AXCA HEALPAR The following discussion of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this Annual Report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. We caution you that forward-looking statements are not guarantees of future performance, and that our actual results of operations, financial condition and liquidity, and the developments in our business and the industry in which we operate, may differ materially from the results discussed or projected in the forward-looking statements contained in this Annual Report. We discuss risks and other factors that we believe could cause or contribute to these potential differences elsewhere in this Annual Report, including under Part I, Item 1A. "Risk Factors" and under "Special Note Regarding Forward-Looking Statements." In addition, even if our results of operations, financial condition and liquidity, and the developments in our business and the industry in which we operate are consistent with the forward-looking statements contained in this Annual Report, they may not be predictive of results or developments in future periods. We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of theSEC to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.
Overview
We are a clinical-stage biotechnology company focused on pioneering a new approach to treat complex diseases using compositions of endogenous metabolic modulators, or EMMs. Our product candidates are comprised of multiple EMMs that are engineered in distinct combinations and ratios with the goal of simultaneously impacting multiple biological pathways. Our pipeline includes lead therapeutic candidates for the treatment of non-alcoholic steatohepatitis, or NASH, and for the treatment of Long COVID (also known as Post COVID-19 Condition and Post-Acute Sequelae of COVID-19, or "PASC") associated fatigue. InDecember 2022 , we announced that we discontinued our EMMPACT Phase 2b clinical trial of AXA1125 for the treatment of NASH to focus on AXA1125 for the treatment of Long COVID associated fatigue. We also announced a corporate restructuring and that we have initiated a process to explore a range of strategic alternatives to maximize shareholder value and we have engaged an investment bank to act as a strategic advisor for this process. We expect to devote substantial time and resources to exploring strategic alternatives that our board of directors believes will maximize enterprise value. Despite devoting significant efforts to identify and evaluate potential strategic alternatives, there can be no assurance that this strategic review process will result in us pursuing any transaction or that any transaction, if pursued, will be completed on attractive terms or at all. We have not set a timetable for completion of this strategic review process, and our board of directors has not approved a definitive course of action. Additionally, there can be no assurances that any particular course of action, business arrangement or transaction, or series of transactions, will be pursued, successfully consummated or lead to increased stockholder value or that we will make any additional cash distributions to our stakeholders. Also, inDecember 2022 , we reduced our workforce by 52 positions, (representing approximately 85% of employees), leaving a core team of individuals to lead the strategic review process. Funding Overview Since our inception, we have focused substantially all of our resources on building our proprietary platform, establishing and protecting our intellectual property portfolio, conducting research and development activities, developing our manufacturing process and manufacturing product candidate material, organizing and staffing our company, business planning, raising capital 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 funded our operations with proceeds from the sale of preferred stock and issuance of debt and with proceeds from our public offerings. 116
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InMay 2019 , we completed our IPO pursuant to which we issued and sold 3,571,428 shares of common stock. We received proceeds of$64.5 million after deducting underwriting discounts and commissions and other offering expenses.
In
InJune 2020 , we entered into a sales agreement withSVB Leerink LLC pursuant to which we may offer and sell shares of our common stock having an aggregate offering price of up to$35.0 million from time to time throughSVB Leerink . As ofDecember 31, 2022 , we sold an aggregate of 3,285,308 shares of common stock under the ATM Offering for net cash proceeds of$14.7 million after deducting commissions and expenses of$0.9 million . InMarch 2022 , we secured$24.8 million in net proceeds after deducting estimated offering expenses through a registered direct offering with certain institutional purchasers and certain directors and officers of the company named therein. In the registered direct offering, we sold 13,089,002 shares of common stock, at a purchase price of$1.91 per share.
In
InSeptember 2022 , we paid SLR approximately$6.4 million , including principal, accrued interest, fees and costs, under the loan and security agreement. InOctober 2022 , the interest only period was extended fromJanuary 2023 toJuly 2023 as we satisfied an equity related condition under the loan and security agreement. InOctober 2022 , we secured$28.1 million in net proceeds after deducting estimated offering expenses through a registered direct offering of common stock. As part of the registered direct offering, the$6.0 million convertible notes held by funds associated with Flagship Pioneering were automatically converted into our common stock. In total, we sold 20,847,888 shares of common stock at a purchase price of$1.64 per share. OnDecember 15, 2022 , pursuant to a payoff letter, we voluntarily accelerated the debt and paid approximately$21.0 million , in full satisfaction of all obligations, including all outstanding principal, accrued interest, fees, costs, expenses and other amounts chargeable, under the loan and security agreement. Since our inception, we have incurred significant operating losses. We reported net losses of$81.2 million and$64.6 million for the years endedDecember 31, 2022 and 2021, respectively. As ofDecember 31, 2022 , we had an accumulated deficit of$418.4 million . Further, our cash resources have been depleted due to the$27.4 million used to extinguish our long-term debt and satisfy our obligations under the loan and security agreement with SLR. As ofDecember 31, 2022 , we had cash and cash equivalents of$17.1 million . Based on our current financial resources and forecasted operating plan, we believe that we will be able to operate into the second quarter of 2023. We expect our corporate restructuring will reduce our operating expenses with the goal of allowing us to pursue any viable strategic alternatives. There is no guarantee that this plan will be successful. We may not be able to successfully pursue any strategic alternatives and, even if certain strategic alternatives may be available, we cannot provide any assurance that the strategic alternatives review process will result in any particular alternative, transaction or value. 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. We have assessed our ability to continue as a going concern, and, based on our need to raise additional capital to finance our future operations, recurring losses from operations incurred since inception, and expectation of continuing operating losses for the foreseeable future, as ofMarch 30, 2023 , the issuance date of the consolidated financial statements for the year endedDecember 31, 2022 , we have concluded that there is substantial doubt about our ability to continue as a going concern for a period of one year from the date that these consolidated financial statements are issued. 117
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We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for any product candidates we may develop. If we obtain regulatory approval for any such product candidates, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing and distribution. Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately 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. Even if we are able to continue operations beyond the next twelve months, 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.
COVID-19 Pandemic
The extent to which COVID-19 impacts our business, operations or financial results will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the pandemic, new information that may emerge concerning the severity of COVID-19 or the nature or effectiveness of actions to contain COVID-19 or treat its impact, among others. We cannot presently predict the scope and severity of any potential business shutdowns or disruptions. However, if we or any of the third parties with whom we engage were to experience shutdowns or other business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially and negatively affected, which could have a material adverse impact on our business, results of operations and financial condition.
Components of our Consolidated 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 in the near future. If our development efforts for our product candidates are successful and result in regulatory approval or we execute license or collaboration agreements with third parties, we may generate revenue in the future from product sales, payments from collaborations or license agreements that we may enter into with third parties, or any combination thereof.
Research and Development Expenses
Our research and development expenses consist primarily of costs incurred in connection with our research activities, including our drug discovery efforts, and the development of our product candidates, which include: •direct external research and development expenses, including fees, reimbursed materials and other costs paid to consultants, contractors, contract manufacturing organizations, or CMOs, and clinical research organizations, or CROs, in connection with our clinical and preclinical development and manufacturing activities;
•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 our product candidates, including any Clinical Studies, Clinical Trials and other research programs, including under agreements with third parties, such as consultants, contractors and CROs;
•the cost of developing and scaling our manufacturing process and manufacturing products for use in our preclinical studies, Clinical Studies and Clinical Trials, including under agreements with third parties, such as consultants, contractors and CMOs;
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•patent-related costs incurred in connection with filing and prosecuting patent applications; and
•facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and insurance.
We expense research and development costs as incurred. We often contract with CROs and CMOs to facilitate, coordinate and perform agreed-upon research, design, development, and manufacturing of our product candidates. To ensure that research and development costs are expensed as incurred, we record monthly accruals for Clinical Studies, Clinical Trials and manufacturing costs based on the work performed under the contract. These CRO and CMO contracts typically call for the payment of fees for services at the initiation of the contract and/or upon the achievement of certain clinical or manufacturing milestones. In the event that we prepay CRO or CMO fees, we record the prepayment as a prepaid asset and amortize the asset into research and development expense over the period of time the contracted research and development or manufacturing services are performed. Most professional fees, including project and clinical management, data management, monitoring and manufacturing fees are incurred throughout the contract period. These professional fees are expensed based on their estimated percentage of completion at a particular date. Our CRO and CMO contracts generally include pass through fees. Pass through fees include, but are not limited to, regulatory expenses, investigator fees, travel costs and other miscellaneous costs and raw materials. We expense the costs of pass through fees under our CRO and CMO contracts as they are incurred, based on the best information available to us at the time. A significant portion of our research and development costs are not tracked by project as they benefit multiple projects or our technology platform, and, as such, are not separately classified. We anticipate that our future research and development expenses will decrease compared to 2022 levels due to the discontinuation of the NASH clinical trial and reduction in workforce. Many factors can affect the cost and timing of our Clinical Studies and Clinical Trials, including, without limitation, slow patient enrollment and the availability of supplies, including as a result of the COVID-19 pandemic, and real or perceived lack of effect on biology or safety of our product candidates. In addition, the development of all of our product candidates may be subject to extensive governmental regulation. These factors make it difficult for us to predict the timing and costs of the further development of our product candidates. See "Risk Factors" for further discussion of these and additional risks and uncertainties associated with product development and commercialization that may significantly affect the timing and cost of our research and development expenses and our ability to obtain regulatory approval for and successfully commercialize our product candidates. We expect research and development expenses to increase as we advance existing product candidates into additional Clinical Trials and Clinical Studies and develop new product candidates.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries, benefits, travel and stock-based compensation expense for personnel in executive, finance and administrative functions. General and administrative expenses also include professional fees for legal, consulting, accounting and audit services.
We anticipate that our future general and administrative expenses will decrease from 2022 levels due to our corporate restructuring.
Impairment of Long-Lived Assets
Impairment of long-lived assets consists of:
•Costs attributable to the ceased use of our corporate offices. The impairment
was determined by comparing the fair value of the impacted asset group to their
carrying value as of the impairment measurement date.
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•Costs attributable to the return of leased laboratory equipment to the lessor
in
Restructuring Charge
In
Interest Income
Interest income consists of interest earned on our investments in cash equivalents, money market funds, and high-quality fixed income securities.
Interest Expense
Interest expense consists of interest on outstanding borrowings under our loan and security agreement, the amortization expense of the debt discount and debt issuance costs, and interest paid for leased capital equipment.
Loss on Extinguishment of Debt
The loss on extinguishment of debt was related to charges upon the early redemption of debt which consist of: unamortized debt issuance costs and unamortized deferred financing fees; final fees due and payable to the lender; and lender's legal fees. During 2022, we repaid all outstanding principal of$26.0 million on our loan and security agreement. As such, we recognized a$1.5 million loss calculated as the difference between the carrying amount of the debt and the total cash paid upon debt extinguishment. In addition, we recognized an extinguishment loss of$0.1 million in the year endedDecember 31, 2022 representing legal fees related to the conversion of notes held by funds associated with Flagship Pioneering into common stock.
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, 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 NOLs, carryforwards
and tax credits will not be realized.
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Consolidated Results of Operations
Comparison of the Years Ended
The following table summarizes our consolidated results of operations for the
years ended
Year Ended December 31,
2022 2021 Change
Operating expenses:
Research and development $ 56,984 $ 43,135 $ 13,849
General and administrative 15,815 18,711 (2,896)
Restructuring and impairment charges 4,189 - 4,189
Total operating expenses 76,988 61,846 15,142
Loss from operations (76,988) (61,846) (15,142)
Other income (expense):
Interest income 504 139 365
Interest expense (3,021) (2,917) (104)
Loss on extinguishment of debt (1,601) - (1,601)
Other income (expense), net (80) (4)
(76)
Total other income (expense), net (4,198) (2,782) (1,416) Net loss$ (81,186) $ (64,628) $ (16,558)
Research and Development Expenses
The following table summarizes our research and development expenses incurred
during the years ended
Year Ended December 31,
2022 2021 Change
Salary and benefits-related $ 14,571 $ 13,918 $ 653
Clinical research and outside services 37,666 24,208 13,458
Facility-related and other 4,747 5,009 (262)
Total research and development expenses $ 56,984 $
43,135
Salary and benefits-related costs increased by$0.7 million due to higher headcount and related compensation, offset in part by the reduction in force. Clinical research and outside services costs increased by$13.5 million due to expenses incurred for our Phase 2/2b clinical trials. Facility-related and other costs decreased by$0.3 million due to lower corporate expenses. 121
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General and Administrative Expenses
The following table summarizes our general and administrative expenses incurred
during the years ended
Year Ended December 31,
2022 2021 Change
Salary and benefits-related $ 8,821 $ 11,751 $ (2,930)
Other contract services and outside costs 5,923 5,833 90
Facility-related and other 1,071 1,127 (56)
Total general and administrative expenses $ 15,815 $
18,711
Salary and benefits-related costs decreased by
Restructuring and Impairment Charges
The following table summarizes our restructuring and impairment charges incurred
during the years ended
Year Ended
2022 2021 Change
Employee termination benefits $ 1,858 $ - $ 1,858
Impairment of operating lease right-of-use assets 2,116 - 2,116
Impairment of property and equipment 215 - 215
Total restructuring and impairment charges $ 4,189 $ -
InDecember 2022 , we recorded charges of$1.9 million ,$2.1 million and$0.2 million related to employee termination benefits, impairment of operating lease right-of-use assets, and impairment of property and equipment, respectively, following the reorganization. We paid$0.6 million of employee termination benefits inDecember 2022 and we paid the remainder inJanuary 2023 . In total, we paid approximately$1.9 million in employee severance benefits.
Other Income (Expense), Net
Other income (expense), net was a net expense of$4.2 million for the year endedDecember 31, 2022 , compared to a net expense of$2.8 million for the year endedDecember 31, 2021 . InDecember 2022 , we recognized a$1.5 million loss upon extinguishing our debt with SLR Investment Corp.
Liquidity and Capital Resources
Since our inception, we have incurred significant operating losses. We have not yet commercialized any product candidates and we do not expect to generate revenue from sales of any product candidates we may develop for several years, if at all. To date, we have funded our operations with proceeds from the sale of preferred and common stock and borrowing of debt.
See "-Funding Overview."
As ofDecember 31, 2022 , we had cash and cash equivalents of$17.1 million . Our cash equivalents as ofDecember 31, 2022 consisted of bank deposits and money market funds, which enables us to achieve our liquidity and capital needs. 122 -------------------------------------------------------------------------------- Tab le o f Contents Cash Flows
The following table summarizes our cash flows for each of the periods presented (in thousands):
Year Ended December 31,
2022 2021
Net cash used in operating activities
3,047
Net cash provided by financing activities 32,238
3,158
Net decrease in cash and cash equivalents
Operating Activities During the year endedDecember 31, 2022 , operating activities used$69.6 million of cash, primarily resulting from our net loss of$81.2 million , partially offset by non-cash charges for stock-based compensation expense of$3.6 million , impairment of long-lived assets of$2.3 million , and loss on extinguishment of debt of$1.6 million . Additionally, accrued expenses increased to account for NASH clinical trial shut-down costs. During the year endedDecember 31, 2021 , operating activities used$54.2 million of cash, primarily resulting from our net loss of$64.6 million , partially offset by changes in our operating assets and liabilities of$2.3 million and non-cash charges of$8.1 million , including$6.2 million of stock-based compensation expense.
Investing Activities
During the year ended
During the year ended
Financing Activities
During the year endedDecember 31, 2022 , net cash provided by financing activities was$32.2 million . We received net proceeds of$59.4 million from the issuance of common stock and short-term convertible notes. These cash inflows were partially offset by repayment of principal, accrued interest, fees and costs of$27.4 million .
During the year ended
Loan and Security Agreement
OnSeptember 2, 2021 , we entered into a loan and security agreement with SLR Investment Corp., or SLR, (formerly known as Solar Capital Ltd.), for term loans in an aggregate principal amount of$26.0 million . The loan and security agreement replaced the loan and security agreement between us and SLR, dated as ofJanuary 9, 2018 and further amended onOctober 5, 2018 ,November 30, 2018 andAugust 28, 2020 (as amended, the "Prior Loan and Security Agreement"). 123
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InSeptember 2022 , we paid SLR approximately$6.4 million , including principal, accrued interest, fees and costs. InOctober 2022 , we satisfied an equity related condition under the loan and security agreement that extended the date on which repayment of principal commences fromJanuary 2023 toJuly 2023 . OnDecember 15, 2022 , we entered into a payoff letter with SLR, under which we voluntarily accelerated the debt and paid SLR approximately$21.0 million , in full satisfaction of all obligations, including all outstanding principal, accrued interest, fees, costs, expenses and other amounts chargeable, under the loan and security agreement. The payoff letter also provided for the termination of all commitments and obligations under the loan and security agreement and release of all liens held by SLR on our assets.
Funding Requirements
As ofDecember 31, 2022 , we had cash and cash equivalents of$17.1 million . Based on our current financial resources and forecasted operating plan, we believe that we will be able to operate into the second quarter of 2023. We expect our corporate restructuring will reduce our operating expenses with the goal of allowing us to pursue any viable strategic alternatives. There is no guarantee that this plan will be successful. We may not be able to successfully pursue any strategic alternatives and, even if certain strategic alternatives may be available, we cannot provide any assurance that the strategic alternatives review process will result in any particular alternative, transaction or value. Our cash requirements depend on numerous factors, including, without limitation, expenditures in connection with our research and development programs, including with respect to the timing and progress of Clinical Trials, Clinical Studies and preclinical development activities; payments to CROs, CMOs and other third-party providers; the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; our ability to raise additional equity or debt financing; potential repayments of our long-term debt; and our ability to enter into collaboration or license agreements and our receipt of any upfront, milestone or other payments thereunder. Changes in our research and development plans or other changes affecting our operating expenses may result in changes in the timing and amount of expenditures of our capital resources. See "Risk Factors" for further discussion of these and additional risks and uncertainties that may significantly affect the timing and amount of expenditures of our capital resources. Based on our current operating plan, we believe we do not have sufficient cash and cash equivalents to support current operations through a full 12 months from the issuance date of this Annual Report on Form 10-K. 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 a combination of equity offerings, debt re-financings, collaboration agreements, strategic alliances and licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all, including as a result of market volatility following the COVID-19 pandemic. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions. The amounts involved in any such transactions, individually or in the aggregate, may be material. These factors individually and collectively raise substantial doubt about our ability to continue as a going concern.
Nasdaq Delisting Notification
OnDecember 30, 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 Market pursuant to Nasdaq Listing Rule 5450(a)(1) (which we refer to as the "Minimum Bid Price Requirement"). The Nasdaq deficiency letter has no immediate effect on the listing of our common stock, and our common stock will continue to trade on the Nasdaq Global Market under the symbol "AXLA" at this time. 124 -------------------------------------------------------------------------------- Tab le o f Contents In accordance with Nasdaq Listing Rule 5810(c)(3)(A), or the Compliance Period Rule, we have been provided a period of 180 calendar days, or untilJune 28, 2023 (the "Compliance Date"), to regain compliance with the Minimum Bid Price Requirement. If, at any time endingJune 28, 2023 , the bid price for our common stock closes at$1.00 or more for a minimum of ten consecutive business days, as required under the Compliance Period Rule, the Staff will provide written notification to us that we have regained compliance with the Minimum Bid Price Requirement and our common stock will continue to be eligible for listing on the Nasdaq Global Market, unless the Staff exercises its discretion to extend this ten-day period pursuant to Nasdaq Listing Rule 5810(c)(3)(H). If we do not regain compliance with the Minimum Bid Price Requirement by the Compliance Date, we may be eligible for an additional 180 calendar day compliance period. To qualify, we would need to transfer the listing of our common stock to The Nasdaq Capital Market, provided that we meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the Minimum Bid Price Requirement, and would need to provide written notice to Nasdaq of our intention to cure the deficiency during the additional compliance period. To effect such a transfer, we would also need to pay an application fee to Nasdaq and provide written notice to the Staff of our intention to cure the deficiency during the second compliance period by effecting a reverse stock split if necessary. As part of its review process, the Staff will make a determination of whether it believes we will be able to cure the deficiency. Should the Staff conclude that we will not be able to cure the deficiency, the Staff will provide written notification to us that our common stock will be subject to delisting. At that time, we may appeal the Staff's delisting determination to aNasdaq Listing and Hearing Review Panel . However, there can be no assurance that, if we receive a delisting notice and appeal the delisting determination by the Staff to the panel, such appeal would be successful. We intend to monitor the closing bid price of our common stock and may, if appropriate, consider available options to regain compliance with the Minimum Bid Price Requirement, which could include seeking to affect a reverse stock split. However, there can be no assurance that we will be able to regain, or even pursue, compliance with the Minimum Bid Price Requirement, secure a second period of 180 days to regain compliance, or maintain compliance with any of the other Nasdaq continued listing requirements.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles inthe United States . The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, 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 are described in more detail in Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
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Long-Lived Assets Impairment
Long-lived assets consist of property and equipment and operating lease, right-of-use asset. Long-lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that we consider in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset group for recoverability, we compare forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset group to its carrying value. An impairment loss would be recognized in loss from operations when estimated undiscounted future cash flows expected to result from the use and eventual disposition of an asset group are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset group over its fair value, determined based on discounted cash flows.
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 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 advanced 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 these estimates with the service providers
and make adjustments if necessary. Examples of estimated accrued research and
development expenses include fees paid to vendors including CROs and CMOs for
research and development services.
We base our expenses related to research and development on our estimates of the
services received and efforts expended pursuant to quotes and contracts with
CROs that conduct and manage Clinical Trials, Clinical Studies and preclinical
development activities on our behalf. The financial terms of these agreements
are subject to negotiation, vary from contract to contract and may result in
uneven payment flows. There may be instances in which payments made to our
vendors will exceed the level of services provided and result in a prepayment of
the expense. Payments under some of these contracts depend on factors such as
the successful enrollment of patients or subjects and the completion of clinical
milestones. 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 the amount of prepaid
expenses 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.
Restructuring
We recognize restructuring charges related to reorganization plans that have
been committed to by management when liabilities have been incurred. In
connection with these activities, we record restructuring charges at fair value
for one-time employee termination benefits when management has committed to a
plan of termination, the plan identifies the employees and their expected
termination dates, the details of termination benefits are complete, it is
unlikely changes to the plan will be made or the plan will be withdrawn and
communication to such employees has occurred.
One-time employee termination benefits are recognized in their entirety when
communication has occurred and future services are not required. If future
services are required, the costs are recorded ratably over the remaining period
of service. Contract termination costs to be incurred over the remaining
contract term without economic benefit are recorded in their entirety when the
contract is canceled.
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Stock-Based Compensation
We estimate the fair value of our stock-based awards to employees and non-employees using the Black-Scholes option-pricing model, which requires the input of highly subjective assumptions, including (a) the expected volatility of our stock, (b) the expected term of the award, (c) the risk-free interest rate, and (d) expected dividends. Due to the lack of company-specific historical and implied volatility data, we base our estimate of expected volatility on the historical volatility of a group of companies in the pharmaceutical and biotechnology industries in a similar stage of development as us and that are publicly traded. For these analyses, we have selected companies with comparable characteristics to ours including enterprise value, risk profiles and with historical share price information sufficient to meet the expected life of the stock-based awards. We compute the historical volatility data using the daily closing prices for the selected companies' shares during the equivalent period of the calculated expected term of our stock-based awards. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available. We have estimated the expected life of our employee stock options using the "simplified" method, whereby, the expected life equals the average of the vesting term and the original contractual term of the option. The risk-free interest rates for periods within the expected life of the option are based on theU.S. Treasury yield curve in effect during the period the options were granted. We account for forfeitures as they occur.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report.
Emerging Growth Company Status
We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We may take advantage of these exemptions until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. We have elected to use the extended transition period for complying with new or revised accounting standards and, as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. We may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of our IPO or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than$1.235 billion in annual revenue, we have more than$700.0 million in market value of our stock held by non-affiliates (and we have been a public company for at least 12 months and have filed one annual report on Form 10-K) or we issue more than$1.0 billion of non-convertible debt securities over a three-year period.
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