Janux Therapeutics, Inc. 10-Q

Item 1 . Financial Statements. Janux Therapeutics, Inc. Condensed Bal ance Sheets (in thousands, except share and par value data) June 30, 2021 December 31, 2020 Assets (unaudited) Current assets: Cash and cash equivalents $ 251,625 $ 7,813 Short-term investments 142,570 — Accounts receivable 375 8,000 Prepaid expenses and other current assets (includes related party amounts of $ 36 and $ 0 , respectively) 2,038 249 Total current assets 396,608 16,062 Property and equipment, net 215 155 Total assets $ 396,823 $ 16,217 Liabilities, Convertible Preferred Stock and Stockholders’ Equity (Deficit) Current liabilities: Accounts payable $ 354 $ 428 Accrued liabilities (includes related party amounts of $ 0 and $ 544 , respectively) 2,286 751 Current portion of deferred revenue 5,065 1,950 Unvested stock liability 1,500 52 Total current liabilities 9,205 3,181 Deferred revenue, net of current portion 2,823 6,050 Total liabilities 12,028 9,231 Commitments and contingencies (Note 3) Convertible preferred stock, $ 0.001 par value; authorized shares – 0 and 6,838,829 at June 30, 2021 and December 31, 2020, respectively; issued and outstanding shares – 0 and 6,838,829 at June 30, 2021 and December 31, 2020, respectively; liquidation preference – $ 0 and $ 21,709 at June 30, 2021 and December 31, 2020, respectively — 21,624 Stockholders’ equity (deficit): Preferred stock, $ 0.001 par value; authorized shares – 10,000,000 and 0 at June 30, 2021 and December 31, 2020, respectively; no shares issued and outstanding at June 30, 2021 and December 31, 2020 — — Common stock, $ 0.001 par value; authorized shares – 200,000,000 and 9,000,000 at June 30, 2021 and December 31, 2020, respectively; issued shares – 41,611,510 and 1,257,736 at June 30, 2021 and December 31, 2021, respectively; outstanding shares – 41,094,559 and 1,046,599 at June 30, 2021 and December 31, 2020, respectively 41 1 Additional paid-in capital 407,966 100 Accumulated other comprehensive income (loss) 17 — Accumulated deficit ( 23,229 ) ( 14,739 ) Total stockholders’ equity (deficit) 384,795 ( 14,638 ) Total liabilities, convertible preferred stock and stockholders’ equity (deficit) $ 396,823 $ 16,217 See accompanying notes. 1 Table of Contents Janux Therapeutics, Inc. Unaudited Condensed Statemen ts of Operations and Comprehensive Loss (in thousands, except share and per share data) Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Collaboration revenue $ 482 $ — $ 862 $ — Operating expenses: Research and development (includes related party amounts of $ 423 , $ 305 , $ 909 and $ 638 , respectively) 4,737 673 6,662 1,222 General and administrative (includes related party amounts of $ 99 , $ 205 , $ 203 and $ 419 , respectively) 1,997 433 2,736 710 Total operating expenses 6,734 1,106 9,398 1,932 Loss from operations ( 6,252 ) ( 1,106 ) ( 8,536 ) ( 1,932 ) Other income (expense): Interest income 46 — 46 — Interest expense – related parties — ( 109 ) — ( 206 ) Increase in fair value of convertible promissory notes – related parties — ( 1,245 ) — ( 1,735 ) Total other income (expense) 46 ( 1,354 ) 46 ( 1,941 ) Net loss $ ( 6,206 ) $ ( 2,460 ) $ ( 8,490 ) $ ( 3,873 ) Other comprehensive loss: Unrealized gain (loss) on available-for-sale securities, net ( 17 ) — ( 17 ) — Comprehensive loss $ ( 6,223 ) $ ( 2,460 ) $ ( 8,507 ) $ ( 3,873 ) Net loss per common share, basic and diluted $ ( 0.62 ) $ ( 2.76 ) $ ( 1.52 ) $ ( 4.52 ) Weighted-average shares of common stock outstanding, basic and diluted 10,033,328 890,916 5,596,900 856,093 See accompanying notes. 2 Table of Contents Janux Therapeutics, Inc. Unaudited Condensed Statements of Conv ertible Preferred Stock and Stockholders’ Equity (Deficit) For the Six Months Ended June 30, 2021 and 2020 (in thousands, except share data) Convertible Preferred Stock Common Stock Additional Paid-in Accumulated Other Comprehensive Income Accumulated Total Stockholders’ Equity Shares Amount Shares Amount Capital (Loss) Deficit (Deficit) Balance at December 31, 2020 6,838,829 $ 21,624 1,046,599 $ 1 $ 100 $ — $ ( 14,739 ) $ ( 14,638 ) Issuance of Series A convertible preferred stock, net of $ 278 of issuance costs 5,894,740 55,722 — — — — — — Issuance of Series B convertible preferred stock, net of $ 175 of issuance costs 8,038,073 124,825 — — — — — — Conversion of convertible preferred stock to common stock in connection with initial public offering ( 20,771,642 ) ( 202,171 ) 26,608,460 27 202,144 — — 202,171 Initial public offering, net of $ 18,733 of issuance costs — — 13,110,000 13 204,124 — — 204,137 Exercise of common stock options — — 113,418 — 20 — — 20 Vesting of restricted shares — — 216,082 — 178 — — 178 Stock-based compensation — — — — 1,400 — — 1,400 Unrealized gain (loss) on investment securities — — — — — 17 — 17 Net loss — — — — — — ( 8,490 ) ( 8,490 ) Balance at June 30, 2021 — $ — 41,094,559 $ 41 $ 407,966 $ 17 $ ( 23,229 ) $ 384,795 Convertible Preferred Stock Common Stock Additional Paid-in Accumulated Other Comprehensive Income Accumulated Total Stockholders’ Equity Shares Amount Shares Amount Capital (Loss) Deficit (Deficit) Balance at December 31, 2019 2,689,997 $ 3,996 774,008 $ 1 $ 10 $ — $ ( 7,955 ) $ ( 7,944 ) Issuance of Series Seed 2 convertible preferred stock, net of $ 39 of issuance costs 1,056,337 4,461 — — — — — — Conversion of convertible promissory notes into Series Seed 2 convertible preferred stock 2,036,158 8,674 — — — — — — Exercise of common stock options — — 36,508 — 4 — — 4 Vesting of restricted shares — — 106,034 — — — — — Stock-based compensation — — — — 4 — — 4 Net loss — — — — — — ( 3,873 ) ( 3,873 ) Balance at June 30, 2020 5,782,492 $ 17,131 916,550 $ 1 $ 18 $ — $ ( 11,828 ) $ ( 11,809 ) See accompanying notes. 3 Table of Contents Janux Therapeutics, Inc. Unaudited Condensed Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) For the Three Months Ended June 30, 2021 and 2020 (in thousands, except share data) Convertible Preferred Stock Common Stock Additional Paid-in Accumulated Other Comprehensive Income Accumulated Total Stockholders’ Equity Shares Amount Shares Amount Capital (Loss) Deficit (Deficit) Balance at March 31, 2021 12,733,569 $ 77,346 1,226,977 $ 1 $ 251 $ — $ ( 17,023 ) $ ( 16,771 ) Issuance of Series B convertible preferred stock, net of $ 175 of issuance costs 8,038,073 124,825 — — — — — — Conversion of convertible preferred stock to common stock in connection with initial public offering ( 20,771,642 ) ( 202,171 ) 26,608,460 27 202,144 — — 202,171 Initial public offering, net of $ 18,733 of issuance costs — — 13,110,000 13 204,124 — — 204,137 Vesting of restricted shares — — 149,122 — 170 — — 170 Stock-based compensation — — — — 1,277 — — 1,277 Unrealized gain (loss) on investment securities — — — — — 17 — 17 Net loss — — — — — — ( 6,206 ) ( 6,206 ) Balance at June 30, 2021 — $ — 41,094,559 $ 41 $ 407,966 $ 17 $ ( 23,229 ) $ 384,795 Convertible Preferred Stock Common Stock Additional Paid-in Accumulated Other Comprehensive Income Accumulated Total Stockholders’ Equity Shares Amount Shares Amount Capital (Loss) Deficit (Deficit) Balance at March 31, 2020 2,689,997 $ 3,996 863,535 $ 1 $ 16 $ — $ ( 9,368 ) $ ( 9,351 ) Issuance of Series Seed 2 convertible preferred stock, net of $ 39 of issuance costs 1,056,337 4,461 — — — — — — Conversion of convertible promissory notes into Series Seed 2 convertible preferred stock 2,036,158 8,674 — — — — — — Vesting of restricted shares — — 53,015 — — — — — Stock-based compensation — — — — 2 — — 2 Net loss — — — — — — ( 2,460 ) ( 2,460 ) Balance at June 30, 2020 5,782,492 $ 17,131 916,550 $ 1 $ 18 $ — $ ( 11,828 ) $ ( 11,809 ) See accompanying notes. 4 Table of Contents Janux Therapeutics, Inc. Unaudited Condensed Statem ents of Cash Flows (in thousands) Six Months Ended June 30, 2021 2020 Cash flows from operating activities Net loss $ ( 8,490 ) $ ( 3,873 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 22 3 Loss on disposal of assets 3 — Stock-based compensation 1,400 4 Noncash interest – related parties — 206 Amortization (accretion) of premiums/discounts on investments, net ( 35 ) — Increase in fair value of convertible promissory notes – related parties — 1,735 Changes in operating assets and liabilities: Accounts receivable 7,625 — Prepaid expenses and other current assets (includes related party amounts of $ 36 and $ 0 , respectively) ( 1,789 ) — Accounts payable 37 167 Accrued expenses (includes related party amounts of $( 544 ) and $ 37 , respectively) 698 101 Deferred revenue ( 112 ) — Net cash used in operating activities ( 641 ) ( 1,657 ) Cash flows from investing activities Purchases of property and equipment ( 232 ) — Purchases of short-term investments ( 142,518 ) — Net cash used in investing activities ( 142,750 ) — Cash flows from financing activities Proceeds from issuance of convertible promissory notes — 2,500 Proceeds from issuance of Series Seed 2 convertible preferred stock, net of issuance costs — 4,500 Proceeds from issuance of Series A convertible preferred stock, net of issuance costs 55,722 — Proceeds from issuance of Series B convertible preferred stock, net of issuance costs 124,825 — Proceeds from exercise of vested and unvested common stock options 1,646 4 Proceeds from initial public offering, net of issuance costs 205,010 — Net cash provided by financing activities 387,203 7,004 Net increase in cash and cash equivalents 243,812 5,347 Cash and cash equivalents – beginning of period 7,813 658 Cash and cash equivalents – end of period $ 251,625 $ 6,005 Supplemental disclosure of noncash investing and financing activities Conversion of convertible preferred stock in connection with initial public offering $ 202,171 $ — Conversion of convertible promissory notes and accrued interest into shares of convertible preferred stock $ — $ 8,674 Vesting of restricted common stock $ 178 $ — Unpaid equity issuance costs $ 873 $ 39 Unrealized gain (loss) on short-term investments $ 17 $ — See accompanying notes. 5 Table of Contents Janux Therapeutics, Inc. Notes to Unaudited Condensed Financial Statements 1. Organization and Summ ary of Significant Accounting Policies Organization Janux Therapeutics, Inc. (the “Company”) was incorporated in the State of Delaware in June 2017 and is based in San Diego, California. The Company is a preclinical stage biopharmaceutical company developing next-generation therapeutics based on the Company’s proprietary Tumor Activated T Cell Engager (“TRACTr”) platform technology to better treat patients suffering from cancer. Forward Stock Split In June 2021, the Company’s board of directors and stockholders approved an amendment to the Company’s certificate of incorporation to effect a forward split of shares of the Company’s common stock on a one-for- 1.281 basis, which was effected on June 4, 2021 (the “Forward Stock Split”). The number of authorized shares and the par values of the common stock and convertible preferred stock were not adjusted as a result of the Forward Stock Split. The accompanying financial statements and notes to the financial statements give retroactive effect to the Forward Stock Split for all periods presented. Liquidity and Capital Resources From its inception through June 30, 2021, the Company has devoted substantially all its efforts to organizing and staffing, business planning, raising capital and developing its TRACTr therapeutics platform and preclinical assets. The Company has incurred net losses and negative cash flows from operations since inception and had an accumulated deficit of $ 23.2 million as of June 30, 2021. The Company has a limited operating history, has not generated any product revenue, and the sales and income potential of its business is unproven. To date the Company has funded its operations primarily with the net proceeds from the issuance of convertible promissory notes, the issuance of convertible preferred stock, the issuance of common stock in its initial public offering (“IPO”), the exercise of common stock options and amounts received under a collaboration agreement. The Company expects to incur substantial operating losses for the next several years and will need to obtain additional financing in order to continue its research and development activities, initiate and complete clinical trials and launch and commercialize any product candidates for which it receives regulatory approval. The Company plans to continue to fund its losses from operations and capital funding needs through public or private equity or debt financings or other sources. If the Company is not able to secure adequate additional funding, the Company may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, or suspend or curtail planned programs. Any of these actions could materially harm the Company’s business, results of operations and future prospects. There can be no assurance that such financing will be available or will be at terms acceptable to the Company. Management believes the Company has sufficient capital to fund its operation for at least 12 months from the issuance date of these unaudited condensed financial statements. Unaudited Interim Financial Information The unaudited condensed financial statements as of June 30, 2021, and for the three and six months ended June 30, 2021 and 2020, have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”), and with accounting principles generally accepted in the United States (“GAAP”) applicable to interim financial statements. These unaudited condensed financial statements have been prepared on the same basis as the Company’s audited financial statements and include all adjustments, consisting of only normal recurring accruals, which in the opinion of management are necessary to present fairly the Company’s financial position as of the interim date and results of operations for the interim periods presented. Interim results are not necessarily indicative of results for a full year or future periods. The condensed balance sheet data as of December 31, 2020 was derived from the Company’s audited financial statements but does not include all disclosures required by GAAP. These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2020, included in the Company’s prospectus filed with SEC on June 11, 2021 pursuant to Rule 424(b) under the Securities Act of 1933, as amended. Use of Estimates The preparation of the Company’s financial statements requires it to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the Company’s financial statements and accompanying notes. The most significant estimates in the Company’s financial statements relate to estimates to complete the performance obligations and the estimated transaction price for collaboration revenue, accruals for research and 6 Table of Contents Janux Therapeutics, Inc. Notes to Unaudited Condensed Financial Statements–(Continued) development expenses, stock-based compensation and fair value measurements. These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenues and expenses that are not readily apparent from other sources. Actual results may differ materially and adversely from these estimates. Fair Value Option As permitted under Accounting Standards Codification (“ASC”) 825, Financial Instruments , (“ASC 825”), the Company has elected the fair value option to account for its convertible promissory notes issued since inception. In accordance with ASC 825, the Company recorded these convertible promissory notes at fair value with changes in fair value recorded in the statements of operations and comprehensive loss. As a result of applying the fair value option, direct costs and fees related to the convertible promissory notes were recognized in earnings as incurred and not deferred. For the three and six months ended June 30, 2020, the Company recognized $ 1.2 million and $ 1.7 million, respectively, of increase in fair value of convertible promissory notes – related party. The convertible promissory notes were converted into Series Seed 2 convertible preferred stock in June 2020. Fair Value Measurements The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or non-recurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1: Observable inputs such as quoted prices in active markets. Level 2: Inputs, other than the quoted prices in active markets that are observable either directly or indirectly. Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, classified within Level 1 of the designations discussed above, accounts receivable, prepaid and other current assets, accounts payable, and accrued liabilities, approximate fair value due to the short-term nature of those instruments. Financial assets measured at fair value on a recurring basis consist of short-term investments. The fair value of short-term investments is based upon market prices quoted on the last day of the fiscal period or other observable market inputs. The Company obtains pricing information from its investment manager and generally determines the fair value of investment securities using standard observable inputs, including reported trades, broker/dealer quotes, bids and/or offers. The Company has no financial liabilities recorded at fair value on a recurring basis. None of the Company’s non-financial assets or liabilities are recorded at fair value on a non-recurring basis. No transfers between levels have occurred during the periods presented. The following table summarizes the Company’s financial instruments measured at fair value on a recurring basis (in thousands): Fair Value Measurements at Reporting Date Using Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) As of June 30, 2021: Assets: Short-term investments: Commercial paper $ 142,570 $ — $ 142,570 $ — Total assets measured at fair value $ 142,570 $ — $ 142,570 $ — 7 Table of Contents Janux Therapeutics, Inc. Notes to Unaudited Condensed Financial Statements–(Continued) Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Cash and cash equivalents include cash in readily available checking accounts, commercial paper and money market funds. Short-Term Investments Short-term investments consist of commercial paper. The Company has classified these investments as available-for-sale, as the sale of such investments may be required prior to maturity to implement management strategies, and therefore has classified all short-term investments with maturity dates beyond three months at the date of purchase as current assets in the accompanying balance sheets. As of June 30, 2021, the remaining contractual maturities of all short-term investments were less than 12 months. Short-term investments are carried at fair value with the unrealized gains and losses included in accumulated other comprehensive income (loss) as a component of stockholders’ equity (deficit) until realized. Any premium or discount arising at purchase is amortized and/or accreted to interest income as an adjustment to yield using the straight-line method over the life of the instrument. The Company records an allowance for credit losses when unrealized losses are due to credit-related factors. Realized gains and losses are calculated using the specific identification method and recorded as interest income or expense. The Company has determined there were no material declines in fair values of its investments due to credit-related factors as of June 30, 2021. The following table summarizes short-term investments (in thousands): As of June 30, 2021 Amortized Unrealized Estimated Cost Gains Losses Fair Value Commercial paper $ 142,553 $ 18 $ ( 1 ) $ 142,570 Total $ 142,553 $ 18 $ ( 1 ) $ 142,570 The amortized cost and estimated fair value in the table above excludes $ 3,000 of accrued interest receivable as of June 30, 2021 included in prepaid expenses and other current assets in the accompanying balance sheets. As of June 30, 2021, aggregated gross unrealized losses of available-for-sale investments were not material and no allowance for credit losses has been recorded. Additionally, no realized gains or losses on sales of short-term investments have been recorded through June 30, 2021. The Company had no short-term investments as of or during the year ended December 31, 2020. Concentrations of Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents and short-term investments. The Company maintains deposits in a federally insured financial institution in excess of federally insured limits. The Company has not experienced any losses in such account and management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institution in which those deposits are held. The Company is also subject to credit risk from its accounts receivable. The Company generally does not perform evaluations of customers’ financial condition and generally does not require collateral. As of December 31, 2020 and June 30, 2021, all of the Company’s accounts receivable relate to a single customer. For the three and six months ended June 30, 2021, all of the Company’s revenue related to a single customer. Revenue Recognition The Company recognizes revenue in a manner that depicts the transfer of control of a product or a service to a customer and reflects the amount of the consideration the Company is entitled to receive in exchange for such product or service. In doing so, the Company follows a five-step approach: (i) identify the contract with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) the customer obtains control of the product or service. The Company considers the terms of a contract and all relevant facts and circumstances when applying the revenue recognition standard. 8 Table of Contents Janux Therapeutics, Inc. Notes to Unaudited Condensed Financial Statements–(Continued) A customer is a party that has entered into a contract with the Company, where the purpose of the contract is to obtain a product or a service that is an output of the Company’s ordinary activities in exchange for consideration. To be considered a contract, (i) the contract must be approved (in writing, orally, or in accordance with other customary business practices), (ii) each party’s rights regarding the product or the service to be transferred can be identified, (iii) the payment terms for the product or the service to be transferred can be identified, (iv) the contract must have commercial substance (that is, the risk, timing or amount of future cash flows is expected to change as a result of the contract), and (v) it is probable that the Company will collect substantially all of the consideration to which it is entitled to receive in exchange for the transfer of the product or the service. A performance obligation is defined as a promise to transfer a product or a service to a customer. The Company identifies each promise to transfer a product or a service (or a bundle of products or services, or a series of products and services that are substantially the same and have the same pattern of transfer) that is distinct. A product or a service is distinct if both (i) the customer can benefit from the product or the service either on its own or together with other resources that are readily available to the customer and (ii) the Company’s promise to transfer the product or the service to the customer is separately identifiable from other promises in the contract. Each distinct promise to transfer a product or a service is a unit of accounting for revenue recognition. If a promise to transfer a product or a service is not separately identifiable from other promises in the contract, such promises should be combined into a single performance obligation. The transaction price is the amount of consideration the Company is entitled to receive in exchange for the transfer of control of a product or a service to a customer. To determine the transaction price, the Company considers the existence of any significant financing component, the effects of any variable elements, noncash considerations and consideration payable to the customer. If a significant financing component exists, the transaction price is adjusted for the time value of money. If an element of variability exists, the Company must estimate the consideration it expects to receive and uses that amount as the basis for recognizing revenue as the product or the service is transferred to the customer. There are two methods for determining the amount of variable consideration: (i) the expected value method, which is the sum of probability-weighted amounts in a range of possible consideration amounts, and (ii) the mostly likely amount method, which identifies the single most likely amount in a range of possible consideration amounts. If a contract has multiple performance obligations, the Company allocates the transaction price to each distinct performance obligation in an amount that reflects the consideration the Company is entitled to receive in exchange for satisfying each distinct performance obligation. For each distinct performance obligation, revenue is recognized when (or as) the Company transfers control of the product or the service applicable to such performance obligation. In those instances where the Company first receives consideration in advance of satisfying its performance obligation, the Company classifies such consideration as deferred revenue until (or as) the Company satisfies such performance obligation. In those instances where the Company first satisfies its performance obligation prior to its receipt of consideration, the consideration is recorded as accounts receivable. The Company expenses incremental costs of obtaining and fulfilling a contract as and when incurred if the expected amortization period of the asset that would be recognized is one year or less, or if the amount of the asset is immaterial. Otherwise, such costs are capitalized as contract assets if they are incremental to the contract and amortized to expense proportionate to revenue recognition of the underlying contract. Research and Development Expenses All research and development costs are expensed in the period incurred. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and payments made in advance of performance are reflected in the accompanying balance sheets as prepaid expenses. The Company records accruals for estimated costs incurred for ongoing research and development activities. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the services, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates may be made in determining the prepaid or accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates. Stock-Based Compensation Stock-based compensation expense represents the cost of the grant date fair value of equity awards recognized over the requisite service period of the awards (generally the vesting period) on a straight-line basis. The Company estimates the fair value of equity awards using the Black-Scholes option pricing model and recognizes forfeitures as they occur. 9 Table of Contents Janux Therapeutics, Inc. Notes to Unaudited Condensed Financial Statements–(Continued) Comprehensive Loss Comprehensive loss is defined as a change in equity during a period from transactions and other events and circumstances from non-owner sources. The only component of other comprehensive loss is unrealized gain (loss) on available-for-sale securities. Comprehensive losses have been reflected in the statements of operations and comprehensive loss and as a separate component in the statements of convertible preferred stock and stockholders’ equity (deficit). Net Loss Per Share Basic net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding for the period, without consideration for potentially dilutive securities. The Company has excluded weighted-average unvested shares of 589,054 shares, 255,373 shares, 447,465 shares and 282,172 shares from the weighted-average number of common shares outstanding for the three months ended June 30, 2021 and 2020 and six months ended June 30, 2021 and 2020, respectively. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and dilutive common stock equivalents outstanding for the period determined using the treasury-stock and if-converted methods. Dilutive common stock equivalents are comprised of convertible preferred stock, unvested common stock subject to repurchase and options outstanding under the Company’s stock option plan. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding as inclusion of the potentially dilutive securities would be anti-dilutive. Potentially dilutive securities not included in the calculation of diluted net loss per share, because to do so would be anti-dilutive, are as follows (in common stock equivalent shares): June 30, 2021 2020 Convertible preferred stock outstanding — 5,782,492 Common stock options 5,173,702 291,426 Unvested common stock 516,951 229,739 ESPP shares 1,235 — Total potentially dilutive shares 5,691,888 6,303,657 Recently Issued Accounting Pronouncements In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity . The new guidance, among other things, simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments, and amends existing earnings-per-share (“EPS”) guidance by requiring that an entity use the if-converted method when calculating diluted EPS for convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company plans to adopt the new guidance effective January 1, 2022 and is currently evaluating the effect adoption will have on its financial position, results of operations or related disclosures. 2. Balance Sheet Details Property and equipment, net consist of the following (in thousands): June 30, 2021 December 31, 2020 Laboratory equipment $ 244 $ 176 Computer equipment and software 10 — Total property and equipment 254 176 Less: accumulated depreciation ( 39 ) ( 21 ) Property and equipment, net $ 215 $ 155 10 Table of Contents Janux Therapeutics, Inc. Notes to Unaudited Condensed Financial Statements–(Continued) Accrued liabilities consist of the following (in thousands): June 30, 2021 December 31, 2020 Accrued equity issuance costs $ 837 $ — Accrued research and development (including related party amounts of $ 0 and $ 14 , respectively) 822 66 Accrued compensation (including related party amounts of $ 0 and $ 286 , respectively) 343 286 Other accrued liabilities (including related party amounts of $ 0 and $ 244 , respectively) 199 255 Accrued professional fees 85 144 $ 2,286 $ 751 3. Commitments and Contingencies License Agreement with WuXi Biologics (Hong Kong) Limited In April 2021, the Company entered into a cell line license agreement (“Cell Line License Agreement”) with WuXi Biologics (Hong Kong) Limited (“WuXi Biologics”), pursuant to which the Company received a non-exclusive, worldwide, sublicensable license under certain of WuXi Biologics’ patent rights, know-how and biological materials (“WuXi Biologics Licensed Technology”), to use the WuXi Biologics Licensed Technology to make, use, sell, offer for sale and import certain therapeutic products produced through the use of the cell line licensed by WuXi Biologics under the Cell Line License Agreement (“WuXi Biologics Licensed Product”). Specifically, the WuXi Biologics Licensed Technology is used to manufacture a component of the Company’s PSMA-TRACTr and EGFR-TRACTr product candidates. In consideration for the license, the Company paid WuXi Biologics a non-refundable, one-time license fee of $ 0.2 million upon Wuxi Biologics’ achievement of a certain technical milestone. This one-time license fee was recognized as research and development expense when incurred since the WuXi Biologics Licensed Technology had no alternative future use. If the Company does not engage WuXi Biologics or its affiliates to manufacture the WuXi Biologics Licensed Products for its commercial supplies, the Company is required to make royalty payments to WuXi Biologics in an amount equal to a low single-digit percentage of specified portions of net sales of WuXi Biologics Licensed Products manufactured by a third party manufacturer. The Company has the right (but not the obligation) to buy out its remaining royalty obligations with respect to each WuXi Biologics Licensed Product by paying WuXi Biologics a one-time payment in an amount ranging from low single digit million dollars to a maximum of $ 15.0 million depending on the development and commercialization stage of the WuXi Biologics Licensed Product (the “Buyout Option”), and upon such payment, the Company’s license with respect to such WuXi Biologics Licensed Product will become fully paid-up, irrevocable, and perpetual. The royalty obligations will remain in effect during the term of the Cell Line License Agreement so long as the Company has not exercised the Buyout Option. The Cell Line License Agreement will continue indefinitely unless terminated (i) by the Company upon three months’ prior written notice and the Company’s payment of all amounts due to WuXi Biologics through the effective date of termination, (ii) by either party for the other party’s material breach that remains uncured for 30 days after written notice, and (iii) by WuXi Biologics if the Company fails to make a payment and such failure continues for 30 days after receiving notice of such failure. Contingencies From time to time, the Company may be subject to claims or suits arising in the ordinary course of business. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. 4. Related Party Transactions In August 2017, the Company entered into a Support Services Agreement with COI Pharmaceuticals, Inc. (“COI”) that outlines the terms of services provided by COI to the Company, as well as the fees charged for such services. COI is a shared service company that provides certain back-office and administrative and research and development support services, including facilities support, to the portfolio companies of Avalon Ventures, a stockholder of the Company. The Company pays COI quarterly prepayments for estimated costs to be incurred under the agreement in such quarter. Either party may terminate the support services agreement by giving 30 days’ 11 Table of Contents Janux Therapeutics, Inc. Notes to Unaudited Condensed Financial Statements–(Continued) prior notice. The support services agreement automatically renews in August of each year unless terminated by either party by giving 30 days’ prior notice. On January 1, 2021, the Company entered into a second Support Services Agreement with COI, which superseded the August 2017 Support Services Agreement. The agreement modified the nature of services provided to the Company considering the transition of certain individuals as full-time Janux employees effective January 1, 2021. The services will no longer include services normally associated with the roles of Chief Executive Officer, President and Senior Vice President. Other services associated with certain back-office and administrative and research and development services, including facilities support and other terms of the original agreement remain unchanged. The initial term of the second Support Services Agreement expires in January 2022 and will automatically renew for one or more additional periods of one year unless terminated by either party by giving 30 days’ prior notice. Expense recognized by the Company under the Support Services Agreement with COI was as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Research and development $ 423 $ 305 $ 909 $ 638 General and administrative 99 205 203 419 Total $ 522 $ 510 $ 1,112 $ 1,057 At June 30, 2021, the Company had prepaid expenses and other current assets of $ 36,000 with COI. At December 31, 2020, the Company had accounts payable and accrued expenses due to COI or its affiliates of $ 0.5 million. For the six months ended June 30, 2021, the Company paid COI $ 10,000 related to the purchase of property and equipment. 5. Convertible Preferred Stock and Stockholders’ Equity (Deficit) Convertible Preferred Stock On March 1, 2021, the Company entered into a Series A preferred stock purchase agreement with various investors, pursuant to which it issued and sold an aggregate of 5,894,740 shares of its Series A convertible preferred stock at a price per share of $ 9.50 for gross proceeds of $ 56.0 million. On April 15, 2021, the Company entered into a Series B preferred stock purchase agreement with various investors, pursuant to which it issued and sold an aggregate of 8,038,073 shares of its Series B convertible preferred stock at a price per share of $ 15.551 for gross proceeds of $ 125.0 million. In connection with the Company’s IPO, all outstanding shares of the Company’s convertible preferred stock automatically converted into 26,608,460 shares of common stock. Initial Public Offering In June 2021, the Company completed its IPO selling 13,110,000 shares its common stock at $ 17.00 per share. Proceeds from the Company’s IPO, net of underwriting discounts and commissions and other offering costs, were $ 204.1 million. 2017 Equity Incentive Plan In August 2017, the Company adopted the Janux Therapeutics, Inc. 2017 Equity Incentive Plan (the “2017 Plan”), which provided for the grant of incentive stock options, nonstatutory stock options, restricted stock awards and other stock awards to its employees, members of its board of directors and consultants. The maximum term of options granted under the 2017 Plan is ten years and, in general, the options issued under the 2017 Plan vest over a four-year period from the vesting commencement date. The 2017 Plan allows for the early exercise of stock options, which may be subject to repurchase by the Company at the original exercise price. Upon the effectiveness of the 2021 Plan defined and described below, no further grants will be made under the 2017 Plan. Any outstanding awards granted under the 2017 Plan will remain subject to the terms of the 2017 Plan and applicable award agreements. 2021 Equity Incentive Plan 12 Table of Contents Janux Therapeutics, Inc. Notes to Unaudited Condensed Financial Statements–(Continued) In June 2021, the Company’s board of directors and stockholders adopted the 2021 Equity Incentive Plan (the “2021 Plan,” and together with the 2017 Plan the “Plans”). The 2021 Plan became effective upon the date of the underwriting agreement related to the Company’s IPO. Under the 2021 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance stock awards, performance cash awards and other forms of stock awards to employees, directors and consultants. The maximum term of options granted under the 2021 Plan is ten years and, in general, the options issued under the 2021 Plan vest over a four-year period from the vesting commencement date. The 2021 Plan does not permit early exercises. A total of 2,775,890 new shares of common stock were initially reserved for issuance under the 2021 Plan. The number of shares reserved that were remaining under the 2017 Plan as of the effective date of the 2021 Plan, or 1,424,110 shares, were added to the shares initially reserved under the 2021 Plan upon its effectiveness and any future cancellations under the 2017 Plan will become available for future issuance under the 2021 Plan. In addition, the number of shares of common stock available for issuance under the 2021 Plan will automatically increase on January 1 of each calendar year, starting on January 1, 2022 through January 1, 2031, in an amount equal to 5% of the total number of shares of the Company’s common stock on the last day of the calendar month before the date of each automatic increase, or a lesser number of shares determined by the Company’s board of directors. A summary of the Company’s stock option activity under its Plans is as follows (in thousands, except share, per share data and years): Number of Outstanding Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value Balance at December 31, 2020 1,096,533 $ 0.47 9.31 $ 3,214 Granted 4,712,485 $ 8.45 Exercised ( 635,316 ) $ 2.59 Balance at June 30, 2021 5,173,702 $ 7.48 9.69 $ 90,410 Vested and expected to vest at June 30, 2021 5,173,702 $ 7.48 9.69 $ 90,140 Exercisable at June 30, 2021 5,083,702 $ 7.31 9.68 $ 89,694 The weighted average grant date fair value per share of option grants for the six months ended June 30, 2021 and 2020 was $ 6.45 , and $ 0.09 , respectively. The total intrinsic value of stock options exercised for the six months ended June 30, 2021 and 2020 was $ 1.0 million and $ 0 , respectively. As of June 30, 2021, total unrecognized stock-based compensation cost was $ 29.4 million, which is expected to be recognized over a remaining weighted-average period of approximately 3.6 years. The assumptions used in the Black-Scholes option pricing model to determine the fair value of stock option grants under its Plans were as follows: Six Months Ended June 30, 2021 2020 Risk-free interest rate 0.9 % – 1.6 % 1.8 % Expected volatility 83 % – 87 % 85 % Expected term (in years) 5.5 – 10.0 10.0 Expected dividend yield — — Risk-free interest rate . The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities similar to the expected term of the awards. Expected volatility . Given the Company’s limited historical stock price volatility data, the expected volatility assumption is based on volatilities of a peer group of similar companies whose share prices are publicly available. The peer group was developed based on companies in the biotechnology industry. 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. Expected term . The expected term represents the period of time that options are expected to be outstanding. Because the Company does not have historical exercise behavior, it determines the expected life assumption using the simplified method, for 13 Table of Contents Janux Therapeutics, Inc. Notes to Unaudited Condensed Financial Statements–(Continued) employees, which is an average of the contractual term of the option and its vesting period. The expected term for nonemployee options is generally the contractual term. Expected dividend yield . The Company bases the expected dividend yield assumption on the fact that it has never paid cash dividends and has no present intention to pay cash dividends and, therefore, used an expected dividend yield of zero. 2021 Employee Stock Purchase Plan In June 2021, the Company’s board of directors and stockholders adopted the 2021 Employee Stock Purchase Plan (the “ESPP”). The ESPP became effective immediately prior to the date of the underwriting agreement related to the IPO. The ESPP permits eligible employees who elect to participate in an offering under the ESPP to have up to 15 % of their eligible earnings withheld, subject to certain limitations, to purchase shares of common stock pursuant to the ESPP. The price of common stock purchased under the ESPP is equal to 85 % of the lower of the fair market value of the common stock at the commencement date of each offering period or the relevant date of purchase. A total of 466,000 shares of common stock were approved to be initially reserved for issuance under the ESPP. In addition, the number of shares of common stock available for issuance under the ESPP will automatically increase on January 1 of each calendar year, starting on January 1, 2022 through January 1, 2031, in an amount equal to the lesser of (i) 1 % of the total number of shares of the Company’s common stock on the last day of the calendar month before the date of each automatic increase and (ii) 932,000 shares; provided that before the date of any such increase, the Company’s board of directors may determine that such increase will be less than the amount set forth in clauses (i) and (ii). In June 2021, employees began to enroll in the ESPP and the Company’s first offering period commenced. Stock-based compensation expense related to the ESPP for the three and six months ended June 30, 2021 was immaterial. Stock-Based Compensation Expense Stock-based compensation expense has been reported in the statements of operations and comprehensive loss as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Research and development $ 608 $ 1 $ 640 $ 2 General and administrative 669 1 760 2 Total $ 1,277 $ 2 $ 1,400 $ 4 Unvested Stock Liability A summary of the Company’s unvested shares and unvested stock liability is as follows (in thousands, except share data): Number of Unvested Shares Unvested Stock Liability Balance at December 31, 2020 211,137 $ 52 Early exercised shares 521,896 1,626 Vested shares ( 216,082 ) ( 178 ) Balance at June 30, 2021 516,951 $ 1,500 14 Table of Contents Janux Therapeutics, Inc. Notes to Unaudited Condensed Financial Statements–(Continued) Common Stock Reserved for Future Issuance Common stock reserved for future issuance consists of the following: June 30, December 31, 2021 2020 Conversion of preferred stock — 8,760,535 Common stock options outstanding 5,173,702 1,096,533 Shares available for issuance under the Plans 4,110,000 220,147 Shares available for issuance under the ESPP 466,000 — Total 9,749,702 10,077,215 6. Research Collaboration and Exclusive License Agreement In December 2020, the Company entered into a research collaboration and exclusive license agreement with Merck to develop TRACTr product candidates that are distinct from those in its internally developed pipeline (“Merck Agreement”). The Company recognized $ 0.5 million and $ 0.9 million of revenue under the Merck Agreement for the three and six months ended June 30, 2021. No revenue was recognized under the Merck Agreement during 2020. As of June 30, 2021, aggregate deferred revenue related to the Merck Agreement was $ 7.9 million, of which $ 5.1 million was classified as current. The Company had $ 0.4 million and $ 8.0 million of accounts receivable outstanding as of June 30, 2021 and December 31, 2020, respectively. The remaining performance obligations under the Merck Agreement relate to the Company’s conduct of research services and the Company’s participation in a joint research committee. The Company estimates the remaining term of the research services, over which revenue will be recognized, to be 1.8 years as of June 30, 2021. 7. 401(k) Plan Effective April 23, 2021, the Company adopted a defined contribution retirement savings plan under Section 401(k) of the Internal Revenue Code available to eligible employees. Employee contributions are voluntary and determined on an individual basis, limited to the maximum amount allowable under federal tax regulations. Under the plan, the Company makes a mandatory annual contribution of 3 % of the eligible employees’ compensation. Employer contributions paid through June 30, 2021 were immaterial. 15 Table of Contents Item 2 . Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and related notes included in the prospectus dated June 10, 2021 that forms a part of our Registration Statement on Form S-1 (File No. 333-256297), as filed with the Securities and Exchange Commission (SEC) pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the Securities Act), on June 11, 2021 (the Prospectus). Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should carefully read the “Risk Factors” section of this Quarterly Report to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Furthermore, past operating results are not necessarily indicative of results that may occur in future periods. Overview We are an innovative biopharmaceutical company developing next-generation therapeutics based on our proprietary Tumor Activated T Cell Engager (TRACTr) platform technology to better treat patients suffering from cancer. Our initial focus is on developing a novel class of T Cell engagers (TCEs), and our lead product candidates are designed to target clinically validated drug targets. While TCE therapeutics have displayed potent anti-tumor activity in hematological cancers, developing TCEs to treat solid tumors has faced challenges due to the limitations of prior TCE technologies, namely (i) overactivation of the immune system leading to cytokine release syndrome (CRS), (ii) on-target, healthy tissue toxicities and (iii) poor pharmacokinetics (PK) leading to short half-life. We are using our TRACTr platform technology to engineer product candidates designed to overcome these limitations. We are developing a broad pipeline with lead programs targeting prostate-specific membrane antigen (PSMA), epidermal growth factor receptor (EGFR), and trophoblast cell surface antigen 2 (TROP2), with all of our programs currently in the preclinical or discovery stage. We expect to submit at least two Investigational New Drug application (IND) submissions by the end of 2022. We are also applying our proprietary technology to develop a Tumor Activated Immunomodulator (TRACIr) costimulatory bispecific product candidate against programmed death-ligand 1 (PD-L1) and CD28 designed to further enhance the anti-tumor activity of T cells, which we believe has the potential to be used as a single-agent or in combination with our current TRACTr pipeline. Based on data we have generated in non-human primates (NHPs), we believe our TRACTr and TRACIr product candidates have the potential for (i) significantly reduced risk of toxic CRS responses, (ii) reduced risk of on-target, healthy tissue toxicities, and (iii) improved half-life with once-weekly dosing in humans. We were incorporated in June 2017. To date, we have devoted substantially all of our resources to organizing and staffing our company, business planning, business development, raising capital, developing and optimizing our technology platform, identifying potential product candidates, undertaking research and preclinical studies for our lead programs, establishing and enhancing our intellectual property portfolio and providing general and administrative support for these operations. We do not have any products approved for sale and have not generated any revenue from product sales. We have funded our operations primarily with the net proceeds from the issuance of convertible promissory notes, the issuance of convertible preferred stock, the exercise of common stock options, proceeds from our initial public offering and amounts received under a collaboration agreement with Merck Sharp & Dohme Corp. (Merck). We have incurred operating losses since our inception and have not yet generated any product revenue. Our net losses were $8.5 million and $3.9 million, respectively, for the six months ended June 30, 2021 and 2020. As of June 30, 2021, we had an accumulated deficit of $23.2 million. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on a variety of factors including the timing and scope of our preclinical studies and our expenditures on other research and development activities and the timing of any revenue recognition under our collaboration agreement with Merck. We expect our expenses and operating losses will increase substantially and that we will continue to incur significant losses for the foreseeable future as we conduct our ongoing and planned research and development activities and conduct preclinical studies and clinical trials, hire additional personnel, protect our intellectual property and incur additional costs associated with being a public company. We do not expect to generate any revenues from product sales unless and until we successfully complete development and obtain regulatory approval for one or more product candidates, which will not be for many years, if ever. Accordingly, until such time as we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including potentially grants, collaborations, licenses or 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. 16 Table of Contents Our failure to raise capital or enter into such other arrangements when needed would have a negative impact on our financial condition and could force us to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates or to our platform technology that we would otherwise prefer to develop and market ourselves. The global COVID-19 pandemic continues to rapidly evolve, and we will continue to monitor the COVID-19 situation closely. The extent of the impact of the COVID-19 on our business, operations and clinical development timelines and plans remains uncertain, and will depend on certain developments, including the duration and spread of the outbreak and its impact on our CROs, third-party manufacturers, and other third parties with whom we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel and most of our office employees working remotely. We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business. At this point, the extent to which the COVID-19 pandemic may affect our business, operations and clinical development timelines and plans, including the resulting impact on our expenditures and capital needs, remains uncertain and is subject to change. Support Services Agreement with COI Pharmaceuticals, Inc. In January 2021, we entered into a Support Services Agreement (the Support Services Agreement) with COI Pharmaceuticals, Inc. (COI), pursuant to which COI provides certain services to us, including general administrative services and facilities support services, and provides us with supplies and equipment, laboratory facilities, and office space. COI is a shared service company that provides certain back-office and administrative and research and development support services, including facilities support, to the portfolio companies of Avalon Ventures, an entity that beneficially owns greater than 5% of our outstanding capital stock. The amounts paid to COI include support service fees or mark-ups of up to 5%. The Support Services Agreement outlines the terms of the services provided by COI to us, as well as the fees and expenses charged for such services. The initial term of the Support Services Agreement expires in January 2022. The agreement will continue to renew for additional one-year renewal periods until terminated by the parties. Either party may terminate the agreement with 30 days written notice. Our Research Collaboration with Merck In December 2020, we entered into a research collaboration and exclusive license agreement with Merck to develop TRACTr product candidates that are distinct from those in our internally developed pipeline. Merck has the right to select up to two collaboration targets (each a Collaboration Target) related to next generation T cell engager immunotherapies for the treatment of cancer. Merck selected one of the Collaboration Targets upon execution of the agreement and has a specified period of time to select the second Collaboration Target. Merck will receive an exclusive worldwide license for each selected target and intellectual property from the collaboration. In return, we are eligible to receive up to $500.5 million per target in upfront and milestone payments, plus royalties on sales of the products derived from the collaboration. Merck provides research funding under the collaboration. Financial Operations Overview Revenues To date, we have not generated any revenues from the commercial sale of any products, and we do not expect to generate revenues from the commercial sale of any products for the foreseeable future, if ever. We did not recognize any revenues under our December 2020 collaboration with Merck through December 31, 2020 since we had not completed any substantive research services required by that agreement. We began recognizing revenue under this agreement in 2021. Research and Development To date, our research and development expenses have related primarily to development of our TRACTr platform technology, programs, and discovery efforts, preclinical studies and other preclinical activities related to lead discovery and optimization of development candidates under our TRACTr platform technology and costimulatory bispecific development program. Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received. Research and development expenses include: 17 Table of Contents  salaries and employee-related costs, including stock-based compensation for those individuals involved in research and development efforts;  external research and development expenses incurred under agreements with CROs and consultants to conduct our preclinical studies;  license fees;  laboratory equipment, materials and supplies; and  facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent, maintenance of facilities, insurance, equipment and other supplies. Certain research and development expenses as listed above include amounts paid to COI. We anticipate that our research and development expenses will substantially increase for the foreseeable future as we continue the development of our TRACTr and costimulatory bispecific platforms and the discovery and development of product candidates within our TRACTr and costimulatory bispecific programs. We cannot determine with certainty the timing of initiation, the duration or the completion costs of future clinical trials and preclinical studies of product candidates due to the inherently unpredictable nature of preclinical and clinical development. Preclinical and clinical development timelines, the probability of success and development costs can differ materially from expectations. We anticipate that we will make determinations as to which product candidates and development programs to pursue and how much funding to direct to each product candidate or program on an ongoing basis in response to the results of ongoing and future preclinical studies and clinical trials, regulatory developments and our ongoing assessments as to each product candidate’s commercial potential. We will need to raise substantial additional capital in the future. In addition, we cannot forecast which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements. General and Administrative General and administrative expenses consist primarily of salaries and employee-related costs, including stock-based compensation, for personnel in executive, finance and other administrative functions. Other significant general and administrative expenses include facility-related costs, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities; legal fees relating to intellectual property and corporate matters; professional fees for accounting, tax and consulting services; insurance costs; and other operating costs. Our general and administrative expenses include amounts paid to COI for certain back-office and administrative support services, including facilities support. We anticipate that our general and administrative expenses will substantially increase for the foreseeable future as we continue to increase our general and administrative headcount to support our continued research and development activities and, if any of our product candidates receive marketing approval, commercialization activities. We also anticipate increased expenses associated with operating as a public company, including expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums and investor relations costs. Interest Income Interest income consists of interest income on our cash and cash equivalents and short-term investments. Interest Expense – Related Parties Interest expense consists of coupon interest of 8% per annum on our convertible promissory notes that converted in June 2020. Increase in Fair Value of Convertible Promissory Notes – Related Parties We issued convertible promissory notes in 2019 and 2020 for which we have elected the fair value option. Until their conversion into Series Seed 2 convertible preferred stock in June 2020, we adjusted the carrying value of our convertible promissory notes to their estimated fair value at each reporting date, with the increases in fair value of the convertible promissory notes recorded as increase in fair value of convertible promissory notes in our statements of operations and comprehensive loss. We estimated the fair value of our convertible promissory notes using a scenario-based analysis that estimated the fair value of the convertible promissory notes based on the probability-weighted present value of expected future investment returns, considering possible outcomes available to the noteholders. 18 Table of Contents Results of Operations Comparison of the Three Months Ended June 30, 2021 and 2020 Three Months Ended June 30, 2021 2020 Change (in thousands) Collaboration revenue $ 482 $ — $ 482 Operating expenses: Research and development 4,737 673 4,064 General and administrative 1,997 433 1,564 Total operating expenses 6,734 1,106 5,628 Loss from operations (6,252 ) (1,106 ) (5,146 ) Other expense: Interest income 46 — 46 Interest expense – related parties — (109 ) 109 Increase in fair value of convertible promissory notes – related parties — (1,245 ) 1,245 Total other income (expense) 46 (1,354 ) 1,400 Net loss $ (6,206 ) $ (2,460 ) $ (3,746 ) Collaboration Revenue We began recognizing revenue from our December 2020 collaboration with Merck in 2021 when we began to provide the research services required under the agreement. We did not generate any collaboration revenue for the three months ended June 30, 2020. Research and Development Expense Research and development expenses were $4.7 million and $0.7 million for the three months ended June 30, 2021 and 2020, respectively. The increase of $4.0 million was due to a net increase related to the development of our TRACTr platform technology and programs of $2.4 million, personnel and facilities costs of $0.8 million, stock-based compensation expense of $0.6 million, and license fees of $0.2 million. General and Administrative Expense General and administrative expenses were $2.0 million and $0.4 million for the three months ended June 30, 2021 and 2020, respectively. The increase of $1.6 million was due primarily to increases of $0.7 million of stock-based compensation, $0.5 million in personnel and facilities related expenses, $0.2 million in consulting and outside services, and $0.2 million in other general and administrative costs. Other Expense Other income of $46,000 for the three months ended June 30, 2021 consisted of interest income on our cash and cash equivalents and short-term investments. Other expense of $1.4 million for the three months ended June 30, 2020 consisted of a $1.2 million increase in the fair value of our convertible promissory notes and $0.1 million of interest expense on our convertible promissory notes. 19 Table of Contents Comparison of the Six Months Ended June 30, 2021 and 2020 Six Months Ended June 30, 2021 2020 Change (in thousands) Collaboration revenue $ 862 $ — $ 862 Operating expenses: Research and development 6,662 1,222 5,440 General and administrative 2,736 710 2,026 Total operating expenses 9,398 1,932 7,466 Loss from operations (8,536 ) (1,932 ) (6,604 ) Other expense: Interest income 46 — 46 Interest expense – related parties — (206 ) 206 Increase in fair value of convertible promissory notes – related parties — (1,735 ) 1,735 Total other income (expense) 46 (1,941 ) 1,987 Net loss $ (8,490 ) $ (3,873 ) $ (4,617 ) Collaboration Revenue We began recognizing revenue from our December 2020 collaboration with Merck in 2021 when we began to provide the research services required under the agreement. We did not generate any collaboration revenue for the six months ended June 30, 2020. Research and Development Expense Research and development expenses were $6.7 million and $1.2 million for the six months ended June 30, 2021 and 2020, respectively. The increase of $5.5 million was due to a net increase related to the development of our TRACTr platform technology and programs of $3.4 million, personnel and facilities costs of $1.1 million, stock-based compensation expense of $0.6 million, license fees of $0.2 million, and other research and development costs of $0.2 million. General and Administrative Expense General and administrative expenses were $2.7 million and $0.7 million for the six months ended June 30, 2021 and 2020, respectively. The increase of $2.0 million was due primarily to increases of $0.8 million of stock-based compensation, $0.6 million in personnel and facilities related expenses, $0.3 million in professional services related primarily to corporate legal fees and audit and tax fees, $0.2 million in consulting and outside services, and $0.1 million in other general and administrative costs. Other Expense Other income of $46,000 for the six months ended June 30, 2021 consisted of interest income on our cash and cash equivalents and short-term investments. Other expense of $1.9 million for the six months ended June 30, 2020 consisted of a $1.7 million increase in the fair value of our convertible promissory notes and $0.2 million of interest expense on our convertible promissory notes. Liquidity and Capital Resources We have incurred net losses and negative cash flows from operations since our inception and anticipate we will continue to incur net losses for the foreseeable future. In March and April of 2021 we sold convertible preferred stock resulting in aggregate net proceeds of $180.5 million. In June 2021, we completed our IPO and sold 13,110,000 shares of our common stock at $17.00 per share. Proceeds from our IPO, net of underwriting discounts and commissions and other offering costs, were $204.1 million. As of June 30, 2021, we had not yet paid $0.9 million of the IPO offering costs. All outstanding shares of our convertible preferred stock converted into common stock in connection with our IPO. As of June 30, 2021, we had cash and cash equivalents and short-term investments of $394.2 million. 20 Table of Contents The following summarizes our cash flows for the periods indicated: Six Months Ended June 30, 2021 2020 (in thousands) Net cash provided by (used in): Operating activities $ (641 ) $ (1,657 ) Investing activities (142,750 ) — Financing activities 387,203 7,004 Net increase (decrease) in cash and cash equivalents $ 243,812 $ 5,347 Operating Activities Net cash used in operating activities was $0.6 million for the six months ended June 30, 2021 and net cash used in operating activities was $1.7 million for the six months ended June 30, 2020. The net cash used in operating activities for the six months ended June 30, 2021 was primarily due to our net loss of $8.5 million, adjusted for $1.4 million of noncash charges and a change in operating assets and liabilities of $6.5 million. The net cash used in operating activities for the six months ended June 30, 2020 was primarily due to our net loss of $3.9 million, adjusted for a $1.7 million noncash charge related to an increase in the fair value of convertible promissory notes, $0.2 million of noncash interest and a $0.3 million change in operating assets and liabilities. Investing Activities Net cash used in investing activities was $142.7 million for the six months ended June 30, 2021 due our purchase of short-term investments of $142.5 million and our purchase of property and equipment of $0.2 million. We had no cash flows from investing activities for the six months ended June 30, 2020. Financing Activities Net cash provided by financing activities of $387.2 million for the six months ended June 30, 2021 primarily consisted of $205.0 million of net proceeds from our initial public offering, $180.5 million of net proceeds from our preferred stock sales and $1.7 million of proceeds from stock option exercises. Net cash provided by financing activities of $7.0 million for the six months ended June 30, 2020 primarily consisted of $2.5 million of net proceeds from the issuance of convertible promissory notes and $4.5 million of net proceeds from the issuance of convertible preferred stock. Funding Requirements Based on our current operating plan, we believe that our existing cash and cash equivalents and short-term investments, will be sufficient to meet our anticipated cash requirements through at least the next 12 months, following the date of this Quarterly Report. 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 deplete our capital resources sooner than we expect. Additionally, the process of testing product candidates in clinical trials is costly, and the timing of progress and expenses in these trials is uncertain. Our future capital requirements will depend on many factors, including:  the initiation, trial design, progress, timing, costs and results of drug discovery, preclinical studies and clinical trials of our product candidates, and in particular the IND-enabling studies and planned future clinical trials for PSMA-TRACTr, EGFR-TRACTr, TROP2-TRACTr and costimulatory bispecific;  the number and characteristics of clinical programs that we pursue;  the outcome, timing and costs of seeking FDA, European Medicines Agency (EMA) and any other regulatory approvals for any future drug candidates;  the costs of manufacturing our product candidates;  the costs associated with hiring additional personnel and consultants as our preclinical, manufacturing and clinical activities increase;  the receipt of marketing approval and revenue received from any commercial sales of any of our product candidates, if approved; 21 Table of Contents  the cost of commercialization activities for any of our product candidates, if approved, including marketing, sales and distribution costs;  the ability to establish and maintain strategic collaboration, licensing or other arrangements and the financial terms of such agreements;  the extent to which we in-license or acquire other products and technologies;  the costs involved in preparing, filing, prosecuting, maintaining, expanding, defending and enforcing patent claims, including litigation costs and the outcome of such litigation;  our implementation of additional internal systems and infrastructure, including operational, financial and management information systems;  our costs associated with expanding our facilities or building out our laboratory space;  the effects of the recent disruptions to and volatility in the credit and financial markets in the United States and worldwide from the COVID-19 pandemic; and  the costs of operating as a public company. Until such time, if ever, as we can generate substantial product revenues to support our cost structure, we expect to finance our cash needs through a combination of equity offerings, debt financings or other capital sources, including potentially grants, collaborations, licenses or other similar arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, or other similar arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our product candidates even if we would otherwise prefer to develop and market such product candidates ourselves. Critical Accounting Policies and Estimates Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, accruals for research and development expenses, stock-based compensation and fair value measurements. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies are those accounting principles generally accepted in the United States that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations, as well as the specific manner in which we apply those principles. For a description of our critical accounting policies, see Item 1 of Part I, “Notes to Condensed Financial Statements — Note 1 — Organization and Summary of Significant Accounting Policies” of this Quarterly Report and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Significant Judgments and Estimates” contained in the Prospectus. There have not been any material changes to the critical accounting policies discussed therein during the three months ended June 30, 2021. Off-Balance Sheet Arrangements We have not entered into any off-balance sheet arrangements, as defined in the rules and regulations of the SEC. Item 3 . Quantitative and Qualitative Disclosures About Market Risk. Not applicable to a smaller reporting company. 22 Table of Contents