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Item 7. Management’s Discussion and Analysis

2021-03-01 compared with 2020-03-16 · 75 added, 128 removed, 177 unchanged (53% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYS IS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 the section titled “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere in this report.

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Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under the section titled “Risk Factors” and elsewhere in this report.

Kodiak Sciences (we or the Company) is a biopharmaceutical company committed to researching, developing and commercializing transformative therapeutics to treat high prevalence retinal diseases in the United States and additional international markets.

We are bringing new science to the design and development of next generation retinal medicines.

Our ABC Platform TM uses molecular engineering to merge the fields of antibody-based and chemistry-based therapies and is at the core of Kodiak’s discovery engine.

Our lead product candidate, KSI-301, is a novel anti-VEGF antibody biopolymer conjugate generating compelling data in treatment naïve patients with retinal vascular diseases.

Our pivotal program is exploring KSI-301 in wAMD, DME, RVO and non-proliferative diabetic retinopathy.

Our hope with KSI-301 is to meaningfully change the treatment paradigm for all patients with retinal vascular diseases.

Our pipeline, including product candidates KSI-501 and KSI-601, aims to bring a similar ethos of drug development to other unmet needs in retina such as dry AMD and glaucoma.

Our goal is to prevent and treat the major causes of blindness by developing next-generation therapeutics for chronic, high-prevalence retinal diseases.

Throughout 2019 and into 2020, we have generated clinical data with our most advanced product candidate, KSI-301, a biologic therapy built with our antibody biopolymer conjugate platform, or ABC Platform, which is designed to maintain potent and effective drug levels in ocular tissues for longer periods than the currently-marketed biologic medicines used to treat retinal diseases.

To date, KSI-301 has been administered more than 500 times to over 200 patients.

Our overall objective is to develop our product candidates, seek FDA and worldwide health authority marketing authorization approvals, and ultimately commercialize our product candidates.

Product Candidates

Kodiak's lead product candidate, KSI-301, is a novel anti-VEGF antibody biopolymer conjugate being developed for the treatment of retinal vascular diseases including age-related macular degeneration, a leading cause of blindness in elderly patients, and diabetic eye diseases, a leading cause of blindness in working-age patients.

We continue to observe promising safety, efficacy and clinical durability data through 52-weeks in our ongoing Phase 1b study of KSI-301 in treatment-naïve patients with wet AMD, DME or RVO.

Based on the encouraging data from our Phase 1b study, we have expanded the KSI-301 clinical pivotal program in the third quarter of 2020, and we have entered into the manufacturing-related commitments necessary for KSI-301’s commercial scale-up and BLA submission.

We successfully recruited patients into both of our paired pivotal studies in DME (GLEAM and GLIMMER) and into our pivotal study in RVO (BEACON) in the third quarter of 2020.

The pivotal study for wet AMD (DAZZLE) began recruiting in the third quarter of 2019 and completed patient enrollment in the fourth quarter of 2020.

Approximately 2,000 KSI-301 injections have been administered to approximately 500 patients, representing approximately 350 patient-years of exposure.

We believe the intersection of these clinical and manufacturing activities remain on track per our “2022 Vision” to submit a single BLA for wet AMD, DME and RVO in calendar year 2022.

We believe that KSI-301, if approved, has the potential to be an important therapy to treat patients with wet age-related macular degeneration, or wet AMD, diabetic retinopathy, or DR, including diabetic macular edema, or DME, and macular edema due to retinal vein occlusion, or RVO.

In our ongoing Phase 1b clinical study, we have completed enrollment and administered multiple doses of KSI-301 to treatment-naïve patients with wet AMD, DME or RVO, and we are observing promising safety, efficacy, and clinical durability in the emerging data in each of the retinal diseases under study.

We believe the data support an acceleration of efforts to bring KSI-301 to the market in these retinal diseases and that the data lend confidence to the design of our current and planned pivotal studies of KSI-301, which studies we believe, if successful, may demonstrate a meaningfully differentiated clinical profile of KSI-301 as compared to current therapies.

Based on this encouraging data, we are entering into the manufacturing-related commitments necessary for pre-commercial scale-up and BLA submission.

We have completed an end of phase 2 meeting with the U.S.

Food and Drug Administration, or FDA, where we agreed on the order and number of clinical studies required to support the licensure of KSI-301 in wet AMD, DME, RVO and DR (without DME).

Two pivotal studies will be required in RVO and one study each in wet AMD, DME, and DR in order to support the potential U.S.

approval of KSI-301 across these four indications.

The pivotal study for wet AMD began recruiting patients in the third quarter of 2019, and we plan to initiate the pivotal studies in DME, RVO and DR in 2020.

Our Pre-Clinical Pipeline

Kodiak has leveraged its ABC Platform to build a pipeline of product candidates in various stages of development including KSI-501, our bispecific anti-IL-6/VEGF biopolymer conjugate for the treatment of neovascular retinal diseases with an inflammatory component, and we are expanding our early research pipeline to include ABC Platform based triplet inhibitors for multifactorial retinal diseases such as dry AMD and glaucoma.

The ABC Platform and KSI-301 were developed at Kodiak, and we own worldwide rights to these assets.

We have applied our ABC Platform to develop additional product candidates beyond KSI-301, including KSI-501, our bispecific anti-IL-6/VEGF bioconjugate, and we are expanding our early research pipeline to include ABC Platform-based triplet inhibitors for multifactorial retinal diseases such as dry AMD and the neurodegenerative aspects of glaucoma.

We intend to progress these and other product candidates to address high-prevalence ophthalmic diseases.

Our overall objective is to develop our product candidates, seek FDA and worldwide health authority marketing authorization approvals, and ultimately commercialize our product candidates.

Recent developments

On December 1, 2019, we and our subsidiary, Kodiak Sciences GmbH, entered into a funding agreement with Baker Bros.

Advisors, or BBA, pursuant to which BBA purchased the right to receive a capped 4.5% royalty on future net sales of KSI-301 in exchange for $225,000,000 in committed development funding payable to us.

Unless earlier terminated or re-purchased by us, the royalty terminates upon the date that BBA has received an aggregate amount equal to 4.5 times the funding amount paid to us.

On February 4, 2020, BBA paid us the first $100,000,000 of the funding amount, and the remaining $125,000,000 of the funding amount will be paid following the achievement of 50% enrollment in each of (i) the planned Phase 3 clinical trial of KSI-301 for branch RVO and (ii) the planned Phase 3 clinical trial of KSI-301 for central RVO.

We have the option, exercisable at any point during the term of the funding agreement, to repurchase from BBA 100% of the royalties due to BBA under the funding agreement for a purchase price equal to the funding amount paid to us as of such time times 4.5, less amounts paid by us to BBA.

The funding agreement was the result of a competitive process overseen by independent and disinterested directors with the assistance of outside counsel.

For further details, see the “Business” section above.

On December 6, 2019, we completed a follow-on equity offering and issued and sold 6,900,000 shares of the Company’s common stock at a price to the public of $46.00 per share.

The gross proceeds from this offering were $317.4 million, resulting in aggregate net proceeds of $297.6 million after deducting underwriting discounts and commissions and other offering costs payable by us.

Proceeds from the royalty funding agreement together with our current cash, cash equivalents and marketable securities, which includes proceeds from the equity offering, are expected to advance the clinical programs for KSI-301 towards achieving our “2022 Vision” of a Biologics License Application, or BLA, of KSI-301 in 2022 for wet AMD, DME, RVO and potentially DR without DME, including the manufacturing activities necessary for BLA submission, as well as to advance our pipeline of drug candidates including KSI-501 and our triplet inhibitor drug candidates and for working capital and general corporate purposes.

In 2019 and into the first quarter of 2020, highlights of our activities included:

Initiation of enrollment and on-going recruitment in our pivotal DAZZLE clinical trial of KSI-301 in patients with treatment naïve wet AMD.

As of March 6, 2020, more than 175 patients have been enrolled in the study randomized 1:1 between KSI-301 and Eylea as active comparator;

Completion of recruitment into our ongoing Phase 1b study of KSI-301 in 121 treatment-naïve patients with wet AMD, DME and RVO;

Presentation of promising on-going clinical safety, efficacy and durability data at the American Society of Retina Specialists 2019 Annual Meeting, the Macula Society 2019 Annual Meeting, the American Academy of Ophthalmology 2019 Annual Meeting Retina Subspecialty Day, and the Angiogenesis, Exudation, and Degeneration 2020 Annual Meeting;

Completion of a Type B (End of Phase 2 or EOP) meeting with the FDA where we discussed and agreed on:

Certain recommended clinical, non-clinical, and manufacturing activities to support the licensure of KSI-301, and

The order and number of clinical studies required to support a BLA in wet AMD, DME, RVO and DR;

Announcement of an accelerated registration strategy for KSI-301 which includes:

(i) running our pivotal clinical studies in the major retinal vascular disease indications in parallel (rather than in series), and (ii) engaging in BLA and pre-commercial manufacturing validation and scale-up activities;

Expansion of our Board of Directors with the appointment of Taiyin Yang, Ph.D., Executive Vice President, Pharmaceutical Development and Manufacturing of Gilead Sciences, who brings expertise and experience in the relevant pre-commercial areas of clinical and commercial manufacturing, quality and supply chain operations;

Entry into a royalty funding agreement with BBA in which we sold a capped, pre-payable 4.5% royalty on future net sales of KSI-301 in exchange for $225,000,000 in committed development funding payable to us.;

Closing of a $317.4 million follow-on offering of our common stock.

Based on the emerging clinical data , our productive EOP meeting with the FDA , and our substantive financing events, we are accelerating our BLA- and pre-commercial manufacturing activities to match the clinical timelines for KSI-301, with the goal of demonstrating a meaningfully-differentiated ( i.e.

, first line) clinical profile in each of wet AMD, DME , RVO, and DR as compared to currently-marketed medicines.

Our current cash, cash equivalents and marketable securities which includes the net proceeds from the December 2019 public offering, and together with the royalty funding agreement, provide the resources for us to advance the KSI-301 program towards achieving our “2022 Vision,” and also to advance our pipeline of drug candidates including KSI-501 and our triplet inhibitor drug candidates, and for working capital and general corporate purposes.

Kodiak’s 2022 Vision and KSI-301 accelerated development strategy

We believe that we can achieve our “2022 Vision” of a BLA submission and initial FDA approval for KSI-301 in wet AMD, DME, RVO and DR with a total of five pivotal trials— two in RVO, one in wet AMD, one in DME and one in DR without DME.

Consequently, we now intend to initiate at least four US/EU-based pivotal trials in 2020 – one in DME, one in central RVO (CRVO), one in branch RVO (BRVO), and one in DR without DME.

These studies, together with our ongoing pivotal study in wet AMD, will be the basis of our intended BLA and sBLA submissions.

We currently expect to submit the wet AMD, DME, and RVO indications in a single initial BLA for KSI-301 and the DR indication in a supplemental BLA in the United States.

We continue to invest in our science and our pipeline, including our bispecific ABC product candidate KSI-501 for retinal vascular diseases with a strong inflammatory component and our new triplet inhibitors for the high prevalence multifactorial retinal diseases dry AMD and the neurodegenerative aspects of glaucoma.

Our 2022 Vision includes the following potential catalysts and milestones in 2020, 2021 and 2022 , along with the important milestones achieved in 2019 that support the accelerated development program :

Further details of our ongoing KSI-301 Phase 1b trial and our accelerating development strategy are described in the “Business” section above.

Further details of our ongoing KSI-301 Phase 1b trial, our accelerating development strategy, our manufacturing-related commitments, and our pipeline of retinal medicines based on the ABC Platform are described in the “Business” section above.

Financial Operations Overview

Since inception in June 2009, we have devoted substantially all of our resources to discovering and developing product candidates and manufacturing processes, building our ABC Platform and assembling our core capabilities in drug development for ophthalmic disease.

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In December 2019, we completed a follow-on offering.

In November 2020, we completed a second follow-on offering.

We have incurred significant operating losses to date and expect that our operating losses will increase significantly as we advance our product candidates, particularly KSI-301, through preclinical and clinical development, seek regulatory approval, prepare for and, if approved, proceed to commercialization;

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If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back, or discontinue the development and commercialization of KSI-301 for wet AMD, RVO, DME or NPDR or delay our efforts to advance and expand our product pipeline.

On November 1, 2019, we filed a shelf registration statement on Form S-3 (File No.

333-234443) with the SEC covering the offer and sale of up to $400.0 million of the Company’s securities for a period of up to three years from the date of effectiveness of the shelf registration statement.

In December 2019, we completed a follow-on offering pursuant to the shelf registration on Form S-3 and issued and sold 6 ,9 00,000 shares of the Company’s common stock, including the underwriters’ full exercise of their over-allotment option, at a price to the public of $46.00 per share.

In November 2020, we filed an automatic shelf registration statement (File No.

333-250109), which became effective upon filing.

The shelf registration statement allows us to issue certain securities, including shares of our common stock, from time to time.

In November 2020, we completed a follow-on offering pursuant to the automatic shelf registration and issued and sold 5,972,222 shares of the Company’s common stock, including the underwriters’ full exercise of their over-allotment option, at a price to the public of $108.00 per share under our shelf registration statement.

The gross proceeds from this offering were $645.0 million, resulting in aggregate net proceeds of $612.0 million after deducting underwriting discounts and commissions and other offering costs.

As of December 31, 2020, we had cash, cash equivalents and marketable securities of $969.0 million.

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We are focusing substantially all of our resources and development efforts on the development of our product candidates, in particular KSI-301.

We expect our research and development expenses to increase substantially during the next few years as we initiate our Phase 3 studies, complete our clinical program, pursue regulatory approval of our drug candidates and prepare for a possible commercial launch.

We expect our research and development expenses to increase substantially during the next few years as we conduct our Phase 3 clinical studies, complete our clinical program, pursue regulatory approval of our drug candidates and prepare for a possible commercial launch.

Predicting the timing or the final cost to complete our clinical program or validation of our commercial manufacturing and supply processes is difficult and delays may occur because of many factors, including factors outside of our control.

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Interest income consists primarily of interest income earned on our cash, cash equivalents and marketable securities.

Interest Expense

Interest expense consists primarily of interest expense related to our convertible notes, including accretion of debt discount and debt issuance costs, which converted into shares of common stock upon the closing of our IPO.

Other Income (Expense), Net

Other income (expense), net consists primarily of accretion income on marketable debt securities in 2019 and primarily consists of changes in the fair value of warrants for Series B redeemable convertible preferred stock, changes in fair value of the derivative instruments in 2018.

Loss on Extinguishment of Debt

Loss on extinguishment of debt was recognized for the year ended December 31, 2018 related to the convertible notes issued in February 2018 which converted into shares of common stock upon closing of our IPO.

Other income (expense), net consists primarily of accretion income and amortization expense on marketable debt securities net of amortized issuance costs from the liability related to the future sale of royalties to BBA in 2019.

Results of Operations

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Interest income

Interest expense (includes $0, $3,030 and $914

attributable to related parties for the years

ended December 31, 2019, 2018 and 2017,

Interest expense (includes $nil, $nil and $3,030

attributable to related parties for the years ended

December 31, 2020, 2019 and 2018, respectively)

Other income (expense), net (includes $49, $nil, and

$2,736 expenses attributable to related parties for

the years ended December 31, 2020, 2019, and

2018, respectively)

Other income (expense), net (includes $0,

$2,736 and $1,008 attributable to related

parties for the years ended December 31,

2019, 2018 and 2017, respectively)

Loss on extinguishment of debt (includes $1,587

$1,587 attributable to related parties for

the year ended December 31, 2018)

attributable to related parties for the year ended

December 31, 2018)

* Percentage is not meaningful

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ABC Platform external expenses primarily relates to manufacturing of biopolymer intermediate drug substance which can be used with multiple product candidates.

These expenses are primarily for services provided by CMOs and CROs.

KSI-301 program external expenses relates to development of KSI-301, including manufacturing and clinical trial costs.

These expenses are primarily for services provided by CMOs.

KSI-301 program external expenses relate to development of KSI-301, including manufacturing and clinical trial costs.

These expenses are primarily for services provided by CMOs and CROs.

KSI-501 program external expenses relates to research and development of KSI-501.

KSI-501 program external expenses relate to research and development of KSI-501.

Payroll and personnel expenses includes salaries, benefits and stock-based compensation for our personnel involved in research and development activities.

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The increase was primarily driven by manufacturing runs to support our product candidate pipeline.

KSI-301 program external expenses increased $11.0 million during the year ended December 31, 2019 as compared to 2018.

The increase was primarily due to clinical trial costs as well as manufacturing runs for KSI-301.

KSI-501 program external expenses increased $1.2 million during the year ended December 31, 2019 , due to ongoing research and development of KSI-501.

Payroll and personnel expenses increased $5.2 million during the year ended December 31, 2019 as compared to 2018.

The increase was a result of increased headcount and stock-based compensation expense.

Other research and development expenses increased $0.5 million during the year ended December 31, 2019 as compared to 2018.

KSI-301 program external expenses increased $39.3 million during the year ended December 31, 2020 as compared to 2019, primarily due to clinical trial costs to support ongoing trials, as well as manufacturing activities for KSI-301.

Our pivotal Phase 2b/3 clinical study in wAMD (DAZZLE) dosed the first patient in October 2019, and patient recruitment completed in the fourth quarter of 2020.

We initiated two pivotal Phase 3 clinical studies in DME (GLEAM and GLIMMER) and one pivotal Phase 3 clinical study in RVO (BEACON) in the third quarter of 2020.

KSI-501 program external expenses increased $0.4 million during the year ended December 31, 2020 as compared to 2019 , due to ongoing research and development of KSI-501.

Payroll and personnel expenses increased $18.5 million during the year ended December 31, 2020 as compared to 2019, due to increased headcount and stock-based compensation expense.

Other research and development expenses increased $6.6 million during the year ended December 31, 2020 as compared to 2019, primarily due to the allocation of lease costs for Palo Alto and Switzerland.

Our other research and development expenses may fluctuate in future periods as we elect to develop other product candidates .

General and Administrative Expenses

General and administrative expenses increased $4.1 million, or 54%, from the year ended December 31, 2018 to the year ended December 31, 2019.

The increase in general and administrative expenses was primarily attributable to an increase of $2.1 million in professional services related to accounting, audit, legal and consulting services and additional costs associated with operating as a public company, and an increase of $2.0 million in salaries, including stock-based compensation.

General and administrative expenses increased $16.9 million, or 145%, from the year ended December 31, 2020 as compared to 2019.

The increase in general and administrative expenses was primarily driven by increased headcount and stock-based compensation expense as well as professional services related to consulting, legal and accounting, as well as the allocation of lease costs for Palo Alto.

Interest Income

Interest income increased $1.0 million from the year ended December 31, 2018 to the year ended December 31, 2019 which was mainly attributable to interest income earned on increased cash balances from our IPO in October 2018 and follow-on offering in December 2019.

Interest Expense

Interest expense decreased $5.5 million from the year ended December 31, 2018 to the year ended December 31, 2019, which was mainly attributable to interest expense in 2018 on convertible notes issued in August 2017 and February 2018, including accretion of debt discount and issuance costs.

The convertible notes converted into shares of common stock upon the closing of our IPO.

Interest income increased $1.3 million from the year ended December 31, 2020 as compared to 2019 , which was mainly attributable to interest income earned on increased cash balances from our follow-on offering in December 2019 and November 2020.

Other Income (Expense), Net

Other income (expense), net decreased $5.0 million from the year ended December 31, 2018 to the year ended December 31, 2019, which was mainly attributable to the movement in fair value of the redeemable convertible preferred stock warrant liability and derivative instrument related to the convertible notes issued in February 2018 prior to our IPO in 2018, offset by accretion income on marketable debt securities of $0.3 million in 2019.

The preferred stock warrants converted into common stock warrants and the derivative liability was extinguished upon our IPO.

Loss on Extinguishment of Debt

Loss on extinguishment of the convertible notes issued in February 2018 was $5.5 million for the year ended December 31, 2018.

Other income (expense), net decreased $0.2 million from the year ended December 31, 2020 as compared to 2019 , which was mainly attributable to issuance costs from the liability related to the future sale of royalties to BBA in December 2019.

Liquidity and Capital Resources;

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As of December 31, 2020, we had cash, cash equivalents and marketable securities of $969.0 million.

2017 Convertible Notes

In August 2017, we received $10.0 million in gross proceeds from the issuance of the 2017 convertible notes and warrants to purchase Series B redeemable convertible preferred stock.

Upon the closing of our IPO, 500,000 redeemable convertible preferred stock warrants automatically converted into common stock warrants and 100,000 of such warrants were exercised immediately following the closing of our IPO.

The 2017 convertible notes converted into 2,637,292 shares of common stock at the closing of our IPO.

2018 Convertible Notes

In February 2018, we received $33.0 million in gross proceeds from the issuance of the 2018 convertible notes.

The 2018 convertible notes converted into 4,295,677 shares of common stock at the closing of our IPO.

In October 2018, we completed our IPO.

We sold and issued 9,400,000 shares of common stock at a price to the public of $10.00 per share.

In connection with our IPO in 2018, we sold and issued 9,400,000 shares of common stock at a price to the public of $10.00 per share.

The aggregate net proceeds from our IPO, inclusive of the partial over-allotment option exercise, were $83.5 million after deducting underwriting discounts and commissions and other offering costs.

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In November 2020, we completed a follow-on offering pursuant to the shelf registration on Form S-3 and issued and sold 5,972,222 shares of common stock at a price to the public of $108.00 per share.

The gross proceeds from this offering were $645.0 million, resulting in aggregate net proceeds of $612.0 million after deducting underwriting discounts and commissions and other offering costs.

Future Funding Requirements

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As of December 31, 2020, we had an accumulated deficit of $291.2 million.

We currently plan to raise additional funding as required based on the status of its clinical trials and projected cash flows, however based on our current business plan, we believe that our existing cash, cash equivalents and marketable securities are sufficient to fund our projected operations for at least the next 12 months.

We have based these estimates on assumptions that may prove to be wrong, and we could deplete our available capital resources sooner than we expect.

Because of the risks and uncertainties associated with research, development and commercialization of product candidates, we are unable to estimate the exact amount of our working capital requirements.

Our future funding requirements will depend on and could increase significantly as a result of many factors.

To date, we have not generated any product revenue.

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We may also be required to sell or license rights to our product candidates in certain territories or indications to others that we would prefer to develop and commercialize ourselves.

The significant uncertainties caused by the evolving effects of the COVID-19 pandemic may also negatively impact our operations and capital resources.

We and our key clinical and manufacturing partners have been able to continue to advance our operations, and we continue to monitor the impact of COVID-19 on our ability to continue the development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products.

This pandemic may ultimately have a material adverse effect on our liquidity and operating plans, although we are unable to make any prediction with certainty given the spread and rapidly changing nature of the pandemic and the evolving global actions taken to contain and treat the novel coronavirus.

Adequate additional funding may not be available to us on acceptable terms or at all.

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Net cash used in operating activities was $83.4 million for year ended December 31, 2020.

Cash used in operating activities was primarily due to the use of funds in our operations to continue to develop KSI-301 and in connection with our operations as a public company , resulting in a net loss of $47.4 million, adjusted by non-cash charges of $6.8 million offset by a change in operating assets and liabilities of $1.4 million.

The non-cash charges consisted of $0.5 million of depreciation expense, $6.1 million of stock-based compensation, $0.2 million net accretion of discount on marketable securities, and $0.4 million amortization of the operating lease right-of-use asset.

The change in net operating assets and liabilities was primarily due to an increase in accounts payable of $1.6 million due to timing of vendor payments, an increase in accrued liabilities of $4.9 million mainly related to an increase in accrued research and development expenses and an increase in accrued compensation expenses, and an increase in other assets of $4.5 million mainly due to an increase in advance payments.

Cash used in operating activities was primarily driven by the increase in net loss during this period due to increased payroll and personnel expenses and manufacturing and clinical trial costs to support overall growth.

Cash used in operating activities was also driven by changes in operating assets and liabilities.

Cash Flows from Investing Activities

Net cash used in investing activities was $137.0 million for year ended December 31, 2019 and primarily related to purchases of marketable securities, net of maturities.

Net cash provided by investing activities was $104.8 million for year ended December 31, 2020 and primarily related to purchases of marketable securities, net of maturities, and purchases of property and equipment.

Cash Flows from Financing Activities

Net cash provided in financing activities was $299.7 million for year ended December 31, 2019, which consisted primarily of $297.6 million of net proceeds from our follow-on offering, and $2.3 million of proceeds from the exercise of stock options.

Net cash provided by financing activities was $717.4 million for year ended December 31, 2020, which consisted primarily of the net proceeds from our follow-on offering, proceeds from sale of future royalties to BBA, and proceeds from the exercise of stock options.

Contractual Obligations and Commitments

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

The following table summarizes our contractual obligations as of December 31, 2020 (in thousands):

Payments Due by Period

(in thousands)

Operating lease obligations

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Tenant improvement obligations

We lease our facility under a non-cancelable operating lease.

In January 2013, we entered into a lease for our current laboratory and office space that commenced in October 2013 and expired in October 2018.

In March 2016, we entered into a lease amendment that extended the lease term to October 2023.

The minimum lease payments above do not include any related common area maintenance charges or real estate taxes.

We have entered into service agreements with a third-party CMO, pursuant to which the CMO agreed to perform activities in connection with the manufacturing process of certain compounds.

Such agreements, and related amendments, state that planned activities that are included in some signed work orders are, in some cases, binding and, hence, obligate us to pay the full price of the work order upon satisfactory delivery of products and services.

Per the terms of the agreements, we have the option to cancel signed orders at any time upon written notice, which may or may not be subject to payment of a cancellation fee depending on the timing of the written notice in relation to the commencement date of the work, with the maximum cancellation fee equal to the full price of the work order.

Although the payment of the cancellation fee will generally be due at the scheduled commencement date, we may record the manufacturing expense and related obligation as an accrued liability at the time of cancellation.

In the normal course of business, we have entered into purchase commitments to support research and development activities that cannot be terminated without incurring cancellation fees.

The level of cancellation fees may vary and are generally based on the passage of time within a 12-month period.

We have tenant improvement obligations under our facilities lease agreements, which are required to be paid over the contractually agreed period.

We enter into contracts in the normal course of business with third party contract organizations for preclinical and clinical studies and testing, manufacturing, and providing other services and products for operating purposes.

These contracts generally provide for termination following a certain period after notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.

Other agreements

For further information, refer to Note 7 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Critical Accounting Policies, Significant Judgments and Use of Estimates

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The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported expenses incurred during the reporting periods.

The impact of the ongoing COVID-19 pandemic continues to evolve.

Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

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Accrued Research and Development

Our preclinical and clinical accruals are a component of research and development expenses and are based on patient enrollment and related costs as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and CROs.

We estimate research and development accruals, including preclinical and clinical expenses, based on the level of services performed, progress of the studies, including the phase or completion of events, and contracted costs.

Our accrued research and development costs are estimated based on the level of services performed, including the phase or completion of events, and contracted costs.

Accrued clinical trial and related costs are estimated using data such as patient enrollment, clinical site activations or information provided by outside service providers regarding their actual costs incurred.

Management determined accrual estimates through reports from and discussions with clinical personnel and outside service providers as to the progress of trials, or the services completed.

The estimated costs of research and development provided, but not yet invoiced, are included in accrued liabilities and other current liabilities on the consolidated balance sheets.

If the actual timing of the performance of services or the level of effort varies from the original estimates, we will adjust the accrual accordingly.

Payments made to CROs or CMOs under these arrangements in advance of the performance of the related services are recorded as prepaid expenses and other current assets until the services are rendered.

Payments made to third parties under these arrangements in advance of the performance of the related services are recorded as prepaid expenses and other assets until the services are rendered.

Stock-Based Compensation Expense

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The calculation of stock‑based compensation expense requires that we make certain assumptions and judgments about a number of complex and subjective variables used in the Black‑Scholes model, including the expected term, expected volatility of the underlying common stock and risk‑free interest rate.

Our stock-based awards are subject to either service or performance-based vesting conditions.

Our stock-based awards are subject to either service or performance-based vesting

We evaluate whether achievement of the performance conditions is probable and record expense over the appropriate service period based on this assessment.

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Current income tax expense or benefit represents the amount of income taxes expected to be payable or refundable for the current year.

Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards, and are measured using the enacted tax rates and laws that will be in effect when such items are expected to reverse.

Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and net operating loss, or NOLs, and credit carryforwards, and are measured using the enacted tax rates and laws that will be in effect when such items are expected to reverse.

Deferred income tax assets are reduced, as necessary, by a valuation allowance when management determines it is more likely than not that some or all of the tax benefits will not be realized.

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To date, there have been no interest or penalties charged in relation to the unrecognized tax benefits.

Net operating loss carryforwards, or NOLs, and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service, or IRS, and may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50% as defined under Sections 382 and 383 in the Internal Revenue Code, which could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities.

NOLs and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service, or IRS, and may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50% as defined under Sections 382 and 383 in the Internal Revenue Code, which could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities.

The amount of the annual limitation is determined based on our value immediately prior to the ownership change.

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Since our inception, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

JOBS Act Accounting Election

The Jumpstart Our Business Startups Act of 2012, or JOBS Act, permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until such pronouncements are made applicable to private companies, unless we otherwise irrevocably elect not to avail ourselves of this exemption.

However, we have chosen to irrevocably “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

Section 107 of the JOBS Act provides that our decision to not take advantage of the extended transition period for complying with new or revised accounting standards is irrevocable.

Recent Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is discussed under Note 2 to our consolidated financial statements included in this report .

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