LONGBOARD PHARMACEUTICALS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended
December 31, 2021, filed with the Securities and Exchange Commission("SEC") on March 3, 2022(our "2021 Annual Report"). Forward-Looking Statements Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, 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 the "Risk Factors" section of this Quarterly Report, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should carefully read Part II, Item 1A, "Risk Factors" of this Quarterly Report to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements.
Overview and recent developments
We are a clinical-stage biopharmaceutical company focused on developing novel, transformative medicines for neurological diseases. We were formed in
January 2020by Arena Pharmaceuticals, Inc. ("Arena") to advance a portfolio of centrally acting product candidates designed to be highly selective for specific G protein-coupled receptors ("GPCRs"). Our small molecule product candidates were discovered out of the same platform at Arena that represents a culmination of more than 20 years of GPCR research. Our pipeline includes:
LP352, an oral, centrally acting, 5-hydroxytryptamine 2C receptor subtype ("5-HT2C") superagonist, currently in a Phase 1b/2a clinical trial ("the PACIFIC Study") expected to evaluate approximately 50 participants ages 12 to 65 years old with developmental and epileptic encephalopathies ("DEEs"), which may include Dravet syndrome, Lennox-Gastaut syndrome ("LGS"), tuberous sclerosis complex ("TSC"), CDKL5 deficiency disorder, SCN2A-related disorders, among others, with topline data expected in the second half of 2023;
LP659, a centrally acting, sphingosine-1-phosphate ("S1P") receptor subtypes 1 and 5 ("S1P1,5") receptor modulator, for which we have a pre-investigational new drug ("IND") meeting with the FDA to finalize details regarding the clinical development plan for use of LP659 in rare neuroinflammatory indications scheduled in the fourth quarter of 2022; and
LP143, a centrally acting cannabinoid type 2 (“CB2”) receptor full agonist in preclinical studies in central nervous system (“CNS”) diseases and disorders.
October 2020, we entered into a License Agreement with Arena (the "Arena License Agreement"), pursuant to which Arena granted us an exclusive, royalty bearing, sublicensable, worldwide license to develop and commercialize LP352, LP659, LP143 and certain 5-HT2A compounds (pharmaceutical products containing any such product candidates, the "Licensed Products"). We further amended the Arena License Agreement in January and September 2022. See the discussion of the Arena License Agreement under "Agreements with Arena" below. 20 --------------------------------------------------------------------------------
The following table provides an overview of the current product candidates we are focused on:[[Image Removed: img8596771_0.jpg]]* We own the rights to our product candidates through the Arena License Agreement.
We are also eligible to receive royalties of 9.5% to 18.5% on sales of lorcaserin if commercialization is approved through the Royalty Purchase Agreement.
We were incorporated in
January 2020. Since our inception, we have devoted substantially all of our resources to research and development activities, organizing and staffing our company, business planning, raising capital, in-licensing intellectual property rights and establishing our intellectual property portfolio, and providing general and administrative support for these operations. We have principally financed our operations to date through the private placement of convertible preferred stock and the completion of our initial public offering (the "IPO") of our common stock in March 2021. To date, we have raised gross proceeds of approximately $56.0 millionfrom the issuance of our convertible preferred stock and $84.8 millionfrom our IPO. As of September 30, 2022, we had cash, cash equivalents and short-term investments of $77.3 million. We have incurred net losses since our inception. Our net losses were $11.6 million, $32.6 million, $6.3 millionand $19.0 million, respectively, for the three and nine months ended September 30, 2022and 2021. As of September 30, 2022, we had an accumulated deficit of $74.8 million. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and preclinical studies and our expenditures on other research and development activities. We expect that our expenses and operating losses will increase substantially as product candidates advance through preclinical studies and clinical trials, and as we expand our clinical, regulatory, quality and manufacturing capabilities, incur significant commercialization expenses for marketing, sales, manufacturing and distribution, if we obtain marketing approval for any of our product candidates, and incur additional costs associated with operating as a public company. We expect that our existing cash, cash equivalents and short-term investments will be sufficient to fund our operations for at least the next 12 months. 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 base our estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect. 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 a combination of public or private equity offerings, debt financings or other capital sources, including potential collaborations, licenses and 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 research and development programs, future commercialization efforts or other operations, or grant rights to develop and market our product candidates that we would otherwise prefer to develop and market ourselves, which would have a negative impact on our financial condition. The global COVID-19 pandemic continues to evolve. As a result of the COVID-19 pandemic, we have faced and may continue to face delays in meeting our anticipated timelines for our ongoing and planned clinical trials. For example, the initiation of the multiple-ascending dose ("MAD") portion of the Phase 1 clinical trial of LP352 was previously delayed, in part, as a result of the impact of the COVID-19 pandemic on the clinical site in the United Kingdomthat conducted the single-ascending dose ("SAD") portion of the Phase 1 clinical trial for LP352, and subsequently we modified the protocol and relocated the MAD portion of such trial 21 -------------------------------------------------------------------------------- to a new clinical site in the United States. We completed the MAD portion of the Phase 1 clinical trial of LP352 in September 2021. The extent of the impact of COVID-19 on our business, operations and development timelines and plans remains uncertain, and will depend on certain developments, including the duration and spread of the outbreak and its impact on our development activities, planned clinical trial enrollment, future trial sites, contract research organizations ("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. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel and work locations. We will continue to actively monitor the evolving impacts of the COVID-19 pandemic and may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business. The extent to which the COVID-19 pandemic or a similar health epidemic may affect our business, operations and development timelines and plans, including the resulting impact on our expenditures and capital needs, remains highly uncertain and subject to change. For a discussion of risks related to the impact of the ongoing COVID-19 pandemic on our business, see Part II, Item 1A, "Risk Factors-Risks Related to Our Business Operations, Employee Matters and Managing Growth-COVID-19 has impacted and could continue to adversely impact our business." In addition, the ongoing geopolitical turmoil caused by the conflict in Ukrainehas contributed to further disruption, instability and volatility of the financial markets, which may have an adverse impact on our business or ability to access the capital markets in the future. For a discussion of risks related to the impact of the ongoing conflict in Ukraineon our business, see Part II, Item 1A, "Risk Factors-Risks Related to Our Limited Operating History, Financial Position and Need For Additional Capital-We will need substantial additional capital to finance our operations, which may not be available on acceptable terms, or at all. A recession or other unfavorable market conditions, including economic slowdowns, recessions, inflation, rising interest rates and tightening of credit markets caused by the ongoing COVID-19 pandemic, the conflict in Ukraineor otherwise, may limit our access to capital. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate certain of our product development efforts or other operations."
Agreements with Arena
Below is a summary of the key terms for our license and other agreements with Arena. On
March 11, 2022, Pfizer, Inc. ("Pfizer") announced it completed its acquisition of Arena, and Arena became a wholly-owned subsidiary of Pfizer. For a discussion of risks related to Pfizer's acquisition of Arena, see Part II, Item 1A, "Risk Factors-Risk Related to Arena Having Been Acquired by Pfizer-Arenawas acquired by Pfizer on March 11, 2022, and Arena's acquisition may negatively impact our development programs and stock price."
October 2020, we entered into the Arena License Agreement, pursuant to which we obtained an exclusive, worldwide license of certain intellectual property for the Licensed Products. In January 2022, we amended the Arena License Agreement to add an additional program, and in September 2022we further amended the Arena License Agreement to expand the field of the license of LP659 and provide Arena a right of first negotiation to acquire certain development and commercial rights to LP659 products. The Arena License Agreement imposes various development, regulatory and/or commercial diligence obligations on our company, and requires the payment of royalties, including a mid-single digit royalty on net sales of Licensed Products of LP352, and a low-single digit royalty on net sales of all other Licensed Products, by our company, its affiliates or its sublicensees, subject to standard reductions, and other obligations.
Royalty Purchase Agreement
October 2020, we entered into a Royalty Purchase Agreement with Arena and 356 Royalty Inc., a wholly-owned subsidiary of Arena ("356 Royalty"), pursuant to which we purchased the right to receive all milestone payments, royalties, interest and other payments relating to net sales of lorcaserin in all countries and territories of the world owed or otherwise payable to 356 Royalty by Eisai Inc.and Eisai Co., Ltd., pursuant to a Transaction Agreement dated December 28, 2016, as amended, by and among 356 Royalty, Eisai Inc.and Eisai Co., Ltd., for an upfront payment of $0.1 million. Lorcaserin is currently in a Phase 3 clinical trial for Dravet syndrome. 22 --------------------------------------------------------------------------------
October 2020, we entered into a services agreement (the "Services Agreement") with Arena under which Arena agreed to perform certain research and development services, general administrative services, management services and other mutually agreed services for us and receive service fees therefore on an hourly rate based on an annual full time equivalent rate agreed upon by the parties. We have significantly reduced our activities under the Services Agreement, including as a result of our having hired employees or contracted with third parties with the requisite expertise, and we are no longer substantially dependent on such services from Arena.
Components of our operating results
Our operating expenses consist of (i) research and development expenses and (ii) general and administrative expenses.
Research and development
Our research and development expenses consist primarily of direct and indirect costs incurred in connection with the preclinical and clinical development of our product candidates. Direct costs include: •
external research and development costs incurred under agreements with CROs, investigational sites, consultants and other third parties to conduct our preclinical studies and clinical trials; and
costs associated with manufacturing our product candidates for preclinical studies and clinical trials, including fees paid to third-party manufacturers.
Indirect costs include:
personnel costs, which include salaries, payroll taxes, benefits and other personnel costs, including stock-based compensation, for personnel engaged in research and development functions; and
facilities and other miscellaneous expenses.
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. We track direct costs by stage of program, clinical or preclinical. However, we do not track indirect costs on a program specific or stage of program basis because these costs are deployed across multiple programs and, as such, are not separately classified. We expect that our research and development expenses will increase substantially for the foreseeable future as we continue the development of our product candidates, particularly as product candidates in later stages of development generally have higher development costs than those in earlier stages of development. We cannot determine with certainty the timing of the initiation, duration or completion costs of future clinical trials and preclinical studies of our product candidates due to the inherently unpredictable nature of clinical and preclinical 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 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 may occur, if at all, and to what degree such arrangements would affect our development plans and capital requirements.
Our research and development costs can vary significantly depending on various factors, such as:
the scope, rate of progress, expenditures and results of our preclinical development activities;
the development phase of our product candidates;
clinical trial costs per patient;
the number of clinical trials required for approval;
the number of sites included in our ongoing and planned clinical trials;
the number of patients who participate in our ongoing and planned clinical trials;
the countries in which our clinical trials are conducted;
uncertainties in clinical trial design and patient enrollment or drop out or discontinuation rates, particularly in light of the ongoing COVID-19 pandemic and the conflict in
potential additional safety oversight requested by regulators;
the duration of patient participation in our ongoing and planned clinical trials and their follow-up;
the efficacy and safety profile of our product candidates;
the timing, receipt and terms of any approvals from applicable regulatory authorities, including the FDA and foreign regulatory authorities;
significant and changing government regulation and regulatory guidance;
any additional tests requested by regulatory bodies;
the cost and timing of manufacturing our product candidates;
establish clinical and commercial manufacturing capabilities or enter into agreements with third-party manufacturers to ensure that we or our third-party manufacturers are able to successfully manufacture the product;
the extent to which we enter into additional strategic collaborations or other arrangements;
the impact of any business interruptions to our operations or to those of the third parties with whom we work, particularly in light of the ongoing COVID-19 pandemic, the conflict in
Ukraineand general disruption of global supply chains and financial markets; and
maintain an acceptable continuing safety profile of our product candidates following the approval, if any, of our product candidates.
A change in the outcome of any of these or other variables with respect to the development of any of our product candidates could materially alter the costs and schedule associated with the development of such product candidate.
General and administrative
General and administrative expenses consist primarily of personnel-related costs, which include salaries, payroll taxes, employee benefits and other employee-related costs, including stock-based compensation, for personnel in executive, finance and other administrative functions. Other significant costs include legal fees relating to corporate matters, professional fees for accounting and consulting services and facility-related costs. We expect that our ongoing general and administrative expenses will increase modestly for the foreseeable future to support our increased research and development activities and increased costs of operating as a public company and in building our internal resources. These increased costs will include increased expenses related to audit and legal services associated with maintaining compliance with exchange listing and
SECrequirements, prosecuting and maintaining our patent portfolio, and investor and public relations activities associated with operating as a public company. 24 --------------------------------------------------------------------------------
Overview of financial operations
The following table summarizes our operating results for the three and nine months ended
Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Operating expenses: Research and development $ 9,403 $ 4,093 $ 25,445 $ 13,406 General and administrative 2,481 2,262 7,626 5,639 Total operating expenses 11,884 6,355 33,071 19,045 Loss from operations (11,884 ) (6,355 ) (33,071 ) (19,045 ) Interest income, net 287 23 446 40 Other income (expense) 1 (13 ) 25 (19 ) Net loss $ (11,596 )
$ (6,345 ) $ (32,600 ) $ (19,024 )
Research and development costs
The following table summarizes our research and development expenditures for the three and nine months ended
Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Direct costs: LP352 $ 5,965 $ 1,332
$ 14,228$ 5,815 Preclinical programs 1,043 1,265 4,274 4,134 Indirect costs: Personnel-related 2,177 1,315 6,058 2,937 All other 218 181 885 520
Total research and development expenses $9,403 $4,093
Research and development expenses were
$9.4 millionfor the three months ended September 30, 2022, an increase of $5.3 million, or 130%, compared to $4.1 millionfor the three months ended September 30, 2021. The net increase of $5.3 millionis primarily related to increases of $4.6 millionin clinical trial and preclinical expenses related to LP352, $0.9 millionin personnel-related expenses, and a $0.2 milliondecrease in preclinical expenses related to LP659 and LP143. Research and development expenses were $25.4 millionfor the nine months ended September 30, 2022, an increase of $12.0 million, or 90%, compared to $13.4 millionfor the nine months ended September 30, 2021. The increase of $12.0 millionis primarily related to increases of $8.4 millionin clinical trial and preclinical expenses related to LP352, $3.1 millionin personnel-related expenses, $0.1 millionin preclinical expenses related to LP659 and LP143, and $0.4 millionin other miscellaneous R&D expenses.
General and administrative expenses
General and administrative expenses were
$2.5 millionfor the three months ended September 30, 2022, an increase of $0.2 million, or 10%, compared to $2.3 millionfor the three months ended September 30, 2021. The net increase of $0.2 millionis primarily related to an increase in personnel-related costs. General and administrative expenses were $7.6 millionfor the nine months ended September 30, 2022, an increase of $2.0 million, or 35%, compared to $5.6 millionfor the nine months ended September 30, 2021. The increase of $2.0 millionis primarily related to increases of $1.3 millionin personnel-related costs, $0.2 millionin insurance expense, $0.2 millionin rent expense and $0.3 millionin other miscellaneous G&A expenses.
Cash and capital resources
September 30, 2022, we had cash, cash equivalents and short-term investments of $77.3 millionand working capital of $71.6 millionto fund future operations. As of December 31, 2021, we had cash, cash equivalents and short-term investments of $106.7 millionand working capital of $102.9 millionto fund future operations. 25
Sources of liquidity
We have funded our operations primarily through available cash, cash equivalents and short-term investments, and the sale and issuance of common stock and convertible preferred stock. In
October 2020, we completed a $56.0 millionprivate placement of our Series A convertible preferred stock. In connection with our IPO in March 2021, we issued and sold 5,298,360 shares of common stock, which included 298,360 shares of our common stock issued pursuant to the over-allotment option granted to the underwriters to purchase additional shares of common stock, at a public offering price of $16.00per share. We raised $76.2 millionin net proceeds from the IPO after deducting underwriters' discounts and commissions of $5.9 millionand issuance costs of $2.6 million.
September 2022, we entered into a Controlled Equity OfferingSM Sales Agreement (the "Sales Agreement") with Cantor Fitzgerald & Co., as sales agent ("Cantor Fitzgerald"), pursuant to which we may issue and sell our common stock from time to time through an "at the market offering" ("ATM") program under the Sales Agreement. We have no obligation to sell any shares of common stock under the Sales Agreement and may at any time suspend sales under the Sales Agreement. Cantor Fitzgeraldwill be entitled to compensation in an amount of 3% of the gross proceeds of any shares of common stock sold under the Sales Agreement. A maximum of $20.0 millionof shares of common stock may be sold under the Sales Agreement. We did not sell any shares of our common stock under the Sales Agreement as of September 30, 2022.
Material cash needs
We have incurred net losses and negative operating cash flow since our inception and expect that we will continue to incur net losses for the foreseeable future.
We expect that our existing cash, cash equivalents and short-term investments will be sufficient to fund our operations for at least the next 12 months. We believe we will meet longer-term expected future cash requirements and obligations beyond the next 12 months by utilizing our existing cash, cash equivalents and short-term investments and through a combination of equity offerings, debt financings, collaborations, licenses and other similar arrangements. 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 our 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 ability to fund longer-term operating needs will depend on our ability to commercialize product candidates for which we may obtain regulatory approval, our ability to access the capital markets and other factors, including those discussed in Part II, Item 1A, "Risk Factors" of this Quarterly Report.
Our future capital requirements will depend on many factors, including:
the type, number, scope, progress, expansions, results, costs and timing of our preclinical studies and clinical trials for our current and any future product candidates and the potential indications which we are pursuing or may choose to pursue in the future;
the outcome, timing and costs of regulatory review of our product candidates;
the costs and timing of manufacturing our product candidates, including commercial manufacturing;
our efforts to improve operating systems and hire additional staff to meet our obligations as a public company, including enhanced internal controls over financial reporting;
costs associated with hiring additional staff and consultants as our preclinical and clinical activities increase;
the terms and timing of establishing and maintaining collaborations, licenses and other similar agreements;
the costs of obtaining, expanding, maintaining and enforcing our patents and other intellectual property rights;
the costs and timing of establishing or securing sales, marketing and distribution capabilities, alone or with third parties, to commercialize product candidates for which we may obtain regulatory approval, if any;
the timing and amount of payments we are obligated to make under the Arena License Agreement;
our ability to obtain sufficient market acceptance, adequate coverage and reimbursement from third-party payers, and adequate market share and revenues for all approved products;
patients’ willingness to pay out-of-pocket for any approved product in the absence of coverage and/or adequate reimbursement by third-party payers;
costs associated with any product candidate, product or technology that we may license or acquire; and
if we experience any delays or encounter any issues with any of the above, which may be exacerbated by macroeconomic events stemming from the ongoing COVID-19 pandemic or evolving geopolitical developments such as the conflict in
Ukraine. Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval for any product candidates or generate revenue from the sale of any product candidate for which we may obtain marketing approval. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for at least several years, if ever. As a result, we will need substantial additional financing to support our continuing operations and further the development of and commercialize our product candidates. 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 a combination of public or private equity offerings, debt financings or other capital sources, including potential collaborations, licenses and 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 ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United Statesand worldwide resulting from the ongoing COVID-19 pandemic, the conflict in Ukraineor otherwise. 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 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 when needed, we may be required to delay, limit, reduce or terminate our research and development programs, future commercialization efforts or other operations, or grant rights to develop and market our product candidates that we would otherwise prefer to develop and market ourselves, which would have a negative impact on our financial condition.
The following table provides a summary of our cash flows for the nine months ended
Nine Months Ended
September 30, (in thousands) 2022
Net cash used in operating activities
$ (28,392 ) $ (19,030 )Net cash used in investing activities (19,209 ) (37,276 ) Net cash provided by financing activities - 76,451
(Decrease) net increase in cash and cash equivalents
$ 20,145 Operating Activities Net cash used in operating activities was
$28.4 millionand $19.0 millionfor the nine months ended September 30, 2022and 2021, respectively. Net cash used in operating activities for the nine months ended September 30, 2022was primarily due to our net loss of $32.6 million, adjusted for $2.1 millionof stock-based compensation expense and $1.9 millionfrom changes in operating assets and liabilities. Net cash used in operating activities for the nine months ended September 30, 2021was primarily due to our net loss of $19.0 million, adjusted for $1.4 millionof stock-based compensation expense and $1.5 millionfrom changes in operating assets and liabilities. 27 --------------------------------------------------------------------------------
Net cash used in investing activities was
$19.2 millionand $37.3 millionfor the nine months ended September 30, 2022and 2021, respectively. Net cash used in investing activities for the nine months ended September 30, 2022was related to $50.8 millionof short-term investment purchases, which was offset by $31.6 millionin short-term investment maturities. Net cash used in investing activities for the nine months ended September 30, 2021primarily consisted of $37.3 millionof short-term investment purchases.
Net cash provided by financing activities was none and
$76.5 millionfor the nine months ended September 30, 2022and 2021, respectively. Net cash provided by financing activities during the nine months ended September 30, 2021was comprised of net proceeds of $76.5 millionfrom our IPO, which excludes $0.2 millionof IPO expenses that were paid in 2020.
Critical accounting estimates
Our financial statements are prepared in accordance with generally accepted accounting principles in
the United States. The preparation of our financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on a periodic basis. Our actual results may differ from these estimates. While our significant accounting policies are described in more detail in the notes to our financial statements appearing in our 2021 Annual Report, we believe that the following accounting policies are critical to understanding our historical and future performance, as the policies relate to the more significant areas involving management's judgments and estimates used in the preparation of our financial statements. There have been no significant changes in our critical accounting policies and estimates during the nine months ended September 30, 2022, as compared to the critical accounting policies and estimates disclosed in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2021 Annual Report.
As part of the process of preparing our financial statements, we are required to estimate our accrued research and development 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 actual costs. The majority of our service providers invoice us in arrears for services performed, based on a pre-determined schedule or when contractual milestones are met, but some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known to us at that time. If timelines or contracts are modified based upon changes in the protocol or scope of work to be performed, we modify our estimates and accruals accordingly on a prospective basis. We base our expenses related to external research and development services 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 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 expenses accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material differences between our estimates of such expenses and the amounts actually incurred.
Emerging Growth Company and Small Company Reporting Status
We are an "emerging growth company" under the Jumpstart Our Business Startups Act of 2012 ("JOBS Act"), and as such, we can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of accounting standards that have different effective dates for public and private companies until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption 28 -------------------------------------------------------------------------------- from new or revised accounting standards, and therefore we will not be subject to the same requirements to adopt new or revised accounting standards as other public companies that are not emerging growth companies. We will cease to be an emerging growth company prior to the end of
December 31, 2026, if certain earlier events occur, including if we become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, our annual gross revenues exceed $1.235 billionor we issue more than $1.0 billionof non-convertible debt in any three-year period. We are also a "smaller reporting company" as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as our voting and non-voting common stock held by non-affiliates is less than $250.0 millionmeasured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 millionduring the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 millionmeasured on the last business day of our second fiscal quarter. 29
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