NAUTILUS BIOTECHNOLOGY, INC.
You should read the following discussion and analysis of our financial condition
and results of operations together with the financial statements and related
notes appearing elsewhere in this Annual Report on Form 10-K. Some of the
information in this discussion and analysis contains forward-looking statements
reflecting our current expectations and involves risk and uncertainties. For
example, statements regarding our expectations as to our plans and strategy for
our business, future financial performance, expense levels and liquidity sources
are forward-looking statements. Our actual results and the timing of events
could differ materially from those discussed in our forward-looking statements
as a result of many factors, including those set forth under the "Risk Factors"
section and elsewhere in this Annual Report on Form 10-K. Please also see the
section entitled "Special Note Regarding Forward-Looking Statements."
Unless otherwise indicated or the context otherwise requires, references in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section to "Nautilus," "we," "us," "our" and other similar terms
refer to the business and operations of Legacy Nautilus prior to the Business
Combination and to New Nautilus and its consolidated subsidiary following the
Business Combination.
Overview
We are a development stage life sciences company creating a platform technology
for quantifying and unlocking the complexity of the proteome. Our mission is to
transform the field of proteomics by democratizing access to the proteome and
enabling fundamental advancements across human health and medicine. We were
founded on the belief that incremental advancements of existing technologies are
inadequate, and that a bold scientific leap would be required to radically
reinvent proteomics and revolutionize precision medicine. Our vision is to
integrate our breakthrough innovations in computer science, engineering, and
biochemistry to develop and commercialize a proteomic analysis technology of
extreme sensitivity and scale. To accomplish this, we have built a prototype of
a proteome analysis system, an instrument to perform massively parallel single
protein molecule measurements which will be further developed to deliver the
speed, simplicity, accuracy, and versatility that we believe is necessary to
establish a new gold standard in the field.
Since our incorporation in 2016, we have devoted substantially all of our
resources to research and development activities, including with respect to our
proteomics platform, or Nautilus platform, business planning, establishing and
maintaining our intellectual property portfolio, hiring personnel, raising
capital and providing general and administrative support for these operations.
We do not have any products available for commercial sale, and we have not
generated any revenue from our Nautilus platform or other sources since
inception. Our ability to generate revenue sufficient to achieve profitability,
if ever, will depend on the successful development and eventual
commercialization of our Nautilus platform, which we expect, if it ever occurs,
will take a number of years. Our Nautilus platform, which includes our
end-to-end solution comprised of instruments, consumables, and software
analysis, is currently under development and will require significant additional
research and development efforts, including extensive testing prior to
commercialization. These efforts require significant amounts of additional
capital and adequate personnel infrastructure. There can be no assurance that
our research and development activities will be successfully completed, or that
our Nautilus platform will be commercially viable.
In order to commercialize our Nautilus platform in volume, we will need to
establish internal manufacturing capacity or to contract with one or more
manufacturing partners, or both. Our technology is complex, and the
manufacturing process for our products will be similarly complex, involving a
large number of unique precision parts in addition to the production of various
reagents and antibodies. We may encounter unexpected difficulties in
manufacturing our Nautilus platform, instruments, and related consumables. Among
other factors, we will need to develop reliable supply chains for the various
components in the Nautilus platform, instruments, and consumables to support
large-scale commercial production. In connection with our Nautilus platform, we
intend to utilize over 300 complex reagents and various antibodies in order to
generate deep proteomic information at the speed and scale which we expect our
Nautilus platform to perform. Such reagents and antibodies are expected to be
more difficult to manufacture and more expensive to procure. There is no
assurance that we will be able to build manufacturing or consumable production
capacity internally or find one or more suitable manufacturing or production
partners, or both, to meet the volume and quality requirements necessary to be
successful in the proteomics market.
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Given our stage of development, we have not yet established a commercial
organization or distribution capabilities. We do intend to build a commercial
infrastructure to support sales of our products. We expect to manage sales,
marketing and distribution through both internal resources and third-party
relationships. We plan to commercialize our proteomics platform using a
three-phase plan that has been shown to be effective and optimal for introducing
disruptive products in numerous life sciences technology markets. The first
phase is expected to involve collaboration with biopharmaceutical companies and
key opinion leaders to validate the performance and utility of Nautilus'
product, during which we do not expect to recognize significant revenue, if any.
The second phase will include an early access limited release phase in which we
expect to recognize limited revenue. Finally, the third phase is anticipated to
include a broader commercial launch. We are currently in the collaboration phase
during which we have entered into collaborations with a small number of research
customers, including with biopharmaceutical companies and key opinion leaders in
proteomics whose assessment and validation of our products can significantly
influence other researchers in their respective markets and/or fields. During
the early access limited release phase, we plan to leverage our publications to
drive awareness and customer demand to pre-sell instruments and reagents to
select customers performing large-scale proteomics research. During this phase,
we plan to provide early access program partners with broad-scale analysis and
profiling of samples analyzed in its facility and shared via a cloud platform.
We do not anticipate that these activities will result in any material revenue.
During this phase, we expect to work closely with early access customers to
demonstrate a unique value proposition for our Nautilus platform. We expect this
second phase to lead into the third phase of broad commercialization by the end
of 2023. We do not expect to realize any material revenue prior to the second
half of 2023.
We intend to commercialize our Nautilus platform through a direct sales channel
in the United States , and through both direct and distributor sales channels in
regions outside the United States . Given our stage of development, we currently
have no marketing, sales, commercial product distribution or service and support
capabilities. We intend to build the necessary infrastructure for these
activities in the United States , European Union , the United Kingdom , and
potentially other countries and regions, including Asia-Pacific , as we execute
on our three phase commercial launch strategy for our Nautilus platform.
Prior to the Business Combination, we financed our operations primarily through
private placements of convertible preferred stock and had raised aggregate net
proceeds of $108.4 million from these private placements. In connection with the
consummation of the Business Combination and PIPE Financing, we received
additional gross proceeds of approximately $345.5 million from PIPE Investors
and the Business Combination, offset by approximately $18.2 million of
transaction costs and underwriters' fees relating to the closing of the Business
Combination. As of December 31, 2021 , we had cash, cash equivalents and
short-term investments of $345.7 million . Based on this, we believe that our
existing cash, cash equivalents, and short-term investments will enable us to
fund our planned operating expenses and capital expenditures through at least
the next 12 months.
We have incurred significant losses since the commencement of our operations.
Our net loss was $50.3 million during the year ended December 31, 2021 , and we
expect to continue to incur significant losses for the foreseeable future as we
continue our research and development activities and planned commercialization
of our proteomics platform. As of December 31, 2021 , we had an accumulated
deficit of $80.6 million . These losses have resulted primarily from costs
incurred in connection with research and development activities and to a lesser
extent from general and administrative costs associated with our operations. We
expect to incur significant and increasing expenses and operating losses for the
foreseeable future. Our net losses may fluctuate significantly from period to
period, depending on the timing of and expenditures on our planned
commercialization and research and development activities.
We expect our expenses and capital requirements will increase substantially in connection with our ongoing activities as we:
•continue our research and development activities, including with respect to our Nautilus platform;
•undertake activities to establish sales, marketing and distribution capabilities for our Nautilus platform;
•setup costs related to production tooling and required testing;
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--------------------------------------------------------------------------------•maintain, protect and expand our intellectual property portfolio, including patents, trade secrets and know how;
•implement operational, financial and management information systems;
•attract, hire and retain additional management, scientific and administrative personnel; and
•operate as a public company.
As a result, we will require substantial additional funding to develop our products and support our continuing operations. Until such time that we can generate significant revenue from product sales, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, which could include income from collaborations, strategic partnerships or marketing, distribution or licensing arrangements with third parties or from grants. We may be unable to raise additional funds or to enter into such agreements or arrangements on favorable terms, or at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on our business, results of operations or financial condition, and could force us to delay, reduce or eliminate our product development or future commercialization efforts. We may also be required to grant rights to develop and market products that we would otherwise prefer to develop and market ourselves. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our development efforts. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities.
Impact of COVID-19 Pandemic
The global COVID-19 pandemic continues to rapidly evolve. The extent of the impact of the 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 development activities, third-party manufacturers, and other third parties with whom we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. As the COVID-19 pandemic has developed, we have taken numerous steps to help ensure the health and safety of our employees. We are maintaining hygiene and respiratory protocols; controls for social distancing; enhanced cleaning, disinfecting, decontamination, and ventilation protocols; health policies; and usage of personal protective equipment, where appropriate. During March and April of 2020 in which stay at home orders were in place in the state ofCalifornia andWashington , the volume of ongoing lab work was reduced, and only critical program work in the lab continued with staggered lab employee work shifts to minimize risk of exposure to COVID-19, which disrupted and delayed our ability to conduct development activities. While we were broadly able to resume normal operations inAugust 2021 , if any resurgence or worsening of the COVID-19 pandemic causes us to reinstitute these measures we may experience additional disruption and/or delays in our ability to conduct development activities. We have been and continue to actively monitor our supply chain during the COVID-19 pandemic, including third-party materials and suppliers. To date, we have experienced some supply disruptions due to the pandemic, including closures at certain chip manufacturers, which led to extended lead times for certain chips; diversion of certain lab materials needed to support COVID-19 relief efforts; and lower availability of certain reagents. While certain of these disruptions have resolved since the start of the COVID-19 pandemic, we are continuing to monitor our supply chain and contingency planning is ongoing with our partners to reduce the possibility of an interruption to our development activities or the availability of necessary materials. The ultimate impact of the 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, with necessary or advisable modifications to employee travel and with our employees working remotely fully or intermittently as able fromMarch 2020 untilAugust 2021 . We will continue to actively monitor the rapidly evolving situation related to COVID-19 and 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. At this point, the extent to which the COVID-19 pandemic may affect our future business, operations and development timelines and plans, including the resulting impact on our expenditures and capital needs, remains uncertain. 77 --------------------------------------------------------------------------------
Reverse Recapitalization Transaction
OnJune 9, 2021 (the "Closing Date"),Nautilus Biotechnology, Inc. , aDelaware corporation (f/k/aARYA Sciences Acquisition Corp III , aCayman Islands exempted company and our predecessor company ("ARYA")) (the "Company"), consummated its previously announced business combination (the "Business Combination") pursuant to the terms of that certain Business Combination Agreement, dated as ofFebruary 7, 2021 (the "Business Combination Agreement"), by and among ARYA,Mako Merger Sub, Inc. , aDelaware corporation and wholly-owned subsidiary of ARYA ("Mako Merger Sub"), andNautilus Subsidiary, Inc. , aDelaware corporation (f/k/aNautilus Biotechnology, Inc. ) ("Legacy Nautilus"). Pursuant to the terms of the Business Combination Agreement, on the Closing Date, (i) ARYA changed its jurisdiction of incorporation by deregistering as aCayman Islands exempted company and continuing and domesticating as a corporation incorporated under the laws of theState of Delaware (the "Domestication"), upon which ARYA changed its name to "Nautilus Biotechnology, Inc. " (together with its consolidated subsidiary, "New Nautilus" or "Nautilus") and (ii) Mako Merger Sub merged with and into Legacy Nautilus (the "Merger"), with Legacy Nautilus as the surviving company in the Merger and, after giving effect to such Merger, Legacy Nautilus becoming a wholly-owned subsidiary of New Nautilus. In accordance with the terms and subject to the conditions of the Business Combination Agreement, at the effective time of the Merger (the "Effective Time"), (i) each share of Legacy Nautilus outstanding as of immediately prior to the Effective Time was exchanged for shares of common stock of New Nautilus, par value$0.0001 per share ("Common Stock"), and (ii) all vested and unvested options to purchase shares of Legacy Nautilus were exchanged for comparable options to purchase shares of Common Stock, in each case, based on an implied Legacy Nautilus equity value of$900,000,000 .
As of the open of trading on
In conjunction with the consummation of the Business Combination with ARYA, we received gross proceeds of approximately$345.5 million fromPIPE Investors and the Business Combination, offset by approximately$18.2 million of transaction costs and underwriters' fees relating to the closing of the Business Combination.
Components of Our Results of Operations
Revenue
To date, we have not generated any revenue and we may not generate any revenue from the sale of products or from other sources in the near future.
Operating Expenses
Research and Development Expense
Research and development expenses account for a significant portion of our
operating expenses and consist primarily of salaries, related benefits and
stock-based compensation expense of product development personnel, facilities
costs, laboratory supplies and equipment, depreciation and amortization,
external costs of vendors engaged to conduct research and development
activities, and allocated expenses for technology and facilities. We expense
research and development expenses in the periods in which they are incurred.
We plan to continue to invest in our research and development efforts and to
increase our investment in research and development efforts related to our
product development. As a result, we expect research and development expenses to
increase in absolute dollars as we continue to advance our product development,
hire additional personnel and retain existing personnel, purchase supplies and
materials and allocate expense to our research and development facilities.
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--------------------------------------------------------------------------------General and Administrative Expenses
General and administrative expenses consist of salaries and benefits, and stock-based compensation expense for personnel in executive, operations, legal, human resources, finance, marketing, commercial, IT personnel and administrative functions, professional fees for legal, patent, consulting, accounting and audit services, and allocated expenses for technology and facilities. We expense general and administrative expenses in the periods in which they are incurred. We expect that our general and administrative expenses will increase substantially over the next several years as we hire additional personnel to support the continued research and development of our products and growth of our business. We also anticipate that we will incur substantially higher expenses as a result of operating as a public company, including expenses related to accounting, audit, legal, regulatory, insurance, compliance with the rules and regulations of theSEC , Sarbanes-Oxley Act and those of any national securities exchange on which our securities are traded, director and officer insurance, investor and public relations, and other administrative and professional services.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income on our cash, cash equivalents and investments and other miscellaneous nonrecurring expenses such as loss on disposal of property and equipment.
Results of Operations
Comparison of Fiscal Year Ended
The following table shows our consolidated statements of operations for the
periods indicated:
Year Ended December 31, 2021 to 2020
2021 2020 Change Change
(in thousands) ($) (%)
Operating expenses:
Research and development $ 29,352 $ 12,432 $ 16,920 136 %
General and administrative 21,146 3,312 17,834 538 %
Total operating expenses 50,498 15,744 34,754 221 %
Other income (expense), net 183 125 58 46 %
Net loss $ (50,315) $ (15,619) $ (34,696) 222 %
Research and Development Expenses
Research and development expenses were$29.4 million for the year endedDecember 31, 2021 , compared to$12.4 million for the year endedDecember 31, 2020 , an increase of$16.9 million , or 136%. The increase was primarily due to a$8.4 million increase in salaries, related benefits, and stock-based compensation due to an increase in headcount to support on-going development of our products, a$4.2 million increase in laboratory supplies and equipment expense, a$2.2 million increase in costs for development services and a$1.4 million increase in facilities cost.
General and Administrative Expenses
General and administrative expenses were
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--------------------------------------------------------------------------------Other Income (Expense), Net
Other income (expense), net for the year ended
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have not generated any revenue from product sales and have incurred significant operating losses and negative cash flows from our operations. Our net loss was$50.3 million for the year endedDecember 31, 2021 . As ofDecember 31, 2021 , we had an accumulated deficit of$80.6 million . Prior to the Business Combination, we funded our operations primarily with proceeds from the sale of convertible preferred stock. Prior to the Business Combination, we had raised net proceeds of$108.4 million from these private placements of our convertible preferred stock. InJune 2021 , in conjunction with the consummation of the Business Combination with ARYA, we received additional gross proceeds of approximately$345.5 million fromPIPE Investors and the Business Combination, offset by approximately$18.2 million of transaction costs and underwriters' fees relating to the closing of the Business Combination. As ofDecember 31, 2021 , we had cash, cash equivalents and short-term investments of$345.7 million . Our primary uses of cash to date have been to fund our research and development activities, business planning, establishing and maintaining our intellectual property portfolio, hiring personnel, raising capital, and providing general and administrative support for these operations.
Funding Requirements
To date, we have not generated any revenue and we may not generate any revenue from the sale of products or from other sources in the near future. We expect our expenses and capital requirements will increase substantially in connection with our ongoing activities as we:
•continue our research and development activities, including with respect to our proteomics platform;
•undertake activities to establish sales, marketing and distribution capabilities for our proteomics platform;
•incur setup costs related to production tooling and required testing;
•maintain, protect and expand our intellectual property portfolio, including patents, trade secrets and know how;
•implement operational, financial and management information systems;
•attract, hire and retain additional management, scientific and administrative personnel; and
•operate as a public company.
Based on our planned operations, we expect our current cash, cash equivalents,
and short-term investments will be sufficient to fund our operating expenses and
capital expenditures for at least the next 12 months. We continue to face
challenges and uncertainties and, as a result, our available capital resources
may be consumed more rapidly than currently expected due to: delays in execution
of our development plans; the scope and timing of our investment in our sales,
marketing, and distribution capabilities; changes we may make to the business
that affect ongoing operating expenses; the costs of filing, prosecuting,
defending and enforcing any patent claims and other intellectual property
rights; changes we may make in our business or commercialization strategy;
changes we may make in our research and development spending plans; our need to
implement additional infrastructure and internal systems; the impact of the
COVID-19 pandemic; and other items affecting our forecasted level of
expenditures and use of cash resources including potential acquisitions.
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Until such time as we can generate significant revenue from commercialization of
our products, if ever, we will continue to require substantial additional
capital to develop our proteomics platform and fund operations for the
foreseeable future. We intend to obtain such capital through public or private
equity offerings or debt financings, credit or loan facilities or a combination
of one or more of these funding sources. We may also seek additional financing
opportunistically. We may be unable to raise additional funds on favorable terms
or at all. Our failure to raise additional capital, if needed, would have a
negative impact on our financial condition and our ability to execute our
business plan.
Our expected future capital requirements depend on many factors including
expansion of our product portfolio and the timing and extent of spending on
sales and marketing and the development of our technology. If we raise
additional funds by issuing equity securities, our stockholders will experience
dilution. Any future debt financing into which we enter may impose upon us
additional covenants that restrict our operations, including limitations on our
ability to incur liens or additional debt, pay dividends, repurchase our common
stock, make certain investments and engage in certain merger, consolidation or
asset sale transactions. Any debt financing or additional equity that we raise
may contain terms that are not favorable to us or our stockholders.
Historical Cash Flows
For the Fiscal Years Ended
The following table summarizes our cash flows for the periods indicated:
Year Ended December 31,
2021 2020
(in thousands)
Net cash used in operating activities $ (39,241) $ (13,996)
Net cash used in investing activities (138,964) (25,279)
Net cash provided by financing activities 327,447 75,899
Net increase in cash, cash equivalents and restricted cash
$ 36,624 Operating Activities During the year endedDecember 31, 2021 , net cash used in operating activities was$39.2 million , primarily resulting from our operating loss of$50.3 million and a$2.8 million increase in prepaid expenses and other assets, partially offset by a$7.9 million of stock-based compensation, a$2.3 million increase in accrued expenses and other liabilities,$1.8 million amortization of operating lease right-of-use assets, a$1.3 million increase in accounts payable and a$1.0 million in depreciation. During the year endedDecember 31, 2020 , net cash used in operating activities was$14.0 million , primarily resulting from our operating loss of$15.6 million ,$1.6 million decrease in operating lease liability,$0.6 million increase in prepaid expenses and other assets, partially offset by$1.6 million amortization of operating lease right-of-use assets,$0.7 million in depreciation,$0.7 million increase in accrued expenses and other liabilities,$0.3 million amortization of premiums on securities and$0.4 million of stock-based compensation.
Investing Activities
During the year endedDecember 31, 2021 , net cash used in investing activities was$139.0 million , resulting from$221.8 million in purchases of securities and$2.3 million in purchases of property and equipment, partially offset by$85.1 million in proceeds from sale and maturities of securities. During the year endedDecember 31, 2020 , net cash used in investing activities was$25.3 million , primarily resulting from$68.4 million in purchases of securities and$0.9 million in purchases of property and equipment, offset by$44.0 million in proceeds from maturities of securities. 81 --------------------------------------------------------------------------------
Financing Activities
During the year ended
During the year ended
Contractual Obligations and Commitments
For a discussion of our contractual obligations and commitments, refer to Part II, Item 8, Note 10, "Commitments and Contingencies" to the consolidated financial statements in this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition results of operations are based upon our financial statements included elsewhere in this prospectus. The preparation of our financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, and expenses. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Actual results may differ from those estimates. Our critical accounting policies are those that materially affect our financial statements and involve difficult, subjective or complex judgments by management. A thorough understanding of these critical accounting policies is essential when reviewing our financial statements. We believe that the critical accounting policies listed below are the most difficult management decisions as they involve the use of significant estimates and assumptions as described above.
Research and Development
Costs for research and development activities are expensed in the period in which they are incurred. Research and development expenses consist of costs incurred in performing research and development activities, including salaries and bonuses, stock-based compensation, employee benefits, facilities costs, laboratory supplies, depreciation and amortization, external costs of vendors engaged to conduct research and development activities. As part of the process of preparing our financial statements, we estimate our accrued expenses. This process involves reviewing quotations and contracts, identifying services that have been performed on our behalf and estimating the level of services performed and the associated cost incurred for services for which we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses at the end of each reporting period based on the facts and circumstances known to us at that time. The significant estimates in our accrued research and development expenses relate to expenses incurred with respect to academic research centers and other vendors in connection with research and development activities for which we have not yet been invoiced.
Stock Based Compensation
We maintain a stock-based compensation plan as a long-term incentive for
employees, non-employee directors and consultants. The plan allows for the
issuance of incentive stock options, non-qualified stock options, restricted
stock units, and other forms of equity awards. Our stock-based compensation
programs include shares issued under our 2021 Equity Incentive Plan and 2021
Employee Stock Purchase Plan.
We recognize stock-based compensation expense for stock options on a
straight-line basis over the requisite service period and account for
forfeitures as they occur. Our stock-based compensation costs are based upon the
grant date fair value of options estimated using the Black-Scholes option
pricing model. To the extent any stock option grants are made subject to the
achievement of a performance-based milestone, management evaluates when
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--------------------------------------------------------------------------------the achievement of any such performance-based milestone is probable based on the relative satisfaction of the performance conditions as of the reporting date.
The Black-Scholes option pricing model utilizes inputs which are highly subjective assumptions and generally require significant judgment. These assumptions include:
•Fair Value of Common Stock. See the subsection titled "Common Stock Valuations" below.
•Risk-Free Interest Rate. The risk-free interest rate is based on the
•Expected Volatility. Historically, we have been a private company and lacked company-specific historical and implied volatility information for our common stock. Therefore, the expected volatility of our common stock was determined by using an average of historical volatilities of selected industry peers deemed to be comparable to our business corresponding to the expected term of the equity awards and we expect to continue to do so until such time we have adequate historical data regarding the volatility of our traded common stock price. •Expected Term. The expected term of stock options represents the weighted-average period that the stock-based awards are expected to be outstanding. We do not have sufficient historical exercise and post-vesting termination activity to provide accurate data for estimating the expected term of options and have opted to use the "simplified method," whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option.
•Expected Dividend Yield. The expected dividend rate is zero as we have no history or expectation of declaring dividends on our common stock.
Certain assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different.
Common Stock Valuations
Prior to the closing of the Business Combination, there had been no public market for our common stock, and, as a result, the fair value of the shares of common stock underlying our share-based awards was estimated on each grant date by our board of directors. To determine the fair value of our common stock underlying option grants at each grant date, our board of directors considered, among other things, input from management, valuations of our common stock prepared by unrelated third-party valuation firms in accordance with the guidance provided by theAmerican Institute of Certified Public Accountants 2013 Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, and our board of directors' assessment of additional objective and subjective factors that it believed were relevant, and factors that may have changed from the date of the most recent valuation through the date of the grant. These factors included, but were not limited to:
•our results of operations and financial position, including our levels of available capital resources;
•our stage of development and material risks related to our business;
•progress of our research and development activities;
•our business conditions and projections;
•the market value of stock or equity interests in similar corporations and other
entities engaged in trades or businesses substantially similar to ours, the
value of which could be readily determined through nondiscretionary, objective
means (such as through trading prices on an established securities market or an
amount paid in an arm's length transaction), as well as recently completed
mergers and acquisitions of peer companies;
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--------------------------------------------------------------------------------•the lack of marketability of our common stock as a private company;
•the prices at which we sold shares of our convertible preferred stock to outside investors in arms-length transactions and the terms and prices of other arm's length transactions involving the sale or transfer of our securities;
•the rights, preferences, and privileges of our convertible preferred stock relative to those of our common stock;
•the likelihood of achieving a liquidity event for our securityholders, such as an initial public offering or a sale of our company, given prevailing market conditions;
•the hiring of key personnel and the experience of management;
•trends and developments in our industry;
•external market conditions affecting the life sciences and biotechnology industry sectors; and
•as applicable, the implied equity value of Legacy Nautilus as contemplated by the Business Combination Agreement.
The Practice Aid identifies various available methods for allocating enterprise
value across classes and series of capital stock to determine the estimated fair
value of common stock at each valuation date. In accordance with the Practice
Aid, we considered the following methods:
Option Pricing Method. Under the option pricing method ("OPM"), shares are
valued by creating a series of call options with exercise prices based on the
liquidation preferences and conversion terms of each equity class. The estimated
fair values of the preferred and common stock are inferred by analyzing these
options.
Probability-Weighted Expected Return Method. The probability-weighted expected
return method ("PWERM") is a scenario-based analysis that estimates value per
share based on the probability-weighted present value of expected future
investment returns, considering each of the possible outcomes available to us,
as well as the economic and control rights of each share class.
For our valuation performed in May 2020 , we utilized the OPM Backsolve approach
to estimate the total equity value based on the recently completed Series B
redeemable convertible preferred round of financing. Under this method the OPM
allocation model is constructed based on our capital structure and reasonable
option model inputs (term, volatility, etc.) are assumed. The total equity value
in the model is then iterated until the model output for the Series B redeemable
convertible preferred stock is equal to its original issue price. We utilized
the Hybrid Methodology as the primary allocation method.
For the valuations performed in December 2020 , we used a hybrid method utilizing
a combination of the OPM and the PWERM. We utilized two different scenarios: (a)
a transaction with a SPAC and (b) an acquisition by another company. Under the
hybrid method, we used the OPM to allocate the equity value of the business
among the various classes of stock. The if-converted method presumes that all
shares of our redeemable convertible preferred stock convert into Common Stock
based upon their conversion terms and differences in the rights and preferences
of the shares of our redeemable convertible preferred stock are ignored. The
liquidation method presumes payment of proceeds in accordance with the
liquidation terms of each class of stock.
For awards granted in late January 2021 , these were granted at the grant date
fair value on the date of grant. Our board of directors made a determination of
the fair market value of our common stock which contemplated the implied equity
value of the Legacy Nautilus per the Business Combination agreement that was
executed on February 7, 2021 .
In determining the estimated fair value of our common stock at each grant date,
our board of directors also considered the fact that our stockholders could not
freely trade our common stock in the public markets. Accordingly, we applied
discounts to reflect the lack of marketability of our common stock based on the
weighted-
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-------------------------------------------------------------------------------- average expected time to liquidity. The estimated fair value of our common stock at each grant date reflected a non-marketability discount partially based on the anticipated likelihood and timing of a future liquidity event.
Following the closing of the Business Combination, our board of directors determine the fair market value of our common stock based on its closing price as reported on the date of grant on Nasdaq.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see Part II, Item 8, Note 2, "Significant Accounting Policies" to the consolidated financial statements in this Annual Report on Form 10-K.
Emerging Growth Company Accounting Election
The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits an "emerging growth company" such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected to use this extended transition period under the JOBS Act until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make comparison of our financials to those of other public companies more difficult. We will cease to be an emerging growth company on the date that is the earliest of (i) the last day of the fiscal year in which we have total annual gross revenue of$1.07 billion or more, (ii) the last day of our fiscal year following the fifth anniversary of the date of the closing of ARYA's initial public offering, (iii) the date on which we have issued more than$1.0 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 theSecurities and Exchange Commission . Further, even after we no longer qualify as an emerging growth company, we may still qualify as a "smaller reporting company," which would allow us to take advantage of many of the same exemptions from disclosure requirements, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common shares less attractive because we may rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our share price may be more volatile. 85
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