The information contained in this section has been derived from our consolidated
financial statements and should be read together with our consolidated financial
statements and related notes included elsewhere in this Annual Report on Form
10-K. This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended, the
"Exchange Act" and are subject to the "safe harbor" created by those sections.
In particular, statements contained in this Annual Report on Form 10-K that are
not historical facts, including, but not limited to statements regarding our
future expectations, plans and prospects, including without limitation, our
expectations regarding the potential of the TGF? program, our collaboration with
Gilead, the potential of apitegromab as a therapy in SMA and the timeline for
and progress in developing apitegromab, the potential of SRK-181 as a cancer
immunotherapy and the timeline for and
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progress in developing SRK-181, and liquidity, constitute forward-looking statements and are made under these safe harbor provisions. Some of the forward-looking statements can be identified by the use of forward-looking terms such as "believes," "expects," "may," "will," "should," "could," "seek," "intends," "plans," "estimates," "anticipates," or other comparable terms. Forward-looking statements involve inherent risks and uncertainties, which could cause actual results to differ materially from those in the forward-looking statements. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. We urge you to consider the risks and uncertainties discussed in greater detail under the heading "Risk Factors" elsewhere in this Annual Report on Form 10-K in evaluating our forward-looking statements. We have no plans to update our forward-looking statements to reflect events or circumstances after the date of this report. As a result of many factors, including those factors set forth under the heading "Risk Factors" elsewhere in this Annual Report on Form 10-K, 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. Overview
We are a biopharmaceutical company focused on the discovery and development of innovative medicines for the treatment of serious diseases in which signaling by protein growth factors plays a fundamental role. Our novel understanding of the molecular mechanisms of growth factor activation enabled us to develop a proprietary platform for the discovery and development of monoclonal antibodies that locally and selectively target the precursor, or latent, forms of growth factors. By targeting the signaling proteins at the cellular level and acting in the disease microenvironment, we believe we may avoid the historical dose-limiting safety challenges associated with inhibiting growth factors for therapeutic effect. We believe our focus on biologically validated growth factors may facilitate a more efficient development path. We have a productive scientific platform and are building our portfolio of novel product candidates with the aim of transforming the lives of patients suffering from a wide range of serious diseases, including neuromuscular disorders, cancer, and fibrosis. We have discovered and progressed the development of:
Apitegromab, an inhibitor of latent myostatin activation, for the
? SMA treatment. We also believe that apitegromab may have potential in the
treatment of other myostatin-related disorders.
? SRK-181, an inhibitor of latent TGFα1 activation, for the treatment of
cancers resistant to anti-PD-(L)1 antibody therapies.
Potent and selective inhibitors of TGF activation? in collaboration with
? Gilead, for the treatment of fibrotic diseases. We advance several
collaborative programs for the selection of product candidates.
? Additional discovery and early preclinical programs related to breeding
modulation of growth factor signaling. Our first product candidate, apitegromab (formerly SRK-015), is a highly selective, fully human, monoclonal antibody, with a unique mechanism of action that results in inhibition of the activation of the growth factor, myostatin, in skeletal muscle. Apitegromab is being developed as a potential first muscle-directed therapy for the treatment of SMA. Our TOPAZ Phase 2 proof-of-concept trial enrolled 58 patients with Type 2 and Type 3 SMA across three cohorts; one patient discontinued from the trial. OnOctober 27, 2020 we announced positive six-month interim analysis results from the TOPAZ trial and top-line data for the 12-month treatment period are expected in the second quarter of 2021. The FDA granted Rare Pediatric Disease designation and Orphan Drug Designation to apitegromab for the treatment of SMA inAugust 2020 andMarch 2018 , respectively. Our second product candidate, SRK-181, is being developed for the treatment of cancers that are resistant to CPI therapies, such as anti-PD-1 or anti-PD-L1 antibody therapies. SRK-181 is a potent and highly selective inhibitor of the activation of latent TGF?1. InMay 2020 , we announced the initiation of patient dosing in our DRAGON Phase 1 proof-of-concept clinical trial of SRK-181 in patients with locally advanced or metastatic solid tumors that exhibit primary resistance to anti-PD-(L)1 antibodies. This two-part trial consists of a dose escalation portion (Part A) and a dose expansion portion (Part B). Part A is evaluating SRK-181 as a single-agent and in combination with an approved anti-PD-(L)1 therapy and Part B will evaluate SRK-181 in combination with an approved anti-PD-(L)1 therapy across 111
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multiple solid tumor types, including urothelial carcinoma, cutaneous melanoma and non-small cell lung cancer, and other solid tumors. We expect to advance to Part B of the trial in the second quarter of 2021 with initial clinical response and safety data anticipated in the second half of 2021. Since inception, we have incurred significant operating losses. Our net losses were$86.5 million and$51.0 million for the years endedDecember 31, 2020 and 2019, respectively. As ofDecember 31, 2020 , we had an accumulated deficit of$244.3 million . We expect to continue to incur significant expenses and operating losses for the foreseeable future. In addition, we anticipate that our expenses will increase in connection with our ongoing activities, as we:
continue apitegromab development activities, including finalizing
? our TOPAZ phase 2 clinical trial and planning for our phase 3 clinical trial
trial program and supply of associated drugs;
? continue research and development activities for SRK-181, including conducting
our Phase 1 clinical trial DRAGON;
? continue research and development activities to support our collaboration with
Gilead;
? continue to discover, validate and develop additional product candidates
through the use of our proprietary platform;
? maintain, develop and protect our intellectual property portfolio;
? hire additional staff for research, development and business; and
? continue to build the infrastructure to support our operations as a public
company. To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the near future. If we successfully complete clinical development and obtain regulatory approval for apitegromab, SRK-181 or any of our future product candidates, we may generate revenue in the future from product sales. In addition, if we obtain regulatory approval for apitegromab, SRK-181 or any of our future product candidates, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing and distribution activities.
Covid-19 pandemic
InMarch 2020 , theWorld Health Organization declared the outbreak of a novel coronavirus, or COVID-19, as a pandemic (the "COVID-19 pandemic"), which continues to spread throughout theU.S. and worldwide. We could be materially and adversely affected by the risks, or the public perception of the risks, related to an epidemic, pandemic, outbreak, or other public health crisis, such as the COVID-19 pandemic. The ultimate extent of the impact of any epidemic, pandemic, outbreak, or other public health crisis on our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of such epidemic, pandemic, outbreak, or other public health crisis and actions taken to contain or prevent the further spread, including the development and deployment of any vaccine program. Accordingly, we cannot predict the extent to which our business, including our clinical trials, financial condition and results of operations will be affected. As a result of the COVID-19 pandemic, we have experienced disruptions that have impacted our business, preclinical studies and clinical trials, including disruptions or restrictions on our ability to access and monitor certain clinical trial sites, restrictions on clinical trial participants' ability to access our clinical trial sites and delays in enrollment. Some clinical trial participants have missed or experienced delays in receiving doses of study drug and completing their clinical trial assessments. For example, three patients (one in Cohort 2 and two in Cohort 3) of the TOPAZ clinical trial each missed three doses of apitegromab and the six-month interim analysis timepoint due to COVID-19-related site access restrictions; the six-month timepoint from these patients was not included in the interim analysis. The COVID-19 pandemic has affected our clinical trials and could result in further impacts, including delays in or adverse impacts to data readouts (e.g. poor or negative efficacy results or adverse safety signal) from our clinical trials, delays in our ability to identify and enroll patients in current or future clinical trials and decisions by enrolled patients to discontinue from our clinical trials due to COVID-19 related concerns. Additionally, our laboratory operations have been reduced since the declaration of the pandemic and our research activities will continue to be impacted until our laboratory operations are able to return to normal levels of operation that existed prior to the COVID-19 pandemic. In addition, delays in the development of COVID-19 vaccines or the deployment of approved vaccines, a 112 Table of Contents recurrence or "subsequent waves" of COVID-19 cases, or the discovery of vaccine-resistant COVID-19 variants could cause other widespread or more severe impacts. We continue to monitor developments as we deal with the disruptions and uncertainties relating to the COVID-19 pandemic.
Overview of financial operations
Revenue
No revenues have been recorded from the sale of any commercial product. Revenue generation activities have been limited to collaborations, containing research services and the issuance of a license. Currently, revenue is being recognized related to the Gilead Collaboration Agreement which was executed onDecember 19, 2018 (the "Effective Date"), and we began recognizing associated revenue in 2019. Under the Gilead Collaboration Agreement, Gilead has exclusive options to license worldwide rights to product candidates that emerge from three of the Company's TGF? programs (each a "Gilead Program"). Each option may be exercised by Gilead at any time from the Effective Date through a date that is 90 days following the expiration of the Research Collaboration Term for a given Gilead Program (no later thanMarch 19, 2022 ), or until termination of the Gilead Program, whichever is earlier (the "Option Exercise Period"). Revenue associated with the research and development and license performance obligations relating to the Gilead Programs is recognized as revenue as the research and development services are provided using an input method. The input method is based on the costs incurred on each Gilead Program and the costs expected to be incurred in the future to satisfy the performance obligation. The transfer of control occurs over time. In management's judgment, this input method is the best measure of progress towards satisfying the performance obligations. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. The estimate of remaining costs is highly subjective, as the research is novel, therefore efforts to be successful may be significantly different than the estimated costs made at the balance sheet date. The amounts received that have not yet been recognized as revenue are recorded in deferred revenue on our consolidated balance sheet. We expect to recognize the deferred revenue related to the research and development services based on the cost input method described above, over the remaining research term for each respective Gilead Program, which is up to three years from the execution of the agreement. Each research term is dependent on the timing of Gilead either exercising its options for the Gilead Programs or terminating further development on the Gilead Programs prior to the expiration date of the research term. The deferred revenue related to the material rights will be recognized as options are exercised by Gilead or at the conclusion of the Option Exercise Period.
Functionnary costs
Research and development
Research and development expenses consist primarily of costs incurred for our research and development activities, including our product candidate discovery efforts, preclinical studies, manufacturing, and clinical trials under our research programs, which include:
? employee-related expenses, including salaries, benefits, and stocks
compensation costs for our research and development personnel;
? expenses incurred under agreements with third parties who carry out research and
development and preclinical activities on our behalf;
? expenses incurred under agreements related to our clinical trials, including
the costs of investigational sites and CROs who conduct our clinical trials;
? development of manufacturing processes, manufacture of clinical supplies and
technology transfer fees;
? consulting fees and professional fees related to research and development
Activities;
? the costs of purchasing laboratory supplies and non-capital equipment used in our
internal research and development activities;
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? costs related to compliance with clinical regulatory requirements; and
? facility costs and other allocated expenses, which include rental expenses
and facility maintenance, insurance, depreciation and other supplies.
Research and development costs are expensed as incurred. Costs for certain activities are recognized based on an evaluation of the progress to completion of specific tasks. Nonrefundable advance payments for research and development goods and services to be received in the future from third parties are deferred and capitalized. The capitalized amounts are expensed as the related services are performed. A significant portion of our research and development costs have been external costs, which we track on a program-by-program basis after a clinical product candidate has been identified. However, we do not allocate our internal research and development expenses, consisting primarily of employee related costs, depreciation and other indirect costs, on a program-by-program basis as they are deployed across multiple projects. Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials, as well as the associated clinical trial material requirements. We expect research and development costs to increase for the foreseeable future as our product candidate development programs progress, and we expect to incur additional costs in connection with our research and development activities under our collaboration with Gilead. However, we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans. The successful development of apitegromab, SRK-181 and any future product candidates is uncertain. Accordingly, 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 remainder of the development of apitegromab, SRK-181 and any future product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from the sale of our product candidates, if approved. This is due to the numerous risks and uncertainties associated with developing product candidates, including the uncertainty of:
? the scope, progress, results and costs of our preclinical development
research and development activities, clinical trials and other activities;
? establish an appropriate security profile;
? successful enrollment and completion of clinical trials, including on
update on the COVID-19 pandemic and its impact on clinical trial sites;
? whether our product candidates demonstrate safety and efficacy in our clinical trials;
? receipt of marketing approvals from applicable regulatory authorities, if any;
? establishing commercial manufacturing capabilities or making arrangements with
third-party manufacturers;
? obtain and maintain patent and trade secret protection and regulation
exclusivity for our product candidates;
? significant and changing government regulations;
? commercialize the product candidates, if approved, alone or
in collaboration with others; and
? maintenance of the acceptable safety profile of the products following any
approval.
A change in the outcome of any of these variables with respect to the development of apitegromab, SRK-181 or any of our future product candidates could significantly alter the costs and schedule associated with development. of this product candidate.
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General and Administrative
General and administrative expenses consist primarily of employee-related
expenses, including salaries, benefits and equity-based compensation expenses
for personnel in executive, finance, business development, investor relations,
legal, information technology and human resources functions. Other significant
general and administrative expenses include facility costs not otherwise
included in research and development expenses, legal fees relating to patent and
corporate matters and fees for accounting, consulting services, and corporate
expenses.
We anticipate that our general and administrative expenses will increase in the
future as our business expands to support expected growth in research and
development activities, including the continued progression of our product
candidates through development stages, as we hope to approach marketing and
commercialization. These increases will likely include increased costs related
to the hiring of additional personnel, as well as fees to outside consultants,
among other expenses. We also anticipate continued expenses associated with
being a public company, including costs for audit, legal, regulatory and
tax-related services, director and officer insurance premiums and investor
relations costs.
Other income (expenses), net
Other income (expense), net consists primarily of interest income earned on our cash and cash equivalents and marketable securities, interest expense incurred on our credit facilities (theAugust 2015 Loan and Security Agreement withSilicon Valley Bank , which was fully repaid inJune 2019 , and theOctober 2020 Loan and Security Agreement withOxford Finance LLC ("Oxford") andSilicon Valley Bank ("SVB"), both further discussed in Note 12 of our consolidated financial statements appearing elsewhere in this report), including amortization of debt discount and debt issuance costs.
Operating results
Comparison of the years ended
The following table summarizes our results of consolidated operations for the years endedDecember 31, 2020 and 2019 (in thousands, except percentages): Year Ended December 31, Change 2020 2019 $ % Revenue$ 15,403 $ 20,492 $ (5,089) (24.8) % Operating expenses:
Research and development 74,062 54,217 19,845 36.6 % General and administrative 28,219 20,817 7,402
35.6 % Total operating expenses 102,281 75,034 27,247 36.3 % Loss from operations (86,878) (54,542) (32,336) 59.3 %
Other income (expense), net 395 3,542 (3,147)
(88.8) % Net loss$ (86,483) $ (51,000) $ (35,483) 69.6 % 115 Table of Contents Revenue
Revenue was$15.4 million for the year endedDecember 31, 2020 compared to$20.5 million for the year endedDecember 31, 2019 , a decrease of$5.1 million , or 24.8%. The revenue for both of these periods was related to the Gilead Collaboration Agreement executed inDecember 2018 . Revenue associated with the research and development and license performance obligations relating to the Gilead Programs is recognized as the research and development services are provided using a cost input method. A$25.0 million preclinical milestone was achieved inDecember 2019 through the successful demonstration of efficacy in preclinical in vivo proof-of-concept studies. As a result, the associated$25 million was included in the transaction price allocated to the performance obligations as ofDecember 31, 2019 . The decrease in revenue was attributable to the change in progress of the programs period over period, due to a lower utilization of internal resources partly due to laboratory restrictions associated with the COVID-19 pandemic.
Functionnary costs
Research and development
Research and development expense was$74.1 million for the year endedDecember 31, 2020 compared to$54.2 million for the year endedDecember 31, 2019 , an increase of$19.9 million , or 36.6%. The following table summarizes our research and development expense for the years endedDecember 31, 2020 and 2019 (in thousands, except percentages): Year Ended December 31, Change 2020 2019 $ % External costs by program: Apitegromab (SRK-015)$ 19,213 $ 10,643 $ 8,570 80.5 % SRK-181 16,397 14,121 2,276 16.1 % Other early programs and unallocated costs 6,058 6,089 (31) (0.5) % Total external costs 41,668 30,853 10,815 35.1 % Internal costs: Employee compensation and benefits 22,590 15,853 6,737 42.5 % Facility and other 9,804 7,511 2,293 30.5 % Total internal costs 32,394 23,364 9,030 38.6 % Total research and development expense$ 74,062 $ 54,217 $ 19,845 36.6 %
The increase in research and development expenses is mainly attributable to the following items:
? An increase in our external research and development costs of
which mainly consisted of:
o the costs of our TOPAZ phase 2 clinical trial, including the supply of clinical drugs
manufacturing; and
o the clinical trial was initiated during the first quarter of 2020 and the increase
is associated with the costs of clinical trials.
primarily due to increased compensation and employee benefits costs,
? associated with an increase in headcount and associated overhead as we continue to
expand our research and development functions in addition to an increase in
set-up costs due to our new office and lab space at
in
We expect our research and development expenses to increase as we continue to
advance the development of our product candidates, including apitegromab,
completing our TOPAZ Phase 2 clinical trial and planning for the Phase 3
clinical trial program, and SRK-181, through our DRAGON Phase 1 clinical trial.
Additionally, we expect to continue to conduct research under the Gilead
collaboration. However, as described above in COVID-19 Pandemic, the ultimate
extent of the impact of the COVID-19 pandemic on our results of operations will
depend on future developments, which are highly uncertain. Accordingly, we
cannot fully predict the extent to which our business and results of operations
will be affected.
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General and Administrative
General and administrative expense was $28.2 million for the year ended December
31, 2020 compared to $20.8 million for the year ended December 31, 2019 , an
increase of $7.4 million or 35.6%. The increase in general and administrative
expense was primarily attributable to an increase of $4.4 million in employee
compensation and benefits, related to increased headcount and separation related
expenses, and $2.5 million in professional services.
We anticipate that our general and administrative expenses will increase in the
future as our business expands to support expected growth in research and
development activities, including the continued development of our product
candidates. However, as described above in COVID-19 Pandemic, the ultimate
extent of the impact of the COVID-19 pandemic on our results of operations will
depend on future developments, which are highly uncertain. Accordingly, we
cannot fully predict the extent to which our business and results of operations
will be affected.
Other Income (Expense), Net
The decrease in other income (expense), net was attributable a decrease in income earned on our investment portfolio, associated with lower interest rates during the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 , in addition to interest expense related to our debt facility entered into inOctober 2020 .
Cash and capital resources
Sources of liquidity
Since our inception, we have not generated any product revenue and have incurred significant operating losses and negative cash flows from our operations. We have funded our operations to date primarily with proceeds from the sale of our convertible preferred stock and units in private placements before our IPO, and sale of our common stock through our IPO, to Gilead in an exempt private placement, through a secondary public offering inJune 2019 , and through a follow-on offering completed inNovember 2020 , as well as payments from our research collaborations and a debt facility entered into inOctober 2020 . The following table provides information regarding our total cash and cash equivalents and marketable securities atDecember 31, 2020 andDecember 31, 2019 (in thousands): December 31, December 31, 2020 2019 Cash and cash equivalents$ 160,358 $ 36,308 Marketable securities 180,673 121,140
Total cash, cash equivalents and marketable securities
$ 157,448 During the year endedDecember 31, 2020 , our cash, cash equivalents and marketable securities balance increased by approximately$183.6 million . The change was primarily the result of net proceeds from the sale of our common stock in a follow-on offering completed inNovember 2020 , the$25.0 million of cash received from Gilead inJanuary 2020 from the preclinical milestone that was achieved inDecember 2019 for the successful demonstration of efficacy in preclinical in vivo proof-of-concept studies, as well as$25.0 million received from a debt facility entered into inOctober 2020 , partially offset by cash used to operate our business, including payments related to, among other things, research and development and general and administrative expenses as we continued to invest in our primary product candidates and supported our internal research and development efforts. We also made capital purchases and interest payments on our debt. InOctober 2020 , we entered into an underwriting agreement relating to the issuance and sale of an aggregate of 3,717,948 shares of our common stock at$39.00 per share and pre-funded warrants to purchase 2,179,487 shares of our common stock. The price of each pre-funded warrant was$38.9999 , which equals the per share public offering price for the common shares less the$0.0001 exercise price for each such pre-funded warrant. The shares of common stock
sold
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include 769,230 shares that we granted to the guarantors under an over-allotment option, which was exercised in full. The total gross proceeds of the transaction were
InOctober 2020 , we entered into a Loan and Security Agreement (the "Loan and Security Agreement") with Oxford and SVB (each, a "Lender" and collectively, the "Lenders"), providing up to$50.0 million of borrowings, of which$25.0 million was advanced onOctober 16, 2020 . The additional$25.0 million under the Loan and Security Agreement will be available to us untilDecember 31, 2021 , subject to our achievement of both (i) the dosing of the first patient in a Phase 3 clinical trial for apitegromab and (ii) the dosing of the first patient in Part B of the DRAGON Phase 1 clinical trial for SRK-181. In June andJuly 2019 , we sold 3,450,000 shares of our common stock through an underwritten public offering, including an overallotment option. As a result of the offering, we received aggregate net proceeds, after underwriting discounts and commissions and other offering expenses, of approximately$48.3 million . InDecember 2018 , we entered into the Gilead Collaboration Agreement, with Gilead pursuant to which we will conduct research and pre-clinical development activities relating to the diagnosis, treatment, cure, mitigation or prevention of diseases, disorders or conditions, other than in the field of oncology in accordance with a pre-determined research plan. Pursuant to the Gilead Collaboration Agreement, Gilead made non-refundable payments of$80.0 million , including an upfront payment and an equity investment. InDecember 2019 , we achieved a$25 million preclinical milestone for the successful demonstration of efficacy in preclinical in vivo proof-of-concept studies, and subsequently received the associated payment inJanuary 2020 .
Cash flow
The following table provides information on our cash flows for the years ended
Year Ended December 31,
2020 2019
Net cash used in operating activities$ (60,271) $ (63,115) Net cash used in investing activities (63,498)
(62,236)
Net cash provided by financing activities 247,819
48,883
Net increase (decrease) in cash and cash equivalents and restricted cash$ 124,050 $ (76,468)
Net cash used in operating activities was$60.3 million for the year endedDecember 31, 2020 and consisted of our net loss of$86.5 million partially offset by changes in our assets and liabilities of$11.2 million and non-cash adjustments of$15.0 million . The changes in our assets and liabilities includes the reduction of accounts receivable due to the$25.0 million of cash received from Gilead inJanuary 2020 from the preclinical milestone that was achieved inDecember 2019 and a$15.4 million change in deferred revenue related to the Gilead collaboration. The non-cash adjustments are primarily from equity-based compensation. Net cash used in operating activities was$63.1 million for the year endedDecember 31, 2019 and consisted of our net loss of$51.0 million and changes in our assets and liabilities of$21.2 million , of which$25.0 million is a change in accounts receivable related to the milestone achieved in the Gilead collaboration. The uses of cash were partially offset by non-cash adjustments of$9.1 million , primarily from equity-based compensation. 118
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Net cash used in investing activities was$63.5 million for the year endedDecember 31, 2020 compared to net cash used in investing activities of$62.2 million for the year endedDecember 31, 2019 . Net cash used in investing activities for both periods was primarily associated with transactions involving our marketable securities as well as capital expenditures.
Net cash provided by financing activities
Net cash provided by financing activities was$247.8 million for the year endedDecember 31, 2020 compared to$48.9 million for the year endedDecember 31, 2019 . Net cash provided by financing activities for the year endedDecember 31, 2020 consisted primarily of$215.9 million in net proceeds from the sale of our common stock in a follow-on offering completed inNovember 2020 as well as a$25.0 million drawdown from our debt facility, which we entered into inOctober 2020 , in addition to$7.3 million in proceeds from stock option exercises. Net cash provided by financing activities for the year endedDecember 31, 2019 consisted primarily of net proceeds from a secondary public offering of common stock in June andJuly 2019 , in addition to proceeds from stock option exercises.
Financing needs
We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development for, continue and initiate later stage clinical trials for, continue to develop and optimize our manufacturing processes for, and seek marketing approval for, our product candidates, including apitegromab and SRK-181, and any of our future product candidates. In addition, if we obtain marketing approval for apitegromab, SRK-181 or any of our future product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Furthermore, we expect to continue to incur costs associated with operating as a public company. We expect that our existing cash, cash equivalents, marketable securities will enable us to fund our operating expenses and capital expenditure requirements into 2023. However, we will require additional capital in order to complete clinical development for each of our current programs. We have based this estimate on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Our future capital requirements will depend on many factors, including:
the costs and development schedule of our product candidates, apitegromab and
SRK-181, including TOPAZ phase 2 clinical trial and phase 3 clinical trial
? program for apitegromab, the DRAGON phase 1 clinical trial for SRK-181 and
the costs and timing of conducting future clinical trials, including due to
the COVID-19 pandemic and its impact on clinical trial sites;
? future manufacturing costs of apitegromab, SRK-181 and any other products
candidates;
the scope, progress, results and costs of discovery, preclinical development,
? laboratory and clinical trials for other potential product candidates
we can develop, if necessary;
? identification and development costs, or licensing or acquisition costs,
additional product candidates and technologies;
? the costs, timing and results of regulatory review of our product candidates;
? our ability to establish and maintain collaborations under favorable conditions, if
everything;
the achievement of milestones or the occurrence of other developments that trigger
? payments under any collaboration agreement, license agreement or other
any agreements we might have at that time;
? the costs of seeking marketing authorizations for our product candidates that
successfully complete clinical trials, if any;
costs and timing of future marketing activities, including products
? sales, marketing, manufacturing and distribution, for all our products
candidates for whom we receive marketing authorization;
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? the amount of revenue, if any, from commercial sales of our product
candidates, if any of our product candidates receive marketing approval;
the costs of preparing, filing and pursuing patent applications, obtaining,
? maintain and enforce our intellectual property rights and defend
intellectual property claims;
? the growth of our workforce and associated costs as we expand our business
and research and development activities;
the costs of expanding our infrastructure and facilities to accommodate our
? growth of the employee base, including the addition of equipment and physical infrastructure
to support our research and development; and
? operating costs as a public company.
Identifying potential product candidates and 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 and achieve product sales. 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 many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, common stockholder ownership interests may be diluted, and the terms of these securities may include liquidation or other preferences that could adversely affect the rights of a common stockholder. Additional debt financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business. If we raise funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. Market volatility resulting from the COVID-19 pandemic or other factors could also adversely impact our ability to access capital as and when needed. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Significant Accounting Policies and Use of Estimates
This management's discussion and analysis is based on our consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates, if any, will be reflected in the consolidated financial statements prospectively from the date of change in estimates. Our actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements appearing elsewhere in this report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements. 120 Table of Contents
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued expenses as of each balance sheet date. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. The significant estimates in our accrued research and development expenses include the costs incurred for services performed by our vendors in connection with research and development activities for which we have not yet been invoiced. In certain instances, we prepay for services to be provided in the future. These amounts are expensed as the services are performed. We base our expenses related to research and development activities on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors that conduct research and development on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the research and development expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid balance accordingly. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Although we do not expect our estimates to be materially different from amounts incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts incurred.
Determining the fair value of share-based awards
We determine the fair value of restricted common stock awards granted based on the fair value of our common stock less any purchase price, as applicable. We estimate the fair value of stock option awards granted using the Black-Scholes option-pricing model, which uses as inputs the fair value of our common stock and subjective assumptions we make, including the expected stock price volatility and the expected term of the award. Due to the lack of a public market for the trading of our common stock prior to our IPO, and a lack of company-specific historical and implied volatility data, we base the estimate of expected volatility on the historical volatility of a representative group of publicly traded companies for which historical information is available. The historical volatility is generally calculated based on a period of time commensurate with the expected term assumption. We use the simplified method to calculate the expected term for options granted to employees and directors. We utilize this method as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. For grants to non-employees, ASU 2018-07 allows entities to use the expected term to measure non-employee options or elect to use the contractual term as the expected term, on an award-by-award basis. The risk-free interest rate is based on aU.S. treasury instrument whose term is consistent with the expected term of the stock options. The expected dividend yield is assumed to be zero as we have never paid dividends and do not have current plans to pay any dividends on our common stock.
The assumptions underlying these valuations represented management’s best estimates, which involve inherent uncertainties and the application of management’s judgment. Accordingly, if factors or expected results change and we use materially different assumptions or estimates, our stock-based compensation expense could be materially different.
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Revenue Recognition
No revenues have been recorded from the sale of any commercial product. Revenue
generation activities have been limited to collaborations, containing research
services and the issuance of a license. Currently, revenue is being recognized
related to the Gilead Collaboration Agreement which was executed in December
2018 . We began recognizing associated revenue in 2019 over the period that
research is performed under the collaboration. We account for revenue under ASC
Topic 606, Revenue from Contracts with Customers ("ASC 606").
Under ASC 606, we recognize revenue when our customer obtains control of
promised goods or services, in an amount that reflects the consideration which
we expect to receive in exchange for those goods or services. To determine the
appropriate amount of revenue to be recognized for arrangements determined to be
within the scope of ASC 606, we perform the following five steps: (i)
identification of the contract(s) with the customer, (ii) identification of the
promised goods or services in the contract and determination of whether the
promised goods or services are performance obligations, (iii) measurement of the
transaction price, (iv) allocation of the transaction price to the performance
obligations, and (v) recognition of revenue when (or as) we satisfy each
performance obligation. We only apply the five-step model to contracts when it
is probable that we will collect the consideration we are entitled to in
exchange for the goods or services we transfer to our customer.
Identification of the Contract(s) with the Client
We account for a contract with a customer that is within the scope of ASC 606 when all of the following criteria are met: (i) the arrangement has been approved by the parties and the parties are committed to perform their respective obligations, (ii) each party's rights regarding the goods or services to be transferred can be identified, (iii) the payment terms for the goods or services to be transferred can be identified, (iv) the arrangement has commercial substance and (v) collection of substantially all of the consideration to which we will be entitled in exchange for the goods or services that will be transferred to the customer is probable.
Identification of performance obligations
Performance obligations are promised goods or services in a contract to transfer a distinct good or service to the customer. Promised goods or services are considered distinct when: (i) the customer can benefit from the good or service on its own or together with other readily available resources and (ii) the promised good or service is separately identifiable from other promises in the contract. In assessing whether promised goods or services are distinct, we consider factors such as the stage of development of the underlying intellectual property, the capabilities of our customer to develop the intellectual property on their own and whether the required expertise is readily available. Arrangements that include rights to additional goods or services that are exercisable at a customer's discretion are generally considered options. We assess if these options provide a material right to the customer and if so, they are considered performance obligations. The identification of material rights requires judgments related to the determination of the value of the underlying license relative to the option exercise price, including assumptions about technical feasibility and the probability of developing a candidate that would be subject to the option rights.
Determination of the transaction price
We estimate the transaction price based on the amount of consideration we expect
to receive for transferring the promised goods or services in the contract. The
consideration may include both fixed consideration and variable consideration.
At the inception of each arrangement that includes variable consideration, we
evaluate the amount of the potential payments and the likelihood that the
payments will be received. We utilize either the most likely amount method or
expected value method to estimate the transaction price based on which method
better predicts the amount of consideration expected to be received. If it is
probable that a significant revenue reversal would not occur, the variable
consideration is included in the transaction price.
We evaluate whether development, regulatory, and commercial milestone payments
are considered probable of being reached and estimate the amount to be included
in the transaction price using the most likely amount method. If it is probable
that a significant revenue reversal would not occur, the associated milestone
value is included in the transaction
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price. Milestone payments that are not within our control or the licensee's control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. At the end of each reporting period, we re-evaluate the probability of achievement of such milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenue and earnings in the period of adjustment. For sales-based royalties, including milestone payments based on the level of sales, we determine whether the sole or predominant item to which the royalties relate is a license. When the license is the sole or predominant item to which the sales-based royalty relates, we recognize revenue at the later of: (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any sales-based royalty revenue resulting from our arrangement.
Allocation of the transaction price
We allocate the transaction price based on the estimated standalone selling price. We must develop assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract. We utilize key assumptions to determine the standalone selling price, which may include other comparable transactions, pricing considered in negotiating the transaction and the estimated costs. Estimating costs for research and development programs is subjective as we estimate the costs anticipated to successfully complete the research performance obligations. As the research is novel, efforts to be successful may be significantly different than the estimated costs at the beginning of the contract. Certain variable consideration is allocated specifically to one or more performance obligations in a contract when the terms of the variable consideration relate to the satisfaction of the performance obligation and the resulting amounts allocated to each performance obligation are consistent with the amounts we would expect to receive for satisfying each performance obligation.
Revenue recognition
We utilize judgment to determine whether the performance obligation is satisfied over time or at a point in time. We determine the appropriate method of measuring progress performance obligations satisfied over time for purposes of recognizing revenue, such as by using an input method based on costs incurred compared to the costs expected to be incurred in the future to satisfy the performance obligation. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. The estimated remaining costs is highly subjective, as the research is novel, therefore efforts to be successful may be significantly different than the estimated costs made at the balance sheet date. If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we will recognize revenue from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. We receive payments from customers based on billing schedules established in each contract. Up-front payments and fees are recorded as deferred revenue upon receipt or when due until we perform our obligations under these arrangements. Amounts are recorded as accounts receivable when our right to consideration is unconditional.
Off-balance sheet arrangements
We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the
Recent accounting pronouncements
We have reviewed all recently issued standards and have determined that, other
than Recently Issued Accounting Pronouncements as disclosed in Note 2 to our
audited consolidated financial statements appearing elsewhere in this Annual
Report on Form 10-K, such standards will not have a material impact on our
financial statements or do not otherwise apply to our operations.
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