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Item 7. Management’s Discussion and Analysis

2021-02-26 compared with 2020-03-24 · 111 added, 138 removed, 168 unchanged (60% of the section changed)

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Our goal is to be an industry leader in each of these therapeutic areas and enhance and extend the lives of patients suffering from such diseases.

To accomplish this goal, we have assembled a deeply experienced and highly skilled group of industry veterans, scientists, clinicians and key opinion leaders from leading biotechnology and pharmaceutical companies, as well as leading academic centers from around the world.

Our collective immunology and translational discovery and development expertise serves as the foundation of our company.

We are pursuing product candidates with strong scientific rationale to address indications where there is both a high unmet need and an opportunity to develop best-in-class or first-in-class programs.

We currently have four clinical-stage product candidates, in addition to multiple preclinical programs.

We have completed enrollment for the LEDA Phase 2b clinical trial for our most advanced product candidate, GB001, in moderate-to-severe eosinophilic asthma.

We expect to conduct an interim analysis in the second quarter of 2020, with full results from the study expected in the second half of 2020.

If the interim analysis is positive, we plan on initiating preparatory activities for a Phase 3 program.

We have completed enrollment for our TITAN Phase 2 proof-of-concept clinical trial of GB001 in patients with chronic rhinosinusitis, both with and without nasal polyps.

Topline data from this trial are expected in the second half of 2020.

Additionally, we may initiate a translational Phase 2 clinical trial of GB001 in patients with chronic spontaneous urticaria in the second half of 2020, after review of relevant data and evaluation of competitive landscape.

We are developing GB002 for the treatment of PAH.

We commenced enrolling patients for a Phase 1b clinical trial in PAH in the first quarter of 2020, and we expect to commence a Phase 2 clinical trial in PAH in the second half of 2020.

We are developing GB004 for the treatment of inflammatory bowel disease, including UC and Crohn’s disease.

We have completed enrollment for the Phase 1b clinical trial in mild-to-moderate UC patients with active disease symptoms and histology.

We expect to report topline results from the study in the second quarter of 2020.

We currently have four clinical-stage product candidates, in addition to six preclinical programs.

We are developing seralutinib for the treatment of PAH and commenced enrolling patients for a Phase 2 TORREY clinical trial in PAH patients in December 2020.

We expect topline results from this trial in the first half of 2022, subject to developments in the ongoing COVID-19 pandemic.

We are developing GB004 for the treatment of inflammatory bowel disease, including UC and CD.

We commenced enrolling patients for a Phase 2 SHIFT-UC clinical trial in UC in October 2020.

We expect topline results from this trial in the first half of 2022, subject to developments in the ongoing COVID-19 pandemic.

We are developing GB1275 for the treatment of oncology indications.

In the third quarter of 2019, we initiated a Phase 1/2 clinical trial for GB1275 in solid tumor indications as a monotherapy and in combination with either pembrolizumab or chemotherapy.

Initial data from this trial is expected in the second half of 2020.

We have reported data from that ongoing trial, and we expect to report further data from this trial in 2021.

We announced topline Phase 2 asthma results for GB001 in the fourth quarter of 2020.

GB001 did not achieve its primary endpoint of statistically significant reduction in the portion of patients experiencing asthma worsening, though consistent and meaningful numeric reductions in the odds of asthma worsening were observed across all three drug arms, as compared to placebo.

GB001 did achieve statistically significant improvements in the key secondary endpoint of time to first asthma worsening in two of the three drug arms, as compared to placebo.

We do not currently plan to move forward with GB001, or its backup molecule, in further clinical trials without a partner.

We were incorporated in October 2015 and commenced operations in 2017.

To date, we have focused primarily on organizing and staffing our company, business planning, raising capital, identifying, acquiring and in-licensing our product candidates and conducting preclinical studies and early clinical trials.

We have funded our operations primarily through equity financings.

We raised $631.3 million from October 2017 through May 2019 through Series A and B convertible preferred stock financings, a convertible note financing, our IPO completed in February 2019, and proceeds from our credit facility.

We have funded our operations primarily through equity financings and debt issuance.

We raised $942.0 million from October 2017 through December 31, 2020 through Series A and B convertible preferred stock financings, a convertible note financing, our IPO completed in February 2019, proceeds from our credit facility, and proceeds from our concurrent underwritten public offerings of 5.00% convertible Notes due 2027 (the "2027 Notes") and common stock in May 2020.

In addition, we received $12.8 million in cash in connection with the January 2018 acquisition of AA Biopharma Inc., of which Pulmagen Therapeutics (Asthma) Limited is a wholly-owned subsidiary.

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As of December 31, 2020, we had an accumulated deficit of $577.5 million.

W e expect our expenses and operating losses will increase substantially as we conduct our ongoing and planned clinical trials, continue our research and development activities and conduct preclinical studies, and seek regulatory approvals for our product candidates, as well as hire additional personnel, protect our intellectual property and incur additional costs associated with being a public company.

In addition, as our product candidates progress through development and toward commercialization, we will need to make milestone payments to the licensors and other third parties from whom we have in-licensed or acquired our product candidates, including GB002, GB004 and GB1275.

We expect our expenses and operating losses will increase substantially as we conduct our ongoing and planned clinical trials, continue our research and development activities and conduct preclinical studies, and seek regulatory approvals for our product candidates, as well as hire additional personnel, protect our intellectual property and incur additional costs associated with being a public company.

Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending in particular on the timing of our clinical trials and preclinical studies and our expenditures on other research and development activities.

We do not expect to generate any revenue from product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years.

If we obtain regulatory

approval for any of our product candidates, we expect to incur significant commercialization expense s related to product sales, marketing, manufacturing and distribution.

Accordingly, until such time as we can generate substantial product revenues to support our cost structure, if ever, we expect to finance our cash needs through equity offerings, debt f inancings or other capital sources, including potentially collaborations, licenses and other similar arrangements.

obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution.

Accordingly, until such time as we can generate substantial product revenues to support our cost structure, if ever, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including potentially collaborations, licenses and other similar arrangements.

However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all.

Our failu re to raise capital or enter into such other arrangements when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies.

If we are unable to raise additional capital when needed, we could be forced to delay, limit, reduce or terminate our product candidate development or future commercialization efforts or grant rights to develop and market our product candidates even if we would otherwise prefer to develop and market such product candidat es ourselves.

Our failure to raise capital or enter into such other arrangements when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies.

COVID-19 Pandemic

The current COVID-19 worldwide pandemic has presented substantial public health and economic challenges and is affecting our employees, patients, communities and business operations, as well as the U.S.

and global economies and financial markets.

International and U.S.

governmental authorities in impacted regions are taking actions in an effort to slow the spread of COVID-19, including issuing varying forms of “stay-at-home” orders, and restricting business functions outside of one’s home.

In response, we have implemented a work-from-home policy for certain of our employees.

To date, we have been able to continue to supply our product candidates to our patients currently enrolled in our clinical trials, including for seralutinib, GB004 and GB1275, and do not currently anticipate any interruptions in supply.

In addition, while we are continuing the clinical trials we have underway in sites across the globe, COVID-19 precautions have delayed, such as the previous pause in enrollment in our Phase 1b clinical trial for seralutinib in PAH earlier this year, and may continue to delay completion of these and future trials and may directly or indirectly impact the timeline for data readouts, initiation of, as well as monitoring, data collection and analysis and other related activities for, some of our current and future clinical trials.

For example, our current expectations for how we will continue to enroll our Phase 2 clinical trials of seralutinib and GB004 are based on an assumption that clinical trial and healthcare activities begin to return to normal and clinical sites remain open or reopen during the first half of 2021 in light of the continued spread of COVID-19.

In particular with respect to seralutinib, some PAH clinical trial sites are currently closed or limited as PAH patients may be at a higher risk of COVID-19 complications than the general population, and some PAH clinical trials may close again if there is a surge of COVID-19 cases in the specific geographies of such trial site locations.

Therefore, our assumptions around enrollment timing may prove to be incorrect, in particular if COVID-19 continues to spread.

In light of recent developments relating to the COVID-19 pandemic, and consistent with the FDA’s updated industry guidance for conducting clinical trials, clinical trials may be deprioritized in favor of treating patients who have contracted the virus or to prevent the spread of the virus.

This may lead to clinical trial protocol deviations or to discontinuation of treatment for patients who are currently enrolled in our trials.

Any delays in the completion of our clinical trials, data analysis or readouts and any disruption in our supply chain could have a material adverse effect on our business, results of operations and financial condition.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat it, as well as the economic impact on local, regional, national and international markets.

Components of Results of Operations

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Our clinical development costs may vary significantly based on factors such as:

• the costs incurred as a result of the COVID-19 pandemic, including clinical trial delays;

• per patient trial costs;

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In process research and development

In process research and development, or IPR&D, expenses include in process research and development acquired as part of an asset acquisition or in-license for which there is no alternative future use, are expensed as incurred.

IPR&D expenses consist of our upfront payments made to Pulmokine, Inc., in connection with the in-license of GB002, the value of our stock issued to former AA Biopharma Inc.

shareholders, in connection with the acquisition of GB001, and our upfront payments made to Aerpio Pharmaceuticals, Inc., or Aerpio, in connection with the in-license of GB004, our upfront and milestone payments made to Adhaere Pharmaceuticals, Inc., or Adhaere, in connection with the acquisition of GB1275, and upfront and milestone payments made in connection with the acquisition of certain preclinical programs.

In process research and development, or IPR&D, expenses include IPR&D acquired as part of an asset acquisition or in-license for which there is no alternative future use, are expensed as incurred.

IPR&D expenses consist of our upfront and milestone payments made to Pulmokine, Inc., in connection with the in-license of seralutinib, the value of our stock issued to former AA Biopharma Inc.

shareholders, in connection with the acquisition of GB001, our upfront payments made to Aerpio Pharmaceuticals, Inc., or Aerpio, in connection with the in-license and subsequent amendment of the in-license of GB004, our upfront and milestone payments made to Adhaere Pharmaceuticals, Inc., or Adhaere, in connection with the acquisition of GB1275, and upfront and milestone payments made in connection with the acquisition or in-license of certain preclinical programs.

General and administrative

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Other income (expense), net

Other income (expense), net consists of (1) interest income on our cash, cash equivalents and marketable securities, (2) interest expense related to our credit facility, (3) interest expense related to the convertible promissory note issued in October 2017, and (4) other miscellaneous income (expense).

The note converted into shares of our Series A convertible preferred stock in January 2018.

Other income (expense), net consists of (1) interest income on our cash, cash equivalents and marketable securities, (2) sublease income, (3) interest expense related to our Credit Facility and our 2027 Notes, and (4) other miscellaneous income (expense).

Critical Accounting Policies and Estimates

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In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period.

If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid expense accordingly.

If the actual timing of the performance of services or

the level of effort varies from our estimate, we adjust the accrual or prepaid expense accordingly.

Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made.

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To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred.

Stock-based compensation

We measure and recognize compensation expense for all options based on the estimated fair value of the award on the grant date.

We use the Black-Scholes option-pricing model to estimate the fair value of option awards.

The fair value is recognized as expense on a straight-line basis over the requisite service period.

We account for forfeitures as they occur.

We record expense for awards subject to performance-based milestone vesting over the remaining service period when management determines that achievement of the milestone is probable.

Management evaluates when the achievement of a performance-based milestone is probable based on the expected satisfaction of the performance conditions at each reporting date.

The determination of the grant date fair value of options using an option pricing model is affected principally by our estimated fair value of shares of our common stock and requires management to make a number of other assumptions, including the expected life of the option, the volatility of the underlying shares, the risk-free interest rate and expected dividends.

The assumptions used in our Black-Scholes option-pricing model represent management’s best estimates at the time of measurement.

These estimates are complex, involve a number of variables, uncertainties and assumptions and the application of management’s judgment, as they are inherently subjective.

If any assumptions change, our stock-based compensation expense could be materially different in the future.

See Note 10 to our consolidated financial statements included elsewhere in this annual report on Form 10-K for information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options granted in the year ended December 31, 2019.

As of December 31, 2019, the unrecognized stock-based compensation expense related to employee stock options and unvested restricted stock was $61.0 million and $13.5 million, respectively, and is expected to be recognized as expense over a weighted-average period of approximately 2.9 years and 2.8 years, respectively.

The intrinsic value of all outstanding stock options as of December 31, 2019 was approximately $35.4 million, of which approximately $10.2 million related to vested options and approximately $25.2 million related to unvested options.

Fair value of common stock

We are required to estimate the fair value of the common stock underlying our stock-based awards when performing fair value calculations, which is the most subjective input into the Black-Scholes option pricing model.

Prior to our IPO, the fair value of the common stock underlying our stock-based awards was determined on each grant date by our board of directors, taking into account input from management and independent third-party valuation analyses.

All options to purchase shares of our common stock are intended to be granted with an exercise price per share no less than the fair value per share of our common stock underlying those options on the date of grant, based on the information known to us on the date of grant.

Prior to our IPO, in the absence of a public trading market for our common stock, on each grant date we developed an estimate of the fair value of our common stock in order to determine an exercise price for the option grants.

Our determinations of the fair value of our common stock were made using methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Audit and Accounting Practice Aid Series:

Valuation of Privately Held Company Equity Securities Issued as Compensation, or the Practice Aid .

Our board of directors considered various objective and subjective factors, along with input from management, to determine the fair value of our common stock, including:

valuations of our common stock performed by independent third-party valuation specialists;

our stage of development and business strategy, including the status of research and development efforts of our product candidates, and the material risks related to our business and industry;

our results of operations and financial position, including our levels of available capital resources;

the valuation of publicly traded companies in the life sciences and biotechnology sectors, as well as recently completed mergers and acquisitions of peer companies;

the lack of marketability of our common stock as a private company;

the prices of our convertible preferred stock sold to investors in arm’s length transactions and the rights, preferences, and privileges of our convertible preferred stock relative to those of our common stock;

the likelihood of achieving a liquidity event for the holders of our common stock, such as an initial public offering or a sale of our company, given prevailing market conditions;

trends and developments in our industry;

external market conditions affecting the life sciences and biotechnology industry sectors.

Our valuations were prepared in accordance with the guidelines in the Practice Aid, which prescribes several valuation approaches for setting the value of an enterprise, such as the cost, income and market approaches, and various methodologies for allocating the value of an enterprise to its common stock.

The cost approach establishes the value of an enterprise based on the cost of reproducing or replacing the property less depreciation and functional or economic obsolescence, if present.

The income approach establishes the value of an enterprise based on the present value of future cash flows that are reasonably reflective of our company’s future operations, discounting to the present value with an appropriate risk adjusted discount rate or capitalization rate.

The market approach is based on the assumption that the value of an asset is equal to the value of a substitute asset with the same characteristics.

Each valuation methodology was considered in our valuations.

In determining a fair value for our common stock, we estimated the enterprise value of our business using either the market approach or the back-solve method.

The back-solve method assigns an implied enterprise value based on the most recent round of funding or investment and allows for the incorporation of the implied future benefits and risks of the investment decision assigned by an outside investor.

In accordance with the Practice Aid, we considered the various methods for allocating the enterprise value across our classes and series of capital stock to determine the fair value of our common stock at each valuation date.

We only granted restricted stock awards prior to January 2018.

From January 2018 to July 2018, we concluded that a hybrid of the Option Pricing Method, or OPM, and the guideline transaction method with current value method allocation, or CVM, was the most appropriate for each of the valuations of our common stock performed by our independent third-party valuation specialist.

Under the OPM, shares are valued by creating a series of call options with exercise prices based on the liquidation preferences and conversion terms of each equity class.

The values of the preferred and common stock are inferred by analyzing these options.

Under the CVM, the enterprise value is calculated based on an assumed forced asset sale at a future date and the corresponding allocation of proceeds based on the rights and preferences of each class of equity.

The valuations assigned a relative weighting to each of the OPM back-solve and asset sale scenarios, based on the likelihood that the Company would be able to successfully advance its development programs to the next development stage with its current capital resources.

We believed this hybrid method was the most appropriate given the expectation of various potential liquidity outcomes and the difficulty of selecting appropriate enterprise values given our early stage of development, while allowing us to accurately capture the potential downside risk of our clinical-stage assets.

In November 2018, we changed to a hybrid of the OPM and

Probability-Weighted Expected Return Method, or PWERM.

The PWERM is a scenario-based analysis that estimates the value per share based on the probability-weighted present value of e xpected future investment returns, considering each of the possible outcomes available to us, as well as the economic and control rights of each share class.

Under this hybrid method, we considered the expected initial public offering liquidity scenario, b ut also used the OPM to capture all other scenarios in the event a near-term initial public offering does not occur.

Following the closing of our IPO, the fair value per share of our common stock for purposes of determining stock-based compensation expense is based on the closing price of our common stock as reported on the applicable grant date.

Convertible Senior Notes

In accounting for the issuance of the 2027 Notes, we separated the 2027 Notes into liability and equity components.

The carrying amount of the liability component was calculated by measuring the fair value of similar debt instruments that do not have associated convertible features.

The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2027 Notes.

The equity component is not remeasured as long as it continues to meet the condition for equity classification.

The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the 2027 Notes.

We allocated the issuance costs incurred to the liability and equity components of the 2027 Notes based on their relative fair values.

Issuance costs attributable to the liability component were recorded as a reduction to the liability portion of the 2027 Notes and are being amortized to interest expense over the term of the 2027 Notes.

Issuance costs attributable to the equity component, representing the conversion option, were netted with the equity component in stockholders' equity.

Results of Operations for the Years Ended December 31, 2020 and 2019

The following table sets forth our selected statements of operations data for the years ended December 31, 2020 and 2019:

Years Ended December 31,

Years Ended December 31, 2020 vs 2019

(in thousands)

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Loss from operations (233,962) (186,139) (47,823)

Other income, net

Other income (expense)

Interest income 3,442 5,563 (2,121)

Interest expense (12,666) (1,938) (10,728)

Other income (expense) (174) 2,207 (2,381)

Total other income (expense), net (9,398) 5,832 (15,230)

Net loss $ (243,360) $ (180,307) $ (63,053)

Operating expenses

Research and development

Research and development expenses were $143.4 million for the year ended December 31, 2019, compared to $55.3 million for the year ended December 31, 2018, for an increase of $88.1 million, which was primarily attributable to an increase of $17.1 million of costs associated with preclinical studies and clinical trials for GB002, an increase of $17.0 million of costs associated with preclinical and clinical trials for GB001, an increase of $13.2 million of costs associated with preclinical studies and clinical trials for GB004, an increase of $12.7 million of costs associated with preclinical studies and clinical trials for GB1275, an increase of $8.8 million of costs associated with preclinical studies for our other programs, and an increase of $19.3 million of costs related to personnel and other associated costs.

Research and development expenses were $160.9 million for the year ended December 31, 2020, compared to $143.4 million for the year ended December 31, 2019, for an increase of $17.5 million, which was primarily attributable to an increase of $4.4 million of costs associated with preclinical studies and clinical trials for GB004, an increase of $2.8 million of costs associated with preclinical and clinical trials for GB1275, an increase of $1.4 million of costs associated with preclinical studies and clinical trials for seralutinib, and an increase of $12.6 million of costs associated with preclinical studies for our other programs;

offset by a decrease of $3.8 million of costs associated with preclinical research and clinical trials for GB001.

The following table shows our research and development expenses by program for the years ended December 31, 2020 and 2019:

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(in thousands)

GB001 $ 36,576 $ 40,404

Seralutinib 34,564 33,161

GB004 24,382 19,986

GB1275 16,714 13,870

Other Programs 48,618 35,982

Unallocated expenses

Total research and development $ 160,854 $ 143,403

In process research and development

IPR&D expenses were $3.6 million for the year ended December 31, 2019, compared to $49.7 million for the year ended December 31, 2018, for a decrease of $46.1 million, which was primarily attributable to our $20.0 million upfront payment made to Aerpio in connection with the in-license of GB004 in 2018, $19.1 million of costs associated with the issuance of our stock in connection with our acquisition of GB001 and AA Biopharma in 2018, and a $7.5 million upfront payment in connection with our acquisition of GB1275 and Adhaere in 2018.

General an d administrative

General and administrative expenses were $39.1 million for the year ended December 31, 2019, compared to $44.1 million for the year ended December 31, 2018, for a decrease of $5.0 million, which was primarily attributable to a $19.7 million decrease in stock-based compensation costs, partially offset by a $5.7 million increase in personnel-related costs, a $4.3 million increase in professional and legal fees, a $2.5 million increase associated with insurance costs, and a $1.3 million increase in facility and office-related costs.

Other income, net

Other income, net was $5.8 million for the year ended December 31, 2019, compared to $2.0 million for the year ended December 31, 2018 related to a $3.8 million increase in investment income earned on our cash, cash equivalents and marketable securities during the period.

IPR&D expenses were $23.4 million for the year ended December 31, 2020, compared to $3.6 million for the year ended December 31, 2019, for an increase of $19.8 million, which was primarily attributable to a $15.0 million payment to Aerpio in connection with the amendment to the in-license agreement of GB004 in 2020 and a milestone payment of $5.0 million in connection with the initiation of the first Phase 2 clinical trial of seralutinib in 2020.

General and administrative

General and administrative expenses were $49.7 million for the year ended December 31, 2020, compared to $39.1 million for the year ended December 31, 2019, for an increase of $10.6 million, which was primarily attributable to a $9.2 million increase in stock-based compensation costs and a $2.4 million increase in personnel-related costs.

Other income (expense), net

Other expense, net was $9.4 million for the year ended December 31, 2020, compared to other income, net of $5.8 million for the year ended December 31, 2019, for a decrease of $15.2 million, which was primarily related to a $10.7 million increase in interest expense, a $2.4 million decrease in investment income and a $2.1 million decrease in interest income earned on our cash, cash equivalents and marketable securities during the period.

Results of Operations for the Years Ended December 31, 2019 and 2018

The following table sets forth our selected statements of operations data for the years ended December 31, 2019 and 2018:

Years Ended December 31,

Years Ended December 31, 2019 vs 2018

(in thousands)

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Loss from operations (186,139) (148,993) (37,146)

Other income (expense), net

Other income (expense)

Interest income 5,563 1,720 3,843

Interest expense (1,938) (12) (1,926)

Other income (expense) 2,207 316 1,891

Total other income (expense), net 5,832 2,024 3,808

Net loss $ (180,307) $ (146,969) $ (33,338)

Operating expenses

Research and development

Research and development expenses were approximately $55.3 million for the year ended December 31, 2018, compared to $0.9 million for the year ended December 31, 2017.

The $55.3 million was primarily attributable to $23.4 million of costs associated with preclinical studies and clinical trials for GB001, $16.0 million of costs associated with preclinical studies and clinical trials for GB002, $6.7 million of costs associated with preclinical studies and clinical trials for GB004, and $6.0 million of costs related to personnel and external consultants.

Research and development expenses were $143.4 million for the year ended December 31, 2019, compared to $55.3 million for the year ended December 31, 2018, for an increase of $88.1 million, which was primarily attributable to an increase of $17.1 million of costs associated with preclinical studies and clinical trials for seralutinib, an increase of $17.0 million of costs associated with preclinical and clinical trials for GB001, an increase of $13.2 million of costs associated with preclinical studies and clinical trials for GB004, an increase of $12.7 million of costs associated with preclinical studies and clinical trials for GB1275, an increase of $8.8 million of costs associated with preclinical research for our other programs, and an increase of $19.3 million of costs related to personnel and other associated costs.

The following table shows our research and development expenses by program for the years ended December 31, 2019 and 2018:

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(in thousands)

GB001 $ 40,404 $ 23,409

Seralutinib 33,161 16,028

GB004 19,986 6,739

GB1275 13,870 1,196

Other Programs 35,982 1,948

Unallocated expenses

Total research and development $ 143,403 $ 49,320

In process research and development

IPR&D expenses were approximately $49.7 million for the year ended December 31, 2018, compared to $5.5 million for the year ended December 31, 2017.

The $49.7 million for the period ended December 31, 2018 was primarily attributable to our $20.0 million upfront payment made to Aerpio in connection with the in-license of GB004, $19.1 million of costs associated with the issuance of our stock in connection with our acquisition of GB001 and AA Biopharma and our $7.5 million upfront payment in connection with our acquisition of GB1275 and Adhaere.

General and administrative

General and administrative expenses were approximately $44.1 million for the year ended December 31, 2018, compared to approximately $0.3 million for the year ended December 31, 2017.

The $44.1 million for the year ended December 31, 2018 was primarily attributable $30.3 million in stock-based compensation costs, $6.0 million in personnel-related costs, $3.7 million in legal fees and $0.8 million in facility-related costs.

Other income (expense), net

Other income (expense), net was $2.0 million for the year ended December 31, 2018, compared to $(0.1) million for the year ended December 31, 2017 related to interest expense on the convertible note.

The $2.0 million for the year ended December 31, 2018 was attributable to $1.7 million interest income earned on our cash, cash equivalents and marketable securities during the period and $0.5 million of accretion of investments related to marketable securities held by us at December 31, 2018.

This was offset by $0.2 million of franchise taxes and realized losses on marketable securities.

General and administrative expenses were $39.1 million for the year ended December 31, 2019, compared to approximately $44.1 million for the year ended December 31, 2018, for a decrease of $5.0 million, which was primarily attributable to a $19.7 million decrease in stock-based compensation costs, partially offset by a $5.7 million increase in personnel-related costs, a $4.3 million increase in professional and legal fees, a $2.5 million increase associated with insurance costs, and a $1.3 million increase in facility and office-related costs.

Other income, net

Other income, net was $5.8 million for the year ended December 31, 2019, compared to $2.0 million for the year ended December 31, 2018, attributable to a $3.8 million increase in investment income earned on our cash, cash equivalents and marketable securities during the period.

Liquidity and Capital Resources

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Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures, and to a lesser extent, general and administrative expenditures.

We enter into contracts in the normal course of business with clinical trial sites and clinical supply manufacturers and with vendors for preclinical studies, research supplies and other services and products for operating purposes.

Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.

From our inception through the year ended December 31, 2019, our operations have been financed primarily by gross proceeds of $631.3 million from the sale of our convertible preferred stock, convertible promissory note, proceeds from our IPO and proceeds from our credit facility.

Under our license agreements with Pulmokine and Aerpio, as well as our other license and acquisition agreements, we have payment obligations that are contingent upon future events such as our achievement of specified development, regulatory and commercial milestones and are required to make royalty payments in connection with the sale of products developed under those agreements.

As of December 31, 2020, we were unable to estimate the timing or likelihood of achieving the milestones or making future product sales.

Other contractual obligations include future payments under our Credit Facility, 2027 Notes and existing operating leases.

From our inception through the year ended December 31, 2020, our operations have been financed primarily by gross proceeds of $942.0 million from the sale of our convertible preferred stock, convertible promissory note, proceeds from our IPO, proceeds from our Credit Facility, and proceeds from our concurrent underwritten public offerings of 2027 Notes and common stock.

As of December 31, 2020, we had cash, cash equivalents and marketable securities of $512.6 million.

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In connection with the closing of the IPO, the outstanding shares of our convertible preferred stock were converted into shares of common stock at a ratio of 4.5-to-one.

On May 2, 2019, we entered into a credit, guaranty and security agreement, as amended, pursuant to which the lenders party thereto agreed to make term loans available to us for working capital and general business purposes, in a principal amount of up to $150.0 million in term loan commitments, including a $30.0 million term loan which was funded at the closing date, with the ability to access the remaining $120.0 million in three additional tranches (of $40.0 million, $30.0 million and $50.0 million, respectively), subject to specified availability periods, the achievement of certain clinical development milestones, minimum cash requirements and other customary conditions, or the Credit Facility.

As of December 31, 2019, and through the date of this filing, no other tranches under the Credit Facility have been drawn.

On May 2, 2019, we entered into the Credit Facility, as amended on September 18, 2019 and July 2, 2020, pursuant to which the lenders party thereto agreed to make term loans available to us for working capital and general business purposes, in a principal amount of up to $150.0 million in term loan commitments, including a $30.0 million term loan which was funded at the closing date, with the ability to access the remaining $120.0 million in two additional tranches (each $60.0 million).

The remaining two tranches are available no earlier than the satisfaction of the applicable funding conditions, including the applicable clinical development milestones, and no later than December 31, 2022.

As of December 31, 2020, and through the date of this filing, no other tranches under the Credit Facility have been available.

On April 10, 2020, we filed a registration statement on Form S-3, or the Shelf Registration Statement, covering the offering from time to time of common stock, preferred stock, debt securities, warrants and units, which registration statement became automatically effective on April 10, 2020.

In May 2020, we issued $200.0 million aggregate principal amount 5.00% convertible senior notes due 2027 in a registered public offering.

The interest rate on the 2027 Notes is fixed at 5.00% per annum.

Interest is payable semi-annually in arrears on June 1 and December 1 of each year commencing on December 1, 2020.

The total net proceeds from the 2027 Notes, after deducting the underwriting discounts and commissions and other offering costs, were approximately $193.6 million.

Concurrent with the registered underwritten public offering of the 2027 Notes, we completed an underwritten public offering of 9,433,963 shares of our common stock.

We received net proceeds of $117.1 million, after deducting underwriting discounts and commissions and other offering costs.

Our concurrent offerings of 2027 Notes and common stock were registered pursuant to the Shelf Registration Statement.

Additional information about the Credit Facility and our long-term borrowings is presented in Note 5 “Long-term Debt” to the Notes to Consolidated Financial Statements included in Part II, Item 8, of this Form 10-K, which is incorporated herein by this reference.

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Years Ended December 31,

2020 2019 2018

(in thousands)

Net cash used in operating activities $ (176,360) $ (144,834) $ (51,044)

Net cash used in investing activities

Net cash provided by (used in) investing activities 215,342 (147,144) (144,711)

Net cash provided by financing activities 312,540 321,578 300,859

Effect of exchange rate changes on cash, cash equivalents and restricted cash $ 9 $ 70 $ —

Net increase in cash, cash equivalents and restricted cash $ 351,531 $ 29,670 $ 105,104

Operating activities

During the year ended December 31, 2020, operating activities used approximately $176.4 million of cash, primarily resulting from a net loss of $243.4 million, partially reduced by stock-based compensation expense of $38.7 million, IPR&D expenses of $23.4 million and amortization of long-term debt discount and issuance costs of $3.9 million.

During the year ended December 31, 2019, operating activities used approximately $144.8 million of cash, primarily resulting from a net loss of $180.3 million, partially reduced by stock-based compensation expense of $20.8 million, and changes in operating assets and liabilities of $12.3 million.

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Net cash provided by changes in operating assets and liabilities consisted primarily of increases in accounts payable, accrued research and development expenses, and accrued expenses of $18.6 million, partially offset by an increase in prepaid expenses due to prepayments for clinical development activities and security deposits of $2.8 million.

During the year ended December 31, 2017, operating activities used approximately $5.7 million of cash, primarily resulting from a net loss of $6.8 million, partially reduced by increases in accounts payable and accrued research and development expenses of $1.0 million.

Investing activities

During the year ended December 31, 2020, investing activities provided approximately $215.3 million of cash, primarily resulting from the sales and maturities of marketable securities of $349.2 million, partially offset by the purchase of marketable securities of $109.0 million and upfront and milestone payments of $23.4 million made to third parties in connection with the in-license or acquisition of our clinical and preclinical programs.

During the year ended December 31, 2019, investing activities used approximately $147.1 million of cash, primarily resulting from the purchase of marketable securities of $499.1 million, partially offset by sales and maturities of investments of $358.5 million.

During the year ended December 31, 2018, investing activities used approximately $144.7 million of cash, primarily resulting from the upfront payment made to Aerpio of $20.0 million in connection with the in-license of GB004, upfront payments of $10.5 million in connection with the acquisition of our preclinical programs, the purchase of marketable securities of $123.5 million, and the purchase of property and equipment of $3.5 million, partially offset by $12.8 million of cash proceeds received from AA Biopharma in connection with our acquisition.

There were no investing activities for the year ended December 31, 2017.

Financing activities

During the year ended December 31, 2019, financing activities provided $321.6 million of cash, primarily resulting from the net proceeds from our IPO of $291.3 million, and proceeds from our Credit Facility, net of debt discount and issuance costs of $28.2 million.

During the year ended December 31, 2020, financing activities provided $312.5 million of cash, primarily resulting from the concurrent registered underwritten public offerings of 2027 Notes and common stock for net proceeds of $193.6 million and $117.1 million, respectively.

During the year ended December 31, 2019, financing activities provided $321.6 million of cash, primarily resulting from the net proceeds from our IPO of $291.3 million, and proceeds from our Credit Facility of $30.0 million, offset by $1.8 million of debt issuance costs.

During the year ended December 31, 2018, financing activities provided $300.9 million of cash, primarily resulting from the net proceeds from issuance of our Series A and B convertible preferred stock of $303.0 million.

During the year ended December 31, 2017, financing activities provided $6.0 million of cash, primarily resulting from the proceeds from issuance of a convertible promissory note.

Funding requirements

Based on our current operating plan, we believe that our existing cash, cash equivalents and marketable securities will be sufficient to fund our operations through at least the next 12 months.

However, our forecast of the period of time through which our

financial resources will be adequate to support our operations is a forward-l ooking statement that involves risks and uncertainties, and actual results could vary materially.

Based on our current operating plan, we believe that our existing cash, cash equivalents and marketable securities, and access to our Credit Facility, will be sufficient to fund our operations through at least the next 12 months.

However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect.

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• costs associated with any products or technologies that we may in-license or acquire;

• any delays and cost increases that result from the COVID-19 pandemic.

Until such time as we can generate substantial product revenues to support our cost structure, if ever, we expect to finance our cash needs through equity offerings, our Credit Facility, debt financings or other capital sources, including potentially collaborations, licenses and other similar arrangements.

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations at December 31, 2019:

(in thousands)

Contractual obligations:

Principal under Credit Facility, excluding accrued interest

Operating leases (1)

Purchase obligations (2)

Total contractual obligations

Operating leases include our continuing rent obligations through December 2024.

As of December 31, 2019, we had $1.0 million of open purchase orders.

All of our purchase orders may be cancelled without significant penalty.

As of December 31, 2019, we were unable to estimate the timing or likelihood of achieving the milestones or making future product sales and, therefore, any related payments are not included in the table above.

These contracts generally provide for termination after a notice period, and, therefore, are cancelable contracts and not included in the table above.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under the rules and regulations of the SEC.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements included elsewhere in this annual report.

As an emerging growth company under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we can take advantage of an extended transition period for complying with new or revised accounting standards.

This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We intend to rely on other exemptions provided by the JOBS Act, including without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of Sarbanes-Oxley.

We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year following the fifth anniversary of the consummation of our IPO, (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (iii) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year, or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis