, considering our most recently available third-party valuations of common stock and our board of directors' assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. These third-party valuations were performed in accordance with the guidance outlined in theAmerican Institute of Certified Public Accountants' Accounting and Valuation Guide , Valuation of Privately-Held-Company Equity Securities Issued as Compensation.
Our common stock valuations were prepared using either an option pricing method, or OPM, or a hybrid method of OPM and probability-weighted expected return method, or PWERM. Both the OPM and hybrid method used market approaches to
108 -------------------------------------------------------------------------------- estimate our enterprise value. The OPM treats common stock and preferred stock as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company's securities changes. Under this method, the common stock has value only if the funds available for distribution to stockholders exceeded the value of the preferred stock liquidation preferences at the time of the liquidity event, such as a strategic sale or a merger. The PWERM is a scenario-based methodology that estimates the fair value of common stock based upon an analysis of future values for the company, assuming various outcomes. The common stock value is based on the probability-weighted present value of expected future investment returns considering each of the possible outcomes available as well as the rights of each class of stock. The future value of the common stock under each outcome is discounted back to the valuation date at an appropriate risk-adjusted discount rate and probability weighted to arrive at an indication of value for the common stock. A discount for lack of marketability of the common stock is then applied to arrive at an indication of value for the common stock. The hybrid method is a hybrid between the PWERM and OPM, estimating the probability-weighted value across multiple scenarios but using the OPM to estimate the allocation of value within one or more of those scenarios. When using the hybrid method, we assumed two scenarios: an IPO scenario and a sale scenario. The IPO scenario estimated an equity value based on the guideline public company method under a market approach. The guideline public companies considered for this scenario consist of biopharmaceutical companies with recently completed IPOs. We converted our estimated future value in an IPO to present value using a risk-adjusted discount rate. The equity value for the sale scenario was estimated using the price of a recently issued preferred security, as well as a milestone-based tranche closing. We utilized an option pricing model to quantify or attribute value to these economic rights of convertible preferred stock as compared to the common stock, such as liquidation preferences, dividend provisions, and participation rights after liquidation preferences. These third-party valuations were performed at various dates, which resulted in valuations of our common stock of$1.89 as ofSeptember 18, 2020 ,$3.78 as ofMay 1, 2021 ,$6.02 as ofJuly 21, 2021 ,$9.57 as ofOctober 14, 2021 and$11.79 as ofNovember 19, 2021 . In addition to considering the results of these third-party valuations, our board of directors considered various objective and subjective factors to determine the fair value of our common stock as of each grant date, including:
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the prices at which we sold shares of preferred stock and the superior rights and preferences of the preferred stock relative to our common stock at the time of each grant;
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the progress of our research and development programs, including the status and results of preclinical studies for our therapeutic candidates;
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our stage of development and our business strategy;
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external market conditions affecting the biopharmaceutical industry and trends within the biopharmaceutical industry;
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our financial position, including cash on hand, and our historical and forecasted performance and operating results;
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the lack of an active public market for our common stock and our preferred stock;
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significant changes to the key assumptions underlying the factors used could have resulted in different fair values of common stock at each valuation date;
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the likelihood of achieving a liquidity event, such as an initial public offering, or IPO, or sale of our company in light of prevailing market conditions; and
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the analysis of IPOs and the market performance of similar companies in the therapeutics industry.
The assumptions underlying these valuations represented management's best estimate, which involved inherent uncertainties and the application of management's judgment. As a result, if we had used significantly different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could have been materially different.
In the course of preparing for our IPO, inJune 2021 , we performed a retrospective fair value assessment and concluded that (i) the fair value of our common stock underlying restricted shares that we granted onJuly 8, 2020 was$2.42 per share for accounting purposes and (ii) the fair value of our common stock underlying stock options that we granted onNovember 19, 2020 ,November 23, 2020 andFebruary 23, 2021 was$3.53 per share for accounting purposes. These reassessed values were based, in part, upon third-party valuations of our common stock prepared on a retrospective basis as ofJuly 8, 2020 andSeptember 18, 2020 , respectively. The third-party retrospective valuations were prepared using the OPM or the PWERM, both which used a market approach to determine our enterprise value. 109 -------------------------------------------------------------------------------- In the course of preparing for our IPO, inSeptember 2021 , we performed a retrospective fair value assessment and concluded that the fair value of our common stock underlying stock options that we granted onSeptember 1, 2021 was$6.55 per share for accounting purposes. The reassessed value was based, in part, upon a third-party valuation of our common stock prepared on a retrospective basis as ofSeptember 1, 2021 . The third-party retrospective valuation was prepared using the hybrid method, which used a market approach to determine our enterprise value. In the course of preparing for our IPO, inNovember 2021 , we performed a retrospective fair value assessment and concluded that the fair value of our common stock underlying stock options that we granted onNovember 4 and 16, 2021 was$11.79 per share for accounting purposes. The reassessed value was based, in part, upon a third-party valuation of our common stock prepared on a retrospective basis as ofNovember 19, 2021 . The third-party retrospective valuation was prepared using the hybrid method, which used a market approach to determine our enterprise value. We applied the fair values of our common stock from our retrospective fair value assessments performed inJune 2021 andSeptember 2021 to determine the fair value of theJuly 2020 ,November 2020 ,February 2021 andSeptember 2021 awards as of each respective grant date and to calculate stock-based compensation expense for accounting purposes for all applicable periods, from the date such awards were granted. As a public trading market for our common stock has been established it will no longer be necessary for our board of directors to estimate the fair value of our common stock in connection with our accounting for granted stock options and other such awards we may grant, as the fair value of our common stock will be determined based on the quoted market price of our common stock. Following the close of our IPO inJanuary 2022 , the fair value of our common stock is determined based on the closing price of our common stock as reported by Nasdaq Global Select Market on the date of grant.
Valuation of Series A Preferred Stock Tranche Obligation and Related Party Antidilution Obligation
The Series A Preferred Stock Tranche Obligation was valued using a probability-weighted present value model. The valuation model considered the probability of closing the tranche, the estimated future value of the Series A convertible preferred stock to be issued at each closing and the investment required at each closing. Future values were converted to present value using a discount rate appropriate for probability-adjusted cash flows. The Series A Preferred Stock Tranche Obligation was settled inMay 2021 . The Related Party Antidilution Obligation was valued using a probability-weighted expected return method, which requires a variety of inputs, including the probability of occurrence of events that would trigger the issuance of additional shares, the expected timing of such events, the expected value of the contingently issuable equity upon occurrence of a triggering event and a discount rate. The fair value of the Related Party Antidilution Obligation when it was settled inMay 2021 was$5.1 million which was based on 1,963,093 shares of preferred stock issued at a price of$2.589 per share. 110 --------------------------------------------------------------------------------
Emerging Growth Company Status
The Jumpstart Our Business Startups Act of 2012, or JOBS, permits an "emerging growth company" such as us to take advantage of an extended transition to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. 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 will adopt the new or revised standard at the time private companies adopt the new or revised standard and will 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. There are other exemptions and reduced reporting requirements provided by the JOBS Act that we are currently evaluating. For example, as an "emerging growth company," we are exempt from Sections 14A(a) and (b) of the Securities Exchange Act of 1934, as amended, which would otherwise require us to (1) submit certain executive compensation matters to shareholder advisory votes, such as "say-on-pay," "say-on-frequency," and "golden parachutes;" and (2) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of our chief executive officer's compensation to our median employee compensation. We also intend to rely on an exemption from the rule requiring us to provide an auditor's attestation report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. We will continue to remain an "emerging growth company" until the earliest of the following: (1) the last day of the fiscal year following the fifth anniversary of the date of the completion of our IPO; (2) the last day of the fiscal year in which our total annual gross revenue is equal to or more than$1.235 billion ; (3) the date on which we have issued more than$1 billion in nonconvertible debt during the previous three years; or (4) the date on which we are deemed to be a large accelerated filer under the rules of theSEC .
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position, results of operations and cash flows is disclosed in Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. 111
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