Annexon, Inc. (ANNX) 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 of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K.

In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs, and expectations, and involve risks and uncertainties. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors.”

Overview

We are a clinical-stage biopharmaceutical company pioneering a new class of complement medicines for patients with classical complement-mediated autoimmune, neurodegenerative and ophthalmic disorders. The classical complement pathway is a core component to the body’s immune system that activates a powerful inflammatory cascade. We believe that by stopping the classical complement pathway at its start by targeting C1q, the initiating molecule of the classical complement pathway, our approach may have the potential to provide more complete protection against complement-mediated disorders of the body, brain and eye.

Using our proprietary platform, we are identifying and characterizing the role of the classical complement pathway in three therapeutic areas—autoimmune, neurodegeneration and ophthalmology. In so doing, we are advancing a broad pipeline of product candidates designed to block the early classical cascade and all downstream pathway components and their tissue-damaging functions. Our goal is to suppress excessive or aberrant classical complement activity that contributes to chronic inflammation and tissue damage to slow or even halt disease progression, while preserving the beneficial immune functions of the lectin and alternative complement pathways involved in the clearance of pathogens and damaged cells. We have demonstrated robust target engagement in the body, brain and eye, and clinical proof of concept in multiple diseases, resulting in four flagship programs that we are actively advancing:

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Guillain-Barré Syndrome, or GBS: We are advancing our lead candidate, ANX005, an investigational, full-length monoclonal antibody, or mAb, formulated for intravenous administration in a pivotal Phase 3 clinical trial for the potential treatment of patients with GBS. GBS is a rare antibody-mediated autoimmune disease with no U.S. Food and Drug Administration, or FDA, approved therapies, and for which we believe maximum suppression of C1q and the classical cascade early in the disease process may act to rapidly prevent nerve damage and irreversible neurological disability. We demonstrated clinical proof-of-concept in a prior placebo-controlled trial and expect to complete enrollment of approximately 220 patients in our ongoing Phase 3 GBS trial in the second half of 2023, with data anticipated in the first half of 2024.

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Huntington’s Disease, or HD: We are evaluating ANX005 for the potential treatment of patients with HD, a slowly progressing, inherited and fatal neurodegenerative disease in which we believe C1q triggers synapse loss and neuroinflammation. We completed a Phase 2 clinical trial in patients with manifest HD in 2022, in which ANX005 demonstrated positive efficacy results and was generally well-tolerated. Based on the Phase 2 results and a productive engagement with the FDA in late 2022, we are preparing to advance ANX005 into a randomized, double-blind, placebo-controlled Phase 2/3 trial for patients with HD in 2023.

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Geographic Atrophy, or GA: We are evaluating ANX007, an antigen-binding fragment, or Fab, formulated for intravitreal administration, for the potential treatment of patients with GA, the leading cause of blindness resulting from damaged and dying retinal cells. ANX007 is designed to block C1q locally in the eye to provide more complete protection against excess classical complement activity, a key driver of disease. We completed enrollment of approximately 270 patients in our ongoing Phase 2 GA trial in early 2022. We expect to report data from the 12-month treatment-period of the Phase 2 trial in mid-2023, followed by additional data after the conclusion of the six-month off-treatment period by the end of 2023.

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ANX1502 for Autoimmune Indications: ANX1502 is a novel oral small molecule targeting classical complement, which we believe is first-in-kind. We are conducting an ongoing Phase 1 single-ascending dose, or SAD, and multiple-ascending dose, or MAD, clinical trial designed to evaluate the safety, tolerability, pharmacokinetics, or PK, and pharmacodynamics, or PD, of ANX1502 in healthy volunteers. In the SAD trial, a single dose of 450 mg has achieved target drug levels in plasma in patients, consistent with twice-daily dosing. Additionally, ANX1502 has been generally well-tolerated as of October 23, 2022. The SAD trial is ongoing to identify the maximum tolerated dose. We are preparing to initiate a proof-of-concept trial in patients with cold agglutinin disease, or CAD, in 2023, which is supported by positive data previously generated by ANX005 in CAD patients. We also plan to expand development into additional autoimmune indications with strong scientific rationale, including multifocal motor neuropathy, or MMN, in the first half of 2024.

In addition to our flagship programs, we are studying multiple programs across our three therapeutic franchise areas, including:

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Amyotrophic Lateral Sclerosis, or ALS: We are evaluating ANX005 in a Phase 2a signal-finding clinical trial in patients with ALS, a fatal neurodegenerative disorder characterized by C1q activation driving inflammation and neurodegeneration. Preliminary Phase 2a data as of December 6, 2022 from the first eight patients in the trial showed that treatment with ANX005 resulted in a reduction in neurofilament light, or NfL, a neurodegenerative disease biomarker, and slowed disease progression as measured by reductions in revised ALS functional rating scores during the initial 12-week on-treatment period, followed by an increase in disease progression in the off-treatment period. Enrollment in the Phase 2a trial is ongoing, and we expect to report full data from the Phase 2a clinical trial in 2023.

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Lupus Nephritis, or LN: We are advancing a Phase 1b signal-finding trial of ANX009, a C1q Fab formulated for subcutaneous delivery, using a precision medicine approach for patients with LN who have high baseline complement activity. LN is an autoimmune disease for which pathogenic autoantibodies against C1q enhance activity and uniquely amplify kidney inflammation and damage. Enrollment in the Phase 1b clinical trial is ongoing with multiple patients dosed, and clinical data are expected in the first half of 2023.

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ANX105: We are continuing to evaluate ANX105, a next-generation full-length mAb, in a Phase 1 SAD clinical trial in healthy volunteers. Enrollment is ongoing and initial data are expected in 2023.

We were incorporated in March 2011 and commenced operations later that year. To date, we have focused primarily on performing research and development activities, hiring personnel and raising capital to support and expand these activities. We do not have any products approved for sale, and we have not generated any revenue from product sales. We have incurred net losses each year since our inception. Our net losses were $141.9 million and $130.3 million for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, we had an accumulated deficit of $438.3 million and cash and cash equivalents and short-term investments of $242.7 million.

Components of Operating Results

Revenue

Our product candidates are not approved for commercial sale. We have not generated any revenue from sales of our product candidates and do not expect to do so in the foreseeable future and until we complete clinical development, submit regulatory filings and receive approvals from applicable regulatory bodies for such product candidates, if ever.

Operating Expenses

Research and Development

Research and development expenses account for a significant portion of our operating expenses. Research and development expenses consist primarily of direct and indirect costs incurred for the development of our product candidates.

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Direct expenses include:

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preclinical and clinical outside service costs associated with discovery, preclinical and clinical testing of our product candidates;

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professional services agreements with third party contract organizations, investigative clinical trial sites and consultants that conduct research and development activities on our behalf;

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contract manufacturing costs to produce clinical trial materials; and

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laboratory supplies and materials.

Indirect expenses include:

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compensation and personnel-related expenses (including stock-based compensation);

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allocated expenses for facilities and depreciation; and

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other indirect costs.

We record research and development expenses as incurred. Payments made to other entities are under agreements that are generally cancelable by us. Advance payments for goods or services to be received in future periods for use in research and development activities are deferred as prepaid expenses. The prepaid amounts are then expensed as the related services are performed. At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates.

We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, particularly as they advance into later stages of development and as we conduct larger clinical trials, engage in other research and development activities and seek regulatory approvals for any product candidates that successfully complete clinical trials and as we incur expenses associated with hiring additional personnel and facility costs to support our research and development efforts. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain.

General and Administrative

General and administrative expenses consist primarily of compensation and personnel-related expenses (including stock-based compensation) for our personnel in executive, finance and other administrative functions. General and administrative expenses also include professional fees paid for accounting, legal and tax services, allocated expenses for facilities and depreciation and other general and administrative costs.

We expect our general and administrative expenses to increase substantially for the foreseeable future as we continue to support our research and development activities, grow our business and, if any of our product candidates receive marketing approval, commercialization activities. We will also incur additional expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC, Sarbanes-Oxley Act and the Nasdaq Stock Market, additional insurance expenses, investor relations activities and other administrative and professional services. We also expect to increase the size of our administrative function to support the growth of our business.

Interest and Other Income, Net

Interest and other income, net, primarily consists of interest income earned on our cash equivalents and short-term investments.

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Results of Operations

Comparison of the Years Ended December 31, 2022 and 2021

The following tables summarize our results of operations for the periods presented:

* Not meaningful

Research and Development Expenses

* Not meaningful

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Research and development expenses increased by $12.4 million, or 12%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily due to an increase of $10.9 million in direct clinical outside services related to our multiple clinical trials in GBS, warm autoimmune hemolytic anemia, Huntington’s Disease, amyotrophic lateral sclerosis, geographic atrophy, and first in human trials of ANX105 and ANX1502. Contract manufacturing expense decreased by $4.2 million due to completion of ANX005 production runs in the prior year period. Compensation and personnel-related expenses increased by $5.3 million, due to an increase in headcount. Direct consulting and professional services costs decreased by $0.6 million due to timing of costs related to the support of multiple functions including clinical development, translational, regulatory and project management. Other expenses increased by $0.4 million due to increase in third-party software costs.

General and Administrative Expenses

General and administrative expenses increased by $2.5 million, or 8%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily due to an increase of $3.5 million in compensation and personnel-related expenses, including an increase of $2.0 million in stock-based compensation, related to an increase in headcount. Consulting and professional services for accounting, legal and audit fees, and directors’ and officers’ insurance decreased by $1.3 million during the year ended December 31, 2022. Facilities and depreciation costs decreased by $0.1 million due to sublease income offsetting rent expense associated with our leased facility in Brisbane, California, which commenced in November 2021. Other expenses increased by $0.5 million due to increase in information technology costs.

Interest and other income, net

Interest and other income increased by $3.3 million for the year ended December 31, 2022 compared to the same period in 2021. The increase was primarily due to the increase in cash and cash equivalents and short-term investments balances, which was the result of the private placement completed in July 2022 and higher interest rates.

Liquidity and Capital Resources

Sources of Liquidity

Due to our significant research and development expenditures, we have generated operating losses since our inception.

We have funded our operations primarily through the sale of equity securities. From our inception through December 31, 2022, we have raised net cash proceeds of $356.4 million from private placements of our redeemable convertible preferred stock, our common stock and warrants to purchase our common stock, and $262.4 million from the initial public offering of our common stock, or our IPO. As of December 31, 2022, we had available cash and cash equivalents and short-term investments of $242.7 million and an accumulated deficit of $438.3 million.

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Cash Flows

Cash Flows from Operating Activities

Cash used in operating activities for the year ended December 31, 2022 was $116.3 million, which consisted of a net loss of $141.9 million, partially offset by $21.9 million in non-cash charges and a net change of $3.7 million in our operating assets and liabilities. The non-cash charges consisted of stock-based compensation of $18.5 million, depreciation and amortization of $2.1 million, accretion of discount on available-for-sale securities of $0.1 million, and reduction in the carrying amount of right-of-use assets of $1.2 million.

Cash used in operating activities for the year ended December 31, 2021 was $106.1 million, which consisted of a net loss of $130.3 million, partially offset by $20.9 million in non-cash charges and a net change of $3.3 million in our operating assets and liabilities. The non-cash charges consisted of stock-based compensation of $16.3 million, depreciation and amortization of $2.1 million, accretion of discount on available-for-sale securities of $1.3 million, and reduction in the carrying amount of right-of-use assets of $1.3 million.

Cash Flows from Investing Activities

Cash provided by investing activities for the year ended December 31, 2022 was $58.4 million, which consisted of $178.2 million of proceeds from maturities of available-for-sale securities, partially offset by $113.2 million of purchases of available-for-sale securities and $6.5 million of tenant improvement costs associated with our lease in Brisbane, California.

Cash used in investing activities for the year ended December 31, 2021 was $88.2 million, which consisted of $225.6 million of purchases of available-for-sale securities and $1.7 million of purchase of property and equipment, partially offset by $133.0 million of proceeds from maturities of available-for-sale securities and $6.0 million of proceeds from sale of available-for-sale securities.

Cash Flows from Financing Activities

Cash provided by financing activities for the year ended December 31, 2022 was $122.9 million, which consisted of $122.5 million of net proceeds from issuance of common stock and pre-funded warrants, and $0.4 million of proceeds from the exercise of common stock options and employee stock purchase plan purchases.

Cash provided by financing activities for the year ended December 31, 2021 was $1.8 million, related to $1.8 million of proceeds from the exercise of common stock options and employee stock purchase plan purchases.

Funding Requirements

We use our cash to fund operations, primarily to fund our clinical trials, research and development expenditures and related personnel costs. We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to our product candidates, particularly as they advance into later stages of development and as we conduct larger clinical trials, engage in other research and development activities, seek regulatory approvals for any product candidates that successfully complete clinical trials and as we incur expenses associated with hiring additional personnel to support our research and development efforts. In addition, we expect our general and administrative expenses to increase substantially for the

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foreseeable future as we continue to support our research and development activities and to grow our business and as we expect to engage in commercialization activities, if any of our product candidates receive marketing approval. We will also incur additional expenses as a result of operating as a public company and also expect to increase the size of our administrative function to support the growth of our business. The timing and amount of our operating expenditures will depend on many factors, including:

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the scope, progress, results and costs of researching and developing our current product candidates or any other future product candidates we choose to pursue, and conducting preclinical studies and clinical trials;

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the timing of, and the costs involved in, obtaining regulatory approvals for our lead product candidates or any future product candidates;

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the number and characteristics of any additional product candidates we develop or acquire;

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the timing and amount of any milestone, royalty and/or other payments we are required to make pursuant to our current or any future license or collaboration agreements;

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the cost of manufacturing our lead product candidates or any future product candidates and any products we successfully commercialize;

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the cost of building a sales force in anticipation of product commercialization;

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

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our ability to establish strategic collaborations, licensing or other arrangements and the financial terms of any such agreements, including the timing and amount of any future milestone, royalty or other payments due under any such agreement;

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any product liability or other lawsuits related to our products;

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the expenses needed to attract, hire and retain skilled personnel;

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the costs associated with operating as a public company;

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the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing our intellectual property portfolio; and

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the timing, receipt and amount of sales of any future approved products.

Based upon our current operating plan, we believe that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements into 2025. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. We expect to continue to expend significant resources for the foreseeable future. Until such time, if ever, as we can generate substantial product revenue, we will be required to seek additional funding in the future and currently intend to do so through public or private equity offerings or debt financings, credit or loan facilities, collaborations or a combination of one or more of these funding sources. Additional funds may not be available to us on acceptable terms or at all. If we fail to obtain necessary capital when needed on acceptable terms, or at all, we could be forced to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations. If we raise additional funds by issuing equity securities, our stockholders will suffer dilution and the terms of any financing may adversely affect the rights of our stockholders. In addition, as a condition to providing additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. Debt financing, if available, is likely to involve restrictive covenants limiting our flexibility in conducting future business activities, and, in the event of insolvency, debt holders would be repaid before holders of our equity securities received any distribution of our corporate assets.

At-the-Market Offering

In August 2021, we entered into a sales agreement with Cowen and Company LLC, or Cowen, as sales agent, pursuant to which we may issue and sell shares of our common stock for an aggregate maximum offering price of $100.0 million under an at-the-market offering program, or 2021 ATM program. We will pay Cowen up to 3% of

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gross proceeds for the common stock sold through the 2021 ATM program. As of December 31, 2022, no shares of common stock had been sold under the 2021 ATM program. In February 2023, an entity related to one of our directors purchased 2,646,458 shares of common stock at a price of $6.80 per share through the 2021 ATM program, resulting in net proceeds to us of approximately $17.5 million, after deducting placement agent fees.

Private Placement

On July 11, 2022, we sold in a private placement an aggregate of 9,013,834 shares of common stock, pre-funded warrants to purchase up to 24,696,206 shares of our common stock and accompanying common warrants to purchase up to 8,427,508 shares of our common stock. The offering price per share and accompanying common warrant was $3.87125 per share and the offering price per pre-funded warrant and accompanying common warrant was $3.87025 per share, which equals the per share offering price for the shares of common stock less the $0.001 exercise price for each such pre-funded warrant. The pre-funded warrants remain exercisable until exercised in full. The common warrants have an exercise price of $5.806875 per share and expire on June 30, 2025. The private placement resulted in net proceeds of approximately $122.5 million, after deducting placement agent fees and other expenses.

Both the pre-funded and common warrants are immediately exercisable, subject to beneficial ownership limitations. The warrants meet the criteria for equity classification and were therefore recorded at fair value as of the grant date as a component of stockholders’ equity within additional paid-in capital.

As of December 31, 2022, no pre-funded or common warrants were exercised, and there were pre-funded and common warrants to purchase an aggregate of 33,123,714 shares of common stock outstanding. The 24,696,206 shares of common stock issuable upon the exercise of the pre-funded warrants and the 8,427,508 shares of common stock issuable upon the exercise of the common warrants are not included in the number of issued and outstanding shares of common stock as of December 31, 2022.

Off-Balance Sheet Arrangements

Since our inception, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.

While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations.

Accrued and Prepaid Research and Development Costs

We estimate preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions, clinical research organizations, and clinical manufacturing organizations that conduct and manage preclinical studies and clinical trials on our behalf. In recording service fees as either prepaid or accrued costs, we estimate the period over which services will be performed and the level of effort to be expended in each period. These estimates of the expense are based on communications with and information provided by the third-party service providers at each balance sheet date. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the amounts recorded accordingly. The estimates are trued up to reflect the best

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information available at the time of the financial statement issuance. We have not experienced any material differences between accrued or prepaid costs and actual costs incurred since inception.

We defer and capitalize non-refundable advance payments for goods or services that will be used or rendered for future research and development activities as prepaid expenses until the related goods are delivered or services are performed. We evaluate such payments for current or long-term classification based on when such services are expected to be received.

Operating Lease Obligations

We determine if an arrangement is a lease at inception. Upon adoption of Accounting Standards Codification 842, Leases, as of January 1, 2021, we include operating leases in operating lease right of use, or ROU, assets, current and noncurrent operating lease liabilities in our consolidated balance sheets. The ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. We measure our ROU assets based on the associated lease liabilities adjusted for any lease incentives such as tenant improvement allowances. As most of the leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at the commencement date. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise the option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

As a practical expedient, we elected, for all facility leases, not to separate non-lease components from lease components and instead to account for each separate lease component and its associated non-lease components as a single lease component. We elected to exclude from our balance sheets recognition of leases having a term of 12 months or less (short-term leases).

Warrants

Warrants are accounted for as either derivative liabilities or as equity instruments depending on the specific terms of the agreement. Our pre-funded and common warrants are equity-classified instruments that were recorded in additional paid-in capital at issuance and are not subject to remeasurement. We periodically evaluate changes in facts and circumstances that could impact the classification of warrants.

Stock-Based Compensation

We maintain a stock-based compensation plan as a long-term incentive for employees, non-employee directors and consultants. The plan allows for the issuance of incentive stock options, non-qualified stock options, restricted stock units and other forms of equity awards.

We recognize stock-based compensation expense for stock options on a straight-line basis over the requisite service period and account for forfeitures as they occur. Our stock-based compensation costs are based upon the grant date fair value of options estimated using the Black-Scholes option pricing model.

To determine the value of stock option awards for stock-based compensation purposes, we use the Black-Scholes option pricing model and the assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment.

Fair Value of Common Stock—The fair value of each share of underlying common stock is based on the closing price of our common stock as reported on the date of grant on the Nasdaq Global Select Market.

Expected Term—The expected term represents the period that the stock-based awards 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). We continue using the simplified method as we do not have sufficient historical exercise

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data to provide a reasonable basis upon which to estimate expected term due to the limited period of time our equity shares have been publicly traded.

Expected Volatility—Because we do not have sufficient trading history for our common stock, the expected volatility was estimated based on the average volatility for comparable publicly traded life sciences companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on the similar size, stage in life cycle or area of specialty.

Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the option.

Dividend Yield—We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we used an expected dividend yield of zero.

See Note 7—Equity Incentive Plan to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options. Certain of such assumptions involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different.

Recent Accounting Pronouncements Not Yet Adopted

See Note 2—Basis of Presentation and Significant Accounting Policies to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one yet, of their potential impact on our financial condition of results of operations.