LONGBOARD PHARMACEUTICALS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSecurities and Exchange Commission ("SEC") onMarch 3, 2022 (our "2021 Annual Report"). Forward-Looking Statements Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Risk Factors" section of this Quarterly Report, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should carefully read Part II, Item 1A, "Risk Factors" of this Quarterly Report to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements.
Overview and Recent Developments
We are a clinical-stage biopharmaceutical company focused on developing novel, transformative medicines for neurological diseases. We were formed inJanuary 2020 by Arena Pharmaceuticals, Inc. ("Arena") to advance a portfolio of centrally acting product candidates designed to be highly selective for specific G protein-coupled receptors ("GPCRs"). Our small molecule product candidates were discovered out of the same platform at Arena that represents a culmination of more than 20 years of GPCR research. Our pipeline includes:
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LP352, an oral, centrally acting, 5-hydroxytryptamine 2C receptor subtype ("5-HT2C") superagonist, currently in a Phase 1b/2a clinical trial ("the PACIFIC Study") for the treatment of seizures associated with developmental and epileptic encephalopathies ("DEEs"), which may include Dravet syndrome, Lennox-Gastaut syndrome ("LGS"), tuberous sclerosis complex ("TSC"), CDKL5 deficiency disorder, SCN2A-related disorders, among others;
o We recently announced that we have expanded the age range of patients in the PACIFIC Study to include adolescents (ages 12 to 17), we are expanding our clinical trial sites intoAustralia , including sites in the Australian Epilepsy Clinical Trial Network, and we have added an open-label extension study to allow us to offer long-term access of LP352 to eligible trial participants.
•
LP659, a centrally acting, sphingosine-1-phosphate ("S1P") receptor subtypes 1
and 5 ("S1P1,5") receptor modulator in preclinical studies for multiple
neurological diseases, for which we anticipate submitting an investigational new
drug application ("IND") to the FDA in the fourth quarter of 2022; and
•
LP143, a centrally acting, full cannabinoid type 2 receptor ("CB2") agonist in preclinical studies for central nervous system ("CNS") diseases and disorders.
InOctober 2020 , we entered into a License Agreement with Arena (the "Arena License Agreement"), pursuant to which Arena granted us an exclusive, royalty bearing, sublicensable, worldwide license to develop and commercialize LP352, LP659, LP143 and certain 5-HT2A compounds (pharmaceutical products containing any such product candidates, the "Licensed Products"). InJanuary 2022 , we amended the Arena License Agreement to add an additional program. 19 --------------------------------------------------------------------------------
The following table provides an overview of the current product candidates we are focusing on:[[Image Removed: img8593888_0.jpg]] * We hold rights to our product candidates through the Arena License Agreement.
We are also eligible to receive royalties of 9.5% to 18.5% on sales of lorcaserin if approved for commercialization through the Royalty Purchase Agreement.
We were incorporated inJanuary 2020 . Since our inception, we have devoted substantially all of our resources to research and development activities, organizing and staffing our company, business planning, raising capital, in-licensing intellectual property rights and establishing our intellectual property portfolio, and providing general and administrative support for these operations. We have principally financed our operations to date through the private placement of convertible preferred stock and the completion of our initial public offering (the "IPO") of our common stock inMarch 2021 . To date, we have raised gross proceeds of approximately$56.0 million from the issuance of our convertible preferred stock and$84.8 million from our IPO. As ofJune 30, 2022 , we had cash, cash equivalents and short-term investments of$87.4 million . We have incurred net losses since our inception. Our net losses were$11.4 million ,$21.0 million ,$7.0 million and$12.7 million , respectively, for the three and six months endedJune 30, 2022 and 2021. As ofJune 30, 2022 , we had an accumulated deficit of$63.2 million . Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and preclinical studies and our expenditures on other research and development activities. We expect that our expenses and operating losses will increase substantially as product candidates advance through preclinical studies and clinical trials, and as we expand our clinical, regulatory, quality and manufacturing capabilities, incur significant commercialization expenses for marketing, sales, manufacturing and distribution, if we obtain marketing approval for any of our product candidates, and incur additional costs associated with operating as a public company. We expect that our existing cash, cash equivalents and short-term investments will be sufficient to fund our operations for at least the next 12 months. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We base our estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect. We do not expect to generate any revenues from product sales unless and until we successfully complete development and obtain regulatory approval for one or more product candidates, which will not be for many years, if ever. Accordingly, until such time as we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our cash needs through a combination of public or private equity offerings, debt financings or other capital sources, including potential collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements when needed would have a negative impact on our financial condition and could force us to delay, limit, reduce or terminate our research and development programs, future commercialization efforts or other operations, or grant rights to develop and market our product candidates that we would otherwise prefer to develop and market ourselves, which would have a negative impact on our financial condition. The global COVID-19 pandemic continues to evolve. As a result of the COVID-19 pandemic, we have faced and may continue to face delays in meeting our anticipated timelines for our ongoing and planned clinical trials. Specifically, the initiation of the multiple-ascending dose ("MAD") portion of the Phase 1 clinical trial of LP352 was delayed, in part, as a result of the impact of the COVID-19 pandemic on the clinical site in theUnited Kingdom that conducted the single-ascending dose ("SAD") portion of the Phase 1 clinical trial for LP352, and subsequently we modified the protocol and relocated the MAD portion of such trial to a new clinical site inthe United States . We completed the MAD portion of the Phase 1 clinical trial of LP352 inSeptember 2021 . The extent 20 -------------------------------------------------------------------------------- of the impact of COVID-19 on our business, operations and development timelines and plans remains uncertain, and will depend on certain developments, including the duration and spread of the outbreak and its impact on our development activities, planned clinical trial enrollment, future trial sites, contract research organizations ("CROs"), third-party manufacturers, and other third parties with whom we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel and work locations. We will continue to actively monitor the evolving impacts of the COVID-19 pandemic and may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business. The extent to which the COVID-19 pandemic or a similar health epidemic may affect our business, operations and development timelines and plans, including the resulting impact on our expenditures and capital needs, remains highly uncertain and subject to change. For a discussion of risks related to the impact of the ongoing COVID-19 pandemic on our business, see Part II, Item 1A, "Risk Factors-Risks Related to Our Business Operations, Employee Matters and Managing Growth-COVID-19 has impacted and could continue to adversely impact our business." In addition, the ongoing geopolitical turmoil caused by the conflict inUkraine has contributed to further disruption, instability and volatility of the financial markets, which may have an adverse impact on our business or ability to access the capital markets in the future. For a discussion of risks related to the impact of the ongoing conflict inUkraine on our business, see Part II, Item 1A, "Risk Factors-Risks Related to Our Limited Operating History, Financial Position and Need For Additional Capital-We will need substantial additional capital to finance our operations, which may not be available on acceptable terms, or at all. A recession or other unfavorable market conditions, including economic slowdowns, recessions, inflation, rising interest rates and tightening of credit markets caused by the ongoing COVID-19 pandemic, the conflict inUkraine or otherwise, may limit our access to capital. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate certain of our product development efforts or other operations."
Agreements with Arena
Below is a summary of the key terms for our license and other agreements with Arena. OnMarch 11, 2022 , Pfizer, Inc. ("Pfizer") announced it completed its acquisition of Arena, and Arena became a wholly-owned subsidiary of Pfizer. For a discussion of risks related to Pfizer's acquisition of Arena, see Part II, Item 1A, "Risk Factors-Risk Related to Arena Having Been Acquired byPfizer-Arena was acquired by Pfizer onMarch 11, 2022 , and Arena's acquisition may negatively impact our development programs and stock price."
License Agreement
InOctober 2020 , we entered into the Arena License Agreement, pursuant to which we obtained an exclusive, worldwide license of certain intellectual property for the Licensed Products. InJanuary 2022 , we amended the Arena License Agreement to add an additional program. The Arena License Agreement imposes various development, regulatory and/or commercial diligence obligations on our company, and requires the payment of royalties, including a mid-single digit royalty on net sales of Licensed Products of LP352, and a low-single digit royalty on net sales of all other Licensed Products, by our company, its affiliates or its sublicensees, subject to standard reductions, and other obligations.
Royalty Purchase Agreement
InOctober 2020 , we entered into a Royalty Purchase Agreement with Arena and 356Royalty Inc. , a wholly-owned subsidiary of Arena ("356 Royalty"), pursuant to which we purchased the right to receive all milestone payments, royalties, interest and other payments relating to net sales of lorcaserin in all countries and territories of the world owed or otherwise payable to 356 Royalty byEisai Inc. and Eisai Co., Ltd., pursuant to a Transaction Agreement datedDecember 28, 2016 , as amended, by and among 356 Royalty,Eisai Inc. and Eisai Co., Ltd., for an upfront payment of$0.1 million . Lorcaserin is currently in a Phase 3 clinical trial for Dravet syndrome.
Services Agreement
InOctober 2020 , we entered into a services agreement (the "Services Agreement") with Arena under which Arena agreed to perform certain research and development services, general administrative services, management services and other mutually agreed services for us and receive service fees therefore on an hourly rate based on an annual full time equivalent rate agreed upon by the parties. We have significantly reduced our activities under the Services Agreement, including as a result of our having hired employees or contracted with third parties with the requisite expertise, and we are no longer substantially dependent on such services from Arena. 21 --------------------------------------------------------------------------------
Components of Our Results of Operations
Operating Expenses
Our operating expenses consist of (i) research and development expenses and (ii) general and administrative expenses.
Research and Development
Our research and development expenses consist primarily of direct and indirect costs incurred in connection with the preclinical and clinical development of our product candidates. Direct costs include: •
external research and development expenses incurred under agreements with CROs, investigative sites, consultants and other third parties to conduct our preclinical studies and clinical trials; and
•
costs related to manufacturing our product candidates for preclinical studies and clinical trials, including fees paid to third-party manufacturers.
Indirect costs include:
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personnel-related costs, which include salaries, payroll taxes, employee benefits and other employee-related costs, including stock-based compensation, for personnel engaged in research and development functions; and
•
facilities and other various expenses.
Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received. We track direct costs by stage of program, clinical or preclinical. However, we do not track indirect costs on a program specific or stage of program basis because these costs are deployed across multiple programs and, as such, are not separately classified. We expect that our research and development expenses will increase substantially for the foreseeable future as we continue the development of our product candidates, particularly as product candidates in later stages of development generally have higher development costs than those in earlier stages of development. We cannot determine with certainty the timing of the initiation, duration or completion costs of future clinical trials and preclinical studies of our product candidates due to the inherently unpredictable nature of clinical and preclinical development. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. We anticipate that we will make determinations as to which product candidates and development programs to pursue and how much funding to direct to each product candidate or program on an ongoing basis in response to the results of ongoing and future preclinical studies and clinical trials, regulatory developments and our ongoing assessments as to each product candidate's commercial potential. We will need to raise substantial additional capital in the future. In addition, we cannot forecast which product candidates may be subject to future collaborations, when such arrangements may occur, if at all, and to what degree such arrangements would affect our development plans and capital requirements.
Our research and development expenses may vary significantly based on a variety of factors, such as:
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the scope, rate of progress, expense and results of our preclinical development activities;
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the phase of development of our product candidates;
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per patient clinical trial costs;
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the number of clinical trials required for approval;
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the number of sites included in our ongoing and planned clinical trials;
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the number of patients that participate in our ongoing and planned clinical trials;
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the countries in which our clinical trials are conducted;
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uncertainties in clinical trial design and patient enrollment or drop out or discontinuation rates, particularly in light of the ongoing COVID-19 pandemic and the conflict inUkraine ;
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potential additional safety monitoring requested by regulatory agencies;
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the duration of patient participation in our ongoing and planned clinical trials and follow-up;
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the efficacy and safety profile of our product candidates;
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the timing, receipt and terms of any approvals from applicable regulatory authorities, including the FDA and foreign regulatory authorities;
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significant and changing government regulation and regulatory guidance;
•
potential additional trials requested by regulatory agencies;
•
the cost and timing of manufacturing our product candidates;
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establishing clinical and commercial manufacturing capabilities or making arrangements with third-party manufacturers in order to ensure that we or our third-party manufacturers are able to make product successfully;
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the extent to which we establish additional strategic collaborations or other arrangements;
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the impact of any business interruptions to our operations or to those of the third parties with whom we work, particularly in light of the ongoing COVID-19 pandemic, the conflict inUkraine and general disruption of global supply chains and financial markets; and
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maintaining a continued acceptable safety profile of our product candidates following approval, if any, of our product candidates.
A change in the outcome of any of these or other variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate.
General and Administrative
General and administrative expenses consist primarily of personnel-related costs, which include salaries, payroll taxes, employee benefits and other employee-related costs, including stock-based compensation, for personnel in executive, finance and other administrative functions. Other significant costs include legal fees relating to corporate matters, professional fees for accounting and consulting services and facility-related costs. We expect that our ongoing general and administrative expenses will increase modestly for the foreseeable future to support our increased research and development activities and increased costs of operating as a public company and in building our internal resources. These increased costs will include increased expenses related to audit and legal services associated with maintaining compliance with exchange listing andSEC requirements, prosecuting and maintaining our patent portfolio, and investor and public relations activities associated with operating as a public company. 23 --------------------------------------------------------------------------------
Financial Operations Overview
Results of Operations
The following table summarizes our results of operations for the three and six
months ended
Three Months Ended June 30, Six Months Ended June 30,
(in thousands) 2022 2021 2022 2021
Operating expenses:
Research and development $ 8,921 $ 4,915 $ 16,042 $ 9,313
General and administrative 2,646 2,072 5,145 3,377
Total operating expenses 11,567 6,987 21,187 12,690
Loss from operations (11,567 ) (6,987 ) (21,187 ) (12,690 )
Interest income, net 127 13 159 17
Other income (expense) 33 (6 ) 24 (6 )
Net loss $ (11,407 ) $ (6,980 ) $ (21,004 ) $ (12,679 ) Research and Development Expenses
The following table summarizes our research and development expenses for the
three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
(in thousands) 2022 2021 2022 2021
Direct costs:
LP352 $ 4,721 $ 2,975 $ 8,263 $ 4,483
Preclinical programs 1,684 759 3,231 2,869
Indirect costs:
Personnel-related 2,118 976 3,881 1,622
All other 398 205 667 339
Total research and development
expenses $ 8,921 $ 4,915 $ 16,042 $ 9,313
Research and development expenses were $8.9 million for the three months ended
June 30, 2022 , an increase of $4.0 million , or 82%, compared to $4.9 million for
the three months ended June 30, 2021 . The net increase of $4.0 million is
primarily related to increases of $1.7 million in clinical trial and preclinical
expenses related to LP352, $1.1 million in personnel-related expenses, and $0.9
million in preclinical expenses related to LP659 and LP143.
Research and development expenses were $16.0 million for the six months ended
June 30, 2022 , an increase of $6.7 million , or 72%, compared to $9.3 million for
the six months ended June 30, 2021 . The net increase of $6.7 million is
primarily related to increases of $3.8 million in clinical trial and preclinical
expenses related to LP352, $2.3 million in personnel-related expenses, and $0.4
million in preclinical expenses related to LP659 and LP143.
General and Administrative Expenses
General and administrative expenses were$2.6 million for the three months endedJune 30, 2022 , an increase of$0.5 million , or 28%, compared to$2.1 million for the three months endedJune 30, 2021 . The net increase of$0.5 million is primarily related to a$0.4 million increase in personnel-related costs. General and administrative expenses were$5.1 million for the six months endedJune 30, 2022 , an increase of$1.7 million , or 52%, compared to$3.4 million for the six months endedJune 30, 2021 . The net increase of$1.7 million is primarily related to increases of$1.0 million in personnel-related costs,$0.3 million in insurance expense and$0.2 million in rent expense.
Liquidity and Capital Resources
As ofJune 30, 2022 , we had cash, cash equivalents and short-term investments of$87.4 million and working capital of$82.6 million to fund future operations. As ofDecember 31, 2021 , we had cash, cash equivalents and short-term investments of$106.7 million and working capital of$102.9 million to fund future operations. 24 --------------------------------------------------------------------------------
Sources of Liquidity
We have funded our operations primarily through available cash, cash equivalents and short-term investments, and the sale and issuance of common stock and convertible preferred stock. InOctober 2020 , we completed a$56.0 million private placement of our Series A convertible preferred stock. In connection with our IPO inMarch 2021 , we issued and sold 5,298,360 shares of common stock, which included 298,360 shares of our common stock issued pursuant to the over-allotment option granted to the underwriters to purchase additional shares of common stock, at a public offering price of$16.00 per share. We raised$76.2 million in net proceeds from the IPO after deducting underwriters' discounts and commissions of$5.9 million and issuance costs of$2.6 million .
Material Cash Requirements
We have incurred net losses and negative cash flows from operations since our inception and anticipate we will continue to incur net losses for the foreseeable future.
We expect that our existing cash, cash equivalents and short-term investments will be sufficient to fund our operations for at least the next 12 months. We believe we will meet longer-term expected future cash requirements and obligations beyond the next 12 months by utilizing our existing cash, cash equivalents and short-term investments and through a combination of equity offerings, debt financings, collaborations, licenses and other similar arrangements. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based our estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect. Additionally, the process of testing product candidates in clinical trials is costly, and the timing of progress and expenses in these trials is uncertain. Our ability to fund longer-term operating needs will depend on our ability to commercialize product candidates for which we may obtain regulatory approval, our ability to access the capital markets and other factors, including those discussed in Part II, Item 1A, "Risk Factors" of this Quarterly Report.
Our future capital requirements will depend on many factors, including:
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the type, number, scope, progress, expansions, results, costs and timing of our preclinical studies and clinical trials for our current and any future product candidates and the potential indications which we are pursuing or may choose to pursue in the future;
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the outcome, timing and costs of regulatory review of our product candidates;
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the costs and timing of manufacturing for our product candidates, including commercial manufacturing;
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our efforts to enhance operational systems and hire additional personnel to satisfy our obligations as a public company, including enhanced internal controls over financial reporting;
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the costs associated with hiring additional personnel and consultants as our preclinical and clinical activities increase;
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the terms and timing of establishing and maintaining collaborations, licenses and other similar arrangements;
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the costs of obtaining, expanding, maintaining and enforcing our patent and other intellectual property rights;
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the costs and timing of establishing or securing sales and marketing and distribution capabilities, whether alone or with third parties, to commercialize product candidates for which we may obtain regulatory approval, if any;
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the timing and amount of the payments we are obligated to make under the Arena License Agreement;
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our ability to achieve sufficient market acceptance, coverage and adequate reimbursement from third-party payors and adequate market share and revenue for any approved products;
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patients' willingness to pay out-of-pocket for any approved products in the absence of coverage and/or adequate reimbursement from third-party payors;
•
costs associated with any product candidates, products or technologies that we may in-license or acquire; and
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if we experience any delays or encounter any issues with any of the above, which may be exacerbated by macroeconomic events stemming from the ongoing COVID-19 pandemic or evolving geopolitical developments such as the conflict inUkraine . Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval for any product candidates or generate revenue from the sale of any product candidate for which we may obtain marketing approval. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for at least several years, if ever. As a result, we will need substantial additional financing to support our continuing operations and further the development of and commercialize our product candidates. Until such time as we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our cash needs through a combination of public or private equity offerings, debt financings or other capital sources, including potential collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets inthe United States and worldwide resulting from the ongoing COVID-19 pandemic, the conflict inUkraine or otherwise. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, or other similar arrangements with third parties, we may have to relinquish valuable rights to our product candidates, future revenue streams or research programs or may have to grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock. 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 research and development programs, future commercialization efforts or other operations, or grant rights to develop and market our product candidates that we would otherwise prefer to develop and market ourselves, which would have a negative impact on our financial condition.
Cash Flows
The following table sets forth a summary of our cash flows for the six months
ended
Six Months Ended June 30 ,
(in thousands) 2022 2021
Net cash used in operating activities$ (18,539 ) $ (12,896 ) Net cash used in investing activities (20,091 ) (28,012 ) Net cash provided by financing activities -
76,453
Net (decrease) increase in cash and cash equivalents
Operating Activities Net cash used in operating activities was$18.5 million and$12.9 million for the six months endedJune 30, 2022 and 2021, respectively. Net cash used in operating activities for the six months endedJune 30, 2022 was primarily due to our net loss of$21.0 million , adjusted for$1.3 million of stock-based compensation expense and$1.0 million from changes in operating assets and liabilities. Net cash used in operating activities for the six months endedJune 30, 2021 was primarily due to our net loss of$12.7 million , adjusted for$0.8 million of stock-based compensation expense and$1.1 million from changes in operating assets and liabilities.
Investing Activities
Net cash used in investing activities was$20.1 million and$28.0 million for the six months endedJune 30, 2022 and 2021, respectively. Net cash used in investing activities for the six months endedJune 30, 2022 was related to$34.3 million of short-term investment purchases, which was offset by$14.2 million in short-term investment maturities. Net cash used in investing activities for the six months endedJune 30, 2021 consisted of$28.0 million of short-term investment purchases. 26 --------------------------------------------------------------------------------
Financing Activities
Net cash provided by financing activities was none and$76.5 million for the six months endedJune 30, 2022 and 2021, respectively. Net cash provided by financing activities during the six months endedJune 30, 2021 was comprised of net proceeds of$76.5 million from our IPO, which excludes$0.2 million of IPO expenses that were paid in 2020.
Critical Accounting Estimates
Our financial statements are prepared in accordance with generally accepted accounting principles inthe United States . The preparation of our financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on a periodic basis. Our actual results may differ from these estimates. While our significant accounting policies are described in more detail in the notes to our financial statements appearing in our 2021 Annual Report, we believe that the following accounting policies are critical to understanding our historical and future performance, as the policies relate to the more significant areas involving management's judgments and estimates used in the preparation of our financial statements. There have been no significant changes in our critical accounting policies and estimates during the six months endedJune 30, 2022 , as compared to the critical accounting policies and estimates disclosed in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2021 Annual Report.
As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses as of each balance sheet date. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify 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 actual costs. The majority of our service providers invoice us in arrears for services performed, based on a pre-determined schedule or when contractual milestones are met, but some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known to us at that time. If timelines or contracts are modified based upon changes in the protocol or scope of work to be performed, we modify our estimates and accruals accordingly on a prospective basis. We base our expenses related to external research and development services 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 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 differences between our estimates of such expenses and the amounts actually incurred.
Emerging Growth Company and Smaller Reporting Company Status
We are an "emerging growth company" under the Jumpstart Our Business Startups
Act of 2012 ("JOBS Act"), and as such, we can take advantage of an extended
transition period for complying with new or revised accounting standards. This
provision allows an emerging growth company to delay the adoption of accounting
standards that have different effective dates for public and private companies
until those standards would otherwise apply to private companies. We have
elected to avail ourselves of this exemption from new or revised accounting
standards, and therefore we will not be subject to the same requirements to
adopt new or revised accounting standards as other public companies that are not
emerging growth companies.
We will cease to be an emerging growth company prior to the end of December 31,
2026 , if certain earlier events occur, including if we become a "large
accelerated filer" as defined in Rule 12b-2 under the Exchange Act, our annual
gross revenues exceed $1.07 billion or we issue more than $1.0 billion of
non-convertible debt in any three-year period.
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We are also a "smaller reporting company" as defined in the Exchange Act. We may
continue to be a smaller reporting company even after we are no longer an
emerging growth company. We may take advantage of certain of the scaled
disclosures available to smaller reporting companies and will be able to take
advantage of these scaled disclosures for so long as our voting and non-voting
common stock held by non-affiliates is less than $250.0 million measured on the
last business day of our second fiscal quarter, or our annual revenue is less
than $100.0 million during the most recently completed fiscal year and our
voting and non-voting common stock held by non-affiliates is less than $700.0
million measured on the last business day of our second fiscal quarter.
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