ROCKET PHARMACEUTICALS, INC. (RCKT) FY 2023 MD&A

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements, related notes and other financial information included elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties such as our plans, objectives, expectations, and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in “Risk Factors” included elsewhere in this Annual Report.

Unless otherwise indicated, references to “Rocket,” the “Company,” “we,” “our” and “us” refer to Rocket Pharmaceuticals, Inc. and its subsidiaries.

Introduction

We are a fully integrated, late-stage biotechnology company focused on the development of first, only and best in class gene therapies, with direct on-target mechanism of action and clear clinical endpoints, for rare and devastating diseases. We have three clinical-stage ex vivo lentiviral vector (“LV”) programs, which include programs for:

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Fanconi Anemia (“FA”), a genetic defect in the bone marrow that reduces production of blood cells or promotes the production of faulty blood cells;

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Leukocyte Adhesion Deficiency-I (“LAD-I”), a genetic disorder that causes the immune system to malfunction; and

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Pyruvate Kinase Deficiency (“PKD”), a red blood cell autosomal recessive disorder that results in chronic non-spherocytic hemolytic anemia.

In September 2023, the FDA accepted the Biologics License Application (“BLA”) and granted priority review for RP-L201 for the treatment of severe LAD-I. Treatments in the FA Phase 2 studies were completed in 2023 with regulatory filings in the United States (“U.S.”) and Europe (“EU”) for FA anticipated in 2024. Additional work on a gene therapy program for the less common FA subtypes C and G is ongoing.

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In the U.S., we also have two clinical stage and one pre-clinical stage in vivo adeno-associated virus (“AAV”) programs, which include programs for:

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Danon disease (“DD”), a multi-organ lysosomal-associated disorder leading to early death due to heart failure. The DD program is currently in an ongoing Phase 2 trial.

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Plakophilin-2 Arrhythmogenic Cardiomyopathy (“PKP2-ACM”), an inheritable cardiac disorder that is characterized by a progressive loss of cardiac muscle mass, severe right ventricular dilation, dysplasia, fibrofatty replacement of the myocardium and a high propensity to arrhythmias and sudden death. This program received FDA clearance of an Investigational New Drug (“IND”) application and we have initiated a Phase 1 study.

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BAG3 Dilated Cardiomyopathy (“DCM”), which is the most common form of cardiomyopathy and is characterized by progressive thinning of the walls of the heart resulting in enlarged heart chambers that are unable to pump blood. Our program utilizes recombinant AAV9-based gene therapy designed to slow or halt progression of BAG3-DCM.

We have global commercialization and development rights to all of these product candidates under royalty-bearing license agreements.

Recent Developments

At-the-Market Offering Program

On February 28, 2022, we entered into a Sales Agreement with Cowen with respect to an at-the-market offering program pursuant to which we may offer and sell, from time to time at our sole discretion, shares through Cowen as our sales agent. The shares to be offered and sold under the Sales Agreement, if any, will be offered and sold pursuant to our shelf registration statement on Form S-3. We filed a prospectus supplement with the SEC on February 28, 2022 in connection with the offer and sale of the shares pursuant to the Sales Agreement. We will pay Cowen a cash commission of 3.0% of gross proceeds from the sale of the shares pursuant to the Sales Agreement. We also agreed to provide Cowen with customary indemnification and contribution rights. We have reimbursed Cowen for certain expenses incurred in connection with the Sales Agreement. Through December 31, 2023, we sold 4.2 million shares under the at-the-market offering program for gross proceeds of $65.8 million, less commissions of $2.0 million for net proceeds of $63.8 million. During the year ended December 31, 2023, we sold 0.9 million shares under the at-the-market offering program for gross proceeds of $17.8 million, less commissions of approximately $0.6 million for net proceeds of $17.2 million. On September 12, 2023, the Company and Cowen entered into an amendment pursuant to which the aggregate offering amount available under the at-the-market offering program was reduced to $180.0 million.

Public Offering

On September 15, 2023, we completed a public offering of approximately 9.5 million shares of our common stock at a public offering price of $16.00 per share and pre-funded warrants to purchase 3.1 million shares of common stock at a price of $15.99 per warrant (the “September 2023 Public Offering”). The gross proceeds from the September 2023 Public Offering were approximately $201.3 million, net of $12.4 million of offering costs, underwriting discounts and commissions, legal and other expenses for net proceeds from the offering of $188.9 million.

Financial Overview

Since our inception, we have devoted substantially all of our resources to organizing and staffing the Company, business planning, raising capital, acquiring, or discovering product candidates and securing related intellectual property rights, conducting discovery, R&D activities for our product candidates and planning for potential commercialization. We do not have any products approved for sale and have not generated any revenue from product sales. From inception through December 31, 2023, we raised net cash proceeds of approximately $1.0 billion from investors through both equity and convertible debt financing to fund operating activities.

Revenue

To date, we have not generated any revenue from any sources, including from product sales, and we do not expect to generate any revenue from the sale of products in the near future. If our development efforts for product candidates are successful and result in regulatory approval or license agreements with third parties, we may generate revenue in the future from product sales.

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Research and Development Expenses

Our R&D program expenses consist primarily of external costs incurred for the development of our product candidates. These expenses include:

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expenses incurred under agreements with research institutions and consultants that conduct R&D activities, including process development and preclinical and clinical activities on our behalf;

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costs related to process development and production of preclinical and clinical materials, including fees paid to contract manufacturers and manufacturing input costs for use in internal manufacturing processes;

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consultants supporting process development and regulatory activities; and

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costs related to in-licensing of rights to develop and commercialize our product candidate portfolio.

We recognize external development costs based on contractual payment schedules aligned with program activities, invoices for work incurred, and milestones that correspond with costs incurred by the third parties. Nonrefundable advance payments for goods or services to be received in the future for use in R&D activities are recorded as prepaid expenses.

Our direct R&D expenses are tracked on a program-by-program basis for product candidates and consist primarily of external costs, such as research collaborations and third-party manufacturing agreements associated with our preclinical research, process development, manufacturing, and clinical development activities. Our direct R&D expenses by program also include fees incurred under license agreements. Our personnel, non-program and unallocated program expenses include costs associated with activities performed by our internal R&D organization and generally benefit multiple programs. These costs are not separately allocated by product candidate and consist primarily of:

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salaries and personnel-related costs, including benefits, travel, and stock-based compensation, for our scientific personnel performing R&D activities;

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

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laboratory supplies and equipment used for internal R&D activities.

We allocate salary and benefit costs directly related to specific programs. We do not allocate personnel-related discretionary bonus or stock-based compensation costs, costs associated with our general discovery platform improvements, depreciation or other indirect costs that are deployed across multiple projects under development and, as such, the costs are separately classified as other R&D expenses.

The following table presents R&D expenses, in thousands, tracked on a program-by-program basis as well as by type and nature of our expense for our product candidates for the years ended December 31, 2023 and 2022, and 2021.

(1)
Effective December 2021, a decision was made to no longer pursue Rocket-sponsored clinical evaluation of RP-L401; this program was returned to academic innovators. Costs to close out the study were incurred in 2022.

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We cannot determine with certainty the duration and costs to complete current or future clinical studies of product candidates or if, when, or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs, and timing of clinical studies and development of product candidates will depend on a variety of factors, including:

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the scope, rate of progress, and expense of ongoing clinical studies as well as any clinical studies and other R&D activities that we undertake in the future;

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future clinical study results;

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uncertainties in clinical study enrollment rates;

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changing standards for regulatory approval; and

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the timing and receipt of any regulatory approvals.

We expect R&D expenses to increase for the foreseeable future as we continue to invest in R&D activities related to developing product candidates, including investments in manufacturing, as our programs advance into later stages of development and as we conduct additional clinical trials. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of product candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of R&D projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.

Our future R&D expenses will depend on the clinical success of our product candidates, as well as ongoing assessments of the commercial potential of such product candidates. In addition, we cannot forecast with any degree of certainty which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements. We expect our R&D expenses to increase for the foreseeable future as we seek further development of our product candidates.

The successful development and commercialization of our product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:

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the scope, progress, outcome and costs of our clinical trials and other R&D activities;

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the efficacy and potential advantages of our product candidates compared to alternative treatments, including any standard of care;

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the market acceptance of our product candidates;

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obtaining, maintaining, defending, and enforcing patent claims and other intellectual property rights;

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significant and changing government regulation; and

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the timing, receipt, and terms of any marketing approvals.

A change in the outcome of any of these variables with respect to the development of our product candidates that we may develop could mean a significant change in the costs and timing associated with the development of our product candidates. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials or other testing beyond those that we currently contemplate for the completion of clinical development of any of our product candidates that we may develop or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related benefit costs for personnel, including stock-based compensation and travel expenses for our employees in commercial, executive, operational, finance, legal, business development, and human resource functions. In addition, other significant general and administrative expenses include professional fees for legal, consulting, investor and public relations, auditing, and tax services as well as other expenses for rent and maintenance of facilities, insurance and other supplies used in general and administrative activities. We expect general and administrative expenses to increase for the foreseeable future due to anticipated increases in headcount to support the continued advancement of our product candidates and our progression to commercial operations. We also anticipate that as we continue to operate as a public company with increasing complexity, we will continue to incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses.

Interest Expense

Interest expense in 2023 and 2022 was related to our financing lease obligation for our Cranbury, NJ facility. Interest expense in 2021 was related to convertible notes due in 2021, which were converted into common stock in August 2021 and convertible notes due in 2022, which were converted into common stock in April 2021, and our financing lease obligation for the Cranbury, NJ facility.

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Interest and Other Income

Interest and other income related to interest earned from investments and cash equivalents, liability extinguishment and reduced fair value of warrant liability.

Results of Operations

Comparison of the Years Ended December 31, 2023 and 2022

The following table summarizes our results of operations, in thousands, for each of the periods presented:

Research and Development Expenses

R&D expenses increased $20.8 million to $186.3 million for the year ended December 31, 2023, compared to the year ended December 31, 2022. The increase in R&D expenses was primarily driven by increases in costs for compensation and benefits of $16.9 million due to increased R&D headcount, clinical trial costs of $14.5 million, non-cash stock compensation expense of $5.0 million, and license expenses of $2.2 million. Increases noted were partially offset by decreases in manufacturing and development costs of $17.0 million and direct materials of $3.5 million.

General and Administrative Expenses

G&A expenses increased $14.5 million to $73.3 million for the year ended December 31, 2023, compared to the year ended December 31, 2022. The increase in G&A expenses was primarily driven by increases in commercial preparation related expenses of $8.4 million, non-cash stock compensation expense of $3.4 million, and legal expenses of $3.0 million, which were partially offset by a reduction in acquisition related expenses of $3.0 million due to the closing of the Renovacor acquisition in 2022.

Other Income, Net

Other income, net increased by $11.6 million to $14.1 million for the year ended December 31, 2023, compared to the year ended December 31, 2022. The increase in other income was primarily driven by an increase in accretion of discount and amortization of premium on investments, net, of $10.7 million and interest and other income, net, of $1.4 million. The increase in interest and other income, net, of $1.4 million was due to increased interest rates of $1.6 million and a liability extinguishment of $0.6 million, partially offset by increased fair value of warrant liability of $0.4 million.

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Comparison of the Years Ended December 31, 2022 and 2021

The following table summarizes our results of operations, in thousands, for each of the periods presented:

Research and Development Expenses

R&D expenses increased $40.1 million to $165.6 million for the year ended December 31, 2022, compared to the year ended December 31, 2021. The increase in R&D expenses was primarily driven by increases in manufacturing and development costs of $26.3 million, laboratory supplies of $6.6 million, compensation and benefits expense of $11.5 million due to increased R&D headcount, direct materials of $3.6 million, and consulting and professional fees of $2.7 million. Increases noted were offset by a decrease in license fees of $12.9 million attributable to the expense in connection with warrants to purchase shares of common stock recorded for the year ended December 31, 2021.

General and Administrative Expenses

G&A expenses increased $17.0 million to $58.8 million for the year ended December 31, 2022, compared to the year ended December 31, 2021. The increase in G&A expenses was primarily driven by increases in commercial preparation expenses which consists of commercial strategy, medical affairs, market development and pricing analysis of $4.9 million, compensation and benefits of $4.4 million due to increased G&A headcount and acquisition related expenses of $3.2 million.

Other Income, Net

Other income, net increased by $4.3 million to $2.5 million for the year ended December 31, 2022, compared to the year ended December 31, 2021. The change was primarily driven by decreased interest expense of $1.1 million associated with convertible notes due in 2022, which were converted into common stock in April 2021 and convertible notes due in 2021, which were converted into common stock in August 2021, an increase in interest and other income, net, of $0.8 million due to increased interest rates and a decrease in amortization of premium on investment, net, of $2.9 million.

Liquidity and Capital Resources

We have not generated any revenue and have incurred losses since inception. Operations of the Company are subject to certain risks and uncertainties, including, among others, those related to drug candidate development, technology and data security, patents and proprietary rights, our lack of commercial manufacturing marketing or sales experience, dependency on key personnel, compliance with government regulations and the need to obtain additional financing. Drug candidates currently under development will require significant additional R&D efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel infrastructure, and extensive compliance-reporting capabilities.

Our drug candidates are in the development and clinical stage. There can be no assurance that our R&D will be successfully completed, that adequate protection for our intellectual property will be obtained, that any products developed will obtain necessary government approval or that any approved products will be commercially viable. Even if our product development efforts are successful, it is uncertain when, if ever, we will generate significant revenue from product sales. We operate in an environment of rapid change in technology and substantial competition from pharmaceutical and biotechnology companies.

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Our consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities in the ordinary course of business. Rocket has incurred net losses and negative cash flows from its operations each year since inception. Rocket incurred net losses of $245.6 million, $221.9 million, and $169.1 million for the years ended December 31, 2023, 2022 and 2021, respectively. We have experienced negative cash flows from operations and have an accumulated deficit of $959.4 million as of December 31, 2023. As of December 31, 2023, we had $407.5 million of cash, cash equivalents and investments. Included in the $407.5 million cash balance are securities that have yet to be paid of $13.1 million related to investments in securities that settled in 2024. The net cash balance, when adjusting for this payable would have been $394.4 million. We expect such resources would be sufficient to fund our operating expenses and capital expenditure requirements into 2026. We have funded our operations primarily through the sale of equity.

On April 30, 2019, CIRM awarded the Company up to $7.5 million under a CLIN2 grant award program to support the clinical development of our LV-based gene therapy for RP-L201 based on achievements of specific development milestones. The Company achieved two milestones in 2019 and received $1.1 million. In 2020, the Company achieved two more milestones and received $2.8 million. The Company achieved an additional milestone in 2021 and received $1.0 million. In 2022, the Company achieved one more milestone and received $0.9 million. In 2023, the Company achieved a final milestone resulting in a payment of $0.05 million. No additional payments are available under the grant award program as of December 31, 2023.

In the longer term, our future viability is dependent on our ability to generate cash from operating activities or to raise additional capital to finance our operations. If we raise additional funds by issuing equity securities, our stockholders will experience dilution. Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation, or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. Our failure to raise capital as and when needed could have a negative impact on our financial condition and ability to pursue our business strategies.

At-the-Market Offering Program

On February 28, 2022, we entered into a Sales Agreement with Cowen with respect to an at-the-market offering program pursuant to which we may offer and sell, from time to time at our sole discretion, shares through Cowen as our sales agent. The shares to be offered and sold under the Sales Agreement, if any, will be offered and sold pursuant to our shelf registration statement on Form S-3. We filed a prospectus supplement with the SEC on February 28, 2022 in connection with the offer and sale of the shares pursuant to the Sales Agreement. We will pay Cowen a cash commission of 3.0% of gross proceeds from the sale of the shares pursuant to the Sales Agreement. We also agreed to provide Cowen with customary indemnification and contribution rights. We have reimbursed Cowen for certain expenses incurred in connection with the Sales Agreement. Through December 31, 2023, we sold 4.2 million shares under the at-the-market offering program for gross proceeds of $65.8 million, less commissions of $2.0 million for net proceeds of $63.8 million. During the year ended December 31, 2023, we sold 0.9 million shares under the at-the-market offering program for gross proceeds of $17.8 million, less commissions of approximately $0.6 million for net proceeds of $17.2 million. On September 12, 2023, the Company and Cowen entered into an amendment pursuant to which the aggregate offering amount available under the at-the-market offering program was reduced to $180.0 million.

Public Offering

On September 15, 2023, we completed a public offering of approximately 9.5 million shares of our common stock at a public offering price of $16.00 per share and pre-funded warrants to purchase 3.1 million shares of common stock at a price of $15.99 per warrant (the “September 2023 Public Offering”). The gross proceeds from the September 2023 Public Offering were approximately $201.3 million, net of $12.4 million of offering costs, underwriting discounts and commissions, legal and other expenses for net proceeds from the offering of $188.9 million.

Contractual Obligations

In the normal course of business, we enter into contracts and commitments that obligate us to make payments in the future. Information regarding our obligations relating to income taxes and lease arrangements are provided in “Note 12. Income Taxes” and “Note 13. Leases” to our consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data.”

We do not have any off-balance sheet arrangements that are material or reasonably likely to become material to our financial condition or results of operations.

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Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities, in thousands, for each of the periods presented:

Operating Activities

During the year ended December 31, 2023, operating activities used $194.9 million of cash and cash equivalents, primarily resulting from our net loss of $245.6 million offset by net non-cash charges of $37.2 million, including non-cash stock-based compensation expense of $39.4 million, depreciation and amortization expense of $7.1 million, impairment of acquired intangible asset and write down of property and equipment of $0.9 million, partially offset by accretion of discount on investments of $10.2 million. Changes in our operating assets and liabilities for the year ended December 31, 2023 included an increase in accounts payable and accrued expenses of $10.1 million, and a decrease in our prepaid expenses and other assets of $2.7 million.

During the year ended December 31, 2022, operating activities used $178.1 million of cash and cash equivalents, primarily resulting from our net loss of $221.9 million and net changes in our operating assets and liabilities of $6.1 million, partially offset by net non-cash charges of $37.6 million, including stock-based compensation expense of $31.0 million and depreciation and amortization expense of $6.3 million. Changes in our operating assets and liabilities for the year ended December 31, 2022 consisted of an increase in accounts payable and accrued expenses of $9.7 million and an increase in prepaid expenses and other assets of $3.6 million.

During the year ended December 31, 2021, operating activities used $121.2 million of cash and cash equivalents, primarily resulting from our net loss of $169.1 million and net changes in our operating assets and liabilities of $3.4 million, partially offset by net non-cash charges of $51.3 million, including expenses in connection with the issuance of warrant of $12.8 million, stock-based compensation expense of $29.2 million, amortization of premium on investments of $2.9 million and depreciation and amortization expense of $5.4 million. Changes in our operating assets and liabilities for the year ended December 31, 2021 consisted of a decrease in accounts payable and accrued expenses of $4.8 million and a decrease in prepaid expenses and other assets of $1.3 million.

Investing Activities

During the year ended December 31, 2023, net cash used in investing activities was $98.1 million, primarily resulting from proceeds of $309.3 million from the maturities of investments, offset by purchases of investments of $390.9 million, and purchases of property and equipment of $16.5 million.

During the year ended December 31, 2022, net cash used in investing activities was $69.3 million, consisting of proceeds of $272.9 million from the maturities of investments and proceeds of $42.7 million from the acquisition of Renovacor, offset by purchases of investments of $376.3 million, purchases of property and equipment of $8.4 million and purchases of right of use assets of $0.3 million.

During the year ended December 31, 2021, net cash provided by investing activities was $18.9 million, consisting of proceeds of $272.4 million from the maturities of investments, offset by purchases of investments of $245.9 million, and purchases of property and equipment of $7.6 million.

Financing Activities

During year ended December 31, 2023, net cash provided by financing activities was $208.4 million, consisting primarily of proceeds related to the September 2023 Public Offering of $188.9 million, $17.2 million from issuance of common stock through our at-the-market offering program and $2.2 million from the exercise of stock options.

During the year ended December 31, 2022, net cash provided by financing activities was $155.3 million, consisting primarily of proceeds related to the October 2022 Public Offering of $108.1 million and issuance of common stock through our at-the-market offering program of $46.6 million.

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During the year ended December 31, 2021, net cash provided by financing activities was $37.7 million, consisting of proceeds from the issuance of common stock related to a private placement in August 2021 of $26.4 million and issuance of common stock, pursuant to exercises of stock options, of $11.3 million.

Critical Accounting Policies and Estimates

Our 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 conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. 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. We periodically review our estimates as a result of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in the financial statements prospectively from the date of the change in estimate.

For a description of our significant accounting policies, refer to “Note 3. Summary of Significant Accounting Policies” included in the notes to our consolidated financial statements appearing elsewhere in this report. We consider the most critical accounting policies to be those related to our Accrued R&D Expenses, Stock-Based-Compensation, Goodwill and Intangible Assets.

Goodwill

Business combinations are accounted for under the acquisition method. The total cost of an acquisition is allocated to the underlying identifiable net assets, based on their respective estimated fair values as of the acquisition date. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives and market multiples, among other items. Assets acquired and liabilities assumed are recorded at their estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Goodwill is tested for impairment annually as of December 31, or more frequently when events or changes in circumstances indicate that the asset might be impaired. Examples of such events or circumstances include, but are not limited to, a significant adverse change in legal or business climate, an adverse regulatory action or unanticipated competition. The Company has one segment and one reporting unit and as such reviews goodwill for impairment at the consolidated level. When testing goodwill, the Company has the option to first assess qualitative factors for reporting units that carry goodwill. The qualitative assessment includes assessing the totality of relevant events and circumstances that affect the fair value or carrying value of the reporting unit. These events and circumstances include macroeconomic conditions, industry and competitive environment conditions, overall financial performance, reporting unit specific events and market considerations. The Company also considers recent valuations of the reporting unit, including the magnitude of the difference between the most recent fair value estimate and the carrying value, as well as both positive and adverse events and circumstances, and the extent to which each of the events and circumstances identified may affect the comparison of a reporting unit’s fair value with its carrying value. If the qualitative assessment results in a conclusion that it is more likely than not that the fair value of a reporting unit exceeds the carrying value, then no further testing is performed for that reporting unit.

The Company performed the qualitative assessment of its goodwill and determined that it is more likely than not that the fair value of a reporting unit exceeds the carrying value of the reporting unit. As a result, the Company has determined there was no goodwill impairment as of and for the years ended December 31, 2023, 2022 and 2021.

Intangible Assets

Intangible assets consisted of indefinite lived intangible in process research and development (“IPR&D”) assets and a mice colony model. Intangible assets related to IPR&D projects are considered to be indefinite-lived until the completion or abandonment of the associated R&D efforts. If and when development is complete, which generally occurs if and when regulatory approval to market a product is obtained, the associated assets would be deemed finite-lived and would then be amortized based on their respective estimated useful lives at that point in time. IPR&D intangible assets which are determined to have had a drop in their fair value are adjusted downward and an expense recognized in R&D expenses in the Consolidated Statements of Operations. These IPR&D intangible assets are tested at least annually or when a triggering event occurs that could indicate a potential impairment based on indicators including progress of R&D activities, changes in projected development of assets, and changes in regulatory environment and future commercial markets. If a triggering event occurs that would indicate a potential impairment, the Company will perform a quantitative analysis to determine whether it is more likely than not that the fair value is below carrying amount. No impairment of the IPR&D asset was recognized and the mice colony model was impaired and written off during the year ended December 31, 2023.

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Accrued R&D Expenses

As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued R&D expenses. 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 costs incurred for the services when we have not yet been invoiced or otherwise notified of the 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 advanced payments. We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. Examples of estimated accrued R&D expenses include fees paid to:

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CROs in connection with performing R&D services on our behalf;

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investigative sites or other providers in connection with clinical trials;

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vendors in connection with non-clinical development activities; and

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vendors related to product manufacturing, development and distribution of clinical supplies.

We base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs that conduct and manage non-clinical studies and clinical trials 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 clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed, enrollment of patients, number of sites activated and level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid 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 us reporting expenses that are too high or too low in any particular period.

Stock-Based Compensation

We issue stock-based awards to employees and non-employees, generally in the form of stock options and restricted stock units. We account for stock-based compensation awards in accordance with FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all stock-based payments, including grants of stock options and restricted stock units and modifications to existing stock options, to be recognized in the consolidated statements of operations and comprehensive loss based on their fair values. We measure the compensation expense of employee and non-employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. That cost is recognized on a straight-line basis over the period during which the employee and nonemployee is required to provide service in exchange for the award. The fair value of options on the date of grant is calculated using the Black-Scholes option pricing model based on key assumptions such as expected volatility and expected term. These assumptions are primarily based on the trading price of the Company’s stock, historical data, peer company data and judgment regarding future trends and factors.

We classify stock-based compensation expense in our statements of operations in the same manner in which the award recipient’s payroll costs and services are classified or in which the award recipient’s service payments are classified. The Company recognizes compensation expense for at least the portion of awards that are vested. Forfeitures are accounted for as they occur.

Recent Accounting Pronouncements

There were no recent accounting pronouncements that impacted the Company or are expected to have a significant effect on the consolidated financial statements.

Not Adopted as of December 31, 2023

ASU 2023-09: Income Taxes Topic 740 - Improvements to Income Tax Disclosures. This update standardizes categories for the effective tax rate reconciliation, requires disaggregation of income taxes and additional income tax-related disclosures. This update is required to be effective for the Company for fiscal periods beginning after December 15, 2024. As this accounting standard only impacts disclosures, it will not have a material impact on the Company's consolidated financial statements.

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ASU 2023-07: Segment Reporting Topic 280 - Improvements to Reportable Segment Disclosures. This update requires expanded annual and interim disclosures for significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss. This update will be effective for fiscal years beginning after December 15, 2023, and is to be applied retrospectively to all periods presented in the financial statements. Early adoption is permitted. As the Company does not have segments and this accounting standard only impacts disclosures, it will not have a material impact on the Company’s consolidated financial statements.