Nkarta, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Annual Report. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those discussed in the section titled “Risk Factors” included under Part I, Item 1A and elsewhere in this Annual Report. See “Cautionary Note Regarding Forward-Looking Statements” in this Annual Report. Overview We are a biopharmaceutical company focused on the discovery, development and commercialization of allogeneic, off-the-shelf engineered natural killer, or NK, cell therapies to treat cancer. Our NK cell engineering platform builds on prior experience and success with engineering T cells and includes proprietary technologies that enable us to generate an abundant supply of NK cells, improve the persistence of these cells for sustained activity in the body, engineer enhanced NK cell recognition of tumor targets and to freeze, store and thaw our engineered NK cells for off-the-shelf use for the treatment of cancer. All of our product candidates are designed to be allogeneic, meaning they are produced using cells from a different person than the patient treated, as well as off-the-shelf, meaning they are produced in quantity, then frozen and therefore available for treating patients without delay, unlike existing autologous cell therapies, or cell therapies derived from a patient’s own cells . Based on recently published data and data presented at medical conferences from a number of clinical trials of certain NK cell therapies, we believe that engineered NK cells have the potential to be an effective cancer therapy, be well tolerated, and avoid some of the toxicities observed with other cell therapies. Our two co-lead product candidates are NKX101 and NKX019. Our NK cell engineering platform is designed to address the limitations and challenges of current technologies for engineering T cells and NK cells and is a result of our internal expertise and deep understanding of NK cell biology. Our platform includes proprietary technologies for NK cell expansion, persistence, targeting and cryopreservation. All of our product candidates incorporate each of the four components of our technology platform, which we believe provides the best opportunity for achieving clinically meaningful results in our development program. Our IND for NKX101 for the treatment of relapsed AML and higher-risk MDS was accepted by the FDA in July 2020. On November 12, 2020, we announced that the first patient was treated in the multi-center Phase 1 clinical trial of NKX101 for the treatment of relapsed/refractory AML or higher risk MDS. This first-in-human study evaluates the safety, pharmacokinetics, and preliminary anti-tumor activity of NKX101, administered in a cycle of three weekly infusions following lymphodepletion. The clinical trial consists of sequential dose-finding and dose-expansion parts and is designed to identify a recommended Phase 2 dose. Since the commencement of our operations in 2015, we have devoted substantially all of our resources in support of our product development efforts, hiring personnel, raising capital to support and expand such activities and providing general and administrative support for these operations. We have not generated any revenue from product sales and have funded our operations primarily from our initial public offering, the issuance of convertible promissory notes, private placements of our preferred stock and with proceeds from our previous collaboration with GSK. We have incurred a net loss of $91.4 million and $21.1 million during the years ended December 31, 2020 and 2019, respectively, and we expect to continue to incur significant losses for the foreseeable future. As of December 31, 2020, we had an accumulated deficit of $118.0 million. At December 31, 2020, we had cash, cash equivalents, restricted cash and short-term investments of $315.3 million. We expect our operating expenses to significantly increase as we continue to develop and seek regulatory approvals for our product candidates, engage in other research and development activities to expand our pipeline of product candidates, maintain and expand our intellectual property portfolio, and ultimately establish a commercial organization and operate as a public company. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials, and our expenditures on other research and development activities. 94 We will need substantial additional funding to support our continuing operations and pursue our long-term development strategy. We may seek additional funding through the issuance of our common stock, other equity or debt financing or collaborations or partnerships with other companies. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our clinical development efforts for our product candidates and other research, development and manufacturing activities. We may not be able to raise additional capital on terms acceptable to us, or at all. Any failure to raise capital as and when needed would compromise our ability to execute on our business plan and may cause us to significantly delay, scale back or discontinue the development of some of our programs or curtail any efforts to expand our product pipeline. We issued shares of our Series B convertible preferred stock for aggregate gross proceeds of $64.4 million in the second tranche of our Series B convertible preferred stock financing on July 1, 2020. On July 14, 2020, we completed the initial public offering of our common stock, or the IPO. In connection with the IPO, we issued and sold 16,100,000 shares of our common stock, including 2,100,000 shares associated with the full exercise of the underwriters’ option to purchase additional shares, at a price to the public of $18.00 per share. We received approximately $265.1 million in net proceeds, after deducting underwriting discounts and commissions and other offering costs of $24.7 million. The shares began trading on the Nasdaq Global Select Market on July 10, 2020. Upon completion of the IPO, all of our outstanding shares of convertible preferred stock converted into 14,689,215 shares of our common stock. In connection with the IPO, our board of directors and stockholders approved the restated certificate of amendment to our certificate of incorporation to, among other things, effect a 1-for-3.7 reverse stock split of our issued and outstanding shares of common stock, as well as a proportional adjustment to the existing conversion ratios for our convertible preferred stock. The reverse stock split was effected on July 1, 2020. All issued and outstanding common stock and convertible preferred stock and related share and per share amounts contained in this Annual Report have been retroactively adjusted to reflect the reverse stock split for all periods presented. The COVID-19 global pandemic continued to spread throughout the United States and around the world in the fourth quarter of 2020, and multiple variants of the virus that causes COVID-19 are circulating globally. The COVID-19 pandemic is contributing to a general slowdown in the global economy and may affect our business, results of operations, financial condition, and future strategic plans and those of third parties on which we rely, including by causing disruptions in the supply of our product candidates and the conduct of current and future clinical trials. In addition, the COVID-19 pandemic may affect the operations of the FDA and other health authorities, which could result in delays of reviews and approvals, including with respect to our product candidates. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, and its impact on our planned preclinical studies and clinical trials, employees and vendors, all of which are uncertain and cannot be predicted. We have taken certain precautionary measures to minimize exposure of our employees to the virus and to comply with directives from public health officials. This includes work from home policies for our employees as well as enhanced safety measures for scientists who are in our labs and manufacturing facility. Some of the third-party vendors that we use have experienced disruptions during this pandemic. However, COVID-19 did not materially impact the timelines we previously announced for the filing of the NKX101 IND or the dosing of the first patient in the NKX101 clinical trial, and we do not expect COVID-19 to have a material impact on the current timeline for the filing of the NKX019 IND. At this time, the extent to which the COVID-19 pandemic may impact our financial condition or results of operations is uncertain and these precautionary measures may negatively impact our productivity, and cause disruptions or delays to our activities and timelines. In response to the pandemic, the CARES Act was signed into law on March 27, 2020. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer’s social security payments, net operating loss utilization and carryback periods, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. We continue to evaluate the impact of the CARES Act on our financial position, results of operations and cash flows. We currently do not believe the CARES Act will have a material impact on our financial condition, results of operations, or liquidity. 95 Financial Operations Overview Collaboration Revenue We currently have no therapeutic products approved for sale, and we have never generated any revenue from the sale of any therapeutic products. Our ability to generate product revenues will depend on the successful development and eventual commercialization of our product candidates. We may look to generate revenue from collaboration and license agreements in the future, as well as from product sales, which approval we do not expect for several years, if ever. Prior to the year ended December 31, 2019, we generated revenue from a collaboration and license agreement with GSK, which terminated in December 2018. Through 2019, the Company recognized a total collaboration revenue of $7.9 million from the collaboration agreement with GSK. Revenue recognized was a nominal amount of $0.1 million during 2019 due to the wind-down efforts associated with this agreement. Costs incurred in performing the research services under this agreement were recorded as research and development expense in our financial statements. Operating Expenses Research and Development Research and development costs consist primarily of costs incurred for the discovery and clinical development of our drug candidates, which include: • employee-related expenses, including salaries, related benefits, travel and share-based compensation expenses for employees engaged in research and development functions; • expenses incurred in connection with research, laboratory consumables, sponsored research, and preclinical studies; • expenses incurred in connection with conducting clinical trials including investigator grants and site payments for time and pass-through expenses and expenses incurred under agreements with CROs, other vendors or central laboratories and service providers engaged to conduct our trials; • the cost of consultants engaged in research and development related services and the cost to manufacture drug products for use in our preclinical studies and clinical trials; • facilities, depreciation and other expenses, which include allocated expenses for rent and maintenance of facilities, insurance and supplies; • costs related to regulatory compliance; and • the cost of annual license fees. Our research and development expenses through December 31, 2020 were primarily incurred in connection with the preclinical development of our most advanced program, NKX101. However, we have not historically tracked research and development expenses by program. We typically have various early stage research and drug discovery projects as well as various product candidates undergoing clinical trials. Our internal resources, employees and infrastructure are not directly tied to any one research or drug discovery project and are typically deployed across multiple projects. As such, we do not maintain information regarding these costs incurred for these early stage research and drug discovery programs on a project-specific basis. We expense research and development costs as they are incurred. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed. 96 The following table summarizes our research and development expenses for the years ended December 31 , 2020 and 2019 . The direct external development program expenses reflect external costs attributable to our clinical development candidates and preclinical candidates selected for further development. Such expenses include third-party contract costs relating to manufacturing, clinical trial activities, translational medicine and toxicology activities. The unallocated internal research and development costs include personnel, facility costs, laboratory consumables and discovery and research related activities associated with our pipeline. Year Ended December 31, 2020 2019 Direct external development program expenses: NKX101 $ 8,145 $ 4,154 NKX019 1,141 26 Program 3 589 — Unallocated internal research and development costs: Personnel related (including share-based compensation) 16,989 7,604 Others 9,356 5,433 Total research and development costs $ 36,220 $ 17,217 Research and development activities are central to our business model. There are numerous factors associated with the successful commercialization of any of our drug candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. In addition, future regulatory factors beyond our control may impact our clinical development programs. Drug candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our drug candidates. However, we expect that our research and development expenses will increase substantially in connection with our planned preclinical and clinical development activities in the near term and in the future. The successful development of our drug candidates is highly uncertain. This is due to numerous risks and uncertainties, including the following: • successful completion of preclinical studies and clinical trials; • delays in regulators or institutional review boards authorizing us or our investigators to commence our clinical trials or in our ability to negotiate agreements with clinical trial sites or contract research organizations; • the number of enrolled participants and clinical sites included in the trials; • raising additional funds necessary to complete clinical development of our drug candidates; • obtaining and maintaining patent, trade secret and other intellectual property protection and regulatory exclusivity for our drug candidates; • establishing manufacturing capabilities, for clinical supplies of our drug candidates; • the results of our clinical trials; • protecting and enforcing our rights in our intellectual property portfolio; • maintaining a continued acceptable safety profile of the products following approval; and • business interruptions resulting from the COVID-19 global pandemic. A change in the outcome of any of these variables with respect to the development of our drug candidates may significantly impact the costs and timing associated with the development of our drug candidates. We may never succeed in obtaining regulatory approval for any of our drug candidates. 97 General and Administrative General and administrative expenses consist primarily of salaries and employee-related costs, including share-based compensation, for personnel in executive, finance and other administrative functions. Other significant costs include legal fees relating to intellectual property and corporate matters, professional fees for accounting and consulting services and facility-related costs. We expect our general and administrative expenses will increase for the foreseeable future to support our increased research and development activities and to reflect increased costs associated with operating as a public company. These increased costs will likely include increased 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. Other Income (Expense) Change in Fair Value of Preferred Stock Purchase Right Liability In August 2019, we entered into a Series B Preferred Stock Purchase Agreement that contained future purchase rights that were required to be accounted for as liabilities and remeasured to fair value at each reporting date, with any change in the fair value reported as a component of other expense, net. We recorded periodic adjustments to the estimated fair value of the preferred stock purchase rights until they were exercised in July 2020. Upon the exercise of the preferred stock purchase right, the final remeasurement adjustment of the convertible preferred stock purchase right liability was recorded and was reclassified to additional paid-in capital on the balance sheets. Change in Fair Value of Derivative Liability In May 2019, we issued convertible promissory notes that contained certain conversion options that were required to be accounted for as liabilities and remeasured to fair value at each reporting date, with changes in the fair value reported as a component of other income (expense). In August 2019, our convertible promissory notes and related accrued interest converted into Series B convertible preferred stock and as such a final remeasurement adjustment was recorded at that time. Loss from Extinguishment of Debt The loss from extinguishment of debt represented the write-off of the unamortized debt issuance costs, slightly offset by the remaining unamortized debt discount, on the date the convertible promissory notes converted into Series B convertible preferred stock. Interest Income Interest income consists of interest earned on our cash, cash equivalents and short-term investments and adjustments related to amortization of purchase premiums and accretion of discounts of short-term investments. Interest Expense Interest expense consisted of interest on our convertible promissory notes that were outstanding during 2019. 98 Income Taxes We are subject to corporate U.S. federal and state income taxation. As of December 31, 2020, we had federal and state net operating loss carryforwards of approximately $63.3 million and $62.7 million, respectively. Of the $63.3 million federal net operating loss carryforwards, $3.2 million will begin expiring in 2035, if not utilized, while $60.1 million can be carried forward indefinitely. The state tax loss carryforwards will begin expiring in 2036, if not utilized. As of December 31, 2020, we had federal and state research and development tax credits of approximately $3.2 million and $1.9 million, respectively. If not utilized, the federal research tax credit will begin to expire in 2035. The California research tax credit can be carried forward indefinitely. Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. This annual limitation may result in the expiration of net operating losses and credits before utilization. We have not performed an analysis to determine the limitation of our net operating loss carryforwards. We estimate our income tax provision, including deferred tax assets and liabilities, based on management’s judgment. We record a valuation allowance to reduce our deferred tax assets to the amounts that are more likely than not to be realized. We consider future taxable income, ongoing tax planning strategies and our historical financial performance in assessing the need for a valuation allowance. If we expect to realize deferred tax assets for which we have previously recorded a valuation allowance, we will reduce the valuation allowance in the period in which such determination is first made. We record liabilities related to uncertain tax positions in accordance with the guidance that clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of December 31, 2020 and 2019, we had gross unrecognized tax benefits of $0.8 million and $0.3 million, respectively, all of which would affect our income tax expense if recognized, before consideration of our valuation allowance. As of December 31, 2020, we do not expect our unrecognized tax benefits will significantly change over the next 12 months. Results of Operations The following table summarizes our results of operations for the periods indicated (in thousands): Year Ended December 31, 2020 2019 Change Collaboration revenue $ — $ 115 $ (115 ) Operating expenses: Research and development 36,220 17,217 19,003 General and administrative 15,288 5,247 10,041 Total operating expenses 51,508 22,464 29,044 Loss from operations (51,508 ) (22,349 ) (29,159 ) Other income (expense), net: Change in fair value of purchase right liability (40,163 ) 1,318 (41,481 ) Change in fair value of derivative liability — 858 (858 ) Loss from extinguishment of debt — (752 ) 752 Interest income 313 304 9 Interest expense — (473 ) 473 Other income (expense), net (3 ) 18 (21 ) Total other income (expense), net (39,853 ) 1,273 (41,126 ) Net loss $ (91,361 ) $ (21,076 ) $ (70,285 ) 99 Collaboration revenue Revenue earned under our collaboration and license agreement with GSK were nil and $0.1 million for the years ended December 31, 2020 and 2019, respectively. Collaboration revenue recognized during 2019 was nominal in amount and was related to wind-down activities as the collaboration agreement with GSK was terminated in December 2018. There will be no further revenues recognized after 2019 under this agreement. Research and development expenses Research and development expenses were $36.2 million and $17.2 million for the years ended December 31, 2020 and 2019, respectively. The increase of $19.0 million was primarily due to increases of $9.4 million in personnel costs, including an increase in share-based compensation expense of $1.5 million as a result of continued growth in headcount, and increases of $5.7 million in our external program costs related to NKX101, NKX019 and Program 3, and $4.0 million in other internal research costs, primarily consisting of research and laboratory supplies and facilities expenses. We expect our research and development expenses will increase in the future periods as we progress our product candidates and conduct our clinical trials and development activities. General and administrative expenses General and administrative expenses were $15.3 million and $5.2 million for the years ended December 31, 2020 and 2019, respectively. The increase of $10.0 million was primarily due to an increase in personnel costs of $6.1 million, including an increase of $2.0 million in share-based compensation expense as a result of continued growth in headcount and $2.3 million in share-based compensation expense related to the modification of certain stock option granted to our former Chief Financial Officer under a Separation and Release Agreement that was executed in October 2020. The increases in general and administrative expense were also due to a $1.1 million increase in legal costs, and $1.2 million increases in outside consulting fees, and accounting and audit fees associated with maintaining compliance with exchange listing and SEC requirements as a public company, and a $1.6 million increase in other general and administrative expenses that included insurance, rent, depreciation expense and other facilities expense. We have incurred and expect to continue incur additional expenses as a result of being a public company following the completion of our IPO in July 2020, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange and costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC. In addition, we have incurred and expect to continue to incur increased expenses related to additional insurance, investor relations and other increases related to needs for additional human resources and professional services associated with being a public company. Change in fair value of preferred stock purchase right liability We recognized a remeasurement adjustment for the change in fair value of preferred stock purchase right liability of $40.2 million in other expense and $1.3 million in other income for the years ended December 31, 2020 and 2019, respectively. This was related to the Series B Preferred Stock Purchase Agreement that we entered into in August 2019, which contained future purchase rights that were required to be accounted for as liabilities and remeasured to fair value at each reporting date, with any change in the fair value reported as a component of other expense, net. Upon the exercise of the preferred stock purchase right with the completion of the Series B Milestone Closing in July 2020, that resulted in the issuance of 27,066,206 shares of our Series B convertible preferred stock for an aggregate gross proceeds of $64.4 million, the final remeasurement adjustment of the preferred stock purchase right liability was recorded and reclassified to additional paid-in capital on the balance sheets. 100 Change in fair value of derivative liability The change in fair value of derivative liability resulted in a remeasurement benefit of $0.9 million for the year ended December 31, 2019. This was related to the conversion of our convertible promissory notes and related accrued interest into Series B convertible preferred stock upon the sale of the Series B convertible preferred stock in August 2019. The final remeasurement adjustment of the derivative liability was recorded in August 2019. Loss from extinguishment of debt Loss from extinguishment of debt was $0.8 million for the year ended December 31, 2019. This was related to the conversion of our convertible promissory notes into our Series B convertible preferred stock in August 2019 that resulted in the write-off of all related unamortized debt issuance costs offset by the remaining unamortized debt discount. Interest income Interest income were $0.3 million and $0.3 million for the years ended December 31, 2020 and 2019 respectively. Interest income for the year ended December 31, 2020 was comprised of interest earned from short-term investments of $1.0 million, offset by amortization of purchase premiums and accretion of discounts of short-term investments of $0.7 million. Interest income for the year ended December 31, 2019 was related to interest income of $0.3 million. Interest expense Interest expense was nil and $0.5 million for the years ended December 31, 2020 and 2019, respectively. The non-cash interest expense was related to a debt discount feature on our convertible promissory notes issued in May 2019. Liquidity and Capital Resources Sources of Liquidity As of December 31, 2020, we had cash, cash equivalents, restricted cash and short-term investments of $315.3 million. In connection with our IPO which closed on July 14, 2020, we received $265.1 million in net proceeds, after deducting underwriting discounts and commissions and other offering expenses. We issued and sold 16,100,000 shares of our common stock, including 2,100,000 shares associated with the full exercise of the underwriters’ option to purchase additional shares, at a price to the public of $18.00 per share. On July 1, 2020, we issued 27,066,206 shares of our Series B convertible preferred stock at a price of $2.37935 per share for gross proceeds of $64.4 million in connection with the closing of the second tranche of our Series B convertible preferred stock financing upon the exercise of the preferred stock purchase right. Prior to our IPO, we funded our operations primarily through the issuance of convertible promissory notes and private placements of our convertible preferred stock with total gross proceeds of $126.0 million, and from our previous collaboration agreement with GSK which terminated in December 2018 of $7.9 million. We have incurred net losses and negative cash flows from operations since our inception and anticipate that we will continue to incur net losses for the foreseeable future. We expect to incur substantial expenditures as we develop our product pipeline and advance our drug candidates through clinical development, undergo the regulatory approval process and, if approved, launch commercial activities. Specifically, in the near term we expect to incur substantial expenses relating to initiating and completing our clinical trials, the development and validation of our manufacturing processes, and other development activities. Furthermore, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company. 101 We will need substantial additional funding to support our continuing operations and pursue our development strategy. Until such time as we can generate significant revenue from sales of our drug candidates, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, including potential collaborations with other companies or other strategic transactions. Adequate funding may not be available to us on acceptable terms, or at all. 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 our drug candidates or delay our efforts to expand our product pipeline. We may also be required to sell or license to other parties’ rights to develop or commercialize our drug candidates that we would prefer to retain. We believe that our cash and investment balances as of December 31, 2020 will be sufficient to meet our cash needs for at least 12 months following the issuance date of this Annual Report on Form 10-K. Cash Flows The following table sets forth a summary of our cash flows for the periods indicated (in thousands): Year Ended December 31, 2020 2019 Net cash used in operating activities $ (43,506 ) $ (18,367 ) Net cash used in investing activities (210,081 ) (18,295 ) Net cash provided by financing activities 329,817 49,581 Net increase in cash and cash equivalents $ 76,230 $ 12,919 Operating Activities The net cash used in operating activities for the year ended December 31, 2020 was $43.5 million was primarily due to our net loss of $91.4 million, adjusted for net non-cash charges of $48.7 million and a change in operating assets and liabilities of $0.8 million. The net non-cash charges of $48.7 million consisted primarily of change in fair value of our preferred stock purchase right liability of $40.2 million related to the remeasurement adjustment of the Series B convertible preferred stock purchase right liability , share-based compensation of $6.7 million, depreciation and amortization of $0.8 million, investment accretion and amortization of $0.7 million and non-lease lease expense of $0.3 million. The net change in operating assets and liabilities of $0.8 million was related to the increase in prepaid and other current assets of $3.6 million primarily due to higher prepayments for director and officer insurance premiums and other current assets, offset by an increase in accounts payable and accrued and other liabilities of $2.8 million as we continued to increase our research and development related activities . The net cash used in operating activities for the year ended December 31, 2019 of $18.4 million was primarily due to our net loss of $21.1 million, adjusted for non-cash charges of $0.5 million and a change in operating assets and liabilities of $2.2 million. The net non-cash charges of $0.5 million consisted primarily share-based compensation of $0.9 million, depreciation and amortization of $0.4 million, offset by $1.0 million due to net changes in fair value of our preferred stock purchase right liability and derivative liability, non-cash loss from extinguishment of debt, and non-cash interest expense related to our convertible promissory notes that were outstanding during 2019 . The net change in operating assets and liabilities of $2.2 million is related to the increase in prepaid expenses and other current assets of $0.5 million, offset by an increase in accounts payable and accrued and other liabilities of $2.6 million due to the timing of payments . Investing Activities The net cash used by investing activities for the years ended December 31, 2020 of $210.1 million was comprised of purchases of short-term investments of $222.6 million using the proceeds from Series B preferred stock upon the closing of Series B Preferred Stock Milestone Closing and proceeds from our initial public offering in July 2020, offset by proceeds from maturities of short-term investments of $20.0 million, and purchases of property and equipment of $7.5 million primarily related to the construction of our manufacturing facility. 102 The net cash used in investing activities for the year ended December 31, 2019 of $ 18. 3 million was primarily due to purchases of $16.4 million in short-term investments, using the proceeds received from our Series B convertible preferred stock financing in 2019, and purchases of property and equipment of $1.9 million to support our research activities. Financing Activities Net cash provided by financing activities for the year ended December 31, 2020 of $329.8 million, was mainly due to the net proceeds of $265.1 million from initial public offering, after deducting underwriting discounts and commissions and other offering costs of $24.7 million, net proceeds of $64.3 million from the issuance of our Series B convertible preferred stock, after deducting issuance costs of $0.1 million, and proceeds of $0.4 million from the exercise of stock options. Net cash provided by financing activities for the year ended December 31, 2019 of $49.6 million, was primarily due to the proceeds of $6.0 million received from the issuance of our convertible promissory notes and the proceeds of $43.5 million received from the issuance of our Series B convertible preferred stock, net of issuance costs of $0.5 million. Funding Requirements Based upon our current operating plans, we believe that our existing cash, cash equivalents, restricted cash and short-term investments will be sufficient to fund our operations for at least the next 12 months from the date of this filing. 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 therapeutic 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 type, number, scope, progress, expansions, results, costs and timing of, our clinical trials and preclinical studies for our product candidates or other potential product candidates or indications which we are pursuing or may choose to pursue in the future; • the outcome, timing and costs of regulatory review of our product candidates; • the costs and timing of manufacturing for our product candidates, including commercial manufacturing and the costs associated with building our manufacturing facility; • our efforts to enhance operational systems and hire additional personnel to satisfy our obligations as a public company, including enhanced internal controls over financial reporting; • the costs associated with hiring additional personnel and consultants as our preclinical and clinical activities increase; • the costs and timing of establishing or securing sales and marketing capabilities if any product candidate is approved; • our ability to achieve sufficient market acceptance, coverage and adequate reimbursement from third-party payors and adequate market share and revenue for any approved products; • patients’ willingness or ability to pay out-of-pocket for any approved products in the absence of coverage and/or adequate reimbursement from third-party payors; • the terms and timing of establishing and maintaining collaborations, licenses and other similar arrangements, including payments required for meeting regulatory and commercial milestones or sales based royalties; • the costs of obtaining, maintaining and enforcing our patent and other intellectual property rights; and • costs associated with any product candidates, products or technologies that we may in-license or acquire. 103 Until such time as we can generate significant revenue from sales of our therapeutic product candidates, if ever, we expect to finance our cash needs through public or private equity or debt financings or other capital sources, including potential collaborations, licenses and other similar arrangements. We may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. 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 product candidates, future revenue streams or research programs or may have to grant licenses on terms that may not be favorable to us and 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. Contractual Obligations and Commitments In May 2018, we entered into a lease agreement for our corporate office and laboratory space located in South San Francisco, California with an expiration date in May 2025. In April 2019, we executed the first amendment to the lease agreement for additional corporate space, laboratory space and manufacturing capabilities and an extension to the lease term through April 2026. The terms of the lease contain a rent abatement for the first month and rent escalation provisions. In addition to the base rent payments, we will be obligated to pay certain customary amounts for our share of operating expenses and tax obligations related to the facilities. In May 2020, we executed the second amendment to the lease agreement for an eight-year non-cancelable lease for additional office and laboratory space in the same building. The lease for the additional space provided for abatement of rent during the first three months of the lease and contained rent escalations during the term of the lease. The lease for this additional space is expected to commence in the first quarter of 2021 and expires in 2029. The lease also includes an extension of the lease term of our existing office and laboratory space beginning May 1, 2020 through the first quarter of 2029, with an option to extend the lease for an additional seven-year term. In January 2021, we executed the third amendment to the lease agreement for a three-year non-cancelable lease for additional office space in the same building. The lease for this additional space is expected to commence in the second quarter of 2021 and expires in March 2024. The other terms of the existing lease remain unchanged. Off-Balance Sheet Arrangements During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements as defined under the rules and regulations of the SEC. Critical Accounting Policies and Significant Judgments 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. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates and judgments, including those related to preclinical studies and clinical trial accruals, share-based compensation and preferred stock purchase right liability prior to the conversion of convertible preferred stock to common stock in July 2020 . We base our estimates and assumptions on historical experience, known trends and events, and various other factors that are believed to be reasonable and appropriate 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. See Note 2 to our financial statements included in 104 Part II, Item 8 of this Annual Report on Form 10-K for a summary of significant accounting policies and the effect on our financial statements. Recently Issued Accounting Pronouncements See Recent Accounting Pronouncements in Note 2 to our financial statements included in Part II , Item 8 of this Annual Report on Form 10-K. Indemnification As permitted under Delaware law and in accordance with our bylaws, we indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving in such capacity. We are also a party to indemnification agreements with our officers and directors. We believe the fair value of the indemnification rights and agreements is minimal. Accordingly, we have not recorded any liabilities for these indemnification rights and agreements as of December 31, 2020 and 2019. Segment Information We have one business activity and operate in one reportable segment. JOBS Act We are an “emerging growth company” as described under the JOBS Act, and we could have taken advantage of an extended transition period for complying with new or revised accounting standards. This would have allowed us to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have chosen irrevocably to “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. We intend to rely on other exemptions provided by the JOBS Act, including without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of Sarbanes-Oxley. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year following the fifth anniversary of the consummation of our IPO, (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (iii) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year, or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. Even after we no longer qualify as an emerging growth company, we may still qualify as a smaller reporting company, which would allow us to take advantage of many of the same exemptions from disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our prospectuses and in our periodic reports and proxy statements. 105 Item 7A. Quantitative and Qualitati ve Disclosures About Market Risk. We hold certain financial instruments for which a change in prevailing interest rates may cause the principal amount of the marketable securities to fluctuate. Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash, cash equivalents and short-term investments. We invest our excess cash primarily in money market funds, commercial paper and debt instruments of financial institutions, corporations, U.S. government-sponsored agencies and the U.S. Treasury. The primary objectives of our investment activities are to ensure liquidity and to preserve principal while at the same time maximizing the income we receive from our marketable securities without significantly increasing risk. Additionally, we established guidelines regarding approved investments and maturities of investments, which are designed to maintain safety and liquidity. For marketable investment securities with short-term maturities, we do not believe that an increase or decrease in market rates would have a significant impact on the realized values or the statements of operations and comprehensive loss. As such, we believe that if a 10.0% change in interest rates were to have occurred on December 31, 2020, this change would not have had a material effect on the fair value of our investment portfolio as of that date. We are exposed to market risk related to changes in foreign currency exchange rates. We contract with vendors that are located outside the United States and certain invoices are denominated in foreign currencies. We are subject to fluctuations in foreign currency rates in connection with such arrangements. We do not currently hedge our foreign currency exchange risk. Inflation generally affects us by increasing our cost of labor and research and development contract costs. We do not believe inflation has had a material effect on our results of operations during the periods presented. We do not believe that inflation, interest rate changes, or exchange rate fluctuations had a significant impact on our results of operations for any periods presented herein. 106