The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited financial statements and related notes appearing 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 future results of operations or financial condition, business strategy and plans and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties and should be read together with the "Risk Factors" section of this Annual Report on Form 10-K for a discussion of important factors that could cause our actual results to differ materially from those described in or implied by these forward-looking statements contained in the following discussion and analysis.
Overview
We are a clinical-stage biopharmaceutical company developing a novel disease-modifying approach to target what we believe to be a key underlying cause of AD. Alzheimer's disease is a progressive neurodegenerative disease of the brain that leads to loss of memory and cognitive functions and ultimately results in death. Our scientific founders pioneered research on soluble AßOs, which are globular assemblies of the Aß peptide that are distinct from Aß monomers and amyloid plaques. Based on decades of research and supporting evidence, AßOs have gained increasing scientific acceptance as a primary toxin involved in the initiation and propagation of AD pathology. We are currently focused on advancing a targeted immunotherapy drug candidate, ACU193, through clinical proof of mechanism trials in early AD patients. ACU193 is a recombinant humanized IgG2 mAb that was designed to selectively target AßOs, has demonstrated functional and protective effects in in vitro assays, and has demonstrated in vivo safety and pharmacologic activity in multiple animal species, including transgenic models for AD. We initiated a Phase 1 clinical trial of ACU193 in the second quarter of 2021, which we named "INTERCEPT-AD." This trial enrolled 65 patients with mild dementia or MCI due to AD, conditions referred to as "early AD." INTERCEPT-AD is aU.S. -based, multi-center, randomized, double-blind, placebo-controlled clinical trial with overlapping SAD and MAD cohorts involving patients with early AD. The overall objective of the trial is to evaluate the safety and tolerability of ACU193 and to establish clinical proof of mechanism of ACU193 administered intravenously. The primary trial endpoints are focused on safety and immunogenicity. An important safety measure will be the use of MRI to assess the presence or absence of ARIA. Secondary endpoints include pharmacokinetics in plasma and CSF and target engagement as evidenced by detection of ACU193 bound to AßOs in CSF. Clinical scales typically used in AD trials as well as computerized cognitive testing and arterial spin labelling with MRI scans are included as exploratory measures. InOctober 2021 , we announced the initial dosing of the first patient in the INTERCEPT-AD trial and the subsequent successful sentinel safety review of the first two patients. We were incorporated in 1996 and were party to an exclusive license and research collaboration with Merck in 2003. Although we acquired the exclusive rights to ACU193 from Merck in 2011 following Merck's strategic decision to focus its AD development efforts on a different product candidate, we did not recommence meaningful operations until we completed our first institutional fundraising in 2018. Since 2018, we have devoted substantially all of our efforts to organizing and staffing our company, business planning, raising capital, conducting discovery, research and development activities, and providing general and administrative support for these operations. We do not have any products approved for sale and have not generated any revenue from product sales. We have funded our operations primarily through the sale of our convertible preferred stock and common stock, the issuance of notes, grant revenue and during our collaboration with Merck, certain payments received under our collaboration agreement. Prior to our IPO, which closed onJuly 6, 2021 , we raised an aggregate of$99.4 million of gross proceeds through the issuance of convertible preferred stock, as well as sales of common stock and issuance of notes that were converted to preferred stock, with the vast majority of this capital being raised since our Series A-1 convertible preferred stock, or Series A-1, financing in 2018. In 2020, we conducted a Series B convertible preferred stock, or Series B, financing, with the funding to occur in two tranches. We closed the first tranche of the Series B financing inNovember 2020 , selling 11,862,043 shares of Series B at$3.80 per share for gross proceeds of$45.1 million . OnJune 9, 2021 , our board of directors and the holders of more than 67% of the outstanding shares of Series B preferred stock elected to waive the achievement of the milestone event. OnJune 17, 2021 , we closed the second tranche of our Series B preferred stock financing, pursuant to which certain of our investors funded an additional$30.0 million in exchange for 7,908,027 shares of Series B preferred stock. OnJuly 6, 2021 , we issued 9,999,999 shares of our common stock in the IPO, and onJuly 8, 2021 , we issued an additional 1,499,999 shares of our common stock that were purchased by the underwriters pursuant to the underwriters' option to 83
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purchase additional shares at the public offering price less underwriting
discounts and commissions. The price to the public for each share was
We have incurred net losses and negative cash flows from operations since our inception. Our net losses were$42.9 million and$100.6 million for the years endedDecember 31, 2022 and 2021, respectively. Approximately$32.4 million , or 76%, of the net loss for the year endedDecember 31, 2022 was due to research and development spending. As ofDecember 31, 2022 , we had an accumulated deficit of$170.4 million . Our net losses and cash flows from operations may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of nonclinical studies, clinical trials and our expenditures on other research and development activities. Our net losses and cash flows from operations may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of nonclinical studies, clinical trials and our expenditures on other research and development activities. We expect our expenses and operating losses will increase substantially for the foreseeable future as we advance ACU193 in clinical trials, seek to expand our product candidate portfolio through developing additional product candidates, grow our clinical, regulatory and quality capabilities, and incur additional costs associated with operating as a public company. It is likely that we will seek third-party collaborators for the future commercialization of ACU193 or any other product candidate that is approved for marketing. However, we may seek to commercialize our products at our own expense, which would require us to incur significant additional expenses for marketing, sales, manufacturing and distribution. We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. In addition, if we obtain regulatory approval for our product candidates and do not enter into a third-party commercialization partnership, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing, manufacturing and distribution activities. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity offerings and debt financings or other sources, such as potential collaboration agreements, strategic alliances and licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on acceptable terms, or at all. Our failure to raise capital or enter into such agreements as, and when needed, could have a material adverse effect on our business, results of operations and financial condition. As ofDecember 31, 2022 , we had cash and cash equivalents of$130.1 million and$63.3 million in marketable securities. Based on our current operating plan, we expect that our existing cash and cash equivalents and marketable securities will be sufficient to enable us to fund our operating expenses and capital expenditure requirements at least through 2025. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See "Liquidity and Capital Resources."
Components of Results of Operations
Operating Expenses
Our operating expenses consist of research and development expenses and general and administrative expenses.
Research and Development Expenses
Research and development costs primarily consist of direct costs associated with consultants and materials, biologic storage, third party, contract research organizations, or CRO, costs and contract manufacturing organization, or CMO, expenses, salaries and other personnel-related expenses. Research and development costs are expensed as incurred. More specifically, these costs include:
•costs of funding research performed by third parties that conduct research and development and nonclinical and clinical activities on our behalf;
•costs of manufacturing drug supply and drug product;
•costs of conducting nonclinical studies and clinical trials of our product candidates;
•consulting and professional fees related to research and development activities, including equity-based compensation to non-employees;
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•costs related to compliance with clinical regulatory requirements; and
•employee-related expenses, including salaries, benefits and stock-based compensation expense for our research and development personnel.
As we currently only have one product candidate, ACU193, in development, we do not separately track expenses by program. Further, we have historically relied primarily on consultants for research and development activities, and as such, our internal research and development costs for the years endedDecember 31, 2022 and 2021 represent 20% or less of our total research and development expenses. Our research and development expenses increased substantially in the year endedDecember 31, 2022 in connection with initiating the clinical trial for our ACU193 program in 2021.
General and Administrative Expenses
General and administrative expenses consist primarily of employee-related expenses, including stock-based compensation costs, as well as business insurance, management and business consultants and other related costs. General and administrative expenses also include professional fees for legal, consulting, accounting, auditing, tax and patent services, investor and public relations, board of directors' expenses, franchise taxes and rent. We expect that our general and administrative expenses will increase as our organization and headcount needed in the future grows to support continued research and development activities and potential commercialization of our product candidates. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, attorneys and accountants, among other expenses. Additionally, we expect to continue to incur increased expenses associated with being a public company, including costs of additional personnel, accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing andSEC requirements, director and officer insurance costs, and investor and public relations costs.
Other Income (Expense)
Other income (expense) primarily includes interest income, net and other income, net. Following our IPO, we made investments in marketable securities and the interest income earned, as well as amortization and accretion of premiums and discounts, are recorded in interest income, net. Other income (expense), net generally consists of sublease income offset by fees incurred on our investments in marketable securities. Prior to our IPO onJuly 6, 2021 , changes in the fair values of the Series A-1 warrant liability and the Series B tranche rights were recognized as a component of other income (expense). The Series A-1 warrant liability and the Series B tranche rights were initially recorded at fair value as liabilities on our balance sheet. Each was subsequently re-measured at fair value at the end of each reporting period and also upon the exercise of the warrant onJune 22, 2021 , and upon settlement of the tranche rights with the milestone closing for the Series B onJune 17, 2021 . 85
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Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations for the years ended
Year Ended December 31, Change 2022 2021 $ % Costs and operating expenses Research and development$ 32,361 $ 12,305 $ 20,056 163 % General and administrative 12,876 7,279 5,597 77 % Total operating expenses 45,237 19,584 25,653 131 % Loss from operations (45,237) (19,584) (25,653) 131 % Other income (expense) Interest income, net 2,392 84 2,308 * Other income, net (11) 51 (62) (122) % Change in fair value of preferred stock tranche rights liability and preferred stock warrant liability - (81,157) 81,157 * Total other income (expense) 2,381 (81,022) 83,403 * Net loss$ (42,856) $ (100,606) $ 57,750 (57) % *Not meaningful
Research and Development Expenses
Research and development expenses were$32.4 million and$12.3 million for the years endedDecember 31, 2022 and 2021, respectively. The$20.1 million increase was primarily due to increases in expenses of$7.2 million for CRO costs,$5.0 million for consulting costs,$3.3 million for personnel-related expenses,$2.9 million for drug safety testing and$1.3 million for materials; all related to our ongoing clinical trial which was initiated in 2021 and nonclinical research and development activity.
General and Administrative Expenses
General and administrative expenses were$12.9 million and$7.3 million for the years endedDecember 31, 2022 and 2021, respectively. The$5.6 million increase was primarily due to increased expenses as a public company, as well as additions to its financial and administrative infrastructure and included increases of$3.4 million for personnel expenses, including stock compensation costs,$1.1 million for insurance expenses,$0.5 million for marketing costs, including investor relations,$0.2 million for legal expenses,$0.2 million for recruiting costs and$0.2 million for travel and entertainment.
Other Income (Expense)
Other income was$2.4 million for the year endedDecember 31, 2022 , which was due to net interest income on our portfolio of marketable securities. Other expense was$81.0 million for the year endedDecember 31, 2021 , primarily due to increases in the fair values of the Series B tranche liability and Series A-1 warrant liability of$76.2 million and$5.0 million , respectively, offset by$0.1 million of net interest income from our portfolio of marketable securities and$0.1 million of other income, net, which was primarily related to sublease income.
Liquidity and Capital Resources
We have incurred net losses since inception. We have not generated any revenue from product sales or any other sources and have incurred significant operating losses. We have not yet commercialized any products and we do not expect to generate revenue from sales of any drug candidates for at least several years, if ever. 86
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Our operations have been financed primarily by net proceeds from the sale and issuance of our common stock and convertible preferred stock, net proceeds from our IPO, the issuance of notes, grant revenue and, during our collaboration with Merck, certain payments received under our collaboration agreement. OnJuly 1, 2022 , we filed a shelf registration statement on Form S-3, or the Registration Statement. Pursuant to the Registration Statement, we may offer and sell securities having an aggregate public offering price of up to$200.0 million . In connection with the filing of the Registration Statement, we also entered into a sales agreement withBofA Securities, Inc. andStifel, Nicolaus & Company, Incorporated , or the Sales Agents, pursuant to which we may issue and sell shares of our common stock for an aggregate offering price of up to$50.0 million under an at-the-market offering program, or ATM, which is included in the$200.0 million of securities that may be offered pursuant to the Registration Statement. Pursuant to the ATM, we will pay the Sales Agents a commission rate of up to 3.0% of the gross proceeds from the sale of any shares of our common stock. We are not obligated to make any sales of shares of our common stock under the ATM.
In
As ofDecember 31, 2022 , our cash and cash equivalents totaled$130.1 million . Additionally, we had$63.3 million of available-for-sale marketable securities as ofDecember 31, 2022 , which mature over the next two years. Based on our current operating plan, we expect that our existing cash and cash equivalents and marketable securities will be sufficient to enable us to fund our operating expenses and capital expenditure requirements at least through 2025. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. We enter into contracts in the normal course of business with CROs and CMOs for clinical trials, nonclinical research studies and testing, manufacturing and other services and products for operating purposes. These contracts do not contain any minimum purchase commitments and are generally cancellable by us after giving a certain amount notice. Payments due upon cancellation consist only of payments for services provided and expenses incurred up to the date of cancellation. Cash Flows
The following table summarizes our sources and uses of cash (in thousands):
Year Ended
2022
2021
Net cash used in operating activities$ (35,153) $ (17,961) Net cash provided by (used in) investing activities 39,185
(104,120)
Net cash provided by financing activities 3,907
200,466
Net change in cash and cash equivalents$ 7,939 $ 78,385 Operating Activities Net cash used in operating activities was$35.2 million for the year endedDecember 31, 2022 , which primarily consisted of net loss of$42.9 million , which was reduced by non-cash adjustments of$3.1 million for stock-based compensation expense and$0.5 million for amortization of premiums and accretion of discounts on marketable securities, net, plus cash provided of$2.6 million from accrued clinical trial expenses and$1.7 million from prepaid expenses mainly associated with research and development. Cash used in operating activities during the year endedDecember 31, 2022 , was mainly the result of our ongoing research and development activities as we continued our clinical trial, which we initiated in 2021. Net cash used in operating activities was$18.0 million for the year endedDecember 31, 2021 , which primarily consisted of net loss of$100.6 million , which was reduced by non-cash adjustments of$81.2 million related to the change in the fair values of the Series B tranche liability and the Series A-1 warrant liability and$0.9 million for stock-based compensation expenses, plus cash provided of$3.5 million from accrued expenses and other current liabilities mainly related to research and development expenses and employee-related accruals and$0.6 million of cash provided by accounts payable; partially offset by$3.9 million of cash used for prepaid expenses mainly associated with research and development activities and insurance. Cash used in operating activities during the year endedDecember 31, 2021 , was the result of our research and development activities as we commenced our clinical trial, as well as costs associated with the transition from a private to a public company. 87
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Investing Activities
Net cash provided by investing activities for the year endedDecember 31, 2022 was$39.2 million and was predominantly related to the maturities and sales of marketable securities of$80.9 million , partially offset by$41.5 million in purchases of marketable securities and$0.2 million for purchases of computer hardware and furniture. Net cash used in investing activities for the year endedDecember 31, 2021 was$104.1 million and was predominantly related to the purchase of marketable securities, but also included less than$0.1 million for purchases of computer hardware. Financing Activities Net cash provided by financing activities for the year endedDecember 31, 2022 was$3.9 million primarily due to$3.8 million in proceeds from the issuance of common stock, net of issuance costs, and$0.1 million from the exercise of stock options. Net cash provided by financing activities during the year endedDecember 31, 2021 was primarily due to our IPO for net proceeds of$168.6 million , the closing of the second tranche of our Series B convertible preferred stock for gross proceeds of$30.0 million , plus a total of$1.9 million received from the exercise of the Series A-1 preferred warrant, as well as proceeds from exercises of common stock warrants. Funding Requirements We expect our expenses to increase in connection with our ongoing activities, particularly as we continue our research and development, conduct clinical trials, and seek marketing approval for our current and any of our future product candidates. Furthermore, we have incurred and expect to incur additional costs associated with operating as a public company following ourJuly 2021 IPO. It is likely that we will seek third-party collaborators for the future commercialization of ACU193 or any other product candidate that is approved for marketing. However, we may seek to commercialize our products at our own expense, which would require us to incur significant additional expenses for marketing, sales, manufacturing and distribution, which costs we may seek to offset through entry into collaboration agreements with third parties. As a result, we expect that we will need to obtain substantial additional funding in connection with our future operations. If we are unable to raise capital when needed or on acceptable terms, we could be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts. Based on our current operating plan, we expect that our existing cash and cash equivalents and marketable securities will be sufficient to enable us to fund our operating expenses and capital expenditure requirements through 2025. We have based this estimate on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Our future capital requirements will depend on many factors, including: •the scope, progress, results and costs of discovery, nonclinical development, laboratory testing and clinical trials for other potential product candidates we may develop, if any;
•the costs, timing and outcome of regulatory review of ACU193 or any future product candidates;
•our ability to establish and maintain collaborations on favorable terms, if at all;
•the achievement of milestones or occurrence of other developments that trigger payments under any collaboration agreements we might have at such time;
•the costs and timing of future commercialization activities, including product sales, marketing, manufacturing and distribution, for ACU193 or any future product candidates for which we receive marketing approval;
•the amount of revenue, if any, received from commercial sales of ACU193 or any future product candidates, should any of our product candidates receive marketing approval;
•the costs of preparing, filing and prosecuting patent applications, obtaining, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
•our headcount growth and associated costs as we expand our business operations and our research and development activities; and
•the costs of operating as a public company.
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Until such time, if ever, as we can generate substantial product revenue, we expect to finance our longer-term cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, ownership interests may be diluted, and the terms of these securities may include liquidation or other preferences that could adversely affect the rights of our common stockholders. Any debt financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business. 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 product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Critical Accounting Policies, Significant Judgments and Use of Estimates
The preparation of financial statements in conformity withU.S. generally accepted accounting principles, orU.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses incurred during the reporting periods. Our estimates and assumptions are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. While our significant accounting policies are described in the notes to our financial statements included elsewhere in this Annual Report for Form 10-K, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results.
Stock-Based Compensation Expense
We recognize stock-based compensation expense for all stock-based awards. Stock-based compensation costs are estimated at the grant date based on the fair value of the equity and recognized as expense, net of actual forfeitures when they occur, on a straight-line basis over the requisite service period.
We calculate the fair value of options using the Black-Scholes option-pricing model, which requires the use of various highly subjective assumptions as follows:
•Fair Value of Common Stock-See the subsection titled "Common Stock Valuations" below.
•Expected Term-We have opted to use the "simplified method" for estimating the expected term of options, whereby the expected term equals the arithmetic average of the mid-point between the vesting date and the end of contractual term of the option (generally ten years). •Expected Volatility-Due to our limited operating history and a lack of sufficient company-specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of industry peers that are publicly traded. We will continue to utilize a group of publicly traded peers to estimate volatility until a sufficient amount of historical information regarding the volatility of our own stock becomes available. •Risk-Free Interest Rate-The risk-free rate assumption is based on theU.S. Treasury yield in effect at the time of the grant with maturities consistent with the expected term of our options. •Expected Dividend Yield-We have not issued any dividends in our history and do not expect to pay dividends on our common stock over the life of the options and therefore have estimated the dividend yield to be zero. 89
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We will continue to use judgment in evaluating the expected volatility, expected terms and interest rates utilized for our stock-based compensation expense calculations on a prospective basis.
For the years endedDecember 31, 2022 and 2021, stock-based compensation expense was$3.1 million and$0.9 million , respectively. As ofDecember 31, 2022 , we had approximately$8.9 million of total unrecognized stock-based compensation costs, which we expect to recognize over an estimated weighted-average period of 2.6 years. We expect to continue to grant options and other stock-based awards in the future, and to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase.
Common Stock Valuations
Given the absence of a public trading market for our common stock prior to the IPO, and in accordance with theAmerican Institute of Certified Public Accountants Practice Guide , Valuation of Privately Held Company Equity Securities Issued as Compensation, or the Practice Aid, our board of directors exercised reasonable judgment and considered numerous and subjective factors to determine the best estimate of fair value of our common stock prior to the IPO, including, but not limited to:
•relevant precedent transactions involving our capital stock;
•contemporaneous valuations of our common stock performed by third-party specialists;
•rights, preferences, and privileges of our redeemable convertible preferred stock relative to those of our common stock;
•our business, financial condition and results of operations, including related industry trends affecting our operations;
•likelihood of achieving a liquidity event, such as an initial public offering or a sale of our business;
•the lack of marketability of our common stock, and the illiquidity of stock-based awards involving securities in a private company;
•market multiples of comparable publicly-traded companies; and
•U.S. and global capital and macroeconomic conditions.
The Practice Aid identifies various available methods for allocating enterprise value across classes and series of capital stock to determine the estimated fair value of common stock at each valuation date. In accordance with the Practice Aid, we considered the following methods: •Option Pricing Method, or OPM. Under the OPM, shares are valued by creating a series of call options with exercise prices based on the liquidation preferences and conversion terms of each equity class. The estimated fair values of the preferred and common stock are inferred by analyzing these options. This method is appropriate to use when the range of possible future outcomes is so difficult to predict that estimates would be highly speculative, and dissolution or liquidation is not imminent.
•Probability-Weighted Expected Return Method, or PWERM. The PWERM is a scenario-based analysis that estimates value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to us, as well as the economic and control rights of each share class.
For valuations performed during fiscal years 2018 through 2020 we used the OPM. For valuations performed beginning in 2021, prior to the IPO, in accordance with the Practice Aid, we used a hybrid approach of the OPM and the PWERM methods to determine the estimated fair value of our common stock as a result of the increasing likelihood of the occurrence of certain discrete events, such as a potential IPO, improving market conditions and receptivity of the market to initial public offerings. The enterprise value determined under the OPM and PWERM methods was weighted according to our board of directors' estimate of the probability of the occurrence of a certain discrete event as of the valuation date. The resulting equity value for the common stock was then divided by the number of shares of common stock outstanding at the date of the valuation to derive a per share value on a non-marketable basis. In order to determine the fair value of our common stock on a marketable basis, we then applied a discount for lack of marketability which we derived based on inputs including a company-specific volatility rate, a term equal to the expected time to a future liquidity event and a risk-free rate equal to the yield on treasuries of similar duration. 90
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Application of these approaches involves the use of estimates, judgment and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses, cash flows, discount rates, market multiples, the selection of comparable companies and the probability of future events. Changes in any or all of these estimates and assumptions, or the relationships between those assumptions, impact our valuations as of each valuation date and may have a material impact on the valuation of common stock. The assumptions underlying these valuations represent our management's best estimate, which involve inherent uncertainties and the application of management judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different.
Following the closing of the initial public offering, the fair value of our common stock has been determined based on the quoted market price of our common stock.
As part of the process of preparing our financial statements, we are required to estimate our accrued expenses as of each balance sheet date. This process involves reviewing open contracts and purchase orders, identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. We make estimates of our accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. The significant estimates in our accrued research and development expenses include the costs incurred for services performed by our vendors in connection with research and development activities for which we have not yet been invoiced. Since our inception, we have not experienced any material differences between accrued or prepaid costs and actual costs. We base our expenses related to research and development activities on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors that conduct research and development on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the research and development 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 our estimate, we adjust the accrual or prepaid expense accordingly. 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. Clinical trial costs are a significant component of accrued research and development expenses and include costs associated with third-party contractors. We accrue and expense costs for clinical trial activities performed by third parties based upon the work completed to date for each clinical trial in accordance with established agreements. Management determines costs through discussions with internal clinical stakeholders and outside service providers as to the progress or stage of completion of clinical trials or services and the contracted fee to be paid for such services. In the event advance payments are made to an outside service provider, the payments are recorded within prepaid expenses and other current assets on the Balance Sheet and subsequently recognized as research and development expense in the Statement of Operations when the associated services have been performed. As actual costs become known, we adjust our estimates, liabilities and assets. Inputs used in the determination of estimates discussed above may vary from actual, which will result in adjustments to research and development expense in future periods. Accrued research and development expenses, including accrued clinical trial expenses, increased to$3.9 million as ofDecember 31, 2022 , compared with$2.6 million as ofDecember 31, 2021 , and prepaid research and development expenses decreased to$1.1 million as ofDecember 31, 2022 , compared with$2.6 million as ofDecember 31, 2021 .
Emerging Growth Company and Smaller Reporting Company Status
InApril 2012 , the Jumpstart Our Business Startups Act of 2012, or JOBS Act, was enacted. Section 107 of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We elected the extended transition period for complying with new or revised accounting standards, which delays the adoption of these accounting standards until they would apply to private companies. 91
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In addition, as an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:
•an exception from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended;
•reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements and registration statements;
•exemptions from the requirements of holding non-binding advisory votes on executive compensation or golden parachute arrangements; and
•an exemption from compliance with the requirements of the
We may take advantage of these provisions until we no longer qualify as an emerging growth company. We will cease to qualify as an emerging growth company on the date that is the earliest of: (i)December 31, 2025 , (ii) the last day of the fiscal year in which we have more than$1.235 billion in total annual gross revenues, (iii) the date on 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 million as of the priorJune 30th , or (iv) the date on which we have issued more than$1.0 billion of non-convertible debt over the prior three-year period. We may choose to take advantage of some but not all of these reduced reporting burdens. We have taken advantage of certain reduced reporting requirements in this Annual Report on Form 10-K and our other filings with theSEC . Accordingly, the information contained herein may be different than you might obtain from other public companies in which you hold equity interests. We are also a "smaller reporting company," meaning that the market value of our shares held by non-affiliates is less than$700 million and our annual revenue was less than$100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our shares held by non-affiliates is less than$250 million or (ii) our annual revenue was less than$100 million during the most recently completed fiscal year and the market value of our shares held by non-affiliates is less than$700 million . If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company, we may choose to present only the two most recent fiscal years of audited financial 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.
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