THIRD HARMONIC BIO, INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q.
As discussed in the section titled "Special Note Regarding Forward Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those set forth in the section titled "Risk Factors" under Part II, Item 1A below.
Overview
We are a clinical-stage biopharmaceutical company focused on the development of the next wave of medicine for the treatment of allergic and inflammatory diseases. Our lead product candidate,THB001 , is a highly selective, oral small molecule inhibitor of KIT, a cell surface receptor that acts as the master survival and functional regulator of mast cells. Mast cells are a part of the immune system, and dysfunctional mast cell activity has been implicated in the pathophysiology of a broad range of allergic and other inflammatory disorders including urticaria, asthma and gastrointestinal disorders, among others. KIT inhibition has shown positive clinical responses in mast cell mediated diseases such as asthma and chronic urticaria. In our recently completed Phase 1a clinical trial,THB001 demonstrated dose-dependent reductions of serum tryptase, a key biomarker of mast cell activity which has been shown to correlate with clinical benefit in chronic urticaria patients. We submitted a CTA inEurope for our dose escalation Phase 1b proof-of-concept trial in chronic inducible urticaria inMay 2022 , initiated the trial inSeptember 2022 , and expect to report initial data from this trial in the second half of 2023. We also intend to submit a CTA inCanada to support initiation of a Phase 1b trial in asthma in the first half of 2023 and expect to report initial data from this trial in the second half of 2024. We intend to submit both a CTA inEurope and an IND inthe United States to support initiation of a Phase 2 trial in chronic spontaneous urticaria in the first half of 2024. We are also exploring development opportunities across a range of other indications whereTHB001 may provide benefit to patients suffering from mast cell driven inflammation to demonstrate the "pipeline-in-a-product" potential ofTHB001 . Since our inception in 2019, we have devoted substantially all of our efforts to organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio, acquiring or discovering product candidates, research and development activities forTHB001 and other compounds, establishing arrangements with third parties for the manufacture of our product candidates and component materials, and providing general and administrative support for these operations. We do not have any products approved for sale and have not generated any revenue from product sales. To date, we have financed our operations primarily with proceeds from sales of shares of our preferred stock and our initial public offering of our common stock. Our primary uses of capital are, and we expect will continue to be, research and development services, compensation and related expenses, and general overhead costs. We have incurred significant operating losses since inception. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization ofTHB001 and any future product candidates. Our net losses were$29.6 million and$23.7 million for the year endedDecember 31, 2021 and nine months endedSeptember 30, 2022 , respectively. As ofSeptember 30, 2022 , we had an accumulated deficit of$71.9 million . We expect to continue to incur net operating losses for at least the next several years, and we expect our research and development expenses, general and administrative expenses, and capital expenditures will increase substantially in connection with our ongoing activities, particularly if, and as, we:
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advance
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conduct additional nonclinical studies and clinical trials for
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discover and develop new product candidates;
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obtain, expand, maintain, defend and enforce our intellectual property portfolio;
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manufacture, or have manufactured, nonclinical, clinical and potentially
commercial supplies of
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seek regulatory approvals for
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establish a sales, marketing and distribution infrastructure to commercialize
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identify additional compounds or product candidates and acquire rights from third parties to those compounds or product candidates through licenses;
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hire additional clinical, scientific and management personnel, as well as administrative staff to support the growth of our business;
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add operational, financial and management information systems and personnel;
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incur additional legal, accounting and other costs associated with operating as a public company;
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experience delays related to the ongoing COVID-19 pandemic inthe United States and in other countries in which we have planned or have active clinical trial sites and where our third-party CDMOs operate; and
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establish licenses, collaborations or strategic partnerships.
Our net losses may fluctuate significantly from period to period, depending on the timing of expenditures related to our research and development activities.
We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for a product candidate. In addition, if we obtain regulatory approval for a product candidate and do not enter into a third-party commercialization partnership, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing, manufacturing and distribution activities. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through equity offerings, debt financings or other capital sources, which could include collaborations, strategic alliances or additional licensing arrangements. We may be unable to raise additional funds or enter into such arrangements when needed, on favorable 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, including requiring us to have to delay, reduce or eliminate product development or future commercialization efforts. The amount and timing of our future funding requirements will depend on many factors including the successful advancement ofTHB001 or any future product candidates. Our ability to raise additional funds may also be adversely impacted by potential worsening global economic conditions and disruptions to and volatility in the credit and financial markets inthe United States and worldwide, such as those resulting from the ongoing COVID-19 pandemic, the hostilities inUkraine , and increasing interest rates and rates of inflation. Because of the numerous risks and uncertainties associated with development of treatment of allergic and inflammatory diseases, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate 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. We oversee and manage third partyContract Development and Manufacturing Organizations, or CDMOs, to support development and manufacture ofTHB001 for our clinical trials. The manufacturing process has readily-sourced available raw materials and straightforward scalability. TheTHB001 drug product is a cost-effective and readily scaled solid oral dosage form in standard gelatin capsules. We expect to enter into commercial supply agreements with commercial manufacturers prior to any potential regulatory approval ofTHB001 . We continue to develop a commercial route forTHB001 manufacture in alignment with our program timeline. We believe our current manufacturers are able to supply the upcoming clinical trials and additional CDMOs may be on-boarded at later stages of clinical and commercial development. As ofSeptember 30, 2022 , we had$299.5 million in cash and cash equivalents. We believe that our existing cash and cash equivalents, will be sufficient to fund our operations and capital expenses through 2025. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See the subsection titled "Liquidity and Capital Resources." 20 --------------------------------------------------------------------------------
License Agreement with
OnJune 28, 2019 , we entered into a license agreement withNovartis International Pharmaceutical Ltd. (which subsequently merged into the companyNovartis Pharma AG ), or Novartis, as amended, or the Novartis Agreement. Pursuant to the Novartis Agreement, Novartis granted us an exclusive, worldwide, sublicensable (subject to certain requirements therein) license under specified patent rights and know-how related to three licensed compounds to develop, make, use and sell certain products incorporating or comprising a licensed compound, includingTHB001 , or the Licensed Products. Under the Novartis Agreement, we are solely responsible for all research, development, regulatory and commercialization activities related to the Licensed Products. We are required to use commercially reasonable efforts to develop and seek regulatory approval for, and commercialize, at least one Licensed Product inthe United States ,France ,Germany ,Italy ,Spain , theUnited Kingdom , andJapan . Pursuant to the Novartis Agreement, we made a one-time payment of$0.4 million to Novartis and agreed to issue shares of preferred stock pursuant to that certain Investment Letter dated as ofJune 27, 2019 , or theNovartis Investment Letter. Pursuant to the Novartis Investment Letter, we have issued Novartis 5,970,000 shares of Series A-1 Preferred Stock. Further, we are obligated to pay Novartis up to an aggregate of: (i)$31.7 million upon the achievement of certain specified development milestones for the Licensed Products and (ii)$200.0 million upon the achievement of certain specified sales and commercialization milestones with respect to the Licensed Products. We are also required to pay Novartis, on a Licensed Product-by-Licensed Product and country-by-country basis, tiered royalties in the single-digit percentage range on annual net sales of Licensed Products, subject to reduction and offset upon certain specified events. The foregoing royalty payment obligations will expire on the latest to occur of: (a) expiration of the last valid claim of the licensed patent rights that covers such Licensed Product in such country; (b) the expiration of any regulatory exclusivity for such Licensed Product in such country; and (c) ten years following the first commercial sale of such Licensed Product in such country. Upon the expiration of such royalty term in a particular country for a particular Licensed Product, the license granted to us with respect to such Licensed Product in such country will become fully paid-up, royalty-free, transferable, perpetual and irrevocable.
For a more detailed description of this agreement, see Note 5 to our consolidated financial statements and our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report.
Impact of COVID-19 on Our Business
The COVID-19 pandemic continues to evolve, and we will continue to monitor any
developments. The extent of the impact of the ongoing COVID-19 pandemic on our
business, operations and development timelines and plans remains uncertain, and
will depend on certain developments, including the duration and spread of the
outbreak and its impact on our CDMOs, contract research organizations, or CROs,
and other third parties with whom we do business, as well as its impact on
regulatory authorities and our key scientific and management personnel. The
ultimate impact of the ongoing COVID-19 pandemic or a similar health epidemic is
highly uncertain and subject to change. To the extent possible, we are
conducting business as usual, though it is possible we may take further actions
that alter our operations, including those that may be required by federal,
state or local authorities, or that we determine are in the best interests of
our employees and other third parties with whom we do business. Measures we have
taken in response to the ongoing COVID-19 pandemic include, where feasible,
conducting remote clinical trial site activations and data monitoring. However,
despite these efforts, we have experienced delays in trial site initiations,
patient participation and patient enrollment in our clinical trial and we may
continue to experience some delays in our clinical trials and nonclinical
studies and delays in data collection and analysis. At this point, the extent to
which the ongoing COVID-19 pandemic may affect our business, operations and
development timelines and plans, including the resulting impact on our
expenditures and capital needs, remains uncertain and is subject to change. For
additional details regarding the ongoing COVID-19 pandemic's impact and
potential impact on our business, operations and prospects, see the section
titled "Risk Factors-Risks Related to Discovery, Development and
Commercialization." The ongoing COVID-19 pandemic could adversely impact our
business, including the conduct of our clinical trials.
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--------------------------------------------------------------------------------Results of Operations
Comparison of the three and nine months ended
The following table summarizes our results of operations for each of the periods presented (in thousands, except percentages):
Three Months Ended September 30, Nine Months Ended September 30,
2021 2022 $ Change % Change 2021 2022 $ Change % Change
(unaudited) (unaudited)
Operating expenses:
Research and development $ 4,917 $ 4,757 $ (160 ) (3 %) $ 11,463 $ 15,150 $ 3,687 32 %
General and administrative 780 3,831 3,051 391 % 1,790 9,008 7,218 403 %
Total operating expenses 5,697 8,588 2,891 51 % 13,253 24,158 10,905 82 %
Loss from operations 5,697 8,588 2,891 51 % 13,253 24,158 10,905 82 %
Other (income) expense,
net:
Change in fair value of
anti-dilution right
liability - - - 0 % 682 - (682 ) 0 %
Change in fair value of
preferred stock tranche
liability 1,685 - (1,685 ) (100 %) (105 ) - 105 (100 %)
Other (income) (1 ) (383 ) (382 ) * (3 ) (493 ) (490 ) *
Total other (income)
expense, net 1,684 (383 ) (2,067 ) (123 %) 574 (493 ) (1,067 ) (186 %)
Net loss $ 7,381 $ 8,205 $ 824 11 % $ 13,827 $ 23,665 $ 9,838 71 %
*Percentage not meaningful.
Research and Development Expenses
The following table summarizes our research and development expenses for each of the periods presented (in thousands, except percentages):
Three Months Ended September 30, Nine Months Ended September 30,
2021 2022 $ Change % Change 2021 2022 $ Change % Change
(unaudited) (unaudited)
Direct costs:
THB001 $ 3,845 $ 1,947 $ (1,898 ) (49 %) $ 8,474 $ 8,116 $ (358 ) (4 %)
Other discovery and
development 359 1,378 1,019 284 % 1,433 3,353 1,920 134 %
Indirect costs:
Personnel-related 701 1,424 723 103 % 1,544 3,672 2,128 138 %
Facilities and other 12 8 (4 ) (33 %) 12 9 (3 ) (25 %)
Total research and
development expenses $ 4,917 $ 4,757 $ (160 ) (3 %) $ 11,463 $ 15,150 $ 3,687 32 %
Research and development expenses decreased by $0.2 million from $4.9 million
for the three months ended September 30, 2021 to $4.8 million for the three
months ended September 30, 2022 , primarily due to the timing of our nonclinical
and clinical activities. Research and development expenses increased by $3.7
million from $11.5 million for the nine months ended September 30, 2021 to $15.2
million for the nine months ended September 30, 2022 , primarily due to the
increased clinical trial expenses related to our lead product candidate, THB001 .
General and Administrative Expenses
General and administrative expenses increased by$3.1 million from$0.8 million for the three months endedSeptember 30, 2021 to$3.8 million for the three months endedSeptember 30, 2022 , primarily driven by the increases in costs associated with personnel-related expenses and the initial public offering. General and administrative expenses increased by$7.2 million from$1.8 million for the nine months endedSeptember 30, 2021 to$9.0 million for the nine months endedSeptember 30, 2022 , primarily driven by the increases in costs associated with personnel-related expenses and the initial public offering. 22 --------------------------------------------------------------------------------
Total Other (Income) Expense, Net
Total other (income) expense, net increased by approximately$2.1 million from$1.7 million of expense for the three months endedSeptember 30, 2021 to$0.4 million of income for the three months endedSeptember 30, 2022 , primarily driven by a$1.7 million expense due to the remeasurement of the fair value of the preferred stock tranche liability in 2021 and the increase in interest income received as the Company's cash balance has increased. Total other (income) expense, net increased by approximately$1.1 million from$0.6 million of expense for the nine months endedSeptember 30, 2021 to$0.5 million of income for the nine months endedSeptember 30, 2022 . This increase was primarily attributable to changes in fair value of anti-dilution right liability and preferred stock tranche liability that was recognized during the nine months endedSeptember 30, 2021 and the increase in interest income received as the Company's cash balance has increased.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have incurred significant losses in each period and on an aggregate basis. We have not yet commercialized any product candidates, and we do not expect to generate revenue from sales of any product candidates or from other sources for several years, if at all. OnSeptember 19, 2022 , we completed our IPO at which time we issued 12,535,000 shares of common stock, including the exercise in full by the underwriters of their option to purchase up to 1,635,000 additional shares of common stock, at a public offering price of$17.00 per share. We received$198.2 million , net of underwriting discounts and commissions, but before deducting offering costs payable by the Company, which were$2.3 million . Prior to our IPO, we funded our operations primarily with gross proceeds from sales of our preferred stock.
As of
Cash Flows
The following table provides information regarding our cash flows for each of the periods presented (in thousands):
Nine Months Ended September 30,
2021 2022
(unaudited)
Net cash used in operating activities
- -
Net cash provided by financing activities 15,922
196,866
Net increase in cash and cash equivalents $ 4,517
Net cash used in operating activities for the nine months endedSeptember 30, 2021 was$11.4 million , and was primarily due to our net loss of$13.8 million , adjusted for non-cash income of$0.1 million related to the change in fair value of the preferred stock tranche liability, a non-cash charge of$0.7 million related to the change in fair value of the anti-dilution right liability,$0.3 million non-cash stock-based compensation expense and net changes in working capital of$1.5 million . Net cash used in operating activities for the nine months endedSeptember 30, 2022 was$25.6 million , and was primarily due to our net loss of$23.7 million , adjusted for$2.6 million non-cash stock-based compensation expense, an increase of$1.2 million in other assets relating to deferred compensation, and net changes in working capital of$3.4 million .
Net Cash Provided by (Used in) Investing Activities
We had no investing activities for the nine months ended
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--------------------------------------------------------------------------------Net Cash Provided by Financing Activities
Net cash provided by financing activities for the nine months endedSeptember 30, 2021 was$15.9 million , resulting entirely from proceeds received from the issuance and sale of shares of our Series A Preferred Stock, net of issuance costs.
Net cash provided by financing activities for the nine months ended
Funding Requirements
Our primary uses of capital are, and we expect will continue to be, research and development services, compensation and related expenses and general overhead costs. We expect to continue to incur significant expenses and operating losses for the foreseeable future. Following the closing of our IPO, we expect to incur additional costs associated with operating as a public company. We anticipate that our expenses will increase significantly in connection with our ongoing activities. Based on our current operating plan, we believe that our existing cash and cash equivalents, will be sufficient to fund our operations and capital expenses through 2025. However, we have based this estimate on assumptions that may prove to be wrong, and we could exhaust our capital resources sooner than we expect.
Because of the numerous risks and uncertainties associated with research, development and commercialization of product candidates, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on, and could increase significantly as a result of, many factors, including:
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the timing, cost and progress of nonclinical and clinical development activities;
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the cost of regulatory submissions and timing of regulatory approvals;
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the number and scope of nonclinical and clinical programs we decide to pursue;
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the progress of the development efforts of parties with whom we may in the future enter into collaborations and/or research and development agreements;
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the timing and amount of milestone and other payments we are obligated to make under our Novartis Agreement or any future license agreements;
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the cash requirements of any future acquisitions or discovery of product candidates;
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our ability to establish and maintain collaborations, strategic partnerships or marketing, distribution, licensing or other strategic arrangements with third parties on favorable terms, if at all;
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the costs involved in prosecuting and enforcing patent and other intellectual property claims;
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the costs of manufacturing our product candidates by third parties;
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the cost of commercialization activities if
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our efforts to enhance operational systems and hire additional personnel, including personnel to support development of our product candidates; and
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our need to implement additional internal systems and infrastructure, including financial and reporting systems to satisfy our obligations as a public company.
A change in the outcome of any of these or other variables with respect to the development of ourTHB001 or any product or development candidate we may develop in the future could significantly change the costs and timing associated with our development plans. Further, our operating plans may change in the future, and we may need additional funds to meet operational needs and capital requirements associated with such operating plans. 24 -------------------------------------------------------------------------------- Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings or other capital sources, which could include collaborations, strategic alliances or licensing arrangements. We currently have no credit facility or committed sources of capital. Adequate additional funds may not be available to us on acceptable terms, or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our existing stockholders may be diluted, and the terms of these securities may include liquidation or other preferences that could adversely affect the rights of such stockholders. Debt financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research program or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and disruptions to and volatility in the credit and financial markets inthe United States and worldwide resulting from the ongoing COVID-19 pandemic or otherwise. Because of the numerous risks and uncertainties associated with product development, there is no assurance that we will ever be profitable or generate positive cash flow from operating activities.
Contractual Obligations and Other Commitments
Novartis Agreement
We may incur contingent royalty payments that we are required to make under the Novartis Agreement. Due to the uncertainty of the achievement and timing of the events requiring payment under our license agreement with Novartis, the amounts to be paid by us are not fixed or determinable at this time. We are required to pay Novartis royalties on all sales of licensed products, with such royalty percentages in the mid-single digits of sales. We have not paid any royalties to date as we have no products commercially approved for sale. For additional information regarding the license agreement and royalties payable to Novartis, see Note 5 to our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report.
Lease Obligations
Our leases comprised of month-to-month office space leases entered into with Atlas for various office suites located at300 Technology Square inCambridge, Massachusetts , with us acting as a subtenant, as well as other temporary month-to-month office space entered into with various third parties. OnOctober 21, 2022 , the Company entered into two separate lease agreements, one for office space located inCambridge, Massachusetts (the "Cambridge Lease Agreement"), and one for office space located inSan Francisco, California (the "San Francisco Lease Agreement"). The Cambridge Lease Agreement and the San Francisco Lease Agreement are expected to commence inDecember 2022 , and each have an initial term of 63 months. The aggregate estimated rental payments due over the initial term of the Cambridge Lease Agreement is approximately$4.0 million , and the aggregate estimated rental payments due over the initial term of the San Francisco Lease Agreement is approximately$1.8 million .
Purchase and Other Obligations
We enter into contracts in the normal course of business with CROs, CDMOs and
other third-party vendors for nonclinical research studies and testing, clinical
trials and testing and manufacturing services. Most contracts do not contain
minimum purchase commitments and are cancellable by us upon written notice.
Payments due upon cancellation consist of payments for services provided or
expenses incurred, including non-cancelable obligations of our service provided
up to one year after the date of cancellation.
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--------------------------------------------------------------------------------Critical Accounting Policies
The preparation of these financial statements in accordance withU.S. generally accepted accounting principles or GAAP requires us to make judgments and estimates that affect the reported amounts of assets, liabilities and expenses, as well as related disclosures during the reported periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience, known trends and events, and various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. A summary of our significant accounting policies is presented in our final prospectus for our IPO, and during the nine months endedSeptember 30, 2022 , there have been no changes to our critical accounting policies from those disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our final prospectus for our IPO filed pursuant to Rule 424(b)(4) under the Securities Act with theSEC onSeptember 15, 2022 .
Internal Controls Over Financial Reporting
A company's internal control over financial reporting is a process designed by, or under the supervision of, a company's principal executive and principal financial officers, or persons performing similar functions, and effected by a company's board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. A material weakness is a significant deficiency, or a combination of significant deficiencies, in internal control over financial reporting such that it is reasonably possible that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. In preparing our financial statements as of and for the year endedDecember 31, 2021 , management identified a material weakness in our internal control over financial reporting. The material weakness we identified related to the lack of segregation of duties, certain system limitations in our accounting software and the overall control environment as we had insufficient internal resources with appropriate accounting and finance knowledge and expertise to design, implement, document and operate effective internal controls around our financial reporting process. We are implementing measures designed to improve our internal control over financial reporting to remediate this material weakness, including formalizing our processes and internal control documentation and strengthening supervisory reviews by our financial management; hiring additional qualified accounting and finance personnel and engaging financial consultants to enable the implementation of internal control over financial reporting and segregating duties amongst accounting and finance personnel. In addition, we are in the process of selecting and implementing an accounting software system with the design and functionality to segregate incompatible accounting duties, which we currently expect will be fully implemented in our 2023 fiscal year. While we are implementing these measures, we cannot assure you that these efforts will remediate our material weakness and significant deficiencies in a timely manner, or at all, or prevent restatements of our financial statements in the future. In particular, we do not currently expect that our material weakness related to our accounting software will be fully remediated for the fiscal year endedDecember 31, 2022 as we expect to implement new software in 2023. If we are unable to successfully remediate our material weakness, or identify any future significant deficiencies or material weaknesses, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports, and the market price of our common stock may decline as a result.
Emerging Growth Company and Smaller Reporting Company Status
Under Section 107(b) of the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, an "emerging growth company" can delay the adoption of new or revised accounting standards until such time as those standards would apply to private companies. We have elected this exemption to delay adopting new or revised accounting standards until such time as those standards apply to private companies. Where allowable we have early adopted certain standards as described in Note 2 of our consolidated financial statements included elsewhere in this Quarterly Report. As a result, our consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. We will continue to remain an "emerging growth company" until the earliest of the following: (i)December 31, 2027 ; (ii) the last day of the fiscal year in which our total annual gross revenue is equal to or more than$1.235 billion ; (iii) the date on which we have issued more than$1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of theSEC . 26 -------------------------------------------------------------------------------- We are also a "smaller reporting company," meaning that the market value of our stock held by non-affiliates plus the proposed aggregate amount of gross proceeds to us as a result of our IPO was less than$700.0 million and our annual revenue is less than$100.0 million during the most recently completed fiscal year. We will continue to be a smaller reporting company until either (i) the market value of our stock held by non-affiliates is more than$250.0 million or (ii) our annual revenue is more than$100.0 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is more than$700.0 million . If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
Recent Accounting Pronouncements
We have reviewed all recently issued accounting pronouncements and have determined that, other than as disclosed in Note 2 to our condensed consolidated financial statements included elsewhere in this Quarterly Report, such standards do not have a material impact on our financial statements or do not otherwise apply to our operations.
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 . 27
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