# Lexeo Therapeutics, Inc. (LXEO) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Lexeo Therapeutics, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1907108/000095017024028941/lxeo-20231231.htm
Accession: 0000950170-24-028941
Filing date: 2024-03-11
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/LXEO/
All MD&A years: /company/LXEO/mda/
Next year: /company/LXEO/mda/fy2024/ (FY 2024)

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

You should read the following discussion and analysis of our financial condition and results of operations together with the financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in “Item 1A. Risk Factors” and in other parts of this Annual Report on Form 10-K.

Overview

We are a clinical stage genetic medicine company dedicated to transforming healthcare by applying pioneering science to fundamentally change how disease is treated. By taking aim at the underlying genetic cause of the devastating diseases we target, we seek to create substantial positive impact and reduce the overwhelming burdens placed on people receiving treatment, their caregivers, and healthcare systems. Our current pipeline consists of candidates targeting patient populations that place significant burden on society and are most amenable to our genetic medicine approach.

Since our inception, we have devoted substantially all of our efforts to organizing and staffing our company, research and development activities, business planning, raising capital, building our intellectual property portfolio and providing general and administrative support for these operations. To date, we have funded our operations primarily through proceeds from the sale of shares of our convertible preferred stock and common stock, including our IPO and the subsequent partial exercise of the underwriters’ 30-day option to purchase additional shares of common stock. As of December 31, 2023, we had $121.5 million of cash and cash equivalents, and we had raised aggregate net proceeds of $100.3 million from our IPO and the subsequent partial exercise of the underwriters’ 30-day option to purchase additional shares of common stock, as well as totals of $185.0 million and $3.9 million of net proceeds from sales of our convertible equity securities and a convertible SAFE Note, respectively.

We have incurred significant operating losses since the commencement of our operations. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current gene therapy candidates or any future gene therapy candidates. Our net losses for the years ended December 31, 2022 and December 31, 2023 were $59.3 million and $66.4 million, respectively, and our accumulated deficit was $181.8 million at December 31, 2023. We expect to continue to incur significant losses for the foreseeable future as we advance our current and future product candidates through preclinical and clinical development, continue to build our operations and transition to operating as a public company.

We expect to continue to incur net operating losses for at least the next several years, and we expect our research and development expenses, general and administrative expenses, and capital expenditures to continue to increase. We expect our expenses and capital requirements will increase significantly in connection with our ongoing activities as we:

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continue our ongoing and planned clinical trials as well as research and development of our Friedreich’s ataxia cardiomyopathy, or FA cardiomyopathy (LX2006), APOE-associated Alzheimer’s disease (LX1001), and arrhythmogenic cardiomyopathy caused by mutations in the PKP2 gene, or PKP2-ACM (LX2020) programs and other product candidates;

•
initiate preclinical studies and clinical trials for any additional product candidates that we may pursue in the future;

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seek to discover and develop additional product candidates and further expand our clinical product pipeline;

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seek regulatory approvals for any product candidates that successfully complete clinical trials;

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invest in capital equipment in order to expand our research and development and manufacturing activities;

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attract, hire and retain additional clinical, scientific, quality control, regulatory, and manufacturing management and administrative personnel;

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add clinical, operational, financial and management information systems and personnel, including personnel to support our product development;

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develop, maintain, expand, protect and enforce our intellectual property portfolio, including patents, trade secrets and know-how;

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acquire or in-license other product candidates and technologies;

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expand our operations in the United States and to other geographies;

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•
incur additional legal, accounting, investor relations and other general and administrative expenses associated with operating as a public company; and

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establish a sales, marketing and distribution infrastructure, either ourselves or in partnership with others, to commercialize any product candidates, if approved, and related additional commercial manufacturing costs.

Summary of key factors impacting the comparability of our performance

Stelios acquisition

On July 16, 2021, we purchased all of the issued and outstanding capital stock of Stelios for initial cash consideration of $7.0 million, with payments of up to an additional $20.5 million due upon the achievement of the following milestones: clinical candidate selection for either the ACM or the TNNI3-associated programs; first patient dosed in a Phase 1 clinical trial for any product in our Cx43 program; first patient dosed in a Phase 1 clinical trial for any product in our ACM program; or first patient dosed in a Phase 1 clinical trial for any candidate in our TNNI3 program. In the third quarter of 2022, a development milestone associated with a clinical candidate selection was achieved resulting in a $2.0 million payment to the selling shareholders of Stelios.

We accounted for the acquisition of Stelios as an asset acquisition pursuant to Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Section 805, Business Combinations. We acquired in-process research and development, or IPR&D, assets from Stelios related to ACM and TNNI3-associated hypertrophic cardiomyopathy programs. Such programs relate to our development efforts for LX2020, LX2021 and LX2022. The fair value of the IPR&D acquired of $7.0 million was charged to research and development expense as it had no alternative future use at the time of the acquisition. Stelios was merged into Lexeo Therapeutics, Inc. on December 15, 2022 and ceased to exist.

See Note 13 to the audited consolidated financial statements appearing elsewhere in this Annual Report for more information on the Stelios acquisition.

Lease agreement

In February 2022, we entered into a lease agreement for our New York headquarters located at 345 Park Avenue South, 6th Floor, New York, NY 10010, pursuant to which we lease a total of approximately 15,839 square feet of office and laboratory space. The lease began in April 2022 and ends in July 2029 with an additional five-year option to extend at the then prevailing effective market rental rate. We accounted for this lease pursuant to FASB ASC Topic 842, Leases. Upon commencement of this lease, we recorded operating lease right-of-use assets and operating lease liabilities of approximately $11.6 million based on the present value of payments over the lease term using an estimated incremental borrowing rate of 8.53%. In connection with this lease, we provided a security deposit to the landlord in the form of a letter of credit totaling $1.2 million.

See Note 5 to the audited consolidated financial statements appearing elsewhere in this Annual Report for more information on this lease.

Components of our results of operations

Revenue

Our revenue to date has been comprised of grant revenue, which are amounts earned from performing contracted research and development services. These grants generally require us to meet certain research milestones in order to receive the funds. To date, we have not generated any revenue from product sales. If our development efforts for LX2006, LX1001, and LX2020 or any future product candidates, are successful and result in regulatory approval, or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from product sales, royalties or payments from such collaboration or license agreements, or a combination of product sales and payments from such agreements.

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Operating expenses

Research and development

Research and development expenses consist of costs incurred for our research activities, including our discovery efforts and the preclinical and clinical development of our programs. These expenses include:

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employee-related expenses, including salaries, benefits, and stock-based compensation expense for employees engaged in research and development functions;

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expenses incurred under agreements with third parties, such as consultants, clinical investigators, contractors and CROs that assist with (i) identification of potential product candidates in discovery platforms and (ii) the preclinical and clinical studies of our product candidates;

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the cost of developing and scaling our manufacturing process and manufacturing product candidates for use in our research, preclinical studies and clinical trials, including under agreements with third parties, such as consultants, contractors and CMOs;

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costs to maintain compliance with FDA and other regulatory requirements;

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laboratory supplies and research materials;

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facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities;

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payments made under our licensing agreements with third parties, including milestone payments; and

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other expenses incurred as a result of research and development activities.

We expense research and development costs as incurred. Nonrefundable 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. When third-party service providers’ billing terms do not coincide with our period-end, we are required to make estimates of our obligations to those third parties incurred in a given accounting period and record accruals at the end of the period. We base these estimates on our knowledge of the research and development programs, services performed for the period, past history for related activities and the expected duration of the third-party service contract, where applicable. If timelines or contracts are modified based upon changes in the scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis; therefore, actual results could differ from our estimates. Upfront payments under license agreements are expensed upon receipt of the license, and annual maintenance fees under license agreements are expensed in the period in which they are incurred. Milestone payments under license agreements are accrued, with a corresponding expense being recognized, in the period in which the milestone is determined to be probable of achievement and the related amount is reasonably estimable.

Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of external costs, such as fees paid to CROs, CMOs, central laboratories and certain outside consultants in connection with our research and discovery, preclinical development, process development, manufacturing, clinical development, clinical trials, regulatory and quality assurance activities. We do not allocate professional services costs and licensing fees and other similar costs to specific programs because these costs are deployed across multiple programs.

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Research and development activities are central to our business model and account for a significant portion of our operating expenses. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. As a result, we expect our research and development expenses to increase substantially in absolute dollars for the foreseeable future as we further advance LX2006, LX2020, LX1001, and any other future product candidates that we may develop, into and through preclinical studies and clinical trials and pursue regulatory approvals. We cannot determine with certainty the timing of initiation, the duration or the completion costs of current or future preclinical studies and clinical trials of our product candidates due to the inherently unpredictable nature of preclinical and clinical development. Clinical and preclinical 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 to pursue and how much funding to direct to each product candidate on an ongoing basis in response to the results of ongoing and future research, preclinical studies and clinical trials, regulatory developments and our assessments as to each product candidate’s commercial potential. In addition, we cannot forecast whether any of our current or future product candidates will 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. We are also unable to predict when, if ever, we will generate revenue from our product candidates to offset our expenses.

General and administrative

General and administrative expenses consist primarily of personnel expenses, including salaries, benefits and stock-based compensation expense, for personnel in executive, accounting, business development, legal, human resources and administrative functions. General and administrative expenses also include corporate facility costs not otherwise included in research and development expenses, depreciation and other expenses, which include direct or allocated expenses for rent and maintenance of facilities and insurance, not otherwise included in research and development expenses, as well as professional fees for legal, consulting, investor and public relations, accounting and audit services.

We expect that our general and administrative expenses will increase significantly in the near-to-medium term as we incur additional expenses associated with operating as a public company, including increased expenses for insurance premiums and audit, legal, regulatory, and tax-related services associated with maintaining compliance with the rules and regulations of the SEC and standards applicable to companies listed on a national securities exchange, investor relations activities and other administrative and professional services. We also plan to increase our general and administrative headcount to support the continued research and development of our programs and the growth of our business.

Fair value adjustment to convertible SAFE Note

Fair value adjustment to convertible SAFE Note consists of gains (losses) on the estimated fair value of the convertible SAFE Note.

Other income (expense)

Other income (expense) includes net foreign exchange gains (losses).

Interest expense

Interest expense is primarily associated with our finance right of use asset equipment leases, as well as amortization of the discount to our convertible SAFE Note liability balance since August 2023.

Interest income

Interest income is primarily related to interest earned from our investment in a U.S. government money market fund, as well as interest earned on interest-bearing demand deposit cash accounts.

Income taxes

Provision for income taxes consists of U.S. federal and state income taxes in which we conduct business. Since our inception, we have not recorded any income tax benefits for the net losses we have incurred in each year or for our research and development tax credits, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our NOL carryforwards and tax credits will not be realized. Accordingly, we have recorded a full valuation allowance against our net deferred tax assets at December 31, 2023, and December 31, 2022. As of December 31, 2023 and December 31, 2022 we had no unrecognized tax benefits.

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Results of operations

Comparison of the Years Ended December 31, 2023 and 2022

The following table summarizes our results of operations for the years ended December 31, 2023 and 2022 (in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","","2022","","","Change"],["Revenue"],["Grant revenue","","$","\u2014","","","$","654","","","$","(654",")"],["Total revenue","","","\u2014","","","","654","","","","(654",")"],["Operating expenses"],["Research and development","","","53,130","","","","49,162","","","","3,968"],["General and administrative","","","15,383","","","","12,001","","","","3,382"],["Total operating expenses","","","68,513","","","","61,163","","","","7,350"],["Operating loss","","","(68,513",")","","","(60,509",")","","","(8,004",")"],["Other income and expense"],["Loss on fair value adjustment to convertible SAFE Note","","","(530",")","","","\u2014","","","","(530",")"],["Other income (expense), net","","","(13",")","","","(2",")","","","(11",")"],["Interest expense","","","(205",")","","","(91",")","","","(114",")"],["Interest income","","","2,867","","","","1,325","","","","1,542"],["Total other income and expense","","","2,119","","","","1,232","","","","887"],["Loss from operations before income taxes","","","(66,394",")","","","(59,277",")","","","(7,117",")"],["Income taxes","","","\u2014","","","","\u2014","","","","\u2014"],["Net loss and comprehensive loss","","$","(66,394",")","","$","(59,277",")","","$","(7,117",")"]]
[[/GREPCENT_TABLE]]

Grant revenue

We did not record any grant revenue for the year ended December 31, 2023, and grant revenue was $0.7 million for the year ended December 31, 2022. The decrease in grant revenue was due to the wind-down of the underlying grants, which was completed in the third quarter of 2022.

Research and development expenses

The following table summarizes our research and development expenses incurred for the years ended December 31, 2023 and 2022 (in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","","2022","","","Change"],["Direct external research and development expenses by program:"],["LX2020","","$","14,192","","","$","8,551","","","$","5,641"],["LX1001","","","9,936","","","","7,605","","","","2,331"],["LX2006","","","7,537","","","","7,591","","","","(54",")"],["LX1004","","","310","","","","1,783","","","","(1,473",")"],["Other programs","","","2,214","","","","5,226","","","","(3,012",")"],["Total direct external research and development expenses by program","","","34,189","","","","30,756","","","","3,433"],["Unallocated research and development expenses:"],["Employee compensation and stock-based compensation expenses","","","13,499","","","","10,087","","","","3,412"],["Professional fees","","","1,707","","","","1,341","","","","366"],["Lab-related costs and supplies","","","1,103","","","","979","","","","124"],["License fees","","","6","","","","451","","","","(445",")"],["Other unallocated","","","2,626","","","","5,548","","","","(2,922",")"],["Total unallocated research and development expenses","","","18,941","","","","18,406","","","","535"],["Total research and development expenses","","$","53,130","","","$","49,162","","","$","3,968"]]
[[/GREPCENT_TABLE]]

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The net increase of $4.0 million in total research and development expenses for the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily due to increases in (i) clinical trial costs of $5.3 million, (ii) employee compensation and stock-based compensation expenses of $3.4 million due to increased headcount, and (iii) net milestone expense of $1.5 million that consisted of a $3.5 million milestone paid to Adverum in 2023 that was partially offset by a $2.0 million milestone payment made to the selling shareholders of Stelios during the year ended December 31, 2022. These increases were partially offset by decreases in (i) non-clinical and preclinical expenses of $5.4 million primarily related to our early stage cardiovascular and CNS disease programs, (ii) other unallocated expenses of $2.9 million, and (iii) CMC expenses of $0.9 million.

General and administrative expenses

General and administrative expenses were $15.4 million for the year ended December 31, 2023 compared to $12.0 million for the year ended December 31, 2022. The increase of $3.4 million was primarily due to increases in (i) $1.9 million of employee compensation and stock-based compensation expenses due to increased headcount, (ii) $1.7 million of third-party legal costs, and (iii) $0.3 million of rent expense as the operating lease for our New York headquarters commenced in April 2022, which were partially offset by a decrease of $0.4 million in third-party audit, accounting service provider, and professional service fees.

Interest income

We recognized interest income of $2.9 million and $1.3 million for the years ended December 31, 2023 and December 31, 2022, respectively, primarily related to interest earned on our investment in a U.S. government money market fund, with increased interest rates on such money market fund investment earned over those periods.

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. We expect to incur significant expenses and operating losses for the foreseeable future as we advance the clinical development of our product candidates. Since our inception through December 31, 2023, we have funded our operations primarily with net proceeds from sales of our convertible preferred stock, convertible SAFE Note, and shares of common stock sold in our IPO and the subsequent partial exercise of the underwriters’ 30-day option to purchase additional shares of common stock collectively totaling $289.1 million. As of December 31, 2023, we had cash and cash equivalents of $121.5 million.

Based on our current operating plans, we expect that our existing cash and cash equivalents and the gross proceeds of $95.0 million expected to be received upon the anticipated closing of our private placement equity financing in March 2024 will be sufficient to fund our planned operating expenses and capital expenditure requirements into 2027. Our total future capital requirements will depend on many factors and is subject to the risks and uncertainties set forth in the section titled “Item 1A. Risk Factors.”

Cash flows

The following table summarizes our sources and uses of cash for the years ended December 31, 2023 and December 31, 2022 (in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","","2022"],["Net cash used in operating activities","","$","(59,496",")","","$","(54,560",")"],["Net cash used in investing activities","","","(165",")","","","(901",")"],["Net cash provided by financing activities","","","103,791","","","","189"],["Net increase (decrease) in cash","","$","44,130","","","$","(55,272",")"]]
[[/GREPCENT_TABLE]]

Operating activities

During the year ended December 31, 2023, net cash used in operating activities consisted primarily of our net loss of $66.4 million, which was partially offset by (i) $3.0 million of stock-based compensation expense, (ii) $1.6 million of amortization of our right-of-use assets for our operating and finance leases, and (iii) $1.5 million of net cash provided by changes in operating assets and liabilities.

During the year ended December 31, 2022, net cash used in operating activities consisted primarily of our net loss of $59.3 million, which was partially offset by (i) $1.8 million of net cash provided by changes in operating assets and liabilities, (ii) $1.8 million of stock-based compensation expense, and (iii) $1.0 million of amortization of our right-of-use assets for our operating and finance leases.

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Investing activities

During the years ended December 31, 2023 and 2022, net cash used in investing activities was $0.2 million and $0.9 million, respectively, and consisted of the purchase of lab equipment and internal use software.

Financing activities

During the year ended December 31, 2023, net cash provided by financing activities consisted primarily of the net proceeds received from the IPO of $100.3 million, as well as net proceeds received from the issuance of the convertible SAFE Note of $3.9 million, which were partially offset by $0.4 million of principal payments made on equipment finance leases.

During the year ended December 31, 2022, net cash provided by financing activities consisted primarily of proceeds received from the exercise of stock options of $0.3 million, which was partially offset by $0.2 million of principal payments made on equipment finance leases.

Our primary uses of cash are to fund our clinical trials, research and development activities related to our discovery programs and our preclinical and clinical product candidates, hiring personnel, raising capital and providing general and administrative support for these operations.

Funding requirements

We expect our expenses and capital requirements to increase significantly in connection with our ongoing activities, particularly as we advance our lead product candidates and other development programs. Further, we incur costs associated with operating as a public company. Accordingly, we will require substantial additional funding to support our continuing operations.

The timing and amount of our future operating and capital requirements will largely depend on many factors, including:

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the initiation, scope, progress, timing, results and costs of product discovery, preclinical studies and clinical trials for our product candidates or any future candidates we may develop;

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our ability to maintain our relationships with Weill Cornell Medicine, Adverum, UCSD, and any other key licensors or collaborators;

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the scope, prioritization and number of our research and development programs;

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the costs, timing and outcome of seeking and obtaining regulatory approvals from the FDA and comparable foreign regulatory authorities, including the potential for such authorities to require that we perform more preclinical studies or clinical trials than those that we currently expect or change their requirements on studies that had previously been agreed to;

•
our ability to establish and maintain collaborations on favorable terms, if at all;

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the achievement of milestones or occurrence of other developments that trigger payments under any collaboration agreements we have or may enter into;

•
the extent to which we are obligated to reimburse, or entitled to reimbursement of, clinical trial costs under collaboration agreements, if any;

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the costs to establish, maintain, expand, enforce and defend the scope of our intellectual property portfolio, including preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;

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

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the costs of securing manufacturing arrangements for commercial production;

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the costs of establishing or contracting for sales and marketing capabilities if we obtain regulatory approvals to market our product candidates; and

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our need to implement additional internal systems and infrastructure.

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We may be unable to raise additional funds or enter into potential collaborations, strategic partnerships or marketing, distribution, licensing or other similar agreements or arrangements on favorable terms, or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted. If we fail to raise capital or enter into such agreements or arrangements as, and when, needed, we may have to significantly delay, scale back or discontinue the development or commercialization of our product candidates or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Critical accounting policies and significant judgments and estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses, and the disclosure of our contingent liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 2 to our audited consolidated financial statements included elsewhere in this Annual Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our audited consolidated financial statements.

Research and development

As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in the consolidated financial statements based on facts and circumstances known to us at that time. At each period end, we corroborate the accuracy of these estimates with the service providers and make adjustments, if necessary. Examples of estimated accrued research and development expenses include those related to fees paid to:

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vendors in connection with discovery and preclinical development activities;

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CROs in connection with preclinical studies and testing; and

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CMOs in connection with the process development and scale up activities and the production of materials.

We record the expense and accrual related to contract research and manufacturing based on our estimates of the services received and efforts expended considering a number of factors, including our knowledge of the progress towards completion of the research, development, and manufacturing activities; invoicing to date under contracts; communication from the CROs, CMOs, and other companies of any actual costs incurred during the period that have not yet been invoiced; and the costs included in the contracts and purchase orders. The financial terms of these agreements are subject to negotiation, vary from contract to contract, and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or the amount of prepaid expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses; however, we cannot guarantee that such adjustments will not be made in the future.

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Determination of fair value of common stock

Given the lack of an active public market for our common stock and other equity instruments prior to our IPO, the estimated fair value of our common stock was determined by our board of directors as of the date of each option grant, with input from management, considering our most recently available third-party valuations of common stock and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

Our common stock valuations were prepared using either an option pricing method, or OPM, or a hybrid method of OPM and probability-weighted expected return method, or PWERM. Both the OPM and hybrid methods use market approaches to estimate our enterprise value. These third-party valuations were performed at various dates, which resulted in valuations of our common stock of $14.62 as of December 17, 2021, $15.15 as of February 15, 2022, $17.59 as of February 14, 2023, and $11.02 as of June 23, 2023. In addition to considering the results of these third-party valuations, our board of directors considered various objective and subjective factors to determine the fair value of our common stock as of each grant date, including:

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the prices at which we sold shares of preferred stock and the superior rights and preferences of the preferred stock relative to our common stock at the time of each grant;

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the progress of our research and development programs, including the status and results of preclinical studies for our product candidates;

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our stage of development and our business strategy;

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external market conditions affecting the biopharmaceutical industry and trends within the biopharmaceutical industry;

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our financial position, including cash on hand, and our historical and forecasted performance and operating results;

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the lack of an active public market for our common stock and our preferred stock;

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significant changes to the key assumptions underlying the factors used could have resulted in different fair values of common stock at each valuation date; the likelihood of achieving a liquidity event, such as an initial public offering, or IPO, or sale of our company in light of prevailing market conditions; and

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the analysis of IPOs and the market performance of similar companies in the therapeutics industry.

Following the closing of our IPO, the fair value of our common stock is determined based on the quoted market price of our common stock on the date of grant.

Stock option awards

We recognize share-based compensation expense related to stock option awards granted based on the estimated fair value of the awards on the date of grant using a Black-Scholes option pricing model. The grant date fair value of the share-based awards is recognized on a straight-line basis over the requisite service period, which is the vesting period of the respective awards. Share-based payments to non-employees issued in exchange for services are based upon the fair value of the equity instruments issued. Compensation expense for stock options issued to non-employees is calculated using the Black-Scholes option pricing model and is recorded over the requisite service performance period.

The Black-Scholes option-pricing model requires the use of highly subjective assumptions, which are used to determine the fair value stock option awards granted. These assumptions include:

Expected Term. The expected term represents the period that our stock option awards granted are expected to be outstanding and is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term).

Expected Volatility. Because we did not have any trading history for our shares of common stock prior to the IPO, the expected volatility for stock options granted prior to the IPO was estimated entirely using averages of the historical volatility of our peer group of companies, and the expected stock price volatility was primarily based on the historical volatility of a publicly traded set of peer companies for stock options granted since the IPO, each for a period equal to the expected life of the stock options granted, and we expect to continue to do so until such time as we have adequate historical data regarding the volatility of our own traded stock price. Our peer group of publicly traded companies was chosen based on their similar size, stage in the life cycle or area of specialty.

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Risk-Free Interest Rate. The risk-free interest rate is based on the interest rates paid on securities issued by the U.S. Treasury with a term approximating the expected life of stock options granted.

Expected Dividend. We have never paid, and do not anticipate paying, cash dividends on our shares of common stock. Therefore, the expected dividend yield was assumed to be zero.

Fair Value of Common Stock. Since our IPO, the fair value of shares of our common stock is measured by the stock price on the date of grant.

The following table summarizes option activity for the year ended December 31, 2023:

[[GREPCENT_TABLE]]
[["Grant Date","","Number of Shares Subject to Options Granted","","","Per Share Exercise Price of Options","","","Per Share Fair Value of Common Stock on Grant Date","","","Per Share Estimated Fair Value of Options"],["March 14, 2023","","","464,613","","","$","17.59","","","$","17.59","","","$","13.06"],["July 24, 2023","","","146,234","","","$","11.02","","","$","11.02","","","$","7.08"],["August 22, 2023","","","459,800","","","$","11.02","","","$","11.02","","","$","8.27"],["September 17, 2023","","","63,665","","","$","11.02","","","$","11.02","","","$","8.22"],["November 30, 2023","","","93,642","","","$","12.72","","","$","12.72","","","$","9.43"]]
[[/GREPCENT_TABLE]]

Emerging growth company status

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 not to “opt out” of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time private companies adopt the new or revised standard and will do so until such time that we either (i) irrevocably elect to “opt out” of such extended transition period or (ii) no longer qualify as an emerging growth company. There are other exemptions and reduced reporting requirements provided by the JOBS Act that we are currently evaluating. For example, as an “emerging growth company,” we are exempt from Sections 14A(a) and (b) of the Exchange Act, which would otherwise require us to (1) submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay,” “say-on-frequency,” and “golden parachutes;” and (2) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of our chief executive officer’s compensation to our median employee compensation. We also rely on an exemption from the rule requiring us to provide an auditor’s attestation report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. We will continue to remain an “emerging growth company” until the earliest of the following: (1) the last day of the fiscal year following the fifth anniversary of the date of the completion of our IPO; (2) the last day of the fiscal year in which our total annual gross revenue is equal to or more than $1.235 billion; (3) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (4) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

Recently issued accounting pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position, results of operations and cash flows is disclosed in Note 2 to our audited consolidated financial statements included elsewhere in this Annual Report.

Qualitative and quantitative disclosures about market risk

Interest rate risk

We are a smaller reporting company, as defined by Rule 12b-2 under the Exchange Act and are not required to provide the information under this item.