PLIANT THERAPEUTICS, 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 and analysis contains forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intention, beliefs and projections. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth in the section titled “Risk Factors” under Part I, Item 1A and elsewhere in this Annual Report. See “Special Note Regarding Forward-Looking Statements” in this Annual Report. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “should,” “will” or the negative of these terms or other similar expressions. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate we have conducted exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Overview We are a clinical stage biopharmaceutical company focused on discovering and developing novel therapies for the treatment of fibrosis and related diseases. Our initial focus is on treating fibrosis by inhibiting integrin-mediated activation of TGF-ß. We have applied our deep understanding of fibrosis biology, along with our medicinal chemistry and translational medicine expertise to develop a set of proprietary tools designed to discover and de-risk product candidates quickly and efficiently. Our wholly owned lead product candidate, PLN-74809, is an oral small-molecule dual selective inhibitor of α v β 6 and α v β 1 integrins that we are developing for the treatment of idiopathic pulmonary fibrosis, or IPF, and primary sclerosing cholangitis, or PSC. We have completed a Phase 1a SAD/MAD trial and a Phase 1b proof-of-mechanism trial of PLN-74809 in IPF and are currently recruiting three Phase 2a trials in our lead indications; two in IPF and one in PSC. We expect to announce preliminary data from our first Phase 2a IPF trial in the first half of 2021. Our second product candidate, PLN-1474, is a small-molecule selective inhibitor of α v β 1 for the treatment of liver fibrosis associated with nonalcoholic steatohepatitis, or NASH, which we have partnered with Novartis. PLN-1474 has successfully completed Phase 1 SAD/MAD trials and was transferred to Novartis, in the first quarter of 2021, who will be responsible for all future development, manufacturing, and commercialization activities. In addition to our clinical programs, we currently have preclinical integrin-based programs targeting oncology and muscular dystrophies. Recent Highlights • PLN-74809 Phase 2a positron emission tomography (PET) imaging trial resumed, with preliminary data expected in the first half 2021. With the reopening of the trial site in November, we were able to resume the Phase 2a PET trial. This open-label dose ranging trial will evaluate target engagement of PLN-74809 in IPF patients utilizing a PET tracer of the integrin α v β 6 . We will assess receptor occupancy levels achieved by PLN-74809, a dual selective inhibitor of α v β 6 / α v β 1 , across multiple single-dose cohorts. • PLN-74809 Phase 2a INTEGRIS trials in idiopathic pulmonary fibrosis (IPF) and primary sclerosing cholangitis (PSC) gained momentum in the fourth quarter and are currently on track to complete enrollment by the end of 2021 and the first half of 2022, respectively. These 12-week randomized, dose-ranging, double-blind, placebo-controlled trials will evaluate safety, tolerability, and pharmacokinetics, as well as exploratory efficacy endpoints in patients with IPF and PSC. • IND open for development of a PET tracer of the protein integrin α v β 1 . Following a December 2020 Investigational New Drug (IND) filing and the recently issued a “Safe to Proceed Letter”, Pliant expects to rapidly advance into clinical trials a study of a wholly owned α v β 1 PET tracer to evaluate expression levels of α v β 1 in various fibrotic tissues. This marks the Company’s fifth IND. • Successful completion of PLN-1474 Phase 1 trial and t ransfer of PLN-1474 to Novartis . The Phase 1 trial of PLN-1474 was a safety, tolerability, and pharmacokinetics dose-escalating first-in-human trial that enrolled 84 healthy volunteers. PLN-1474 was rapidly absorbed and well tolerated with no dose-or treatment-limiting toxicities or severe/ serious adverse events observed. In preclinical studies, PLN-1474 was observed to selectively block the α v β 1 integrin-mediated activation of TGF-β, reducing liver fibrosis in animal models. Following the successful completion of this study, PLN-1474 has been transferred to Novartis. 102 • Completed an initial public offering (IPO) and concurrent private placement with Novartis. The IPO priced at $16.00 per share, generating gross proceeds of $165.6 million including shares sold to the underwriters pursuant to the full exercise of their overallotment option before deducting underwriting discounts, commissions and other offering expenses payable by Pliant. The company also received $10.0 million in additional proceeds from a concurrent private placement with Novartis Institutes for BioMedical Research, Inc. at the public offering price of $16.00 per share. The Company's common stock commenced trading on the Nasdaq Global Select Market under the ticker symbol "PLRX" on June 3rd, 2020. In October 2019, we entered into a Collaboration and License Agreement with Novartis, or the Novartis Agreement, for the development and commercialization of our then preclinical product candidate, PLN-1474 and up to three integrin research targets. PLN-1474 is an internally discovered small molecule selective inhibitor of integrin αvß1, currently being developed for the treatment of liver fibrosis associated with nonalcoholic steatohepatitis, or NASH. In December 2019, we received an upfront license payment of $50.0 million for the worldwide exclusive license to PLN-1474. Pursuant to the Novartis Agreement, we expect to receive research and development funding totaling $19.6 million for PLN-1474 development services and funding of up to $13.4 million for optional research and development services on the integrin research targets. Additionally, we are eligible to receive developmental, regulatory and commercial milestone payments of up to $416.0 million in total, if defined development, regulatory and commercialization milestones are achieved and tiered royalties, on a product-by-product basis based on annual nets sales of products, at percentages ranging from high-single digits to low teens of the applicable licensed products and mid-single digits to high-single digits for any products resulting from the research programs. With the successful completion of the Phase 1 SAD/MAD trials, PLN-1474 was transferred to Novartis in the first quarter of 2021 who will then be responsible for all future development, manufacturing, and commercialization activities. In February 2020, we issued an additional 28.5 million shares of Series C redeemable convertible preferred stock for gross cash proceeds of $52.2 million. In June 2020, we completed an IPO issuing an aggregate of 10,350,000 shares of common stock, which included 1,350,000 shares of common stock issued pursuant to the over-allotment option granted to the underwriters at a price of $16.00 per share generating gross proceeds of $165.6 million, before underwriting discounts and commissions and offering expenses payable by the Company. As a result of the IPO, we received approximately $148.3 million in net proceeds, after deducting underwriting discounts, commissions and offering expenses of $5.7 million, of which $2.6 million was paid in 2019. We offset the deferred offering costs against the net proceeds received from the sale of common stock. At the closing of the IPO, 160,389,279 shares of outstanding convertible preferred stock were automatically converted to 22,423,029 shares common stock on a 7.15:1 basis. Following the IPO, there were no shares of preferred stock outstanding. Concurrent with the completion of the IPO, we also issued 625,000 shares to Novartis in a private placement at a price of $16.00 per share for proceeds of $10.0 million. We have incurred net losses since our inception and expect to continue to incur significant expenses and net losses in the foreseeable future as we continue our research and development activities and expand our operational activities. We had net losses of $41.5 million and $0.6 million for the years ended December 31, 2020 and December 31, 2019, respectively. As of December 31, 2020 and December 31, 2019, we had an accumulated deficit of $117.8 million and $76.3 million, respectively. To date, we have funded our operations primarily through private placements of our redeemable convertible preferred stock, net proceeds from our IPO, a private placement of common stock to Novartis, and from revenue generated from the Novartis Agreement. To date, all our revenue has solely been generated from the Novartis Agreement. We expect revenue will continue to fluctuate from period to period and there can be no assurance that we will generate other revenue, that we will enter into new collaborations, or that new or existing collaborations will continue beyond their initial terms or that we will be able to meet the milestones specified in these agreements. We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for PLN-74809 or any of our other product candidates. In addition, if we obtain regulatory approval for PLN-74809 or any of our other product candidates and do not enter into one or more collaborations with third-parties for commercialization, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing and distribution activities. Because of the numerous risks and uncertainties associated with pharmaceutical product development and the economic and developmental uncertainty arising from the COVID-19 pandemic, we may be unable to accurately predict the timing or magnitude of all expenses. Even if we can generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. We will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of 103 public or private equity offerings and debt financings, government funding arrangements, collaborations, strategic alliances and marketing, distribution or licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable 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 one or more of our product candidates. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred 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 acquisitions or capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or drug candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our research, product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. COVID-19 Pandemic In March 2020, the World Health Organization declared the outbreak of a novel coronavirus, or COVID-19, as a pandemic, which continues to spread throughout the United States and worldwide. We have been, and could continue to be materially and adversely affected by the risks, or the public perception of the risks, related to an epidemic, pandemic, outbreak, or other public health crisis, such as the recent outbreak of COVID-19. Among other things, our clinical trials have experienced delays of approximately four to six months, and may experience additional delays in the future, extending the timelines and increasing the overall costs to finish the clinical trials, as our fixed costs are not substantially reduced while the clinical trials are delayed. For example, the clinical site conducting our Phase 2a PET trial of PLN-74809 in IPF was closed to clinical research in March 2020, but resumed enrollment and trial activities in the fourth quarter of 2020. Currently, all three Phase 2a trials in our lead indications of IPF and PSC are enrolling patients. The ultimate extent of the impact of any epidemic, pandemic, outbreak, or other public health crisis on our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of such epidemic, pandemic, outbreak, or other public health crisis and actions taken to contain or prevent the further spread, among others. Accordingly, we cannot predict the extent to which our business, financial condition and results of operations will be affected. We remain focused on maintaining a strong balance sheet, liquidity and financial flexibility and continue to monitor developments as we deal with the disruptions and uncertainties from a business and financial perspective relating to COVID-19. Financial Operations Overview Revenue—Related Party In October 2019, we entered into the Novartis Agreement for the development and commercialization of our then preclinical product candidate, PLN-1474 and up to three additional integrin research targets. Under the terms of the Novartis Agreement, in December 2019, Novartis paid Pliant an upfront license fee payment of $50.0 million for the worldwide exclusive license to PLN-1474. Novartis will fund our research and development activities for PLN-1474 through Phase 1 after which Novartis will assume responsibility for all future development, manufacturing and commercialization of PLN-1474. Novartis will also fund the research and development activities associated with the integrin research targets as outlined in the Novartis Agreement. We are scheduled to receive up to $19.6 million in funding for PLN -1474 development services through Phase 1 and are expected to receive up to $13.4 million in funding for optional development and research services on the integrin research targets. The research and development funding payments are expected to be paid periodically throughout 2020, 2021 and 2022. We are eligible for milestone payments of up to $416.0 million in total, if defined developmental, regulatory and commercialization milestones are achieved, and tiered royalties on a product-by-product basis based on annual nets sales of products, at percentages ranging from high-single digits to low teens of the applicable licensed products and mid-single digits to high-single digits for any products resulting from the research programs. Revenue-related party was $41.8 million and $57.1 million for the years ended December 31, 2020 and 2019, respectively. Novartis became a related party to us following its purchase of 10.9 million shares of our Series C redeemable convertible preferred stock on December 19, 2019 which were subsequently converted to common stock upon our IPO, along with the concurrent private placement of 625,000 shares upon our IPO, representing aggregate holdings of 6.1% and 7.4% of our outstanding shares of common stock on a fully diluted basis as of December 31, 2020 and 2019, respectively. 104 Operating Expenses Research and Development Our research and development expenses consist of expenses incurred in connection with the development of our product candidates. Research and development expenses include: • employee-related expenses, which include salaries, benefits and stock-based compensation for our research and development personnel; • expenses incurred under agreements with third-party contract organizations for pre-clinical studies, investigative clinical trial sites and consultants that conduct research and development activities on our behalf; • costs associated with clinical trials; • depreciation of laboratory equipment and costs of equipment and supplies; • costs associated with technology and intellectual property licenses; and • facilities and other allocated expenses, which include expenses for rent and other facility related costs and other supplies. The following table summarizes our research and development expenses for the years ended December 31, 2020 and 2019 (in thousands): Year Ended December 31, 2020 2019 Employee-related expenses $ 15,301 $ 10,385 Outside and consulting services for preclinical studies and research and development activities by third party contract organizations 14,677 22,043 Clinical trials expenses 23,907 6,667 Depreciation of lab equipment and costs of equipment and supplies 4,801 4,829 Technology and intellectual property licenses 2,442 288 Facilities and other allocated expenses 5,065 3,141 Total research and development expenses $ 66,193 $ 47,353 We expense all research and development costs in the periods in which they are incurred. We do not allocate our costs by product candidates or by preclinical programs as these are in early stages of clinical trials or development, and our internal expenses are not allocated between product candidates and programs. Although external third-party costs are allocable between product candidates and programs, we do not perform this allocation. We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates and our preclinical programs and as they advance into later stages of development. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates. General and Administrative Our general and administrative expenses consist primarily of personnel costs, allocated facilities costs and other expenses for outside professional services, including legal, marketing, investor relations, human resource and accounting services. Personnel costs consist of salaries, benefits and stock-based compensation for our general and administrative personnel. We expect to incur additional expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC, The Nasdaq Global Market, additional insurance expenses, investor relations activities and other administrative and professional services. We also expect to increase the size of our administrative function to support the growth of our business. In addition, if we obtain regulatory approval for any of our product candidates and do not enter into a third-party commercialization collaboration, we expect to incur significant expenses related to building a sales and marketing team to support product sales, marketing and distribution activities. 105 Interest Income Our interest income consists of interest income earned on cash and cash equivalents, money market funds and short-term investments. Results of Operations As described above in “COVID 19 Pandemic”, the ultimate extent of the impact of any epidemic, pandemic, outbreak or other public health crisis on our results of operations will depend on future developments, which are highly uncertain, including new information that may emerge concerning the severity of the COVID-19 pandemic or other public health crisis and actions taken to contain or prevent the further spread, among others. Accordingly, we cannot fully predict the extent to which our business and results of operations will be affected; however, we expect the COVID-19 pandemic to impact our operations in several ways. Many clinical trial sites have been impacted by the pandemic, forcing them to delay enrollment in research trials, including ours. This will likely impact the speed of enrollment in our current trials. Additionally, the pandemic has limited our ability to perform basic science R&D in our facilities due to government shelter-in-place orders, ultimately slowing, but not stopping, progress of several early stage projects. Comparison of the Years Ended December 31, 2020 and 2019 (In thousands, except percentages) Year Ended December 31, 2020 2019 $ Change % Change Revenue—related party $ 41,817 $ 57,052 $ (15,235 ) (26.7 %) Operating expenses: Research and development (66,193 ) (47,353 ) (18,840 ) 39.8 % General and administrative (17,269 ) (10,930 ) (6,339 ) 58.0 % Total operating expenses (83,462 ) (58,283 ) (25,179 ) 43.2 % Loss from operations (41,645 ) (1,231 ) (40,414 ) NM Interest income 478 816 (338 ) (41.4 %) Other expense, net (366 ) (216 ) (150 ) 69.4 % Net loss $ (41,533 ) $ (631 ) $ (40,902 ) NM _________________________ NM: Results not meaningful Revenue - Related Party Revenue-related party consisted exclusively of revenue generated from the Novartis Agreement. The decrease of 15.2 million, or 26.7%, in revenue-related party for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the recognition of $50.0 million in upfront license fee revenue in 2019, offset by the recognition of $25.0 million milestone payment from the achievement with the first patient dosing under the Novartis agreement in the first quarter of 2020 and the $9.8 million increase in research and development services revenue in 2020. Over the next several years, we expect our revenue will be derived primarily from the Novartis Agreement as we continue to recognize related party revenue from research and development services funding and from the potential achievement of the Novartis Agreement’s developmental, regulatory and commercial milestones. Research and Development Expenses Research and development expenses increased by $18.8 million, or 39.8%, for the year ended December 31, 2020, compared to the year ended December 31, 2019. The increase was primarily due to $10.4 million of increased consulting and outside services costs, $3.8 million of increased compensation costs, $1.1 million of increased stock-based compensation costs, $2.2 million in increased license fees and $1.6 million of increased insurance expense, partially offset by a $0.4 million in decreased research studies expense. Consulting and outside services costs increased primarily due to increased PLN-74809 and PLN-1474 development activities with external vendors. Compensation costs and stock-based compensation costs increased as a result of increased headcount and the implementation of the employee stock purchase plan in the third quarter of 2020. License fees increased due to the $2.4 milestone payment to the Regents of the University of California (the “UC Regents”) in connection with our IPO in the second quarter of 2020. Insurance expenses increased due to additional costs for insurance as a public company. The decreases in research expenses was primarily due to delayed research related activities stemming from the Covid-19 pandemic. 106 General and Administrative Expenses General and administrative expenses increased by $6.3 million, or 58.0%, for the year ended December 31, 2020, compared to the year ended December 31, 2019. The increase was primarily due to $2.8 million of increased professional and consulting services costs, $1.6 million of increased compensation costs, $0.9 million of increased stock-based compensation expense, $0.5 million of increased charitable contributions and $0.5 million of increased insurance expenses, partially offset by $0.5 million decrease in travel expenses. Professional and consulting costs increased primarily as a result of increased legal, marketing, investor relations and accounting fees. Compensation costs and stock-based compensation costs increased as a result of increased headcount and the implementation of the employee stock purchase plan in the third quarter of 2020. Insurance expenses increased due to additional cost for insurance as a public company. Travel expenses decreased primarily due to decreased executive travel as a result of the COVID-19 pandemic. Interest Income Interest income decreased by $0.3 million, or 41.4%, for the year ended December 31, 2020, compared to the year ended December 31, 2019. The decrease was primarily attributable to lower interest rates in 2020 when compared to 2019. Liquidity and Capital Resources Overview As of December 31, 2020, we had cash, cash equivalents and short-term investments of $276.9 million. This amount includes the net proceeds from our IPO in June 2020, in which we issued an aggregate of 10,350,000 shares of common stock, which included 9,000,000 shares of common shares and 1,350,000 shares of common stock sold pursuant to the underwriters’ exercise of their option to purchase additional shares, at an offering price of $16.00 per share. We received $148.3 million, net of underwriting discounts, commissions and offering expenses payable by us. We concurrently completed a private placement of 625,000 common shares to Novartis at a price of $16.00 per share for proceeds of $10.0 million. Our cash position as of December 31, 2020 also includes an additional $52.2 million from the issuance of an additional 28.5 million shares of our Series C redeemable convertible preferred stock in February 2020, and reflects the achievement of the first patient dosing milestone of the Novartis Agreement that triggered the receipt of a $25.0 million payment which was received from Novartis in the second quarter of 2020. Due to the COVID-19 pandemic, our clinical trials with universities were temporarily delayed and our ability to identify and enroll patients in future clinical trials may become more difficult and costly. Our liquidity and capital resource evaluation includes an estimate of the financial impact of the delay in clinical trials and increased patient enrollment costs. Based on our current cash balance and our ability to control discretionary spending, such as research and development expenditures with outside service providers, we have evaluated and concluded our financial condition is sufficient to fund our planned operations, commitments and contractual obligations for a period of at least one year following the date that these financial statements are issued. Funding Requirements Our primary use of cash is to fund operating expenses, primarily research and development expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable, accrued expenses and prepaid expenses. Our future funding requirements will depend on many factors, including the following: • the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our product candidates; • the clinical development plans we establish for these product candidates; • the timelines of our clinical trials and the overall costs to conduct and complete the clinical trials, which may be impacted by the COVID-19 pandemic; • the number and characteristics of product candidates that we develop; • the outcome, timing and cost of meeting regulatory requirements established by the U.S. Food and Drug Administration, or FDA, and other comparable foreign regulatory authorities; • whether we enter into any collaboration agreements and the terms of any such agreements; • the cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights; 107 • the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us or our product candidates; • the effect of competing technological and market developments; • the cost and timing of completion of commercial-scale outsourced manufacturing activities; • the cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval in regions where we choose to commercialize our products on our own; and • the cost of operating as a public company. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development expenditures. If we need to raise additional capital to fund our operations, funding may not be available to us on acceptable terms, or at all. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of or suspend one or more of our preclinical studies, clinical trials, research and development programs or commercialization efforts. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, collaborations and other licensing arrangements. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain valuable rights to our product candidates, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. Cash Flows Comparison of the Years Ended December 31, 2020 and 2019 The following summarizes our cash flows for the periods indicated (in thousands): Year Ended December 31, 2020 2019 Net cash used in operating activities $ (37,271 ) $ (2,750 ) Net cash used in investing activities (210,866 ) (17,931 ) Net cash provided by financing activities 213,212 45,539 Net (decrease) increase in cash and cash equivalents $ (34,925 ) $ 24,858 Cash Used in Operating Activities Net cash used in operating activities was $37.3 million for the year ended December 31, 2020 and $2.8 million for the year ended December 31, 2019. Cash used in operating activities in the year ended December 31, 2020 was primarily due to our net loss for the period of 41.5 million adjusted by non-cash charges of $5.4 million and net decrease of $1.2 million in our net operating assets and liabilities. The increase in cash used in operations was due to increased research and development expenses, higher general administrative expenses and decreased related party revenue. The non-cash charges consisted of $3.9 million of stock-based compensation expense, $1.3 million of depreciation expense, and $0.3 million of other losses. The changes in our net operating assets and liabilities were primarily due to an increase of $2.8 million in prepaid expense and other current assets and increase of $2.2 million in trade receivables, partially offset by an increase of $2.7 million in accrued expenses, an increase of $0.9 million in accounts payable, and a decrease of $0.3 million in tax credit receivables. Cash used in operating activities in the year ended December 31, 2019 was primarily due to our net loss for the period of $0.6 million adjusted by non-cash charges of $2.9 million and net change of $5.1 million in our net operating assets and liabilities. The non-cash charges consisted of $1.8 million of stock-based compensation expense and $1.1 million of depreciation. The changes in our net operating assets and liabilities were primarily due to an increase of $7.1 million in accounts receivable, an increase of $1.5 million in prepaid expense and other current assets, a decrease of $1.3 million in accounts payable, partially offset by an increase of $4.3 million in accrued expenses, a decrease of $0.2 million in other non-current assets and a decrease of $0.2 million in tax credit receivable. 108 Cash Used in Investing Activities During the years ended December 31, 2020 and 2019, cash used in investing activities was $210.9 million and $17.9 million, respectively. Cash used in investing activities for the year ended December 31, 2020 was primarily due to the purchase of short-term investments of $322.6 million and purchases of property, plant and equipment of $1.5 million, partially offset by $113.3 million in maturities of short-term investments. Cash used in investing activities for the year ended December 31, 2019 was primarily due to the purchase of short-term investments of $51.7 million and purchases of property, plant and equipment of $1.0 million and $0.3 million of accretion on short-term investments, partially offset by $35.0 million in maturities of short-term investments. Cash Provided by Financing Activities During the years ended December 31, 2020, cash provided by financing activities was $213.2 million. Cash provided by financing activities for the year ended December 31, 2020 was primarily due to the net proceeds from issuance of common stock upon completion of our IPO of $150.8 million, issuance of common stock upon completion of the private placement with Novartis of $10.0 million, issuance of our Series C convertible preferred stock net of issuance costs of $52.0 million, and the issuance of common stock upon the exercise of previously granted stock options of $0.4 million. The net proceeds from the completion of the IPO of $150.8 million were composed of our proceeds of $154.0 million, after deducting underwriting discounts and commissions, less offering expenses of $5.7 million, of which $3.2 million was paid in 2020. During the year ended December 31, 2019, cash provided by financing activities was $45.5 million. Cash provided by financing activities for the year ended December 31, 2019 was primarily due to net proceeds from the issuance of our Series C redeemable convertible preferred stock financing of $47.9 million and proceeds from the exercise of stock options of $0.2 million, partially offset by the payment of deferred offering costs of $2.6 million. Off-Balance Sheet Arrangements During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements or holdings in any variable interest entities. Contractual Obligations and Other Commitments The following table summarizes our contractual obligations and other commitments as of December 31, 2020 (in thousands): Payments Due by Period Less than 1 Year 1 to 3 Years 3 to 5 Years More Than 5 Years Total Operating lease $ 2,027 $ 4,269 $ 3,391 $ — $ 9,687 Total obligations $ 2,027 $ 4,269 $ 3,391 $ — $ 9,687 We enter into contracts in the normal course of business with third-party contract organizations for clinical trials, non-clinical studies and testing, manufacturing and other services and products. These contracts generally provide for termination following a certain period after notice and therefore we believe that our cancelable obligations under these agreements are not material and they are not included in the table above. We have not included milestone or royalty payments or other contractual payment obligations in the table above if the timing and amount of such obligations are unknown or uncertain. Critical Accounting Polices and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. 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. Actual results may differ from these estimates under different assumptions or conditions. 109 While our significant accounting policies are described in more detail in Note 2 to our financial statements appearing elsewhere in this Annual Report , we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements. Revenue Recognition As of December 31, 2020, all of our revenue to date has been generated from the Novartis Agreement. We recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of Topic 606, we perform the following five steps: (i) identification of the contract(s) with the customer, (ii) identification of the promised goods or services in the contract and determination of whether the promised goods or services are performance obligations, (iii) measurement of the transaction price, (iv) allocation of the transaction price to the performance obligations, and (v) recognition of revenue when (or as) we satisfy each performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to our customer. Identification of the Contracts with the Customers We evaluate every contract to determine whether it in its entirety or in part represent a contract with a customer, or a collaboration agreement and, based on this determination, apply appropriate accounting guidance. We account for a contract with a customer that is within the scope of Topic 606 when all of the following criteria are met: (i) the arrangement has been approved by the parties and the parties are committed to perform their respective obligations, (ii) each party’s rights regarding the goods or services to be transferred can be identified, (iii) the payment terms for the goods or services to be transferred can be identified, (iv) the arrangement has commercial substance and (v) collection of substantially all of the consideration to which we will be entitled in exchange for the goods or services that will be transferred to the customer is probable. Identification of the Performance Obligations The promised goods or services in our collaboration and option arrangements consist of license and research and development services. The arrangements also have options for additional items (i.e., license rights). Options are considered to be marketing offers and are to be accounted for as separate contracts when the customer elects such options, unless we determine the option provides a material right which would not be provided without entering into the contract. The determination as to whether such options are material rights requires significant management judgment, and management considers factors such as other similar arrangements, market data and the terms of the contractual arrangement to make such conclusion. Performance obligations are promised goods or services in a contract to transfer a distinct good or service to the customer. Promised goods or services are considered distinct when: (i) the customer can benefit from the good or service on its own or together with other readily available resources and (ii) the promised good or service is separately identifiable from other promises in the contract. In assessing whether promised goods or services are distinct, we consider factors such as the stage of development of the underlying intellectual property, the capabilities of our customer to develop the intellectual property on their own and whether the required expertise is readily available. Determination of the Transaction Price We estimate the transaction price based on the amount of consideration we expect to receive for transferring the promised goods or services in the contract. The consideration may include both fixed consideration and variable consideration. At the inception of each arrangement that includes variable consideration, we evaluate the amount of the potential payments and the likelihood that the payments will be received. We utilize either the most likely amount method or expected value method to estimate the transaction price based on which method better predicts the amount of consideration expected to be received. If it is probable that a significant revenue reversal would not occur, the variable consideration is included in the transaction price. All contingent future payments, which include research, development, regulatory, and sales-based royalty payments, have not been considered in the initial analysis, as they are contingent upon option(s) being exercised or are subject to significant risk of achievement. Allocation of Transaction Price We allocate the transaction price based on the estimated standalone selling price. We must develop assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract. We utilize key assumptions to determine the standalone selling price, which may include other comparable transactions, pricing considered in negotiating the transaction, and the estimated costs. Certain variable consideration is allocated specifically to one or more performance obligations in a contract when the terms of the variable consideration relate to the satisfaction of the performance obligation and the 110 resulting amounts allocated to each performance obligation are consistent with the amounts we would expect to receive for satisfying each performance obligation. Recognition of Revenue We considered the license to PLN-1474 as functional intellectual property, as when control of the license was transferred to Novartis at the inception of the Novartis Agreement, Novartis had the right to access its technology and it was functional. The license was distinct from the research and development services as the services are not transformative in nature. As such, under Topic 606, we determined the $50.0 million was standalone selling price PLN-1474 license and was recorded to revenue at the inception of the Novartis Agreement and $25.0 million in revenue was recognized from the achievement of the first patient dosing milestone in the first quarter of 2020. We recognize revenue as we perform the research and development services based on an input method, as such costs have direct relationship between our effort and the progress made towards satisfying its performance obligations to Novartis. Accrued Research and Development Costs We record accrued expenses for estimated costs of our research and development activities conducted by third-party service providers, which include the conduct of clinical studies and preclinical studies. We record the estimated costs of research and development activities based upon the estimated amount of services provided but not yet invoiced and include these costs in accrued liabilities in the balance sheets and within research and development expense in the statements of operations and comprehensive (loss) income. These costs are a significant component of our research and development expenses. We record accrued expenses for these costs based on factors such as estimates of the work completed and in accordance with agreements established with these third-party service providers. Any payments made in advance of services provided are recorded as prepaid assets, which are expensed as the contracted services are performed. We estimate the amount of work completed through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. We make significant judgments and estimates in determining the accrued balance in each reporting period. As actual costs become known, we adjust our accrued estimates. Our accrued expenses are dependent, in part, upon the receipt of timely and accurate reporting from clinical research organizations and other third-party service providers. If we under estimate or over-estimate the level of services performed or the costs of these services, our accrued expenses could differ from our estimates. For the periods presented, we have experienced no material differences between our accrued expenses and actual expenses. Stock-Based Compensation The Company’s stock-based equity awards include restricted stock awards, stock options and shares that will be issued under the Company’s 2020 Employee Stock Purchase Plan (“ESPP”). We recognize stock-based compensation for awards granted to employees, nonemployees and directors based on the estimated fair value of the awards on the date of grant. We estimate the grant date fair value and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is recognized on a straight-line basis over the requisite service periods, which are generally the vesting period of the respective awards. Forfeitures are accounted for as they occur. The Black-Scholes option-pricing model requires the use of subjective assumptions which determine the fair value of stock-based awards, including the expected term and the price volatility of the underlying stock. These assumptions include: • Fair value of common stock —See paragraph below for discussion of the fair value of our common stock. • Expected term —The expected term represents the period that the stock-based awards are expected to be outstanding. The expected term for our stock options was calculated based on the weighted-average vesting term of the awards and the contract period, or simplified method, as allowed by the SEC. • Expected volatility —Prior to becoming a public company, as we did not have any trading history for our common stock, the expected volatility was estimated based on the average historical volatilities of common stock of comparable publicly traded entities over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on their size, stage in the life cycle or area of specialty. We will continue to apply this process until enough historical information regarding the volatility of our own stock price becomes available. • 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 approximately equal to the expected term of the awards. 111 • Expected dividend —We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we used an expected dividend yield of zero. Prior to the closing of our IPO, the fair value of the common stock underlying our share-based awards was estimated on each grant date by our board of directors. In order to determine the fair value of our common stock underlying option grants, our board of directors considered, among other things, timely valuations of our common stock prepared by the third-party valuation firm in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation . Given the absence of a public trading market for our common stock historically, our board of directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including our stage of development; progress of our research and development efforts; the rights, preferences and privileges of our convertible preferred stock relative to those of our common stock; equity market conditions affecting comparable public companies; and the lack of marketability of our common stock. Following the closing of our IPO, the fair value of our common stock was determined based on the quoted market price of our common stock. Emerging Growth Company Status and JOBS Act Accounting Election We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption and adopt ASU No. 2016-02 (Topic 842 ), Leases when the standard is effective for private companies which is for fiscal years beginning after December 15, 2020. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. In addition, we intend to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if as an “emerging growth company” we intend to rely on such exemptions, we are not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis) and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation. These exemptions will apply for a period of five years following the completion of our IPO or until we no longer meet the requirements of being an emerging growth company, whichever is earlier. Recent Accounting Pronouncements The information set forth under Note 2 to the financial statements under the caption “Recently Issued Accounting Pronouncements” is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable 112