Relay Therapeutics, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Overview We are a clinical-stage, precision medicines company transforming the drug discovery process with an initial focus on enhancing small molecule therapeutic discovery in targeted oncology. Our company is built upon unparalleled insights into protein motion and how this dynamic behavior relates to protein function. We built our Dynamo platform to integrate an array of leading edge experimental and computational approaches, which allows us to apply our understanding of protein structure and motion to drug discovery. We are advancing a pipeline of medicines to address targets in precision oncology, including our lead product candidates, RLY-1971 and RLY-4008, as well as our PI3Kα mutant selective program, or the RLY-PI3K1047 program. We initiated a Phase 1 clinical trial for RLY-1971, our inhibitor of Src homology region 2 domain-containing phosphatase-2, or SHP2, in patients with advanced solid tumors in the first quarter of 2020. In December 2020, we entered into a global collaboration and license agreement, or the Genentech Agreement, with Genentech, Inc., a member of the Roche Group, or Genentech, for the development and commercialization of RLY-1971. We initiated a first-in-human clinical trial for RLY-4008, our inhibitor of fibroblast growth factor receptor 2, or FGFR2, enriched for patients with advanced solid tumors having oncogenic FGFR2 alterations in the third quarter of 2020. We anticipate the RLY-PI3K1047 program, our program for molecules targeting cancer-associated mutant variants of phosphoinostide 3-kinase alpha, or PI3Kα, to be in Investigational New Drug, or IND, enabling studies in 2021. While our initial focus is on precision oncology, we believe our Dynamo platform may also be broadly applied to other areas of precision medicine, such as genetic disease. In addition to the three product candidates described above, we have five discovery stage programs across both precision oncology and genetic disease. We are focused on using the novel insights derived from our approach to transform the lives of patients suffering from debilitating and life-threatening diseases through the discovery, development and commercialization of our therapies. We were incorporated in May 2015. We have devoted substantially all of our resources to developing our lead product candidates, developing our innovative experimental and computational approaches on protein motion, building our intellectual property portfolio, business planning, raising capital and providing general and administrative support for these operations. To date, we have principally financed our operations through private placements of preferred stock, convertible debt and proceeds from our initial public offering, or IPO, discussed below. Additionally, in January 2021, we received an upfront payment of $75.0 million in connection with the Genentech Agreement. On July 20, 2020, we closed our IPO and issued 23,000,000 shares of our common stock at a price of $20.00 per share for net proceeds of $425.3 million, after deducting underwriting discounts and commissions of $32.2 million and expenses of $2.5 million. In connection with our IPO, all shares of Series A, Series B and Series C convertible preferred stock converted into 61,992,534 shares of common stock. Prior to our IPO, we had received gross proceeds of approximately $520.0 million from sales of our preferred stock and our issuance of convertible debt. In December 2020, we entered into the Genentech Agreement with Genentech, for the development and commercialization of RLY-1971. Under the terms of the Genentech Agreement, we received $75.0 million in an upfront payment and are eligible to receive $25.0 million in near-term payments; and, if we do not opt into a U.S. profit/cost share, up to $695.0 million in additional development, commercialization and sales-based milestones for RLY-1971; and tiered royalties on annual global net sales (on a country-by-country basis), anticipated to be in the low-to-mid-teens, subject to reductions in certain circumstances. Additionally, we are eligible to receive additional royalties in the event of regulatory approval of RLY-1971 and Genentech’s compound, GDC-6036, that directly 121 binds to and inhibits KRAS G12C , in combination. We have the right to opt-in to a 50/50 U.S. profit/cost share and if we do opt into the U.S. profit/cost share, we are eligible to receive up to $410 million in additional commercialization and sales-based milestones for RLY-1971 outside of the U.S. and tiered royalties on annual net sales outside of the U.S. (on a country-by-country basis), anticipated to be in the low-to-mid-teens, subject to reduction in certain circumstances . We also retain the right to develop RLY-1971 in combination with our FGFR2 and PI3Kα programs. The current COVID-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting our employees, patients, communities and business operations, as well as contributing to significant volatility and negative pressure on the U.S. economy and in financial markets. Efforts to contain the spread of the COVID-19 pandemic have intensified and the United States, Europe and Asia have implemented severe travel restrictions, social distancing requirements, stay-at-home orders and have delayed the commencement of non-COVID-19-related clinical trials, among other restrictions. While we are currently continuing the clinical trials we have underway, we expect that COVID-19 precautions may directly or indirectly impact the timeline for some of our clinical trials. To date, we have been able to continue to enroll our patients in first-in-human clinical trials for RLY-1971 and RLY-4008, and we currently do not anticipate any interruptions in clinical enrollment. However, we are continuing to assess the potential impact of the COVID-19 pandemic on our current and future business and operations, including our expenses and clinical trials, as well as on our industry and the healthcare system. Since our inception, we have incurred significant operating losses on an aggregate basis. Our ability to generate product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more of our current or future product candidates. Our net losses were $52.4 million and $75.3 million for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, we had an accumulated deficit of $404.2 million. These losses have resulted primarily from costs incurred in connection with research and development activities, licensing and patent investment and general and administrative costs associated with our operations. We expect to continue to incur significant expenses , including the costs of operating as a public company, and generate increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially if and as we: • conduct our current and future clinical trials of RLY-4008, additional preclinical research and development of our RLY-PI3K1047 program , and other early-stage programs ; • initiate and continue research and preclinical and clinical development of our other product candidates; • seek to identify additional product candidates; • pursue marketing approvals for any of our product candidates that successfully complete clinical trials, if any; • establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval; • require the manufacture of larger quantities of our product candidates for clinical development and potentially commercialization; • obtain, maintain, expand and protect our intellectual property portfolio; • acquire or in-license other drugs and technologies; • hire and retain additional clinical, regulatory, quality and scientific personnel; • build out new facilities or expand existing facilities to support our ongoing development activity; and • add operational, financial and management information systems and personnel, including personnel to support our drug development, any future commercialization efforts and our operations as a public company. 122 In addition, if we obtain marketing approval for any of our lead product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. As a result, we will need additional financing to support our continuing operations. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources, which may include collaborations with third parties. 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 or commercialization of one or more of our product candidates. Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from 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 may be forced to reduce or terminate our operations. We believe our cash, cash equivalents and investments of $678.1 million as of December 31, 2020 , together with the $75.0 million upfront payment received in January 2021 in connection with the Genentech Agreement, will enable us to fund our operating expenses and capital expenditure requirements into 2024. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. We will need to raise additional capital in the future to continue developing the drugs in our pipeline and to commercialize any approved drug. We may seek to obtain additional financing in the future through the issuance of our common stock, through other equity or debt financings or through collaborations or partnerships with other companies. We may not be able to raise additional capital on terms acceptable to us, or at all, and any failure to raise capital as and when needed could compromise our ability to execute on our business plan. See “—Liquidity and Capital Resources.” Components of our Results of Operations Revenue For the year ended December 31, 2020, our revenue consists solely of amounts related to the Genentech Agreement. We recognize our revenue as the performance obligations are satisfied under the agreement. Operating Expenses Our operating expenses since inception have consisted solely of research and development costs and general and administrative costs. Research and Development Expenses Research and development expenses include: • salaries, benefits and other employee related costs, including stock-based compensation expense, for personnel engaged in research and development functions; • costs of outside consultants, including their fees, stock-based compensation and related travel expenses; • expenses incurred under agreements with contract research organizations, or CROs, contract manufacturing organizations, or CMOs, and other vendors that conduct our clinical trials and preclinical activities; • costs of acquiring, developing and manufacturing clinical trial materials and lab supplies; • costs related to compliance with regulatory requirements; and • facility costs, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies. 123 We expense research and development costs as the services are performed or the goods are received. We recognize costs for certain development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or information provided to us by our vendors and our clinical investigative sites. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our financial statements as prepaid expenses or accrued research and development expenses. We began tracking external development costs by program on January 1, 2020 for programs that have entered clinical trials. We do not allocate internal costs, facilities costs or other overhead costs to specific programs. The following summarizes our costs based on their status in development: Year Ended December 31, 2020 External costs for programs in clinical trials $ 7,447 External costs for programs in discovery and pre-clinical studies 42,431 External costs for platform research and other research and development activities 11,544 Employee related expenses 38,440 Total research and development expenses $ 99,862 Our most advanced development programs, RLY-1971 and RLY-4008, are enrolling patients in first-in-human clinical trials. Programs in discovery and pre-clinical stages include our RLY-P13K1047 program as well as other earlier stage programs. Costs incurred for these programs include costs incurred to support our discovery research and translational science efforts up to the initiation of first-in-human clinical development. Platform research and other research and development activities include costs that are not specifically allocated to active product candidates, including facilities costs, depreciation expense and other costs. Employee related expenses includes salary, wages, stock-based compensation and other costs related to our personnel, which are not allocated to specific programs or activities. We cannot determine with certainty the duration and costs of future clinical trials and future development costs, if, when or to what extent we will generate revenue from the commercialization and sale of any our product candidates for which we obtain marketing approval or our other research and development costs. We may never succeed in obtaining marketing approval for any of our product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including: • the scope, rate of progress, expense and results of our preclinical development activities, any future clinical trials of RLY-4008, our RLY-PI3K1047 program or other product candidates and other research and development activities that we may conduct; • uncertainties in clinical trial design and patient enrollment or drop out or discontinuation rates; • establishing an appropriate safety and efficacy profile with IND-enabling studies; • the initiation and completion of future clinical trial results; • the timing, receipt and terms of any approvals from applicable regulatory authorities including the U.S. Food and Drug Administration, or FDA, and non-U.S. regulators; • significant and changing government regulation and regulatory guidance; • potential additional studies requested by regulatory agencies; • establishing clinical and commercial manufacturing capabilities or making arrangements with third-party manufacturers in order to ensure that we or our third-party manufacturers are able to make product successfully; 124 • the impact of any business interruptions to our operations, including the timing and enrollment of patients in our planned clinical trials, or to those of our manufacturers, suppliers or other vendors resulting from the COVID-19 pandemic or a similar public health crisis; • the expense of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and • maintaining a continued acceptable safety profile of our product candidates following approval, if any, of our product candidates. Research and development activities are central to our business model. Product 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. We expect that our research and development expenses will continue to increase for the foreseeable future as we continue clinical trials of RLY-4008, the development of our RLY-PI3K1047 program and to identify and develop additional product candidates. A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant trial delays due to patient enrollment or other reasons, we would be required to expend significant additional financial resources and time on the completion of clinical development. General and Administrative Expenses General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, corporate and business development and administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing, tax and consulting services; insurance costs; travel expenses; and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs. We expect that our general and administrative expenses will increase in the future as we increase our general and administrative personnel headcount to support personnel in research and development and to support our operations generally as we increase our research and development activities and activities related to the potential commercialization of our product candidates. We also expect to incur increased expenses associated with operating as a public company, including costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and Securities and Exchange Commission, or SEC, requirements, director and officer insurance costs, and investor and public relations costs. Other Income, Net Other income, net primarily consists of interest income related to interest earned on our cash, cash equivalents and investments. Income Taxes Since our inception in 2015, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in any year or for our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items. As of December 31, 2020, we had federal NOL carryforwards of $174.0 million available to reduce taxable income, of which $43.1 million expire beginning in 2035 and $130.9 million do not expire. We have state NOL carryforwards of $192.3 million as of December 31, 2020 available to reduce future state taxable income, which expire at various dates beginning in 2035. As of December 31, 2020, we also had federal and state research and development tax credit carryforwards of $8.1 million and $2.7 million, respectively, which begin to expire in 2035 and 2030, respectively. 125 Results of Operations Comparison of years ended December 31, 2020 and 2019 The following table summarizes our results of operations for the years ended December 31, 2020 and 2019: Year Ended December 31, 2020 2019 Change (in thousands) Revenue $ 82,654 $ — $ 82,654 Operating expenses: Research and development $ 99,862 $ 70,306 $ 29,556 General and administrative 38,588 13,742 24,846 Total operating expenses 138,450 84,048 54,402 Loss from operations (55,796 ) (84,048 ) 28,252 Interest income and other expense 3,384 8,743 (5,359 ) Net loss $ (52,412 ) $ (75,305 ) $ 22,893 Revenue We recognized revenue of $82.7 million for the year ended December 31, 2020 in connection with the Genentech Agreement related to the satisfaction of our performance obligation for the license transfer. We did not recognize any revenue for the year ended December 31, 2019. Research and Development Expenses Year Ended December 31, 2020 2019 Change (in thousands) Employee related expenses $ 38,440 $ 19,914 $ 18,526 Outside and consulting services 46,009 34,585 11,424 Depreciation of laboratory equipment 2,889 2,410 479 Laboratory supplies and other costs 6,754 7,289 (535 ) Facilities and other allocated expenses 5,770 6,108 (338 ) Total research and development expenses $ 99,862 $ 70,306 $ 29,556 Research and development expenses were $99.9 million for the year ended December 31, 2020 compared to $70.3 million for the year ended December 31, 2019 . The increase of $29.6 million was primarily due to $18.5 million of increased employee related costs, including $12.0 million of additional share-based compensation expense, primarily due to increases in our stock price and increased headcount, and $11.4 million in increased outside and consulting expenses associated with our clinical and pre-clinical candidates. General and Administrative Expenses General and administrative expenses were $38.6 million for the year ended December 31, 2020 compared to $13.7 million for the year ended December 31, 2019 . The increase of $24.8 million was primarily due to $19.2 million of increased employee related costs, including $15.5 million of additional share-based compensation expense, primarily due to increases in our stock price and increased general and administrative headcount to support the growth of our organization, and $5.2 million of other general and administrative expenses primarily attributed to increases in insurance, legal and other expenses. 126 Other Income (Expense), Net Other income, net, was $3.4 million for the year ended December 31, 2020 compared to $8.7 million for the year ended December 31, 2019 due primarily to decreases in interest rates and lower investment amounts. Liquidity and Capital Resources Since our inception, we have not generated any revenue from product sales and have incurred significant operating losses. We have not yet commercialized any products and we do not expect to generate revenue from sales of any product candidates for several years, if ever. On July 20, 2020, we closed our IPO and issued 23,000,000 shares of common stock for net proceeds of $425.3 million. Prior to our IPO , we received gross proceeds of $520.0 million from sales of our preferred stock and our issuance of convertible debt. As of December 31, 2020, we had cash, cash equivalents and investments of $678.1 million. In January 2021, we received an upfront payment of $75.0 million from Genentech pursuant to the Genentech Agreement. Cash Flows The following table summarizes our sources and uses of cash for each of the periods presented: Year Ended December 31, 2020 2019 (in thousands) Cash used in operating activities $ (102,489 ) $ (66,133 ) Cash provided by (used in) investing activities 81,672 (319,024 ) Cash provided by financing activities 426,509 5,606 Net increase (decrease) in cash, cash equivalents and restricted cash $ 405,692 $ (379,551 ) Operating Activities. During the year ended December 31, 2020, operating activities used $102.5 million of cash, primarily resulting from our net loss of $52.4 million and cash used by changes in our operating assets and liabilities of $85.2 million, partially offset by non-cash charges of $35.1 million. Net cash used by changes in our operating assets and liabilities of $85.2 million during the year ended December 31, 2020 consisted of increases of $75.0 million in accounts receivable, $7.7 million in contract assets, and $4.7 million in prepaid expenses and other current assets, offset by an increase of $2.0 million in accrued expenses and other liabilities. The increase in accounts receivable and contract assets was due to the upfront payment received and revenue recognized in connection with the Genentech Agreement. The increase in prepaid expenses was primarily due to increases in prepaid license fees and insurance. The increase in accrued expenses and other current liabilities was largely due to an increase in external research and development costs. During the year ended December 31, 2019, operating activities used $66.1 million of cash, primarily resulting from our net loss of $75.3 million, partially offset by non-cash charges of $4.9 million and cash provided by changes in our operating assets and liabilities of $4.3 million. Net cash provided by changes in our operating assets and liabilities of $4.3 million during the year ended December 31, 2019 consisted of an increase of $5.2 million in accounts payable, accrued expenses and other current liabilities as well as a decrease of $1.2 million of operating lease assets, net, partially offset by an increase of $2.1 million in prepaid expenses and other current assets. The increase in accounts payable, accrued expenses and other current liabilities was largely due to an increase in external research and development costs. The increase in prepaid expenses and other current assets was due to an increase in external research and development costs. 127 Investing Activities . During the year ended December 31, 2020, investing activities provided $81.7 million, consisting primarily of $83.6 million of net investment proceeds from maturities offset by $1.9 million for the purchase of property and equipment. During the year ended December 31, 2019, investing activities used $319.0 million, consisting primarily of $311.0 million of net investment purchases and $8.0 million for the purchase of property and equipment. Financing Activities . During the year ended December 31, 2020, net cash provided by financing activities was $426.5 million, consisting of net proceeds from the issuance of common stock upon the closing of our IPO of $425.3 million and proceeds from stock option exercises of $1.2 million. During the year ended December 31, 2019, net cash provided by financing activities was $5.6 million, consisting of net proceeds from our sales of Series C convertible preferred stock of $5.0 million and proceeds from the exercise of stock options of $0.6 million. Funding Requirements We expect our expenses to increase substantially in connection with our ongoing clinical development activities related to the potential clinical development activities of RLY-4008 and the ongoing pre-clinical development activities of our RLY-PI3K1047 program. In addition, we are now incurring additional costs associated with operating as a public company. We expect that our expenses will increase substantially as discussed in more detail in “ — Overview” above. As of December 31, 2020, we had cash, cash equivalents and investments of $678.1 million. We believe that our existing cash, cash equivalents and investments, together with the $75.0 million upfront payment received in January 2021 in connection with the Genentech Agreement, will enable us to fund our operating expenses and capital expenditure requirements into 2024. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with the development of RLY-4008, our RLY-PI3K1047 programs and other product candidates and programs, and because the extent to which we may enter into collaborations with third parties for the development of our product candidates is unknown, we are unable to estimate the timing and amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our future capital requirements will depend on many factors, including: • the impact of any business interruptions to our operations, including the timing and enrollment of patients in our planned clinical trials, or to those of our manufacturers, suppliers or other vendors, resulting from the COVID-19 pandemic or similar public health crisis; • the scope, progress, results and costs of our current and future clinical trials of RLY-4008 and additional preclinical research of our RLY-PI3K1047 program; • the scope, progress, results and costs of drug discovery, preclinical research and clinical trials for our other product candidates; • the number of future product candidates that we pursue and their development requirements; • the costs, timing and outcome of regulatory review of our product candidates; • our ability to establish and maintain collaborations on favorable terms, if at all; • the success of any existing or future collaborations that we may enter into with third parties; 128 • the extent to which we acquire or invest in businesses, products and technologies, including entering into licensing or collaboration arrangements for product candidates, such as our collaboration with Genentech; • the achievement of milestones or occurrence of other developments that trigger payments under any existing or future collaboration agreements, if any; • the extent to which we are obligated to reimburse, or entitled to reimbursement of, clinical trial costs under any existing or future collaboration agreements, if any; • the costs and timing of future commercialization activities, including drug sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval, to the extent that such sales, marketing, manufacturing and distribution are not the responsibility of any collaborator that we may have at such time; • the amount of revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval; • the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; • our headcount growth and associated costs as we expand our business operations and our research and development activities; and • the costs of operating as a public company. Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval for any product candidates or generate revenue from the sale of any product candidate for which we may obtain marketing approval. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of drugs that we do not expect to be commercially available for many years, if ever. Accordingly, we will need to obtain substantial additional funds to achieve our business objectives. Adequate additional funds may not be available to us on acceptable terms, or at all. We do not currently have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest may be diluted, and the terms of these securities may include liquidation or other preferences and anti-dilution protections that could adversely affect your rights as a common stockholder. Additional debt or preferred equity financing, if available, may involve agreements that include restrictive covenants that may limit our ability to take specific actions, such as incurring debt, making capital expenditures or declaring dividends, which could adversely impact our ability to conduct our business, and may require the issuance of warrants, which could potentially dilute your ownership interest. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technology, future revenue streams, research programs or product 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 collaborations, strategic alliances or licensing arrangements with third parties when needed, we may be required to delay, limit, reduce and/or terminate our product development programs or any future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Contractual Obligations and Commitments On June 15, 2020, we entered into an Amended and Restated Collaboration and License Agreement, or DESRES Agreement, with D. E. Shaw Research, LLC, or D. E. Shaw Research, extending the term and otherwise modifying the terms of the Collaboration and License Agreement originally entered into on August 17, 2016. The DESRES Agreement provides that the parties will jointly conduct research efforts with the goal of identifying and developing product candidates. On a product-by-product basis, we have agreed to pay D. E. Shaw Research milestone payments upon the achievement of certain development and regulatory milestone events for products we develop under the 129 DESRES Agreement that are directed to a Category 1 Target or any target that was a Category 1 Target. Such payments for achievement of development and regulatory milestones total up to $7. 3 million in the aggregate for each of the first three products we develop, and up to $6. 3 million in the aggregate for each product we develop after the first three. In addition, we are obligated to pay D. E. Shaw Research royalty payments as defined in the DESRES A greement. We assessed the milestone and royalty events under the DESRES Agreement as of December 31, 2020 and 2019, respectively, and concluded that $1.5 million was due related to the execution of the Genentech Agreement as of December 31, 2020 and no such payments were due as of December 31, 2019. The DESRES Agreement extended the term of the original agreement to August 16, 2025 and increased the annual fee from $1.0 million to $7.9 million, commencing on August 16, 2020. The DESRES Agreement automatically renews for successive one year periods unless either party provides at least one year notice of non-renewal, and the annual fee during each of the one year renewal terms is subject to the mutual agreement of us and D. E. Shaw Research. We also have certain research and license arrangements with other third parties, which provide us with research services with the goal of identifying and developing product candidates until all payment obligations by us to the third party have expired. We have the right to terminate these agreements with a reasonable period of notice. We are also obligated to pay development milestone payments for up to four targets, each in the range of $4.0 million to $7.0 million, upon the achievement of certain specified contingent events. We assessed the milestones as of December 31, 2020 and 2019 and concluded no such milestone payments were due. We enter into contracts in the normal course of business with CROs and CMOs for clinical trials, preclinical research studies and testing, manufacturing and other services and products for operating purposes. These contracts do not contain any minimum purchase commitments and are cancelable by us upon prior notice of 30 days. Payments due upon cancelation consist only of payments for services provided and expenses incurred up to the date of cancelation. In December 2017, we entered into a facility lease agreement for approximately 44,336 square feet of office and laboratory space at 399 Binney Street, Cambridge, Massachusetts, which was increased to 44,807 square feet in January 2018. We gained control of the space in January 2019 and the lease expires in April 2029, subject to certain renewal options, which have not been included in our right of use asset and liability. In September 2020, we entered into an amendment to our existing facility lease agreement to expand the leased area by approximately 1,824 square feet of office space at 399 Binney Street, Cambridge, Massachusetts. The amendment commenced in October 2020 and expires in April 2029, subject to certain renewal options. We provided a letter of credit in connection with our facility lease agreement in the amount of $878 with a financial institution, which expires September 30, 2028. For more information, see Note 13, Commitments and Contingencies, and Note 14, Leases, of the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Critical Accounting Policies and Use of Estimates Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, costs and expenses and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including expenses, clinical trials and research and development costs, will 130 depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat COVID-19, as well as the economic impact on local, regional, national and international markets. We have made estimates of the impact of COVID-19 within our financial statements and there may be changes to those estimates in future periods. Actual results could differ from our estimates. While our significant accounting policies are described in more detail in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements. Revenue Recognition We account for revenue recognition in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers , or ASC 606. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within the contract and determine those that are performance obligations. We then determine the transaction price and allocate it to the performance obligations using the relative selling price model. As part of the accounting for these arrangements, we must use significant judgment to determine: (a) the number of performance obligations based on the determination under step (ii) above; (b) the transaction price under step (iii) above, including the determination of whether milestones or other variable consideration should be included in the transaction price; and (c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of the transaction price in step (iv) above. We utilize key assumptions and judgments to determine the stand-alone selling price for each performance obligation, which may include discounted cash flow models, evaluation of comparable transactions, pricing considered in negotiating the transaction and estimated costs, to determine how the transaction price is allocated among the performance obligations . We use judgment to determine whether milestones or other variable consideration should be included in the transaction price. For revenue-based royalties, including milestone payments based on the level of sales, we will include royalties in the transaction price at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty is allocated has been satisfied (or partially satisfied). As part of management’s evaluation of the transaction price, we consider numerous factors, including whether the achievement of the milestones is outside of our control, contingent upon the efforts of others or subject to the risks of success. If we conclude it is probable that a significant revenue reversal would not occur, the associated milestone payment is included in the transaction price. Milestone payments that are not within our control, such as regulatory approvals, are generally not considered probable until those milestones are achieved. We re-evaluate the transaction price, including estimated variable consideration included in the transaction price and all constrained amounts, in each reporting period and as uncertain events are resolved or other changes in circumstances occur. Once the performance obligations are identified, the transaction price is allocated to each performance obligation based on the relative stand-alone selling price. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied, either at a point in time or over time. If the performance obligation is satisfied over time, we recognize revenue based on the use of either an output or input method. 131 As of December 31, 2020, we had one collaboration and license agreement with Genentech, which we entered into on December 11, 2020. Accrued Research and Development Expenses As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development and manufacturing expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears for services performed on a pre-determined schedule or when contractual milestones are met; however, some require advanced payments. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. Examples of estimated accrued research and development expenses include fees paid to: • CROs in connection with performing research activities on our behalf and conducting preclinical studies and clinical trials on our behalf; • investigative sites or other service providers in connection with clinical trials; • vendors in connection with preclinical and clinical development activities; and • vendors related to product manufacturing and development and distribution of preclinical and clinical supplies. We base our expenses related to preclinical studies and clinical trials on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple CROs that conduct and manage preclinical studies and clinical trials on our behalf. The financial terms of these agreements are subject to negotiation and vary from contract to contract, which may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing fees, we estimate the time period over which services will be performed, enrollment of patients, number of sites activated and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or amount of prepaid expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period. To date, we have not made any material adjustments to our prior estimates of accrued research and development expenses. Stock-Based Compensation We measure stock options and other stock-based awards granted to employees, directors and non-employees based on their fair value on the date of grant and recognize compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective award. We recognize the impact of forfeitures on stock-based compensation expense as forfeitures occur. We issued certain options with performance-based vesting conditions whereby the service inception date preceded the accounting grant date and therefore we applied variable accounting for the awards until the fair value of the awards was known on the accounting grant date. The board of directors approved the commencement of vesting for all such awards in 2020, therefore we no longer apply variable accounting as of December 11, 2020. We estimate the fair value of each stock option grant on the date of grant using the Black-Scholes option-pricing model, which uses as inputs the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield. 132 Prior to our IPO, the estimated fair value of our common stock was determined by our board of directors, or compensation committee thereof , as of the date of each option grant, with input from management, considering our most recently available third-party valuations of common stock and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. Historically, these independent third - party valuations of our equity instruments were performed contemporaneously with identified value inflection points. These third-party valuations were performed 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, or the Practice Aid. The Practice Aid identifies various available methods for allocating the enterprise value across classes of series of capital stock in determining the fair value of our common stock at each valuation date. Following our IPO, in connection with our accounting for granted stock options and other awards we may grant, the fair value of our common stock is determined based on the quoted market price of our common stock. Emerging Growth Company and Smaller Reporting Company Status In April 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an “emerging growth company,” or an EGC, can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. Thus, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period for new or revised accounting standards during the period in which we remain an emerging growth company; however, we may adopt certain new or revised accounting standards early. We will remain an emerging growth company until the earliest to occur of: (1) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (2) the date we qualify as a “large accelerated filer,” with at least $700.0 million of equity securities held by non-affiliates; (3) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period; and (4) the last day of the fiscal year ending after the fifth anniversary of our initial public offering. We are also a “smaller reporting company” meaning that the market value of our stock held by non-affiliates is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC. Recently Issued and Adopted Accounting Pronouncements A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. 133 Item 7A. Quantitative and Qualitati ve Disclosures About Market Risk. Interest rate risk We are exposed to market risk related to changes in interest rates of our investment portfolio of cash equivalents and investments. As of December 31, 2020, our cash equivalents consisted of money market funds. As of December 31, 2020, our investments consisted of investments in United States Treasury Bills, United States Treasury Bonds and agency bonds that have contractual maturities of less than two years. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. The fair value of our marketable securities is subject to change as a result of potential changes in market interest rates, including changes resulting from the impact of the COVID-19 pandemic. The potential change in fair value for interest rate sensitive instruments has been assessed on a hypothetical 100 basis point adverse movement across all maturities. As of December 31, 2020 and 2019, we estimate that such hypothetical 100 basis point adverse movement would not result in a material impact to our consolidated results of operations. As of December 31, 2020, we had no debt outstanding and are therefore not exposed to interest rate risk with respect to debt. Foreign currency exchange risk All of our employees and our operations are currently located in the United States and our expenses are generally denominated in U.S. dollars. However, we have entered into a limited number of contracts with vendors for research and development services that permit us to satisfy our payment obligations in U.S. dollars (at prevailing exchange rates) but have underlying payment obligations denominated in foreign currencies, including the Euro. We are subject to foreign currency transaction gains or losses on our contracts denominated in foreign currencies. To date, foreign currency transaction gains and losses have not been material to our financial statements, and we do not have a formal hedging program with respect to foreign currency. A 10% increase or decrease in current exchange rates would not have a material effect on our financial results for the years ended December 31, 2020 and 2019.