Adicet Bio, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties, such as our plans, objectives, expectations, intentions and beliefs. 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 the section entitled “Risk Factors” included elsewhere in this Annual Report on Form 10-K. Overview We are a biotechnology company discovering and developing allogeneic gamma delta T cell therapies for cancer and other diseases. We are advancing a pipeline of “off-the-shelf” gamma delta T cells, engineered with CARs and T cell receptor-like antibodies to enhance selective tumor targeting, facilitate innate and adaptive anti-tumor immune response, and improve persistence for durable activity in patients. We believe our approach has potentially significant advantages over alpha beta T cells, which are the basis of standard CAR-T cell therapies. We are developing proprietary processes for engineering and manufacturing product candidates based on gamma delta T cells from the blood of healthy donors, resulting in high yields of cells with efficacious tumor-killing activity in preclinical studies. The potential to administer product candidates based on gamma delta T cells to patients without inducing a graft versus host immune response could mean that our products can potentially be produced as “off-the-shelf” therapies. This is in contrast to products based on alpha beta T cells, which either must be manufactured for each patient from his or her own T cells, or require significant gene editing to manufacture if the T cells are derived from donors that are unrelated to the patient. Based on what we believe is the unique potential of these cells and associated modifications, we are initially developing product candidates in oncology, both for hematological malignancies and for solid tumors. Due to certain unique properties of gamma delta T cells, we believe that our product candidates can be developed to have an inherent capacity to recognize and kill circulating tumor cells and to infiltrate and kill solid tumors. In October 2020, the FDA cleared our Investigational New Drug (IND) application for ADI-001, our lead product candidate, for the treatment of Non-Hodgkin’s Lymphoma (NHL). The active IND enables us to initiate the first-in-human clinical trial to assess safety and efficacy of ADI-001 in NHL patients in March 2021. The Phase 1 study for ADI-001 will enroll up to 80 late-stage non-Hodgkin’s lymphoma patients at a number of cancer centers across the U.S. The study includes a dose finding portion followed by dose expansion cohorts to explore the activity of ADI-001 in multiple subtypes of NHL. Site initiation activities are underway and interim clinical data from this study are expected in 2021. We intend to file an IND with the FDA in late 2021 for ADI-002, our first solid tumor product candidate. Recent Developments Reverse Merger On April 28, 2020, Adicet Bio, Inc. (Former Adicet) entered into an agreement and plan of merger with resTORbio, Inc., a Delaware corporation (resTORbio), and Project Oasis Merger Sub, Inc., a Delaware corporation and a direct, wholly owned subsidiary of resTORbio (Merger Sub), pursuant to which, subject to the satisfaction or waiver of the conditions therein, Merger Sub agreed to merge with and into Former Adicet, with Former Adicet surviving as a wholly owned subsidiary of resTORbio and changing the name to Adicet Therapeutics, Inc., (such transactions, the Merger). The Merger was subject to certain conditions, including the approval of resTORbio stockholders. On September 15, 2020, we completed the Merger. In connection with the completion of the Merger, resTORbio was renamed Adicet Bio, Inc. (Adicet Bio). Immediately prior to the Effective Time of the Merger, resTORbio effected a reverse stock split of its common stock at a ratio of 1-for-7 or the Reverse Stock Split). At the Effective Time of the Merger, each outstanding share of Former Adicet’s capital stock was converted into the right to receive 0.1240 (the Exchange Ratio) shares of resTORbio common stock. The business combination has been accounted for as a reverse merger in accordance with the Generally Accepted Accounting Principles in the United States of America (U.S. GAAP or GAAP). Under this method of accounting, Former Adicet is deemed to be the accounting acquirer for financial reporting purposes. This determination was primarily based on the facts that, immediately following the Merger: (i) Former Adicet’s securityholders own approximately 75% of the voting rights of the combined company (on a fully-diluted basis excluding equity incentives available for grant); (ii) Former Adicet designated a majority (five of seven) of the initial members of the Board of Directors of the combined company; and (iii) the terms of the exchange of equity interests based on the exchange ratio at the announcement of the Merger factored in an implied premium to resTORbio’s stockholders. The composition of senior management of the combined company was determined to be a neutral factor in the accounting acquirer determination, as the combined company will leverage the expertise of the senior management of both companies. Accordingly, for accounting purposes, the business combination has been treated as the equivalent of Former Adicet issuing stock to acquire the net assets of resTORbio. As a result, as of the closing date of the Merger, the net assets of resTORbio have been recorded at their acquisition-date fair values in the financial statements of the combined entity and the reported operating results prior to the business combination are those of Former Adicet. Subsequent to 85 the closing of the Merger, the reported operating results will reflect those of the combined organization. In addition, transaction costs incurred by Former Adicet in connection with the business combination have been expensed as incurred. Our common stock remained listed on the Nasdaq Stock Market, with trading having commenced on a post-Merger and post-Reverse Stock Split basis and under the new name as of September 16, 2020. The trading symbol also changed on that date from “TORC” to “ACET.” Public Offering In February 2021, we completed an underwritten public offering of 10,575,513 shares of our common stock, including the exercise in full by the underwriters of their option to purchase up to an additional 1,344,743 shares of common stock at a public offering price of $13.00 per share. The aggregate gross proceeds from the offering, before deducting underwriting discounts and commissions and offering expenses were approximately $137.5 million. In connection with the offering, we also entered into a stock purchase agreement with certain existing investors for $15.0 million of shares of our common stock at a price per share equal to the public offering price, with an initial closing for certain investors held simultaneously with the closing of the offering and a subsequent closing for certain additional investors. We received the full proceeds from the sale and did not pay any underwriting discounts or commissions with respect to the shares of common stock that sold in the concurrent private placement. The shares sold in the private placement were not registered under the Securities Act. Impact of COVID-19 Pandemic In December 2019, a novel strain of coronavirus, COVID-19, was reported in China. Since then, COVID-19 has spread globally. The spread of COVID-19 from China to other countries has resulted in the World Health Organization (WHO) declaring the outbreak of COVID-19 as a “pandemic,” or a worldwide spread of a new disease, on March 11, 2020. Many countries around the world have imposed quarantines and restrictions on travel and mass gatherings to slow the spread of the virus and have closed non-essential businesses. As local jurisdictions continue to put restrictions in place, our ability to continue to operate our business may also be limited. Such events may result in a period of business, supply and drug product manufacturing disruption, and in reduced operations, any of which could materially affect our business, financial condition and results of operations. In response to the COVID-19 pandemic, we tasked members of our Executive Leadership team, Human Resources, Facilities and Operations and Employee Communications to develop guidelines and processes intended to raise awareness of new health and well-being protocols and potentially helpful practices for cross-functional teamwork for our employees. These efforts have included implementation of remote working and shift scheduling, providing our team members practical recommendations based on guidelines from the Centers for Disease Control and Prevention, State of California Department of Health Care Services, State of Massachusetts Department of Public Health, OSHA and other regional government entities. In addition, we are committed to updating these recommendations and communicating new pertinent information when available. While doing so we are sensitive to ensuring any guidance provided may vary by locality based on government orders and regulations. Thus far we have not experienced a significant disruption or delay in our operations as it relates to the clinical development of our drug candidates. However, we anticipate that the impact of the COVID-19 pandemic may create difficulties in our clinical trials for a variety of reasons, including future regulations regarding, or the inability or unwillingness of patients to, travel to participate in clinical trials, or to participate in clinical trials that are administered in medical facilities that also treat COVID-19, potential delays in the FDA’s review and approval processes and/or shortages of medical supplies that may force medical professionals to focus on non-clinical procedures, including treatment of COVID-19. The duration and ultimate impact of the COVID-19 pandemic on clinical trials generally, and on our trials particularly, is currently unknown. In addition, the spread of COVID-19, which has caused a broad impact globally, may materially affect us economically. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business. Possible effects may also include absenteeism in our labor workforce, unavailability of products and supplies used in operations, and a decline in value of assets held by us, including property and equipment, and marketable debt securities. Loan Agreement On April 28, 2020, we entered into a Loan and Security Agreement with Pacific Western Bank for a term loan not exceeding $12.0 million (the Loan Agreement) to finance leasehold improvements for our facilities in Redwood City, CA and other purposes permitted under the Loan Agreement, with an interest rate equal to the greater of 0.25% above the Prime Rate 86 (as defined in the Loan Agreement) or 5.00%. In connection with the entrance into the Loan Agreement, we issued Pacific Western Bank a warrant to purchase shares of our Series B redeemable convertible preferred stock (described below) at an exercise price of $1.4034 per share. Such warrant was initially exercisable for 42,753 shares of our Series B redeemable convertible preferred stock. Upon the closing of the Merger, it was exchanged for a warrant to purchase 5,301 shares of common stock at an exercise price of $11.32 per share and shall be exercisable for an additional number of shares of common stock equal to 1.00% of the aggregate original principal amount of all term loans made pursuant to the Loan Agreement (up to an aggregate maximum of 15,903 shares of common stock). The Loan Agreement contains a variety of affirmative and negative covenants, including required financial reporting, limitations on certain dispositions of assets, limitations on the incurrence of additional debt and other requirements. As of the date of this Annual Report on Form 10- K , we were in compliance with such covenants and had no indebtedness outstanding under the Loan Agreement. At-the-Market (ATM) Offering On December 1, 2020, we entered into a Sales Agreement (the 2020 Sales Agreement) with Evercore Group L.L.C. and H.C. Wainwright & Co., LLC (collectively, the Agents), pursuant to which we could sell, from time to time, at our option, up to an aggregate of $50.0 million of shares of our common stock, through the Agents, as our sales agents. No shares were sold under the 2020 Sales Agreement before it was terminated in February 2021. Financial Operations Overview Revenue We have no products approved for commercial sale and do not expect to generate revenue from product sales unless and until we successfully complete development and obtain regulatory approval for our product candidates, which we expect will not be for at least several years, if ever. Our revenues to date are generated from our License and Collaboration Agreement with Regeneron Pharmaceuticals, Inc. (Regeneron) and the agreement referred to as the “Regeneron Agreement”. The primary purpose of the Regeneron Agreement is to establish a strategic relationship to identify and validate appropriate targets and work together to develop a pipeline of engineered immune cell products (Collaboration ICPs) for the selected targets. The Regeneron Agreement provides for the following: (i) licenses to our technology, (ii) research and development services, (iii) services or obligations in connection with participation in the research committee, (iv) information sharing, and (v) manufacturing services to manufacture of Collaboration ICPs for the research programs. The Regeneron Agreement provides Regeneron an option to obtain an exclusive, royalty-bearing development and commercial license under our intellectual property to develop and commercialize the optioned Collaboration ICPs ready for an IND submission. We received a non-refundable upfront payment of $25.0 million from Regeneron upon execution of the Regeneron Agreement on July 29, 2016 and have received an aggregate of $20.0 million of additional payments for research funding from Regeneron as of December 31, 2020. In addition, Regeneron may have to pay us additional amounts in the future consisting of up to an aggregate of $100.0 million of option exercise fees, in each case as specified in the Regeneron Agreement. Regeneron must also pay us high single digit royalties as a percentage of net sales for ICPs to targets for which it has exclusive rights and low single digit royalties as a percentage of net sales on any non-ICP product comprising a target generated by us through the use of Regeneron’s proprietary mice. We must pay Regeneron mid-single to low double digit royalties as a percentage of net sales of ICPs to targets for which we have exercised exclusive rights, and low to mid-single digit royalties as a percentage of net sales of targeting moieties generated from our license to use Regeneron’s proprietary mice. Royalties are payable until the longer of the expiration or invalidity of the licensed patent rights or 12 years from first commercial sale. We use a cost-based input method to measure proportional performance and to calculate the corresponding amount of revenue to recognize under the Regeneron Agreement. In applying the cost-based input method of revenue recognition, we use actual costs incurred relative to budgeted costs to fulfill the combined performance obligation. Revenue is recognized based on actual costs incurred as a percentage of total budgeted costs as we complete our performance obligations over the research term of five years. A cost-based input method of revenue recognition requires us to estimate costs to complete our performance obligations, which requires significant judgment to evaluate assumptions related to cost estimates. The cumulative effect of revisions to estimated costs to complete our performance obligations is recorded in the period in which changes are identified and amounts can be reasonably estimated. Operating Expenses Research and Development Research and development expenses, which consist primarily of costs incurred in connection with the development of our product candidates, are expensed as incurred. Research and development expenses consist primarily of: • employee related costs, including salaries, benefits and stock-based compensation expenses for research and development employees; 87 • costs incurred under agreements with consultants, contract manufacturing organizations ( CMOs ) and contract research organizations ( CROs ) ; • lab materials, supplies, and maintenance of equipment used for research and development activities; and • allocated facility-related costs, such as rent, utilities, insurance, repairs and maintenance, depreciation and amortization, information technology costs and general support services. We do not allocate our costs by product candidate, as a significant amount of research and development expenses are not tracked by product candidate, and we believe the allocation of such costs would be arbitrary and would not provide a meaningful assessment as we have used our employee and infrastructure resources across multiple product candidate research and development programs. We are focusing substantially all of our resources on the development of our product candidates. At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of our product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from sales of our product candidates. The duration, costs, and timing of clinical trials and development of our product candidates will depend on a variety of factors, including: • the scope, rate of progress and expense of clinical trials and other research and development activities; • clinical trial results; • uncertainties in clinical trial enrollment rate or design; • significant and changing government regulation; • the timing and receipt of any regulatory approvals; • the FDA’s or other regulatory authority’s influence on clinical trial design; • establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers; • commercializing product candidates, if and when approved, whether alone or in collaboration with others; • obtaining and maintaining patent and trade secret protection and regulatory exclusivity for product candidates; • continued applicable safety profiles of the products following approval; and • retention of key research and development personnel. A change in the outcome of any of these variables with respect to the development of a product candidate could significantly change the costs, timing and viability associated with the development of that product candidate. For example, if the FDA, or another regulatory authority, were to require us to conduct clinical trials beyond those that it currently anticipates will be required for the completion of clinical development of a product candidate, 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. Furthermore, we are unable to predict when or if our product candidates will receive regulatory approval with any certainty. We are focusing substantially all of our resources on the development of our product candidates. We expect our research and development expenses to increase substantially during the next few years, as we seek to initiate clinical trials for our product candidates, complete our clinical program, pursue regulatory approval of our product candidates and prepare for a possible commercial launch. Predicting the timing or the cost to complete our clinical program or validation of our commercial manufacturing and supply processes is difficult and delays may occur because of many factors, including factors outside of our control. For example, if the FDA or other regulatory authorities were to require us to conduct clinical trials beyond those that we currently anticipate, 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. Furthermore, we are unable to predict when or if our product candidates will receive regulatory approval with any certainty. 88 General and Administrative General and administrative expenses consist principally of payroll and personnel expenses, including salaries and bonuses, benefits and stock-based compensation expenses, professional fees for legal, consulting, accounting and tax services, allocated overhead expenses, including rent, equipment, depreciation, information technology costs and utilities, and other general operating expenses not otherwise classified as research and development expenses. We anticipate that our general and administrative expenses will increase for the foreseeable future due to anticipated expenses related to the Merger and future expenses related to operating as a public company, including expenses related to personnel costs, expanded infrastructure and higher consulting, legal and accounting services costs associated with complying with the applicable Nasdaq and SEC requirements, investor relations costs and director and officer insurance premiums. Interest Income Interest income consists primarily of interest income earned on our cash and cash equivalents and marketable debt securities. Interest Expense Interest expense consists primarily of the non-cash amortization of costs incurred in connection with the term loan agreement entered into in April 2020. Other Income (Expense), Net Other income (expense), net primarily consists of changes in the fair value of our redeemable convertible preferred stock tranche liability and redeemable convertible preferred stock warrant liability prior to their conversion to warrants to purchase common stock upon closing of the Merger. Results of Operations Comparison of the Years Ended December 31, 2020 and 2019 The following table summarizes our results of operations for the periods indicated (in thousands, except percentages): Year Ended December 31, 2020 2019 Change % Change Revenue – related party $ 17,903 $ 995 $ 16,908 1699 % Operating expenses Research and development 34,334 23,691 10,643 45 % General and administrative 22,760 8,692 14,068 162 % Total operating expenses 57,094 32,383 24,711 76 % Loss from operations (39,191 ) (31,388 ) (7,803 ) 25 % Interest income 785 938 (153 ) -16 % Interest expense (134 ) — (134 ) 100 % Other income (expense), net (953 ) 2,331 (3,284 ) -141 % Loss before income tax benefit (39,493 ) (28,119 ) (11,374 ) 40 % Income tax expense (benefit) (2,815 ) 19 (2,834 ) *% Net loss $ (36,678 ) $ (28,138 ) $ (8,540 ) 30 % * Not meaningful Revenue Revenue increased by $16.9 million, or 1699%, for the year ended December 31, 2020 compared to the year ended December 31, 2019 resulting from the increase in revenue recognized under the Regeneron Agreement. The increase in revenue recognized under the Regeneron Agreement for the year ended December 31, 2020 was primarily due to the following: • In April 2019, we executed an amendment to the Regeneron Agreement, according to which the future research program fees that were due on the third and fourth anniversaries of the Regeneron Agreement were replaced with payments based on achievement of certain development and regulatory milestones. After the amendment became 89 effective in July 2019, these payments were accounted for as variable consideration and excluded from the transaction price due to substantial uncertainties related to achieving the milestones and, as a result, earning such payments. There was also a significant change in forecasted research and development expenses during the third quarter of 2019. • In June 2020, we achieved a milestone under the Regeneron Agreement relating to the selection of a clinical candidate for ADI-002. This resulted in an increase in the transaction price of the Regeneron Agreement by $10.0 million. As a result, we recognized an additional $5.0 million in revenue during the three months ended June 30, 2020. • The proportional performance under the Regeneron Agreement measured, using a cost-based input method, was higher during the year ended December 31, 2020 as compared to the year ended December 31, 2019 due to increased research and development activities. Research and development Year Ended December 31, 2020 2019 Payroll and personnel expenses (1) $ 15,490 $ 10,104 Costs incurred under agreements with consultants, CMOs, and CROs 11,195 5,982 Lab materials, supplies, and maintenance of equipment used for research and development activities 4,401 4,961 Other research and development expenses (2) 3,248 2,644 Total research and development expenses $ 34,334 $ 23,691 (1) Employee related costs, including salaries, benefits, bonuses, and stock-based compensation expenses for research and development employees. (2) Allocated facility-related costs, such as rent, utilities, insurance, repairs and maintenance, depreciation and amortization, information technology costs and general support services. Research and development expenses increased by $10.6 million, or 46%, during the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase in research and development expenses was primarily due to an increase of $5.3 million in personnel expenses, including salaries, benefits, and bonuses due to increases in headcount of employees involved in research and development activities, as well as an increase in stock-based compensation expense of $0.9 million, a portion which was attributable to the modification of the outstanding in-the-money stock options and restricted stock units held by resTORbio employees, in connection with the Merger. In addition, there was an increase of $5.4 million in fees incurred for CRO and CMO costs due to initiating and ramping up manufacturing and preclinical development activities related to our first product candidate, and an increase of $0.6 million in allocated facility-related costs and other general support services. There was also a change in the fair value of our in-process research & development (IPR&D) asset and contingent consideration liability (CVR) of $2.3 million and $1.9 million respectively, which represented a net charge of $0.4 million to research and development expenses. These increases were offset by a decrease in $0.6 million in lab materials, supplies, and maintenance of equipment used for research and development activities and a decrease in consulting fees of $0.2 million. General and administrative General and administrative expenses increased by $14.1 million, or 162%, during the year ended December 31, 2020 as compared to the year ended December 31, 2019. The increase in general and administrative expenses was primarily due to an increase of $7.1 million of professional fees for legal, consulting, accounting, tax and other services incurred in connection with the Merger, an increase of $5.1 million of payroll and personnel expenses, which includes salaries, benefits, bonuses, and stock-based compensation expenses, and temporary contractor fees, and an increase of $1.3 million in facilities and other expenses. The increase in payroll and personnel expenses includes payments of $0.7 million to Dr. Singhal, the former Chief Executive Officer in accordance with the Transition Agreement executed with him, incremental stock compensation expense of $0.7 million recognized resulting from the modification of Dr. Singhal’s stock options in connection with the Merger, and stock compensation expense of $1.0 million attributable to post combination services recognized resulting from the modification of the outstanding in-the-money stock options and restricted stock units held by resTORbio employees, in connection with the Merger. Interest income Interest income decreased by $0.2 million, or 16%, during the year ended December 31, 2020 compared to the year ended December 31, 2019, which was primarily attributable to the decrease in average balance of cash and cash equivalents and marketable debt securities. 90 Interest Expense Interest expense increased by $0.1 million during the year ended December 31, 2020 as compared to the year ended December 31, 2019 due to the non-cash amortization of costs incurred in connection with the Loan Agreement entered into in April 2020. Other income (expense), net Other income (expense), net decreased by $3.3 million, or 141%, during the year ended December 31, 2020 compared to the year ended December 31, 2019. The decrease was primarily due to a decrease in the fair value of redeemable convertible preferred stock warrant liability of $0.9 million in 2020 compared to an increase in the fair value of the redeemable convertible preferred stock tranche liability and the Technion Research and Development Foundation (TRDF) liability of $2.0 million in 2019. Income tax expense We recognized an income tax benefit of $2.8 million during the year ended December 31, 2020 compared to the income tax expense of $19,000 for the year ended December 31, 2019. The income tax benefit during the year ended December 31, 2020 was a result of the recognition of a net operating loss carryback under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) which was enacted on March 27, 2020 in response to the COVID-19 pandemic. This generated a refund of income taxes paid by us during the year ended December 31, 2017. In accordance with Accounting Standards Codification (ASC) 740, Income Taxes, we recorded the effect of an enacted change in a tax law in the period that includes the enactment date. Comparison of the Years Ended December 31, 2019 and 2018 The following table summarizes our results of operations for the periods indicated (in thousands, except percentages): Year Ended December 31, 2019 2018 Change % Change Revenue – related party $ 995 $ 8,181 $ (7,186 ) -88 % Operating expenses: Research and development 23,691 14,717 8,974 61 % General and administrative 8,692 8,428 264 3 % Total operating expenses 32,383 23,145 9,238 40 % Loss from operations (31,388 ) (14,964 ) (16,424 ) 110 % Interest income 938 543 395 73 % Other income (expense), net 2,331 4,533 (2,202 ) -49 % Loss before income tax provision (benefit) (28,119 ) (9,888 ) (18,231 ) 184 % Income tax provision (benefit) 19 (589 ) 608 -103 % Net loss $ (28,138 ) $ (9,299 ) $ (18,839 ) 203 % Revenue Revenue decreased by $7.2 million, or 88%, for the year ended December 31, 2019 compared to the year ended December 31, 2018 resulting from the decrease in revenue recognized under the Regeneron Agreement. The decrease in revenue recognized under the Regeneron Agreement during the year ended December 31, 2019 was primarily due to an amendment to the Regeneron Agreement. In April 2019, we executed an amendment to the Regeneron Agreement according to which future research program fees that were due on the third and fourth anniversaries of the Regeneron Agreement were replaced with the payments based on achievement of certain development and regulatory milestones. After the amendment became effective in July 2019, these payments were accounted for as variable consideration and excluded from the transaction price due to substantial uncertainties related to achieving the milestones and, as a result, earning with such payments. This resulted in a decrease in the cumulative revenue recognized under the Regeneron Agreement (see critical accounting policy on revenue recognition below). 91 Research and development Year Ended December 31, 2019 2018 Payroll and personnel expenses (1) $ 10,104 $ 7,449 Costs incurred under agreements with consultants, CMOs, and CROs 5,982 1,054 Lab materials, supplies, and maintenance of equipment used for research and development activities 4,961 3,857 Other research and development expenses (2) 2,644 2,357 Total research and development expenses $ 23,691 $ 14,717 (1) Employee related costs, including salaries, benefits, bonuses, and stock-based compensation expenses for research and development employees. (2) Allocated facility-related costs, such as rent, utilities, insurance, repairs and maintenance, depreciation and amortization, information technology costs and general support services. Research and development expenses increased by $9.0 million, or 61%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase in research and development expenses was primarily due to an increase of $4.9 million in fees paid to CMOs due to initiating and ramping up manufacturing and preclinical development activities related to our first product candidate, an increase of $2.7 million in payroll and personnel expenses, including salaries, bonuses, benefits and stock-based compensation expenses due to increases in headcount of employees involved in research and development activities, an increase of $1.1 million in laboratory materials, supplies, and maintenance of equipment used for research and development activities, and an increase of $0.3 million in facility-related costs and other general support services. General and administrative General and administrative expenses increased by $0.3 million, or 3%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase in general and administrative expenses was primarily due to an increase of $0.7 million of professional fees for legal, consulting, accounting, tax and other services and an increase of $0.4 million in depreciation, rent, travel and other expenses, offset by a decrease of $0.8 million of payroll and personnel expenses, including salaries, bonuses, benefits and stock-based compensation expenses largely due to a decrease in stock-based compensation expenses resulting from accounting for forfeitures of unvested stock options of terminated employees during the year that was partly offset by increases in headcount at the senior management level. Interest income Interest income increased by $0.4 million, or 73%, for the year ended December 31, 2019 compared to the year ended December 31, 2018, which was primarily attributable to interest income from an increase in cash and cash equivalents and marketable debt securities as a result of the proceeds received from the sale of shares of Series B redeemable convertible preferred stock in the third quarter of 2019. Other income (expense), net Other income (expense), net decreased by $2.2 million, or 49%, for the year ended December 31, 2019 compared to the year ended December 31, 2018, which was primarily due to a decrease in fair value of redeemable convertible preferred stock tranche liability by $2.5 million, partially offset by an increase in fair value of redeemable convertible preferred stock warrant liability of $0.3 million. Income tax expense (benefit) During the year ended December 31, 2019, we recorded income tax expense of less than $0.1 million. For the year ended December 31, 2018, we recorded an income tax benefit of $0.6 million which was primarily due to the New York state net operating loss carryback, which generated a refund of income taxes paid for the year ended December 31, 2017. Liquidity and Capital Resources Sources of Liquidity Since our formation in 2014, we have funded our operations with an aggregate of $116.3 million in gross cash proceeds from the sale of redeemable convertible preferred stock and an aggregate of $45.0 million received to date from Regeneron under the Regeneron Agreement. In September 2020, f ollowing the closing of the Merger, all outstanding shares of the redeemable convertible preferred stock converted into 12,048,671 shares of common stock. We also acquired $64.1 million of cash, cash equivalents and restricted cash owned by resTORbio, as part of the Merger. As of December 31, 2020, we had cash, 92 cash equivalents and marketable debt securities of $ 94.6 million. In February 2021, we completed an underwritten public offering of 10,575,513 shares of our common stock, including the exercise in full by the underwriters of their option to purchase up to an additional 1,344,743 shares of common stock at a public offering price of $13.00 per share. The aggregate gross proceeds from the offering, before deducting underwriting discounts and commissions and offering expenses were approximately $137.5 million. In connection with the offering, we also enter ed into a stock purchase agreement with certain existing investors for $15.0 million of shares of our common stock at a price per share equal to the public offering price, with an initial closing for certain investors held simultaneous ly with the closing of the offering and a subsequent closing for certain additional investors. We expect that the cash, cash equivalents, and marketable debt securities will be sufficient to fund our forecasted operating expenses, capital expenditure requirements and debt service payments for at least the next twelve months from the issuance of these annual consolidated financial statements. Redeemable Convertible Preferred Stock Series A Redeemable Convertible Preferred Stock From 2015 to 2018, we issued 30,233,758 shares of our Series A redeemable convertible preferred stock at $1.20 per share for total gross proceeds of $36.3 million. We also issued 411,892 and 67,656 shares of our Series A redeemable convertible preferred stock in connection with an amendment of the license agreement with the TRDF in February 2016 and February 2019, respectively. In January 2016 and February 2016, we issued 629,633 shares of our Series A-1 redeemable convertible preferred stock and 2,428,688 shares of Series A-2 redeemable convertible preferred stock as part of the purchase consideration for Applied Immune Technologies, Ltd. (AIT), respectively. Following the closing of the Merger, all Series A, Series A-1, and Series A-2 redeemable convertible preferred stock were converted in 4,980,151 shares of our common stock. Series B Redeemable Convertible Preferred Stock In 2019, we issued 57,004,415 share of Series B redeemable convertible preferred stock at $1.4034 per share for gross proceeds of $80.0 million. In connection with Series B redeemable convertible preferred stock financing transactions, we issued to our financial advisor warrants to purchase 1,781,387 shares of our Series B redeemable convertible preferred stock at an exercise price of at $1.4034 per share. Following the closing of the Merger, all Series B redeemable convertible preferred stock were converted in 7,068,520 shares of our common stock. Loan Agreement On April 28, 2020, we entered into the Loan Agreement with Pacific Western Bank (the Bank) for a term loan not exceeding $12.0 million to finance leasehold improvements for our facilities in Redwood City, CA, with an interest rate equal to the greater of 0.25% above the Prime Rate (as defined in the Loan Agreement) or 5.00%. In connection with the entrance into the Loan Agreement, we issued the Bank a warrant to purchase shares of our Series B redeemable convertible preferred stock at an exercise price of $1.4034 per share. Such warrant was initially exercisable for 42,753 shares of our Series B redeemable convertible preferred stock. Upon the closing of the Merger, it was exchanged for a warrant to purchase 5,301 shares of common stock at an exercise price of $11.32 per share and shall be exercisable for an additional number of shares of common stock equal to 1.00% of the aggregate original principal amount of all term loans made pursuant to the Loan Agreement (up to an aggregate maximum of 15,903 shares of common stock). The Loan Agreement contains a variety of affirmative and negative covenants, including required financial reporting, limitations on certain dispositions of assets, limitations on the incurrence of additional debt and other requirements. As of December 31, 2020, we were in compliance with such covenants and had no indebtedness outstanding under the Loan Agreement. To date, we have not drawn any funds from the Loan Agreement. At-the-Market (ATM) Offering On December 1, 2020, we entered into a Sales Agreement (the 2020 Sales Agreement) with Evercore Group L.L.C. and H.C. Wainwright & Co., LLC (collectively, the Agents), pursuant to which we could sell, from time to time, at our option, up 93 to an aggregate of $50 .0 million of shares of our common stock, through the Agents, as our sales agents . No shares were sold under the 2020 Sales Agreement before it was terminated in February 2021. Public Offering In February 2021, we completed an underwritten public offering of 10,575,513 shares of our common stock, including the exercise in full by the underwriters of their option to purchase up to an additional 1,344,743 shares of common stock at a public offering price of $13.00 per share. The aggregate gross proceeds from the offering, before deducting underwriting discounts and commissions and offering expenses were approximately $137.5 million. In connection with the offering, we also entered into a stock purchase agreement with certain existing investors for $15.0 million of shares of our common stock at a price per share equal to the public offering price, with an initial closing for certain investors held simultaneously with the closing of the offering and a subsequent closing for certain additional investors. Future Funding Requirements We have incurred losses since inception and have incurred losses of $36.8 million, $28.1 million and $9.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, we had an accumulated deficit of $106.5 million. As of December 31, 2020, we had cash, cash equivalents and marketable debt securities of $94.6 million. We believe that our cash, cash equivalents and marketable debt securities will be sufficient for us to continue as a going concern for at least 12 months from the issuance date of our consolidated financial statements as of and for the year ended December 31, 2020 included elsewhere in this Annual Report on Form 10-K. We have based these estimates on assumptions that may prove to be wrong, and we could deplete our available capital resources sooner than we expect. Because of the risks and uncertainties associated with research, development, and commercialization of product candidates, we are unable to estimate the exact amount of our working capital requirements. All of our revenue to date is generated from the Regeneron Agreement, which is a collaboration and license agreement. We do not expect to generate any significant product revenue until we obtain regulatory approval of and commercialize any of our product candidates or enter into additional collaborative agreements with third parties, and we do not know when, or if, either will occur. We expect to continue to incur significant losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek regulatory approvals for, our product candidates and begin to commercialize any approved products. We are subject to all of the risks typically related to the development of new product candidates, and we may encounter unforeseen expenses, difficulties, complications, delays, and other unknown factors that may adversely affect our business. We will continue to require additional capital to develop our product candidates and fund operations for the foreseeable future. We may seek to raise capital through private or public equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. We anticipate that we will need to raise substantial additional capital, the requirements for which will depend on many factors, including: • the scope, timing, rate of progress and costs of our drug discovery efforts, preclinical development activities, laboratory testing and clinical trials for our product candidates; • the number and scope of clinical programs we decide to pursue; • the cost, timing and outcome of preparing for and undergoing regulatory review of our product candidates; • the scope and costs of development and commercial manufacturing activities; • the cost and timing associated with commercializing our product candidates, if they receive marketing approval; • the extent to which we acquire or in-license other product candidates and technologies; • the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; • our ability to establish and maintain collaborations on favorable terms, if at all; 94 • our efforts to enhance operational systems and our ability to attract, hire and retain qualified personnel, including personnel to support the development of our product candidates and, ultimately, the sale of our products, following FDA approval; • our implementation of operational, financial and management systems; • the impact of the COVID-19 pandemic on U.S. and global economic conditions that may impact our ability to access capital on terms anticipated, or at all; and • the post-merger costs associated with being a public company. A change in the outcome of any of these or other variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. Furthermore, our operating plans may change in the future, and we will continue to require additional capital to meet operational needs and capital requirements associated with such operating plans. Adequate funding may not be available to us on acceptable terms or at all. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategies. If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials or we may also be required to sell or license to other rights to our product candidates in certain territories or indications that we would prefer to develop and commercialize ourselves. If we are required to enter into collaborations and other arrangements to supplement our funds, we may have to give up certain rights that limit our ability to develop and commercialize our product candidates or may have other terms that are not favorable to us or our stockholders, which could materially affect our business and financial condition. See the section of this Annual Report on Form 10-K titled “ Risk Factors ” for additional risks associated with our substantial capital requirements. Summary Statement of Cash Flows The following table sets forth the primary sources and uses of our cash, cash equivalents, and restricted cash for each of the periods presented below (in thousands): Year Ended December 31, 2020 2019 2018 Net cash provided by (used in): Operating activities $ (41,552 ) $ (27,882 ) $ (18,180 ) Investing activities 115,217 (47,931 ) (16,058 ) Financing activities 303 76,945 11,046 Net increase (decrease) in cash, cash equivalents and restricted cash $ 73,968 $ 1,132 $ (23,192 ) Cash Flows from Operating Activities Net cash used in operating activities was $41.6 million for the year ended December 31, 2020. Cash used in operating activities was primarily due to the use of funds in our operations to develop our product candidates resulting in a net loss of $36.7 million, adjusted for non-cash activities of $8.6 million. The non-cash activities are composed of depreciation expense of $1.2 million, a non-cash lease expense of $0.7 million, stock-based compensation expense of $5.3 million, a non-cash change in fair value of the redeemable convertible preferred stock warrant liability of $0.9 million, a non-cash expense for impairment of IPR&D of $2.3 million, a gain on the remeasurement of contingent consideration liability of $1.9 million, and amortization of the deferred debt issuance cost of $0.1 million. Changes in operating assets and liabilities were composed of an increase in prepaid expenses and other current assets of $3.2 million, an increase in other non-current assets of $1.3 million, a decrease in contract liabilities of $7.9 million, a decrease in deferred tax liability of $0.2 million, a decrease in lease liabilities of $0.9 million, and a decrease in accounts payable of $0.8 million, partially offset by an increase in accrued and other current liabilities of $0.8 million. The increase in prepaid expenses and other current assets resulted from the prepayment for director and officer insurance after the close of the Merger, timing of payments to our CROs and CMOs and an increase in federal tax receivable. The decrease in contract liabilities is due to the recognition of revenue under the Regeneron Agreement. Decreases in accounts payable and increase in accrued and other liabilities resulted from the timing of payments to our service providers. Net cash used in operating activities was $27.9 million for the year ended December 31, 2019. Cash used in operating activities was primarily due to the use of funds in our operations to develop our product candidates resulting in a net loss of $28.1 million, adjusted for a non-cash change in fair value of the redeemable convertible preferred stock tranche liability and 95 TRDF liability of $2.0 million, a non-cash change in fair value of redeemable convertible preferred stock warrant liability of $0.3 million, a decrease in contract liabilities of $1.0 million, and a decrease in accrued and other current liabilities of $0.4 million, partially offset by depreciation expense of $1.2 million, stock-based compensation expense of $1.2 million, a decrease in prepaid expenses and other current assets of $1.4 million, and an increase in accounts payable of $0.5 million. The decrease in prepaid expenses and other current assets, decrease in accrued and other current liabilities, and increase in accounts payable resulted from the timing of payments to our service providers. Net cash used in operating activities was $18.2 million for the year ended December 31, 2018. Cash used in operating activities was primarily due to the use of funds in our operations to develop our product candidates resulting in a net loss of $9.3 million, adjusted for a non-cash change in fair value of redeemable convertible preferred stock tranche liability and TRDF liability of $4.5 million, a decrease in contract liabilities of $3.2 million, an increase in prepaid expenses and other current assets of $2.8 million, a decrease in accrued and other current liabilities of $1.3 million, a decrease in accounts payable of $0.3 million, and an increase in other non-current assets of $0.3 million, partially offset by non-cash depreciation expense of $1.2 million and stock-based compensation expense of $2.5 million. The increase in prepaid expenses and other current assets and decreases in accounts payable and accrued and other current liabilities resulted from the timing of payments to our service providers. Cash Flows Used in Investing Activities Net cash provided by investing activities was $115.2 million for the year ended December 31, 2020, which consisted of cash and restricted cash acquired in connection with the Merger of $64.1 million, proceeds from maturities of marketable debt securities of $57.8 million, partially offset by purchases of marketable debt securities of $5.7 million and purchases of property and equipment of $1.0 million. Net cash used in investing activities was $47.9 million for the year ended December 31, 2019, which related to purchases of marketable debt securities of $76.1 million and purchases of property and equipment of $1.1 million, partially offset by proceeds from maturities of marketable debt securities of $29.1 million. Net cash used in investing activities was $16.1 million for the year ended December 31, 2018, which related to purchases of marketable debt securities of $15.2 million and purchases of property and equipment of $0.9 million. Cash Flows from Financing Activities Net cash provided by financing activities was $0.3 million for the year ended December 31, 2020, due to cash proceeds of $0.5 million from exercise of stock options partly offset by payment of debt issuance costs of $0.2 million. Net cash provided by financing activities was $76.9 million for the year ended December 31, 2019, primarily due to net proceeds from the sale of shares of Series B redeemable convertible preferred stock. Net cash provided by financing activities was $11.0 million for the year ended December 31, 2018, due to net proceeds from the sale of shares of Series A redeemable convertible preferred stock of $10.8 million and cash proceeds of $0.2 million from exercise of stock options. Contractual Obligations and Other Commitments We currently lease an office space in Boston, MA under a non-cancellable operating lease (the Boston Lease), with an expiration date of July 31, 2026. The Boston lease was amended on April 1, 2019, to relocate into a premise in the same building with additional space. The initial annual base rent for this lease was $0.6 million and increases 2% annually. We also have an office facility in Menlo Park, CA under a non-cancellable operating lease (the Menlo Park Lease), with an expiration date of March 31, 2022 (subject to any optional extension). This lease was amended on September 30, 2019 to include additional office space, with an expiration date of March 31, 2022 (subject to any optional extension). The initial annual base rent for the Menlo Park Lease is an aggregate of $1.0 million, and such amount will increase 3% annually. On October 28, 2018, we executed an additional non-cancelable lease agreement for a new office and laboratory facility in Redwood City, CA (the Redwood City Lease), with an expiration date of February 28, 2030. The initial annual base rent for the Redwood City Lease is an aggregate of $1.3 million, and such amount will increase 3% annually. Critical Accounting Policies, Significant Judgments and Use of Estimates Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements prepared in accordance with GAAP. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses during the reported periods and related disclosures. These estimates and assumptions, including those related to revenue recognition, accruals related to CMO, CRO and research and development expenses, equity-based compensation, 96 valuation of the IPR&D and CVR, determination of the fair value of common shares prior to our Merger are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. These critical estimates and assumptions are based on our historical experience, our observance of trends in the industry, and various other factors that are believed to be reasonable under the circumstances and form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our estimates under different assumptions or conditions. Revenue Recognition Under ASC 606, Revenue from Contracts with Customers (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 revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps as prescribed by ASC 606: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. A contract with a customer exists when (i) we enter into a legally enforceable contract with a customer that defines each party’s rights regarding the products or services to be transferred and identifies the payment terms related to these products or services, (ii) the contract has commercial substance and (iii) we determine that collection of substantially all consideration for products or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. At contract inception, once the contract is determined to be within the scope of ASC 606, we identify the goods or services promised and determine the performance obligations by assessing whether each promised good or service is distinct. Goods or services that are not distinct are bundled with other goods or services in the contract until a bundle of goods or services that is distinct is created. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Our revenues are derived through the Regeneron Agreement. The terms of the Regeneron Agreement include (1) a research license, (2) a collaboration invention license, (3) a trademark license, (4) research and development services during the research term, (5) manufacturing services to manufacture collaboration ICPs for the research programs, (6) participation in the joint research committee, and (7) information sharing during the research term. We considered that the licenses granted under the Regeneron Agreement are not capable of being distinct and are not distinct from the research and development and manufacturing services within the context of the Regeneron Agreement, because (1) such licenses are for the research and development effort during the research term, unless Regeneron exercises its option under the Regeneron Agreement, (2) the research and development services significantly increase the utility of such licenses, and (3) research and development services require collaboration ICPs being manufactured. Specifically, the licenses granted by us can only provide benefit to Regeneron in combination with the research and development and manufacturing services provided by us, to discover the collaboration ICPs. Similarly, the participation in the joint research committee and information sharing are not capable of being distinct and are not distinct from the research and development and manufacturing services within the context of the agreement, because the participation in the joint research committee is for monitoring and governing of the research and development efforts and the information sharing is for sharing results of such research and development efforts. Therefore, we concluded all of the above promises are combined into a single performance obligation. For revenue recognition purposes, we determine the term of our license or collaboration agreements by evaluating the period during which present and enforceable rights and obligations exist. This determination is impacted by the existence of substantive termination penalties, among other factors. We recognize revenue under our license or collaboration agreements that are within the scope of ASC 606. These agreements include promises related to licenses to intellectual property and research and development services. If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenue from non-refundable, up-front fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, we utilize judgement to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of 97 recognizing revenue from non-refundable, up-front fees. Accordingly, the transaction price is generally comprised of a fixed fee due at contract inception and at specified future dates, variable consideration in the form of milestone payments due upon the achievement of specified events and tiered royalties earned when customers recognize net sales of licensed products. We measure the transaction price based on the amount of consideration to which we expect to be entitled in exchange for transferring the promised goods and/or services to the customer. We utilize the “most likely amount” method to estimate the amount of variable consideration to which we will be entitled for the contract. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. At the inception of each arrangement that includes development and regulatory milestone payments, we evaluate whether the associated event is considered most likely to be achieved and estimates the amount to be included in the transaction price. Payments or reimbursements for our research and development efforts where such efforts are considered part of or a single performance obligation are recognized over time using a measure of progress that best reflects our performance in satisfying the obligation and are presented on a gross basis. Upfront payments are recorded as contract liabilities upon receipt or when due and may require deferral of revenue recognition to a future period until we perform our obligation under these arrangements. Amounts payable to us are recorded as accounts receivable when our right to consideration is unconditional. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less. For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, 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 royalty revenue resulting from the Regeneron Agreement. Leases We lease our facilities and, prior to December 31, 2019, we met the requirements to account for these leases as operating leases. We recognized rent expense on a straight-line basis over the non-cancelable lease term. Where leases contain escalation clauses, rent abatements or concessions, such as rent holidays and landlord or tenant incentives or allowances, we applied them in the determination of straight-line rent expense over the lease term. As of December 31, 2019, we recorded the difference between the rent paid and the straight-line rent as a deferred rent liability. As of December 31, 2019, leasehold improvements funded by landlord incentives or allowances are recorded as leasehold improvement assets and a corresponding deferred rent liability. The leasehold improvement asset is amortized over the lesser of the term of the lease or life of the asset. The deferred rent liability is amortized on a straight-line basis as a reduction to rent expense over the term of the lease agreement. Upon adoption of ASC 842, Leases , as described below under Recently Adopted Accounting Pronouncements, on January 1, 2020, we determined if an arrangement is a lease, or contains a lease, at inception. The asset component of our operating leases is recorded as right-of-use (ROU) assets, and the liability component is recorded as current lease liabilities and long-term lease liabilities in our consolidated balance sheets. ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use an incremental borrowing rate, which is the estimated rate we would be required to pay for a fully collateralized borrowing equal to the total lease payments over the term of the lease, to determine the present value of future minimum lease payments. The ROU asset also includes any lease payments made to the lessor at or before the commencement date, minus lease incentives received, and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. For lease agreements entered into or reassessed after the adoption of ASC 842, we do not combine lease and non-lease components. Variable lease payments are expenses as incurred. Assumptions made by us at the commencement date are re-evaluated upon occurrence of certain events, including a lease modification. A lease modification results in a separate contract when the modification grants the lessee an additional right of use not included in the original lease and when lease payments increase commensurate with the standalone price for the additional right of use. When a lease modification results in a separate contract, it is accounted for in the same manner as a new lease. As a result of adopting ASC 842 in 2020, we recorded lease right-of-use, (ROU) asset of $1.4 million and lease liabilities of $1.8 million as of January 1, 2020, primarily related to office leases based on the present value of future lease payments. There was no impact to retained earnings upon the adoption of ASC 842. As of December 31, 2020, we did not record any finance leases. 98 Accrued CMO, CRO, and Research and Development Expenses We have entered into various agreements with CMOs and CROs. Our research and development accruals are estimated based on the level of services performed, progress of the studies, including the phase or completion of events, and contracted costs. The estimated costs of research and development provided, but not yet invoiced, are included in accrued and other current liabilities on the consolidated balance sheet. If the actual timing of the performance of services or the level of effort varies from the original estimates, we will adjust the accrual accordingly. Payments made to CMOs and CROs under these arrangements in advance of the performance of the related services are recorded as prepaid expenses and other current assets on the consolidated balance sheets until the services are rendered. To date, our estimated accruals have not differed materially from the actual costs. Stock-Based Compensation We use a fair value-based method to account for all stock-based compensation arrangements with employees and non-employees, including stock options and restricted stock awards. Our determination of the fair value of stock options on the date of grant utilizes the Black-Scholes option pricing model. The fair value of the option granted is recognized on a straight-line basis over the period during which an optionee is required to provide services in exchange for the option award, known as the requisite service period, which usually is the vesting period. We account for forfeitures as they occur. In determining fair value of the stock options granted, we use the Black–Scholes option-pricing model, which requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (expected term), the estimated volatility of our common stock price over the expected term (expected volatility), risk-free interest rate and expected dividends. Changes in the following assumptions can materially affect the estimate of fair value and ultimately how much stock-based compensation expense is recognized; and the resulting change in fair value, if any, is recognized in our consolidated statement of operations and comprehensive loss during the period the related services are rendered. These inputs are subjective and generally require significant analysis and judgment to develop. Changes in the following assumptions can materially affect the estimate of the fair value of stock-based compensation: • Expected Term — The expected term is calculated using the simplified method which is used when there is insufficient historical data about exercise patterns and post-vesting employment termination behavior. The simplified method is based on the vesting period and the contractual term for each grant, or for each vesting-tranche for awards with graded vesting. The mid-point between the vesting date and the maximum contractual expiration date is used as the expected term under this method. For awards with multiple vesting-tranches, the times from grant until the mid-points for each of the tranches may be averaged to provide an overall expected term. • Expected Volatility — We use an average historical stock price volatility of a peer group of comparable publicly traded companies in biotechnology and pharmaceutical related industries to be representative of our expected future stock price volatility, as we do not have any trading history for our common stock. For purposes of identifying these peer companies, we consider the industry, stage of development, size and financial leverage of potential comparable companies. For each grant, we measure historical volatility over a period equivalent to the expected term. • Risk-Free Interest Rate — The risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of the stock award. • Expected Dividend Rate — We have not paid and does not anticipate paying dividends in the near future. Accordingly, we estimate the dividend yield to be zero. Common Stock Valuations Prior to our Merger, the estimated fair value of the common stock underlying our stock options and stock awards was determined at each grant date by our board of directors, with assistance from management and external appraisers. All options to purchase shares of our common stock were intended to be exercisable at a price per share not less than the per-share fair value of our common stock underlying those options on the date of grant. The approach to estimate the fair value of our common stock was consistent with the methods outlined in the American Institute of Certified Public Accountants’ Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation (Practice Aid). Subsequent to the Merger, the fair value of our common stock is determined based on the closing market price. Off-Balance Sheet Arrangements Since our inception, we have not engaged in any off-balance sheet arrangements. 99 Emerging Growth Company and Smaller Reporting In April 2012, the Jumpstart Our Business Startups Act of 2012 (the JOBS Act) was enacted. Section 107 of the JOBS Act provides that an emerging growth company (EGC), can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. Thus, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period for new or revised accounting standards during the period in which we remain an emerging growth company; however, we may adopt certain new or revised accounting standards early. We will remain an emerging growth company until the earliest to occur of: (1) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (2) the date we qualify as a large accelerated filer, with at least $700.0 million of equity securities held by non-affiliates; (3) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period; and (4) the last day of the fiscal year ending after the fifth anniversary of our initial public offering. We are also a smaller reporting company meaning that the market value of our stock held by non-affiliates is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation. Recently Issued and Adopted Accounting Pronouncements See the section titled “Summary of Significant Accounting Policies” in Note 2 to our financial statements included elsewhere in this Annual Report on Form 10-K for additional information.