XILIO THERAPEUTICS, INC. The following discussion and analysis is meant to provide material information relevant to an assessment of the financial condition and results of operations of our company, including an evaluation of the amounts and uncertainties of cash flows from operations and from outside resources, so as to allow investors to better view our company from management's perspective. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.
Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the section entitled "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K, 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 the section entitled "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements.
Overview
We are a clinical-stage biotechnology company discovering and developing tumor-activated immuno-oncology, or I-O, therapies with the goal of significantly improving outcomes for people living with cancer without the systemic side effects of current I-O treatments. We are leveraging our proprietary geographically precise solutions, or GPS, platform to build a pipeline of novel, tumor-activated molecules, including cytokines and other biologics, which are designed to optimize their therapeutic index by localizing anti-tumor activity within the tumor microenvironment. Current I-O therapies have
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curative potential for patients with cancer; however, their potential is significantly curtailed by systemic toxicity that results from activity of the therapeutic molecule outside the tumor microenvironment. Our molecules are engineered to localize activity within the tumor microenvironment with minimal systemic effects, resulting in the potential to achieve enhanced anti-tumor activity and increasing the population of patients who may be eligible to receive our medicines. Our most advanced tumor-activated, clinical-stage product candidates are XTX202, an interleukin 2, or IL-2, therapy, XTX301, an interleukin 12, or IL-12, therapy and XTX101, an Fc-enhanced, anti-CTLA-4 monoclonal antibody, or mAb. In addition to our clinical-stage product candidates, we are continuing to leverage our GPS platform and expertise in developing tumor-activated I-O therapies as we seek to expand our pipeline of discovery-stage programs and develop additional tumor-activated immunotherapies, including product candidates with a range of tumor targeting approaches.
To date, we have financed our operations primarily from proceeds raised through
private placements of preferred units and convertible preferred stock, a debt
financing and our initial public offering, or IPO, of common stock in
We are party to a sales agreement with
We have not generated any revenue from product sales, and do not expect to
generate any revenue from product sales for at least the next several years, if
at all. All of our programs are in early clinical or preclinical development.
Our ability to generate product revenue sufficient to achieve profitability will
depend heavily on the successful development and eventual commercialization of
one or more of our product candidates, if approved. Since inception, we have
incurred significant operating losses, including net losses of
? continue to advance our current research programs and conduct additional
research programs;
? advance our current product candidates and any future product candidates we may
develop into preclinical and clinical development;
? seek marketing approvals for product candidates that successfully complete
clinical trials, if any;
? obtain, expand, maintain, defend and enforce our intellectual property;
? hire additional research, clinical, regulatory, quality, manufacturing and
general and administrative personnel;
? establish a commercial and distribution infrastructure to commercialize
products for which we may obtain marketing approval, if any;
? continue to discover, validate and develop additional product candidates;
continue to manufacture increasing quantities of our current or future product
? candidates for use in preclinical studies, clinical trials and for any
potential commercialization;
? acquire or in-license other product candidates, technologies or intellectual
property; and
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? incur additional costs associated with current and future research, development
and commercialization efforts and operations as a public company.
As a result, we will need substantial additional capital to support our continuing operations and pursue our strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings and other sources of funding, such as collaborations, licensing arrangements or other strategic transactions. We may be unable to raise additional capital or enter into such other agreements or arrangements when needed on acceptable terms, or at all. Our failure to raise capital or enter into such agreements as and when needed could have a material adverse effect on our business, results of operations and financial condition.
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 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
Note Regarding the COVID-19 Pandemic
The impact of the COVID-19 pandemic continues to be widespread, rapidly-evolving and unpredictable on global societies, economies, financial markets, supply chains and business practices. The extent of the impact of the COVID-19 pandemic, including variants of the COVID-19 virus, on our business, operations, and clinical development timelines and plans remains uncertain. For a discussion regarding risks and uncertainties related to the impact of the COVID-19 pandemic and its potential impact on our business and financial results, please refer to our "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K.
Financial Operations Overview
Revenue
We have not generated any revenue since inception and do not expect to generate any revenue from the sale of products for at least the next several years, if at all. If our development efforts for our current or future 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 product sales or payments from third-party collaborators or licensors.
Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our discovery efforts, research activities and development and testing of our programs and product candidates. These expenses include:
personnel-related expenses, including salaries, bonuses, benefits and
? equity-based compensation expense for employees engaged in research and
development functions;
costs incurred with third-party contract development and manufacturing
? organizations, or CDMOs, to acquire, develop and manufacture materials for both
preclinical studies and current or future clinical trials;
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? costs of funding research performed by third parties that conduct research and
development and preclinical activities on our behalf;
costs incurred with third-party contract research organizations, or CROs, and
? other third parties in connection with the conduct of our current or future
clinical trials;
? costs of sponsored research agreements and outside consultants, including their
fees, equity-based compensation and related expenses;
? costs incurred to maintain compliance with regulatory requirements;
? fees for maintaining licenses and other amounts due under our third-party
licensing agreements;
? expenses incurred for the procurement of materials, laboratory supplies and
non-capital equipment used in the research and development process; and
depreciation, amortization and other direct and allocated expenses, including
? rent, insurance, maintenance of facilities and other operating costs, incurred
as a result of our research and development activities.
We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific deliverables 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 expenses or accrued research and development expenses. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are capitalized as assets, even when there is no alternative future use for the research and development. The capitalized amounts are expensed as the related goods are delivered or the services are performed.
We use our personnel and infrastructure resources for our discovery efforts, including the advancement of our GPS platform, developing programs and product candidates and managing external research efforts. A significant portion of our research and development costs have been, and will continue to be, external costs. We track these external costs, such as fees paid to CDMOs, CROs, preclinical study vendors and other third parties in connection with our manufacturing and manufacturing process development, clinical trials, preclinical studies and other research activities by program. Due to the number of ongoing programs and our ability to use resources across several projects, personnel-related expenses and indirect or shared operating costs incurred for our research and development programs are not recorded or maintained on a program-by-program basis.
Research and development activities are central to our business model. Product candidates in later stages of clinical development 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. We expect that our research and development expenses will continue to increase for the foreseeable future as we advance our programs and product candidates into and through clinical development, and as we continue to develop additional product candidates. We also expect our discovery research efforts and our related personnel costs will continue to increase and, as a result, we expect our research and development expenses, including costs associated with equity-based compensation, will continue to increase above historical levels. In addition, we may incur additional expenses related to milestone and royalty payments payable to third parties with whom we have entered into, or may enter into license, acquisition, option or other agreements to acquire the rights to future products and product candidates.
At this time, we cannot reasonably estimate or know the nature, timing and projected costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates or programs. This is due to the numerous risks and uncertainties associated with drug development, including the uncertainty of:
? the scope, timing, costs and progress of preclinical and clinical development
activities;
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? the number and scope of preclinical and clinical programs we decide to pursue;
? our ability to maintain our current research and development programs and to
establish new ones;
? our ability to establish an appropriate safety profile for our product
candidates with IND-enabling studies;
? our ability to hire and retain key research and development personnel;
? the costs associated with the development of any additional product candidates
we develop or acquire through collaborations;
? our successful enrollment in and completion of clinical trials;
our ability to successfully complete clinical trials with safety, potency and
? purity profiles that are satisfactory to the FDA or any comparable foreign
regulatory authority;
? our receipt of regulatory approvals from applicable regulatory authorities;
? our ability to successfully develop, obtain regulatory approval for, and then
successfully commercialize, our product candidates;
? our ability to commercialize products, if and when approved, whether alone or
in collaboration with others;
? the continued acceptable safety profiles of the product candidates following
approval, if any;
our ability to establish and maintain agreements with third-party manufacturers
? for clinical supply for our clinical trials and commercial manufacturing, if
any of our product candidates are approved;
? the terms and timing of any collaboration, license or other arrangement,
including the terms and timing of any milestone payments thereunder, if any;
our ability to obtain and maintain patent, trade secret and other intellectual
? property protection and regulatory exclusivity for our product candidates if
and when approved;
? general economic conditions, including inflation; and
the impact of public health crises, including epidemics and pandemics such as
? the COVID-19 pandemic, on our business, operations, strategy, goals and
anticipated milestones, as well as our response to such epidemics or pandemics.
A change in any of these variables with respect to the development of any of our product candidates would significantly change the costs, timing and viability associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any product candidate we may develop.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related costs, including salaries, bonuses, benefits, recruiting and equity-based compensation, for personnel in our executive, finance, legal, business development, human resources and other administrative functions. General and administrative expenses also include legal fees relating to corporate matters; professional and consulting fees for accounting, auditing, tax, human resources and administrative consulting services; insurance costs; and facility-related expenses, which include depreciation costs and other allocated expenses for rent, maintenance of facilities, and other general administrative costs. These costs relate to the operation of
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the business and are in support of but separate from the research and development function and our individual development programs. Costs to secure and defend our intellectual property are expensed as incurred and are classified as general and administrative expenses.
We anticipate that our general and administrative expenses will increase in the
future as we increase infrastructure to support the expected growth in our
research and development activities. We also expect to continue to incur
increased expenses associated with operating as a public company, including
increased costs of accounting, audit, legal, regulatory and tax-related services
attributable to maintaining compliance with exchange listing standards and
We also expect to incur additional intellectual property-related expenses as we file patent applications to protect intellectual property arising from our research and development activities.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income earned from
our cash and cash equivalents. This interest income is partially offset by
interest expense principally on the note payable under our debt arrangement with
PacWest and gains or losses associated with changes in the fair value of
contingent liabilities associated with the consummation of specified
transactions, including our IPO. Upon completion of our IPO in
Income Taxes
Since our inception, we have not recorded any
Utilization of our NOL carryforwards and research and development credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future in accordance with Section 382 of the Internal Revenue Code of 1986, or Section 382, as well as similar state provisions. These ownership changes may limit the amount of NOL and research and development credit carryforwards that can be utilized annually to offset future taxable income and taxes, respectively. In general, an ownership change as defined by Section 382 results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50% over a three-year period. Since our formation, we have raised capital through the issuance of units and capital stock on several occasions. These financings may have resulted in a change of control as defined by Section 382. We have not yet completed a detailed study of our inception to date ownership change activity.
In addition, we have not yet conducted a study of our research and development credit carry forwards. Such a study may result in an adjustment to our research and development credit carryforwards; however, until a study is completed and any adjustment is known, no amount is being presented as an uncertain tax position. A full valuation allowance has been provided against our research and development credits, and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the balance sheet or statement of operations and comprehensive loss if an adjustment were required.
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Income taxes are determined at the applicable tax rates adjusted for non-deductible expenses, research and development tax credits and other permanent differences. Our income tax provision may be significantly affected by changes to our estimates.
Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations for the years ended
Year Ended
December 31,
2022 2021 Change
Operating expenses
Research and development $ 59,201 $ 51,188 $ 8,013
General and administrative 29,948 23,856 6,092
Total operating expenses 89,149 75,044 14,105
Loss from operations (89,149) (75,044) (14,105)
Other income (expense), net
Other income (expense), net 927 (756) 1,683
Total other income (expense), net 927 (756) 1,683
Net loss $ (88,222) $ (75,800) $ (12,422) Research and Development Expenses
The following table summarizes our research and development expenses for the
years ended
Year Ended
December 31,
2022 2021 Change
XTX101 $ 6,374 $ 5,941 $ 433
XTX202 6,249 14,143 (7,894)
XTX301 11,475 4,697 6,778
Other early programs and indirect research
and development 14,037 10,595 3,442
Personnel-related (including equity-based
compensation) 21,066 15,812 5,254
Total research and development expenses
Research and development expenses increased by
driven by an increase of approximately
? activities, an increase of approximately
development activities and an increase of approximately
clinical development activities related to our Phase 1 clinical trial for
XTX301;
? research and development headcount and a corresponding increase of
approximately
of approximately
? development expenses, primarily driven by an increase in manufacturing
activities and external expenses related to preclinical research and
development activities; and
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clinical trial for XTX202, which were offset by decreases in manufacturing
? expenses and preclinical expenses for XTX202 of approximately
development in 2022.
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the
years ended
Year Ended
December 31,
2022 2021 Change
Personnel-related (including equity-based
compensation) $ 16,701 $ 12,708 $ 3,993
Professional and consulting fees 7,556 8,248 (692)
Facility-related and other general and
administrative expenses 5,691 2,900 2,791
Total general and administrative expenses
General and administrative expenses increased by
general and administrative headcount and a corresponding increase of
approximately
? approximately
includes approximately
resulting from the modification of previously issued stock options, partially
offset by a decrease of approximately
expenses, primarily driven by increases in costs incurred as a result of
? becoming a publicly traded company, including directors' and officers'
liability insurance and other corporate related costs associated with increased
overall corporate headcount; and
? These increases were partially offset by a
professional and consulting fees.
Other Income (Expense), Net
Other income (expense), net changed by
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have incurred significant operating losses and negative
cash flows from operations. We have not yet commercialized any of our product
candidates, which are in preclinical or early clinical development, and we do
not expect to generate revenue from sales of any products for several years, if
at all. To date, we have financed our operations primarily from proceeds raised
through private placements of preferred units and convertible preferred stock, a
debt financing and our IPO. Through
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In
Cash Flows
The following table provides information regarding our cash flows for each period presented (in thousands):
Year Ended
December 31,
2022 2021
Net cash provided by (used in):
Operating activities $ (75,723) $ (80,751)
Investing activities (1,867) (1,100)
Financing activities (69) 260,668
Net (decrease) increase in cash, cash equivalents and
restricted cash $ (77,659) $ 178,817
Operating Activities
Our cash flows from operating activities are greatly influenced by our use of cash for operating expenses and working capital requirements to support our business. We have historically experienced negative cash flows from operating activities as we invested in research and development of our product candidates, including preclinical studies, clinical trials, manufacturing and manufacturing process development. The cash used in operating activities resulted primarily from our net losses adjusted for non-cash charges, which are generally due to equity-based compensation, depreciation and amortization, as well as changes in components of operating assets and liabilities, which are generally due to increased expenses and timing of vendor payments.
During the year ended
During the year ended
Investing Activities
During the years ended
Financing Activities
During the year ended
During the year ended
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Capital Requirements
We expect our future capital requirements to increase substantially over time in connection with our ongoing research and development activities, particularly as we advance our current and planned clinical development of our product candidates and expand the research efforts and preclinical activities associated with our other existing programs and discovery platform. In addition, we expect to continue to incur additional costs associated with operating as a public company. As a result, we expect to incur substantial operating losses and negative operating cash flows for the foreseeable future.
Inflation generally affects us by increasing our cost of labor and certain
services. We do not believe that inflation had a material effect on our
financial statements included elsewhere in this Annual Report on Form 10-K.
However,
As of
Because of the numerous risks and uncertainties associated with product development, and because the extent to which we may enter into collaborations with third parties for the development of our product candidates is unknown, we may incorrectly estimate the timing and amounts of increased capital outlays and operating expenses associated with advancing the research and development of our product candidates. Our funding requirements and timing and amount of our operating expenditures will depend on many factors, including, but not limited to:
the scope, progress, results and costs of research and development for our
current and future product candidates, including our current and planned
? clinical trials for our clinical-stage cytokine product candidates, XTX202 and
XTX301, and ongoing preclinical development for our current and future product
candidates;
? the scope, prioritization and number of our research and development programs;
? the scope, costs, timing and outcome of regulatory review of our product
candidates;
the costs of securing manufacturing materials for use in preclinical studies,
? clinical trials and, for any product candidates for which we receive regulatory
approval, if any, commercial supply;
? the costs and timing of future commercialization activities for any of our
product candidates for which we receive regulatory approval;
? the amount and timing of revenue, if any, received from commercial sales of any
product candidates for which we receive regulatory approval;
the costs and timing of preparing, filing and prosecuting patent applications,
? maintaining and enforcing our intellectual property and proprietary rights and
defending any intellectual property-related claims;
the extent to which we may acquire or in-license other products, product
? candidates, technologies or intellectual property, as well as the terms of any
such arrangements;
our ability to seek, establish and maintain a collaboration to further develop
? XTX101, our Fc-enhanced, tumor-activated anti-CTLA-4, with a collaborator,
including the financial terms and any cost-sharing arrangements of any such
collaboration; and
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? the costs of continuing to expand our operations and operating as a public
company.
Identifying potential product candidates and 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 regulatory approval and achieve product sales. 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 several years, if ever. Accordingly, we will need to obtain substantial additional capital to achieve our business objectives.
Our expectation with respect to our ability to fund our currently planned operations is based on estimates that are subject to various risks and uncertainties. Our operating plan may change as a result of many factors currently unknown to management and there can be no assurance that our current operating plan will be achieved in the time frame anticipated by us, and we may need to seek additional capital sooner than anticipated.
Adequate additional capital may not be available to us on acceptable terms, or at all. Market volatility resulting from the COVID-19 pandemic, adverse changes in domestic and international fiscal, monetary and other policies and political relations, regional or global conflicts, uncertainty around global economic conditions, or other factors could also adversely impact our ability to access capital as and when needed. To the extent that we raise additional capital through the sale of equity or securities convertible into or exchangeable for equity, the ownership interest of our existing stockholders may be diluted, and the terms of such securities may include liquidation or other preferences that adversely affect the rights of our existing stockholders. Additional debt and preferred equity, if available, may also 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 and may require that we issue warrants, which could potentially dilute the ownership interest of our existing stockholders.
If we raise additional capital through collaborations, partnerships, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our intellectual property, future revenue streams, research programs or product candidates or products, and we may be required to grant licenses on terms that may not be favorable to us. If we are unable to raise additional capital through equity or debt offerings when needed, we may have to significantly delay, reduce or eliminate some or all of our product development or future commercialization efforts, or grant rights to develop and market product candidates or products that we would have otherwise preferred to develop and market ourselves.
Contractual Obligations
In the normal course of business, we enter into agreements that contain contractual obligations, of which the most significant to date include our loan and security agreement with PacWest, an operating lease for our corporate headquarters and certain license agreements.
Loan and Security Agreement
In
The loan agreement contains customary representations, warranties and covenants and also includes customary events of default, including payment defaults, breaches of covenants, a change of control and occurrence of a material adverse effect.
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Lease Agreement
We lease building space for our corporate headquarters at
Other Contractual Obligations
We are party to certain agreements that require us to pay third parties upon achievement of certain development, regulatory or commercial milestones or upon the consummation of specified transactions. Amounts related to contingent payments are not considered contractual obligations as they are contingent on the successful achievement of certain development, regulatory and commercial milestones that may not be achieved or upon the consummation of specified transactions that may not occur. We have not included payments contingent upon the achievement of certain development, regulatory or commercial milestones on our consolidated balance sheets. For further information regarding certain of our license agreements and amounts that could become payable in the future under those agreements, please see Note 7, Intellectual Property Licenses, to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
In addition, we are party to certain agreements with contract research organizations for clinical trials and clinical supply manufacturing and with vendors for preclinical research studies and other services and products for operating purposes. Such contracts are generally cancellable by us for convenience with up to 90 days of notice. We may be subject to certain termination fees or wind-down costs upon termination of these agreements. The exact amount of such costs are generally not fixed or estimable.
Critical Accounting Policies and Use of Estimates
Our management's discussion and analysis of our financial condition and results
of operations is based on our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in
While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies used in the preparation of our consolidated financial statements require the most significant judgments and estimates.
Research and Development Expenses and Related Accruals
Research and development expenses are comprised of costs incurred in performing research and development activities, including salaries, equity-based compensation and benefits, facilities costs and laboratory supplies, depreciation, manufacturing expenses and external costs of outside vendors engaged to conduct planned clinical development, preclinical development, manufacturing and manufacturing process development and other research support activities. All costs associated with research and development activities are expensed as incurred.
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued expenses as of each balance sheet date. This process involves reviewing open contracts and purchase orders, 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 the actual
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cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with certain service providers and make adjustments if necessary. The significant estimates in our accrued research and development expenses include the costs incurred for services performed by our vendors in connection with research and development activities for which we have not yet been invoiced. In certain instances, we prepay for services to be provided in the future. These amounts are initially capitalized and subsequently expensed as the services are performed.
We base our expenses related to research and development activities on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors that conduct research and development on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the research and development expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid balance accordingly. Nonrefundable advance payments for goods and services that will be used in future research and development activities are initially capitalized and subsequently expensed when the activity has been performed or when the goods have been received rather than when the payment is made.
Although we do not expect our estimates to be materially different from amounts incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting accrued amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts incurred.
Equity-Based Compensation
We issue equity-based awards to employees, directors and non-employees, generally in the form of stock options. We measure employee equity-based compensation based on the grant date fair value of the equity-based awards and recognize equity-based compensation expense on a straight-line basis over the requisite service period of the awards, which is generally the vesting period of the respective award, in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation-Stock Compensation, or ASC 718. For awards subject to performance conditions, we recognize equity-based compensation expense using an accelerated recognition method over the remaining period when we determine that achievement of the milestone is probable. We recognize forfeitures as they occur. We classify equity-based compensation expense in the consolidated statements of operations and comprehensive loss in the same manner in which the award recipient's salary and related costs are classified or in which the award recipient's service payments are classified, as applicable.
Determination of the Fair Value of Equity-Based Awards
We estimate the fair value of our stock options granted with service-based
conditions using the Black-Scholes option pricing model, which requires inputs
of subjective assumptions, including: (i) the expected volatility of our common
stock, (ii) the expected term of the award, (iii) the risk-free interest rate,
(iv) expected dividends and (v) the fair value of our common stock. We completed
our IPO in
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zero as we have no current plans to pay any dividends on common stock. We have elected to use the expected term for stock options granted to non-employees, using the simplified method, as the basis for the expected term assumption. However, we may elect to use either the contractual term or the expected term for stock options granted to non-employees on an award-by-award basis.
Determination of Fair Value of Common Stock
Subsequent to the completion of our IPO in
Prior to the completion of our IPO in
In addition to considering the results of these third-party valuations, our board of directors considered various objective and subjective factors to determine the fair value of our equity instruments as of each grant date, which may have been later than the most recently available third-party valuation date, including:
? the lack of liquidity of our equity as a private company;
the prices of our convertible preferred stock sold to outside investors in
? arm's length transactions and the rights, preferences and privileges of our
convertible preferred stock as compared to those of our common stock, including
the liquidation preferences of our convertible preferred stock;
? the progress of our research and development efforts, including the status of
preclinical studies for our product candidates;
? our stage of development and business strategy and the material risks related
to our business and industry;
? the achievement of enterprise milestones, including entering into strategic
collaborative and license agreements;
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the valuation of publicly traded companies in the life sciences and
? biotechnology sectors, as well as recently completed mergers and acquisitions
of peer companies;
? any external market conditions affecting the biotechnology industry and trends
within the biotechnology industry;
? the likelihood of achieving a liquidity event, such as an initial public
offering or a sale of our company, given prevailing market conditions; and
? the analysis of initial public offerings and the market performance of similar
companies in the biotechnology industry.
There are significant judgments and estimates inherent in these valuations. These judgments and estimates included assumptions regarding our future operating performance, the stage of development of our product candidates, the timing and probability of a potential initial public offering or other liquidity event and the determination of the appropriate valuation methodology at each valuation date. The assumptions underlying these valuations represented management's best estimates, which involved inherent uncertainties and the application of management judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our equity-based compensation expense could be materially different.
Emerging Growth Company and Smaller Reporting Company Status
As an emerging growth company, or EGC, under the Jumpstart Our Business Startups
Act of 2012, or JOBS Act, we may delay the adoption of certain accounting
standards until such time as those standards apply to private companies. Other
exemptions and reduced reporting requirements under the JOBS Act for EGCs
include presentation of only two years of audited financial statements in a
registration statement for an IPO, an exemption from the requirement to provide
an auditor's report on internal controls over financial reporting pursuant to
Section 404(b) of the Sarbanes-Oxley Act of 2002, an exemption from any
requirement that may be adopted by the
In addition, the JOBS Act provides that an EGC can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an EGC to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected not to "opt out" of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we can adopt the new or revised standard at the time private companies adopt the new or revised standard and may do so until such time that we either (1) irrevocably elect to "opt out" of such extended transition period or (2) no longer qualify as an emerging growth company. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
We may remain classified as an EGC until
We are also a "smaller reporting company," meaning that the market value of our
shares held by non-affiliates is less than
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Recent Accounting Pronouncements
For a description of recent accounting pronouncements, see Note 2 of the notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
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