IGM BIOSCIENCES, INC. Management report and analysis of the financial situation and operating results. (Form 10-K)

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The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this Annual Report on Form
10-K. Some of the information contained in this discussion and analysis or set
forth elsewhere in this Annual Report on Form 10-K, including information with
respect to our plans and strategy for our business, includes forward looking
statements that involve risks and uncertainties. As a result of many factors,
including those factors set forth in the "Risk Factors" section of this Annual
Report on Form 10-K, our actual results could differ materially from the results
described in or implied by, these forward-looking statements.

Overview


We are a clinical-stage biotechnology company pioneering the development of IgM
antibodies for the treatment of cancer, infectious diseases, and autoimmune and
inflammatory diseases. IgM antibodies have inherent properties that we believe
may enable them to bind more strongly to targets on the surface of cells than
comparable IgG antibodies. We have created a proprietary IgM antibody technology
platform that we believe is particularly well suited for developing T cell
engagers, receptor cross-linking agonists, targeted cytokines, and target
neutralizers. Our product candidates currently in clinical testing include:

IGM-2323: A bispecific T-cell engaging IgM antibody targeting CD20 and CD3 proteins currently in a Phase 2 clinical trial for the treatment of patients with relapsed/refractory B-cell non-Hodgkin’s lymphoma (NHL).

IGM-8444: An IgM antibody targeting Death Receptor 5 (DR5) proteins, which may
prove to be useful for the treatment of patients with solid and hematologic
malignancies, currently in a Phase 1 clinical trial for the treatment of solid
cancers.

Our oncology pipeline also includes IGM-7354, an anti-PD-L1 IgM antibody that
targets the delivery of interleukin-15 (IL-15) cytokines to the area of PD-L1
expressing cells for the treatment of patients with solid and hematologic
malignancies; IGM-2644, a bispecific T cell engaging IgM antibody targeting CD38
and CD3 proteins for the treatment of patients with multiple myeloma; and
IGM-2537, a bispecific T cell engaging IgM antibody targeting CD123, and CD3
proteins for the treatment of patients with Acute Myeloid Leukemia (AML),
Myelodysplastic Syndromes (MDS) and Acute Lymphoblastic Leukemia (ALL).

We believe that we have the most advanced research and development program
focused on therapeutic IgM antibodies. We have created a portfolio of patents
and patent applications, know-how and trade secrets directed to our platform
technology, product candidates and manufacturing capabilities, and we retain
worldwide commercial rights to all of our product candidates and the
intellectual property related thereto.

Since the commencement of our operations, we have focused substantially all of
our resources on conducting research and development activities, including drug
discovery, preclinical studies and clinical trials, establishing and maintaining
our intellectual property portfolio, the manufacturing of clinical and research
material, developing our in-house manufacturing capabilities, hiring personnel,
raising capital and providing general and administrative support for these
operations. Since 2010, such activities have primarily focused on the research,
development and manufacture of IgM antibodies and to building our proprietary
IgM antibody technology platform. We do not have any products approved for sale,
and we have not generated any revenue from product sales.

We have incurred significant net losses to date. Our ability to generate product
revenue sufficient to achieve profitability will depend on the successful
development and eventual commercialization of one or more of our current or
future product candidates. Our net losses were $165.2 million, $81.4 million,
and $43.1 million for the years ended December 31, 2021, 2020 and 2019,
respectively. As of December 31, 2021, we had an accumulated deficit of $353.7
million. These losses have resulted primarily from costs incurred in connection
with research and development activities and general and administrative costs
associated with our operations. We expect to continue to incur significant
expenses and increasing operating losses for the foreseeable future, and our net
losses may fluctuate significantly from period to period, depending on the
timing of and expenditures on our planned research and development activities.

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We expect our expenses and capital requirements to increase significantly in our ongoing operations as we:


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advancing the development of our clinical and other product candidates;


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develop our pipeline of IgM antibody product candidates;


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continue to invest in our IgM antibody technology platform;


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invest in our Infectious Diseases and Autoimmunity & Inflammation business units;


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develop and expand our in-house manufacturing capabilities;


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maintain, protect and develop our intellectual property portfolio, including patents, trade secrets and know-how;


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seek marketing approvals for any product candidates that have successfully completed clinical trials;


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establish a sales, marketing, and distribution infrastructure to commercialize
any product candidate for which we may obtain marketing approval and related
commercial manufacturing build-out;

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implement operational, financial and management information systems; and


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attract, hire and retain additional clinical, scientific, managerial and administrative staff.


We plan to continue to use third-party service providers, including contract
research organizations (CROs) and contract manufacturing organizations (CMOs),
to carry out our preclinical and clinical development and manufacture and supply
of our preclinical and clinical materials to be used during the development of
our product candidates.

We do not have any products approved for sale and have not generated any revenue
since inception. We have funded our operations primarily from the sale of common
stock and pre-funded warrants in our public offerings and the sale of
convertible preferred stock and the issuance of unsecured promissory notes in
private placements.

In September 2019, we completed our initial public offering (IPO) and sold and
issued an aggregate of 12,578,125 shares of common stock, including 1,640,625
shares issued in connection with the full exercise by the underwriters of their
option to purchase additional shares of common stock, at $16.00 per share for
gross proceeds of $201.3 million. Immediately prior to the closing of our IPO,
all shares of convertible preferred stock then outstanding automatically
converted into 10,787,861 shares of common stock and 6,431,205 shares of
non-voting common stock. The aggregate net proceeds from our IPO, inclusive of
the full exercise by the underwriters of their option to purchase additional
shares of common stock, were approximately $183.0 million after deducting
underwriting discounts and commissions and other offering costs.

On December 11, 2020, pursuant to our registration statement on Form S-3, we
completed a public offering (2020 Public Offering) of 1,221,224 shares of our
common stock, which included the exercise of the underwriters' option to
purchase 333,333 shares in full, and Pre-funded Warrants to purchase an
additional 1,334,332 shares of common stock for aggregate gross proceeds of
$230.0 million. The public offering price of common stock was $90.00 per share
and the public offering price of each Pre-funded Warrant was $89.99, with each
Pre-funded Warrant having an exercise price of $0.01. After deducting
underwriting discounts and commissions and offering costs paid or payable by us
of approximately $14.6 million, the aggregate net proceeds from our 2020 Public
Offering were approximately $215.4 million.

Components of operating results

Income

To date, we have not generated any revenue and do not expect to generate revenue from product sales in the near future.

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Operating Expenses

Research and Development

Research and development expenses mainly consist of expenses incurred for the discovery and development of product candidates, which include:

Direct expenses composed of:


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Fees paid to third parties, such as consultants, contractors and CROs, for animal studies and other costs related to preclinical studies and clinical trials;


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Costs related to the acquisition and manufacture of research and clinical trial materials, including under agreements with third parties such as CMOs and other suppliers;


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Costs related to the preparation of regulatory submissions;


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Expenses related to laboratory supplies and services; and


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Charges under license agreements where no other future use exists.

Indirect expenses made up of:


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Personnel-related expenses, including salaries, benefits and stock-based compensation expenses, for personnel in our research and development functions; and


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Amortization of capital expenditure and facilities.


We expense research and development costs in the periods in which they are
incurred. Nonrefundable advance payments for goods or services to be received in
future periods for use in research and development activities are deferred and
capitalized. The capitalized amounts are then expensed as the related goods are
delivered and as services are performed. All direct research and development
expenses are tracked by stage of development. We do not track our indirect
research and development costs by product candidate or program.

We expect our research and development expenses to increase substantially for
the foreseeable future as we continue to invest in research and development
activities to advance our product candidates and our clinical programs, expand
our product candidate pipeline and continue to build out and expand our in-house
manufacturing capabilities. The process of conducting the necessary preclinical
and clinical research to obtain regulatory approval is costly and
time-consuming. To the extent that we initiate additional clinical development
activities for our product candidates, as well as advance into larger and later
stage clinical trials, our expenses will increase substantially and may become
more variable. 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, investment in our clinical programs, manufacturing
capability and competition with other products. As a result of these variables,
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. We may never succeed
in achieving regulatory approval for any of our product candidates.

General and administrative


Our general and administrative expenses consist primarily of personnel-related
expenses for personnel in our executive, finance, corporate and other
administrative functions, intellectual property, facilities and other allocated
expenses, other expenses for outside professional services, including legal,
human resources, audit and accounting services, and insurance costs.
Personnel-related expenses consist of salaries, benefits, recruiting costs, and
stock-based compensation. We expect our general and administrative expenses to
increase for the foreseeable future as we increase our headcount to support our
continued and expanding research activities and development of product
candidates in the areas of hematology and oncology, infectious diseases, and
autoimmunity and inflammation, and as a result of operating as a public company,
including compliance with the rules and regulations of the Securities and
Exchange Commission (SEC) and those of any national securities exchange on which
our securities are traded, legal, auditing, additional insurance expenses,
investor relations activities and other administrative and professional

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services. We also expect our intellectual property expenses to increase as we expand our intellectual property portfolio.

Other income, net


Other income, net includes interest income earned on our cash and investments
and non-cash interest income (expense) related to accretion (amortization) of
the discount (premium) on marketable securities.

Operating results

Comparison of the years ended December 31, 2021 and 2020

                               Year Ended December 31,
(in thousands)                   2021             2020         Change
Operating expenses:
Research and development     $     127,026      $  65,030     $  61,996
General and administrative          38,297         18,250        20,047
Total operating expenses           165,323         83,280        82,043
Loss from operations              (165,323 )      (83,280 )     (82,043 )
Other income, net                      159          1,925        (1,766 )
Net loss                     $    (165,164 )    $ (81,355 )   $ (83,809 )



Research and development costs

The following table summarizes our research and development expenses incurred during the periods indicated:

                                            Year Ended December 31,
(in thousands)                                2021              2020        Change
Direct expenses
Clinical stage programs (1)               $      47,866       $ 24,126     $ 23,740
Preclinical stage programs                       28,008         15,035       12,973
Indirect expenses
Personnel-related                                39,573         21,184       18,389
Depreciation and facilities                      11,579          4,685        6,894

Total research and development expenditure $127,026 $65,030 $61,996

(1)

For the year ended December 31, 2021, includes direct expenses related to: (i)
IGM-2323, for which we announced the dosing of the first patient in our Phase 1
clinical trial in October 2019; (ii) IGM-8444, for which we announced the dosing
of the first patient in our Phase 1 clinical trial in September 2020; and (iii)
IGM-6268, for which we initiated a Phase 1 clinical trial in December 2021.


Research and development expenses were $127.0 million in 2021 compared to $65.0
million in 2020. The increase of $62.0 million was primarily driven by
advancement of our product candidates. Clinical stage program expenses increased
by $23.7 million, primarily driven by a $9.5 million increase in expenses
related to IGM-2323, a $9.4 million increase in expenses related to IGM-6268,
and a $2.4 million increase in expenses related to IGM-8444. Preclinical stage
program expenses increased by $13.0 million, primarily driven by an increase in
expenses related to IGM-7354 and our other preclinical programs.
Personnel-related expenses increased by $18.4 million, driven by an increase in
headcount and stock-based compensation expense. Depreciation and facilities
expenses increased by $6.9 million, primarily due to depreciation expense of our
cGMP manufacturing facility which was placed in service in 2021, and higher
rental expense under a new lease agreement for additional space.

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General and administrative expenses

General and administrative expenses were $38.3 million in 2021 compared to $18.3 million in 2020. The increase in $20.0 million was mainly due to a $15.1 million increase in personnel expenses and stock-based compensation resulting from an increase in headcount, and $3.5 million increase related to professional services and insurance costs.

Other income, net


Other income, net was $0.2 million in 2021 compared to $1.9 million in 2020. The
decrease of $1.8 million was primarily due to lower cash and investment balances
and lower interest rates.

Comparison of the years ended December 31, 2020 and 2019

                               Year Ended December 31,
(in thousands)                   2020             2019         Change
Operating expenses:
Research and development     $     65,030       $  35,257     $  29,773
General and administrative         18,250           9,241         9,009
Total operating expenses           83,280          44,498        38,782
Loss from operations              (83,280 )       (44,498 )     (38,782 )
Other income, net                   1,925           1,365           560
Net loss                     $    (81,355 )     $ (43,133 )   $ (38,222 )



Research and development costs

The following table summarizes our research and development expenses incurred during the periods indicated:

                                            Year Ended December 31,
(in thousands)                                2020             2019         Change
Direct expenses
Clinical stage programs (1)               $     24,126       $  10,554     $ 13,572
Preclinical stage programs                      15,035          12,095        2,940
Indirect expenses
Personnel-related                               21,184           9,546       11,638
Depreciation and facilities                      4,685           3,062        1,623

Total research and development expenditure $65,030 $35,257 $29,773

(1)

For the year ended December 31, 2020, includes direct expenses related to: (i)
our lead product candidate, IGM-2323, for which we announced the dosing of the
first patient in our Phase 1 clinical trial in October 2019; and (ii) our second
product candidate, IGM-8444, for which we announced the dosing of the first
patient in our Phase 1 clinical trial in September 2020.


Research and development expenses were $65.0 million in 2020 compared to $35.3
million in 2019. The increase of $29.8 million was primarily driven by
advancement of our product candidates, including $13.6 million of expenses
related to our clinical stage programs, which consisted of clinical and
manufacturing expense incurred in the development of our lead product candidate,
IGM-2323, and our second product candidate, IGM-8444. Preclinical stage programs
expenses increased by $2.9 million primarily driven by a $2.4 million increase
in activities related to our infectious disease program, a $2.6 million increase
in license and fees, and a $1.7 million increase in expenses related to our
discovery and other programs, partially offset by a decrease of $3.8 million for
IGM-8444 expenses which are classified within clinical related expenses for
2020. Effective for 2020, expenses for IGM-8444 were classified as clinical
stage program expenses due to the dosing of the first patient in our Phase 1
clinical trial in 2020. Personnel-related expenses, including stock-based
compensation, increased by $11.6 million due to an increase in headcount, stock
option grants, and an increase in the price of our common stock, which resulted
in an increase in the stock option grant fair value. Depreciation and facilities
increased by $1.6 million primarily due to new lease agreements for additional
office, laboratory and manufacturing space in Mountain View, California which
commenced in 2019.

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General and administrative expenses


General and administrative expenses were $18.3 million in 2020 compared to $9.2
million in 2019. The increase of $9.0 million was primarily due to a $5.7
million increase in personnel-related expenses, including stock-based
compensation, due to an increase in headcount, stock option grants, combined
with an increase in the price of our common stock, which resulted in an increase
in stock option grant fair value. In relation to our public company status,
administrative expenses increased by $1.8 million primarily due to an increase
in directors' and officers' liability insurance and professional services
increased by $1.1 million due to legal, accounting and consulting services.

Other income, net


Other income, net was $1.9 million in 2020 compared to $1.4 million in 2019. The
increase of $0.6 million was primarily due to interest earned from higher cash
and investment balances.

Cash and capital resources

Liquidity


Due to our significant research and development expenditures, we have generated
operating losses since our inception. We have funded our operations primarily
through the sale of common stock and Pre-Funded Warrants in our public
offerings, the sale of convertible preferred stock and the issuance of unsecured
promissory notes in private placements. As of December 31, 2021, we had cash and
investments of $229.5 million. As of December 31, 2021, we had an accumulated
deficit of $353.7 million. We believe that our cash and investments will be
sufficient to fund our planned operations for at least one year past the
issuance date of the consolidated financial statements appearing elsewhere in
this Annual Report on Form 10-K.

Future funding needs


Our primary uses of cash are to fund operating expenses, which consist primarily
of research and development expenditures related to our programs and related
personnel costs. The timing and amount of our future funding requirements
depends on many factors, including the following:

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the initiation, scope, rate of progress, results and cost of our preclinical studies, clinical trials and other related activities for our product candidates;


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costs associated with manufacturing our product candidates, including building and expanding our own manufacturing facilities, and establishing commercial supplies and sales, marketing and distribution capabilities;


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the timing and cost of capital expenditures to support our research, development and manufacturing efforts;


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the number and characteristics of other product candidates we are pursuing;


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the costs, timing and outcome of researching and obtaining US Food and Drug Administration (FDA) and non-we regulatory approvals;


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our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of payments we may be required to make in licensing, filing, defending and the application of any patent or other intellectual property right;


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the timing, receipt and amount of sales of our potential products;


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our need for and ability to hire additional management, scientific and medical personnel;


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the effect of competing products which may limit the market penetration of our product candidates;


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our need to implement additional internal systems and infrastructure, including financial and reporting systems;

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Financial statement index



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the economic and other terms, timing and success of any collaboration, license or other agreement we may enter into in the future, including the timing of receipt of any milestone or royalty payments under such agreements;


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the effects of credit and financial market disruptions and volatility United States and around the world related to the COVID-19 pandemic;


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compliance and administrative costs associated with being a public company; and


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the extent to which we acquire or invest in businesses, products or technologies, although we currently have no commitments or agreements regarding any of these types of transactions.


In addition, we will continue to require additional funding in order to complete
development of our product candidates and commercialize our products, if
approved. We may seek to raise any necessary additional capital through a
combination of public or private equity offerings, debt financings,
collaborations, strategic alliances, licensing arrangements and other marketing
and distribution arrangements. For example, in December 2020 the Company
completed a public offering of common stock and Pre-funded Warrants for
aggregate net proceeds of $215.4 million. Additionally, in August 2021, we filed
with the SEC a shelf registration statement on Form S-3, pursuant to which we
may offer debt securities, preferred stock, common stock, non-voting common
stock and certain other securities from time to time up to a maximum aggregate
amount of $400,000,000.

There can be no assurance that, in the event we require additional financing,
such financing will be available at terms acceptable to us, if at all. Failure
to raise sufficient capital when needed or generate sufficient cash flow from
operations, would impact our ability to pursue our business strategies and could
require us to delay, scale back or discontinue one or more of our product
development programs, or other aspects of our business objectives. Because of
the numerous risks and uncertainties associated with the development and
commercialization of our product candidates we are unable to estimate the
amounts of increased capital outlays and operating expenditures associated with
our current and anticipated preclinical studies and clinical trials. To the
extent that we raise additional capital through collaborations, strategic
alliances or licensing arrangements with third parties, we may have to
relinquish valuable rights to our product candidates, future revenue streams or
research programs at an earlier stage of development or on less favorable terms
than we would otherwise choose or to grant licenses on terms that may not be
favorable to us. If we do raise additional capital through public or private
equity or convertible debt offerings, the ownership interest of our existing
stockholders will be diluted, and the terms of these securities may include
liquidation or other preferences that adversely affect our stockholders' rights.
If we raise additional capital through debt financing, we may be subject to
covenants limiting or restricting our ability to take specific actions, such as
incurring additional debt, making capital expenditures or declaring dividends.
If we 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.

Summary statement of cash flows


The following table sets forth the primary sources and uses of cash for each of
the periods presented below:

                                                              Year Ended December 31,
(in thousands)                                           2021          2020           2019
Net cash used in operating activities                 $ (124,339 )   $ (67,303 )   $  (45,116 )
Net cash provided by (used in) investing activities       14,818        57,711       (203,238 )
Net cash provided by financing activities                  2,476       

214 781 282 258

Net cash used in operating activities


In 2021, net cash used in operating activities was $124.3 million, which
consisted primarily of a net loss of $165.2 million, partially offset by $34.4
million in non-cash charges and a net change of $6.4 million in our net
operating assets and liabilities. The net change in our operating assets and
liabilities was primarily due to an increase in accrued liabilities of $12.6
million, partially offset by an increase in prepaid expenses and other current
assets of $3.3 million, a decrease in lease liabilities, net of $3.0 million, an
increase in other assets of $0.5 million, and a

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decrease in accounts payable of $0.7 million. The non-cash charges primarily
consisted of stock-based compensation expense of $25.9 million, depreciation
expense of $4.5 million, non-cash lease expense of $3.2 million, net
amortization of premiums and accretion of discounts on investments of $0.6
million, and loss on disposal of property, plant and equipment of $0.2 million.

In 2020, net cash used in operating activities was $67.3 million, which
consisted primarily of a net loss of $81.4 million, partially offset by $12.0
million in non-cash charges and a net change of $2.0 million in our net
operating assets and liabilities. The net change in our operating assets and
liabilities was primarily due to an increase in accrued liabilities of $2.8
million and an increase in accounts payable of $2.2 million partially offset by
a decrease in lease liabilities of $2.5 million, an increase in prepaid expenses
of $0.3 million, and an increase in other assets of $0.3 million. The non-cash
charges primarily consisted of stock-based compensation of $8.5 million,
non-cash lease expense of $2.6 million, and depreciation expense of $1.0
million.

In 2019, net cash used in operating activities was $45.1 million, which
consisted of a net loss of $43.1 million and a net change of $5.0 million in our
net operating assets and liabilities, partially offset by $3.0 million in
non-cash charges. The net change in our operating assets and liabilities was
primarily due to an increase in prepaid expenses of $5.4 million, an increase in
other assets of $0.3 million and a decrease in lease liabilities of $1.3
million, partially offset by an increase in accounts payable of $2.0 million.
The non-cash charges primarily consisted of non-cash lease expense of $1.7
million, stock-based compensation of $1.0 million and depreciation expense of
$0.6 million, partially offset by net amortization of premiums and accretion of
discounts on investments of $0.3 million.

Net cash provided by (used in) investing activities

In 2021, net cash from investing activities was $14.8 millionwhich consisted of $154.4 million maturities of investments and sales of investments of $3.0 millionoffset by $129.3 million in investment purchases, and $13.2 million in purchases of property, plant and equipment for research and development activities.

In 2020, net cash provided by investing activities was $57.7 millionwhich consisted of $283.8 million maturities of investments, offset by $208.6 million in investment purchases and $17.5 million in purchases of property, plant and equipment for research and development activities.

In 2019, net cash used in investing activities was $203.2 millionwhich consisted of $208.9 million in investment purchases and $2.3 million purchases of laboratory equipment for research and development activities, partially offset by $8.0 million in the maturities of the investments.

Net cash provided by financing activities


In 2021, net cash provided by financing activities was $2.5 million, which
consisted primarily of $4.0 million of proceeds received from purchases under
our employee stock purchase plan (ESPP) and from the exercise of stock options
under our equity plans. These proceeds were offset by $1.6 million related to
payments of employee taxes and exercise costs for shares withheld in connection
with stock option exercises.

In 2020, net cash provided by financing activities was $214.8 million, which
consisted primarily of $215.7 million of net proceeds from our public offering
of common stock and pre-funded warrants as well as $0.8 million of proceeds
received from purchases under our ESPP and from the exercise of stock options
under our equity plans. These proceeds were offset by $1.7 million related to
payments of employee taxes and exercise costs for shares withheld in connection
with stock option exercises.

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In 2019, net cash provided by financing activities was $282.3 million, which
consisted primarily of $182.8 million of net proceeds from our IPO, $81.7
million of net proceeds from the issuance of shares of our Series C convertible
preferred stock, $15.0 million of proceeds from the issuance of an unsecured
promissory note to a related party which was subsequently settled as Series C
convertible preferred stock in June 2019, the receipt of a $2.6 million
receivable that was due from a related party, and $0.2 million from the issuance
of common stock and exercise of stock options under our equity plans.

Contractual Obligations and Commitments
The following table summarizes our contractual obligations and other commitments
                            as of December 31, 2021:

                                                                 Payments Due by Period
                                  Less than 1
(in thousands)                        Year         1 to 3 Years      3 to 5 Years       More than 5 Years       Total
Contractual obligations:
Operating lease obligations (1)   $      5,210     $       9,460     $       5,756     $            17,503     $ 37,929



(1)
Payments due for our lease of office, laboratory and manufacturing spaces. The
payments represent gross operating lease obligations, and includes $2.2 million
for a building lease signed in November 2021, which had not commenced as of
December 31, 2021.

In addition, we enter into agreements in the normal course of business with
CROs, CMOs and other vendors for research and development services for operating
purposes, which are generally cancelable upon written notice. These payments are
not included in this table of contractual obligations.

We have not included milestone or royalty payments or other contractual payment
obligations in the table above as the timing and amount of such obligations are
unknown or uncertain. See Note 5 to our consolidated financial statements
included elsewhere in this Annual Report on Form 10-K.

Significant Accounting Policies and Use of Estimates


Our consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles (GAAP). The preparation of these
consolidated financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported expenses incurred during the reporting periods. Our
estimates are based on our historical experience and on various other factors
that we believe are reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. We
believe that the accounting policies discussed below are critical to
understanding our historical and future performance, as these policies relate to
the more significant areas involving management's judgments and estimates.

While our significant accounting policies are described in the notes to our
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K, we believe that the following critical accounting policies are most
important to understanding and evaluating our reported financial results.

Accumulated research and development costs


We record accruals for estimated costs of research, preclinical studies,
clinical trials, and manufacturing, which are significant components of research
and development expenses. A substantial portion of our ongoing research and
development activities is conducted by third-party service providers, CROs and
CMOs. Our contracts with the CMOs generally include fees such as initiation
fees, reservation fees, costs related to animal studies and safety tests,
verification run costs, materials and reagents expenses, taxes, etc. Our
contracts with CROs generally include pass-through fees such as regulatory
expenses, investigator fees, travel costs and other miscellaneous costs,
including shipping and printing fees. The financial terms of these contracts are
subject to negotiations, which vary from contract to contract and may result in
payment flows that do not match the periods over which materials or services are
provided to us under such contracts. We accrue the costs incurred under
agreements with these third parties

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based on estimates of actual work completed in accordance with the respective
agreements. We determine the estimated costs through discussions with internal
personnel and external service providers as to the progress, or stage of
completion or actual timeline (start-date and end-date) of the services and the
agreed-upon fees to be paid for such services. In the event we make advance
payments, the payments are recorded as a prepaid expense and recognized as the
services are performed.

As actual costs become known, we adjust our accruals. Although we do not expect
our estimates to be materially different from amounts actually incurred, such
estimates for the status and timing of services performed relative to the actual
status and timing of services performed may vary and could result in us
reporting amounts that are too high or too low in any particular period. Our
accrual is dependent, in part, upon the receipt of timely and accurate reporting
from CROs and other third-party vendors. Variations in the assumptions used to
estimate accruals including, but not limited to, the number of patients
enrolled, the rate of patient enrollment and the actual services performed, may
vary from our estimates, resulting in adjustments to clinical trial expenses in
future periods. Changes in these estimates that result in material changes to
our accruals could materially affect our financial condition and results of
operations. Through December 31, 2021, there have been no material differences
from our estimated accrued research and development expenses to actual expenses.

Stock-based compensation


We account for stock-based compensation by measuring and recognizing
compensation expense for all share-based awards made to employees and directors
based on estimated grant-date fair values. We use the straight-line method to
allocate compensation cost to reporting periods over the requisite service
period, which is generally the vesting period. The grant date fair value of
restricted stock units is estimated based on the closing stock price of our
common stock on the date of grant. The grant date fair value of stock options
granted to employees and directors is estimated using the Black-Scholes
option-pricing valuation model. The Black-Scholes model requires the input of
subjective assumptions, including fair value of common stock, expected term,
expected volatility, risk-free interest rate and expected dividends, which are
described in greater detail below.

Fair Value of Common Stock-Prior to the IPO, as there was no public market for
our common stock, the board of directors determined the fair value of our common
stock by taking into consideration, among other things, timely valuations of our
common stock prepared by an unrelated third-party valuation firm in accordance
with the guidance provided by the American Institute of Certified Public
Accountants Practice Guide, Valuation of Privately-Held-Company Equity
Securities Issued as Compensation. Given the absence of a public trading market
for our common stock prior to our IPO, our board of directors exercised
reasonable judgment and considered a number of objective and subjective factors
to determine the best estimate of the fair value of our common stock, including
our stage of development; progress of our research and development efforts; the
rights, preferences and privileges of our convertible preferred stock relative
to those of our common stock; equity market conditions affecting comparable
public companies and the lack of marketability of our common stock. Since the
completion of our IPO, the fair value of each share of common stock underlying
stock option grants is based on the closing price of our common stock on the
Nasdaq Global Select Market as reported on the date of grant.

Expected Term-The expected term of the options represents the average period the
stock options are expected to remain outstanding. As we do not have sufficient
historical information to develop reasonable expectations about future exercise
patterns and post-vesting employment termination behavior, the expected term of
options granted is derived from the average midpoint between the weighted
average vesting and the contractual term, also known as the simplified method.

Expected Volatility- Since we have only recently become a public company and
have only a limited trading history for our common stock, the expected
volatility was estimated based on the average historical volatilities of common
stock of comparable publicly traded entities over a period equal to the expected
term of the stock option grants. We selected companies with comparable
characteristics, including enterprise value, risk profiles, position within the
industry, and, where applicable, with historical share price information
sufficient to meet the expected life of our stock-based awards. We will continue
to apply this

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  Index to Financial Statements

process until sufficient historical information regarding the price volatility of our own shares is available.

Risk-free interest rate – The risk-free interest rate is based on the zero coupon yield we Treasury notes from the grant date with maturities corresponding to the expected duration of the grants.

Expected Dividends – The expected dividend assumption is based on our expectation of not paying dividends in the foreseeable future; therefore, we used an expected dividend yield of zero.


We account for forfeitures as they occur. Disclosures related to stock-based
compensation have been included for employee stock-based compensation only.
Stock-based compensation awarded to non-employees for the years ended December
31, 2021, 2020, and 2019 was not material. The fair value of each purchase under
our ESPP is estimated at the beginning of the offering period using the
Black-Scholes option pricing model.

The assumptions we have used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options grants involve inherent uncertainties and the application of significant judgment. Therefore, if the factors or expected results change and we use materially different assumptions or estimates, our stock-based compensation could be materially different.

Leases

In 2019, we elected to early adopt Accounting Standard (ASU) Update No. 2016-02, Leases (ASC 842) and its associated amendments effective January 1, 2019
using the modified retrospective transition approach. No adjustment for cumulative effect was recorded in the accumulated deficit at the time of adoption.


Under ASC 842, we determine if an arrangement is a lease at inception. In
addition, we determine whether leases meet the classification criteria of a
finance or operating lease at the lease commencement date considering: (1)
whether the lease transfers ownership of the underlying asset to the lessee at
the end of the lease term, (2) whether the lease grants the lessee an option to
purchase the underlying asset that the lessee is reasonably certain to exercise,
(3) whether the lease term is for a major part of the remaining economic life of
the underlying asset, (4) whether the present value of the sum of the lease
payments and residual value guaranteed by the lessee equals or exceeds
substantially all of the fair value of the underlying asset, and (5) whether the
underlying asset is of such a specialized nature that it is expected to have no
alternative use to the lessor at the end of the lease term. As of December 31,
2021, our lease population consisted of real estate operating leases. As of
December 31, 2021, we did not have finance leases.

Operating leases are included in operating lease right-of-use (ROU) assets,
lease liabilities, current, and lease liabilities, non-current in our balance
sheet. 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. Operating lease ROU assets and liabilities are
recognized at the lease commencement date based on the present value of lease
payments over the lease term. In determining the present value of lease
payments, we use our incremental borrowing rate based on the information
available at the lease commencement date if the rate implicit in the lease is
not readily determinable. We determine the incremental borrowing rate base on an
analysis of corporate bond yields with a credit rating similar ours. The
determination of our incremental borrowing rate requires management judgment
including the development of a synthetic credit rating and cost of debt as we
currently do not carry any debt. We believe that the estimates used in
determining the incremental borrowing rate are reasonable based upon current
facts and circumstances. Applying different judgments to the same facts and
circumstances could result in the estimated amounts to vary. The operating lease
ROU assets also include adjustments for prepayments and accrued lease payments
and exclude lease incentives. Our lease terms may include options to extend or
terminate the lease when it is reasonably certain that we will exercise such
options. Operating lease cost is recognized on a straight-line basis over the
expected lease term. Lease agreements entered into after the adoption of ASC 842
that include lease and non-lease components are accounted for as a single lease
component. Lease agreements with a noncancelable term of less than 12 months are
not recorded on our balance sheet. For more information about the impact of
adoption and disclosures on our leases, refer to "Note 10 - Commitments and
Contingencies" in our notes to consolidated financial statements included
elsewhere in this Annual Report on Form 10-K.

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