Vir Biotechnology, Inc. 10-Q

Item 2. 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 in conjunction with our unaudited condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and notes thereto and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included as part of our Annual Report on Form 10-K for the year ended December 31, 2019. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to the “Company”, “Vir,” “we,” “us” and “our” refer to Vir Biotechnology, Inc. and its consolidated subsidiaries. Overview We are a clinical-stage immunology company focused on combining immunologic insights with cutting-edge technologies to treat and prevent serious infectious diseases. Infectious diseases are among the leading causes of death worldwide and can cause trillions of dollars of direct and indirect economic burden each year – as evidenced by the current coronavirus disease 2019, or COVID-19, pandemic. We believe that now is the time to apply the recent and remarkable advances in immunology to combat infectious diseases. Our approach begins with identifying the limitations of the immune system in combating a particular pathogen, the vulnerabilities of that pathogen and the reasons why previous approaches have failed. We then bring to bear powerful technologies that we believe, individually or in combination, will lead to effective therapies. We have assembled four technology platforms, focused on antibodies, T cells, innate immunity and small interfering ribonucleic acid, or siRNA, through internal development, collaborations and acquisitions. Our current development pipeline consists of product candidates targeting severe acute respiratory syndrome coronavirus 2, or SARS-CoV-2 (the virus that causes COVID-19), hepatitis B virus, or HBV, influenza A virus, human immunodeficiency virus, or HIV, and tuberculosis, or TB. • For SARS-CoV-2, VIR-7831, a SARS-CoV-2-neutralizing monoclonal antibody, or mAb, started the lead-in phase of a Phase 2/3 clinical trial program, which is referred to as the COVID-19 Monoclonal antibody Efficacy Trial - Intent to Care Early, or COMET-ICE study, in August 2020 for the early treatment of COVID-19 in patients who are at high risk of hospitalization. In October 2020, the COMET-ICE study continued into Phase 3 based on a positive evaluation of safety and tolerability data from the Phase 2 lead-in. We anticipate that interim Phase 3 data may be available as early as January 2021. Results for the primary endpoint are expected in the first quarter of 2021. We plan to initiate two additional Phase 3 trials in the COMET clinical development program for VIR-7831 – one for the treatment of hospitalized patients as a sub-study of the National Institutes of Health-sponsored ACTIV-3 trial, which is expected to begin as soon as regulatory and ethical approvals are in place, and another for prophylaxis or prevention of symptomatic infection, which is expected to begin in the first quarter of 2021. VIR-7832, a vaccinal SARS-CoV-2-neutralizing mAb, is planned to initiate a Phase 1b/2a clinical trial in the first quarter of 2021. VIR-2703, a SARS-CoV-2-targeting siRNA, is in preclinical studies led by Alnylam Pharmaceuticals, Inc., or Alnylam. • For HBV, VIR-2218, an HBV-targeting siRNA, is currently in an ongoing Phase 2 clinical trial. Initial Phase 2 data have demonstrated substantial, durable, and dose dependent reduction of hepatitis B virus surface antigen, or HBsAg, and VIR-2218 has been generally well-tolerated. In July 2020, we initiated a Phase 2 clinical trial to combine VIR-2218 with pegylated interferon-alpha, an approved immune modulatory agent. Initial clinical data are anticipated in 2021. In addition, in May 2020, we initiated a Phase 1 clinical trial for VIR-3434, an HBV-neutralizing mAb. The results of this clinical trial are expected to enable us to initiate a Phase 2 combination trial of VIR-3434 in combination with VIR-2218 in 2021. • For influenza A virus, VIR-2482, a mAb designed for the prevention of influenza A, is currently in a Phase 1/2 clinical trial and has been generally well-tolerated. Initiation of the Phase 2 trial for VIR-2482, which was delayed due to the impact of COVID-19, is now expected in the fourth quarter of 2021 with proof-of-concept results anticipated in the first half of 2022. • For HIV, VIR-1111, an HIV T cell vaccine based on HCMV, is planned to initiate a Phase 1 trial in the fourth quarter of this year. We have built an industry-leading team that has deep experience in immunology, infectious diseases and product development. Given the global impact of infectious diseases, we are committed to developing cost-effective treatments that can be delivered at scale. We were incorporated in April 2016 and commenced principal operations later that year. To date, we have focused primarily on organizing and staffing our company, business planning, raising capital, identifying, acquiring, developing and in-licensing our technology platforms and product candidates, and conducting preclinical studies and early clinical trials. 35 Prior to our initial public offering, or IPO, we funded our operations primarily from the issuance and sale of convertible preferred stock, and to a lesser extent from revenue from grant agreements with government-sponsored and private organizations, as well as research and development services. In October 2019, we completed our IPO pursuant to which w e received net proceeds of $126.4 million, after deducting underwriting discounts, commissions and offering expenses . In July 2020, we completed a follow-on offering of our common stock and issued 8,214,285 shares of our common stock for net proceeds of $323. 2 million, after deducting underwriting discounts, commissions and offering expenses . As of September 30, 2020 , excluding restricted cash, we had $826.6 million in cash, cash equivalents and short-term investments. Based upon our current operating plan, we believe that our existing cash, cash equivalents and short-term investments as of September 30, 2020 will enable us to fund our operations through at least the next 12 months from the issuance date of the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10- Q . We have incurred significant operating losses since our inception and expect to continue to incur significant operating losses for the foreseeable future. We do not have any products approved for sale, we have not generated any revenue from the sale of products, and we do not expect to generate revenue from the sale of our product candidates until we complete clinical development, submit regulatory filings and receive approvals from the applicable regulatory bodies for such product candidates, if ever. Our net losses were $193.0 million and $110.9 million for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, we had an accumulated deficit of $561.5 million. Our primary use of our capital resources is to fund our operating expenses, which consist primarily of expenditures related to identifying, acquiring, developing, manufacturing and in-licensing our technology platforms and product candidates, and conducting preclinical studies and early clinical trials, and to a lesser extent, general and administrative expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses. We expect to continue to incur net operating losses for at least the next several years. In particular, we expect our expenses and losses to increase as we continue our research and development efforts, advance our product candidates through preclinical and clinical development, seek regulatory approval, prepare for commercialization, as well as hire additional personnel, protect our intellectual property and incur additional costs associated with being a public company. We also expect to increase the size of our administrative function to support the growth of our business. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and our expenditures on other research and development activities. We are currently manufacturing product candidates from three different platforms: antibodies, T cells and siRNAs. We have established our own internal chemistry, manufacturing and control, or CMC, capabilities and are working with contract development and manufacturing organizations, or CDMOs to supply our early stage product candidates in the near-term. We have completed our internal capacity build in process development, analytical development, quality, manufacturing and supply chain. Specifically, our San Francisco, California and Portland, Oregon facilities include laboratories that support process development, production of human cytomegalovirus, or HCMV research viral seed stock and selected quality control testing for our product candidates. We have established relationships with multiple CDMOs and have produced material to support preclinical studies and Phase 1 and Phase 2 clinical trials. Material for Phase 3 clinical trials and commercial supply will require large-volume, low-cost-of-goods production. For example, we and our partner have executed a number of collaboration agreements with additional large-scale CDMOs to plan for future scale-up and capacity, particularly to support development and potential commercialization. Recent SARS-CoV-2 Activities Since February 2020, we have entered into a number of collaboration agreements to accelerate the development, manufacture, and potential commercialization of therapies to treat and prevent SARS-CoV-2 and other coronaviruses. We have also made substantial efforts to protect our intellectual property in this area, as evidenced by the expansion of our patent portfolio. Development and Commercialization • In June 2020, we, Glaxo Wellcome UK Limited and Beecham S.A. (collectively referred to as GSK), entered into a definitive collaboration agreement, or the GSK Agreement, pursuant to which we agreed to collaborate to research, develop and commercialize products for the prevention, treatment and prophylaxis of diseases caused by SARS-CoV-2 and potentially other coronaviruses. The collaboration is focused on the development and commercialization of three types of collaboration products under three programs: (1) antibodies targeting SARS-CoV-2, and potentially other coronaviruses, or the Antibody Program; (2) vaccines targeting SARS-CoV-2, and potentially other coronaviruses, and (3) products based on genome-wide CRISPR screening of host targets expressed in connection with exposure to SARS-CoV-2. The initial antibodies under the Antibody Program are VIR-7831 and VIR-7832, which have demonstrated high affinity for the SARS-CoV-2 spike protein and are highly potent in neutralizing SARS-CoV-2 in live-virus cellular assays. 36 • I n March and April 2020 , we entered into two further amendments to our collaboration and license agreement with Alnylam to expand our existing collaboration of five infectious disease targets to nine, including one targeting SARS-CoV-2 and potentially other coronaviruses, and up to three targeting human host factors for SARS-CoV-2. Manufacturing • In February 2020, we entered into a development and manufacturing collaboration with WuXi Biologics (Hong Kong) Limited, or WuXi Biologics, for the clinical development, manufacturing, and commercialization of our proprietary antibodies developed for SARS-CoV-2. In addition, in June 2020, we entered into a binding letter of intent with WuXi Biologics, or the WuXi Biologics Letter Agreement, under which WuXi Biologics will perform certain development and manufacturing services for our SARS-CoV-2 antibody program. In July 2020, we assigned the WuXi Biologics Letter Agreement to GlaxoSmithKline Trading Services Limited, or GSKTSL, and GSKTSL entered into a non-exclusive Master Services Agreement for Commercial Manufacture of Drug Substance with WuXi Biologics, or the WuXi Biologics MSA, thereby superseding the WuXi Biologics Letter Agreement, and pursuant to which, among other things, WuXi Biologics will perform development and manufacturing services for clinical and commercial supply of antibody products under our SARS-CoV-2 antibody program. In accordance with the terms of the GSK Agreement, we will continue to be responsible for 72.5% of the costs under the WuXi Biologics MSA, and GSK will bear 27.5% of such costs, subject to certain conditions and exceptions. • In May 2020, we entered into a clinical development and manufacturing agreement with Biogen, Inc., or Biogen, under which Biogen will perform process development activities and specified manufacturing services under agreed statements of work for certain pre-commercial and clinical supply of SARS-CoV-2 antibodies. • In April 2020, we entered into a binding letter agreement, or the Samsung Letter Agreement, with Samsung Biologics Co., Ltd., or Samsung, under which Samsung will perform development and manufacturing services for our SARS-CoV-2 antibody program. In July 2020, we assigned the Samsung Letter Agreement to GSKTSL, and GSKTSL entered into a Master Services Agreement with Samsung, or the Samsung MSA, thereby superseding the Samsung Letter Agreement, and pursuant to which, among other things, Samsung will perform development and manufacturing services for clinical and commercial supply of antibody products under our SARS-CoV-2 antibody program. In accordance with the terms of the GSK Agreement, we will continue to be responsible for 72.5% of the costs under the Samsung MSA, and GSK will bear 27.5% of such costs, subject to certain conditions and exceptions. COVID-19 Business Update With the global spread of the current COVID-19 pandemic, we have implemented a number of plans and policies designed to address and mitigate the impact of the COVID-19 pandemic on our employees and our business. We continue to closely monitor the COVID-19 situation and will evolve our plans and policies as needed going forward. As a result of these developments, in March 2020, we implemented work-from-home policies for most of our employees. We have also implemented plans to reopen our offices to allow employees to return when appropriate. Although these plans are based on a phased approach consistent with local government requirements, and focused on employee safety, and contemplate returning to remote work should new restrictions be implemented, there is uncertainty regarding recent phased reopening, which may be rolled back, and restrictions re-implemented. We are also working to provide our employees with the support they need to ensure continuity of business operations. We are working closely with our CDMOs to manage our supply chain activities and mitigate any potential disruptions to our clinical trial supplies as a result of the COVID-19 pandemic. If the COVID-19 pandemic persists for an extended period of time and begins to impact essential distribution systems, we could experience disruptions to our supply chain and operations, and associated delays in the manufacturing of clinical trial supply. For some of our clinical development programs, we are experiencing, and may continue to experience, a disruption or delay in our ability to initiate trial sites and enroll and assess patients. For example, the initiation of the Phase 1 trial for VIR-1111 and Phase 2 trial for VIR-2482, which were delayed due to the impact of COVID-19, are now expected in the fourth quarter of 2020 and fourth quarter of 2021, respectively. In addition, we rely on contract research organizations or other third parties to assist us with clinical trials, and we cannot guarantee that they will continue to perform their contractual duties in a timely and satisfactory manner as a result of the COVID-19 pandemic. Our License, Collaboration and Grant Agreements We have entered into grant, license and collaboration arrangements with various third parties. For details regarding these and other agreements, see Note 6—Grant Agreements and Note 7—Collaboration and License Agreements to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. 37 Our Acquisitions We have completed various acquisitions. For details regarding our acquisitions, see Note 4—Acquisitions to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Components of Operating Results Revenue We do not have any products approved for sale, we have not generated any revenue from the sale of our products, and we do not expect to generate revenue from the sale of our product candidates until we complete clinical development, submit regulatory filings and receive approvals from the applicable regulatory bodies for such product candidates, if ever. Our revenue consists of: (i) grant revenue; and (ii) license and contract revenue. Grant revenue is comprised of revenue derived from grant agreements with government-sponsored and private organizations. License and contract revenue is comprised of revenue generated from license rights issued and research and development services. Operating Expenses Research and Development To date, our research and development expenses have related primarily to discovery efforts and preclinical and clinical development of our product candidates. Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received. We do not track research and development expenses by product candidate. Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include: • expenses related to license and collaboration agreements, and contingent consideration from business acquisitions; • personnel-related expenses, including salaries, benefits and stock-based compensation for personnel contributing to research and development activities; • expenses incurred under agreements with third-party contract manufacturing organizations, contract research organizations, and consultants; • clinical costs, including laboratory supplies and costs related to compliance with regulatory requirements; and • other allocated expenses, including expenses for rent and facilities maintenance, and depreciation and amortization. We expect our research and development expenses to increase substantially in absolute dollars for the foreseeable future as we advance our product candidates into and through preclinical studies and clinical trials and pursue regulatory approval of our product candidates. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming. The actual probability of success for our product candidates may be affected by a variety of factors including: the safety and efficacy of our product candidates, early clinical data, investment in our clinical programs, the ability of collaborators to successfully develop our licensed product candidates, competition, manufacturing capability and commercial viability. We may never succeed in achieving regulatory approval for any of our product candidates. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of our product candidates. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. We anticipate that we will make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to the results of ongoing and future preclinical studies and clinical trials, regulatory developments, our ongoing assessments as to each product candidate’s commercial potential and the impact of public health epidemics, such as the COVID-19 pandemic. In addition, we cannot forecast which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements. Our clinical development costs may vary significantly based on factors such as: • whether a collaborator is paying for some or all of the costs; • per patient trial costs; 38 • the number of trials required for approval; • the number of sites included in the trials; • the countries in which the trials are conducted; • the length of time required to enroll eligible patients; • the number of patients that participate in the trials; • the number of doses that patients receive; • the drop-out or discontinuation rates of patients; • potential additional safety monitoring requested by regulatory agencies; • the duration of patient participation in the trials and follow-up; • the cost and timing of manufacturing our product candidates; • the phase of development of our product candidates; and • the efficacy and safety profile of our product candidates. General and Administrative Our general and administrative expenses consist primarily of personnel-related expenses for personnel in executive, finance and other administrative functions, facilities and other allocated expenses, transaction costs associated related to acquisitions and other expenses for outside professional services, including legal, audit and accounting services, and insurance costs. Personnel-related expenses consist of salaries, benefits and stock-based compensation. We expect our general and administrative expenses to increase substantially in absolute dollars for the foreseeable future as we continue to support our continued research and development activities, grow our business and, if any of our product candidates receive marketing approval, commercialization activities. We also anticipate incurring additional expenses associated with operating as a public company, including increased expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with the rules and regulations of the SEC and standards applicable to companies listed on a national securities exchange, additional insurance expenses, investor relations activities and other administrative and professional services. Interest Income Interest income consists of interest earned on our cash, cash equivalents and investments. Other Income (Expense), Net Other income (expense), net consists of gains and losses from foreign currency transactions and the remeasurement of contingent consideration related to our acquisition of TomegaVax, Inc., or TomegaVax. Provision for Income Taxes Provision for income taxes consisted of immaterial international income tax. 39 R esults of Operations Comparison of the Three and Nine Months Ended September 30, 2020 and 2019 The following table summarizes our results of operations for the periods presented: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 Change 2020 2019 Change (in thousands) Revenue: Grant revenue $ 1,740 $ 1,166 $ 574 $ 7,690 $ 6,771 $ 919 License revenue from a related party — — — 22,747 — 22,747 Contract revenue 188 237 (49 ) 44,197 340 43,857 Total revenue 1,928 1,403 525 74,634 7,111 67,523 Operating expenses: Research and development 70,684 39,863 30,821 215,316 95,541 119,775 General and administrative 18,859 9,220 9,639 47,894 25,790 22,104 Total operating expenses 89,543 49,083 40,460 263,210 121,331 141,879 Loss from operations (87,615 ) (47,680 ) (39,935 ) (188,576 ) (114,220 ) (74,356 ) Other income (expense): Interest income 412 2,012 (1,600 ) 2,548 6,564 (4,016 ) Other income (expense), net 2,616 (2,659 ) 5,275 (6,904 ) (3,251 ) (3,653 ) Total other income (expense) 3,028 (647 ) 3,675 (4,356 ) 3,313 (7,669 ) Loss before benefit from (provision for) income taxes (84,587 ) (48,327 ) (36,260 ) (192,932 ) (110,907 ) (82,025 ) Benefit from (provision for) income taxes (22 ) 13 (35 ) (84 ) (5 ) (79 ) Net loss $ (84,609 ) $ (48,314 ) $ (36,295 ) $ (193,016 ) $ (110,912 ) $ (82,104 ) Revenue Total revenue was $1.9 million and $1.4 million for the three months ended September 30, 2020 and 2019, respectively, and $74.6 million and $7.1 million for the nine months ended September 30, 2020 and 2019, respectively. The increase in total revenue for the three months ended September 30, 2020 was primarily due to the timing of research activities under the HIV and TB grants with the Bill & Melinda Gates Foundation. The increase in total revenue for the nine months ended September 30, 2020 was primarily due to $43.3 million of revenue related to the license granted to GSK under our collaboration agreement, and $22.7 million of revenue related to Brii Biosciences Offshore Limited’s, or Brii Bio’s, exercise of its option to obtain exclusive rights to develop and commercialize compounds arising from VIR-2218 in greater China. Research and Development Expenses The following table shows the primary components of our research and development expenses for the periods presented: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 Change 2020 2019 Change (in thousands) Licenses, collaborations and contingent consideration $ 20,579 $ 12,666 $ 7,913 $ 80,137 $ 12,356 $ 67,781 Personnel 17,323 11,762 5,561 46,488 31,879 14,609 Contract manufacturing 10,844 2,193 8,651 32,488 14,987 17,501 Clinical costs 7,414 3,080 4,334 14,913 5,912 9,001 Other 14,524 10,162 4,362 41,290 30,407 10,883 Total research and development expenses $ 70,684 $ 39,863 $ 30,821 $ 215,316 $ 95,541 $ 119,775 40 Comparison of three months ended September 30, 2020 and 2019 Research and development expenses were $70.7 million and $39.9 million for the three months ended September 30, 2020 and 2019, respectively. This increase was primarily due to the following factors: • contract manufacturing expense increased by $8.7 million, which was primarily attributable to an increase of $8.2 million related to initiation of manufacturing activities and process development for our SARS-CoV-2 programs; • licenses, collaboration and contingent consideration expenses increased by $7.9 million, which was primarily attributable to increases of $18.8 million related to the change in fair value of the contingent consideration from our acquisition of Humabs Biomed SA, or Humabs, and $1.2 million in costs under our collaboration with GSK, partially offset by $5.7 million decrease in costs incurred under our collaboration agreement with Alnylam, $5.0 million milestone achieved in the third quarter of 2019 under our 2018 license agreement, or the 2018 MedImmune Agreement, with MedImmune, LLC, and $1.4 million decrease in various license fees and milestone with third parties; • personnel-related expenses increased by $5.6 million, which was primarily attributable to an increase in our headcount; • other research and development expenses increased by $4.4 million, which was primarily attributable to increases of $2.0 million in external research costs due to increased clinical and manufacturing activities, and $1.0 million in supplies and equipment costs to support our programs related to COVID-19; and • clinical costs increased $4.3 million, which was primarily attributable to activities related to our VIR-7831, VIR-1111 and VIR-3434 clinical trials. Comparison of nine months ended September 30, 2020 and 2019 Research and development expenses were $215.3 million and $95.5 million for the nine months ended September 30, 2020 and 2019, respectively. This increase was primarily due to the following factors: • licenses, collaboration and contingent consideration expenses increased by $67.8 million, which primarily attributable to increases of $36.9 million related to the change in fair value of the contingent consideration from our acquisition of Humabs, $31.8 million on achievement of the first development milestone related to our Alnylam Agreement, and $10.0 million payment to Alnylam resulting from Brii Bio's exercise of its option for VIR-2218, partially offset by $5.0 million milestone achieved in the third quarter of 2019 under our 2018 MedImmune Agreement, $2.6 million reimbursement of costs pursuant to our collaboration with GSK and $2.3 million decrease in costs incurred under our collaboration agreement with Alnylam; • contract manufacturing expense increased by $17.5 million, which was primarily attributable to an increase of $27.0 million related to initiation of manufacturing activities and process development for our SARS-CoV-2 programs, partially offset by a decrease of $9.0 million related to the manufacturing for HBV, HIV and influenza A drug products initiated in 2018 and completed in the first half of 2019; • personnel-related expenses increased by $14.6 million, which was primarily attributable to an increase in our headcount; • other research and development expenses increased by $10.9 million, which was primarily attributable to increases of $4.0 million in external research costs due to increased clinical and manufacturing activities, $3.3 million in supplies and equipment costs to support our programs related to COVID-19, and $2.7 million in the allocation of facilities costs due to an increase in our headcount; and • clinical costs increased by $9.0 million, which was primarily attributable to activities related to our VIR-7831, VIR-1111 and VIR-3434 clinical trials. General and Administrative Expenses General and administrative expenses were $18.9 million and $9.2 million for the three months ended September 30, 2020 and 2019, respectively, and $47.9 million and $25.8 million for the nine months ended September 30, 2020 and 2019, respectively. The increase was primarily due to increases in personnel-related expenses related to additional headcount, legal fees, external consulting and other expenses due to costs associated with operating as a public company. Interest Income Interest income was $0.4 million and $2.0 million for the three months ended September 30, 2020 and 2019, respectively, and $2.5 million and $6.6 million for the nine months ended September 30, 2020 and 2019, respectively. The decrease was primarily due to lower interest rates on investment balances in the three and nine months ended September 30, 2020 compared to the same periods in 2019. 41 Other Income (Expense), Net Other income, net was $2.6 million for the three months ended September 30, 2020 compared to other expense, net of $2.7 million for the three months ended September 30, 2019. Other expense, net was $6.9 million and $3.3 million for the nine months ended September 30, 2020 and 2019, respectively. The increase in other income or expense was primarily related to the change in fair value of the contingent consideration related to our acquisition of TomegaVax. Liquidity, Capital Resources and Capital Requirements Sources of Liquidity As of September 30, 2020, excluding restricted cash, we had $826.6 million in cash, cash equivalents and short-term investments, and an accumulated deficit of $561.5 million. We have financed our operations primarily through sales of our common stock and convertible preferred securities and payments received under our grant and collaboration agreements. On October 10, 2019, our registration statement on Form S-1 was declared effective by the SEC and our shares began trading on The Nasdaq Global Select Market on October 11, 2019. We sold an aggregate of 7,142,858 shares of our common stock at an initial offering price of $20.00 per share. As a result of the IPO, we received $126.4 million in net proceeds, after deducting underwriting discounts and commissions of approximately $10.0 million and offering expenses of approximately $6.4 million. In April 2020, we issued 6,626,027 shares of our common stock to Glaxo Group Limited (an affiliate of GSK) at a price per share of $37.73, for an aggregate purchase price of approximately $250.0 million. In July 2020, we completed a follow-on offering of our common stock and issued 8,214,285 shares of our common stock for net proceeds of $323.2 million, after deducting underwriting discounts, commissions and offering expenses. Our primary use of our capital resources is to fund our operating expenses, which consist primarily of expenditures related to identifying, acquiring, developing, manufacturing and in-licensing our technology platforms and product candidates, and conducting preclinical studies and early clinical trials, and to a lesser extent, general and administrative expenditures. Future Funding Requirements Based upon our current operating plan, we believe that our existing cash, cash equivalents and short-term investments as of September 30, 2020 will enable us to fund our operations through at least the next 12 months from the issuance date of the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned. Moreover, it is particularly difficult to estimate with certainty our future expenses given the dynamic and rapidly evolving nature of our business and the COVID-19 pandemic environment generally. We will also need to raise additional capital to complete the development and commercialization of our product candidates and fund certain of our existing manufacturing and other commitments. We anticipate raising additional capital through the sale of our equity securities, incurring debt, entering into collaboration, licensing or similar arrangements with third parties, or receiving research contributions, grants or other sources of financing to fund our operations. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, licenses and other similar arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock. There can be no assurance that sufficient funds will be available to us on attractive terms or at all. If we are unable to obtain additional funding from these or other sources, it may be necessary to significantly reduce our rate of spending through reductions in staff and delaying, scaling back, or stopping certain research and development programs. Insufficient liquidity may also require us to relinquish rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. In addition, the COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets. If the disruption persists and deepens, we could experience an inability to access additional capital, which could in the future negatively affect our capacity for certain corporate development transactions or our ability to make other important, opportunistic investments. 42 We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of biotechnology products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to: • the timing, progress and results of our ongoing preclinical studies and clinical trials of our product candidates; • the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials of other product candidates that we may pursue; • our ability to establish and maintain collaboration, license, grant and other similar arrangements, and the financial terms of any such arrangements, including the timing and amount of any future milestone, royalty or other payments due thereunder; • the costs, timing and outcome of regulatory review of our product candidates; • the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval; • the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval; • the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims; • any expenses needed to attract, hire and retain skilled personnel; • the costs of operating as a public company; and • the extent to which we acquire or in-license other companies’ product candidates and technologies. Cash Flows The following table summarizes our cash flows for the periods indicated: Nine Months Ended September 30, 2020 2019 (in thousands) Net cash provided by (used in): Operating activities $ (108,889 ) $ (90,747 ) Investing activities (70,575 ) (182,389 ) Financing activities 529,733 319,144 Net increase in cash and cash equivalents and restricted cash and cash equivalents $ 350,269 $ 46,008 Operating Activities During the nine months ended September 30, 2020, net cash used in operating activities was $108.9 million. This consisted primarily of a net loss of $193.0 million and a payment on contingent consideration of $6.5 million related to a milestone achieved related to our Humabs acquisition, partially offset by a decrease in our net operating assets of $3.6 million and non-cash charges of $87.0 million. The change in our net operating assets of $3.6 million was primarily due to an increase in accrued liabilities and other long-term liabilities by $13.2 million and an increase in accounts payable of $1.0 million due to higher research and development activities, which was partially offset by a decrease in deferred revenue of $5.7 million related to revenue recognized from the Bill & Melinda Gates Foundation grants, and a decrease in operating lease liabilities of $2.3 million due to lease payments. The non-cash charges of $87.0 million primarily consisted of $44.4 million for revaluation of contingent consideration, $16.8 million for the change in fair value of the derivative liability under the Alnylam Agreement, $17.3 million for stock-based compensation expense, and $3.2 million for depreciation and amortization. During the nine months ended September 30, 2019, net cash used in operating activities was $90.7 million. This consisted primarily of a net loss of $110.9 million, partially offset by a decrease in our net operating assets of $6.5 million and non-cash charges of $13.7 million. The change in our net operating assets of $6.5 million was primarily driven by an increase in accrued liabilities related to expenses incurred under the Alnylam Agreement. The non-cash charges of $13.7 million primarily consisted of $6.0 million for stock-based compensation expense, $3.4 million for revaluation of convertible preferred stock liability, and $3.4 million for depreciation and amortization expense. 43 Investing Activities During the nine months ended September 30, 2020, net cash used in investing activities was $70.6 million. This consisted primarily of purchases of investments of $363.4 million and purchases of property and equipment of $4.1 million, partially offset by $296.8 million in proceeds received from investments which matured during the period. During the nine months ended September 30, 2019, net cash used in investing activities was $182.4 million. This consisted of purchases of short-term investments of $495.9 million and purchases of property and equipment of $7.4 million, partially offset by $320.9 million in proceeds received from short-term investments which matured during the period. Financing Activities During the nine months ended September 30, 2020, net cash provided by financing activities was $529.7 million. This consisted primarily of proceeds received from the issuance of our common stock to GSK of $206.7 million in April 2020, the issuance of our common stock related to our follow-on offering of $323.2 million and from exercises of stock options of $3.5 million, partially offset by a payment of contingent consideration related to our Humabs acquisition of $3.5 million. During the nine months ended September 30, 2019, net cash provided by financing activities was $319.1 million. This consisted primarily of net proceeds received from the issuance of our Series B convertible preferred stock of $317.3 million in January 2019. Contractual Obligations and Commitments Except as discussed in Note 9—Commitments and Contingencies to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, there have been no material changes from the contractual obligations previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019. Off-Balance Sheet Arrangements During the periods presented we did not have, nor do we currently have, any off-balance sheet arrangements as defined under the rules of the SEC. Brii Biosciences Limited, or Brii Bio Parent, and its wholly owned subsidiary Brii Bio are variable interest entities due to their reliance on future financing and insufficient equity at risk. However, we do not have the power to direct activities that most significantly impact the economic success of these entities and are not the primary beneficiary, and therefore we do not consolidate Brii Bio Parent or Brii Bio. JOBS Act Accounting Election We are an “emerging growth company,” as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period to enable us to comply with certain new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. In light of our public float at June 30, 2020, we expect that we will no longer be an emerging growth company on December 31, 2020. Critical Accounting Policies and Estimates Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of our unaudited condensed consolidated financial statements requires us to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the related disclosures. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. 44 Except as noted below and in Note 2 to the c ondensed c onsolidated f inancial s tatements included elsewhere in this Quarterly Report on Form 10-Q , there have been no significant changes in our critical accounting policies during the nine months ended September 30, 2020 , as compared with those previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 , filed with the SEC on March 26 , 20 20. Revenue Recognition License and Contract Revenue In accordance with Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers, or ASC 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods and services. To determine revenue recognition for arrangements within the scope of ASC 606, we perform 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 we satisfy a performance obligation. For collaborative arrangements that fall within the scope of ASC 808, Collaborative Arrangements, or ASC 808, we first determine which elements of the collaboration are deemed to be a performance obligation with a customer within the scope of ASC 606. For elements of collaboration arrangements that are accounted for pursuant to ASC 808 and are not subject to the guidance in ASC 606, we apply the revenue recognition model under ASC 606 or other guidance, as deemed appropriate. We have entered into a number of license and collaboration agreements that fall within the scope of ASC 606. We evaluate the promised goods or services in these agreements to determine which ones represent distinct performance obligations. These agreements may include the following types of promised goods or services: (i) grants of licenses, (ii) performance of research and development services, and (iii) participation on joint research and/or development committees. They also may include options to obtain licenses to our intellectual property. Prior to recognizing revenue, we makes estimates of the transaction price, including variable consideration that is subject to a constraint. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur and when the uncertainty associated with the variable consideration is subsequently resolved. These estimates are re-assessed each reporting period as required. These agreements may include the following types of consideration: non-refundable upfront payments, reimbursement for research services, research, development or regulatory milestone payments, and royalty and commercial sales milestone payments. If there are multiple distinct performance obligations, we allocate the transaction price to each distinct performance obligation based on their estimated standalone selling prices, or SSP. For performance obligations satisfied over time, we estimate the efforts needed to complete the performance obligation and recognize revenue by measuring the progress towards complete satisfaction of the performance obligation using an input measure. For arrangements that include sales-based royalties, including commercial milestone payments based on pre-specified level of sales, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). Achievement of these royalties and commercial milestones may solely depend upon performance of the licensee. Management may be required to exercise considerable judgment in estimating revenue to be recognized. Judgment is required in identifying performance obligations, estimating the transaction price, estimating the SSP of identified performance obligations, which may include development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success, and estimating the progress towards satisfaction of performance obligations. Leases On January 1, 2020, we adopted ASC 842, Leases, or ASC 842, using the optional transition method and applied the standard only to leases that existed at that date. Under the optional transition method, we do not need to restate the comparative periods in transition and will continue to present financial information and disclosures for periods before January 1, 2020 in accordance with ASC 840. We elected the package of practical expedients allowed under ASC 842, which permits us to account for our existing operating leases as operating leases under the new guidance, without reassessing our prior conclusions about lease identification, lease classification and initial direct cost. As a result of the adoption of the new lease accounting guidance, on January 1, 2020 we recognized operating lease right-of-use assets, or ROU, of $16.8 million and operating lease liabilities of $17.5 million. The difference between the ROU assets and lease liabilities is attributed to the elimination of deferred rent. 45 We determine if an arrangement is or contains a lease at inception by assessing whether the arrangement contains an identified asset and whether we have the right to control the identified asset. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Lease liabilities are recognized at the lease commencement date based on the present value of future lease payments over the lease term. ROU assets are based on the measurement of the lease liability and also include any lease payments made prior to or on lease commencement and exclude lease incentives and initial direct costs incurred, as applicable. As the implicit rate in our leases is generally unknown, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future lease payments. When calculating the estimated incremental borrowing rates, we consider our credit risk, the lease term, the total lease payments and the impact of collateral, as necessary. The lease terms may include options to extend or terminate the lease when we are reasonably certain we will exercise such options. Rent expense for our operating leases is recognized on a straight-line basis within operating expenses over the reasonably assured lease term. We elected to not separate lease and non-lease components for any leases within our existing classes of assets and, as a result, account for the lease and non-lease components as a single lease component. We also elected to not apply the recognition requirement to any leases within our existing classes of assets with a term of 12 months or less. Recent Accounting Pronouncements Not Yet Adopted See Note 2—Summary of Significant Accounting Policies to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one yet, of their potential impact on our financial condition of results of operations.