Janux Therapeutics, Inc. (JANX) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis together with our financial statements and related notes included in “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that involve risks and uncertainties. For a complete discussion of forward-looking statements, see the section above entitled “Special Note Regarding Forward Looking Statements.” Our actual results could differ materially from those expressed or implied in any forward-looking statements as a result of various factors, including those set forth under the caption “Item 1A. Risk Factors.”

Overview

We are an innovative clinical-stage biopharmaceutical company developing a broad pipeline of novel immunotherapies by applying our proprietary technology to our TRACTr and TRACIr platforms to better treat patients suffering from cancer. Our initial focus is on developing a novel class of TCEs, and our lead product candidates are designed to target clinically validated drug targets. While TCE therapeutics have displayed potent anti-tumor activity in hematological cancers, developing TCEs to treat solid tumors has faced challenges due to the limitations of prior TCE technologies, namely (i) overactivation of the immune system leading to CRS, (ii) on-target, healthy tissue toxicities and (iii) PK leading to short half-life. We use our TRACTr platform technology to engineer product candidates designed to overcome these limitations. We are developing a broad pipeline with lead programs targeting prostate-specific membrane antigen (PSMA), epidermal growth factor receptor (EGFR), and trophoblast cell surface antigen 2 (TROP2). In October 2022, the first patient was dosed with our PSMA-TRACTr (JANX007) in our first-in-human Phase 1 clinical trial in patients with prostate cancer and we anticipate providing an interim clinical update from the trial in the second half of 2023. For our EGFR-TRACTr (JANX008), we recently received FDA clearance of an IND. For our TROP2-TRACTr we expect to select a development candidate in 2023. We are also applying our proprietary technology to develop a TRACIr costimulatory bispecific product candidate (JANX009) against programmed death-ligand 1 (PD-L1) and Cluster of Differentiation 28 (CD28) designed to further enhance the anti-tumor activity of T cells, which we believe has the potential to be used as a single-agent or in combination with our current TRACTr pipeline and other modalities. We expect to submit an IND for this product candidate in 2023. Based on data we have generated in NHPs, we believe our TRACTr and TRACIr product candidates have the potential for (i) significantly reduced risk of toxic CRS responses, (ii) reduced risk of on-target, healthy tissue toxicities, and (iii) improved half-life with once-weekly dosing in humans.

We were incorporated in June 2017. To date, we have devoted substantially all of our resources to organizing and staffing our company, business planning, business development, raising capital, developing and optimizing our technology platform, identifying potential product candidates, undertaking research and preclinical studies for our lead programs, establishing and enhancing our intellectual property portfolio and providing general and administrative support for these operations. All of our product candidates and research programs other than JANX007 and JANX008 are in preclinical development, and none have been approved for commercial sale. We have never generated any revenue from product sales and have incurred net losses each year since we commenced operations. We have funded our operations primarily with the net proceeds from the issuance of convertible promissory notes, the issuance of convertible preferred stock, the exercise of common stock options, proceeds from our initial public offering (IPO) and amounts received under a collaboration agreement with Merck Sharp & Dohme Corp. (Merck).

On March 1, 2021, we entered into a Series A preferred stock purchase agreement with various investors, pursuant to which we issued and sold an aggregate of 5,894,740 shares of our Series A convertible preferred stock at a price per share of $9.50 for gross proceeds of $56.0 million.

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On April 15, 2021, we entered into a Series B preferred stock purchase agreement with various investors, pursuant to which we issued and sold an aggregate of 8,038,073 shares of our Series B convertible preferred stock at a price per share of $15.551 for gross proceeds of $125.0 million.

In June 2021, we completed our IPO and sold 13,110,000 shares of our common stock at $17.00 per share. Proceeds from our IPO, net of underwriting discounts and commissions and other offering costs, were $204.2 million. All outstanding shares of our convertible preferred stock converted into common stock in connection with our IPO.

We have incurred operating losses since our inception and have not yet generated any product revenue. Our net losses were $63.1 million and $32.7 million for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, we had an accumulated deficit of $110.5 million.

Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on a variety of factors including the timing and scope of our clinical and preclinical studies and our expenditures on other research and development activities and the timing of any revenue recognition under our collaboration agreement with Merck. We expect our expenses and operating losses will increase substantially and that we will continue to incur significant losses for the foreseeable future as we conduct our ongoing and planned research and development activities and conduct preclinical studies and clinical trials, hire additional personnel, protect our intellectual property and incur additional costs associated with being a public company.

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, which will not be for many years, if ever. Accordingly, 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 equity offerings, debt financings or other capital sources, including potentially grants, collaborations, licenses or other similar arrangements. 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 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 product candidates or to our platform technologies that we would otherwise prefer to develop and market ourselves. Based on our current operating plan, we believe that our existing cash and cash equivalents and short-term investments, will be sufficient to meet our anticipated cash requirements through at least the next 12 months, following the date of this Annual Report.

Our Research Collaboration with Merck

In December 2020, we entered into a research collaboration and exclusive license agreement with Merck to develop TRACTr product candidates that are distinct from those in our internally developed pipeline (the Merck Agreement). Merck has the right to select up to two collaboration targets (each a Collaboration Target) related to next generation T cell engager immunotherapies for the treatment of cancer. Merck selected one of the Collaboration Targets upon execution of the agreement and selected the second Collaboration Target in May 2022. Merck received an exclusive worldwide license for each selected target and intellectual property from the collaboration. In return, we are eligible to receive up to $500.5 million per target in upfront and milestone payments, plus royalties on sales of the products derived from the collaboration. Merck provides research funding under the collaboration.

Impacts of the COVID-19 Pandemic

The COVID-19 pandemic continues to evolve, and we will continue to monitor the COVID-19 situation. The extent of the impact of COVID-19 on our business, operations and clinical development timelines and plans remains uncertain, and will depend on certain developments, including the impact of COVID-19 on our CROs, 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. 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. We will continue to actively monitor the evolving situation related to COVID-19 and may take 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. We have considered potential

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impacts arising from the COVID-19 pandemic and have not experienced any material disruption to our operations to date.

Inflation

Inflation generally affects us by increasing our salaries and fees paid to third-party contract service providers. We have considered potential impacts arising from inflation and have not experienced any material disruption to our operations to date.

Support Services Agreement with COI Pharmaceuticals, Inc.

In January 2021, we entered into a Support Services Agreement (the 2021 Support Services Agreement) with COI Pharmaceuticals Inc. (COI) that outlines the terms of services provided by COI to the Company, as well as the fees charged for such services. COI is a shared service company that provides certain back-office and administrative and research and development support services, including facilities support, to the portfolio companies of Avalon Ventures, an entity that beneficially owns greater than 5% of our outstanding capital stock. The amounts paid to COI include support service fees or mark-ups of up to 5%. The 2021 Support Services Agreement was most recently renewed in January 2023 and will continue to renew for additional one-year renewal periods until terminated by the parties. Either party may terminate the 2021 Support Services Agreement with 30 days written notice.

Financial Operations Overview

Revenues

To date, we have not generated any revenues from the commercial sale of any products, and we do not expect to generate revenues from the commercial sale of any products for the foreseeable future, if ever. We recognized $8.6 million and $3.6 million of revenue under the Merck Agreement for the years ended December 31, 2022 and 2021, respectively.

Research and Development

To date, our research and development expenses have related primarily to direct and indirect expenses in connection with the development of our TRACTr and TRACIr platforms, discovery efforts and preclinical and clinical development of our product candidates. 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.

Our direct research and development expenses include:

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external research and development expenses incurred under agreements with CROs and consultants to conduct our preclinical and clinical studies;

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license fees; and

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laboratory equipment, materials and supplies.

Our indirect research and development expenses include:

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salaries and employee-related costs, including recruiting fees and stock-based compensation for those individuals involved in research and development efforts;

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maintenance of facilities and equipment, software license fees, depreciation; and

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allocated facilities and equipment-related expenses, which include rent, utilities, insurance, and office supplies.

Certain research and development expenses as listed above include amounts paid to COI.

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We anticipate that our research and development expenses will substantially increase for the foreseeable future as we continue the development of our TRACTr and TRACIr platforms and the discovery and development of product candidates under our TRACTr and TRACIr platforms.

We cannot determine with certainty the timing of initiation, the duration or the completion costs of clinical trials and preclinical studies of product candidates due to the inherently unpredictable nature of preclinical and clinical development. Preclinical and clinical development timelines, the probability of success and 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. We will need to raise substantial additional capital in the future. 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.

General and Administrative

General and administrative expenses consist primarily of salaries and employee-related costs, including stock-based compensation, for personnel in executive, finance and other administrative functions. Other significant general and administrative expenses include facility-related costs, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities; legal fees relating to intellectual property and corporate matters; professional fees for accounting, tax and consulting services; insurance costs; and other operating costs. Our general and administrative expenses include amounts paid to COI for certain back-office and administrative support services, including facilities support. We anticipate that our general and administrative expenses will increase for the foreseeable future as we continue to increase our general and administrative headcount to support our continued research and development activities and, if any of our product candidates receive marketing approval, commercialization activities. We also anticipate increased expenses associated with operating as a public company, including expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums and investor relations costs.

Other Income

Other income consists of interest income on our cash and cash equivalents and short-term investments.

Results of Operations

Comparison of the Years Ended December 31, 2022 and 2021

Collaboration Revenue

Collaboration revenues were $8.6 million and $3.6 million for the years ended December 31, 2022 and 2021, respectively. The increase of $5.0 million was primarily due to an increase in full-time equivalent hours incurred in the performance of research services required under the Merck Agreement.

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Research and Development Expense

The following table summarizes our direct and indirect research and development expenses for the years ended December 31, 2022 and 2021:

IND applications for JANX007 and JANX008 were cleared by the FDA in May 2022 and January 2023, respectively. As a result, we have separated direct costs for the development of JANX007 and JANX008 from preclinical programs for the year ended December 31, 2022 and, for comparability purposes, the year ended December 31, 2021. We will further separate direct costs related to our other programs as future IND applications are cleared by the FDA. These changes in presentation had no effect on net loss, total research and development expenses, stockholders' equity, or cash flows as previously reported.

Research and development expenses were $53.4 million and $26.2 million for the years ended December 31, 2022 and 2021, respectively. The increase of $27.2 million was primarily due to increases in direct costs related to JANX008 of $2.7 million, preclinical stage programs and other unallocated direct costs of $12.7 million and indirect costs of $14.2 million, offset by decreases in direct costs related to JANX007 of $2.4 million. The increase in indirect costs was primarily due to personnel costs of $6.2 million, stock-based compensation expense of $4.2 million, and facilities and other costs of $3.8 million as operations grew in support of program advances, including commencement of the office and laboratory space lease in San Diego, California (Torrey Plaza Lease).

General and Administrative Expense

General and administrative expenses were $22.3 million and $10.3 million for the years ended December 31, 2022 and 2021, respectively. The increase of $12.0 million was primarily due to increases in stock-based compensation of $6.1 million, personnel and facilities related costs of $2.7 million, and other general and administrative expenses of $3.2 million.

Other Income

Other income was $4.0 million and $0.3 million for the years ended December 31, 2022 and 2021, respectively. The increase of $3.7 million was due to the impact of increases in interest rates on our debt securities, resulting in increased interest income.

Liquidity 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 and negative cash flows for the foreseeable future. As of December 31, 2022, we had cash, cash equivalents, restricted cash and short-term investments of $327.8 million. Inclusive in this amount is $0.8 million of restricted cash that is not available for current use.

In August 2022, we filed a shelf registration statement (File No. 333-266720), which became effective upon filing. The shelf registration statement provides us with the ability to offer up to $400.0 million of certain securities, including shares of our common stock, from time to time. The specific terms of any offering under the shelf registration statement are established at the time of such offering. Additionally, we entered into a sales agreement with Jefferies Group LLC (Jefferies) with respect to an at-the-market offering program, under which we may offer

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and sell, from time to time at our sole discretion, shares of our common stock having an aggregate offering price of up to $100.0 million through Jefferies as the sales agent, pursuant to this shelf registration statement.

The following summarizes our cash flows for the periods indicated:

Operating Activities

Net cash used in operating activities of $42.9 million for the year ended December 31, 2022 was primarily due to our net loss of $63.1 million, adjusted for $17.2 million of stock-based compensation expense and a decrease in operating assets and liabilities and other non-cash charges of $3.0 million. The net cash used in operating activities for the year ended December 31, 2021 was primarily due to our net loss of $32.7 million, adjusted for $6.9 million of stock-based compensation expense and a change in operating assets and liabilities and other non-cash charges of $8.8 million.

Investing Activities

Net cash provided by investing activities of $58.3 million for the year ended December 31, 2022 was primarily due to $64.7 million of net maturities of short-term investments offset by our purchases of property and equipment, primarily consisting of laboratory equipment of $6.4 million. Net cash used in investing activities was $341.0 million for the year ended December 31, 2021 due to $339.5 million of net purchases of short-term investments and our purchase of property and equipment, consisting of laboratory equipment, computer equipment, and software, of $1.5 million.

Financing Activities

Net cash provided by financing activities of $0.5 million for the year ended December 31, 2022 was primarily due to proceeds from shares issued under our 2021 Employee Stock Purchase Plan. Net cash provided by financing activities of $386.5 million for the year ended December 31, 2021 primarily consisted of $204.2 million of net proceeds from our IPO, $180.5 million of net proceeds from our preferred stock sales, and $1.8 million of proceeds from stock option exercises.

Funding Requirements

Based on our current operating plan, we believe that our existing cash and cash equivalents and short-term investments, will be sufficient to meet our anticipated cash requirements through at least the next 12 months, following the date of this Annual Report. 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. Additionally, the process of testing product candidates in clinical trials is costly, and the timing of progress and expenses in these trials is uncertain.

Our future capital requirements will depend on many factors, including:

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the initiation, trial design, progress, timing, costs and results of drug discovery, preclinical studies and clinical trials of our product candidates, and in particular the clinical trials for JANX007 and JANX008

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and the IND-enabling studies and planned future clinical trials for TROP2-TRACTr and TRACIr costimulatory bispecific;

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the number and characteristics of clinical programs that we pursue;

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the outcome, timing and costs of seeking FDA, European Commission and any other comparable regulatory approvals for any future drug candidates;

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the costs of manufacturing our product candidates;

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the costs associated with hiring additional personnel and consultants as our preclinical, manufacturing and clinical activities increase;

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the receipt of marketing approval and revenue received from any commercial sales of any of our product candidates, if approved;

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the cost of commercialization activities for any of our product candidates, if approved, including marketing, sales and distribution costs;

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the ability to establish and maintain strategic collaboration, licensing or other arrangements and the financial terms of such agreements;

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the extent to which we in-license or acquire other products and technologies;

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the costs involved in preparing, filing, prosecuting, maintaining, expanding, defending and enforcing patent claims, including litigation costs and the outcome of such litigation;

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our implementation of additional internal systems and infrastructure, including operational, financial and management information systems;

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our costs associated with expanding our facilities or building out our laboratory space;

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the effects of the disruptions to and volatility in the credit and financial markets in the United States and worldwide from the COVID-19 pandemic or other epidemics; and

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the costs of operating as a public company.

Until such time, if ever, as we can generate substantial product revenues to support our cost structure, we expect to finance our cash needs through a combination of equity offerings, debt financings or other capital sources, including potentially grants, collaborations, licenses or other similar arrangements. 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 have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or 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 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.

Contractual Obligations and Commitments

In April 2021, we entered into a cell line license agreement (Cell Line License Agreement) with WuXi Biologics (Hong Kong) Limited (WuXi Biologics). According to the terms of the Cell Line License Agreement, if we do not engage WuXi Biologics or its affiliates to manufacture the therapeutic products produced through the use of the cell line licensed by WuXi Biologics under the Cell Line License Agreement (WuXi Biologics Licensed Products) for our commercial supplies, we are required to make royalty payments to WuXi Biologics in an amount equal to a low single-digit percentage of specified portions of net sales of WuXi Biologics Licensed Products manufactured by a third-party manufacturer. We have the right (but not the obligation) to buy out our remaining royalty obligations with respect to each WuXi Biologics Licensed Product by paying WuXi Biologics a one-time

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payment in an amount ranging from low single digit million dollars to a maximum of $15.0 million (Buyout Option). The royalty obligations will remain in effect during the term of the Cell Line License Agreement so long as we have not exercised the Buyout Option. See the section within Item 1 of Part I of this Annual Report on Form 10-K titled "License Agreement with WuXi Biologics (Hong Kong) Limited" for additional information.

In October 2021, we entered into a noncancelable agreement to lease office and laboratory space in San Diego, California (Torrey Plaza Lease) with aggregate payments of approximately $38.0 million over the 126-month term of the lease. The Torrey Plaza Lease commenced in July 2022. See Note 3 to our audited financial statements appearing in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

We enter into contracts in the normal course of business with various third parties for preclinical and clinical research studies and testing, manufacturing and other services and products for operating purposes. These contracts provide for termination upon notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including non-cancellable obligations of our service providers, up to the date of cancellation.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). 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 estimates to complete the performance obligations and the estimated transaction price for collaboration revenues, accruals for research and development expenses and estimates used in valuing our equity awards for stock-based compensation expense. We base our estimates on historical experience, known trends and events, and various other factors that are believed 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. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 1 to our financial statements included elsewhere in this Annual Report, we believe the following accounting policies and estimates to be most critical to the preparation of our financial statements.

Collaboration Revenue

We determined that our collaboration with Merck is a contract with a customer. We recognize revenue in a manner that depicts the transfer of control of a product or a service to a customer and reflects the amount of the consideration we are entitled to receive in exchange for such product or service. To determine revenue recognition for our contracts with customers, we follow a five-step approach: (i) identify the contract with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) the customer obtains control of the product or service.

A customer is a party that has entered into a contract with us, where the purpose of the contract is to obtain a product or a service that is an output of our ordinary activities in exchange for consideration. To be considered a contract, (i) the contract must be approved (in writing, orally, or in accordance with other customary business practices), (ii) each party’s rights regarding the product or the service to be transferred can be identified, (iii) the payment terms for the product or the service to be transferred can be identified, (iv) the contract must have commercial substance (that is, the risk, timing or amount of future cash flows is expected to change as a result of the contract), and (v) it is probable that we will collect substantially all of the consideration to which we are entitled to receive in exchange for the transfer of the product or the service.

A performance obligation is defined as a promise to transfer a product or a service to a customer. We identify each promise to transfer a product or a service (or a bundle of products or services, or a series of products and services that are substantially the same and have the same pattern of transfer) that is distinct. A product or a service

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is distinct if both (i) the customer can benefit from the product or the service either on its own or together with other resources that are readily available to the customer and (ii) our promise to transfer the product or the service to the customer is separately identifiable from other promises in the contract. Each distinct promise to transfer a product or a service is a unit of accounting for revenue recognition. If a promise to transfer a product or a service is not separately identifiable from other promises in the contract, such promises should be combined into a single performance obligation. When an entity grants a customer the option to acquire additional goods or services, that option is a separate performance obligation only if it provides a material right to the customer that the customer would not receive without entering into the contract. Under our existing collaboration agreement with Merck, due to the early stage of the licensed technology, the license of such technology was combined with the additional promises associated with each of the targets in the agreement as one combined performance obligation. Furthermore, as it relates to the option to select an additional collaboration target, we determined that the option did not represent a material right. The option instead represents a customer option to purchase additional goods or services and was therefore accounted for as a separate contract.

The transaction price is the amount of consideration we are entitled to receive in exchange for the transfer of control of a product or a service to a customer. To determine the transaction price, we consider the existence of any significant financing component, the effects of any variable elements, noncash considerations and consideration payable to the customer. If a significant financing component exists, the transaction price is adjusted for the time value of money. If an element of variability exists, we must estimate the consideration we expect to receive and use that amount as the basis for recognizing revenue as the product or the service is transferred to the customer. There are two methods for determining the amount of variable consideration: (i) the expected value method, which is the sum of probability-weighted amounts in a range of possible consideration amounts, and (ii) the mostly likely amount method, which identifies the single most likely amount in a range of possible consideration amounts.

If a contract has multiple performance obligations, we allocate the transaction price to each distinct performance obligation in an amount that reflects the consideration we are entitled to receive in exchange for satisfying each distinct performance obligation. For each distinct performance obligation, revenue is recognized when (or as) we transfer control of the product or the service applicable to such performance obligation. To date, for collaboration arrangements that represent a single performance obligation, the revenues are recognized over time based on actual Full Time Equivalent employees (FTEs) utilized as a percentage of total FTEs expected to be utilized over the expected term of the research services. We apply judgment in the total estimated FTEs anticipated over the contract. Estimates are based on input from key research personnel and expectations of FTEs necessary to complete the planned activities within the scope of the agreement and availability of internal FTEs to complete such activities.

In those instances where we first receive consideration in advance of satisfying its performance obligation, we classify such consideration as deferred revenue until (or as) we satisfy such performance obligation. In those instances where we first satisfy our performance obligation prior to our receipt of consideration, the consideration is recorded as accounts receivable.

We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that would be recognized is one year or less, or if the amount of the asset is immaterial. Otherwise, such costs are capitalized and amortized to research and development expense ratably in conjunction with the underlying revenue recognition. No incremental costs of obtaining a contract have been incurred to date.

Accrued Research and Development Expenses

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.

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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.

Stock-Based Compensation Expense

Stock-based compensation expense represents the grant date fair value of equity awards, consisting of stock options and employee stock purchase rights, recognized on a straight-line basis over the requisite service period for stock options and over the respective offering period for employee stock purchase plan rights. The grant date fair value of the equity awards is estimated using the Black-Scholes option pricing model. The Black-Scholes option pricing model utilizes inputs which are highly subjective assumptions and generally require significant judgment. See Note 5 to our financial statements included elsewhere in this Annual Report 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 option grants. Equity award forfeitures are recognized as they occur.

Recent Accounting Pronouncements

See Note 1 to our audited financial statements appearing in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

Emerging Growth Company Status

We are an emerging growth company, as defined in the JOBS Act. For so long as we remain an emerging growth company, we are permitted and intend to rely on certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved.

Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have not elected to use this extended transition period.

We will remain an emerging growth company until the earliest to occur of: (i) the last day of the fiscal year in which we have at least $1.235 billion in annual revenue; (ii) the last day of the fiscal year in which we are deemed to be a “large accelerated filer,” as defined in Rule 12b-2 under the Exchange Act; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt securities during the prior three-year period; and (iv) December 31, 2026.