NEXIMMUNE, INC. Management report and analysis of the financial situation and operating results. (Form 10-K)
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this filing on Form 10-K and our final prospectus for our initial public offering filed pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, or the Securities Act, on
February 11, 2021, or the Prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in 91
the “Risk Factors” section of this Form 10-K, our actual results could differ materially from the results described or implied by the forward-looking statements contained in the following discussion and analysis.
Investors and others should note that we routinely use the Investor Relations section of our website to announce material information to investors and the marketplace. While not all of the information that we post on the Investor Relations section of our website is of a material nature, some information could be deemed to be material. Accordingly, we encourage investors, the media, and others interested in us to review the information that it shares on the Investor Relations section of our website, www.neximmune.com.
We are a clinical-stage biotechnology company developing a novel approach to immunotherapy designed to employ the body's own T cells to generate a specific, potent and durable immune response that mimics natural biology. Our mission is to create therapies with curative potential for patients with cancer and other life-threatening immune-mediated diseases. Currently, we have two product candidates in human trials: NEXI-001 in acute myeloid leukemia, or AML, and NEXI-002 in multiple myeloma, or MM.
We were incorporated under the laws of
To date, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, identifying and developing product candidates, enhancing our intellectual property portfolio, undertaking research, conducting preclinical studies and clinical trials, and securing manufacturing for our development programs. 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 primarily with proceeds from private placement of convertible preferred stock, our convertible promissory notes and the IPO. In
February 2021, we completed the IPO and issued and sold an aggregate 7,441,650 shares of common stock, which included 970,650 shares of our common stock issued pursuant to the underwriters' option to purchase additional shares, at a public offering price of $17.00per share, for net proceeds of $114.6 millionafter deducting underwriting discounts and commissions and other offering costs. We have incurred significant operating losses since our inception, which are mainly attributed to research and development costs and employee payroll expense. Our net loss was $50.9 millionand $29.9 millionfor the years ended December 31, 2021and 2020, respectively. As of December 31, 2021, we had an accumulated deficit of $127.7 million. Our operating losses may fluctuate significantly from quarter-to-quarter and year-to-year as a result of several factors, including the timing of our preclinical studies and clinical trials and our expenditures related to other research and development activities. We expect to continue to incur operating losses for the foreseeable future. We anticipate these losses will increase substantially as we advance our product candidates through preclinical and clinical development, develop additional product candidates and seek regulatory approvals for our product candidates. We do not expect to generate any revenues from product sales unless and until we successfully complete development and obtain regulatory approval for one or more product candidates. In addition, if we obtain marketing approval for any product candidate, we expect to incur pre-commercialization expenses and significant commercialization expenses related to marketing, sales, manufacturing and distribution. We may also incur expenses in connection with the in-licensing of additional product candidates. Furthermore, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations, compliance and other expenses that we did not incur as a private company. 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 sales of our product candidates, if ever, we expect to finance our cash needs through public or private equity offerings, debt financings, collaborations and licensing arrangements or other capital sources. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and could force us to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our product candidates that we would otherwise prefer to develop and market ourselves. 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. 92
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, we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.
Components of our operating results
We have not generated any income since our inception and do not expect to generate income from product sales in the near future, if at all.
Research and development costs
To date, our research and development expenses have related primarily to development of NEXI-001 and NEXI-002 and related clinical trials, preclinical studies and other preclinical activities related to our portfolio. Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received. Research and development expenses also include the accrual of minimum royalties under our
Research and development costs include:
•salaries, payroll taxes, benefits and stock-based compensation expenses for those involved in research and development efforts;
•external research and development costs incurred under agreements with contract research organizations, or CROs, and consultants to conduct our preclinical, toxicology and other preclinical studies;
•costs related to the manufacture of product candidates, including fees paid to third-party manufacturers and raw material suppliers;
• license fees and research funding; and
•facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent, maintenance of facilities, insurance, equipment and other supplies. Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. We outsource a substantial portion of our clinical trial activities, utilizing external entities such as CROs, independent clinical investigators and other third-party service providers to assist us with the execution of our clinical trials. We also expect to incur additional expenses related to milestone and royalty payments payable to
Johns Hopkins. We plan to substantially increase our research and development expenses for the foreseeable future as we continue the development of our product candidates and seek to discover and develop new product candidates. Due to the inherently unpredictable nature of preclinical and clinical development, we cannot determine with certainty the timing of the initiation, duration or costs of future clinical trials and preclinical studies of product candidates. Clinical and preclinical development timelines, the probability of success and the amount of development costs can differ materially from expectations. We anticipate that we will make determinations as to which product candidates and development programs to pursue and how much funding to direct to each product candidate or program on an ongoing basis in response to the results of ongoing and future preclinical studies and clinical trials, regulatory developments and our ongoing assessments as to each product candidate's commercial potential. In addition, we cannot forecast which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.
Our future clinical development costs may vary significantly depending on factors such as:
•per-patient trial costs;
•the number of tests required for regulatory approval;
•the number of sites included in the trials;
•the countries in which the trials are taking place;
•the time needed to enroll eligible patients;
•the number of patients taking part in the trials;
•the number of doses patients receive;
•patient drop-out or default rates;
•Potential additional safety oversight required by regulatory agencies;
•the duration of patient participation in trials and follow-up;
•the development phase of the candidate product; and
•the efficacy and safety profile of the candidate product.
General and administrative expenses
General and administrative expenses consist primarily of salaries and employee-related costs, including stock-based compensation, for personnel in our executive, finance and other administrative functions. Other significant costs include facility-related costs, legal fees relating to intellectual property and corporate matters, professional fees for accounting and consulting services and insurance costs. We anticipate that our general and administrative expenses will increase in the future to support our continued research and development activities, pre-commercialization activities and, if any product candidates receive marketing approval, commercialization activities. We also anticipate increased expenses related to audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and
SECrequirements, director and officer insurance premiums and investor relations costs associated with operating as a public company.
Interest income includes interest earned on our cash equivalents and marketable securities during the period.
Interest expense consists of interest accrued on convertible notes and interest accrued upon amortization of the conversion advantage feature, debt issuance costs and bifurcated derivative liability.
Change in fair value of derivative liability
The change in fair value of the derivative liability consists entirely of the mark-to-market adjustment of the bifurcated derivative liability related to the convertible notes. Following our IPO, the derivative liability was settled.
Gain on extinguishment of debt
The gain on extinguishment of debt is the result of the cancellation of our PPP loan by our lending institution pursuant to the CARES Act.
The following table summarizes our results of operations for the years ended
December 31, 2021and 2020: For the years ended December 31, 2021 2020 Change (in thousands) Operating expenses: Research and development 37,456 $ 17,839 $ 19,617General and administrative 15,799 10,012 5,787 Total operating expenses 53,255 27,851 25,404 Loss from operations (53,255) (27,851) (25,404) Other income (expense): Interest income 53 21 32 Change in fair value of derivative liability 2,425 (442)
Gain on extinguishment of debt 844 - 844 Interest expense (905) (1,683) 778 Other (expense) income (61) 89 (150) Other income (expense) 2,354 (2,015) 4,369 Net loss
$ (50,901) $ (29,866) $ (21,035)Research and Development Expenses. Research and development expenses were $37.5 millionand $17.8 millionfor the years ended December 31, 2021and 2020, respectively. The increase of $19.6 millionwas due primarily to increases of $10.5 millionon research and preclinical manufacturing, an increase of $1.9 millionon clinical trial expenses, increases to salary and benefits of $3.7 millionresulting from increased headcount, $2.6 millionin stock compensation expense, and $0.9 millionin consulting fees. We have not historically tracked internal research and development expenses by product candidate. General and Administrative Expenses. General and administrative expenses were $15.8 millionand $10.0 millionfor the years ended December 31, 2021and 2020, respectively. The increase of $5.8 millionwas due primarily to increases of $1.7 millionin salary and benefits resulting from increased headcount, $2.2 millionin stock compensation expense, an increase of $2.5 millionin professional fees and Directors and Officers insurance as a result of operating as public company, partially offset by a $0.6 milliondecrease in legal and consulting fees. Change in Fair Value of Derivative Liability. The change in fair value of derivative liability was an increase of $2.4 millionand a decrease of $0.4 millionfor the years ending December 31, 2021and 2020, respectively. The increase reflected the remeasurement of the derivative liability immediately before the conversion of the convertible notes into shares of common stock upon the completion of the IPO in February 2021. Upon completion of the IPO, the derivative liability was settled and there is no future remeasurement. Gain on Extinguishment of Debt. The gain on extinguishment of debt was $0.8 millionfor the year ended December 31, 2021. The increase was due to the PPP Loan forgiveness of $0.8 million. The was no debt extinguishment for the years ended December 31, 2020. Interest Expense. Interest expense was $0.9 millionand $1.7 millionfor the years ended December 31, 2021and 2020, respectively. The decrease is due to the conversion of the convertible notes into shares of common stock upon the completion of the IPO in February 2021. 95
Table of Contents Results of Operations
The following table summarizes our results of operations for the years ended
December 31, 2020and 2019: For the years ended December 31, 2020 2019 Change (in thousands) Operating expenses: Research and development $ 17,839 $ 15,172 $ 2,667General and administrative 10,012 5,714 4,298 Total operating expenses 27,851 20,886 6,965 Loss from operations (27,851) (20,886) (6,965) Other (expense) income: Interest income 21 254 (233) Interest expense (1,683) (7) (1,676) Change in fair value of derivative liability (442) - (442) Other income (expense) 90 92 (2) Other income / (expense) (2,014) 339 (2,353) Net loss $ (29,865) $ (20,547) $ (9,318)Research and Development Expenses. Research and development expenses were $17.8 millionand $15.2 millionfor the years ended December 31, 2020and 2019, respectively. The increase of $2.7 millionwas due primarily to increases of $1.4 millionfor salary and benefits resulting from increased headcount, increases of $4.0 millionon clinical trial expenses, increases of $0.3 millionfor supplies and increases of $0.2 millionin other expenses. These increases are partially offset by decreases in consulting expenses of $0.8 millionfor regulatory related activities and decreases of $2.4 millionfor preclinical and manufacturing development work. We have not historically tracked internal research and development expenses by product candidate. General and Administrative Expenses. General and administrative expenses were $10.0 millionand $5.7 millionfor the years ended December 31, 2020and 2019, respectively. The increase of $4.3 millionwas due primarily to increases of $1.2 millionin salary and benefits resulting from increased headcount, $2.0 millionin professional services related to corporate and patent related legal fees of $0.8 millionand $1.2 millionin accounting fees, $1.0 millionin consulting fees and other expenses of $0.1 million. Interest Income. Interest income was $0.0 millionand $0.3 millionfor the years ended December 31, 2020and 2019, respectively and consisted of interest earned on our available-for-sale marketable securities during 2019. Interest Expense. Interest expense was $1.7 millionand $0.0 millionfor the years ended December 31, 2020and 2019, respectively. The increase is due to the issuance of convertible debt in 2020. Change in Fair Value of Derivative Liability. The change in fair value of derivative liability was $0.4and $0.0 millionfor years ended December 31, 2020and 2019, respectively. The increase reflected the issuance of convertible debt during 2020 and the related, separately valued derivative.
Cash and capital resources
We have incurred net losses and negative cash flows from operations since our inception and anticipate we will continue to incur net losses for the foreseeable future. As of
December 31, 2021, we had cash, cash equivalents, and available-for-sale marketable securities of $81.8 million. 96
Sources of liquidity
We have funded our operations primarily through private placements of our convertible preferred shares, convertible promissory notes and the IPO.
Financing by convertible notes
Paycheck Protection Program Loan
April 23, 2020, we entered into an unsecured loan agreement with JPMorgan Chase Bank, or Chase, under the terms of which Chase loaned us $843,619, or the PPP Loan, pursuant to the Paycheck Protection Program, or PPP, under the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. In accordance with the requirements of the CARES Act, we used the proceeds primarily for payroll costs and other eligible expenses. The PPP Loan had a maturity date of April 23, 2022and accrued interest at an annual rate of 0.98%. Interest and principal payments were deferred for the first six months of the loan. Thereafter, monthly interest and principal payments were due until the loan is fully satisfied. The promissory note evidencing the PPP Loan contains customary events of default resulting from, among other things, default in the payments. The use of loan proceeds must be for payroll costs, payment of interest on covered mortgage obligations, rent and utility costs over either an eight-week or 24-week period, at our option, following our receipt of the loan proceeds. We elected to use the proceeds over a 24-week period. We treated the PPP loan as debt under ASC 470, Debt. The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. We submitted the PPP Loan forgiveness application in March 2021and received full forgiveness of the $843,619PPP Loan in July 2021. The Company recognized the $843,619forgiveness as a gain on extinguishment of debt for the year ended December 31, 2021.
Initial public offering
February 2021, we completed an IPO and issued and sold an aggregate 7,441,650 shares of common stock, which included 970,650 shares of our common stock issued pursuant to the underwriters' option to purchase additional shares, at a public offering price of $17.00per share, for net proceeds of $114.6 millionafter deducting underwriting discounts and commissions and other offering costs.
The following table presents a summary of net cash activity for the years ended
Year ended December 31 2021 2020 (in thousands) Net cash provided by (used in): Operating activities
$ (45,785) $ (26,405)Investing activities (53,807) 222 Financing activities 124,888 22,085 Net increase (decrease) in cash, cash equivalents and restricted cash $ 25,296 $ (4,098)Operating Activities Net cash used in operating activities was $45.8 millionand $26.4 millionfor the years ended December 31, 2021and 2020, respectively. The net cash used in operating activities for the year ended December 31, 2021was primarily due to our net loss of $50.9 million, resulting from R&D expenditures of $37.5 millionas we continue to ramp up our clinical program and $15.8 millionof administrative expenses for salary and related expenses and professional fees. Our net loss is partially offset by $5.1 millionin non-cash expenses and working capital changes. 97
The net cash used in operating activities for the year ended
December 31, 2020was primarily due to our net loss of $29.9 million, consisting of $17.8 millionfor R&D expenses primarily in pre-clinical research expenses as we prepared for our clinical program and began ramping up our clinical programs, and $10.0 millionin administrative expenses for salary and related expenses and profession fees. These are partially offset by $3.5 millionin non-cash expenses and working capital changes. Investing Activities Net cash used in investing activities was $53.8 millionand $0.2 millionfor the years ended December 31, 2021and 2020, respectively. The net cash used by investing activities for the year ended December 31, 2021was primarily due to the purchase of $90.5 millionin available-for-sale marketable securities partially offset by the maturities of $39.0 millionin available-for-sale marketable securities and by the purchase of property and equipment of $2.4 million. The net cash provided by investing activities for the year ended December 31, 2020was primarily due to maturities of available-for-sale marketable securities of $1.0 million, and collection of employee advance of $0.1 millionpartially offset by the purchase of property and equipment for $0.9 million.
Net cash provided by financing activities was
$124.9 millionfor the year ended December 31, 2021primarily due to the net proceeds of $114.7 millionfrom the IPO excluding financing costs paid in 2020, $9.0 millionfrom the issuance of convertible debt and $1.2 millionfrom the exercise of stock options. Net cash provided by financing activities was $22.1 millionfor the year ended December 31, 2020primarily due to the net proceeds of $20.7 millionfrom the issuance of convertible debt and the receipt of $0.8 millionunder a PPP loan.
We believe that our existing cash, cash equivalents, and marketable securities will be sufficient to meet our anticipated cash requirements for at least 12 months from the issuance of these financial statements. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect.
Our future capital requirements will depend on many factors, including:
•the initiation, progress, timing, costs and results of drug discovery, preclinical studies and clinical trials of NEXI-001 and NEXI-002 and any other future product candidates;
•the number and characteristics of the product candidates we are looking for;
•the outcome, timing and costs of obtaining regulatory approvals;
•the cost of manufacturing NEXI-001 and NEXI-002 and future product candidates for clinical trials in preparation for marketing approval and in preparation for commercialization;
•costs associated with hiring additional staff and consultants as our preclinical and clinical activities increase;
•the emergence of competing therapies and other adverse market developments;
• the ability to establish and maintain strategic licenses or other agreements and the financial terms of such agreements;
•costs involved in preparing, filing, prosecuting, maintaining, expanding, defending and enforcing patent claims, including litigation costs and the outcome of such litigation;
•the extent to which we license or acquire other products and technologies; and
•operating costs as a public company.
Until such time, if ever, as we can generate substantial product revenues to support our capital requirements, we expect to finance our cash needs through a combination of public or private equity offerings, debt financings, collaborations and 98
licensing arrangements or other capital sources. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, or other similar arrangements with third parties, we may need to relinquish valuable rights to our product candidates, future revenue streams or research programs or may have to grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock. If we are unable to raise additional funds through equity or debt financings as and 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 our product candidates even if we would otherwise prefer to develop and market such product candidates ourselves.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with
U.S.generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation. We base our estimates on historical experience, known trends and events, and various other factors that we believe to be 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. 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 3, "Summary of significant accounting policies," we believe the following accounting policies and estimates to be most critical to the preparation of our financial statements.
As part of the process of preparing our financial statements, we are required to estimate our accrued expenses as of each balance sheet date. 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 the actual cost. We make estimates of our accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments, if necessary. The significant estimates in our accrued research and development expenses include the costs incurred for services performed by our vendors in connection with research and development activities for which we have not yet been invoiced. We base our expenses related to research and development activities on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors that conduct research and development 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 research and development expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid expense accordingly. Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred.
Derivative financial instruments
In connection with our issuance of the convertible notes, we assessed all terms and features of the convertible notes to identify any potential embedded features that would require bifurcation. As part of this analysis, we assessed the economic 99
characteristics and risks of the convertible notes including the conversion, put and call features. We bifurcated the share-settled redemption features and recorded them as a derivative liability in our balance sheet. We completed our IPO on
February 11, 2021, which triggered the mandatory conversion of all the outstanding Convertible Notes plus accrued interest. Upon conversion of the Convertible Notes, the outstanding Convertible notes principal plus accrued interest thereon, net of unamortized debt discounts was reclassified to stockholders' equity (deficit). The derivative instruments were re-measured at the end of each reporting period with changes in fair value recorded in the statements of operations in other income (expense) as a change in fair value of the derivative liability. We utilized a valuation specialist in determining the fair value of the derivative liability. The fair value assessment incorporated management's assumptions for probabilities of conversion occurrence through maturity, stock price, stock volatility, credit spread, risk-free interest rates and the stock dividend yield.
Stock-based compensation expense
Stock-based compensation expense represents the cost of the grant date fair value of equity awards recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis. We estimate the fair value of equity awards using the Black-Scholes option pricing model and recognize forfeitures as they occur. Estimating the fair value of equity awards as of the grant date using valuation models, such as the Black-Scholes option pricing model, is affected by assumptions regarding a number of variables, including the risk-free interest rate, the expected stock price volatility, the expected term of stock options, the expected dividend yield and the fair value of the underlying common stock on the date of grant. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized. These inputs are subjective and generally require significant analysis and judgment to develop. See Note 3, "Summary of significant accounting policies" for information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options granted for the years ended
December 31, 2021and 2020.
Common Stock Valuations
We are required to estimate the fair value of the common stock underlying our equity awards when performing fair value calculations. The fair value of the common stock underlying our equity awards was determined on each grant date by our board of directors, taking into account input from management and independent third-party valuation analyses. All options to purchase shares of our common stock are intended to be granted with an exercise price per share no less than the fair value per share of our common stock underlying those options on the date of grant, based on the information known to us on the date of grant. In the absence of a public trading market for our common stock, on each grant date we develop an estimate of the fair value of our common stock in order to determine an exercise price for the option grants. Our determinations of the fair value of our common stock were made using methodologies, approaches and assumptions consistent with the
American Institute of Certified Public Accountants Accounting and Valuation Guide: Valuation of Privately Held Company Equity Securities Issued as Compensation, or the Practice Aid.
Our Board of Directors considered a variety of objective and subjective factors, as well as management’s input, in determining the fair value of our common stock, including:
• valuations of our common stock performed with the assistance of independent third-party valuation specialists;
•current and potential strategic relationships and licenses;
• our stage of development and business strategy, including the status of research and development efforts for our product candidates, and material risks relating to our business and industry;
•our results of operations and financial condition, including our levels of available capital resources;
• the valuation of publicly traded companies in the life sciences and biotechnology sectors, as well as recently completed mergers and acquisitions of comparable companies;
•the lack of marketability of our common stock as a private company;
•the prices of preferred stock sold to investors in arm's length transactions and the rights, preferences and privileges of our preferred stock relative to those of our common stock;
•the likelihood of a liquidity event occurring for holders of our common stock, such as an initial public offering or sale of our company, given prevailing market conditions;
•trends and developments in our industry; and
•external market conditions affecting the life sciences and biotechnology industry sectors.
The Practice Aid prescribes several valuation approaches for setting the value of an enterprise, such as the cost, income and market approaches, and various methodologies for allocating the value of an enterprise to its common stock. The cost approach establishes the value of an enterprise based on the cost of reproducing or replacing the property less depreciation and functional or economic obsolescence, if present. The income approach establishes the value of an enterprise based on the present value of future cash flows that are reasonably reflective of our future operations, discounting to the present value with an appropriate risk-adjusted discount rate or capitalization rate. The market approach is based on the assumption that the value of an asset is equal to the value of a substitute asset with the same characteristics. Each valuation methodology was considered in our valuations.
The various methods of allocating enterprise value among our classes and series of equity to determine the fair value of our common shares pursuant to the practice aid include the following:
Option Pricing Method, or OPM. Under the 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 values of the preferred and common stock are inferred by analyzing these options.
Probability Weighted Expected Return Method, or PWERM. PWERM is a scenario-based analysis that estimates value per share based on the probability-weighted present value of expected future returns from investments, taking into account each of the possible outcomes available to us, as well as economic and control of each class of shares. .
In determining the fair value of our common stock underlying stock option grants prior to our IPO for the years ended
December 31, 2021and 2020, we estimated the enterprise value of our business using the back-solve method and the OPM to allocate enterprise value. The back-solve method is a market approach that assigns an implied enterprise value based on the most recent round of funding or investment and allows for the incorporation of the implied future benefits and risks of the investment decision assigned by an outside investor. We believed the OPM was the most appropriate method given the expectation of various potential liquidity outcomes and the difficulty of selecting and supporting appropriate enterprise values given our early stage of development.
Options granted after the Company’s IPO are issued at the fair market value of the Company’s common stock on the date the grant is approved by the Board.
Other company information
Net operating loss and research and development carryforwards and other tax information
December 31, 2021, we had federal and state net operating loss carryforwards of $115.4 millionand federal research credit carryforwards of $0.3 million. Approximately $10.5 millionof the federal NOL was generated prior to 2018 and will expire in increments through 2037 beginning in 2035, while the remaining $104.8 millionwill be carried forward indefinitely. The state NOL will expire in increments through 2037, beginning expiring in 2035. The federal research and development tax credit carryforwards, if not utilized, will expire beginning in 2037. We believe that it is more likely than not that we will not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance has been established against the net deferred tax assets as of December 31, 2021. Management reevaluates the positive and negative evidence at each reporting period. We have not completed a Section 382 study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since our formation due to the complexity and cost associated with such a study and the fact that there may be additional such ownership changes in the future. Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of our net operating loss and research and development tax credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period.
Emerging Growth Company and Small Company Reporting Status
We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act. We will remain an emerging growth company until the earlier of (1)
December 31, 2026, (2) the last day of the fiscal year in which we have total annual gross revenues of at least $1.07 billion, (3) the date on which we are deemed to be a "large accelerated filer" as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, 101
or (4) the date on which we issued more than
into non-convertible debt securities during the preceding three-year period. An emerging growth company can take advantage of reduced reporting requirements and is exempt from certain other important requirements that otherwise generally apply to public companies. As an emerging growing company,
•we may present only two years of audited financial statements, plus unaudited condensed financial statements for any interim period, and related Management's Discussion and Analysis of Financial Condition and Results of Operations in this filing. •we may avail ourselves of the exemption from the requirement to obtain an attestation and report from our auditors on the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act;
•we may disclose less information about our executive compensation arrangements; and
•we cannot require non-binding shareholder advisory votes on executive compensation or golden parachute agreements.
We have elected to take advantage of certain of the reduced disclosure obligations in the registration statement of which this filing is a part and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests. Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies, which may make our financial statements less comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. Until the date that we are no longer an emerging growth company or affirmatively and irrevocably opt out of the exemption provided by Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, upon issuance of a new or revised accounting standard that applies to our financial statements and that has a different effective date for public and private companies, we will disclose the date on which we will adopt the recently issued accounting standard. 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 the IPO was less than
$700.0 millionand our annual revenue is less than $100.0 millionduring the most recently completed fiscal year. After the IPO we may continue to be a smaller reporting company if either (1) the market value of our stock held by non-affiliates is less than $250.0 millionor (2) our annual revenue is less than $100.0 millionduring the most recently completed fiscal year and the market value of our stock held by non-affiliates is less 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.
Recently issued and adopted accounting pronouncements
A description of recently issued and adopted accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 3, "Summary of significant accounting policies".
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