Annexon, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm 104 Consolidated Balance Sheets as of December 31, 2020 and 2019 105 Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019 106 Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2020 and 2019 107 Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Years ended December 31, 2020 and 2019 108 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019 109 Notes to Consolidated Financial Statements 110 103 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors Annexon, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Annexon, Inc. and subsidiary (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KPMG LLP We have served as the Company’s auditor since 2016. San Francisco, California March 24, 2021 104 ANNEXON, INC. Consolidated Balance Sheets (in thousands, except share and per share amounts) December 31, 2020 2019 Assets Current assets: Cash and cash equivalents $ 268,565 $ 43,931 Short-term investments 82,641 — Prepaid expenses and other current assets 2,805 1,475 Total current assets 354,011 45,406 Property and equipment 1,935 2,138 Other long-term assets — 2,354 Total assets $ 355,946 $ 49,898 Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) Current liabilities: Accounts payable $ 3,734 $ 2,371 Accrued liabilities 6,497 2,194 Deferred rent, current 391 366 Total current liabilities 10,622 4,931 Deferred rent 1,046 1,437 Total liabilities 11,668 6,368 Commitments and contingencies (Note 6) Redeemable convertible preferred stock, $0.001 par value; zero and 119,155,472 shares authorized as of December 31, 2020 and 2019, respectively; zero and 111,748,065 shares issued and outstanding as of December 31, 2020 and 2019, respectively; aggregate liquidation preference of zero and $137,814 as of December 31, 2020 and 2019, respectively — 143,984 Stockholders’ Equity (Deficit): Preferred stock, $0.001 par value; 5,000,000 and zero shares authorized as of December 31, 2020 and 2019, respectively; zero issued and outstanding as of December 31, 2020 and 2019, respectively — — Common stock, $0.001 par value; 300,000,000 and 150,000,000 shares authorized as of December 31, 2020 and 2019, respectively; 38,157,618 and 433,749 shares issued and outstanding as of December 31, 2020 and 2019, respectively 38 4 Additional paid-in capital 510,309 2,202 Accumulated other comprehensive loss (77 ) (80 ) Accumulated deficit (165,992 ) (102,580 ) Total stockholders’ equity (deficit) 344,278 (100,454 ) Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit) $ 355,946 $ 49,898 See accompanying notes to consolidated financial statements. 105 ANNEXON, INC . Consolidated Statements of Operations (in thousands, except share and per share amounts) Year Ended December 31, 2020 2019 Operating expenses: Research and development $ 49,271 $ 24,524 General and administrative 14,198 7,994 Total operating expenses 63,469 32,518 Loss from operations (63,469 ) (32,518 ) Loss on remeasurement of redeemable convertible preferred stock liability — (5,670 ) Other income, net 57 1,009 Net loss before taxes (63,412 ) (37,179 ) Provision for income taxes — 4 Net loss (63,412 ) (37,183 ) Accretion on redeemable convertible preferred stock (705 ) (1,095 ) Deemed dividend – beneficial conversion feature on redeemable convertible preferred stock (6,219 ) — Net loss attributable to common stockholders $ (70,336 ) $ (38,278 ) Net loss per share attributable to common stockholders, basic and diluted $ (4.15 ) $ (88.30 ) Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted 16,962,398 433,493 See accompanying notes to consolidated financial statements. 106 ANNEXON, INC. Consolidated Statements of Comprehensive Loss (in thousands) Year Ended December 31, 2020 2019 Net loss $ (63,412 ) $ (37,183 ) Other comprehensive gain (loss): Foreign currency translation adjustment 9 (14 ) Unrealized loss on available for sale securities (6 ) — Comprehensive loss $ (63,409 ) $ (37,197 ) See accompanying notes to consolidated financial statements. 107 ANNEXON, INC. Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) (in thousands, except share amounts) Redeemable Convertible Preferred Stock Common Stock Additional Paid-In Accumulated Other Comprehensive Accumulated Total Stockholders’ Shares Cost Shares Cost Capital Loss Deficit Equity (Deficit) Balances as of December 31, 2018 89,525,848 $ 102,082 432,309 $ 4 $ 1,257 $ (66 ) $ (65,397 ) $ (64,202 ) Issuance of Series C redeemable convertible preferred stock, net of issuance costs of $3 and the value of the redeemable convertible preferred stock liability of $10,810 22,222,217 40,807 — — — — — — Accretion on redeemable convertible preferred stock — 1,095 — — (1,095 ) — — (1,095 ) Stock option exercises — — 1,440 — 3 — — 3 Stock-based compensation — — — — 2,037 — — 2,037 Foreign currency translation adjustment — — — — — (14 ) — (14 ) Net loss — — — — — — (37,183 ) (37,183 ) Balances as of December 31, 2019 111,748,065 143,984 433,749 4 2,202 (80 ) (102,580 ) (100,454 ) Accretion on redeemable convertible preferred stock — 705 — — (705 ) — — (705 ) Issuance of Series D redeemable convertible preferred stock, net of issuance costs of $5,200 71,719,859 96,807 — — — — — — Beneficial conversion feature on Series D redeemable convertible preferred stock — (6,297 ) — — 6,297 — — 6,297 Conversion of redeemable convertible preferred stock to common stock upon initial public offering (183,467,924 ) (241,418 ) 20,824,938 21 241,397 — — 241,418 Deemed dividend of beneficial conversion feature on conversion of redeemable convertible preferred stock — 6,219 — — (6,219 ) — — (6,219 ) Issuance of common stock in connection with initial public offering, net of issuance costs of $24,700 — — 16,889,403 13 262,427 — — 262,440 Stock-based compensation — — — — 4,888 — — 4,888 Stock option exercises — — 9,528 — 22 — — 22 Foreign currency translation adjustment — — — — — 9 — 9 Unrealized loss on available-for-sale securities (6 ) (6 ) Net loss — — — — — — (63,412 ) (63,412 ) Balances as of December 31, 2020 — $ — 38,157,618 $ 38 $ 510,309 $ (77 ) $ (165,992 ) $ 344,278 See accompanying notes to consolidated financial statements. 108 ANNEXON, INC. Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2020 2019 Operating activities: Net loss $ (63,412 ) $ (37,183 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 667 493 Accretion of discount on available-for sale securities 53 — Stock-based compensation 4,888 2,037 Change in fair value of redeemable convertible preferred stock liability — 5,670 Changes in operating assets and liabilities: Prepaid expenses and other current assets (1,330 ) 56 Other long-term assets 96 — Accounts payable 1,513 931 Accrued liabilities 4,804 (20 ) Deferred rent (366 ) (342 ) Net cash used in operating activities (53,087 ) (28,358 ) Investing activities: Purchases of property and equipment (464 ) (267 ) Purchase of available-for-sale securities (82,700 ) — Net cash used in investing activities (83,164 ) (267 ) Financing activities: Proceeds from the exercise of common stock options 22 3 Proceeds from Paycheck Protection Program loan 500 — Repayments of Paycheck Protection Program loan (500 ) — Proceeds from issuance of redeemable convertible preferred stock (including $13,900 of proceeds from the related parties in 2020) 102,000 29,997 Payments of issuance costs related to redeemable convertible preferred stock (5,193 ) — Proceeds from issuance of common stock upon initial public offering, net of underwriting discounts and commissions 267,021 — Payments of offering costs related to initial public offering (2,974 ) (1,605 ) Net cash provided by financing activities 360,876 28,395 Net increase (decrease) in cash and cash equivalents 224,625 (230 ) Effect of exchange rate changes on cash and cash equivalents 9 (14 ) Cash and cash equivalents at beginning of period 43,931 44,175 Cash and cash equivalents at end of period $ 268,565 $ 43,931 Supplemental disclosures of cash flow information: Income taxes paid $ — $ 2 Non-cash investing and financing activities: Reclassification of redeemable convertible preferred stock to common stock upon initial public offering $ 241,418 $ — Reclassification of redeemable convertible preferred stock liability to redeemable convertible preferred stock $ — $ 10,810 Accretion on redeemable convertible preferred stock $ 705 $ 1,095 Deferred offering costs included in accounts payable and accrued liabilities $ — $ 651 Purchase of property and equipment included in accounts payable $ — $ 19 Beneficial conversion feature recognized upon issuance of redeemable convertible preferred stock $ 6,297 $ — Deemed dividend arising from conversion of beneficial conversion feature $ 6,219 $ — See accompanying notes to consolidated financial statements. 109 ANNEXON, INC. Notes to Consolidated Financial Statements 1. Organization Annexon, Inc., or the Company, is a clinical-stage biopharmaceutical company targeting C1q and initiating molecules of the classical complement pathway to develop transformative therapies for autoimmune and neurodegenerative disorders of the body, brain and eye. The Company is located in South San Francisco, California and was incorporated in Delaware in March 2011. The Company’s wholly-owned subsidiary, Annexon Biosciences Australia Pty Ltd, or the Subsidiary, is a proprietary limited company incorporated in 2016 and domiciled in Australia. The Subsidiary is also engaged in research and development activities in support of its parent company. Initial Public Offering On July 23 , 2020, the Company’s registration statement on Form S-1 relating to its initial public offering, or the IPO, was declared effective by the Securities and Exchange Commission, or the SEC, and the shares of its common stock began trading on the Nasdaq Global Select Market on July 24, 2020. The IPO closed on July 28, 2020, pursuant to which the Company issued and sold 14,750,000 shares of its common stock at a public offering price of $17.00 per share. On August 4, 2020, the Company issued 2,139,403 shares of its common stock to the underwriters of the IPO pursuant to the partial exercise of their option to purchase additional shares. The Company received net proceeds of approximately $ 262.4 million from the IPO, after deducting underwriting discounts and commissions of $20.1 million and offering costs of $4.6 million. Immediately prior to the completion of the IPO, all shares of redeemable convertible preferred stock then outstanding were converted into 20,824,938 shares of common stock. Reverse Stock Split On July 17, 2020, the Company’s board of directors approved an amendment to the Company’s certificate of incorporation to effect a reverse split of shares of the Company’s common stock on a one-for-8.81 basis, or the Reverse Stock Split. The number of authorized shares and the par values of the common stock and redeemable convertible preferred stock were not adjusted as a result of the Reverse Stock Split. In connection with the Reverse Stock Split, the conversion ratio for the Company’s outstanding redeemable convertible preferred stock was proportionately adjusted such that the common stock issuable upon conversion of such preferred stock was decreased in proportion to the Reverse Stock Split. All references to common stock and options to purchase common stock share data, per share data and related information contained in the consolidated financial statements have been adjusted to reflect the effect of the Reverse Stock Split. Liquidity Since inception, the Company has been involved primarily in performing research and development activities, conducting clinical trials, hiring personnel, and raising capital to support and expand these activities. The Company has experienced losses and negative cash flows from operations since its inception and, as of December 31, 2020, had an accumulated deficit of $166.0 million and cash and cash equivalents and short-term investments of $351.2 million. The Company has historically funded its operations through the issuance of shares of its redeemable convertible preferred stock and common stock. Based on projected activities, management projects that cash on hand is sufficient to support operations for at least the next 12 months following issuance of these consolidated financial statements. Management expects to continue to incur losses and negative cash flows from operations for at least the next several years. 110 2 . Basis of Presentation and Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including but not limited to the fair value of common stock, redeemable convertible preferred stock, redeemable convertible preferred stock liability, stock options, income taxes, clinical trial accruals and stock-based compensation. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could differ from those estimates. Principles of Consolidation The consolidated financial statements include the operations of Annexon, Inc. and its wholly owned subsidiary and include the results of operations and cash flows of these entities. All intercompany balances and transactions have been eliminated in consolidation. Segments The Company’s chief operating decision maker is its Chief Executive Officer. The Chief Executive Officer reviews financial information on an aggregate basis for the purposes of evaluating financial performance and allocating the Company’s resources. Accordingly, the Company has determined that it operates in one segment. Cash and Cash Equivalents The Company considers all highly liquid instruments with an original maturity of three months or less at time of purchase to be cash equivalents. Cash equivalents, which includes amounts invested in money market funds, are stated at fair value. Short-Term Investments Short-term investments have been classified as available-for-sale and are carried at estimated fair value as determined based upon quoted market prices or pricing models for similar securities. The Company determines the appropriate classification of its investments in debt securities at the time of purchase. Available-for-sale securities with original maturities beyond three months at the date of purchase are classified as current based on their availability for use in current operations. Unrealized gains and losses are excluded from earnings and are reported as a component of other comprehensive loss. The Company periodically evaluates whether declines in fair values of its marketable securities below their book value are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss as well as the Company’s ability and intent to hold the marketable security until a forecasted recovery occurs. Additionally, the Company assesses whether it has plans to sell the security or it is more likely than not it will be required to sell any marketable securities before recovery of its amortized cost basis. Impairment assessments are made at the individual security level each reporting period. When the fair value of an available-for-sale security is less than its cost at the balance sheet date, a determination is made as to whether the impairment is other-than-temporary and, if it is other-than-temporary, an impairment loss is recognized in other income, net, equal to the difference between the investment’s amortized cost and fair value at such date. The cost of investments sold is based on the specific-identification method. Interest on marketable securities is included in other income, net. 111 Property and Equipment, Net Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Depreciation begins at the time the asset is placed in service. Maintenance and repairs are charged to operations as incurred. Upon sale or retirement of assets, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operations in the period realized. The useful lives of the property and equipment are as follows: Laboratory equipment 5 years Office and computer equipment 3 years Leasehold improvements Shorter of remaining lease term or estimated useful life Impairment of Long-Lived Assets The Company evaluates its long-lived assets, including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate over its remaining life. When indications of impairment are present and the estimated undiscounted future cash flows from the use of these assets is less than the assets’ carrying value, the related assets will be written down to fair value. There were no impairments of the Company’s long-lived assets for the periods presented. Deferred Offering Costs Deferred offering costs, consisting of legal, accounting, audit and filing fees relating to an initial public offering, are capitalized. As of December 31, 2019, $2.3 million of deferred offering costs were capitalized, which are included in other long-term assets in the accompanying consolidated balance sheets. In July 2020, upon the closing of the IPO, all deferred offering costs were offset against the Company’s IPO proceeds within additional paid-in capital. Redeemable Convertible Preferred Stock Liability The obligation to issue additional shares of the Company’s Series C redeemable convertible preferred stock at a future date was determined to be a freestanding financial instrument that should be accounted for as a liability. At initial recognition, the Company recorded the redeemable convertible preferred stock liability on the balance sheet at its estimated fair value. The liability was subject to remeasurement at each balance sheet date, with changes in fair value recognized as gain (loss) on remeasurement of redeemable convertible preferred stock liability on the consolidated statement of operations. Upon settlement of the redeemable convertible preferred stock liability in August 2019, the Company remeasured the liability and reclassified the final value associated with the redeemable convertible preferred stock liability to the carrying value of the Series C redeemable convertible preferred stock. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred taxes to the amounts expected to be realized. The Company recognizes benefits of uncertain tax positions if it is more likely than not that such positions will be sustained upon examination based solely on their technical merit, as the largest amount of benefit that is 112 more likely than not to be realized upon the ultimate settlement. The Company’s policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit. To date, there have been no interest or penalties charged in relation to the unrecognized tax benefits. Commitments and Contingencies Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Foreign Currencies The Company’s reporting currency is the U.S. dollar. The functional currency of the Company’s subsidiary located in Australia is the Australian Dollar . Balance sheets prepared in the functional currencies are translated to the reporting currency at exchange rates in effect at the end of the accounting period, except for stockholders’ equity accounts, which are translated at rates in effect when these balances were originally recorded. Revenue and expense accounts are translated using a weighted-average rate during the year. The resulting foreign currency translation adjustments are recorded as a separate component of accumulated other comprehensive loss in the accompanying consolidated balance sheets. Foreign exchange translation gain for the year ended December 31, 2020 was $9,000 and loss for the year ended December 31, 2019 was $14,000. Gains and losses resulting from exchange rate changes on transactions denominated in a currency other than the functional currency are included in earnings as incurred. Research and Development Expense Research and development expenses consist primarily of direct and indirect costs incurred for the development of the Company’s product candidates. Direct expenses include (i) preclinical and clinical outside service costs associated with discovery, preclinical and clinical testing of the Company’s product candidates; (ii) professional services agreements with third-party contract organizations, investigative clinical trial sites and consultants that conduct research and development activities on the Company’s behalf; (iii) contract manufacturing costs to produce clinical trial materials; and (iv) laboratory supplies and materials. Indirect expenses include (A) compensation and personnel- related expenses (including stock-based compensation), (B) allocated expenses for facilities and depreciation; and (C) other indirect costs. Research and development costs are expensed as incurred. Payments made to third parties are under agreements that are generally cancelable by the Company. Advance payments for research and development activities are deferred as prepaid expenses. The prepaid amounts are expensed as the related services are performed. The Company estimates preclinical studies and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on the Company’s behalf. In accruing service fees, the Company estimates the period over which services will be performed and the level of effort to be expended in each period. These estimates are based on the Company’s communications with the third-party service providers and on information available at each balance sheet date. If the actual timing of the performance of services or the level of effort varies significantly from the estimate, the Company will adjust the accrual accordingly to reflect the best information available at the time of the financial statement issuance. The Company has not experienced any material differences between accrued costs and actual costs incurred since its inception. Stock-Based Compensation The Company accounts for stock-based compensation arrangements with employees and non-employee directors and consultants using a fair value method which requires the recognition of compensation expense for costs 113 related to all stock-based payments, including stock options. The fair value method requires the Company to estimate the fair value of stock-based payment awards to employees and non-employees on the date of grant using the Black- Scholes option pricing model. The Company grants certain employees performance-based stock options. For awards that include performance conditions, no compensation cost is recognized until the performance goals are probable of being met, at which time the cumulative compensation expense from the service inception date would be recognized. Stock-based compensation costs are based on the fair value of the underlying option calculated using the Black-Scholes option pricing model and recognized as expense on a straight-line basis (for all but performance based awards for which the accelerated method is used) over the requisite service period, which is the vesting period. Determining the appropriate fair value model and related assumptions requires judgment, including estimating the fair value of the underlying common stock, expected term, expected stock price volatility, risk-free interest rate and dividend yield. The Company accounts for forfeitures as they occur. Accounting for Non-Recurring Grant Income Non-recurring grant income is recognized when the research and development activities have been undertaken and the Company has completed its assessment of whether such activities meet the relevant qualifying criteria. Grants received from government and other agencies in advance of the specific research and development costs to which they relate are deferred and recognized in the consolidated statement of operations in the period they are earned and when the related research and development costs are incurred. Non-recurring grant income recognized in other income, net was $190,000 for the year ended December 31, 2019. No non-recurring grant income was recognized during 2020. Net Loss Per Share Attributable to Common Stockholders Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period, without consideration for potential dilutive shares of common stock. As the Company was in a loss position for all periods presented, basic net loss per share attributable to common stockholders is the same as diluted net loss per share attributable to common stockholders because the effects of potentially dilutive securities are antidilutive. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and short-term investments. The Company’s cash and cash equivalents and short-term investments are held by high credit quality financial institutions in the United States. At times, such deposits may be in excess of the Federal Depository Insurance Corporation insured limits. Management believes that the financial institutions are financially sound, and accordingly, minimal credit risk exists with respect to the financial institutions. Emerging Growth Company Status The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. 114 Recently Adopted Accounting Pronouncements In June 2018, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (Topic 718) . This standard simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The Company adopted this standard on January 1, 2020 and the adoption of this standard did not have a material impact on its consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820) , which eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. This standard is effective for all entities for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company adopted this standard on January 1, 2020 and the adoption of this standard did not have a material impact on its consolidated financial statements. In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The guidance eliminates certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. This guidance also includes guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU No. 2019-12 is effective for annual and interim periods in fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company early adopted this standard on January 1, 2020. The adoption of this standard did not have a material impact on the financial statements. Recently Issued Accounting Pronouncements In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes the guidance in former ASC 840 , Leases . This standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less may be accounted for similar to existing guidance for operating leases today. This standard is effective for the Company on January 1, 2022, early adoption is permitted. Originally, a modified retrospective transition approach was required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued guidance to permit an alternative transition method for Topic 842, which allows transition to the new lease standard by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Entities may elect to apply either approach. There are also a number of optional practical expedients that entities may elect to apply. The Company is currently assessing the impact of this standard on its consolidated financial statements. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . ASU 2016-13 requires an entity to utilize a new impairment model that requires measurement and recognition of expected credit losses for most financial assets and certain other instruments, including but not limited to available-for-sale debt securities. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security. The new guidance requires the use of forward-looking expected credit loss models based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount, which may result in earlier recognition of credit losses under the new guidance. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. Subsequent to the issuance of ASU 2016-13, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses . This ASU does not change the core principle of the guidance in ASU 2016-13, instead these amendments are intended to clarify and improve operability of certain topics included within the credit losses guidance. The FASB also subsequently issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Derivatives and Hedging (Topic 815), and Financial Instruments (Topic 825), which did not change the core principle of the guidance in ASU 2016-13 but clarified that expected recoveries of amounts previously written off and expected to be written off should be included 115 in the valuation account and should not exceed amounts previously written off and expected to be written off. In March 2020, the FASB issued ASU No. 2020-3, Codification Improvements to Financial Instruments which makes narrow-scope improvements to various financial instruments topics, including the new credit losses standard and clarifies the following areas ( i ) the contractual term of a net investment in a lease should be the contractual term used to measure expected credit losses; (ii) when an entity regains control of financial assets sold, an allowance for credit losses should be recorded. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019 for public business entities, excluding smaller reporting companies. As a smaller reporting company, the guidance will be effective for the Company during the first quarter of 2023. The Company is in the process of assessing the impact adoption will have on its consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (Topic 350) . The standard requires implementation costs incurred by customers in cloud computing arrangements to be deferred over the noncancelable term of the cloud computing arrangements plus any optional renewal periods (1) that are reasonably certain to be exercised by the customer or (2) for which exercise of the renewal option is controlled by the cloud service provider. The effective date of this pronouncement is for fiscal years beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021, and early adoption is permitted. The standard can be adopted either using the prospective or retrospective transition approach. The Company is in the process of assessing the impact of this ASU on its future consolidated financial statements but does not expect this update to have a material impact on the Company's consolidated financial statements.. 3 . Fair Value Measurements The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels: • Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. • Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. • Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. On a recurring basis, the Company measures certain financial assets and liabilities at fair value. The following tables summarize the fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands): December 31, 2020 Valuation Hierarchy Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Aggregate Fair Value Assets: Cash equivalents: Money market funds Level 1 $ 267,968 $ — $ — $ 267,968 Short-term investments: Commercial paper Level 2 59,930 — — 59,930 Corporate bonds Level 2 22,717 1 (7 ) 22,711 Total assets $ 350,615 $ 1 $ (7 ) $ 350,609 116 December 31, 2019 Valuation Hierarchy Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Aggregate Fair Value Assets: Cash equivalents: Money market funds Level 1 $ 43,621 $ — $ — $ 43,621 Total assets $ 43,621 $ — $ — $ 43,621 All of the investments held as of December 31, 2020 had maturities of less than two years. For the years ended December 31, 2020 and 2019, the Company recognized no material realized gains or losses on financial instruments. In August 2019, the redeemable convertible preferred stock liability was settled upon the completion of the second closing of the Company’s Series C redeemable convertible preferred stock financing. In light of the Company’s progress towards an IPO, the liability was remeasured at the settlement date using a probability-weighted expected return method, or PWERM, whereby the Company’s total equity value was estimated under various exit scenarios and allocated to the Company’s different classes of equity. The PWERM included two scenarios, IPO or staying private, that considered an estimate of the timing of each scenario and were weighted based on the Company’s estimate of the probability of each event occurring. The equity value under the IPO scenario was based on recent IPO values of comparable companies and weighted 50%. The equity value under the staying private scenario was based on the recent Series C redeemable convertible preferred stock financing and was weighted 50%. The liability was remeasured to its fair value of $10.8 million upon settlement and the carrying value of the liability was reclassified to the carrying value of the Series C redeemable convertible preferred stock. The Company recorded a loss of $5.7 million in the consolidated statements of operations for the year ended December 31, 2019, for the change in the fair value of the liability. The Company had no gain or loss for the change in the fair value of the liability as of December 31, 2020. The changes in the carrying value of the liability were as follows (in thousands): Fair value as of December 31, 2018 $ 5,140 Change in fair value 5,670 Reclassification to redeemable convertible preferred stock upon settlement (10,810 ) Fair value as of December 31, 2019 $ — 4 . Balance Sheet Components Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consisted of the following (in thousands): December 31, 2020 2019 Prepaid insurance $ 1,236 $ 16 Prepaid research and development costs 1,039 1,086 Other prepaid expenses 527 294 Other receivables 3 79 Total prepaid expenses and other current assets $ 2,805 $ 1,475 117 Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): December 31, 2020 2019 Leasehold improvements $ 3,061 $ 2,772 Laboratory equipment 555 456 Furniture and fixtures 263 187 Computer equipment and software 27 27 Total property and equipment, gross $ 3,906 $ 3,442 Less: accumulated depreciation (1,971 ) (1,304 ) Total property and equipment, net $ 1,935 $ 2,138 Total depreciation expense recognized for the years ended December 31, 2020 and 2019 was $667,000 and $493,000, respectively. Accrued Liabilities Accrued liabilities consisted of the following (in thousands): December 31, 2020 2019 Accrued research and development expenses $ 3,260 $ 459 Accrued compensation 2,543 926 Accrued professional services 524 733 Other accrued expenses 170 76 Total accrued liabilities $ 6,497 $ 2,194 5 . Promissory Note Pursuant to the Coronavirus Aid, Relief, and Economic Security Act, the Company obtained a $0.5 million promissory note from the U.S. Small Business Administration on April 21, 2020, which was repaid in full on May 1, 2020. 6 . Commitments and Contingencies Leases The Company leases its offices and laboratory in South San Francisco, California under a 7-year noncancelable lease agreement that ends in June 2024 with a 5-year renewal option. In December 2020, the Company entered into an agreement to lease office and laboratory space in Brisbane, California, or the Brisbane Lease, with an affiliate of its current landlord. The term of the Brisbane Lease is expected to begin in November 2021 and end in October 2031, with an option by the Company to extend for an additional ten years. Concurrent with the execution of the Brisbane Lease, the Company entered into an agreement to terminate its existing lease in South San Francisco, California effective upon the commencement of the Brisbane Lease. The base rent will be abated for three months and the landlord will provide the Company with a tenant improvement allowance of up to $10.8 million. In connection with the Brisbane Lease, the Company is required to maintain a letter of credit for the benefit of the landlord in the amount of $1.0 million, which was delivered in January 2021. Rent expense is recognized on a straight-line basis over the non-cancelable term of the lease and, accordingly, the Company records the difference between cash rent payments and the recognition of rent expense as a deferred rent liability on the accompanying consolidated balance sheet. 118 Total rent expense was $ 353,000 for each of the year s ended December 31, 20 20 and 2019. Future minimum lease payments under noncancelable operating leases as of December 31, 2020 were as follows (in thousands): 2021 $ 618 2022 4,189 2023 4,756 2024 5,035 2025 and thereafter 38,332 Total $ 52,930 License and Other Agreements In November 2011, the Company entered into an exclusive licensing agreement , or the Stanford Agreement, with The Board of Trustees of the Leland Stanford Junior University, or Stanford, whereby the Company was granted an exclusive, worldwide, royalty-bearing, sublicensable license, under certain patent rights, or the Licensed Patents, to make, use, offer for sale, sell, import and otherwise commercialize products covered by the Licensed Patents for human or animal diseases, disorders or conditions. Under the Stanford Agreement, the Company made an upfront payment and is obligated to pay Stanford annual license maintenance fees, potential future milestone payments totaling up to $500,000, and royalty payments at a rate equal to a low single-digit percentage of worldwide net sales of licensed products. In December 2020, the Company achieved one of the specified development milestones relating to the commencement of the ANX005 Phase 2/3 GBS study, pursuant to the Stanford Agreement. As such, the milestone payment of $0.1 million was expensed to research and development for the year ended December 31, 2020. In December 2016, the Company entered into a Sponsored Research Agreement with a not-for-profit entity to perform research on multiple sclerosis. The Sponsored Research Agreement was amended in March 2019. Under the terms of the Sponsored Research Agreement, as amended, the Company may receive up to $651,000 in funding. If, within 15 years of the end of the Sponsored Research Agreement, the Company files a marketing authorization application for a product treating multiple sclerosis, the Company will be obligated to pay milestone payments up to four times the amounts received under the Sponsored Research Agreement. The Company has received $455,000 in funding to date, including $190,000 received during the year ended December 31, 2019, which was recorded as other income. No income was recognized for the year ended December 31, 2020. Guarantees and Indemnifications In the normal course of business, the Company enters into agreements that contain a variety of representations and provide for general indemnification. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. As of December 31, 2020, the Company did not have any material indemnification claims or guarantees that were probable or reasonably possible and consequently has not recorded related liabilities. 119 7 . Redeemable Convertible Preferred Stock and Stockholder’s Equity ( Deficit ) Redeemable Convertible Preferred Stock As of December 31, 2019, redeemable convertible preferred stock consisted of the following: Shares Authorized Shares Outstanding Net Carrying Value (in thousands) Liquidation Preference (in thousands) Series A 1,015,434 1,015,434 $ 1,000 $ 1,000 Series A-1 16,398,995 16,398,995 17,144 17,219 Series B 38,778,091 38,778,090 44,505 44,595 Series C 62,962,952 55,555,546 81,335 75,000 Total 119,155,472 111,748,065 $ 143,984 $ 137,814 In June 2020, the Company completed its financing of Series D redeemable convertible preferred stock, which resulted in the Company issuing 71,719,859 shares of Series D redeemable convertible preferred stock, including 9,773,587 shares issued to related parties who were 10% or greater holders of the Company, at a price per share of $1.4222 for aggregate proceeds of $96.8 million, net of issuance costs of $5.2 million. The shares of Series D redeemable convertible preferred stock were convertible at any time, at the holders’ option, into shares of common stock. In connection with the issuance and sale of the Series D redeemable convertible preferred stock, the Company recognized a beneficial conversion feature of approximately $6.3 million. A beneficial conversion feature represents the intrinsic value of the conversion feature, as determined by comparing the effective conversion price at the commitment date with the estimated fair value of the Company’s common stock. The beneficial conversion feature was recorded in additional paid-in capital on the issuance date resulting in a discount to the carrying value of the Series D redeemable convertible preferred stock. In July 2020, immediately prior to the completion of the IPO (see Note 1), all outstanding shares of redeemable convertible preferred stock were automatically converted into 20,824,938 shares of common stock. Upon conversion of the redeemable convertible preferred stock, the unamortized balance of $6.2 million of the discount from the beneficial conversion feature was recorded as a deemed dividend to the preferred stockholders resulting in an increase to the carrying value of redeemable convertible preferred stock. Upon conversion into common stock, the carrying value of the redeemable convertible preferred stock of $241.4 million was reclassified to equity. Common Stock The holders of the Company’s common stock have one vote for each share of common stock. Common stockholders are entitled to dividends when, as, and if declared by the Board of Directors. The holders have no preemptive or other subscription rights and there are no redemption or sinking fund provisions with respect to such shares. As of December 31, 2020, no dividends had been declared by the Board of Directors. The Company reserved the following shares of common stock for issuance as follows: December 31, 2020 2019 Redeemable convertible preferred stock outstanding on an as-converted basis — 12,684,214 Options issued and outstanding 3,909,873 2,007,222 Options available for future grant 2,707,947 454,110 Reserved for employee stock purchase plan 360,086 — Total common stock reserved 6,977,906 15,145,546 120 8. Equity Incentive Plan In July 2020, the Company’s board of directors and stockholders adopted and approved the 2020 Incentive Award Plan, or the 2020 Plan, and the Employee Stock Purchase Plan, or the ESPP, which became effective in connection with the IPO. The Company reserved 3,600,868 shares of common stock for future issuance under the 2020 Plan and 360,086 shares under the ESPP, respectively. The Company may not grant any additional awards under the 2011 Equity Incentive Plan, or the 2011 Plan. The 2011 Plan will continue to govern outstanding equity awards granted thereunder. 2020 Equity Incentive Plan The number of shares of common stock reserved for issuance under the 2020 Plan automatically increase on the first day of January, commencing on January 1, 2021 and ending in 2030, in an amount equal to 4% of the total number of shares of the Company’s capital stock outstanding on the last day of the preceding year, or a lesser number of shares determined by the Company’s board of directors. Awards granted under the 2020 Plan expire no later than ten years from the date of grant. For the Incentive Stock Options, or ISOs, and Nonstatutory Stock Options, or NSOs, the option price shall not be less than 100% of the estimated fair value on the date of grant. Options granted typically vest over a four-year period but may be granted with different vesting terms. As of December 31, 2020, there were 2,707,947 shares available for issuance under the 2020 Plan. Stock option activity under the 2011 Plan and the 2020 Plan was as follows: Shares Available for Grant Number of Shares Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Balances as of December 31, 2019 454,110 2,007,222 $ 4.91 8.26 $ 21,623 Additional shares authorized 4,166,016 — Stock options granted (1,914,819 ) 1,914,819 $ 16.88 Stock options exercised — (9,528 ) $ 2.33 Stock options cancelled 2,640 (2,640 ) $ 4.67 Balances as of December 31, 2020 2,707,947 3,909,873 $ 10.78 8.40 $ 56,128 Exercisable as of December 31, 2020 1,365,487 $ 4.96 6.92 $ 27,346 The total intrinsic value of options exercised during the years ended December 31, 2020 and 2019 was $181,000 and $8,000, respectively. The intrinsic value is the difference between the fair value of the Company’s common stock at the time of exercise and the exercise price of the stock option. The weighted-average grant date fair value of options granted to employees during the years ended December 31, 2020 and 2019 was $12.33 and $5.72 per share, respectively. Employee Stock Purchase Plan The ESPP enables eligible employees to purchase shares of the Company's common stock at the end of each offering period at a price equal to 85% of the fair market value of the shares on the first business day or the last business day of the offering period, whichever is lower. Eligible employees generally included all employees. Share purchases are funded through payroll deductions of at least 1%, and up to 15% of an employee’s eligible compensation for each payroll period. The number of shares reserved for issuance under the ESPP increase automatically on the first day of each fiscal year, beginning on January 1, 2021, by a number equal to the least of 360,086 shares, 1% of the shares of common stock outstanding on the last day of the immediately preceding fiscal year, or such number of shares 121 determined by the Company’s board of directors. As of December 31, 2020, 3 6 0 ,0 86 shares were available for future purchase . The ESPP generally provides for six -month consecutive offering periods beg i n ning on December 15, 2020. The ESPP is a compensatory plan as defined by the authoritative guidance for stock compensation. As such , stock-based compensation expense has been recorded for the year ended December 31, 2020. Stock-Based Compensation Expense The total stock-based compensation expense recognized was as follows (in thousands): Year Ended December 31, 2020 2019 Research and development $ 2,274 $ 713 General and administrative 2,614 1,324 Total stock-based compensation expense $ 4,888 $ 2,037 As of December 31, 2020, the total unrecognized stock-based compensation cost related to outstanding unvested stock options that are expected to vest was $25.8 million, which the Company expects to recognize over an estimated weighted-average period of 3.06 years. To determine the value of stock option awards for stock-based compensation purposes, the Company uses the Black-Scholes option pricing model and the assumptions discussed below. Fair Value of Common Stock— Historically, for all periods prior to the IPO in July 2020, fair values of the shares of common stock underlying the Company’s share-based awards were estimated on each grant date by the Company’s board of directors. The board of directors considered, among other things, valuations of the Company’s common stock which were prepared by an independent third- party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants 2013 Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. After the completion of the IPO in July 2020, the fair value of each share of underlying common stock will be based on the closing price of the Company’s common stock as reported on the date of grant on the Nasdaq Global Select Market. Expected Term —The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding. The Company’s historical share option exercise information is limited due to a lack of sufficient data points, and did not provide a reasonable basis upon which to estimate an expected term. The expected term for option grants is therefore determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term). Expected Volatility —Because the Company does not have sufficient trading history for its common stock, the expected volatility was estimated based on the average volatility for comparable publicly traded life science companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on the similar size, stage in the life cycle, or area of specialty. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available and to align with the Company’s expected term. Risk-Free Interest Rate —The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the option. Dividend Yield —The Company has never paid dividends on its common stock and has no plans to pay dividends on its common stock. Therefore, the Company used an expected dividend yield of zero. 122 The fair value of each award issued was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: Year Ended December 31, 2020 2019 Expected term (in years) 5.00-6.08 6.02-6.08 Expected volatility 85%-93% 72%-77% Risk-free interest rate 0.33%-1.45% 1.48%-2.61% Dividend yield — — 9. Income Taxes For financial reporting purposes, loss before provision for income taxes, includes the following components (in thousands): Year Ended December 31, 2020 2019 Domestic $ 63,406 $ 36,973 Foreign 6 206 Loss before income taxes $ 63,412 $ 37,179 For each of the years ended December 31, 2020 and 2019, the Company incurred insignificant amounts for an income tax provision. The U.S. federal and California deferred tax assets generated from the Company’s net operating losses have been fully reserved, as the Company believes it is more likely than not that the benefit will not be realized. Reconciliation of income tax computed at federal statutory rates to the reported provision for income taxes was as follows (in thousands): Year Ended December 31, 2020 2019 Tax provision at U.S. statutory rate $ (13,316 ) $ (7,808 ) State income taxes — 4 Stock-based compensation 426 112 R&D tax credits (1,031 ) (782 ) Change in valuation allowance 13,906 7,292 Redeemable convertible preferred stock liability — 1,191 Other 15 (5 ) Provision for income taxes $ — $ 4 123 Deferred Tax Assets and Liabilities The tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities are as follows (in thousands): December 31, 2020 2019 Deferred Tax Assets: Net operating loss carryforwards $ 36,922 $ 24,917 Research and development credits 6,246 4,405 Other intangibles 5 6 Accruals and reserves 583 254 Stock-based compensation 995 393 Tenant improvement allowances 257 325 Total gross deferred tax assets 45,008 30,300 Less: valuation allowance (44,745 ) (29,961 ) Total deferred tax assets, net $ 263 $ 339 Deferred Tax Liabilities: Fixed assets $ (263 ) $ (339 ) Total gross deferred tax liabilities (263 ) (339 ) Net deferred tax assets $ — $ — As of December 31, 2020, the Company had $146.7 million of federal and $66.7 million of state net operating loss, or NOL, carryforwards available to offset future taxable income. Under the Tax Cuts and Jobs Act of 2017, or the Tax Act, NOLs generated after December 31, 2017 will be carried forward indefinitely with the yearly NOL utilization limited to 80 percent of taxable income. The Company had $103.6 million of such federal NOLs that do not expire. If not utilized, the federal carryforward losses generated prior to 2018 and the state carryforward losses will expire in various amounts beginning in 2031. As of December 31, 2020, the Company had $4.3 million of federal and $3.5 million of state credit carryforwards available to offset future taxable income. If not utilized, these credit carryforwards will expire in various amounts for federal purposes beginning in 2031. The state credits do not expire. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. Management believes that, based on available evidence, both positive and negative, it is more likely than not that the deferred tax assets will not be utilized; therefore, a full valuation allowance has been recorded. The Company’s valuation allowance increased by $14.8 million and $10.4 million for the years ended December 31, 2020 and 2019, respectively. The changes in the 2020 and 2019 valuation allowance were primarily due to the addition of the current year loss carryforwards and research and development credits. Utilization of the net operating loss carryforwards and credits may be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. Any annual limitation may result in the expiration of net operating losses and credits before utilization. 124 Uncertain Tax Benefits The Company has the following activity relating to the gross amount of unrecognized tax benefits (in thousands): Year Ended December 31, 2020 2019 Beginning balance $ 1,116 $ 783 Additions based on tax positions related to current year 460 333 Ending balance $ 1,576 $ 1,116 None of these uncertain tax positions will impact the Company’s effective tax rate if assessed. The Company’s policy is to classify interest and penalties associated with unrecognized tax benefits as income tax expense. The Company had no interest or penalty accruals associated with uncertain tax benefits in its consolidated balance sheet and consolidated statement of operations for the year ended December 31, 2020. The Company files income tax returns in California, Massachusetts, Pennsylvania and in Australia. The Company is not currently under examination by any major tax jurisdictions nor has it been in the past. The tax years 2011 through 2020 remain effectively open for examination by the Internal Revenue Service and most state tax authorities. Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next 12 months due to tax examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities, the Company does not anticipate any significant changes to unrecognized tax benefits over the next 12 months. 10. Net Loss Per Share Attributable to Common Stockholders As the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all potential common securities outstanding would have been anti-dilutive . The following outstanding potentially dilutive shares have been excluded from the calculation of diluted net loss per share due to their anti-dilutive effect: Year Ended December 31, 2020 2019 Redeemable convertible preferred stock on an as-converted basis — 12,684,214 Stock options to purchase common stock 3,909,873 2,007,222 Shares subject to employee stock purchase plan 275 — Total 3,910,148 14,691,436 125 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.