RUBIUS THERAPEUTICS Objective
The purpose of the following discussion and analysis is to provide material information relevant to an assessment of our financial condition and results of operations from management's perspective, including to describe and explain key trends, events and other factors that impacted our reported results and that are reasonably likely to impact our future performance. As previously announced, onFebruary 20, 2023 , following the conclusion of our review of strategic alternatives, our Board of Directors unanimously approved the dissolution and liquidation of Rubius, or the Dissolution, pursuant to a plan of complete liquidation and dissolution, or the Plan of Dissolution, which plan is subject to stockholder approval. As such, the following discussion and analysis of our business, financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K, and should also take into account our recent announcement regarding our planned Dissolution. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans, operations, intellectual property and other matters related to our business, includes forward-looking statements that involve risks and uncertainties, including risks associated with our planned Dissolution. As a result of many factors, including those factors set forth in the "Risk Factors" section of this Annual Report, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.
Overview
We are a biopharmaceutical company that has developed a platform and pipeline focused on creating an entirely new class of cellular medicines called Red Cell Therapeutics, or RCTs, for the treatment of cancer and autoimmune diseases. OnNovember 2, 2022 , we announced that, in light of our financial condition and the early stage of our programs, our Board of Directors approved a plan to review strategic alternatives, including a sale or merger of the Company or one or more sales of our assets, and to significantly and immediately reduce our operations, which we refer to as the "strategic plan." In connection with the strategic plan, we terminated 42 of our employees (representing 82% of our then-current employee base), leaving a core team of individuals to lead the strategic review process. OnFebruary 20, 2023 , following the conclusion of our review of strategic alternatives, our Board unanimously approved the dissolution and liquidation of the Company pursuant to a Plan of Dissolution, which plan is subject to stockholder approval.
The Company cautions that trading in the Company's securities is highly speculative and poses substantial risks. Trading prices for the Company's securities may bear little or no relationship to the actual value realized, if any, by holders of the Company's securities. Accordingly, the Company urges extreme caution with respect to existing and future investments in its securities.
Nasdaq Delisting Notification
As previously disclosed, onJuly 27, 2022 , we received a deficiency letter from theListing Qualifications Department , or the Staff, ofThe Nasdaq Stock Market LLC , or Nasdaq, notifying us that, for the last 30 consecutive business days, the bid price for our common stock had closed below the$1.00 per share minimum bid price requirement for continued inclusion on the Nasdaq Global Select Market pursuant to Nasdaq Listing Rule 5450(a)(1) (which we refer to as the "Minimum Bid Price Requirement"). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), or the Compliance Period Rule, we were provided a period of 180 calendar days, or untilJanuary 23, 2023 (which we refer to as the "Compliance Date"), to regain compliance with the Minimum Bid Price Requirement. OnFebruary 6, 2023 , we were notified by the Staff that, based upon our non-compliance with the Minimum Bid Price Requirement as ofJanuary 23, 2023 , and the Staff's determination that we are a "public shell" as that term is defined in Nasdaq Listing Rule 5101, we would be delisted at the opening of business onFebruary 15, 2023 unless we were to timely request a hearing before aNasdaq Hearings Panel , or the Panel, to address the deficiencies and present a plan to regain compliance. OnFebruary 13, 2023 , we timely requested a hearing before the Panel, which request will stay any further delisting action by the Staff at pending the ultimate outcome of the hearing and the expiration of any extension that may be granted by the Panel, unless we determine to withdraw our hearing request in connection with the Dissolution. Unless we determine to withdraw our hearing request, our common stock will remain listed and eligible for trading on Nasdaq pending the ultimate conclusion of the hearing process. 30
--------------------------------------------------------------------------------
Table of Contents
However, there can be no assurance that we will successfully appeal the delisting determination, or that, if successful, we will be able to maintain compliance with any of the other Nasdaq continued listing requirements. Further, in connection with our planned Dissolution, we may determine not to move forward with the hearing.
Components of Our Results of Operations
Revenue
To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products given our significant reduction in operations and focus on review of strategic alternatives.
Operating Expenses
Research and Development Expenses
Research and development expenses consist of costs incurred for our research activities conducted during the periods presented, including our drug discovery efforts, and the development and manufacturing of our since-discontinued product candidates during such time, which include:
•employee-related expenses, including salaries, related benefits and stock-based compensation expense for employees engaged in research and development functions;
•expenses incurred in connection with the preclinical and clinical development of such product candidates and the wind-down of our research and clinical programs, including under agreements with third parties, such as consultants, contractors and contract research organizations, or CROs; •the cost of developing and scaling our manufacturing process and the manufacturing of product candidates for use in our preclinical studies and clinical trials, including those produced in our manufacturing facility as well as components produced under agreements with third parties, such as consultants, contractors and contract manufacturing organizations, or CMOs;
•laboratory supplies and research materials;
•facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and insurance; and
•payments made under third-party licensing agreements.
We expense research and development costs as incurred. Advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed. Our direct research, manufacturing and development expenses are tracked on a program-by-program basis. These consist mostly of fees, reimbursed materials, testing and other costs paid to consultants, contractors, CMOs and CROs, as well as the cost of materials incurred for internal manufacturing. In addition, we allocate the cost of operating our manufacturing facility to research and development program costs, consisting of associated personnel costs, other than stock-based compensation expense, and manufacturing facility costs, including depreciation. We do not allocate costs associated with our platform development, early-stage research and shared research and development, including associated personnel costs, laboratory supplies, non-manufacturing facilities expenses and other indirect costs, to research and development programs, because these costs are deployed across multiple programs and our technology platform and, as such, are not separately classified. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, due to the increased size and duration of later-stage clinical trials.
General and Administrative Expenses
General and administrative expenses include salaries and related costs,
including stock-based compensation, for personnel in executive, finance and
administrative functions. General and administrative expenses also include
direct and allocated facility-related costs, as well as professional fees for
legal, patent, consulting, investor and public relations, accounting and audit
services.
31
--------------------------------------------------------------------------------
Table of Contents
Restructuring and Impairment Charges
During the year endedDecember 31, 2022 , we undertook certain operational and organizational steps in connection with a strategic reorganization plan and related cost-saving measures that we initiated in the third quarter of 2022. These measures included discontinuing the ongoing clinical trials of RTX-240 and RTX-224 for the treatment of advanced solid tumors and reducing our overall workforce. We also initiated a plan to review strategic alternatives in the fourth quarter of 2022 in which we significantly and immediately reduced our operations, which included terminating all of our remaining employees except for a core team of individuals retained to lead the strategic review process.
Other Income (Expense)
Interest Income
Interest income consists of interest earned on our invested cash balances.
Interest Expense
Interest expense consists of interest owed on outstanding borrowings under our Loan Agreement (as defined below), as well as amortization of debt discount.
Other Income, Net
Other income, net consists of miscellaneous income and expense unrelated to our core operations.
Income Taxes Since our inception, we have not recorded any income tax benefits for the net losses we have incurred in each year or for our research and development tax credits generated, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss, or NOL, carryforwards and tax credits will not be realized. As ofDecember 31, 2022 , we hadU.S. federal and state net operating loss carryforwards of$584.8 million and$583.6 million , respectively, which may be available to offset future taxable income. The federal NOLs include$37.2 million , which expire at various dates through 2037, and$547.6 million , which carryforward indefinitely. The state NOLs expire at various dates through 2041. As ofDecember 31, 2022 , we also hadU.S. federal and state research and development tax credit carryforwards of$29.5 million and$19.9 million , respectively, which may be available to offset future tax liabilities and begin to expire in 2034 and 2026, respectively. We have recorded a full valuation allowance against our net deferred tax assets at each balance sheet date. 32
--------------------------------------------------------------------------------
Table of Contents
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
(in thousands)
Revenue $ - $ - $ -
Operating expenses:
Research and development 96,414 141,587 (45,173)
General and administrative 30,835 53,029 (22,194)
Restructuring and impairment charges 51,197 - 51,197 Total operating expenses 178,446 194,616 (16,170) Loss from operations (178,446) (194,616) 16,170 Other income (expense): Interest income 819 91 728 Interest expense (3,863) (6,434) 2,571 Other income, net 1,824 4,412 (2,588) Total other income (expense), net (1,220) (1,931) 711 Net loss$ (179,666) $ (196,547) $ 16,881
Research and Development Expenses
Twelve Months Ended December 31,
2022 2021 Change
(in thousands)
Research and development program expenses:
Rare disease $ - $ 284 $ (284)
Cancer 50,138 74,080 (23,942)
Platform development, early-stage research and
unallocated expenses:
Personnel-related 19,445 27,827 (8,382)
Stock-based compensation expense 6,863 12,338 (5,475)
Contract research and development 3,839 7,115 (3,276)
Laboratory supplies and research materials 4,742 5,186 (444)
Facility-related and other 11,387 14,757 (3,370)
Total research and development expenses $ 96,414 $ 141,587 $ (45,173)
Research and development expenses were $96.4 million for the year ended
December 31, 2022 , compared to $141.6 million for the year ended December 31,
2021 . The decrease in research and development program expenses of $45.2 million
related to the deprioritization of RTX-321 in May 2022 and RTX-240 AML and
monotherapy studies in September 2022 . This decrease was partially offset by an
increase in clinical costs related to RTX-224 that were incurred prior to the
discontinuation of the ongoing clinical trials of RTX-240 and RTX-224 for the
treatment of advanced solid tumors. We do not expect to incur these costs in
future periods as our research and development has stopped and all remaining
costs have been accrued as of December 31, 2022 . Platform development,
early-stage research and unallocated expenses decreased by $20.9 million
principally due to decreases of $8.4 million in personnel-related expenses
resulting from our headcount reductions and $5.5 million in stock-based
compensation expense resulting from expense reversals on forfeited equity awards
in the third and fourth quarters of 2022. In addition, contract research and
development decreased $3.3 million and laboratory supplies and research
materials decreased $0.4 million as drug discovery activities and platform
development
33--------------------------------------------------------------------------------
Table of Contents
were discontinued in the current year. The reduction in facility-related and other expenses of$3.4 million was primarily due to the termination of our lease for office and laboratory facilities inCambridge, Massachusetts .
General and Administrative Expenses
Twelve Months Ended December 31,
2022 2021 Change
(in thousands)
Personnel-related $ 8,220 $ 13,895 $ (5,675)
Stock-based compensation expense 8,920 23,272 (14,352)
Professional and consultant fees 8,491 9,278 (787)
Facility-related and other 5,204 6,584 (1,380)
Total general and administrative expenses $ 30,835 $ 53,029 $ (22,194)
General and administrative expenses for the year ended December 31, 2022 were
$30.8 million , compared to $53.0 million for the year ended December 31, 2021 .
The decrease in general and administrative expenses of $22.2 million was
primarily due to a decrease in stock-based compensation expense of $14.4
million , which was driven by expense reversals on forfeited equity awards in the
third and fourth quarters of 2022, as well as a reduction in the market price of
our common stock, resulting in a lower valuation of stock options granted in
2022. Additionally, personnel-related expenses decreased by $5.7 million driven
by headcount reductions in general and administrative functions during 2022,
facility-related and other expenses decreased $1.4 million primarily due to the
termination of our lease for office and laboratory facilities in Cambridge,
Massachusetts , and professional and consultant fees decreased $0.8 million due
to the reduction in operations in the fourth quarter of 2022.
Restructuring and Impairment Charges
Twelve Months Ended December 31,
2022 2021 Change
(in thousands)
Employee termination benefits $ 12,929 $ - $ 12,929
Impairment of property, plant and equipment 25,841 - 25,841
Contract termination costs 12,427 - 12,427
Total restructuring and impairment charges $ 51,197 $
- $ 51,197
During the year ended December 31, 2022 , we recorded charges of $12.9 million ,
$25.8 million and $12.4 million related to employee termination benefits,
impairment of property, plant and equipment and contract termination costs,
respectively, due to the reorganization plan we initiated in the third quarter
of 2022 and the plan to review strategic alternatives initiated in the fourth
quarter of 2022. We paid or otherwise settled $22.6 million of employee
termination benefits and contract termination costs during the year ended
December 31, 2022 and expect to pay or otherwise settle approximately $26.0
million in total to implement the two plans.
Interest Income
Interest income was$0.8 million for the year endedDecember 31, 2022 , compared to$0.1 million for the year endedDecember 31, 2021 . Interest income increased due to higher prevailing interest rates.
Interest Expense
Interest expense was$3.9 million for the year endedDecember 31, 2022 , compared to$6.4 million for the year endedDecember 31, 2021 . The decrease in interest expense was principally due to a gain of$1.1 million on the extinguishment of our Loan Agreement (as defined below).
Other Income, Net
34--------------------------------------------------------------------------------
Table of Contents
Other income, net was$1.8 million for the year endedDecember 31, 2022 , compared to$4.4 million for the year endedDecember 31, 2021 . The decrease in other income, net was due to greater monetization of certain tax credits during the prior period.
Liquidity and Capital Resources
Since our inception, we have incurred significant operating losses. We have not commercialized any product candidates and we do not expect to generate revenue from sales of any products given our significant reduction in operations and focus on review of strategic alternatives. To date, we have funded our operations with proceeds from the sale of preferred stock, with borrowings under our recently terminated Loan Agreement, with proceeds from our IPO and with proceeds from ourMarch 2021 Offering, described and defined further below. InJuly 2018 , we completed our IPO, pursuant to which we issued and sold 12,055,450 shares of common stock, inclusive of 1,572,450 shares pursuant to the full exercise of the underwriters' option to purchase additional shares. We received proceeds of$254.3 million , after deducting underwriting discounts and commissions and other offering costs. InDecember 2018 , we entered into a Loan and Security Agreement with SLR Investment Corp. (f/k/a Solar Capital Ltd.) (the "Loan Agreement"), which was amended inJune 2021 , and which provided for aggregate borrowings of up to$75.0 million . InMarch 2021 , we completed theMarch 2021 Offering, pursuant to which we issued and sold 6,896,552 shares of common stock. We received proceeds of$187.2 million , after deducting underwriting discounts and commissions and other offering costs. InOctober 2022 , pursuant to a payoff letter, we voluntarily prepaid approximately$75.7 million , in full satisfaction of all obligations, including all outstanding principal, accrued interest, fees, costs, expenses and other amounts chargeable, under the Loan Agreement, considerably depleting our cash resources. As ofDecember 31, 2022 , we had cash and cash equivalents of$14.9 million and as ofJanuary 31, 2023 , we had cash and cash equivalents of$11.7 million , which includes the proceeds from the sale of ourRhode Island facility for an aggregate purchase price of$18.5 million . As noted elsewhere in this report, there is substantial doubt as to our ability to fund our planned operations for the next twelve months and to continue to operate as a going concern. Further, we have recently announced that our Board unanimously approved the dissolution and liquidation of the Company pursuant to a Plan of Dissolution, which plan is subject to stockholder approval.
Cash Flows
The following table summarizes our sources and uses of cash for each of the
periods presented:
Year Ended December 31,
2022 2021 2020
(in thousands)
Cash used in operating activities $ (150,142) $ (145,122) $ (127,648)
Cash provided by investing activities 12,944 81,351 100,432
Cash provided by (used in) financing activities (75,470) 198,453 26,484
Net increase (decrease) in cash, cash equivalents
and restricted cash $ (212,668) $
134,682
Operating Activities
During the year endedDecember 31, 2022 , operating activities used$150.1 million of cash, primarily resulting from our net loss of$179.7 million , offset by net non-cash charges of$47.0 million , predominantly consisting of impairment charges and stock-based compensation expense. Net cash used in our operating assets and liabilities for the year endedDecember 31, 2022 consisted of a net decrease in accounts payable, accrued expenses and other current liabilities, other long-term liabilities and operating lease liabilities of$27.3 million , offset by a$9.7 million increase in prepaid expenses and other current assets, operating lease, and right-of-use assets. During the year endedDecember 31, 2021 , operating activities used$145.1 million of cash, primarily resulting from our net loss of$196.5 million , partially offset by net non-cash charges of$44.7 million , predominantly consisting of stock-based compensation expense. Net cash used in our operating assets and liabilities for the twelve months endedDecember 31, 2021 consisted of a$0.1 million decrease in accounts payable, accrued expenses and other current liabilities, other long-term liabilities and operating lease liabilities, offset by a decrease in prepaid expenses and other current assets, other assets and operating lease, right-of-use asset of$6.6 million .
During the year ended
35--------------------------------------------------------------------------------
Table of Contents
based compensation expense. Net cash used in our operating assets and liabilities for the twelve months endedDecember 31, 2020 consisted of a$6.5 million decrease in accounts payable, accrued expenses and other current liabilities, other long-term liabilities and operating lease liabilities, offset by a decrease in prepaid expenses and other current assets, other assets and operating lease, right-of-use asset of$6.6 million .
Changes in accounts payable, accrued expenses and other current liabilities and prepaid expenses and other current assets in all periods presented were generally due to growth in our business, the advancement of our research programs and the timing of vendor invoicing and payments.
Investing Activities
During the year endedDecember 31, 2022 , net cash provided by investing activities was$12.9 million , consisting of sales and maturities of investments of$83.9 million and sales of property, plant and equipment of$17.9 million , offset by purchases of investments of$83.6 million and purchases of property, plant and equipment of$5.3 million . Our property, plant and equipment sales primarily relate to the sale of our manufacturing facility inSmithfield, Rhode Island . During the year endedDecember 31, 2021 , net cash provided by investing activities was$81.4 million , consisting of sales and maturities of investments of$85.0 million , offset by purchases of property, plant and equipment of$3.6 million . Our cash purchases of property, plant and equipment primarily relate to the purchase of computer and laboratory equipment installed in our manufacturing facility inSmithfield, Rhode Island and our laboratory space inCambridge, Massachusetts . During the year endedDecember 31, 2020 , net cash provided by investing activities was$100.4 million , consisting of sales and maturities of investments of$228.6 million , offset by net purchases of investments of$122.7 million and purchases of property, plant and equipment of$5.5 million . Our cash purchases of property, plant and equipment consisted of$2.9 million for purchases related to our manufacturing facility inSmithfield, Rhode Island , largely driven by payments for manufacturing equipment purchases and construction costs incurred in 2019, and$2.6 million for the purchase of computer and laboratory equipment installed in our manufacturing facility and our laboratory space inCambridge, Massachusetts . Financing Activities During the year endedDecember 31, 2022 , net cash used in financing activities of$75.5 million consisted of the repayment of our long-term debt under the Loan Agreement. During the year endedDecember 31, 2021 , net cash provided by financing activities of$198.5 million consisted primarily of proceeds of$187.2 million , after deducting underwriting discounts and commissions and other offering costs, from theMarch 2021 Offering, as well as proceeds received from issuance of common stock upon exercise of stock options and under the employee stock purchase plan of$11.0 million . Net cash used in financing activities includes$0.4 million of offering cost payments in connection with theMarch 2021 Offering and$0.2 million of debt issuance cost payments related to our Loan Agreement inJune 2021 .
During the year ended
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as ofDecember 31, 2022 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods: Payments Due by Period More Than 5 Total Less Than 1 Year 1 to 3 Years 4 to 5 Years Years (in thousands) Operating lease commitments (1) $ 1,100 $ 1,100 $ - $ - $ - Total $ 1,100 $ 1,100 $ - $ - $ - (1)Amounts in table reflect payments due for our leases of office and laboratory space inCambridge, Massachusetts under an operating lease agreement terminated inDecember 2022 with an effective date inJanuary 2023 . 36
--------------------------------------------------------------------------------
Table of Contents
As ofDecember 31, 2022 , we were party to contracts in the normal course of business with third parties for various services. These contracts generally do not contain minimum purchase commitments and are cancelable by us upon prior written notice; many such contracts have been cancelled sinceDecember 31, 2022 . Payments due upon cancellation typically consist only of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to the date of cancellation. These payments are not included in the table above. We have also entered into a license agreement with theWhitehead Institute for Biomedical Research , or WIBR, as amended, under which we have been granted an exclusive, sublicensable, nontransferable license under certain patent families related to the development of our RCTs, or the WIBR License. Under the terms of the WIBR License, we are obligated to pay to WIBR low single-digit royalties based on any annual net sales by us, our affiliates and our sublicensees of licensed products and licensed services that are covered by a valid claim of the licensed patent rights at the time and in the country of sale. The terms of the agreement require us to make aggregate milestone payments of up to$1.6 million upon the achievement of specified preclinical, clinical and regulatory milestones. In addition, the license requires us to pay to WIBR a percentage of the non-royalty payments that we receive from sublicensees of the patent rights licensed by WIBR. This percentage varies from low single-digit to low double-digit percentages and is based upon the clinical stage of the product that is the subject of the sublicense. The WIBR License provides that royalties shall be paid by us on a licensed product-by-licensed product and country-by-country basis, beginning on the first commercial sale of such licensed product in such country until expiration of the last valid patent claim covering such licensed product in such country. We have the right to terminate the WIBR License in its entirety, on a patent-by-patent or country-by-country basis, at will upon three months' notice to WIBR. WIBR may terminate the agreement upon breach of contract or in the event of bankruptcy, liquidation, insolvency or cessation of business related to the license. For additional information, see "Business-Licenses."
Loan and Security Agreements
InDecember 2018 , or the Closing Date, we entered into a Loan and Security Agreement with SLR Investment Corp., or SLR (formerly Solar Capital Ltd.), as collateral agent for the lenders party thereto for an aggregate principal amount of$75.0 million . The aggregate principal amount was funded in three tranches of term loans of$25.0 million each, on the Closing Date, inJune 2019 , and inJune 2020 . OnOctober 13, 2022 , we entered into a payoff letter with SLR, under which we voluntarily prepaid SLR approximately$75.7 million , in full satisfaction of all obligations, including all outstanding principal, accrued interest, fees, costs, expenses and other amounts chargeable, under the Loan Agreement. The payoff letter also provided for the termination of all commitments and obligations under the Loan Agreement and release of all liens held by SLR on our assets.
Common Stock Sales Agreement
OnAugust 1, 2019 , we entered into a Distribution Agreement, or the Distribution Agreement, with multiple sales agents, pursuant to which the Company was entitled to offer and sell to or through the agents, from time to time, shares of the Company's common stock, par value$0.001 per share, having an aggregate gross sales price of up to$100.0 million . No shares of the Company's common stock were sold under the Distribution Agreement, which expired in accordance with its terms onAugust 21, 2022 , and the applicable registration statement is no longer effective.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of theSEC .
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles inthe United States , or GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. 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. 37
--------------------------------------------------------------------------------
Table of Contents
While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in the consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of the estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to:
•vendors in connection with preclinical and assay development activities;
•CMOs in connection with raw material acquisition; and
•CROs in connection with clinical trials.
We base the expense recorded related to contract research and manufacturing on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple CMOs and CROs that supply materials and conduct services. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or 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 reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.
Stock-based Compensation
We measure stock-based awards with service-based and performance-based vesting
conditions granted to employees, directors and non-employees based on their fair
value on the date of the grant using the Black-Scholes option-pricing model for
options or the difference between the purchase price per share of the award, if
any, and the fair value of our common stock for restricted common stock awards.
Compensation expense for those awards is recognized over the requisite service
period, which is generally the vesting period of the respective award. We use
the straight-line method to record the expense of awards with service-based
vesting conditions. We use the graded-vesting method to record the expense of
awards with both service-based and performance-based vesting conditions,
commencing when achievement of the performance condition becomes probable.
The Black-Scholes option-pricing model uses as inputs the fair value of our
common stock and assumptions we make for the volatility of our common stock, the
expected term of our common stock options, the risk-free interest rate for a
period that approximates the expected term of our common stock options, and our
expected dividend yield.
We measure the fair value of stock-based awards with market-based vesting
conditions on the date of grant using a Monte Carlo simulation model. When
service-based vesting conditions also exist, we recognize stock-based
compensation expense using the graded-vesting method over the longer of the
derived service period from the market condition or the required service period.
In accordance with accounting guidance for awards with market conditions, the
stock-based compensation expense will be recognized over the appropriate period
regardless of whether the award achieves the market condition and will only be
adjusted to the extent the service condition is not met. When an award contains
a market-based vesting condition and a performance-based vesting condition where
both must be achieved to earn the award, we recognize stock-based compensation
expense over the longer of the derived service period from the market condition
or the period estimated for the performance-based vesting condition to be
achieved. We begin recording stock-based compensation expense for this type of
award when the achievement of the performance-based vesting condition becomes
probable regardless of whether the market condition has been achieved.
38--------------------------------------------------------------------------------
Table of Contents
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position, results of operations or cash flows are disclosed in Note 2 to our consolidated financial statements.
© Edgar Online, source