AURA BIOSCIENCES, INC. The following discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this Annual Report. This discussion and analysis and other parts of this Annual Report contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under Part I, Item 1A, "Risk Factors" and elsewhere in this Annual Report. You should carefully read the "Risk Factors" section of this Annual Report to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled "Special Note Regarding Forward-Looking Statements."
Overview
We are a clinical-stage biotechnology company envisioning a new way to treat cancer. Leveraging our novel targeted oncology platform, we have the goal to develop a new standard of care across multiple cancer indications. Our initial focus is on ocular and urologic oncology where the disease is diagnosed early and there is a high unmet medical need for targeted local therapies. Our proprietary platform enables the targeting of a broad range of solid tumors using Virus-like Particles, or VLPs, that can be conjugated with drugs or loaded with nucleic acids to create Virus-like Drug Conjugates, or VDCs. Our VDCs are largely agnostic to tumor type and can recognize a subset of modified tumor associated glycosaminoglycans, or GAGs, that are part of the heparan sulphate chain of HSPGs expressed on the cell surface of many tumor cells and in the tumor microenvironment. Bel-sar, our first VDC candidate, is being developed for the first-line treatment of early-stage choroidal melanoma, a rare disease with no drugs approved where the standard of care leaves many patients with blindness. We have received orphan drug designation for the treatment of uveal melanoma from theU.S Food and Drug Administration , or FDA, and theEuropean Medicines Agency , or EMA, and fast track designation from the FDA for the treatment of choroidal melanoma. We have completed a Phase 1b/2 trial using intravitreal administration that has demonstrated clinical proof of concept, assessed using endpoints in alignment with the feedback from the FDA. We are currently evaluating suprachoroidal, or SC, administration of bel-sar in a Phase 2 study. InFebruary 2023 we presented average nine-month interim safety and efficacy data from this ongoing trial atMacula Society's Annual Meeting which demonstrated a favorable safety profile with no posterior inflammation and no treatment-related serious adverse events, or SAEs, reported as ofJanuary 10, 2023 . The results, with an average of nine months of follow up in patients who received a therapeutic regimen with three cycles of therapy, and who match the criteria for the planned global Phase 3 trial (n=8), showed a statistically significant reduction in the tumor growth rate (-0.289 mm/yr, p = <0.0001) compared to each patient's documented growth rate at study entry, and a 100% (8/8) tumor control. In addition, the visual acuity preservation in the group of patients was 88% (7/8), with the majority of patients being at high-risk for vision loss with tumors close to fovea or optic disk. We have selected the SC route to conduct our global Phase 3 trial in alignment with regulatory agencies. We are currently conducting start up activities for the global Phase 3 study with the goal to dose our first patient in the first half of 2023. We are also developing bel-sar for additional ocular oncology indications and have an open IND inthe United States for choroidal metastasis, supporting the potential of bel-sar to provide a novel treatment option that preserves vision for these patients. Choroidal metastasis is a high unmet medical need and the most common intraocular malignancy that is caused by multiple primary cancers in the body that metastasize to the eye (e.g., breast and lung cancer). These patients are treated by the same ocular oncologists that treat choroidal melanoma and there are no drugs approved that can treat the lesion in the eye and preserve vision. We received fast track designation from theFDA's Division of Oncology and plan to initiate a Phase 2 study in this indication in the second half of 2023. In addition to our ocular oncology franchise, we are leveraging our targeted oncology platform to develop bel-sar in the field of urologic oncology with an initial indication for the treatment of non-muscle invasive bladder cancer, or NMIBC, where we received fast track designation by theFDA's Division of Oncology . We initiated enrollment in a Phase 1 trial and we plan to present initial data from this trial in the second half of 2023. 93 -------------------------------------------------------------------------------- We were incorporated as aDelaware corporation in 2009 and, as ofAugust 1, 2022 , our headquarters are located inBoston, Massachusetts . Since our inception, we have focused our efforts on identifying and developing potential product candidates, conducting preclinical studies and clinical trials, organizing and staffing our company, business planning, establishing our intellectual property portfolio, raising capital, conducting discovery, research and development activities and providing general and administrative support for these operations. We do not have any product candidates approved for sale and have not generated any revenue to date. We have funded our operations primarily through the sale of convertible preferred stock, common stock, and warrants. From inception throughDecember 31, 2022 , we have raised an aggregate of approximately$320.6 million of gross proceeds primarily from private placements of our equity and convertible preferred stock as well as through the issuance of our common stock. OnDecember 5, 2022 , we issued and sold 7,705,000 shares of common stock, including the full exercise of the underwriters' option to purchase additional shares at a price to the public of$12.00 per share, for aggregate gross proceeds of$92.5 million , or the Follow-On Offering. We received approximately$86.7 million in net proceeds from the Follow-On Offering after deducting underwriting discounts, commissions and offering expenses. OnNovember 1, 2022 , we filed a shelf registration statement on Form S-3, or the 2022 Shelf, with theSEC in relation to the registration of up to an aggregate offering price of$250.0 million of common stock, preferred stock, debt securities, warrants and units or any combination thereof. We also simultaneously entered into an Open Market Sale AgreementSM, or the Sales Agreement, withJefferies LLC , or the Sales Agent, to provide for the offering, issuance and sale by us of up to an aggregate of$75.0 million of its common stock from time to time in "at-the-market" offerings, or the ATM, under the 2022 Shelf and subject to the limitations thereof. We issued 732,189 shares of our common stock at an average price of$12.51 for aggregate gross proceeds of$9.2 million as ofDecember 31, 2022 under the Sales Agreement. InNovember 2021 , we issued and sold 6,210,000 shares of our common stock, including the full exercise of the underwriters' option to purchase additional shares at a price to the public of$14.00 per share for aggregate gross proceeds of$86.9 million in our initial public offering, or IPO. We received approximately$78.3 million in net proceeds from the IPO after deducting underwriting discounts, commissions and offering expenses. We have incurred significant operating losses in every year since our inception in 2009 and have not generated any revenue. We expect to continue to incur significant expenses and operating losses for the foreseeable future. Our ability to generate product revenue sufficient to achieve profitability will depend on the successful development and commercialization of one or more of our product candidates. Our net losses were$58.8 million and$35.3 million for the years endedDecember 31, 2022 and 2021, respectively. As ofDecember 31, 2022 , we had an accumulated deficit of$210.9 million . In addition, our losses from operations may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and our expenditures on other research and development activities. We anticipate that our expenses and capital requirements will increase substantially in connection with our ongoing activities, particularly as we advance the preclinical studies and clinical trials of our product candidates. In addition, we incur additional costs associated with operating as a public company. We expect that our expenses and capital requirements will increase substantially if and as we: ?
conduct our current and future clinical trials of bel-sar;
?
progress the preclinical and clinical development of new indications;
?
establish our manufacturing capability, including developing our contract development and manufacturing relationships;
?
seek to identify and develop additional product candidates;
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seek regulatory approval of our current and future product candidates;
?
expand our operational, financial, and management systems and increase personnel, including personnel to support our preclinical and clinical development, manufacturing and commercialization efforts;
?
maintain, expand and protect our intellectual property portfolio; and
?
incur additional legal, accounting, or other expenses in operating our business, including the additional costs associated with operating as a public company.
94
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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 equity offerings, debt financings,
collaborations or other strategic transactions. We may be unable to raise
additional funds or enter into such other agreements or arrangements when needed
on favorable terms, or at all. 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 and commercialization of one or more of our
product candidates.
We will not generate revenue from product sales unless and until we successfully
complete clinical development and obtain marketing approval for our product
candidates. The lengthy process of securing marketing approvals for new drugs
requires the expenditure of substantial resources. Any delay or failure to
obtain regulatory approvals would materially adversely affect the development
efforts of our product candidates and our business overall. Because of the
numerous risks and uncertainties associated with product development, we are
unable to predict the timing or amount of increased expenses or when or if we
will be able to achieve or maintain profitability. Even if we are able to
generate revenue from product sales, we may not become profitable. 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.
As of December 31, 2022 , we had cash and cash equivalents and marketable
securities of $188.8 million . We believe that our existing cash and cash
equivalents and marketable securities will enable us to fund our operating
expenses and capital expenditure requirements into 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" below.
Impact of the ongoing COVID-19 Pandemic
We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business, including how it may continue to impact our operations and the operations of our suppliers, vendors and business partners. In addition, we have taken steps to minimize the current environment's impact on our business and strategy, including devising contingency plans and securing additional resources from third-party service providers. To date, we've only encountered minor delays in our manufacturing process due to a supply chain constraints. Beyond the impact on our pipeline, the extent to which COVID-19 ultimately impacts our business, results of operations and financial condition will depend on future developments, which remain highly uncertain and cannot be predicted with confidence, such as the duration of the outbreak, the emergence of new variants, new information that may emerge concerning the severity of COVID-19 or the effectiveness of actions taken to contain COVID-19 or treat its impact, including vaccination and booster shot campaigns, among others. If we or any of the third parties with whom we engage, however, were to experience any additional shutdowns or other prolonged business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially or negatively affected, which could have a material adverse impact on our business, results of operations and financial condition. Although to date, our business has not been materially impacted by COVID-19, it is possible that our clinical development timelines could be negatively affected by COVID-19, which could materially and adversely affect our business, financial condition and results of operations. See Item 1A "Risk Factors" of this Annual Report on Form 10-K for a discussion of the potential adverse impact of the COVID-19 pandemic on our business, financial condition and results of operations.
Components of Our Results of Operations
Revenue
Since inception, we have not generated any revenue and do not expect to generate
any revenue from the sale of products in the foreseeable future. If our
development efforts for one or more of our product candidates are successful and
result in regulatory approval, or if we enter into collaboration or license
agreements with third parties, we may generate revenue in the future from a
combination of product sales or payments from collaboration or license
agreements. We cannot predict if, and when, or to what extent, we will generate
revenue from the commercialization and sale of our product candidates. We may
never succeed in obtaining regulatory approval for any of our product
candidates.
95
--------------------------------------------------------------------------------Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts and the development of our bel-sar program, and include: ?
employee-related expenses, including salaries, related-benefits and stock-based compensation expense for employees engaged in research and development functions;
?
fees paid to consultants for services directly related to our product development and regulatory efforts;
?
expenses associated with conducting preclinical studies performed by ourselves, outside vendors or academic collaborators;
?
expenses incurred under agreements with contract research organizations, or CROs, as well as consultants that conduct and provide supplies for our preclinical studies and clinical trials;
? the cost of manufacturing bel-sar, including the potential cost of CMOs that manufacture product for use in our preclinical studies and clinical trials and perform analytical testing, scale-up and other services in connection with our development activities; ?
costs associated with preclinical activities and development activities;
?
costs associated with our intellectual property portfolio;
?
costs related to compliance with regulatory requirements; and
?
allocated expenses for utilities and other facility-related costs.
We expense research and development costs as incurred. Costs for external development activities are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our financial statements as prepaid or accrued research and development expenses. We allocate our direct external research and development costs across the entire bel-sar program. Preclinical expenses consist of external research and development costs associated with activities to support our current and future clinical programs, but are not allocated by specific indications due to the overlap of the potential benefit of those efforts across the entire bel-sar program. Research and development activities are central to our business. We expect that our research and development expenses will increase for the foreseeable future as we continue clinical development for bel-sar and continue to discover and develop additional product candidates. If any of our product candidates enter into later stages of clinical development, they will generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive and administrative functions. General and administrative expenses also include professional fees for legal, accounting, auditing, tax and consulting services; travel expenses; and facility-related expenses, which include allocated expenses for rent and maintenance of facilities and other operating costs not included in research and development. We expect that our general and administrative expenses will increase in the near-term as we continue to build a team to support our administrative, accounting and finance, communications, legal and business development efforts. We expect to incur increased expenses associated with being a public company, including costs of accounting, audit, legal, regulatory and tax compliance services; director and officer insurance costs; and investor and public relations costs.
Other Income (Expense)
Our other income (expense) consists of accretion, interest income and realized
losses on marketable securities, loss on disposal of fixed assets, and interest
income on our invested cash balances.
96
--------------------------------------------------------------------------------Income Taxes
Since our inception, we have not recorded anyU.S. federal or state income tax benefits for the net losses we have incurred in any year or for our earned research and development tax credits, due to the uncertainty of realizing a benefit from those items. As ofDecember 31, 2022 , we had federal gross operating loss carryforwards of approximately$155.1 million which may be available to offset future taxable income, of which$44.2 million begin to expire in 2029 and go through 2037 and$110.9 million do not expire. The state gross operating loss carryforwards of$127.5 million , which may be available to offset future taxable income and which would begin to expire in 2030, except for$0.7 million of state NOLs that do not expire. As ofDecember 31, 2022 , we had federal and state research and experimentation credit carryforwards of$6.4 million and$1.9 million , respectively, which may be available to offset future income tax liabilities and which would begin to expire in 2029 and 2028, respectively. Due to the degree of uncertainty related to the ultimate use of the deferred tax assets, we have fully reserved these tax benefits, as the determination of the realization of the deferred tax benefits was not determined to be more likely than not. Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations for the years endedDecember 31, 2022 and 2021: Year Ended December 31, 2022 2021 Change (in thousands) Operating expenses: Research and development$ 42,238 $ 25,161 $ 17,077 General and administrative 18,057 10,089 7,968 Total operating expenses 60,295 35,250 25,045 Loss from operations (60,295 ) (35,250 ) (25,045 ) Other income (expense): Interest income, including amortization and accretion income 1,864 13 1,851 Realized loss on marketable securities (9 ) - (9 ) Loss on disposal of assets (318 ) (3 ) (315 ) Other expense (5 ) (11 ) 6 Total other income (expense) 1,532 (1 ) 1,533 Net loss$ (58,763 ) $ (35,251 ) $ (23,512 )
Research and Development Expenses
The following table summarizes our research and development expenses for the
years ended
Year Ended December 31,
2022 2021 Change
(in thousands)
Preclinical $ 1,950 $ 1,548 $ 402
Clinical trials 4,806 3,417 1,389
Manufacturing development 11,568 8,070 3,498
Personnel/overhead expenses 23,914 12,126 11,788
Total research and development expenses
Research and development expenses increased to$42.2 million for the year endedDecember 31, 2022 , from$25.2 million for the year endedDecember 31, 2021 , primarily due to ongoing clinical costs associated with the progression of our phase 2 study and CRO costs associated with the start of our phase 3 global trial, manufacturing and development costs for bel-sar, and higher personnel expenses from growing headcount.
General and Administrative Expenses
General and administrative expenses increased to
97
--------------------------------------------------------------------------------Liquidity and Capital Resources
To date we have funded our operations primarily through the sale of convertible preferred stock, and common stock. ThroughDecember 31, 2022 , we have raised an aggregate of approximately$320.6 million of gross proceeds primarily from private placements of our equity and convertible preferred stock and warrants, as well as through the issuance of our common stock. OnDecember 5, 2022 , we issued and sold 7,705,000 shares of common stock, including the full exercise of the underwriters' option to purchase additional shares at a price to the public of$12.00 per share for aggregate gross proceeds of$92.5 million in the Follow-On Offering. We received approximately$86.7 million in net proceeds from the Follow-On Offering after deducting underwriting discounts, commissions and offering expenses. OnNovember 1, 2022 , we filed the 2022 Shelf with theSEC in relation to the registration of up to an aggregate offering price of$250.0 million of common stock, preferred stock, debt securities, warrants and units or any combination thereof. We also simultaneously entered into the Sales Agreement with the Sales Agent to provide for the offering, issuance and sale by us of up to an aggregate of$75.0 million of our common stock from time to time in the ATM under the 2022 Shelf and subject to the limitations thereof. We issued 732,189 shares of our common stock at an average price of$12.51 for aggregate gross proceeds of$9.2 million as ofDecember 31, 2022 . InNovember 2021 , we issued and sold a total of 6,210,000 shares in our IPO of our common stock, including the full exercise of the underwriters' option to purchase additional shares, at a price to the public of$14.00 per share for aggregate gross proceeds of$86.9 million . We received approximately$78.3 million in net proceeds from the IPO after deducting underwriting discounts, commissions and offering expenses. The following table summarizes our cash flows for each of the periods presented: Year Ended December 31, 2022 2021 (in thousands) Net cash used in operating activities$ (54,601 ) $ (32,410 ) Net cash used in investing activities (67,869 ) (2,125 ) Net cash provided by financing activities 95,629
166,259
Net increase (decrease) in cash, cash equivalents, and restricted cash$ (26,841 ) $ 131,724 Operating Activities During the year endedDecember 31, 2022 , net cash used in operating activities was$54.6 million , primarily due to our net loss of$58.8 million and an increase in prepaid expenses and other assets related to clinical and CRO prepayments for bel-sar, partially offset by an increase in stock compensation expense. During the year endedDecember 31, 2021 , net cash used in operating activities was$32.4 million , primarily due to our net loss of$35.3 million and increase in prepaid expenses and other assets related to clinical trials, partially offset by the non-cash charge related to stock compensation expense, an increase in accrued expenses and other liabilities related to personnel expenses, and clinical trials and increase in accounts payable related to the timing of vendor invoicing and payments. Investing Activities Net cash used in investing activities for the year endedDecember 31, 2022 was$67.9 million , primarily due to purchases of marketable securities and property and equipment, partially offset by proceeds from sale and maturities of marketable securities.
Net cash used in investing activities for the year ended
Financing Activities
During the year ended
During the year ended
98
--------------------------------------------------------------------------------Funding Requirements
Our plan of operation is to continue implementing our business strategy, continue research and development of bel-sar and any other product candidates we may acquire or develop and continue to expand our research pipeline and our internal research and development capabilities. We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities and clinical trials of our current and future product candidates. In addition, we expect to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or terminate our research and development programs or future commercialization efforts. Our future capital requirements will depend on many factors, including: ?
the scope, timing, progress, costs, and results of discovery, preclinical development, and clinical trials for our current and future product candidates;
?
the number of clinical trials required for regulatory approval of our current and future product candidates;
?
the costs, timing, and outcome of regulatory review of any of our current and future product candidates;
?
the cost of manufacturing clinical and commercial supplies of our current and future product candidates;
?
the costs and timing of future commercialization activities, including manufacturing, marketing, sales, and distribution, for any of our product candidates for which we receive marketing approval;
? the costs and timing of preparing, filing, and prosecuting patent applications, maintaining and enforcing our intellectual property rights, and defending any intellectual property-related claims, including any claims by third parties that we are infringing upon their intellectual property rights; ? our ability to maintain existing, and establish new, strategic collaborations, licensing, or other arrangements and the financial terms of any such agreements, including the timing and amount of any future milestone, royalty, or other payments due under any such agreement; ?
the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;
?
expenses to attract, hire and retain, skilled personnel;
?
the costs of operating as a public company;
?
our ability to establish a commercially viable pricing structure and obtain approval for coverage and adequate reimbursement from third-party and government payors;
?
addressing any potential interruptions or delays resulting from factors related to the ongoing COVID-19 pandemic;
?
the effect of competing technological and market developments;
?
the extent to which we acquire or invest in businesses, products, and technologies; and
?
unfavorable global economic conditions, which may exacerbate the magnitude of the factors discussed above.
A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. As ofDecember 31, 2022 , we had cash and cash equivalents and marketable securities of$188.8 million . Based on our research and development plans, we believe that our existing cash and cash equivalents, will be sufficient to fund our operations into 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. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations from the sale of additional equity or debt financings, or other capital which comes in the form of strategic collaborations, licensing, or other arrangements. In the event that additional financing is required, we may not be able to raise it on terms acceptable to us, or at all. If we raise additional funds through the issuance of equity or convertible preferred stock, it may result in dilution to our existing stockholders. Debt financing or preferred equity financing, if available, may result in increased fixed payment obligations, and the existence of securities with rights that may be senior to those of our common stock. If we incur indebtedness, we could become subject to covenants that would restrict our operations. 99 -------------------------------------------------------------------------------- If we raise funds through strategic collaboration, licensing or other arrangements, we may relinquish significant rights or grant licenses on terms that are not favorable to us. 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 and otherwise. 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 products or product candidates that we would otherwise prefer to develop and market ourselves.
Material Cash Requirements
The following table summarizes our contractual obligations and commitments as ofDecember 31, 2022 . Payments Due by Period Less than 1 to 3 3 to 5 More than Total 1 Year Years Years 5 Years (in thousands) Operating lease commitments(1)$ 33,949 $ 3,111 $ 6,506 $ 6,902 $ 17,430 Total$ 33,949 $ 3,111 $ 6,506 $ 6,902 $ 17,430 (1)
Amounts in the table above reflect payments due for our lease of office and lab
space in
OnMay 16, 2022 , we entered into an office and laboratory lease inBoston, MA with an initial 10-year term and one renewal option to extend the lease for an additional seven years. The lease commenced onAugust 1, 2022 . Except as disclosed in the table above, we have no long-term debt or finance leases and no material non-cancelable purchase commitments with service providers, as we have generally contracted on a cancelable, purchase-order basis. We enter into contracts in the normal course of business with equipment and reagent vendors, CROs, CMOs and other third parties for clinical trials, preclinical research studies and testing and manufacturing services. These contracts are cancelable by us upon prior notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to the date of cancellation. We have also acquired exclusive and non-exclusive rights to use, research, develop and offer for sale certain products and patents under license agreements. The license agreements obligate us to make payments to the licensors for license fees, milestones, license maintenance fees and royalties. These payments are not included in the preceding table as the amount and timing of such payments are not known.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles, orU.S. GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, costs and expenses and the disclosure of contingent assets and liabilities in our consolidated 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 greater detail in Note 2 to our consolidated financial statements appearing 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 consolidated financial statements. 100 --------------------------------------------------------------------------------
Research and Development Costs
We expense all costs in performing research and development activities in the periods in which they are incurred. Research and development expenses include salaries and benefits, stock-based compensation expense, lab supplies and facility costs, as well as fees paid to nonemployees and entities that conduct certain research and development activities on our behalf and expenses incurred in connection with license agreements. Non-refundable advance payments for goods or services that will be used for rendered or future research and development activities are deferred and amortized over the period that the goods are delivered, or the related services are performed, subject to an assessment of recoverability. As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. 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. 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 expenses 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.
Stock-Based Compensation
We account for our stock-based compensation as expense in the consolidated statements of operations and comprehensive loss based on the awards' grant date fair values. We account for forfeitures as they occur by reversing any expense recognized for unvested awards. For grants of restricted stock units, we base the fair value on the stock price as of the date of grant. We estimate the fair value of options granted using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires inputs based on certain subjective assumptions, including (a) the expected stock price volatility, (b) the calculation of expected term of the award, (c) the risk-free interest rate and (d) expected dividends. Due to a lack of company-specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. The computation of expected volatility is based on the historical volatility of a representative group of companies with similar characteristics to us, including stage of product development and life science industry focus. We use the simplified method as allowed by theSecurities and Exchange Commission , orSEC , Staff Accounting Bulletin, orSAB , No. 107, Share-Based Payment, to calculate the expected term for options granted to employees as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The expected dividend yield is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock. The fair value of stock-based payments is recognized as expense over the requisite service period which is generally the vesting period. Prior to our IPO, there was no public market for our common stock, and consequently, the estimated fair value of our common stock was determined by our Board of Directors as of the date of each option grant, with input from management, considering third-party valuations of our common stock as well as 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 third-party valuation through the date of the grant. In the periods following the IPO, the fair value of our common stock is determined based on the quoted market price of our common stock. 101
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Recent Accounting Pronouncements
See Note 2 in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a description of recent accounting pronouncements applicable to our consolidated financial statements. Other than as disclosed in our consolidated financial statements, we do not expect that any recently issued accounting standards will have a material impact on our consolidated financial statements or will otherwise apply to our operations.
Emerging Growth Company and Smaller Reporting Company Status
The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits that an "emerging growth company" may take advantage of the extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act. However, we did early adopt ASU No. 2016-02, Leases (Topic 842) effectiveJanuary 1, 2021 as disclosed in Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. Accordingly, our consolidated financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards. The JOBS Act also exempts us from having to provide an auditor attestation of internal control over financial reporting under Sarbanes-Oxley Act Section 404(b). We will remain an "emerging growth company" until the earliest of: the last day of the fiscal year in which we have more than$1.07 billion in annual revenue; the date we qualify as a "large accelerated filer," with at least$700.0 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than$1.0 billion in non-convertible debt securities; or the last day of the fiscal year ending after the fifth anniversary of our IPO. We are also a "smaller reporting company," meaning that the market value of our stock 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 stock held by non-affiliates is less than$250 million or (ii) our annual revenue is less than$100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than$700 million . If we are a smaller reporting company at the time we cease to be an EGC, 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 EGCs, smaller reporting companies have reduced disclosure obligations regarding executive compensation. 102
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