KRONOS BIO, INC. The following discussion and analysis should be read in conjunction with our financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including but not limited to those described in the "Risk Factors" section of this Annual Report. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read "Forward-Looking Statements" and "Risk Factors."
Overview
We are an integrated discovery through clinical development biopharmaceutical company, with a focus on developing therapeutics that target the dysregulated transcription that causes cancer and other serious diseases. We are enrolling patients in clinical trials for two compounds. Our product engine, which includes our proprietary small molecule microarray (SMM) screening platform, provides us with the capability to map and target transcription regulatory networks (TRNs) in a differentiated manner to enable discovery of novel compounds and improve our ability to discover and optimize clinical development candidates. In addition to our own internal preclinical programs, we have entered into a collaboration agreement withGenentech, Inc. , a member of the Roche Group (Genentech ). We are developing KB-0742, our internally discovered, oral cyclin dependent kinase 9 (CDK9) inhibitor, for the treatment of MYC-amplified and other transcriptionally addicted solid tumors. We have initiated the Phase 2 portion of our Phase 1/2 clinical trial. KB-0742 was generated from our optimization of a compound that was identified using our SMM platform. We are also developing lanraplenib, our next generation orally-administered SYK inhibitor, and are in the dose escalation stage of our Phase 1b/2 clinical trial. This clinical trial will evaluate lanraplenib in combination with gilteritinib in patients with relapsed or refractory FLT3- mutated AML. Lanraplenib has multiple advantages over our first-generation SYK inhibitor, entospletinib. InNovember 2022 , we announced the decision to close enrollment of our Phase 3 clinical trial of entospletinib in combination with intensive chemotherapy in patients with newly diagnosed NPM-1 mutated AML for strategic reasons, and study closure is anticipated in mid-2023. In our research efforts, we are leveraging our product engine to drive multiple oncology discovery programs targeting dysregulated transcription factors and their associated TRNs. Some of the most powerful oncogenes in all of human cancer encode transcription factors: proteins that bind to specific DNA sequences on the genome and control how sets of genes are turned on and off. Transcription factors historically have been difficult to target in drug development because they are typically intrinsically disordered, adopting a functional structure only when assembled with a complex of cofactors in the nucleus on the genome. Transcription factors with aberrant expression or activity result in dysregulated TRNs, which are frequently responsible for reprogramming healthy cells into cancerous tumor cells. Therapeutically modulating dysregulated transcription factors requires a sophisticated and holistic approach due to their complexity and their regulation of complex TRNs in a context-dependent manner. Based on this work, inNovember 2021 , we announced the advancement of two programs, one focused on the MYC TRN and one focused on the androgen receptor (AR) TRN, which we are continuing to advance.
In addition, in
105
--------------------------------------------------------------------------------
Since our formation, we have incurred significant operating losses, primarily
from costs incurred in connection with research and development activities and
general and administrative costs associated with our operations. Our net losses
were $133.2 million and $151.1 million for the years ended December 31, 2022 and
2021, respectively. As of December 31, 2022 , we had an accumulated deficit of
$396.2 million . As of December 31, 2022 , we had $247.9 million of cash, cash
equivalents and investments. We expect to continue to incur net losses for the
foreseeable future, and we expect to continue to make significant investments in
research and development, general and administrative and capital expenditures.
106
--------------------------------------------------------------------------------
Strategic Agreements
Genentech Collaboration Agreement
OnJanuary 6, 2023 , we entered into a Collaboration and License Agreement withGenentech , a member of the Roche Group. Pursuant to the agreement, the parties have agreed to initially collaborate on two discovery research programs in oncology, each focused on a designated transcription factor, to discover small-molecule GLP-Tox-ready candidates that modulate transcription factor targets selected byGenentech . Each discovery research program will primarily consist of (i) a mapping phase with the goal of identifying the transcription regulatory network for such designated transcription factor, and (ii) a screening phase having the goal of identifying and characterizing multiple screening hits suitable for nomination as a preclinical development program. We will lead discovery and research activities under the discovery research programs and will use our proprietary drug discovery platform, including our SMM, for hit finding. Following the completion of initial discovery and research activities,Genentech will have the exclusive right to pursue further preclinical and clinical development and commercialization of compounds identified in the discovery research programs and designated byGenentech (each, a Hit Program). In connection with the agreement, we received an upfront payment of$20.0 million fromGenentech . In addition, we are eligible for additional milestone payments upon achievement of certain preclinical, clinical and regulatory (including first-sale) milestones, totaling up to$177.0 million for the first development candidate per hit program, and are eligible to receive net sales milestones of up to$100.0 million for the first licensed product per hit program. We are also eligible to receive tiered royalties in the low- to high-single digits on any products that are commercialized byGenentech as a result of the collaboration.
The term of the discovery research programs will be up to 24 months, which may be extended by six months at our option subject to satisfying certain conditions.
Tempus R&D Services Agreement
InOctober 2021 , we entered into an agreement for research and development services (Tempus Agreement) withTempus Labs, Inc. (Tempus ), pursuant to whichTempus agreed to provide us with research and development services for a period of three years. The three primary services are analytical services, data licensing, and organoid services. We intend to utilize the services contemplated under the Tempus Agreement to advance the development of KB-0742 and lanraplenib. In consideration for the access to the services throughout the term of the Tempus Agreement, we have agreed to pay an annual minimum commitment of$1.5 million in year one,$2.0 million in year two, and$2.5 million in year three. Payments are made in quarterly installments. As ofDecember 31, 2022 , we have paid$1.1 million under the Tempus Agreement. In addition, we are required to make milestone payments upon successful achievement of certain regulatory milestones for KB-0742, lanraplenib, and other discovery pipeline compounds up to a combined maximum of$22.4 million . For each milestone payment that becomes due, we have the right to pay up to 50% of such milestone payment amount in shares of our common stock as long as certain regulatory requirements are met. 107 --------------------------------------------------------------------------------
Gilead Asset Purchase Agreement
InJuly 2020 , we entered into the Gilead Asset Purchase Agreement, pursuant to which we acquired certain assets from and assumed certain liabilities of Gilead related to lanraplenib or entospletinib, and patents and other intellectual property covering or related to the development, manufacture and commercialization of lanraplenib or entospletinib. In consideration for such assets, on the date of the Gilead Asset Purchase Agreement, we made a$3.0 million upfront cash payment and issued a$3.0 million principal amount convertible promissory note, which was settled in exchange for 188,567 shares of common stock in connection with the closing of our IPO at a settlement price of$16.15 per share. We also made a$0.7 million payment to reimburse Gilead for certain liabilities we assumed pursuant to the Gilead Asset Purchase Agreement. In addition, we are required to make milestone payments upon successful achievement of certain regulatory and sales milestones for lanraplenib, entospletinib and other SYK inhibitor compounds covered by the patent rights acquired pursuant to the Gilead Asset Purchase Agreement and developed by us as a back-up to entospletinib or lanraplenib (Other Compounds). Upon successful completion of certain regulatory milestones inthe United States ,European Union andUnited Kingdom for lanraplenib, entospletinib and any Other Compounds, across up to two distinct indications, we will be required to pay to Gilead an aggregate total of$51.3 million . Upon achieving certain thresholds for the aggregate annual net sales of lanraplenib, entospletinib, and any Other Compounds combined, we would owe to Gilead potential milestone payments totaling$115.0 million . For the year endedDecember 31, 2022 , there have been no milestone payments made to Gilead. As ofDecember 31, 2021 , we made a$29.0 million milestone payment to Gilead which became payable upon initiation of our registrational Phase 3 clinical trial of entospletinib in combination with induction chemotherapy in acute myeloid leukemia patients with NPM1 mutations. Gilead is also eligible to receive (i) tiered marginal royalties ranging from high-single digits to the mid-teens on annual worldwide net sales of lanraplenib, (ii) tiered marginal royalties ranging from the very low-teens to high-teens on annual worldwide net sales of entospletinib, and (iii) tiered marginal royalties ranging from the low single digits to mid-single digits on annual worldwide net sales of any Other Compounds. The royalties in the foregoing clauses are subject to reduction, on a country-by-country basis, for products not covered by certain claims within the assigned patents, for generic entry and, in the case of lanraplenib and entospletinib, for any royalties paid for future licenses of third-party intellectual property required to develop or commercialize lanraplenib or entospletinib. Our royalty obligation with respect to a given product in a given country begins upon the first commercial sale of such product in such country and ends on the latest of (i) expiration of the last claim of a defined set of the assigned patent rights covering such product in such country, (ii) loss of exclusive data or marketing rights to such product in such country or (iii) 10 years from the first commercial sale of such product in such country. Under the Gilead Asset Purchase Agreement, we are required to use commercially reasonable efforts to develop, obtain regulatory approval for and commercialize either lanraplenib or entospletinib.
Harvard License Agreement
InJanuary 2018 , we entered into a license agreement with President and Fellows ofHarvard College (Harvard), pursuant to which Harvard granted us a non-exclusive, worldwide, royalty-free license to certain patent rights covering aspects of our SMM platform. We paid a one-time license fee in the amount of$10,000 on the date of the agreement and an annual license maintenance fee of$20,000 on each of the first two anniversaries. We are required to pay$25,000 on each subsequent anniversary until the last to expire of any valid claim included in the licensed patents. 108 --------------------------------------------------------------------------------
Components of Our Results of Operations
Operating Expenses
Our operating expenses consisted of research and development expenses and general and administrative expenses.
Research and Development Expenses
Our research and development expenses consist primarily of direct and indirect costs incurred in connection with our therapeutic discovery efforts and the preclinical and clinical development of our product candidates, as well as the development of our product engine.
Direct costs include:
•expenses incurred under agreements with contract research organizations (CROs) and other vendors that conduct our clinical trials and preclinical activities;
•costs of outside consultants, including their fees, stock-based compensation and related travel expenses;
•costs of acquiring, developing, and manufacturing clinical trial materials and lab supplies; and
•payments made under third-party strategic agreements.
Indirect costs include:
•personnel costs, which include salaries, benefits, and other employee related costs, including stock-based compensation, for personnel engaged in research and development functions;
•costs related to compliance with regulatory requirements; and
•facilities costs, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies. We expense research and development costs as the services are performed or the goods are received. We recognize costs for certain development activities based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors and our internal management. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our financial statements as prepaid or accrued research and development expenses. Because we are working on multiple research and development programs at any one time, we intend to track our direct costs by the stage of program, clinical or preclinical. However, our internal costs, employees and infrastructure are not directly tied to any one program and are deployed across multiple programs. As such, we do not track indirect costs on a specific program basis.
Our research and development expenses may vary significantly based on a variety of factors, such as:
•the scope, rate of progress, and results of our preclinical development activities;
•per patient trial costs;
•the number of trials required for approval;
•the number of sites included in the trials;
•the number of patients that participate in the trials;
•the countries in which the trials are conducted;
•uncertainties in clinical trial design and patient enrollment or drop out or discontinuation rates;
•potential additional safety monitoring requested by regulatory agencies;
109
--------------------------------------------------------------------------------•the duration of patient participation in the trials and follow-up;
•the safety and efficacy of our product candidates;
•the timing, receipt, and terms of any approvals from applicable regulatory
authorities including the FDA and non-
•significant and changing government regulation and regulatory guidance;
•potential additional trials requested by regulatory agencies;
•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;
•the extent to which we establish additional strategic collaborations or other arrangements;
•the impact of any business interruptions to our operations or to those of the third parties with whom we work; and
•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 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.
We expect to continue to make significant investments into research and development for the foreseeable future as we continue to identify and develop additional product candidates and as more of our product candidates move into later stages of clinical development, which typically have higher development costs than those in earlier stages of clinical development due to the increased size and duration of later-stage clinical trials. The process of conducting the necessary preclinical and clinical research to obtain regulatory approval is costly and time-consuming. The actual probability of success for our product candidates may be affected by a variety of factors. We may never succeed in achieving regulatory approval for any of our product candidates. Further, a number of factors, including those outside of our control, could adversely impact the timing and duration of our product candidates' development, which could increase our research and development expenses.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs, which include salaries, benefits and other employee related costs, such as stock-based compensation, for personnel in our executive, finance, corporate and business development, and administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing, tax and consulting services; insurance costs; recruiting costs; travel expenses; and facilities-related costs. We expect to maintain the general and administrative function for the foreseeable future to support personnel in research and development and to support our operations generally as we execute on our research and development activities. We also expect to continue to incur expenses associated with operating as a public company, including costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing andSEC requirements, director and officer insurance costs, and investor and public relations costs.
Interest and Other Income, Net
Interest and other income, net primarily consists of interest earned on our cash, cash equivalents and investments.
Results of Operations
110
--------------------------------------------------------------------------------
Comparison of Years Ended
The following table summarizes our results of operations for the years endedDecember 31, 2022 and 2021: Year Ended December 31, Change 2022 2021 2022 vs 2021 (in thousands) Operating expenses: Research and development$ 93,715 $ 112,903 $ (19,188) General and administrative 43,400 38,495 4,905 Total operating expenses 137,115 151,398 (14,283) Loss from operations (137,115) (151,398) 14,283 Other income (expense), net: Interest and other income, net 3,911 320
3,591
Total other income (expense), net 3,911 320 3,591 Net loss$ (133,204) $ (151,078) $ 17,874
Research and Development Expenses
The following table summarizes our research and development expenses for the
years ended
Year Ended December 31, Change
2022 2021 2022 vs 2021
(in thousands)
Direct Costs(1) $ 50,142 $ 74,640 $ (24,498)
Indirect Costs:
Personnel 35,734 30,819 4,915
Facilities, depreciation and other expenses(1) 7,839 7,444 395
Total research and development expenses $ 93,715 (1) Certain costs have been reclassified from Facilities, depreciation and other expenses to Direct Costs, and the prior period amounts have been adjusted by$6.1 million for comparison purposes. Research and development expenses were$93.7 million for the year endedDecember 31, 2022 , compared to$112.9 million for the year endedDecember 31, 2021 . The decrease of$19.2 million was primarily due to a decrease in Direct Costs related to a$29.0 million milestone payment in prior year with no associated milestone payment in the current year, partially offset by an increase in outside and consulting research expenses of$5.0 million related to an increase in research and development activities and increases in personnel costs of$3.2 million and stock-based compensation of$1.8 million , both of which are primarily attributable to increased research and development personnel headcount.
General and Administrative Expenses
General and administrative expenses were$43.4 million for the year endedDecember 31, 2022 compared to$38.5 million for the year endedDecember 31, 2021 . The increase of$4.9 million was primarily due to an increase in stock-based compensation of$3.1 million and an increase of$2.4 million in personnel costs, both of which are primarily attributable to increased general and administrative personnel headcount. The increase in general and administrative expenses was partially offset by a decrease of$0.9 million in professional fees, primarily attributable to lower insurance, legal and outside consultant costs.
Interest and Other Income, Net
Interest and other income, net was$3.9 million and$0.3 million for the years endedDecember 31, 2022 and 2021, respectively. The$3.6 million increase was due to higher interest rates during the twelve months endedDecember 31, 2022 . 111 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Sources of Liquidity
To date, we have incurred significant operating losses and negative cash flows from operations. We have not yet commercialized any products and we do not expect to generate revenue from sales of any product candidates for several years, if ever. Prior to our IPO, our operations were financed primarily by net proceeds from the sale and issuance of our convertible preferred stock and convertible notes, totaling aggregate gross proceeds of$278.2 million . Upon completion of our IPO onOctober 14, 2020 , we sold an aggregate of 15,131,579 shares of our common stock including 1,973,684 shares of common stock sold pursuant to the full exercise of the underwriters' option to purchase additional shares at a price of$19.00 per share and received approximately$263.7 million in net proceeds after deducting underwriting discounts and commissions and offering expenses. As ofDecember 31, 2022 , we had cash, cash equivalents and investments of$247.9 million . We expect that our cash, cash equivalents and investments as ofDecember 31, 2022 , will enable us to fund our planned operating expenses and capital expenditure requirements into the second half of 2025.
Material Cash Requirements
Our primary use of cash is to fund operating expenses, which consist primarily
of research and development expenditures related KB-0742 and lanraplenib, the
wind-down of the entospletinib trial and our other research efforts, and to a
lesser extent, general and administrative expenditures. Cash used to fund
operating expenses is impacted by the timing of when we pay these expenses, as
reflected in the change in our outstanding accounts payable and accrued
expenses.
Our product candidates are still in the early stages of clinical and preclinical
development, and the outcomes of these efforts are uncertain. Accordingly, we
cannot estimate the actual amounts necessary to successfully complete the
development and commercialization of our product candidates or whether, or when,
we may achieve profitability. Until such time, if ever, as we can generate
substantial product revenue, we expect to finance our cash needs through a
combination of equity or debt financings and collaboration agreements. If we do
raise additional capital through public or private equity offerings, the
ownership interest of our existing stockholders will be diluted, and the terms
of these securities may include liquidation or other preferences that adversely
affect our existing stockholders' rights. If we raise additional capital through
debt financing, we may be subject to covenants limiting or restricting our
ability to take specific actions, such as incurring additional debt, making
capital expenditures or declaring dividends. If we are unable to raise capital
when needed, we will need to delay, reduce or terminate planned activities to
reduce costs. Doing so will likely harm our ability to execute our business
plans.
112
--------------------------------------------------------------------------------Cash Flows
The following table summarizes our sources and uses of cash for each of the
periods presented:
Year Ended December 31,
2022 2021
(in thousands)
Cash used in operating activities $ (90,926) $ (117,924)
Cash provided by (used in) investing activities (32,222) 63,724 Cash provided by financing activities
851 4,460
Net decrease in cash and cash equivalents
Operating Activities During the year endedDecember 31, 2022 , cash used in operating activities was$90.9 million , which was primarily attributable to our net loss of$133.2 million and$6.2 million net cash provided by changes in our operating assets and liabilities, partially offset by non-cash charges of$36.1 million . The non-cash charges consisted of$31.1 million of stock-based compensation,$2.2 million of noncash lease expense,$2.3 million of depreciation and amortization, and$1.0 million change in accrued interest on marketable securities, partially offset by a decrease related to net amortization and accretion of investment securities of$0.5 million . Net cash provided by changes in our operating assets and liabilities during the year endedDecember 31, 2022 consisted of a decrease of$2.7 million in right of use assets and liabilities, a decrease of$1.1 million in other long term assets, partially offset by, an increase of$1.6 million in prepaid and other current assets and an increase in accounts payable and accrued expenses of$8.2 million . The decrease in right of use assets was the result of regular amortization. The increase in accounts payable and accrued expenses was primarily due to increases in accrued compensation and external research and development costs. During the year endedDecember 31, 2021 , cash used in operating activities was$117.9 million , which was primarily attributable to our net loss of$151.1 million , partially offset by non-cash charges of$34.8 million . The non-cash charges primarily consisted of$26.2 million in stock-based compensation, net amortization and accretion of investment securities of$4.0 million , noncash lease expense of$2.1 million , depreciation and amortization of$2.0 million , and cash used by changes in our operating assets and liabilities of$1.6 million . Net cash used by changes in our operating assets and liabilities of$1.6 million during the year endedDecember 31, 2021 consisted of a decrease of$2.3 million in other liabilities and a decrease of$1.0 million in prepaid and other current assets partially offset by a net increase in accounts payable and accrued expenses of$1.6 million and an increase of$0.1 million in other assets. The decrease in other liabilities was primarily the result of an decrease in the unvested early exercised share liability. The net increase in accounts payable and accrued expenses was largely due to increases in accrued compensation and external research and development costs
Investing Activities
During the year endedDecember 31, 2022 , cash used in investing activities was$32.2 million , consisting of$366.6 million of net purchases of marketable securities and$0.6 million of purchases of property and equipment, partially offset by$335.0 million in maturities of marketable securities. During the year endedDecember 31, 2021 , cash provided by investing activities was$63.7 million , consisting of$226.2 million in maturities of marketable securities, partially offset by net investment purchases of$158.3 million and$4.3 million for the purchase of property and equipment.
Financing Activities
During the year ended
During the year ended
113
--------------------------------------------------------------------------------Contractual Obligations and Commitments
InMarch 2020 , we entered into a lease agreement for our research and development operations facility at301 Binney Street ,Cambridge, Massachusetts (Cambridge facility). The initial annual base rent was$4.1 million with rent payments escalating 3.0% annually after the initial 12 payments. As discussed in Note 2, we executed a letter of credit for$2.0 million in connection with the lease. The remaining lease term is 8.2 years. InFebruary 2021 , we entered into a new lease agreement for our office space inSan Mateo, California , in order to move from our former suites to a single, larger suite totaling 17,340 square-feet, and relocated in the third quarter of 2021. We accounted for this change in lease term of the original suites as a modification of the originally amended lease. The initial annual base rent for theSan Mateo facility was$1.2 million , and such amount will increase by 3% annually on each anniversary of the new premises commencement date. In connection with the larger space leased, we also made an additional one-time cash security deposit in the amount of$59,000 , bringing our total security deposit to$0.1 million . The new lease commenced inApril 2021 while tenant improvements were being made and the new lease agreement extended the termination date fromApril 30, 2025 toAugust 31, 2026 . Pursuant to the Gilead Asset Purchase Agreement, we are obligated to make milestone payments upon the achievement of specified regulatory and clinical milestones as well as royalty payments. The payment obligations under this agreement are contingent upon future events, such as our achievement of specified milestones or generating product sales. We are currently unable to estimate the timing or likelihood of achieving these milestones or generating future product sales. See the subsection titled "-Strategic Agreements-Gilead Asset Purchase Agreement" above. Pursuant to the Tempus Agreement, we are obligated to make milestone payments upon the achievement of specified regulatory milestones as well as annual minimum commitments in quarterly installments. Some payment obligations under this agreement are contingent upon future events, such as our achievement of specified milestones. We are currently unable to estimate the timing or likelihood of achieving these milestones. See the subsection titled "-Strategic Agreements-Tempus R&D Services Agreement" above. We enter into contracts in the ordinary course of business with CROs for clinical trials, preclinical and clinical research studies and testing, manufacturing and other services and products for operating purposes. These contracts do not contain any minimum purchase commitments and are generally terminable by us upon prior notice. Payments due upon termination generally consist only of payments for services provided and expenses incurred up to the date of termination and certain wind down costs that may be associated with the termination of a contract or clinical trial program.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of financial condition and results of operations is based on our financial statements, which have been 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 assumptions that affect the reported amounts of assets and 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 an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies and estimates are described in more detail in the notes to our financial statements included elsewhere in this Annual Report on Form 10-K, we consider the assumptions and estimates associated with accrued research and development expenditures and stock-based compensation to have the most significant impact on our financial statements and therefore we consider these to be our critical accounting policies and estimates. 114 --------------------------------------------------------------------------------
As part of the process of preparing our financial statements, we are required to estimate our accrued research and development and manufacturing expenses. 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 costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears for services performed on a pre-determined schedule or when contractual milestones are met; however, some require advanced payments. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. Examples of estimated accrued research and development expenses include fees paid to:
•CROs in connection with performing research activities on our behalf and conducting preclinical studies and clinical trials on our behalf;
•investigative sites or other service providers in connection with clinical trials;
•vendors in connection with preclinical and clinical development activities; and
•vendors related to product manufacturing and development and distribution of preclinical and clinical supplies.
We base our expenses related to preclinical studies and clinical trials on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple CROs that conduct and manage preclinical studies and clinical trials on our behalf. The financial terms of these agreements are subject to negotiation and vary from contract to contract, which 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. Payments under some of these contracts depend on factors such as the completion of scientific milestones. In accruing 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 amount of prepaid expense 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 us reporting amounts that are too high or too low in any particular period. To date, we have not made any material adjustments to our prior estimates of accrued research and development expenses. Stock-Based Compensation We measure stock options and other stock-based awards granted to employees, directors, and non-employees based on their fair value on the date of grant and recognize stock-based compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award. We recognize the impact of forfeitures on stock-based compensation expense as forfeitures occur. We apply the straight-line method of expense recognition to all awards with only service-based vesting conditions. We estimate the fair value of each stock option grant on the date of grant using the Black-Scholes option-pricing model. This model requires the use of highly subjective assumptions to determine the fair value of stock-based awards, including: •Fair Value of Common Stock-For grants before the completion of our IPO inOctober 2020 when we were a privately held company with no public market for our common stock, the fair value of our common stock underlying share-based awards was estimated on each grant date by our Board of Directors. In order to determine the fair value of our common stock underlying option grants, our Board of Directors considered, among other things, valuations of our common stock prepared by an unrelated third-party valuation firm in accordance with the guidance provided by theAmerican Institute of Certified Public Accounts Practice Guide , Valuation of Privately-Held-Company Equity Securities Issued as Compensation. For all grants subsequent to our IPO inOctober 2020 , the fair value of common stock was determined by taking the closing price per share of common stock as reported on theNasdaq Stock Market . 115 -------------------------------------------------------------------------------- •Expected Term-The expected term represents the period that the stock-based awards are expected to be outstanding. We use the simplified method to determine the expected term, which is based on the average of the time-to-vesting and the contractual life of the options. •Expected Volatility-The expected volatility for the years endedDecember 31, 2022 and 2021 is estimated based on the average historical volatilities of common stock of comparable publicly traded entities over a period equal to the expected term of the stock option grants. The comparable companies are chosen based on their size, stage in the product development cycle or area of specialty. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available.
•Risk-Free Interest Rate-The risk-free interest rate is based on the
•Expected Dividend-We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we used an expected dividend yield of zero.
See Note 9 to our financial statements included elsewhere in this Annual Report to Form 10-K for information concerning certain of the specific assumptions we used in applying the Black-Scholes option-pricing model to determine the estimated fair value of our stock options granted in the years endedDecember 31, 2022 and 2021.
Recently Issued and Adopted Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially
impact our financial position and results of operations is provided in Note 2 to
our financial statements included elsewhere in Item 8 of Part II of this Annual
Report on Form 10-K.
116
--------------------------------------------------------------------------------
© Edgar Online, source
