9 METERS BIOPHARMA, INC. The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. In addition to historical information, the following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated by the forward-looking statements due to important factors and risks including, but not limited to, those set forth in the "Risk Factors" in Part I, Item 1A of this report. Overview 9 Meters is a clinical-stage company pioneering novel treatments for people with rare digestive diseases, gastrointestinal conditions with unmet needs, and debilitating disorders in which the biology of the gut is a contributing factor. Our pipeline includes vurolenatide, a proprietary Phase 3 long-acting GLP-1 agonist for SBS and a robust pipeline of early-stage candidates for undisclosed rare diseases and/or unmet needs. Our current product development pipeline is described in the table below:
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Vurolenatide for the Treatment of Short Bowel Syndrome
Vurolenatide is a long-acting injectable GLP-1 receptor agonist being developed for SBS, a debilitating orphan disease with an underserved market. InSeptember 2022 , we announced the results from our multi-center, double-blind, double-dummy, randomized, placebo-controlled Phase 2 trial of vurolenatide for the treatment of SBS, called VIBRANT (VurolenatIde for short Bowel syndrome Regardless of pArenteral support requiremeNT). The trial included four parallel treatment arms: vurolenatide 50 mg Q2W, vurolenatide 50 mg every week, vurolenatide 100 mg Q2W, and placebo. The primary efficacy endpoint for the VIBRANT study was change from baseline in mean 24-hour TSO volume over the six-week post-randomization observation period. The mean 24-hour TSO change for the vurolenatide 50 mg Q2W arm was a 30% decrease versus an increase of 32% in the placebo arm, for a relative reduction compared to placebo of 62%. This group showed a rapid (at one week) and sustained TSO reduction over the six-week post-randomization period. Importantly, TSO reduction from baseline was observed in 16 of the 18 weeks of the observation period in the 50 mg Q2W treatment group. These results, coupled with the most favorable adverse event and optimal pharmacokinetic profile, contributed to our decision to move this dose regimen forward into a pivotal Phase 3 clinical development program. The study allowed the inclusion of SBS patients both requiring and not requiring PS. Five of the eleven patients in the Phase 2 study were receiving PS prior to entering the study and all five were randomly assigned to treatment with 51 -------------------------------------------------------------------------------- vurolenatide. Change from baseline in PS volume, an important secondary endpoint, was also evaluated over the six-week observation period. There was a mean decrease of 17% in the PS volume of these five patients by week two which was sustained throughout the six-week observation period. Of the five patients, two remained stable and three demonstrated a mean decrease in PS of 28%. Based upon the results of the VIBRANT trial, we selected a dose and confirmed the design for the Phase 3 trial. The Phase 3 study, called VIBRANT 2, is a randomized, double-blind, placebo-controlled, multicenter study evaluating the efficacy, safety, and tolerability of vurolenatide 50 mg administered subcutaneously every two weeks for 24 weeks in adults with SBS. This international clinical study is designed to enroll approximately 120 patients with SBS with up to 50 clinical investigative sites inNorth America andEurope . The study population will include both SBS patients who meet the current PS dependence definition (PS required three or more times per week) and SBS patients who do not meet this PS requirement (PS required fewer than three times per week). Patients with SBS suffer from severe malabsorption due to the lack of sufficient intestinal surface which results directly in severe and often debilitating fluid and nutritional losses in the form of chronic, recurrent diarrhea. This study will not only assess the degree to which vurolenatide can reduce weekly PS volume requirements, but it will also, for the first time in a large ambulatory study, assess the impact of vurolenatide on malabsorptive diarrhea as measured directly by TSO volume. To maximize the potential for vurolenatide to provide clinical benefit to the entire SBS population regardless of PS requirement, VIBRANT 2 incorporates two primary efficacy endpoints: 1) absolute change from baseline in weekly PS volume which was the established primary efficacy outcome measure to support the approval of the GLP-2 agonist Gattex® (teduglutide) for treatment of SBS patients with a PS dependence; and 2) absolute change from baseline in mean TSO volume, which assesses TSO volume over the entire treatment period and incorporates specific FDA recommendations around the inclusion of nutrition and hydration parameters to help establish the clinical relevance of this novel endpoint. We plan to conduct an interim analysis when 50% of patients reach week 24.
NM-136 Anti-GIP Humanized Monoclonal Antibody
OnJuly 19, 2021 , we entered into and closed an Asset Purchase Agreement with Lobesity, pursuant to which we acquired global development rights to a proprietary and highly specific humanized monoclonal antibody, now known as NM-136, which targets glucose-dependent insulinotropic polypeptide ("GIP"), as well as the related intellectual property (the "Lobesity Acquisition"). GIP is a hormone found in the upper small intestine that is released into circulation after food is ingested, and when found in high concentrations, can contribute to obesity and obesity-related disorders. NM-136 has been shown to prevent GIP from binding to its receptor, which in a preclinical obesity model showed a significant decrease in weight and abdominal fat by reducing nutrient absorption from the intestine as well as nutrient storage without affecting appetite. We are continuing the manufacturing and IND-enabling studies of NM-136 and intend to initiate a clinical proof-of-concept study for obesity later this year.
Corporate Highlights
Lobesity Acquisition
OnJuly 19, 2021 , we completed an Asset Purchase Agreement with Lobesity, pursuant to which we acquired global development rights to a proprietary and highly specific humanized monoclonal antibody, NM-136, which targets GIP, as well as the related intellectual property. We paid a combination of cash and equity consideration in the form of a$5 million upfront payment, as 40% cash and 60% equity (consisting of 2,417,211 shares of unregistered common stock priced at our three-day volume weighted-price immediately prior to the closing), plus the right to contingent payments including certain potential worldwide regulatory and clinical milestone payments totaling$45.5 million for a single indication (with the total amount payable, if multiple indications are developed, not to exceed$58.0 million ), global sales-related milestone payments totaling up to$50.0 million , and, subject to certain adjustments, a mid-single digit royalty on worldwide net sales.
Workforce Reduction
InMarch 2023 , our Board approved a cost reduction plan to extend our cash runway, which reduced operating expenses and further aligned our workforce with immediate business needs. The reduction in workforce represents approximately 52% of our full-time personnel, which includes eleven full-time employees and eight consultants and contractors. 52 -------------------------------------------------------------------------------- We expect to incur approximately$1.1 million in one-time employee termination benefits directly associated with the workforce reduction during the twelve-month period beginningApril 2023 . In addition, we entered into retention agreements with certain key employees, which provide for an aggregate of$0.4 million in cash retention bonuses to be paid out 50% onApril 15, 2023 and 50% onDecember 31, 2023 and an aggregate of 207,232 restricted stock units ("RSUs") that will vest upon the same time-based milestones. In addition, each of our board members will receive 7,885 RSUs each that will vest upon the same time-based milestones. We believe these changes will provide operating efficiencies for us to continue to support our product development programs as well as any potential partnerships, collaborations or other strategic relationships we may enter into.
Financial Overview
Since our inception, we have focused our efforts and resources on identifying and developing our research and development programs. We have not had any products approved for commercial sale and have incurred operating losses in each year since inception. Substantially all of our operating losses resulted from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations. To date, we have financed our operations primarily through public offerings of equity securities and private placements of convertible debt and equity securities. As ofDecember 31, 2022 , we had an accumulated deficit of$212.6 million . We incurred net losses of$43.8 million and$36.8 million for the years endedDecember 31, 2022 and 2021, respectively. We expect to continue to incur significant expenses and increase our operating losses for the foreseeable future, which may fluctuate significantly between periods. We anticipate that our expenses will increase substantially as and to the extent we:
•continue research and development, including preclinical and clinical development of our existing and future product candidates, including vurolenatide;
•experience any delays in our clinical trials;
•successfully develop acquired clinical assets;
•seek regulatory approval for our product candidates;
•commercialize any product candidates for which we obtain regulatory approval;
•maintain and protect our intellectual property rights;
•add operational, financial and management information systems and personnel;
•pursue additional in- or out-licenses or similar strategic transactions; and
•continue to incur additional legal, accounting, regulatory, tax-related and other expenses required to operate as a public company.
As such, we will need substantial additional funding to support our operating activities. Adequate funding might not be available to us on acceptable terms, or at all. We currently anticipate that we will seek to fund our operations through equity or debt financings, strategic alliances or licensing arrangements, or other sources of financing. Our failure to obtain sufficient funds on acceptable terms could have a material adverse effect on our business, results of operations and financial condition.
COVID-19
The COVID-19 pandemic previously created significant delays for our clinical
trials primarily due to multiple site closures because of infected staff and due
to patients avoiding or being unable to travel to healthcare facilities and
physicians' offices unless due to a health emergency. The COVID-19 pandemic
could in the future, directly or indirectly, adversely impact our ability to
recruit and retain patients, principal investigators and site staff, who, as
healthcare providers, may have heightened exposure to COVID-19, which could
negatively impact our clinical trials, increase our operating expenses, and have
a material adverse effect on our financial results. We will continue to assess
the potential impact of the COVID-19 pandemic on our business and operations,
including our clinical operations and manufacturing activities.
Further impact resulting from the COVID-19 pandemic will depend, among other
things, on the extent of the pandemic in the regions with clinical trial sites,
the timing and availability of the COVID-19 vaccines and length and severity of
travel
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--------------------------------------------------------------------------------restrictions and other limitations ordered by governmental agencies. New and potentially more contagious variants could further affect the impact of the COVID-19 pandemic on our operations.
Results of Operations
Comparison of the Years Ended
The following table sets forth the key components of our results of operations
for the years ended
Year Ended December 31,
2022 2021 $ Change % Change
Operating expenses:
Research and development $ 31,008,151 $ 21,995,291 $ 9,012,860 41 %
Acquired in-process research and development - 5,103,753 (5,103,753) (100) %
General and administrative 11,008,900 9,662,875 1,346,025 14 %
Total operating expenses 42,017,051 36,761,919 5,255,132 14 %
Loss from operations (42,017,051) (36,761,919) (5,255,132) 14 %
Total other income (expense), net (1,749,364) (17,481) (1,731,883) 9,907 %
Net loss $ (43,766,415) $ (36,779,400) $ (6,987,015) 19 %
Research and Development Expense
Research and development expense for the year endedDecember 31, 2022 increased approximately$9.0 million , or 41%, as compared to the year endedDecember 31, 2021 . The increase was primarily due to an increase of approximately$11.3 million in clinical trial expenses associated with completion of the Phase 2 trial in SBS and start up activities associated with our Phase 3 trial in SBS. In addition, preclinical expenses for our humanized monoclonal antibody, NM-136, increased by approximately$2.6 million . Personnel costs and benefits and non-cash stock compensation for our research and development personnel increased by approximately$0.2 million each. These increases were offset by decreases in (i) clinical trial costs associated with the discontinuation of our CeDLara study of$4.8 million , (ii) IND-enabling activities for NM-102 of approximately$0.4 million , and (iii) milestone fees of$0.1 million . The table below summarizes our research and development expenses by program, license fees and other research and development expenses for the periods indicated. Year Ended December 31, 2022 2021 Research and development expenses: Larazotide - Celiac Disease$ 2,728,814 $
7,484,835
Vurolenatide - Short Bowel Syndrome 18,739,512 7,419,098
NM-102 - Orphan Indication 1,294,955 1,728,513
NM-136 - Obesity Disorder 3,650,962 1,020,748
License fees 500,000 600,000
Other research and development expenses 4,093,908 3,742,097
Total research and development expenses
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--------------------------------------------------------------------------------Acquired in-process research and development expense was approximately$5.1 million for the year endedDecember 31, 2021 and represents expenses associated with the Lobesity Acquisition of NM-136. Acquired in-process research and development expense includes approximately$2.6 million non-cash acquired in-process research and development expense paid in equity ownership. There was no acquired in-process research and development expense during the year endedDecember 31, 2022 .
General and Administrative Expense
General and administrative expense for the year endedDecember 31, 2022 increased by approximately$1.3 million , or 14%, as compared to the year endedDecember 31, 2021 . The increase was primarily due to increases in non-cash stock compensation expense of approximately$1.3 million and professional fees of approximately$0.7 million . These increases were offset by decreases in (i) personnel costs and benefits of approximately$0.4 million (ii) costs associated with operating as a public company of$0.2 million , and (iii)general corporate expenses of$0.1 million . The increase in non-cash stock compensation is primarily due to the accelerated vesting of options for our former chief financial officer of$1.1 million . The decrease in personnel costs and benefits was primarily due a decrease in performance bonus for the year endedDecember 31, 2022 .
Other Income (Expense), Net
Other expense, net, for the year endedDecember 31, 2022 , increased by approximately$1.7 million , as compared to the year endedDecember 31, 2021 . The change in other expense, net is primarily due to an increase in interest expense associated with the 2022 Convertible Note of approximately$2.6 million . This increase was offset by an increase in interest income of approximately$0.5 million and the gain on fair value of derivative liability of approximately$0.4 million .
Liquidity and Capital Resources
Sources of Liquidity
As ofDecember 31, 2022 , we had cash and cash equivalents of approximately$29.7 million (of which approximately$17.0 million was restricted), compared to approximately$47.0 million as ofDecember 31, 2021 . The decrease in cash, cash equivalents and restricted cash was primarily due to expenditures for business operations, research and development and clinical trial costs, including completion of our Phase 2 trial in SBS, start up activities for our Phase 3 trial in SBS, and close out fees associated with the discontinuation of our Phase 3 clinical trial in celiac disease. InJuly 2022 , we received net proceeds of$19.9 million from the issuance of the 2022 Convertible Note, as amended, subject to a minimum liquidity requirement of 80% of the outstanding principal amount, which was further reduced to$0.5 million upon the second amendment to the 2022 Convertible Note onJanuary 12, 2023 , at which time, we repaid$16.8 million of principal and interest from restricted cash under the original terms of the note. OnMarch 15, 2023 , we completed a registered direct offering (the "March 2023 Offering") with an institutional investor for the issuance and sale of 1,300,000 shares of our common stock (the "Shares"), pre-funded warrants to purchase up to 1,825,000 shares of our common stock (the "Pre-Funded Warrants"), and accompanying warrants to purchase up to 6,250,000 shares of our common stock (the "Common Warrants"). The Shares and accompanying Common Warrants were sold at an offering price of$1.60 and the Pre-Funded Warrants and accompanying Common Warrants were sold at an offering price of$1.5999 . TheMarch 2023 Offering closed onMarch 15, 2023 . The net proceeds to us were approximately$4.4 million , after deducting placement agent fees and other offering expenses. InOctober 2022 , we entered into the 2023 Lease for our new headquarters inRaleigh, North Carolina for a term of 126 months. The 2023 Lease provides for rent abatement for the first six months, after which base rent payments of$24,000 per month are due. Base rent increases by 3% each year and the 2023 Lease may be extended for a period of five years. We expect the 2023 Lease to commence in the second quarter of 2023. We currently anticipate aggregate capital expenditures of approximately$0.4 million during the next 12 months, which is expected to cover the excess of tenant improvement costs over the tenant improvement allowance for our new headquarters. 55 -------------------------------------------------------------------------------- To date, we have not generated revenue from product sales. We do not know when, or if, we will generate any revenue from product sales. We expect to incur substantial expenditures in the foreseeable future for the continued development and clinical trials of our product candidates. We will continue to require additional financing to develop and eventually commercialize our product candidates. Our future liquidity and capital requirements will depend on a number of factors, including the outcome of our clinical trials, and our ability to complete the development, approval and commercialization of our products. There are a number of variables beyond our control including the timing, success and overall expense associated with our clinical trials. As such, there can be no assurance that we will be able to achieve our objectives without additional funding. If we are unable to raise additional funds as needed, our ability to develop our product candidates will be impaired. We may also be required to delay, reduce, or terminate some or all of our development programs and clinical trials. We continue to evaluate multiple dilutive and non-dilutive sources for future funding. If we raise additional funds through the issuance of equity securities, substantial dilution to our existing stockholders could occur. We have concluded that the prevailing conditions and ongoing liquidity risks we face raise substantial doubt about our ability to continue as a going concern.
Cash Flows
The following table sets forth the primary sources and uses of cash for the
years ended
Year Ended
2022 2021
Net cash (used in) provided by:
Operating activities $ (37,243,217) $ (29,478,275)
Investing activities (2,842) (2,430,641)
Financing activities 19,911,706 41,050,813
Net (decrease) increase in cash, cash equivalents and
restricted cash $ (17,334,353) $ 9,141,897 Operating Activities
For the year endedDecember 31, 2022 , net cash used in operating activities of approximately$37.2 million primarily consisted of a net loss of$43.8 million , offset by adjustments for non-cash stock compensation of approximately$3.9 million , amortization of debt discount of$1.8 million and non-cash milestone fee of$0.5 million , which was paid in equity. In addition, the net change in operating assets and liabilities increased by approximately$0.7 million . These changes were offset by the non-cash change in derivative liability of$0.4 million . For the year endedDecember 31, 2021 , net cash used in operating activities of approximately$29.5 million primarily consisted of a net loss of$36.8 million , offset by adjustments for non-cash stock compensation of approximately$2.4 million , amortization of debt discount of approximately$0.1 million , and non-cash in-process research and development expense of approximately$2.6 million . In addition, the net change in operating assets and liabilities increased by approximately$2.2 million .
Investing Activities
For the year endedDecember 31, 2022 , net cash used in investing activities represents the purchase of property and equipment of approximately$2,800 . Net cash used in investing activities for the year endedDecember 31, 2021 represents the purchase of property and equipment of approximately$12,000 and the purchase of in-process research and development, net of assets received, of approximately$2.5 million . These cash outflows were offset by the maturity of our restricted investment of$75,000 .
Financing Activities
For the year endedDecember 31, 2022 , net cash provided by financing activities of approximately$19.9 million primarily consisted of proceeds of$21.0 million from issuance of the 2022 Convertible Note offset by payments of debt issuance costs of approximately$1.1 million . 56 -------------------------------------------------------------------------------- For the year endedDecember 31, 2021 , net cash provided by financing activities of approximately$41.1 million primarily consisted of (i) proceeds of$34.5 million from the public offering of our common stock that closed inApril 2021 , (ii) proceeds of$9.2 million from the exercise of warrants and (iii) proceeds of$0.3 million from the exercise of stock options. These increases were offset by approximately$0.1 million in debt repayments and approximately$2.9 million in stock issuance costs.
Contractual Obligations and Commitments
InJuly 2020 , we entered into a four-year lease agreement for office space that expires onSeptember 30, 2024 . Base annual rent for the four-year lease period is$72,000 with monthly rent payments of$6,000 . We estimated the present value of the lease payments over the remaining term of the lease using a discount rate of 12%, which represented our estimated incremental borrowing rate. The two-year renewal option was excluded from the lease payments as we concluded the exercise of this option was not considered reasonably certain. InOctober 2022 , we entered into the 2023 Lease for our new headquarters inRaleigh, North Carolina for a term of 126 months. The 2023 Lease provides for rent abatement for the first six months, after which base rent payments of$24,000 per month are due. Base rent increases by 3% each year and the 2023 Lease may be extended for a period of five years. We expect the 2023 Lease to commence in the second quarter of 2023. In accordance with ASC 842, Leases, we concluded that we do not control the underlying asset being constructed. As such, there is no impact to our consolidated financial statements for the year endedDecember 31, 2022 . Periodically, we enter into separation and general release agreements with former executives that include separation benefits consistent with the former executive's employment agreements. We recognized severance expense totaling$0.4 million during the year endedDecember 31, 2021 . Severance payments are made in equal installments over 12 months from the date of separation. There was no accrued severance obligation as ofDecember 31, 2022 . InMarch 2023 , the Board implemented a cost reduction plan which included a reduction in workforce of approximately 52% of our full-time personnel. We expect to incur approximately$1.5 million in connection with the cost reduction plan during the twelve-month period beginningApril 2023 , which primarily represents one-time employee termination benefits directly associated with the workforce reduction and retention bonuses for our remaining personnel for their continued service throughDecember 31, 2023 . We are obligated to make future payments to third parties under in-license agreements, including sublicense fees, royalties and payments that become due and payable on the achievement of certain development and commercialization milestones. In general, the amount and timing of sub-license fees and the achievement and timing of development and commercialization milestones are not probable and estimable, and as such, these commitments have not been included on the accompanying consolidated balance sheets. During the years endedDecember 31, 2022 and 2021, we incurred development milestone fees of approximately$0.5 million and$0.6 million , respectively. We also enter into agreements in the normal course of business with contract research organizations and other third parties with respect to services for clinical trials, clinical supply manufacturing and other operating purposes that are generally terminable by us with thirty to ninety days advance notice.
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies and Use of Estimates
Use of 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 with accounting principles generally accepted inthe United States . The preparation of our consolidated 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 at the date of the consolidated 57 -------------------------------------------------------------------------------- financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and various other assumptions 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. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.
Critical Accounting Policies
While our significant accounting policies are more fully described in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our consolidated financial statements and understanding and evaluating our reported financial results. Areas of our consolidated financial statements where estimates may have the most significant effect include acquired in-process research and development, fair value measurements, accrued expenses, share-based compensation, and management's assessment of our ability to continue as a going concern. Changes in the facts or circumstances underlying these estimates could result in material changes and actual results could differ from these estimates.
We have acquired and may in the future acquire, rights to develop and commercialize new drug candidates and/or other in-process research and development assets. The up-front acquisition payments, as well as future milestone payments associated with asset acquisitions that are deemed probable to achieve the milestones and do not meet the definition of a derivative, are expensed as acquired in-process research and development provided that the drug has not achieved regulatory approval for marketing, and, absent obtaining such approval, have no alternative future use. See "Note 3-Merger and Acquisition" to our consolidated financial statements for further discussion of acquired in-process research and development expense.
Fair Value Measurements
We account for derivative instruments in accordance with Accounting Standards
Codification ("ASC") 815, Derivatives and Hedging, which establishes accounting
and reporting standards for derivative instrument, including certain derivative
instruments embedded in other financial instruments or contracts and requires
recognition of all derivatives on the balance sheet date at fair value. We early
adopted Accounting Standards Update ("ASU") 2020-06, Accounting for Convertible
Instruments and Contracts in an Entity's Own Equity, effective January 1, 2022 ,
which simplifies the accounting for these instruments.
Our derivative financial instruments consist of embedded option in our 2022
Convertible Note and include provisions that provide the Holder with certain
conversion and put rights at various conversion or redemption values as well as
certain call options for us.
The fair value of the embedded derivatives issued in connection with the 2022
Convertible Note was determined using a Monte Carlo simulation technique ("MCS")
to value the embedded derivative features associated with the 2022 Convertible
Note. As part of the MCS valuation, a discounted cash flow model ("DCF") is used
to value the debt on a stand-alone basis and determine the discount rate to
utilize in both the DCF and MCS models. The significant estimates used in the
DCF model include the time to maturity and calculated discount rate, which
includes an estimate of our specific risk premium. The MCS methodology
calculates the theoretical value of an option based on certain parameters,
including (i) the threshold of exercising the option, (ii) the price of the
underlying security, (iii) the time to expiration or expected term, (iv) the
expected volatility of the underlying security, (v) the risk-free rate, (vi) the
number of paths, and (vii) an estimated probability of subsequent financing as
defined in the 2022 Convertible Note. We recognized a gain of approximately $0.4
million for the change in fair value of derivative liability during the year
ended December 31, 2022 . There were no outstanding derivative liabilities during
the year ended December 31, 2021 .
Accrued Expenses
We incur periodic expenses such as cost associated with clinical trials and
non-clinical activities, manufacturing of pharmaceutical active ingredients and
drug products, regulatory fees and activities, fees paid to external service
providers and
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consultants, salaries and related employee benefits and professional fees. We
are required to estimate our accrued expenses, which involves reviewing
quotations and contracts, identifying services that have been performed on our
behalf and estimating the level of service performed and the associated cost
incurred for the service when we have not been invoiced or otherwise notified of
the actual cost. The majority of our service providers invoice monthly in
arrears for services performed or when contractual milestones are met. We
estimate accrued expenses as of each balance sheet date based on facts and
circumstances known at that time. We periodically confirm the accuracy of our
estimates with the service providers and make adjustments if necessary.
Costs incurred in research and development of products are charged to research
and development expense as incurred. Costs for preclinical studies and clinical
trial activities are recognized based on an evaluation of the vendors' progress
towards completion of specific tasks, using data such as patient enrollment,
clinical site activations or information provided by vendors regarding the
actual costs incurred. Payments for these activities are based on the terms of
individual contracts and payment timing may differ significantly from the period
in which services are performed. We determine accrual estimates through reports
from and discussions with applicable personnel and outside service providers as
to the progress or state of clinical trials, or the services completed.
Nonrefundable advance payments for goods or services that will be used in future
research and development activities are expensed when the activity is performed
or when the goods have been received, rather than when payment is made. The
estimates of accrued expenses as of each balance sheet date are based on the
facts and circumstances known at the time. Although we do not expect our
estimates to be materially different from those actually incurred, our estimates
and assumptions could differ significantly from actual costs, which could result
in increases or decreases in research and development expenses in future periods
when actual results are known.
Share-based Compensation
We account for share-based compensation using the fair value method of accounting which requires the grant of stock options to be recognized in the consolidated statements of operations based on the option's fair value at the grant date. Share-based compensation expense is generally recognized on a straight-line basis over the requisite service period for awards with time-based vesting. For awards with performance conditions, compensation cost is recognized from the time achievement of the performance criteria is probable over the remaining expected term. We estimate the fair value of our stock-based awards using the Black-Scholes option pricing model, which requires the input of valuation assumptions, some of which are highly subjective. Key valuation assumptions include:
•Expected dividend yield: the expected dividend is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock.
•Expected stock price volatility: due to our limited historical trading data as a public company, the expected volatility is derived from the average historical volatilities of publicly traded companies within the same industry that we consider to be comparable to our business over a period approximating the expected term. In evaluating comparable companies, we consider factors such as industry, stage of life cycle, financial leverage, size and risk profile.
•Risk-free interest rate: the risk-free interest rate is based on the
•Expected term: the expected term represents the period that the stock-based awards are expected to be outstanding. Due to limited history of stock option exercises, we estimate the expected term of stock options with service conditions based on the simplified method, which calculates the expected term as the average of the time-to-vesting and the contractual life of options. Pursuant to ASU 2018-07, we elected to use the contractual life of the option as the expected term for non-employee options. The expected term for performance options is the longer of the explicit or implicit service period.
Recent Accounting Pronouncements
For details of recent accounting pronouncements that we have adopted or are currently being evaluated, see "Note 1-Summary of Significant Accounting Policies-Recently Issued Accounting Standards" to the accompanying consolidated financial statements included in this Annual Report on Form 10-K.
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