Annexon, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm ( KPMG LLP , San Francisco, CA , Auditor Firm ID: 185 ) 108 Consolidated Balance Sheets as of December 31, 2021 and 2020 111 Consolidated Statements of Operations for the Years Ended December 31, 2021 and 2020 112 Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2021 and 2020 113 Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ E quity ( Deficit) for the Years ended December 31, 2021 and 2020 114 Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020 115 Notes to Consolidated Financial Statements 116 107 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors Annexon, Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of Annexon, Inc. and subsidiary (the Company) as of December 31, 2021 and 2020, 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, 2021, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2021 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) . Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 108 Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Accrued preclinical study and clinical trial expenses As discussed in Note 2 to the consolidated financial statements, the Company estimates preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions, clinical research organizations and clinical manufacturing organizations. 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 from the estimate, the Company will adjust research and development expenses accordingly to reflect the best information available at the time of the financial statement issuance. As of December 31, 2021, amounts recorded as accrued liabilities were $9.3 million, which included accrued preclinical study and clinical trial expenses. We identified the evaluation of accrued preclinical study and clinical trial expenses incurred as a result of contracts with clinical research organizations and clinical manufacturing organizations as a critical audit matter. Subjective auditor judgment was required to evaluate the Company’s assessment of the status of research and development activities, specifically, the period over which services were performed and the level of effort expended in the period. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the research and development contract process. This included controls related to the assessment of the period over which services were performed and the level of effort expended in the period. For a selection of research and development contracts, we evaluated the period over which services were performed by obtaining and inspecting executed contracts and change orders, including the timeline and budget, and agreeing them to the information used in the Company’s estimate of preclinical study and clinical trial expenses incurred to date. In addition, for each selected research and development contract, we evaluated the level of effort expended in the period by comparing the Company’s expected status of each clinical trial to confirmations received from clinical research organizations and clinical manufacturing organizations. 109 /s/ KPMG LLP We have served as the Company’s auditor since 2016. San Francisco, California March 1, 2022 110 ANNEXON, INC. Consolidated Balance Sheets (in thousands, except share and per share amounts) December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 74,843 $ 268,565 Short-term investments 167,872 82,641 Prepaid expenses and other current assets 4,978 2,805 Total current assets 247,693 354,011 Restricted cash 1,166 — Property and equipment, net 17,848 1,935 Operating lease right-of-use assets 20,333 — Total assets $ 287,040 $ 355,946 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 11,153 $ 3,734 Accrued liabilities 9,250 6,497 Deferred rent, current — 391 Operating lease liabilities, current 1,202 — Other current liabilities 139 — Total current liabilities 21,744 10,622 Deferred rent — 1,046 Operating lease liabilities, non-current 33,387 — Total liabilities 55,131 11,668 Commitments and contingencies (Note 5) Stockholders’ equity: Preferred stock, $ 0.001 par value; 5,000,000 shares authorized as of December 31, 2021 and 2020, respectively; no shares issued and outstanding as of December 31, 2021 and 2020, respectively — — Common stock, $ 0.001 par value; 300,000,000 shares authorized as of December 31, 2021 and 2020, respectively; 38,560,854 and 38,157,618 shares issued and outstanding as of December 31, 2021 and 2020, respectively 39 38 Additional paid-in capital 528,365 510,309 Accumulated other comprehensive loss ( 180 ) ( 77 ) Accumulated deficit ( 296,315 ) ( 165,992 ) Total stockholders' equity 231,909 344,278 Total liabilities and stockholders’ equity $ 287,040 $ 355,946 See accompanying notes to consolidated financial statements. 111 ANNEXON, INC. Consolidated Statements of Operations (in thousands, except share and per share amounts) Year Ended December 31, 2021 2020 Operating expenses: Research and development $ 100,066 $ 49,271 General and administrative 30,647 14,198 Total operating expenses 130,713 63,469 Loss from operations ( 130,713 ) ( 63,469 ) Interest and other income, net 390 57 Net loss ( 130,323 ) ( 63,412 ) Accretion on redeemable convertible preferred stock — ( 705 ) Deemed dividend – beneficial conversion feature on redeemable convertible preferred stock — ( 6,219 ) Net loss attributable to common stockholders $ ( 130,323 ) $ ( 70,336 ) Net loss per share attributable to common stockholders, basic and diluted $ ( 3.40 ) $ ( 4.15 ) Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted 38,316,273 16,962,398 See accompanying notes to consolidated financial statements. 112 ANNEXON, INC. Consolidated Statements of Comprehensive Loss (in thousands) Year Ended December 31, 2021 2020 Net loss $ ( 130,323 ) $ ( 63,412 ) Other comprehensive gain (loss): Foreign currency translation adjustment ( 5 ) 9 Unrealized loss on available for sale securities ( 98 ) ( 6 ) Comprehensive loss $ ( 130,426 ) $ ( 63,409 ) See accompanying notes to consolidated financial statements. 113 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, 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 Stock-based compensation — — — — 16,262 — — 16,262 Stock option exercises — — 391,349 1 1,609 — — 1,610 Issuance of common stock per ESPP purchase — — 11,887 — 185 — — 185 Foreign currency translation adjustment — — — — — ( 5 ) — ( 5 ) Unrealized loss on available-for-sale securities — — — — — ( 98 ) — ( 98 ) Net loss — — — — — — ( 130,323 ) ( 130,323 ) Balances as of December 31, 2021 — $ — 38,560,854 $ 39 $ 528,365 $ ( 180 ) $ ( 296,315 ) $ 231,909 See accompanying notes to consolidated financial statements. 114 ANNEXON, INC. Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2021 2020 Operating activities: Net loss $ ( 130,323 ) $ ( 63,412 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,141 667 Accretion of discount on available-for sale securities 1,253 53 Stock-based compensation 16,262 4,888 Reduction in the carrying amount of right-of-use assets 1,273 — Changes in operating assets and liabilities: Prepaid expenses and other current assets ( 2,612 ) ( 1,330 ) Other long-term assets — 96 Accounts payable 3,859 1,513 Accrued liabilities 773 4,804 Deferred rent — ( 366 ) Operating lease liabilities 1,125 — Other current liabilities 139 — Net cash used in operating activities ( 106,110 ) ( 53,087 ) Investing activities: Purchases of property and equipment ( 1,654 ) ( 464 ) Purchases of available-for-sale securities ( 225,601 ) ( 82,700 ) Proceeds from sale of available-for-sale securities 5,993 — Proceeds from maturities of available-for-sale securities 133,026 — Net cash used in investing activities ( 88,236 ) ( 83,164 ) Financing activities: Proceeds from the exercise of common stock options 1,610 22 Proceeds from employee stock purchase plan 185 — 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) — 102,000 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 ) Net cash provided by financing activities 1,795 360,876 (Decrease) increase in cash, cash equivalents, and restricted cash ( 192,551 ) 224,625 Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 5 ) 9 Cash, cash equivalents, and restricted cash at beginning of year 268,565 43,931 Cash, cash equivalents, and restricted cash at end of year $ 76,009 $ 268,565 Supplemental disclosures of cash flow information: Cash paid for amounts included in the measurement of lease liability $ 996 $ — Non-cash investing and financing activities: Reclassification of redeemable convertible preferred stock to common stock upon initial public offering $ — $ 241,418 Accretion on redeemable convertible preferred stock $ — $ 705 Right-of-use assets obtained in exchange for lease liability $ 21,084 $ — Leasehold improvements obtained in exchange for tenant improvement allowance from lessors $ 10,860 $ — Purchase of property and equipment included in accounts payable and accrued liabilities $ 5,540 $ — 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. 115 ANNEXON, INC. Notes to Consolidated Financial Statements 1. Organization Annexon, Inc., or the Company, is a clinical-stage biopharmaceutical company pioneering a new class of complement medicines designed to stop the classical complement pathway at its start, C1q, in order to bring therapies to patients suffering from serious complement-mediated autoimmune, neurodegenerative and ophthalmic disorders. The Company is located in Brisbane, 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 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, 2021, had an accumulated deficit of $ 296.3 million and cash and cash equivalents and short-term investments of $ 242.7 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. 116 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. Management evaluates its estimates, including but not limited to the fair value of investments, 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, Cash Equivalents and Restricted Cash 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. Restricted cash as of December 31, 2021 relates to the letters of credit established for the Company’s office leases. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statements of cash flows: December 31, 2021 2020 Cash $ 734 $ 597 Cash equivalents 74,109 267,968 Cash and cash equivalents 74,843 268,565 Restricted cash 1,166 — Cash, cash equivalents and restricted cash $ 76,009 $ 268,565 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. 117 The Company evaluates, on a quarterly basis, its available-for-sale debt securities for potential impairment. For available-for-sale debt securities in an unrealized loss position, the Company assesses whether such declines are due to credit loss based on factors such as changes to the rating of the security by a ratings agency, market conditions and supportable forecasts of economic and market conditions, among others. If credit loss exists, the Company assess es whether it has plans to sell the security or it is more likely than not it will be required to sell any available-for-sale debt security before recovery of its amortized cost basis. If either condition is met, the security’s amortized cost basis is written down to fair value and is recognized through interest and other income (expense) , net. If neither condition is met, declines as a result of credit losses, if any, are recognized as an allowance for credit loss, limited to the amount of unrealized loss, through interest and other income (expense) , net. Any portion of the unrealized loss that is not a result of a credit loss, is recognized in other comprehensive income (loss) . Realized gains and losses, if any, on available-for-sale debt securities are included in interest and other income (expense) , net. The cost of investments sold is based on the specific-identification method. Interest on available-for-sale debt securities is included in interest and other income (expense), net. 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. Leases The Company determines if an arrangement is a lease at inception. Upon adoption of Accounting Standards Codification 842, Leases , as of January 1, 2021, the Company includes operating leases in operating lease right of use, or ROU, assets, current and noncurrent operating lease liabilities in the Company’s consolidated balance sheets. The ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company measures the ROU assets based on the associated lease liabilities adjusted for any lease incentives such as tenant improvement allowances. As most of the leases do not provide an implicit rate, the Company generally uses its incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at the commencement date. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option. Lease expense for lease payments is recognized on a straight-line basis, net of sublease income, over the lease term. 118 As a practical expedient, the Company elected, for all facility leases, not to separate non-lease components from lease components and instead to account for each separate lease component and its associated non-lease components as a single lease component. The Company elected to exclude from its balance sheets recognition of leases having a term of 12 months or less (short-term leases). 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 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 loss for the year ended December 31, 2021 was $ 5,000 and gain for the year ended December 31, 2020 was $ 9,000 . 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. 119 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. The Company also estimates manufacturing costs based on services performed pursuant to contracts with contract manufacturing organizations that develop and manufacture product 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 related to all stock-based payments, including stock options and restricted stock units, or RSUs. The fair value method requires the Company to estimate the fair value of stock options to employees and non-employees on the date of grant using the Black-Scholes option pricing model. The fair value of RSU awards are based on the fair value of the underlying common stock as of the grant date. 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 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 interest and other income (expense), net was $ 135,000 for the year ended December 31, 2021. 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. 120 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. Recently Adopted Accounting Pronouncements In August 2018, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or 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 early adoption is permitted. The standard can be adopted either using the prospective or retrospective transition approach. The Company adopted ASU No. 2018-15 on January 1, 2021 and the adoption did not have a material impact on its consolidated financial statements. 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 under ASC 842, similar to the operating leases under ASC 840. In the second quarter of 2021, the Company adopted ASU No. 2016-02 using the modified retrospective approach as of January 1, 2021. The adoption of Topic 842 as of January 1, 2021 resulted in the recognition of ROU assets of $ 0.5 million, corresponding lease liabilities of $ 0.6 million, the derecognition of the deferred rent liability of $ 1.4 million, and the recognition of a liability of $ 1.3 million related to the reallocation of the consideration of the Company’s lease pending the commencement of the second lease component in May 2021 (see Note 5— Commitments and Contingencies ). T he adoption resulted in additional $ 0.1 million of rent expense for the first quarter of 2021. Under the optional transition method, the Company does not need to restate the comparative periods in transition and will continue to present financial information and disclosures for periods before January 1, 2021 in accordance with Topic 840. As part of the Topic 842 adoption, the Company elected certain practical expedients outlined in the guidance. The Company has chosen to apply the package of practical expedients for existing leases, which provides relief from reassessing: (i) whether a contract is or contains a lease, (ii) lease classification, and (iii) whether initial direct costs can be capitalized. The Company did not elect the hindsight practical expedient to reassess the lease term for existing leases. The Company elected the short-term lease exemption, under which any lease less than 12 months is excluded from recognition on the balance sheet. Additionally, the Company elected the non-separation of lease and non-lease components. 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 121 Improvements to Topic 326, Financial Instrument s —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 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. The Company adopted this guidance on a modified-retrospective basis effective January 1, 2021 and noted no material impact to the Company’s consolidated financial statements. Recently Issued Accounting Pronouncements The Company has reviewed the FASB issued ASU accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter previous generally accepted accounting principles and do not believe that any new or modified principles will have a material impact on the Company’s reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of the Company’s financial management. 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. 122 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, 2021 Valuation Hierarchy Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Aggregate Fair Value Assets: Cash equivalents: Money market funds Level 1 $ 74,109 $ — $ — $ 74,109 Short-term investments: Commercial paper Level 2 85,352 — ( 27 ) 85,325 Corporate debt Level 2 48,814 — ( 24 ) 48,790 Government bonds Level 2 33,809 — ( 52 ) 33,757 Total assets $ 242,084 $ — $ ( 103 ) $ 241,981 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 All of the investments held as of December 31, 2021 had maturities of less than two years . For the years ended December 31, 2021 and 2020, the Company recognized no material realized gains or losses on financial instruments. 4 . Balance Sheet Components Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consisted of the following (in thousands): December 31, 2021 2020 Prepaid insurance $ 1,282 $ 1,236 Prepaid research and development costs 3,002 1,039 Other prepaid expenses 231 527 Other receivables — 3 Other current assets 463 — Total prepaid expenses and other current assets $ 4,978 $ 2,805 123 Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): December 31, 2021 2020 Leasehold improvements $ 16,594 $ 3,061 Laboratory equipment 1,353 555 Furniture and fixtures 649 263 Computer equipment and software 41 27 Total property and equipment, gross $ 18,637 $ 3,906 Less: accumulated depreciation ( 789 ) ( 1,971 ) Total property and equipment, net $ 17,848 $ 1,935 Total depreciation expense recognized for the years ended December 31, 2021 and 2020 was $ 2.1 million and $ 0.7 million, respectively. Accrued Liabilities Accrued liabilities consisted of the following (in thousands): December 31, 2021 2020 Accrued research and development expenses $ 2,404 $ 3,260 Accrued compensation 3,573 2,543 Accrued professional services 1,274 524 Accrued construction costs 1,917 — Other accrued expenses 82 170 Total accrued liabilities $ 9,250 $ 6,497 5 . Commitments and Contingencies Leases The Company leased its offices and laboratory in South San Francisco, California, or the South San Francisco Lease, 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 the South San Francisco Lease landlord. The contractual term of the Brisbane Lease began in November 2021 , for a ten-year term, with the Company’s option to extend for an additional ten years . The Brisbane Lease includes a rent-free period of three months starting in November 2021 and a tenant improvement allowance of $ 10.8 million. The Company records the tenant improvement allowance as a reduction to the ROU asset, which reduces rent expense over the lease term. In connection with the Brisbane Lease, the Company maintains a letter of credit in the amount of $ 1.0 million, which is included in restricted cash on the consolidated balance sheet. In May 2021, the Brisbane Lease commenced when the Company’s tenant improvements started. Concurrent with the execution of the Brisbane Lease, the Company entered into an agreement to terminate the South San Francisco Lease, immediately effective when the tenant improvements of the Brisbane Lease were completed in December 2021. The South San Francisco Lease and the Brisbane Lease are accounted for as one lease with two lease components. Accordingly, upon adoption of Topic 842, the total consideration for the lease was reallocated to each lease component based on standalone selling price. As the Brisbane Lease commenced in May 2021, $ 1.3 million of the consideration allocated to the Brisbane Lease was recorded as a liability as of January 1, 2021 when the deferred rent balance of the South San Francisco Lease was derecognized. 124 In November 2021, the Company subleased space that has no immediate needs for the Company’s operations for two years starting from December 2021 for the aggregate sublease payments of $ 3.4 million. The sublease income, while it reduces the rent expense, is not considered in the value of the right-of-use asset or lease liability. The Company’s sublease income was $ 0.1 million for the year ended December 31, 2021. In connection with the Brisbane Lease, the Company recognized operating lease right-of-use assets of $ 21.0 million as of the commencement date in May 2021 , and lease liabilities of $ 22.2 million. As of December 31, 2021, the operating lease right-of-use assets were $ 20.3 million and lease liabilities were $ 34.6 million in the consolidated balance sheet. The weighted average remaining lease term is 9.9 years. The weighted average incremental borrowing rate used to measure the operating lease liability is 8.4 %. Operating lease cost for the year ended December 31, 2021 was $ 2.9 million. Variable lease payments for the year ended December 31, 2021 were $ 0.4 million. Rent expense for the year ended December 31, 2020 was $ 0.4 million. Future minimum lease payments and related lease liabilities as of December 31, 2021, were as follows: As of December 31: (in thousands) 2022 $ 4,203 2023 4,742 2024 4,907 2025 5,079 2026 and thereafter 32,833 Total undiscounted lease payments 51,764 Less: Imputed interest ( 17,175 ) Total 34,589 The Company’s future undiscounted lease payments under non-cancellable operating leases (as defined by prior guidance) as of December 31, 2020 were as follows: As of December 31: (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. The Company did not achieve any milestones or make any milestone payments for the years ended December 31, 2021 and 2020. 125 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 $ 590,000 in funding to date, including $ 135,000 received during the year ended December 31, 2021, which was recorded as interest and 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 no t paid any claims or been required to defend any action related to its indemnification obligations. As of December 31, 2021, the Company did no t have any material indemnification claims or guarantees that were probable or reasonably possible and consequently has not recorded related liabilities. 6 . Stockholder’s 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, 2021, 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, 2021 2020 Options issued and outstanding 5,662,824 3,909,873 Reserve for 2020 Incentive Plan 2,039,951 2,707,947 Unvested restricted stock units outstanding 50,000 — Common stock reserved for 2021 ATM program 5,265,929 — Reserved for employee stock purchase plan 729,775 360,086 Total common stock reserved 13,748,479 6,977,906 At-the-Market Offering In August 2021, the Company entered into a sales agreement with Cowen and Company LLC, or Cowen, as sales agent, pursuant to which the Company may issue and sell shares of its common stock for an aggregate maximum offering price of $ 100.0 million under an at-the-market offering program, or 2021 ATM program. The Company will pay Cowen up to 3 % of gross proceeds for the common stock sold through the 2021 ATM program. As of December 31, 2021, no shares of common stock have been sold under the 2021 ATM program. 7 . 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 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. 126 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, 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, 2021, there were 2,039,951 shares available for issuance under the 2020 Plan. Stock options Stock option activity under the 2011 Plan and the 2020 Plan was as follows: 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, 2020 3,909,873 $ 10.78 8.40 $ 56,128 Additional shares authorized Stock options granted 2,871,400 $ 25.54 Stock options exercised ( 391,349 ) $ 4.11 Stock options cancelled ( 727,100 ) $ 24.41 Balances as of December 31, 2021 5,662,824 $ 16.98 8.26 $ 10,186 Exercisable as of December 31, 2021 2,065,942 $ 11.34 7.08 $ 8,120 The total intrinsic value of options exercised during the years ended December 31, 2021 and 2020 was $ 6.4 million and $ 0.2 million, 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, 2021 and 2020 was $ 18.83 and $ 12.33 per share, respectively. As of December 31, 2021, the total unrecognized stock-based compensation cost related to outstanding unvested stock options that are expected to vest was $ 51.9 million, which the Company expects to recognize over an estimated weighted-average period of 3.03 years. Restricted Stock Units RSUs are share awards that entitle the holder to receive freely tradeable shares of the Company’s common stock upon vesting. The RSUs cannot be transferred and the awards are subject to forfeiture if the holder’s employment terminates prior to the release of the vesting restrictions. The RSUs generally vest over a three-year period in equal amounts on an annual basis, provided the employee remains continuously employed with the Company. The fair value of the RSUs is equal to the closing price of the Company’s common stock on the grant date. 127 A summary of RSU activity under our equity incentive plan and related information is as follows: Number of Shares Weighted-Average Grant Date Fair Value Per Share Unvested as of December 31, 2020 — $ — Granted 50,000 12.84 Unvested as of December 31, 2021 50,000 $ 12.84 As of December 31, 2021, unrecognized stock-based compensation expense related to outstanding unvested RSUs was $ 0.6 million, which is expected to be recognized over a weighted-average period of 2.98 years. 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, by a number equal to, 1 % of the shares of common stock outstanding on the last day of the immediately preceding fiscal year, or such number of shares determined by the Company’s board of directors. As of December 31, 2021, 729,775 shares were available for future purchase. The ESPP generally provides for six-month consecutive offering periods beginning on May 15 th and November 15 th of each year. 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 years ended December 31, 2021 and 2020. Stock-Based Compensation Expense The total stock-based compensation expense recognized was as follows (in thousands): Year Ended December 31, 2021 2020 Research and development $ 8,610 $ 2,274 General and administrative 7,652 2,614 Total stock-based compensation expense $ 16,262 $ 4,888 The stock-based compensation expense related to the ESPP for the years ended December 31, 2021 and 2020 were $ 0.1 million and $ 0.1 million, respectively. 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, the fair value of each share of underlying common stock is 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 128 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. 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, 2021 2020 Expected term (in years) 4.33-6.08 5.00-6.08 Expected volatility 88%-91% 85%-93% Risk-free interest rate 0.35%-1.31% 0.33%-1.45% Dividend yield — — 8 . Income Taxes For financial reporting purposes, loss before provision for income taxes, includes the following components (in thousands): Year Ended December 31, 2021 2020 Domestic $ 130,313 $ 63,406 Foreign 10 6 Loss before income taxes $ 130,323 $ 63,412 For each of the years ended December 31, 2021 and 2020, 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, 2021 2020 Tax provision at U.S. statutory rate $ ( 27,368 ) $ ( 13,316 ) Stock-based compensation 794 426 R&D tax credits ( 2,392 ) ( 1,031 ) Change in valuation allowance 25,911 13,906 Section 382 limitations 2,922 — Other 133 15 Provision for income taxes $ — $ — 129 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, 2021 2020 Deferred Tax Assets: Net operating loss carryforwards $ 57,073 $ 36,922 Research and development credits 7,367 6,246 Other intangibles 5 5 Accruals and reserves 686 583 Stock-based compensation 3,041 995 Tenant improvement allowances — 257 Lease liabilities 7,340 — Unrealized gain/loss on investments 240 — Total gross deferred tax assets 75,752 45,008 Less: valuation allowance ( 69,147 ) ( 44,745 ) Total deferred tax assets, net $ 6,605 $ 263 Deferred Tax Liabilities: Fixed assets $ ( 2,290 ) $ ( 263 ) Right-of-use assets ( 4,315 ) — Total gross deferred tax liabilities ( 6,605 ) ( 263 ) Net deferred tax assets $ — $ — As of December 31, 2021, the Company had $ 257.9 million of federal and $ 70.7 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, federal 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 $ 197.1 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, 2021, the Company had $ 7.3 million of federal and $ 5.6 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 $ 24.4 million and $ 14.8 million for the years ended December 31, 2021 and 2020, respectively. The changes in the 2021 and 2020 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. The annual limitations may result in the expiration of net operating losses and credits before utilization. The Company performed a Section 382 analysis through June 30, 2021. Federal net operating losses carryforwards of $ 257.8 million and state and local net operating loss carryforwards of $ 30.8 million are not expected to expire unutilized as a result of ownership changes identified through June 30, 2021. The Company has identified $ 0.1 million and $ 39.9 million of federal and state net operating losses, respectively, that will expire unused due to ownership changes, and federal credits of $ 3.7 million that will not be able to be utilized due to ownership change limitation; these amounts have been excluded from the deferred tax assets table above. 130 Uncertain Tax Benefits The Company has the following activity relating to the gross amount of unrecognized tax benefits (in thousands): Year Ended December 31, 2021 2020 Beginning balance $ 1,576 $ 1,116 Decreases based on tax positions related to prior year ( 789 ) — Additions based on tax positions related to current year 1,007 460 Ending balance $ 1,794 $ 1,576 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 years ended December 31, 2021 and 2020. The Company files income tax returns in the US, California, Georgia, Indiana, Maryland, Massachusetts, Nebraska, New Jersey, North Carolina, Pennsylvania, Texas 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 2021 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. 9 . 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, 2021 2020 Stock options to purchase common stock 5,662,824 3,909,873 Shares subject to employee stock purchase plan 15,924 275 Unvested restricted stock units 50,000 — Total 5,728,748 3,910,148 131 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.