What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-09 compared with 2021-05-07 · 122 added, 114 removed, 186 unchanged (56% of the section changed)

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Dose escalation in the STRO-001 Phase 1 trial is continuing, and the maximum tolerated dose has not yet been reached.

We expect to begin the dose expansion portion of the Phase 1 trial in the second half of 2021.

The FDA has granted Orphan Drug Designation for STRO-001 for the treatment of multiple myeloma.

Our second candidate, STRO-002, is currently enrolling patients in a Phase 1 trial focused on ovarian and endometrial cancers with updated data reported in December 2020.

Our second candidate, STRO-002, is currently enrolling patients in a Phase 1 trial focused on ovarian and endometrial cancers with updated data from the dose-escalation portion of the trial most recently reported in May 2021.

As of April 23, 2021, the dose-escalation cohort of the Phase 1 trial had enrolled 39 ovarian cancer patients and included 34 patients treated with clinically active dose levels at 2.9 mg/kg or higher, of which 31 patients had at least one post-baseline scan and were evaluable for RECIST responses.

The results of this data is summarized as follows:

Of the 31 patients evaluable for RECIST, 10 patients met criteria for response.

One patient achieved a complete response, or CR, and nine patients achieved a partial response, or PR.

Of the nine PRs, four were confirmed PRs, or cPRs, and five were unconfirmed PRs, or uPRs;

For the five confirmed responders (1 CR and 4 cPRs), the median duration of response, or DOR, was 5.8 months;

Median study follow-up was 8.4 months and median progression-free survival, or PFS, was 7.2 months;

86% of all observed treatment-emergent adverse events, or AEs, were Grade 1 or 2.

The most common Grade 3 and 4 AEs were neutropenia (64%), arthralgia (13%), fatigue (10%), neuropathy (8%), and abdominal pain (8%);

percentages of Grade 3 and 4 AEs are the percentage of the 39 patients evaluable for safety that manifested the applicable Grade 3 or 4 AE.

All Grade 3 or 4 AEs were managed with standard medical treatment, dose reductions or dose delays;

Dose limiting toxicities, or DLTs, were observed at higher dose levels in two patients – at 6.0 mg/kg (Grade 2 neuropathy/Grade 3 arthralgia) and at 6.4 mg/kg (Grade 3 bone pain).

Tissue samples for FolRα-expression analysis were provided by clinical sites retrospectively and were available in 18 patients treated at ≥ 2.9 mg/kg in the dose-escalation cohort.

Antitumor activity was observed across a broad range of FolRα-expression levels.

Based on such reported data, STRO-002 has been well-tolerated and no ocular toxicity signals have been observed, with no patients receiving prophylactic corticosteroid eye drops.

The dose escalation portion of the STRO-002 Phase 1 trial has been fully enrolled and the dose expansion portion of the trial is ongoing to assess the efficacy, safety and tolerability of STRO-002 at dose levels of 4.3 and 5.2mg/kg .

We expect to report updated dose-escalation data for STRO-002 in the second quarter of 2021.

For the dose-expansion portion, we dosed the first patient in January 2021 and are treating less heavily pre-treated ovarian cancer patients.

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Since the commencement of our operations, we have devoted substantially all of our resources to performing research and development and manufacturing activities in support of our own product development efforts and those of our collaborators, raising capital to support and expand such activities and providing general and administrative support for these operations.

We have funded our operations to date primarily from upfront, milestone and other payments under our collaboration agreements with Celgene (now BMS), Merck and EMD Serono, the issuance and sale of redeemable convertible preferred stock, our initial public offering, or IPO, of common stock and debt proceeds.

We have funded our operations to date primarily from upfront, milestone and other payments under

our collaboration agreements with Celgene (now BMS), Merck and EMD Serono, the issuance and sale of redeemable convertible preferred stock, our initial public offering, or IPO, follow-on public offerings of common stock , and debt proceeds.

We have no products approved for commercial sale and have not generated any revenue from commercial product sales.

We had a net loss of $30.4 million and $19.6 million for the three months ended March 31, 2021 and 2020, respectively.

We had a net loss of $36.5 million for the six months ended June 30, 2021.

We had a loss from operations of $35.6 million and net income of $10.3 million, due principally to an unrealized gain of $48.9 million related to our holdings of Vaxcyte common stock, for the six months ended June 30, 2020.

We cannot assure you that we will have net income or that we will generate positive cash flow from operating activities in the future.

As of March 31, 2021, we had an accumulated deficit of $258.2 million.

As of June 30, 2021, we had an accumulated deficit of $264.4 million.

We do not expect to generate any revenue from commercial product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years.

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The COVID-19 pandemic and its adverse effects have become more prevalent in the locations where we, our CROs, suppliers or third-party business partners conduct business.

We are beginning to experience the impact of the COVID-19 pandemic on our business through delays in the availability of materials routinely used in biologic therapeutic development and manufacturing, which may cause delays in our research, development and/or manufacturing activities , but overall patient enrollment and treatment remains on track.

We may experience more pronounced disruptions in our operations, liquidity, supply chain, facilities, and clinical trials in the future as well.

We are experiencing the impact of the COVID-19 pandemic on our business through delays in the availability of materials routinely used in biologic therapeutic development and manufacturing, which has the potential to cause delays in our research, development and/or manufacturing activities , but overall patient enrollment and treatment remains on track.

We may experience more pronounced and significant disruptions in our operations, liquidity, supply chain, facilities, and clinical trials in the future as well.

With respect to our clinical trials, we have experienced minor delays in enrollment and occasional delays in data entry by trial sites, but overall enrollment and treatment remains on track.

We may in the future experience more significant delays in enrollment, participant dosing, distribution of clinical trial materials, study monitoring and data analysis that could materially adversely impact our business, results of operations and overall financial performance in future periods.

We may in the future experience more significant delays in enrollment, participant dosing, distribution of clinical trial materials, study monitoring and data analysis that could materially adversely impact our business, results of operations, revenue earned from our collaboration partners, and overall financial performance in future periods.

Specifically, we may experience impact from changes in how we and companies worldwide conduct business due to the COVID-19 pandemic, including but not limited to restrictions on travel and in-person meetings, the speed and breadth of mass vaccinations for COVID-19 and the efficacy of such vaccines, delays in site activations and enrollment of clinical trials, prioritization of hospital resources toward pandemic effort, delays in review by the FDA and comparable foreign regulatory agencies, and disruptions in our supply chain for our product candidates.

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The effect of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods.

See the section titled “Risk Factors” for further discussion of the possible impact of the COVID-19 pandemic on our business.

See the section titled “Risk Factors” for further discussion of the possible impact of the ongoing COVID-19 pandemic on our business.

Financial Operations Overview

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We may also perform research and development activities under the collaboration agreements.

Consideration under these contracts generally includes a nonrefundable upfront payment, development, regulatory and commercial milestones and other contingent payments, and royalties based on net sales of approved products.

Consideration under these contracts generally includes a n onrefundable upfront payment, development , regulatory and commercial milestones and other contingent payments, and royalties based on net sales of approved products.

Additionally, the collaborations may provide options for the customer to acquire from us materials and reagents , clinical product supply or additional research and development services under separate agreements.

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Three Months Ended

Six Months Ended

(in thousands)

Internal costs:

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Interest expense includes interest incurred on our debt and amortization of debt issuance costs.

Additionally, the Company identified a financing component under the Merck 2018 Agreement and recorded interest expense associated with the upfront payment.

Other income (expense) in the three months ended March 31, 2021 and 2020 includes changes in values attributable to the arrangement with the Leukemia & Lymphoma Society, Inc.

and the Call Option Plan (each as defined in the notes to our financial statements included elsewhere in this report).

Comparison of the Three Months Ended March 31, 2021 and 2020

Additionally, we identified a financing component under the Merck 2018 Agreement and recorded interest expense associated with the upfront payment.

Other income (expense) in the three months ended June 30, 2021 and 2020 includes changes in values attributable to the arrangement with the Call Option Plan as defined in the notes to our financial statements included elsewhere in this report.

Comparison of the Three Months Ended June 3 0 , 20 2 1 and 20 20

Three Months Ended

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Interest income

Unrealized loss on equity securities

Unrealized gain on equity securities

Interest and other expense, net

* Percentage not meaningful

Net (loss) income

We have recognized revenue as follows during the periods indicated:

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Vaxcyte was a related party until the closing of its initial public offering on June 16, 2020.

* Percentage not meaningful

Total revenue increased by $7.5 million, or 105%, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

This was due to an increase of $9.1 million of Merck revenue, which reflects a $8.1 million increase in revenue from ongoing performance of research and development services, of which $5.9 million was associated with the contingent third program that was fully recognized upon the determination that the related performance obligation had terminated during the first quarter of 2021, and an increase of $1.4 million in clinical trial materials supply, partially offset by a $0.4 million decrease related to the financing component associated with the upfront payment, and an increase of $1.3 million of Vaxcyte revenue under our supply agreement.

These increases were partially offset by a decrease of $2.1 million in EMD Serono revenue and a decrease of $0.8 million in BMS revenue.

Total revenue increased by $18.6 million, or 196%, during the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

This was due to an increase of $12.8 million from Merck, which reflects the cumulative catch-up in revenue as a result of the change in transaction price due to a $15.0 million contingent payment earned in the second quarter of 2021 for the initiation of the first IND-enabling toxicology study under the first program in the collaboration and an increase of $0.1 million in clinical supply.

Further, there was an increase of $3.9 million from BMS, which was comprised of a $5.0 million increase in contract research and manufacturing activities supporting clinical trial supply, partially offset by a $1.0 decrease associated with the ongoing performance related to the partially unsatisfied performance obligations.

Additionally, there was an increase of $1.5 million from EMD Serono, which reflects a $2.0 million contingent payment earned in the second quarter of 2021 related to a patient enrollment achievement in the Phase 1 dose escalation portion of the study of M1231, partially offset by a $0.5 million decrease in research and development services.

Research and Development Expense

Research and development expense increased by $4.9 million, or 28%, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The increase was due primarily to increases of $2.1 million in personnel-related expenses due to higher headcount, $2.0 million in laboratory supplies and production materials-related expenses, and $1.1 million in facility-related expenses, partially offset by a $0.3 million decrease in consulting and outside services.

Research and development expense increased by $8.1 million, or 47%, during the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

The increase was due primarily to increases of $2.6 million in personnel-related expenses due to higher headcount, $3.1 million in laboratory supplies, clinical trial costs and production materials-related expenses, $1.3 million in consulting and outside services, and $1.0 million in facility-related expenses.

General and Administrative Expense

General and administrative expense increased by $2.4 million, or 27% during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The increase was due primarily to increases of $1.5 million in personnel-related expenses due to higher headcount, $0.2 million in insurance and external services, $0.2 million in equipment-related expenses, and $0.5 million in facility-related expenses.

General and administrative expense increased by $3.9 million, or 45%, during the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

The increase was due primarily to increases of $2.6 million in personnel-related expenses due to higher headcount, $0.5 million in insurance and external services, and $0.6 million in facility-related expenses.

Interest Income

Interest income decreased by $0.4 million during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, due primarily to a decrease in the amortization of premiums on investments.

Unrealized Loss on Equity Securities

Unrealized loss on equity securities was $10.7 million during the three months ended March 31, 2021, as compared to zero for the three months ended March 31, 2020.

The unrealized loss on equity securities was entirely due to the remeasurement of the estimated fair value of our investment in Vaxcyte common stock.

Interest income decreased by $0.2 million during the three months ended June 30, 2021 compared to the three months ended June 30, 2020, due primarily to a decrease in the amortization of premiums on investments.

Unrealized Gain on Equity Securities

Unrealized gain on equity securities was $4.3 million during the three months ended June 30, 2021, as compared to $48.9 million for the three months ended June 30, 2020.

The unrealized gain on equity securities in each period was entirely due to the remeasurement of the estimated fair value of our investment in Vaxcyte common stock.

Interest and Other Expense, Net

Interest and other expense, net, decreased by $0.2 million during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, due primarily to a $0.1 million decrease in other expenses related to the

remeasurement of the vested c all o ption s under the Call Option Plan and a $0.

4 million decrease in interest expense associated with the financing component related to the 2018 Merck Agreemen t , partially offset by a $0.

2 million increase in interest expense related to our outstanding debt .

Interest and other expense, net, decreased by $2.1 million during the three months ended June 30, 2021 compared to the three months ended June 30, 2020, due primarily to a $1.8 million decrease related to the remeasurement of the vested call options under the Call Option Plan and a $0.3 million decrease in interest expense associated with the financing component related to the 2018 Merck Agreement.

Comparison of the Six Months Ended June 3 0 , 20 21 and 20 20

Six Months Ended

(in thousands)

Operating expenses

Research and development

General administrative

Total operating expenses

Loss from operations

Interest income

Unrealized (loss) gain on equity securities

Interest and other expense, net

Net (loss) income

We have recognized revenue as follows during the periods indicated:

Six Months Ended

(in thousands)

Bristol Myers Squibb Company

Merck Sharp & Dohme Corporation (1)

Merck KGaA, Darmstadt, Germany

Total revenue

Merck was a related party until the closing of our public offering on May 14, 2020.

Vaxcyte was a related party until the closing of its initial public offering on June 16, 2020.

Total revenue increased by $26.1 million, or 157%, during the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

This was due to an increase of $22.0 million from Merck, primarily in revenue from ongoing performance of research and development services, of which $5.9 million was associated with the contingent third program that was fully recognized upon the determination that the related performance obligation had terminated during the first quarter of 2021, and $14.0 million was a cumulative catch-up in revenue as a result of the change in transaction price, due to a $15.0 million contingent payment earned in the second quarter of 2021 for the initiation of the first IND-enabling toxicology study under the first program in the collaboration, a $2.1 million increase in clinical trial materials supply, partially offset by a $0.6 million decrease in research and development services and a $0.7 million decrease related to the financing component associated with the upfront payment.

Further, there was an increase of $3.1 million from BMS, which was comprised of a $5.0 million increase in contract research and manufacturing activities supporting clinical trial supply, partially offset by a $2.0 million decrease due to the completion in September 2020 of revenue recognition of the transaction price under the BMS Agreement.

Additionally, there was an increase of $1.6 million of Vaxcyte revenue under our supply agreement, which was partially offset by a decrease of $0.6 million in EMD Serono revenue.

Research and Development Expense

Research and development expense increased by $13.0 million, or 37%, during the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

The increase was due primarily to increases of $4.7 million in personnel-related expenses due to higher headcount, $3.4 million in laboratory supplies and production materials-related expenses, $2.1 million in facility-related expenses, $1.7 million in clinical trial costs, and $1.1 million in consulting and outside services.

General and Administrative Expense

General and administrative expense increased by $6.3 million, or 36% during the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

The increase was due primarily to increases of $4.1 million in personnel-related expenses due to higher headcount, $0.5 million in equipment-related expenses, $0.4 million in insurance and other fees associated with being a public company, and $1.1 million in facility-related expenses.

Interest Income

Interest income decreased by $0.7 million during the six months ended June 30, 2021 compared to the six months ended June 30, 2020, due primarily to a $1.1 million decrease in the amortization of premiums on investments, partially offset by an increase of $0.5 million from higher average investment balances in the first half of 2021.

Unrealized (Loss) Gain on Equity Securities

Unrealized loss on equity securities was $6.4 million during the six months ended June 30, 2021, as compared to an unrealized gain of $48.9 million for the six months ended June 30, 2020.

The unrealized (loss) gain on equity securities in each period was entirely due to the remeasurement of the estimated fair value of our investment in Vaxcyte common stock.

Interest and Other Expense, Net

Interest and other expense, net, decreased by $2.3 million during the six months ended June 30, 2021 compared to the six months ended June 30, 2020, due primarily to a $1.9 million decrease in other expenses related to the remeasurement of the vested call options under the Call Option Plan and a $0.7 million decrease in interest expense associated with the financing component related to the 2018 Merck Agreement, partially offset by a $0.3 million increase in interest expense related to our outstanding debt.

Liquidity and Capital Resources

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Our operations have been funded primarily by payments received from our collaborators, and net proceeds from equity sales and debt.

As of March 31, 2021, we had cash, cash equivalents and marketable securities of $294.9 million, equity securities of $31.0 million, outstanding debt of $24.7 million and an accumulated deficit of $258.2 million.

2021 Milestone Payment from Merck

On April 14, 2021, we announced that Merck, known as MSD outside the United States and Canada, will make to us a $15 million milestone payment for the initiation of an IND enabling toxicology study for the first program in its collaboration to develop novel cytokine derivative therapeutics for cancer and autoimmune disorders.

2020 Public Offerings

As of June 30, 2021, we had cash, cash equivalents and marketable securities of $283.4 million, equity securities of $35.3 million, outstanding debt of $24.8 million and an accumulated deficit of $264.4 million.

2021 Contingent Payment from Merck

In the second quarter of 2021, we earned and received a $15.0 million contingent payment from Merck for the initiation of an IND enabling toxicology study for the first program in its collaboration to develop novel cytokine derivative therapeutics for cancer and autoimmune disorders.

2020 Public Offering s

On May 14, 2020, we closed a public offering of 12,650,000 shares of our common stock at a public offering price of $7.75 per share, which included the exercise in full of the underwriters’ option to purchase 1,650,000 shares of common stock.

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The gross proceeds from these sales were approximately $24.6 million, before deducting fees of approximately $0.8 million, resulting in net proceeds of approximately $23.8 million.

During the six months ended June 30, 2021, we did not sell any shares under the ATM Facility.

Vaxcyte, Inc.

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The lock-up agreement expired in December 2020.

As of March 31, 2021, we held 1,567,324 shares of Vaxcyte common stock with an estimated fair value of $31.0 million.

As of June 30 , 2021, we held 1,567,324 shares of Vaxcyte common stock with an estimated fair value of $35.3 million.

For a description of our Loan and Security Agreement with Oxford Finance LLC and Silicon Valley Bank, please see Note 6 to our condensed financial statements.

In June 2021, we entered into a third amendment (the “Third Amendment”) to our manufacturing facility lease, dated May 18, 2011, as amended, by and between Alemany Plaza LLC, located at San Carlos, California (the “San Carlos Lease”), as an extension to the term of the San Carlos Lease for a period of five years (the “Lease Extension Period”).

Pursuant to the Third Amendment, the San Carlos Lease will expire on July 31, 2026, and it includes an option to renew the San Carlos Lease for an additional five years.

The aggregate estimated base rent payments due over the Lease Extension Period is approximately $4.2 million, subject to certain terms contained in the San Carlos Lease.

In June 2021, we entered into a first amendment (the “First Amendment”) to our manufacturing facility lease, dated May 4, 2015, as amended, by and between 870 Industrial Road LLC, located at San Carlos, California (the “Industrial Lease”), as an extension to the term of the Industrial Lease for a period of five years (the “Industrial Lease Extension Period”).

Pursuant to the first Amendment, the Industrial Lease will expire on June 30, 2026, and it includes an option to renew the Industrial Lease for an additional five years.

The aggregate estimated base rent payments due over the Industrial Lease Extension Period is approximately $4.3 million, subject to certain terms contained in the Industrial Lease.

In September 2020, we entered into a sublease agreement with Five Prime Therapeutics, Inc.

located in South San Francisco, California.

P lease see Note 7 to our condensed financial statements.

The following table summarizes our contractual obligations as of June 3 0 , 20 21 :

Payments due in the year

(in thousands)

Contractual obligations:

Debt, principal

Debt, interest

Operating lease obligations

Sublease obligation (1)

Total contractual obligations

Excludes approximately $5.2 million in potential financial benefit to us of base rent abatement to be provided by sublessor for months 7 – 18 of the sublease period, subject to certain terms contained in the Sublease.

Funding Requirements

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The following table summarizes our cash flows during the periods indicated:

Three Months Ended

Six Months Ended

(in thousands)

Net cash used in operating activities

Net cash (used in) provided by investing activities

Net cash used in investing activities

Net cash provided by financing activities

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Cash Flows from Operating Activities

Cash used in operating activities for the three months ended March 31, 2021 was $30.4 million.

Cash used in operating activities for the six months ended June 30, 2021 was $35.7 million.

Our net loss of $36.5 million included $6.4 million of unrealized loss on equity securities as a result of the remeasurement of the estimated fair value of our investment in Vaxcyte common stock, non-cash charges of $9.9 million for stock-based compensation, $2.4 million for depreciation and amortization, and $1.2 million for the amortization of premium on our marketable securities.

Cash used in operating activities also reflected a net decrease in operating assets and liabilities of $16.5 million, due to an increase of $1.7 million in accounts receivable from our collaborators, an increase of $3.1 million in prepaid expenses and other assets, a decrease of $7.8 million in our deferred revenue balance from revenue recognized under our collaboration agreements, a decrease of $4.3 million in accrued compensation expense primarily due to bonuses paid in connection with certain company goal achievements, and a decrease of $0.7 million in accounts payable and other liabilities due to timing of payments, offset by an increase of $1.0 million in deferred rent from our sublease.

Cash used in operating activities for the three months ended March 31, 2020 was $18.7 million.

Our net loss of $19.6 million was reduced by non-cash charges of $2.7 million for stock-based compensation and $1.1 million for depreciation and amortization.

Cash used in operating activities also reflected a net decrease in operating assets and liabilities of $2.9 million, due to an increase of $2.8 million in accounts receivable from research and development services revenues from our collaborators, a decrease of $3.1 million in accrued compensation expense primarily due to bonuses paid in connection with certain company goal achievements, a decrease of $0.7 million in other liabilities due to timing of payments, an increase of $2.3 million in our deferred revenue balance due to the $5.0 million received from Merck upon their exercise of an option to extend the research term of the collaboration’s first cytokine-derivative program by one year, which payment was earned in March 2020 and received in April 2020, offset by revenue recognized under our collaboration agreements, and a decrease of $1.4 million in prepaid expenses and other assets.

Cash used in operating activities also reflected a net decrease in operating assets and liabilities of $19.3 million, due to an a decrease of $12.4 million in our deferred revenue balance from revenue recognized under our collaboration agreements, an increase of $3.6 million in accounts receivable from our collaborators, an increase of $5.3 million in prepaid expenses and other assets, a decrease of $2.3 million in accrued compensation expense primarily due to bonuses paid in connection with certain company goal achievements, partially offset by an increase of $2.2 million in accounts payable and other liabilities due to timing of payments, and an increase of $2.1 million in deferred rent from our sublease.

Cash used in operating activities for the six months ended June 30, 2020 was $31.2 million.

Our net income of $10.3 million included $48.9 million of unrealized gain on equity securities as a result of the remeasurement of our investment in Vaxcyte common stock, which was partially offset by non-cash charges of $5.7 million for stock-based compensation, $2.2 million for depreciation and amortization, $2.0 million for the remeasurement of the vested call options, and $0.3 million for financing costs related to the public offering.

Cash used in operating activities also reflected a net decrease in operating assets and liabilities of $2.9 million, comprised of a decrease of $1.5 million in accrued compensation expense primarily due to 2019 bonuses paid in 2020, a decrease of $2.5 million in accounts payable and other liabilities due to timing of payments, and a decrease of $1.6 million in our deferred revenue balance from revenue recognized under our collaboration agreements, offset partially by a $1.2 million decrease in accounts receivable from our collaborators, and a decrease of $1.5 million in prepaid expenses and other assets.

Cash Flows from Investing Activities

Cash used in investing activities of $121.7 million for the three months ended March 31, 2021 was primarily related to purchases of marketable securities of $164.6 million and purchases of property and equipment of $2.4 million, principally for leasehold improvements to the premises under the Sublease, offset partially by maturities and sales of marketable securities of $45.3 million.

Cash provided by investing activities of $41.6 million for the three months ended March 31, 2020 was primarily related to maturities of marketable securities of $37.5 million and sales of marketable securities of $8.5 million, offset partially by purchases of marketable securities of $3.6 million and purchases of property and equipment of $0.8 million principally related to laboratory and manufacturing equipment.

Cash used in investing activities of $115.9 million for the six months ended June 30, 2021, 2021 was primarily related to purchases of marketable securities of $202.3 million and purchases of property and equipment of $7.8 million, principally for leasehold improvements to the premises under the Sublease, offset partially by maturities and sales of marketable securities of $94.3 million.

Cash used in investing activities of $15.5 million for the six months ended June 30, 2020 was primarily related to purchases of marketable securities of $91.3 million and purchases of property and equipment of $2.5 million, principally to support laboratory and manufacturing activities, offset partially by maturities and sales of marketable securities of $78.0 million.

Cash Flows from Financing Activities

Cash provided by financing activities of $1.8 million for the three months ended March 31, 2021 was primarily related to $1.3 million of proceeds received from the exercise of common stock options and $0.5 million of net proceeds received from participants in our employee equity plans.

Cash provided by financing activities of $15.7 million for the three months ended March 31, 2020 was primarily related to $25.0 million of gross proceeds from our debt refinancing and $0.7 million of proceeds received from participants of our employee stock purchase plan and exercise of common stock options, partially offset by a $10.0 million repayment of the August 2017 Loan.

Cash provided by financing activities of $1.8 million for the six months ended June 30, 2021 was primarily related to $1.4 million of proceeds received from the exercise of common stock options and $0.9 million of net proceeds received from participants in our employee equity plans.

Cash provided by financing activities of $107.1 million for the six months ended June 30, 2020 was primarily related to $91.4 million of net proceeds from the issuance of common stock from our public offering, $25.0 million of gross proceeds from our debt refinancing and $0.7 million of proceeds received from participants in our employee stock purchase plan and from the exercise of common stock options, partially offset by a $10.0 million repayment of the August 2017 loan.

Off-Balance Sheet Arrangements

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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.

We will remain an emerging growth company until the earliest of (i) the last day of our first fiscal year (a) following the fifth anniversary of the completion of our IPO, (b) in which we have total annual gross revenues of at least $1.07 billion, or (ii) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th and (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

We will remain an emerging growth company until the earliest of (i) the last day of our first fiscal year (a) following the fifth anniversary of the completion of our IPO, (b) in which we have total annual gross revenues of at least $1.07 billion, (ii) the date in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th and (iii) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

As the market value of our common stock that was held by non-affiliates exceeded $700 million as of June 30, 2021, we expect to be classified as a large accelerated filer and cease being an emerging growth company as of December 31, 2021, and to adopt ASC 842 in the third quarter of 2021 with an effective date of January 1, 2021.

Critical Accounting Policies 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.

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 U.S.

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 revenue generated and expenses incurred during the reporting periods.

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Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in the notes to our financial statements included elsewhere in this filing, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results.

Revenue Recognition

We have no products approved for commercial sale and have not generated any revenue from commercial product sales.

Our total revenue to date has been generated principally from our collaboration and license agreements with BMS, Merck and EMD Serono, and to a lesser extent, from manufacturing, supply and services and products we provide to the above collaborators and Vaxcyte.

Collaboration revenue

We derive revenue from collaboration arrangements, under which we may grant licenses to our collaboration partners to further develop and commercialize our proprietary product candidates.

We may also perform research and development activities under the collaboration agreements.

Additionally, the collaborations may provide options for the customer to acquire from us materials and reagents, clinical product supply or additional research and development services under separate agreements.

We assess which activities in the collaboration agreements are considered distinct performance obligations that should be accounted for separately.

We develop assumptions that require judgement to determine whether the license to our intellectual property is distinct from the research and development services or participation in activities under the collaboration agreements.

At the inception of each agreement, we determine the arrangement transaction price, which includes variable consideration, based on the assessment of the probability of achievement of future milestones and contingent payments and other potential consideration.

We also evaluate estimates of our resources, which are used as the basis of measurement for revenue to be recognized on an input basis.

For arrangements that include multiple performance obligations, we allocate the transaction price to the identified performance obligations based on the SSP of each distinct performance obligation.

In instances where SSP is not directly observable, we develop assumptions that require judgment to determine the SSP for each performance obligation identified in the contract.

These key assumptions may include full-time equivalent, or FTE, personnel effort, estimated costs, discount rates and probabilities of clinical development and regulatory success.

Upfront Payments :

For collaboration arrangements that include a nonrefundable upfront payment, if the license fee and research and development services cannot be accounted for as separate performance obligations, the transaction price is deferred and recognized as revenue over the expected period of performance using a cost-based input methodology.

We use judgement to assess the pattern of delivery of the performance obligation.

In addition, amounts paid in advance of services being rendered may result in an associated financing component to the upfront payment.

Accordingly, the interest on such borrowing cost component will be recorded as interest expense and revenue, based on an appropriate borrowing rate applied to the value of services to be performed by us over the estimated service performance period.

License Grants:

For collaboration arrangements that include a grant of a license to our intellectual property, we consider whether the license grant is distinct from the other performance obligations included in the arrangement.

For licenses that are distinct, we recognize revenues from nonrefundable, upfront payments and other consideration allocated to the license when the license term has begun and we have provided all necessary information regarding the underlying intellectual property to the customer, which generally occurs at or near the inception of the arrangement.

Milestone and Contingent Payments :

At the inception of the arrangement and at each reporting date thereafter, we assess whether we should include any milestone and contingent payments or other forms of variable consideration in the transaction price using the most likely amount method.

If it is probable that a significant reversal of cumulative revenue would not occur upon resolution of the uncertainty , the associated milestone value is included in the transaction price .

At the end of each subsequent reporting period, we re-evaluate the probability of achievement of each such milestone and any related constraint and , if necessary, adjust our estimate of the overall transaction price.

Since milestone and contingent payments may become payable to us upon the initiation of a clinical study or filing for or receipt of regulatory approval, we review the relevant facts and circumstances to determine when we should update the transaction price, which may occur before the triggering event.

When we update the transaction price for milestone and contingent payments, we allocate the changes in the total transaction price to each performance obligation in the agreement on the same basis as the initial allocation.

Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment , which may result in recognizing revenue for previously satisfied performance obligations in such period.

Our collaborators generally pay milestones and contingent payments subsequent to achievement of the triggering event.

Research and Development Services :

For amounts allocated to our research and development obligations in a collaboration arrangement, we recognize revenue over time using a cost-based input methodology, representing the transfer of goods or services as activities are performed over the term of the agreement.

Materials Supply:

We provide materials and reagents, clinical materials and services to certain of our collaborators under separate agreements.

The consideration for such services is generally based on FTE personnel effort used to manufacture those materials reimbursed at an agreed upon rate in addition to agreed-upon pricing for the provided materials.

The amounts billed are recognized as revenue as the performance obligations are met by us.

Research and Development

We record accrued expenses for estimated costs of our research and development activities conducted by third party service providers, which include outsourced research and development expenses, professional services and contract manufacturing activities.

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 current liabilities in the balance sheets and within research and development expense in the statements of operations.

Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed.

For outsourced research and development expenses, such as professional fees payable to third parties for preclinical studies, clinical trials and research services and other consulting costs, we estimate the expenses based on the services performed, pursuant to contracts with research institutions that conduct and manage preclinical studies, clinical trials and research services on our behalf.

We estimate these expenses based on discussions with internal management personnel and external service providers as to the progress or stage of completion of services and the contracted fees to be paid for such services.

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

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

Stock-Based Compensation

We recognize compensation costs related to stock-based awards granted to employees based on the estimated fair value of the awards on the date of grant.

We account for forfeitures of stock-based awards as they occur.

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 generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards.

The Black-Scholes option-pricing model requires the use of highly subjective assumptions to determine the fair value of stock-based awards, including the expected term and the expected volatility of the underlying stock.

These assumptions include:

Expected term —The expected term represents the period that the stock-based awards are expected to be outstanding.

We use the “simplified” method to determine the expected life of options granted, which calculates the expected term as the average of the weighted-average vesting term and the contractual term of the option.

Expected volatility—Since we have limited information available on the volatility of our common stock due to its short trading history, the expected volatility is 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.

We will continue to apply this process until a sufficient amount of 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 options.

Expected dividend —We have never paid dividends on our common stock and have no plans to pay dividends on our common stock.

Therefore, we use an expected dividend yield of zero.

We will continue to use judgment in evaluating the expected volatility and expected terms utilized for our stock-based compensation calculations on a prospective basis.

There have been no material changes to our critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the year ended December 31, 2020.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis