APPLIED MOLECULAR TRANSPORT INC. You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties, including those described in the section titled "Special Note Regarding Forward Looking Statements." Our actual results and the timing of selected events could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those set forth under the section titled "Risk Factors" included elsewhere in this report. Overview We are a clinical-stage biopharmaceutical company leveraging our proprietary technology platform to design and develop a pipeline of novel oral biologic product candidates. Our proprietary technology platform allows us to exploit existing natural cellular trafficking pathways to facilitate the active transport of diverse therapeutic payloads across epithelial barriers, such as the intestinal epithelium (IE) and the respiratory epithelium (RE). Active transport is an efficient mechanism that uses the cell's own machinery to transport materials across epithelial barriers. We believe that our ability to exploit this mechanism is a key differentiator of our approach. We currently have two oral biologics in clinical development. Our most advanced product candidate, AMT-101, has completed a Phase 2 clinical trial in patients with chronic pouchitis and is in Phase 2 development for patients with rheumatoid arthritis (RA). Our second product candidate, AMT-126, is in Phase 1 development for diseases related to IE barrier function defects. As ofDecember 31, 2022 , we had cash and cash equivalents of$61.1 million . Based on our available cash resources, there is substantial doubt about our ability to continue as a going concern within one year after the date the financial statements included in this Annual Report on Form 10-K are issued. If we are unable to obtain additional funding, we will be forced to delay, reduce in scope or eliminate some of our research and development programs, including related clinical trials and operating expenses, potentially delaying the time to market for, or preventing the marketing of, any of our product candidates, which could adversely affect our business prospects and our ability to continue operations, and would have a negative impact on our financial condition and our ability to pursue our business strategies. If we are unable to continue as a going concern, we may have to cease operations and liquidate our assets. We may receive less than the value at which those assets are carried on our audited financial statements, and it is likely that investors will lose all or a part of their investment. The report from our independent registered public accounting firm issued in connection with this Annual Report on Form 10-K contains statements expressing substantial doubt about our ability to continue as a going concern. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide funding to us on commercially reasonable terms, if at all. To the extent that money is raised through the sale of our securities, the issuance of those securities could result in dilution to our existing security holders. If we raise money through debt financing or bank loans, we may be required to secure the financing with some or all our business assets, which could be sold or retained by the creditor should we default on our payment obligations. If we fail to raise sufficient funds, we will likely need to curtail or cease operations. We are developing oral biologic product candidates in patient-friendly dosage forms that are designed for either targeting local gastrointestinal (GI) tissue or entering systemic circulation to precisely address the relevant biology of a disease. We are building a portfolio of oral product candidates based on our technology platform including our most advanced product candidate, AMT-101, a gastrointestinal-selective oral fusion of interleukin 10 (IL-10) and our proprietary carrier molecule that has been designed for active transport across the IE barrier into local gastrointestinal (GI) tissue. IL-10 is a potent immunomodulatory cytokine that is known to be the master regulator of immune homeostasis, including within GI mucosal tissue. We have designed AMT-101 to cross the IE barrier, but not enter the bloodstream, which we believe may offer significant efficacy and safety benefits compared to systemic IL-10 administration. Since the date of our incorporation inDelaware onNovember 21, 2016 , we have devoted substantial resources to research and development activities, including research activities such as drug discovery, preclinical studies, and clinical trials as well as development activities such as the manufacturing of clinical and research material, establishing and maintaining our intellectual property portfolio, hiring personnel, raising capital, and providing general and administrative support for these operations. For information regarding our product candidates and clinical trial programs, refer to "Overview" within Part I, Item 1. Business in this Annual Report on Form 10-K. We do not currently have any products approved for sale, and we have not generated any revenue from product sales. Our ability to generate product revenue sufficient to achieve profitability, if ever, will depend on the successful development of one or more of our product candidates which we expect will take a number of years. Given our stage of development, we have not yet established a commercial organization or distribution capabilities. We intend to build a commercial infrastructure to support sales 79
--------------------------------------------------------------------------------
Table of Contents
of our product candidates. We expect to manage sales, marketing and distribution through internal resources and third-party relationships. While we may commit significant financial and management resources to commercial activities, we may also consider collaborating with one or more pharmaceutical companies to enhance our commercial capabilities. Manufacturing of protein therapeutics is a complex process and represents a critical path to creating oral biologic therapeutics and a key component of our long-term success. We have spent significant resources to date on developing our current manufacturing processes and know-how to produce sufficient supply and optimize functionality. We now manufacture clinical supply at our new facility located inSouth San Francisco . While we have successfully manufactured clinical supply at our internal facility, we may need to scale our manufacturing operations to manufacture sufficient quantity needed to advance any of our product candidates in preclinical studies and clinical trials. Accordingly, we will be required to make significant investments to expand our manufacturing facilities in the future, and our efforts to scale our internal manufacturing capabilities are subject to risks. In addition, despite having our in-house manufacturing facility, we expect to continue to rely on third parties for the manufacture of our product candidates for preclinical and clinical testing, as well as for commercial manufacture if any of our product candidates obtain marketing approval. We also rely, and expect to continue to rely, on third parties to package, label, store and distribute our product candidates, as well as for our commercial products if marketing approval is obtained. We believe that this strategy allows us to maintain a more efficient infrastructure by eliminating the need for us to invest in our own manufacturing facilities, equipment and personnel while also enabling us to focus our expertise and resources on the development of our product candidates.
Strategic Plan Announcement
In
Under the Strategic Plan, we reduced our then current workforce by approximately 40%. Impacted employees were eligible to receive severance benefits and company-funded COBRA premiums, contingent upon an impacted employee's execution (and non-revocation) of a customary separation agreement, which included a general release of claims against us. In connection with the Strategic Plan, we recognized restructuring charges of approximately$3.8 million for the year endedDecember 31, 2022 . These restructuring charges were primarily related to severance payments and other employee-related separation costs of$3.3 million , contract termination fees of$0.5 million , a lease termination fee of$0.3 million , impairment of property and equipment of$0.1 million and insignificant legal expenses, partially offset by a$0.4 million reduction in stock-based compensation expense as a result of applying modification accounting for accelerated vesting of RSUs. As ofDecember 31, 2022 , accrued contract termination fees of$0.4 million remained unpaid and are expected to be paid within one year.
COVID-19 and Current Economic Environment
Our financial results could be affected by the COVID-19 pandemic in various ways. As a result of the COVID-19 pandemic, we have experienced and could experience disruptions that could severely impact our business, current and planned clinical trials and preclinical studies. For example, the COVID-19 pandemic could result in delays to our clinical trials and preclinical studies for numerous reasons including difficulties in enrolling patients or healthy volunteers, diversion of healthcare resources away from the conduct of clinical trials, delays in receiving regulatory authorities to initiate clinical trials, and delays in receiving supplies to conduct clinical trials and preclinical studies. Moreover, there has been an increase in infections from COVID-19 variants which has impacted patient recruitment at certain of our clinical trial sites and could result in increased costs and delays. In addition, as a result of ongoing COVID-19 research and the current global supply chain issues, there is currently limited availability for certain resources required to conduct some of our preclinical studies and clinical trials, which may result in longer lead times, increased costs, and delays in completing preclinical studies and clinical trials. As a result, research and development expenses and general and administrative expenses may vary significantly if there is an increased impact from COVID-19 on the costs and timing associated with the conduct of the clinical trial and other related business activities. We are carefully monitoring the pandemic and the potential length and depth of the resulting economic impact on our financial condition, including our cash flows and results of operations. We intend to continue to execute on our strategic plans and operational initiatives during the COVID-19 pandemic. However, the extent to which the COVID-19 pandemic impacts our business will depend on future developments, which are highly uncertain and cannot be predicted. Accordingly, management is carefully monitoring the impact of the COVID-19 pandemic on our business. As ofDecember 31, 2022 , we were not aware of any significant contingencies and no estimates were recorded on our financial statements related to COVID-19. 80
--------------------------------------------------------------------------------
Table of Contents
The extent of the ongoing impact of macroeconomic events on our business and on global economic activity is uncertain and the related financial impact cannot be reasonably estimated with any certainty at this time, although the impacts are expected to continue and may significantly affect our business. We expect that the impacts on our business will continue through this period of economic uncertainty as supply chain issues, inflation and other factors continue to worsen or emerge. Accordingly, management is carefully evaluating our liquidity position, communicating with and monitoring the actions of our suppliers and continuing to review our near-term operating expenses as the uncertainty related to these factors continues to unfold. The risks related to our business, including further discussion of the impact and possible future impacts of the COVID-19 pandemic and current economic conditions on our business, are further described in the section titled "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K.
Components of Results of Operations
Revenue
We have not generated any revenue from product sales or otherwise and do not expect to generate any revenue for the foreseeable future.
Operating Expenses
We classify operating expenses into two main categories: (i) research and development expenses and (ii) general and administrative expenses.
Research and Development Expenses
Our research and development expenses consist primarily of external and internal expenses incurred in connection with our research activities and development programs.
These expenses include, but are not limited to:
External expenses, consisting of:
•clinical trials-expenses associated with CROs for managing and conducting clinical trials and sample analysis;
•materials-expenses associated with laboratory supplies and other materials;
•preclinical studies-expenses associated with preclinical studies performed by vendors;
•contract manufacturing-expenses associated with manufacturing clinical trial materials including under agreements with CDMOs and other vendors; and
•other research and development-expenses associated with consulting and other external expenses.
Internal expenses, consisting of:
•personnel-personnel expenses including salaries, bonuses, benefits, and stock-based compensation expense; and
•equipment, depreciation, and facility-expenses associated with service and
repair of equipment, equipment depreciation, and allocated facility costs for
research and development occupied space.
To date, the vast majority of these expenses have been incurred to advance our
most advanced product candidate, AMT-101. We expect that significant additional
spending will be required to progress AMT-101 through the remainder of the
clinical development phases. These expenses will primarily consist of expenses
for the administration of clinical trials as well as manufacturing costs for
clinical material supply.
In addition, we have incurred minimal expenses in connection with our second
product candidate, AMT-126, including expenses for internal animal studies and
preclinical studies performed at contract research organizations. We expect that
significant additional spending will be required as we progress AMT-126 through
clinical trials. We have also incurred minimal expenses to expand our
development pipeline and for general discovery research. We expect spending for
these early-stage research and development activities to increase for the
foreseeable future. We deploy our personnel, equipment, and facility resources
across all our research and development activities.
81--------------------------------------------------------------------------------
Table of Contents
Research and development expenses are recognized as they are incurred. If deposits are required by external vendors, the non-current portion of the deposit is included as a prepaid expense until the related services are provided.
At this time, we cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates. We expect our research and development expenses to increase significantly in the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, as our product candidates advance into later stages of development, as we begin to conduct larger clinical trials, as we seek regulatory approvals for any product candidates that successfully complete clinical trials, and incur expenses associated with hiring additional personnel to support our research and development efforts. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, the successful development of our product candidates is highly uncertain, and we may never succeed in achieving regulatory approval for any of our product candidates.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related costs (including salaries, bonuses, benefits, and stock-based compensation expense) for personnel in executive, finance, accounting, corporate development, and other administrative functions. General and administrative expenses also include legal fees, professional fees paid for accounting, auditing, consulting, tax, and investor relations services, insurance costs, and facility costs not otherwise included in research and development expenses, and public company expenses such as costs associated with compliance with the rules and regulations of theSEC and those of Nasdaq. We expect that our general and administrative expenses will continue to increase significantly in the foreseeable future as additional administrative personnel and services are required to manage these functions of a public company and as our pipeline of product candidates expands.
Interest Income, Net and Other Expense, Net
Interest income, net consists of interest income earned on our cash and cash equivalents, net of interest expense on our finance leases. Other expense, net primarily consists of gains and losses resulting from foreign currency denominated transactions with foreign vendors.
Results of Operations
A discussion regarding our financial condition and results of operations for the year endedDecember 31, 2022 compared to the year endedDecember 2021 is presented below. A discussion regarding our financial condition and results of operations for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K filed with theSEC onFebruary 24, 2022 .
Comparison of the Years Ended
Year Ended December 31,
(in thousands) 2022 2021 Change
Operating expenses:
Research and development $ 89,826 $ 71,448 $ 18,378
General and administrative 37,393 29,341 8,052
Total operating expenses 127,219 100,789 26,430
Loss from operations (127,219) (100,789) (26,430)
Interest income, net 898 626 272
Other expense, net (4) (124) 120
Net loss $ (126,325) $ (100,287) $ (26,038) Research and Development Expenses
Research and development expenses increased by$18.4 million for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . The following table sets forth the primary external and internal research and development expenses for the periods indicated (in thousands): 82
--------------------------------------------------------------------------------
Table of Contents
Year Ended December 31,
2022 2021 Change
External expenses:
Clinical trials $ 18,866 $ 16,558 $ 2,308
Materials 8,497 6,852 1,645
Preclinical studies 4,870 2,975 1,895
Other research and development 8,124 2,021 6,103
Contract manufacturing 1,718 1,699 19
Internal expenses:
Personnel 33,483 29,159 4,324
Equipment depreciation and facilities 14,268 12,184 2,084
Total research and development expenses $ 89,826 $
71,448
The overall increase in research and development expenses was primarily driven by external costs for CROs, CMOs, consultants and laboratory supplies related to the advancement of our product candidates through preclinical studies and clinical trials as ourFILLMORE , LOMBARD and MARKET clinical trials reported top-line data during 2022. The increase in internal costs was primarily due to an increase of$4.3 million in personnel-related expenses, including a$2.6 million increase related to employee separation costs related to our Strategic Plan, which was implemented inMay 2022 , as well as an increase in stock-based compensation expense. In addition, increased lease expense associated with our new corporate headquarters, which we fully occupied inOctober 2021 , as well as depreciation for our research and development equipment also contributed to the increase in internal costs.
General and Administrative Expenses
General and administrative expenses increased by$8.1 million for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . The increase in general and administrative expenses was primarily due to an increase of$6.2 million in personnel-related expenses, including an increase of$4.2 million in stock-based compensation expense and$0.7 million of employee separation costs related to our Strategic Plan. The remaining increase was primarily attributable to increased lease expense associated with our new corporate headquarters, which we fully occupied inOctober 2021 .
Interest Income, Net
Interest income, net increased by$0.3 million during the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 , primarily due to higher interest rate yields on our money market funds, which invests all of its assets in direct obligations of theU.S. Treasury .
Liquidity and Capital Resources
As ofDecember 31, 2022 , we had approximately$61.1 million in cash and cash equivalents. Based on our available cash resources, there is substantial doubt about our ability to continue as a going concern within one year after the date the financial statements included in this Annual Report on Form 10-K are issued. If we are unable to obtain additional funding, we will be forced to delay, reduce in scope or eliminate some of our research and development programs, including related clinical trials and operating expenses, potentially delaying the time to market for, or preventing the marketing of, any of our product candidates, which could adversely affect our business prospects and our ability to continue operations, and would have a negative impact on our financial condition and our ability to pursue our business strategies. If we are unable to continue as a going concern, we may have to cease operations and liquidate our assets. We may receive less than the value at which those assets are carried on our audited financial statements, and it is likely that investors will lose all or a part of their investment. The report from our independent registered public accounting firm issued in connection with this Annual Report on Form 10-K contains statements expressing substantial doubt about our ability to continue as a going concern. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide funding to us on commercially reasonable terms, if at all. To the extent that money is raised through the sale of our securities, the issuance of those securities could result in dilution to our existing security holders. If we raise money through debt financing or bank loans, we may be required to secure the financing with some 83
--------------------------------------------------------------------------------
Table of Contents
or all our business assets, which could be sold or retained by the creditor should we default on our payment obligations. If we fail to raise sufficient funds, we will likely need to curtail or cease operations.
We have invested significant financial resources in research and development activities and have historically financed our operations primarily through the private placements of convertible preferred stock and the issuance of common stock upon the completion of our IPO. We completed our IPO inJune 2020 and received net proceeds of approximately$160.6 million after deducting underwriting discounts and commissions and offering costs, net of offering costs of$0.2 million paid in 2019. OnApril 6, 2021 , we completed a follow-on offering and received net proceeds of approximately$112.8 million after deducting underwriting discounts and commissions and offering costs. InJanuary 2022 , we entered into a Sales Agreement withSVB Securities LLC andJMP Securities LLC , as our sales agents (Agents), pursuant to which we may offer and sell from time to time through the Agents up to$150.0 million in shares of our common stock through an "at-the-market" program (ATM Facility). The shares will be offered and sold pursuant to our shelf registration statement on Form S-3 (File No. 333-263501) and the final prospectus supplement, which was filed onMarch 11, 2022 . For so long as our non-affiliate public float does not exceed$75 million , the amount of securities that we may sell pursuant to registration statements on Form S-3 will be limited to the equivalent of one-third of our public float, which will limit our ability to raise capital. As ofDecember 31, 2022 , we have not yet sold any shares under the ATM facility.
Summary Statement of Cash Flows
The following table sets forth the primary sources and uses of cash, cash equivalents, and restricted cash for the periods indicated (in thousands):
Year
Ended
2022 2021 2020
Net cash used in operating activities $ (93,900) $
(82,609)
(109,286)
Net cash (used in) provided by financing activities (733) 115,298
161,296
Net (decrease) increase in cash, cash equivalents and restricted cash
$ (98,785) $
154,895
Cash Used in Operating Activities
For the year endedDecember 31, 2022 , net cash used in operating activities of$93.9 million reflected a net loss of$126.3 million , a net change of$2.3 million in our net operating assets and liabilities, partially offset by aggregate non-cash charges of$34.7 million . The net change in our operating assets and liabilities was primarily due to decreases of$6.9 million in operating lease liabilities, partially offset by decreases of$4.9 million in prepaids and other current and non-current assets. The non-cash charges primarily consisted of stock-based compensation expense of$23.2 million , non-cash operating lease expense of$8.3 million and depreciation and amortization expense of$3.1 million . For the year endedDecember 31, 2021 , net cash used in operating activities of$82.6 million reflected a net loss of$100.3 million , a net change of$6.6 million in our net operating assets and liabilities, partially offset by$24.3 million in non-cash charges. The net change in our operating assets and liabilities was primarily due to decreases of$5.6 million in prepaid expenses and other current assets and$3.6 million in operating lease liabilities, partially offset by increases of$2.4 million in accounts payable and accrued expenses and$0.2 million in other liabilities. The non-cash charges primarily consisted of stock-based compensation expense of$16.7 million , non-cash operating lease expense of$4.4 million and depreciation and amortization expenses of$3.2 million .
Cash Provided by or Used in Investing Activities
For the year ended
For the year endedDecember 31, 2021 , cash provided by investing activities was$122.2 million related primarily to the sales and maturities of investments of$124.1 million , partially offset by the purchase of property and equipment of$1.9 million . 84
--------------------------------------------------------------------------------
Table of Contents
Cash Provided by Financing Activities
For the year endedDecember 31, 2022 , cash used by financing activities was$0.7 million , consisting primarily of payments of issuance costs related to our ATM facility of$0.9 million and principal payments for finance lease liabilities of$0.2 million , offset by proceeds received from the issuance of common stock under our employee stock purchase plan of$0.3 million and proceeds received from stock option exercises of$0.1 million . For the year endedDecember 31, 2021 , cash provided by financing activities was$115.3 million , consisting primarily of net proceeds from the follow-on offering of$113.5 million , proceeds received from the stock option exercises of$2.1 million , and proceeds from issuance of common stock from employee stock purchase plan of$0.6 million . These proceeds were partially offset by payments for issuance costs related to the follow-on offering of$0.7 million and principal payments for finance lease liabilities of$0.2 million .
Material Cash Requirements from Contractual Obligations
Our material cash requirements from known contractual obligations as ofDecember 31, 2022 consisted of operating lease liabilities including our lease of approximately 84,321 square feet of space inSouth San Francisco, California for a lease term ending inSeptember 2029 . For additional information regarding the terms of our operating leases, see Note 5 to the financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Future Funding Requirements and Going Concern
Management has concluded that there is substantial doubt about our ability to continue as a going concern within one year after the date the financial statements included in this Annual Report on Form 10-K are issued. Our primary uses of cash are to fund our operations, which consist primarily of research and development expenses related to our programs, and to a lesser extent, general and administrative expenses. We expect to continue to incur expenses and operating losses for the foreseeable future in connection with our ongoing activities, if and as we:
•advance product candidates through preclinical studies and clinical trials;
•pursue regulatory approval of product candidates;
•continue to invest in our technology platform;
•seek marketing approvals for any product candidates that successfully complete clinical trials;
•implement operational, financial and management information systems;
•hire additional personnel;
•build out and expand our in-house manufacturing capabilities;
•continue to operate as a public company;
•expand our pipeline of product candidates;
•obtain, maintain, expand, and protect our intellectual property portfolio; and
•establish a sales, marketing, and distribution infrastructure to commercialize any product candidate for which we may obtain marketing approval and related commercial manufacturing build-out.
Our future funding requirements, both short-term and long-term, will depend on many factors, including:
•the progress, costs, trial design, results of and timing of our various clinical trials of our product candidates;
•the progress, costs and results of our research pipeline;
•the willingness of theU.S. Food and Drug Administration (FDA),European Medicines Agency (EMA), or other regulatory authorities to accept our product candidates, as well as data from our completed and planned clinical trials and preclinical studies and other work, as the basis for review and approval of our product candidates for various indications;
•the outcome, costs and timing of seeking and obtaining FDA, EMA, and any other regulatory approvals;
•the number and characteristics of product candidates that we pursue;
•our ability to manufacture sufficient quantities of our product candidates;
•our need to expand our research and development activities;
85--------------------------------------------------------------------------------
Table of Contents
•the costs associated with manufacturing our product candidates, including building-out and expanding our own manufacturing facilities, and establishing commercial supplies and sales, marketing, and distribution capabilities;
•the costs associated with securing and establishing commercialization;
•the costs of acquiring, licensing, or investing in businesses, product candidates, and technologies;
•our ability to maintain, expand, and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense, and enforcement of any patents or other intellectual property rights;
•our need and ability to retain key management and hire scientific, technical, business, and medical personnel;
•the effect of competing drugs and product candidates and other market developments;
•the timing, receipt, and amount of sales from our potential products;
•our need to implement additional internal systems and infrastructure, including financial and reporting systems;
•the economic and other terms, timing of and success of any collaboration, licensing or other arrangements which we may enter in the future;
•the potential effects of inflation on our business operations;
•the volatility of our share price and our ability to maintain our listing on
•the potential effects of the COVID-19 pandemic on our business operations.
If we raise additional funds by issuing equity securities, our stockholders will experience dilution, which could be significant given the recent trading prices for our common stock. If we raise additional capital through debt financing, we may be subject to covenants that restrict our operations including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments, and engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. In addition, our ability to raise additional capital may be adversely impacted by worsening global macroeconomic conditions and the recent disruptions to and volatility in the credit and financial markets inthe United States and worldwide resulting from various factors, including the ongoing COVID-19 pandemic and the conflict betweenRussia andUkraine . We do not currently have any products approved for sale, and we have not generated any revenue from product sales. We have incurred net losses in each reporting period since inception, including net losses of$126.3 million and$100.3 million for the years endedDecember 31, 2022 and 2021, respectively, resulting in an accumulated deficit of$366.0 million atDecember 31, 2022 . We anticipate we will continue to incur net losses for the foreseeable future. We will need to obtain substantial additional funding in connection with our continuing operations. Without additional funding, our current liquidity is not sufficient to fund our projected operating requirements for a twelve-month period. If we are unable to obtain sufficient funds on acceptable terms when needed, we may be required to reduce operating expenses, delay or reduce the scope of our development efforts, obtain funds through arrangements with others that may require us to relinquish rights to certain of our technologies or products that we would otherwise seek to develop or commercialize, or cease operations.
Critical Accounting Estimates
Our financial statements have been prepared in accordance with accounting principles generally accepted inthe United States (GAAP). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates 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. The economic uncertainty in the current environment caused by the COVID-19 pandemic could limit our ability to accurately make and evaluate our estimates and judgments. 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 appearing elsewhere in this Annual Report, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results. 86
--------------------------------------------------------------------------------
Table of Contents
Research and Development Expenses
Research and development expenses are charged to expense as incurred. Research and development expenses include personnel and labor costs related to clinical trials, preclinical studies, contract manufacturing and facilities for laboratory space used for research and development activities.
We accrue for estimated costs of research, preclinical studies, clinical trials, and manufacturing development services performed but not yet invoiced and such accruals are included within accrued expenses which are significant components of research and development expenses. A substantial portion of our ongoing research and development activities is conducted by third-party service providers including CROs and CDMOs. Our contracts, amendments thereto, statements of work and change orders with the CROs and CDMOs generally include fees such as initiation fees, reservation fees, costs related to animal studies and safety tests, verification run costs, materials and reagents expenses, and taxes. Payments made to third parties under these arrangements in advance of the performance of the related services are recorded as prepaid expenses and are expensed as services are rendered. The financial terms of these arrangements are subject to negotiations, which vary from contract to contract and may result in the timing of payments that do not match the periods over which materials or services are provided to us under such contracts. We accrue the costs incurred under agreements with these third-parties and/or adjust the prepaid expenses based on estimates of work completed in accordance with the respective agreements. We determine the estimated costs through information obtained from third-party providers as to the progress, or stage of completion or actual timeline (start-date and end-date) of the services and the agreed-upon fees to be paid for such services and corroboration with internal personnel responsible for oversight of the research and development activities. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust accrued expenses or prepaid expenses accordingly, which impact research and development expenses. 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 research and development expenses.
Stock-Based Compensation Expense
We account for stock-based compensation expense by measuring and recognizing compensation expense for stock options and restricted stock units (RSUs) granted to employees based on estimated grant-date fair values. We use the straight-line method to allocate compensation cost to reporting periods over the requisite service period, which is generally the vesting period. We recognize actual forfeitures by reducing the stock-based compensation expense in the same period as the forfeitures occur. We estimate the fair value of stock option awards using the Black-Scholes option-pricing valuation model. The Black-Scholes model requires the input of subjective assumptions, including the expected term, expected volatility, risk-free interest rate, and expected dividend yield, which are described in greater detail below. The assumptions for expected term and expected volatility are the two assumptions that significantly affect the grant date fair value. The expected dividend yield and risk-free interest rate are not significant to the calculation of fair value. •Expected term-The expected term of the option awards represents the period of time between the grant date of the option awards and the date the option awards are either exercised, converted or canceled. We used the simplified method as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. Under the simplified method, the expected term equals the average of the vesting term and the original contractual term of the option award. •Expected volatility-The expected stock price volatility for option awards granted prior to the fourth quarter of 2022 was determined based on an average of the historical volatilities of the common stock of several peer companies with characteristics that are similar to us. The peer companies were chosen based on their similar size, stage in the life cycle or area of specialty. Beginning in the fourth quarter of 2022, we used a blended volatility estimate consisting of our own historical stock price volatility (as we had at least two years of historical stock price data) supplemented by historical volatilities of peer companies such that the time period over which historical volatility data used was at least equal to the expected term of the option award. •Expected dividend yield-We have never paid dividends on our common stock and have no plans to pay dividends on our common stock in the foreseeable future. Therefore, we used an expected dividend yield of zero.
•Risk-free interest rate-The risk-free interest rate is based on the
87--------------------------------------------------------------------------------
Table of Contents
The fair value of RSUs is measured on the grant date based on the closing fair market value of our common stock.
© Edgar Online, source
