You should read the following discussion and analysis of our financial condition and results of operations together with the financial statements and the related notes appearing elsewhere in this Annual Report. This discussion contains forward-looking statements that are based on management's current expectations, estimates, and projections about our business and operations, and involve risks and uncertainties. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the sections entitled "Risk Factors" and "Special Note Regarding Forward-Looking Statements" and elsewhere in this Annual Report.

Overview

We are a clinical-stage biopharmaceutical company committed to discovering and developing novel, first-in-class immunomedicines to treat cancer and other immune-related diseases by restoring normal immune function. We view the immune system holistically and, rather than target one specific immune cell type, we focus on understanding biological pathways, the interactions of cells and the role each interaction plays in an immune response. Through our proprietary Functional, Integrated, NextCure Discovery in Immuno-Oncology, or FIND-IO, platform, we study various immune cells to discover and understand targets and structural components of immune cells and their functional impact in order to develop immunomedicines. We are focused on patients who do not respond to current therapies, patients whose cancer progresses despite treatment and patients with cancer types not adequately addressed by available therapies. We are committed to discovering and developing first-in-class immunomedicines, which are immunomedicines that use new or unique mechanisms of action to treat a medical condition, for these patients.

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. In order to mitigate the spread of COVID-19, governments have imposed unprecedented restrictions on business operations, travel and gatherings, resulting in a global economic downturn and other adverse economic and societal impacts. The COVID-19 pandemic has also overwhelmed or otherwise led to changes in the operations of many healthcare facilities, including clinical trial sites. While we are considered an essential business under applicable regulations and continue to operate, the impacts of COVID-19 initially placed significant strain on our clinical trial sites, have raised concerns around monitoring patient safety, and caused enrollment to slow in the Phase 2 portion of the ongoing Phase 1/2 monotherapy clinical trial of our lead product candidate, NC318. We are continuing to work closely with our clinical partners and have taken steps as necessary to adjust our protocols and timelines due to the impact of the COVID-19 pandemic. The COVID-19 pandemic and its impacts continue to evolve. We cannot predict the scope and severity of any further disruptions as a result of COVID-19 or their impacts on us, but business disruptions for us or any of the third parties with whom we engage, including the collaborators, contract organizations, third-party manufacturers, suppliers, clinical trial sites, regulators and other third parties with whom we conduct business could materially and negatively impact our ability to conduct our business in the manner and on the timelines presently planned. The extent to which the COVID-19 pandemic may continue to impact our business and financial performance will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope and duration of the pandemic, the extent and effectiveness of government restrictions and other actions, including relief measures, implemented to address the impact of the pandemic, and resulting economic impacts. We are unable to determine the extent of the impact of the pandemic on our operations and financial condition going forward. These developments are highly uncertain and unpredictable, and may materially adversely affect our financial position and results of operations.

Our lead product candidate NC318 is a first-in-class immunomedicine against a novel immunomodulatory receptor called Siglec-15, or S15. In October 2018, we initiated a Phase 1/2 clinical trial of NC318 in patients with advanced or metastatic solid tumors. We completed enrollment of the Phase 1 portion of this trial in August 2019 and preliminary data from the Phase 1 portion were presented at the Society for Immunotherapy of Cancer annual meeting in November 2019 and updated data were announced in December 2020.

We began enrolling patients in the Phase 2 portion of the Phase 1/2 clinical trial of NC318 trial in October 2019. In this portion, we planned to enroll up to 100 patients with tumor types that have been shown to have elevated S15 expression, including non-small cell lung cancer, or NSCLC, ovarian cancer, head and neck squamous cell carcinoma, or HNSCC, and triple-negative breast cancer, or TNBC. In July 2020, we reported a confirmed partial response in a head and neck squamous cell carcinoma patient. In addition, at the time, we reported that at that time we would not progress the NSCLC and ovarian cancer cohorts to the second stage of the Simon 2-stage trial. In December 2020, we completed a retrospective analysis of S15 expression in biopsy samples collected from the Phase 2 patients at their initial screening. Of



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the evaluable biopsies collected, 13% of the patients enrolled had S15-positive tumors. These biopsies showed that the selection criterion did not result in enough S15-positive patients for us to effectively evaluate the activity of NC318 in S15-positive tumors. We are modifying the Phase 2 portion of the trial for S15 selection and expect to begin pre-selecting patients for enrollment based on S15 expression in the second quarter of 2021 in order to assess response rates in patients selected for S15 positivity. In addition, we believe that scientific evidence supports a combination of NC318 with anti-PD-1 therapy, and we plan to study that combination in NSCLC patients.

Our second product candidate, NC410, is a novel immunomedicine designed to block immune suppression mediated by an immune modulator called Leukocyte-Associated Immunoglobulin-like Receptor 1. In June 2020, we initiated a Phase 1/2 clinical trial of NC410 in patients with advanced or metastatic solid tumors after a temporary delay due to the COVID-19 pandemic. The Phase 1 dose-escalation portion of this open-label trial is designed to evaluate the safety and tolerability of NC410 in patients with advanced or metastatic solid tumors and determine its pharmacologically active and/or maximum tolerated dose. After a recommended dose for the Phase 2 portion of the trial is determined, the efficacy of NC410 will be evaluated in select tumor types. We expect to announce data from the Phase 1 portion of this trial in the second half of 2021.

Our third product candidate, NC762, is an immunomedicine targeting an immunomodulatory molecule called human B7 homolog 4 protein, or B7-H4. We submitted our investigational new drug application, or IND, for NC762, to the FDA, in the first quarter of 2021, and we intend to initiate a Phase 1/2 clinical trial of NC762 in patients with lung cancer, HER2+ breast cancer, ovarian cancer or potentially other tumor types in the second quarter of 2021. The Phase 1 dose-escalation portion of this open-label trial is being designed to evaluate the safety and tolerability of NC762 and determine its pharmacologically active and/or maximum tolerated dose. After a recommended dose for the Phase 2 portion of the trial is determined, the efficacy of NC762 will be evaluated in select tumor types.

Financial Overview

Since commencing operations in 2015, we have devoted substantially all of our efforts and financial resources to organizing and staffing our company, identifying business development opportunities, raising capital, securing intellectual property rights related to our product candidates, building and optimizing our manufacturing capabilities and conducting discovery, research and development activities for our product candidates, discovery programs and FIND-IO platform.

We have not generated any revenue from product sales and only limited revenue from other sources and, as a result, we have never been profitable and have incurred net losses since the commencement of our operations. Our net losses for the years ended December 31, 2020 and 2019 were $36.6 million and $33.7 million, respectively. As of December 31, 2020, we had an accumulated deficit of $117.6 million primarily as a result of research and development and general and administrative expenses. We do not expect to generate product revenue unless and until we obtain marketing approval for and commercialize a product candidate, and we cannot assure you that we will ever generate significant revenue or profits.

We have funded our operations to date primarily with proceeds from public offerings of our common stock, private placements our preferred stock and upfront fees received under our former research collaboration and development agreement with Eli Lilly and Company, or Lilly. From our inception through December 31, 2020, we received gross proceeds of $164.4 million through private placements of preferred stock and an upfront payment of $25.0 million in connection with our agreement with Lilly, or the Lilly Agreement.

In November 2018, we entered into the Lilly Agreement, to use our FIND-IO platform to identify novel oncology targets for additional collaborative research and drug discovery by us and Lilly. We received an upfront payment of $25.0 million in cash and an equity investment of $15.0 million from Lilly upon entering into the Lilly Agreement, and we were eligible for quarterly research and development support payments during a portion of the term of the Lilly Agreement. Effective March 3, 2020, Lilly terminated the Lilly Agreement.

On May 13, 2019, we closed our initial public offering, or IPO, in which we sold 5,750,000 shares of common stock, at a public offering price of $15.00 per share, for aggregate gross proceeds of $86.3 million. The net offering proceeds to us were approximately $76.9 million after deducting underwriting discounts and commissions of $6.0 million and offering expenses of $3.4 million. See Note 1 to our audited financial statements included elsewhere in this Annual Report for more information.



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On November 19, 2019, we completed an underwritten public offering, in which we issued and sold 4,077,192 shares of common stock at a public offering price of $36.75 per share. On December 2, 2019, the underwriters exercised in full their option to purchase an additional 611,578 shares of common stock at the public offering price of $36.75, for total net proceeds to us of approximately $160.9 million after deducting underwriting discounts and commissions of approximately $10.3 million and offering expenses of approximately $1.0 million.

As of December 31, 2020, we had cash, cash equivalents and marketable securities, excluding restricted cash, of $283.4 million. We believe that our existing cash, cash equivalents and marketable securities will be sufficient to fund our planned operations into the second half of 2023. We have based this estimate on assumptions that may prove to be incorrect, and we could use our available capital resources sooner than we currently expect.

We expect to incur substantial expenditures in the foreseeable future as we advance our product candidates through clinical development, the regulatory approval process and, if approved, commercialization, and as we expand our pipeline through research and development activities related to our FIND-IO platform and discovery programs. Specifically, in the near term, we expect to incur substantial expenses relating to our ongoing Phase 1/2 clinical trials for NC318 and NC410 and our planned Phase 1/2 clinical for NC762, and other research and development activities. We expect to incur significantly increased costs as a result of operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.

We will need substantial additional funding to support our continuing operations and to pursue our development strategy. Until such time as we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our operations through a combination of public and private equity offerings, debt financings, marketing and distribution arrangements, other collaborations, strategic alliances and licensing arrangements. Adequate funding may not be available to us on acceptable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we may be required to delay, limit, reduce or terminate preclinical studies, clinical trials, or other research and development activities or one or more of our development programs.

Components of Our Results of Operations

Revenue

We recognized revenue under the former Lilly Agreement of $22.4 million and $6.3 million for the years ended December 31, 2020 and 2019, respectively. Lilly terminated the Lilly Agreement effective March 3, 2020, or the Lilly Termination Date, without cause and we recognized all of the remaining deferred revenue as of the Lilly Termination Date in the statement of operations and comprehensive loss. Through December 31, 2020, we have not generated any revenue from product sales.

For additional information about our revenue recognition policy, see Note 2 to our audited financial statements included elsewhere in this Annual Report.

Operating Expenses

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our discovery efforts, research activities, development and testing of our product candidates as well as for clinical trials, including:

? salaries, benefits and other related costs, including stock-based compensation,

for personnel engaged in research and development functions;

expenses incurred under agreements with third parties, including agreements

? with third parties that conduct research, preclinical activities or clinical

trials on our behalf, such as our corporate sponsored research agreement, or

the SRA, and our license agreement with Yale University, or Yale;

? costs of outside consultants, including their fees, stock-based compensation

and related travel expenses;




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? the costs of laboratory supplies and acquiring, developing and manufacturing

preclinical study and clinical trial materials; and

facility-related expenses, which include direct depreciation costs and

? allocated expenses for rent and maintenance of facilities and other operating

costs.

We expense research and development costs as incurred. Our expenses related to clinical trials are based on actual costs incurred and estimates of other incurred costs. These estimated costs are based on several factors, including patient enrollment and related expenses at clinical investigator sites, contract services received, consulting agreement costs and efforts expended under contracts with research institutions and third-party contract research organizations that conduct and manage clinical trials on our behalf. We generally accrue estimated costs related to clinical trials based on contracted amounts applied to the level of patient enrollment and other activity according to the protocol. If future timelines or contracts are modified based on changes in the clinical trial protocol or scope of work to be performed, we would modify our estimates of accrued expenses accordingly on a prospective basis. Historically, any such modifications have not been material.

Research and development activities are central to our business model. We expect that our research and development expenses will continue to increase substantially for the foreseeable future as we advance our product candidates through development and expand the number of trials we are conducting and the patients enrolled in those trials, and as we utilize our current good manufacturing practice, or cGMP, manufacturing capacity, including to provide drug supply of NC318, NC410 and NC762 for future clinical trials, and as we expand our pipeline through research and development activities, including through our FIND-IO platform and discovery programs.

We cannot determine with certainty the duration and costs of future clinical trials of NC318, NC410, NC762 or any other product candidate we may develop or if, when or to what extent we will generate revenue from the commercialization and sale of any product candidate for which we may obtain marketing approval. We may never succeed in obtaining marketing approval for any product candidate. The duration, costs and timing of clinical trials and development of NC318, NC410, NC762 and any other product candidate we may develop will depend on a variety of factors, including:

the scope, progress, results and costs of clinical trials of NC318, NC410 and

? NC762, as well as of any future clinical trials of other product candidates and

other research and development activities that we may conduct;

? the impact of the COVID-19 pandemic, including delays and slowdowns as a result

of strain on our clinical trial sites and concerns about patient safety;

? uncertainties in selection of indications, clinical trial design and patient

enrollment rates;

the probability of success for our product candidates, including safety and

? efficacy, early clinical data, competition, ease and ability of manufacturing

and commercial viability;

? significant and changing government regulation and regulatory guidance;

? the timing and receipt of any development or marketing approvals; and

? the expense of filing, prosecuting, defending and enforcing any patent claims

and other intellectual property rights.

A change in the outcome of any of these variables with respect to the development of a product candidate could lead to a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in our clinical trials due to patient enrollment or other reasons, we would be required to expend significant additional financial resources and time to complete clinical development for any such product candidate.



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General and Administrative Expenses

General and administrative expenses consist primarily of personnel-related costs, including payroll and stock-based compensation, for personnel in executive, finance, human resources, business and corporate development and other administrative functions, professional fees for legal, intellectual property, consulting and accounting services, rent and other facility-related costs, depreciation and other general operating expenses not otherwise classified as research and development expenses. General and administrative expenses also include all patent-related costs incurred in connection with filing and prosecuting patent applications, which are expensed as incurred.

We anticipate that our general and administrative expenses will increase substantially during the next few years, including as a result of expected staff expansion, additional occupancy costs, higher legal and accounting fees, investor relations costs, higher insurance premiums and other compliance costs.

Other Income, Net

Other income, net consists primarily of interest income earned on marketable securities and payment of interest on our term loan with a commercial bank, or the Term Loan.

Results of Operations

Comparison of the Years Ended December 31, 2020 and 2019



The following table summarizes our results of operations for the periods
indicated (in thousands):




                                                                   Year Ended
                                                                 December 31,
                                                               2020          2019        Change
Revenue:

Revenue from former research and development arrangement $ 22,378 $ 6,347 $ 16,031



Operating expenses:
Research and development                                        46,554        34,216       12,338
General and administrative                                      17,049         9,613        7,436
Loss from operations                                          (41,225)      (37,482)      (3,743)
Other income, net                                                4,622         3,745          877
Net loss                                                    $ (36,603)    $ (33,737)    $ (2,866)

Revenue from Former Research and Development Arrangement

Revenue was $22.4 million and $6.3 million for the years ended December 31, 2020 and 2019, respectively. The 2019 revenue is related to the recognition of a portion of the upfront consideration under the Lilly Agreement and the premium on the proceeds from Lilly's investment in shares of our Series B-3 Preferred Stock. The 2020 revenue exclusively relates to the recognition of all of the remaining deferred revenue under the Lilly Agreement as of the Lilly Termination Date. Effective with the termination of the Lilly Agreement, no further quarterly research and development support payments are payable to us.



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Research and Development Expenses

The following table summarizes our research and development expenses by product candidate for the periods indicated (in thousands):




                                                          Year Ended
                                                        December 31,
                                                        2020        2019       Change
External research and development expenses:
NC318                                                $  9,455    $  8,773    $    682
NC410                                                   2,847       3,100       (253)

Programs in discovery and preclinical development 14,798 9,118 5,680 Total external research and development expenses 27,100 20,991 6,109 Total internal research and development expenses 19,454 13,225 6,229 Total research and development expenses

$ 46,554    $ 34,216    $ 12,338

We do not allocate personnel-related costs, including stock-based compensation costs, or other indirect costs to specific programs, as they are deployed across multiple projects under development and discovery and, as such are separately classified as internal research and development expenses in the table above.

Research and development expenses for the year ended December 31, 2020 increased by $12.3 million to $46.6 million compared to $34.2 million for the year ending December 31, 2019. The increase was driven primarily by $6.2 million in internal research and development expenses, such as personnel-related costs, facilities related expenses, and depreciation. Another significant component of the increase in research and development expenses included $5.7 million in external research and development expenses related to early-stage programs and discovery activities, such as lab supplies and services, and payments pursuant to the SRA, and other sponsored research agreements.

General and Administrative Expenses

General and administrative expenses for the year ended December 31, 2020 increased by $7.4 million to $17.0 million as compared to $9.6 million for the year ending December 31, 2019. The increase was driven primarily by $4.6 million in personnel-related costs due to an increase in headcount. Other significant components of the increase in general and administrative expenses included $1.6 million in professional fees related to legal, finance/audit services, public relations, compensation, and investor relations support, and $1.0 million in insurance expenses.





Other Income, Net

Other income, net for the year ended December 31, 2020 increased by $0.9 million to $4.6 million compared to $3.7 million for the year ended December 31, 2019. The increase was driven primarily by interest income earned on higher cash and marketable securities balances.

Liquidity and Capital Resources

We have financed our operations primarily with proceeds from public offerings of our common stock, private placements of our preferred stock and upfront fees received under the Lilly Agreement. On May 13, 2019, we closed our IPO in which we sold 5,750,000 shares of common stock, at a public offering price of $15.00 per share, for aggregate gross proceeds of $86.3 million. The net offering proceeds to us were approximately $76.9 million after deducting underwriting discounts and commissions and offering expenses. On November 19, 2019, we completed an underwritten public offering, in which we sold 4,077,192 shares of common stock at a public offering price of $36.75 per share. On December 2, 2019, the underwriters exercised in full their option to purchase an additional 611,578 shares of common stock at the public offering price of $36.75. The total gross proceeds to us were $172.2 million and the total net offering proceeds to us were approximately $160.9 million after deducting underwriting discounts and commissions and offering expenses.



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As of December 31, 2020, we had cash, cash equivalents and marketable securities, excluding restricted cash, of $283.4 million. We believe that our existing cash, cash equivalents and marketable securities will be sufficient to fund our planned operations into the second half of 2023.

In addition, in April 2016, we entered into a term loan to finance laboratory equipment purchases. In January 2019, we amended the term loan to increase our borrowing capacity from $1.0 million to $5.0 million. As amended, the term loan matures in January 2023. Our obligations under the term loan are secured by a security interest in our certificates of deposit, money market accounts, cash, securities, investment property and deposit or investment accounts. The term loan bears interest at a rate equal to the greater of (i) the prime rate less 1.0% and (ii) 4.25% and is subject to mandatory prepayment upon the occurrence of specified events, including failure to pay the term loan when due, uncured breach, bankruptcy or dissolution. Under the term loan, we made interest-only payments through January 2020 and 36 equal monthly payments of principal plus accrued interest thereafter through January 2023. As of December 31, 2020, our outstanding borrowings under this term loan were $3.5 million.

We will continue to require additional capital to develop our product candidates and fund operations for the foreseeable future. We may seek to raise capital through sale of equity, debt financings, strategic alliances and licensing arrangements. Adequate additional funding may not be available to us on acceptable terms or at all. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back or discontinue the development of our product candidates or delay our efforts to expand our pipeline of product candidates. Our need to raise additional capital will depend on many factors, including:

the scope, progress, results and costs of researching and developing NC318,

? NC410, NC762 and our other programs, including targets identified through our

FIND-IO platform, and of conducting preclinical studies and clinical trials;

the timing of, and the costs involved in, obtaining marketing approvals for

? NC318, NC410, NC762 and any future product candidates we develop, if clinical

trials are successful;

the costs of manufacturing NC318, NC410 and any future product candidates we

? develop for preclinical studies and clinical trials in preparation for

marketing approval and commercialization;

the costs of commercialization activities, including marketing, sales and

distribution costs, for NC318, NC410, NC762 and any future product candidates

? we develop, whether alone or with a collaborator, if any such product

candidates are approved for sale, including marketing, sales and distribution

costs;

? the success of the SRA with Yale;

? our ability to establish and maintain additional collaborations, licenses or

other arrangements on favorable terms, if at all;

the costs involved in preparing, filing, prosecuting, maintaining, expanding,

? defending and enforcing patent claims, including litigation costs and the

outcome of any such litigation;

our current collaboration and license agreements remaining in effect and our

? achievement of milestones and the timing and amount of milestone payments we

are required to make, or that we may be eligible to receive, under those

agreements;

? the timing, receipt and amount of sales of, or royalties on, our future

products, if any; and

? the emergence of competing therapies and other adverse developments in the

oncology market.

Adequate additional financing may not be available to us on acceptable terms, or at all. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms



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that are not favorable to us or our stockholders. If we raise additional funds through government or private grants, collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable rights to our future revenue streams, product candidates or research programs or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we may be required to delay, reduce or terminate some or all of our development programs and clinical trials. We may also be required to sell or license to others rights to our product candidates in certain territories or indications that we would prefer to retain for ourselves. See the section entitled "Risk Factors" for additional risks associated with our substantial capital requirements.

Cash Flows

The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below (in thousands):






                                                           Year Ended
                                                          December 31,
                                                       2020          2019
       Net cash (used in) provided by :
       Operating activities                         $ (44,954)    $  (35,623)
       Investing activities                             43,523      (303,923)
       Financing activities                            (1,415)        243,043
       Net decrease in cash and cash equivalents    $  (2,846)    $  (96,503)

Cash Used in/Provided by Operating Activities

Net cash used in operating activities was $45.0 million for the year ended December 31, 2020, which was primarily due to our net loss of $36.6 million. Net cash used in operating activities was $35.6 million for the year ended December 31, 2019, which was primarily due to our net loss of $33.7 million. The amount of cash used in operating activities in any period is influenced by the timing of cash payments for research-related expenses.

Cash Provided by/Used in Investing Activities

Cash provided by investing activities for the year ended December 31, 2020 was $43.5 million, which was primarily due to the maturities of marketable securities that were not reinvested in marketable securities. Cash used in investing activities for the year ended December 31, 2019 was $303.9 million, which was primarily due to the purchase of marketable securities.

Cash Used in/Provided by Financing Activities

Cash used in financing activities was $1.4 million for the year ended December 31, 2020, which consisted primarily of repayment of a portion of the Term Loan. Cash provided by financing activities was $243.0 million for the year ended December 31, 2019, which consisted primarily of net proceeds from the public offerings of our common stock.

Contractual Obligations and Commitments

Operating Leases

In February 2016, we entered into a non-cancelable facilities operating sublease, or the 2016 Sublease, for our current headquarters that expires in August 2025. The base rent under the 2016 Sublease is currently $32,254 per month, plus our prorated share of the sublandlord's operating expense and is subject to annual rent increases of 3%.

In January 2019, we entered into a new lease to be used for office and laboratory space, or the 2019 Lease, that expires in March 2030. Upon expiration of the 2016 Sublease, the 2019 Lease will also cover the space we are currently



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subleasing under the 2016 Sublease. The base rent under the 2019 Lease is currently $37,824 per month, subject to annual rent increases of 3%.

Term Loan

In April 2016, we entered into a $1.0 million term loan, or the Term Loan. In January 2019, we amended the Term Loan to increase our borrowing capacity to $5.0 million, which amount remains secured by our certificates of deposit, money market account, investment property and deposit or investment accounts. As amended, the Term Loan bears interest at the greater of the prime rate less 1% and 4.25%. The effective interest rate was 4.25% and 4.40% for the years ended December 31, 2020 and 2019, respectively. Under the Term Loan, we were required to make monthly interest-only payments through January 2020 and are required to make 36 equal monthly payments of principal plus accrued interest thereafter through January 2023. Interest expense under the Term Loan was approximately $183,000 and $209,000 for the years ended December 31, 2020 and 2019, respectively. The outstanding balance on the Term Loan totaled $3.5 million and $5.0 million as of December 31, 2020 and 2019, respectively.

We also have potential contingent payment obligations upon the achievement by us of clinical, regulatory, and commercial events, as applicable, or royalty payments that we may be required to make under license agreements we have entered into with various entities pursuant to which we have in-licensed intellectual property, including, our license agreement with Yale and the SRA with Yale. The timing and amount (if any) of any such payments cannot be reasonably estimated at this time. See "Business-Our Collaboration Agreements" for additional information.

We enter into contracts in the normal course of business with third-party contract organizations for clinical trials, non-clinical studies and testing, manufacturing and other services and products for operating purposes. These contracts generally provide for termination following a certain period after notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.

Critical Accounting Policies, Significant Judgments and Use of Estimates

Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. The most significant assumptions used in the financial statements are valuing share-based compensation, including the fair value of our common stock in periods before our IPO. 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. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in the notes to our financial statements, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results, as these policies relate to the more significant areas involving management's judgments and estimates.

Research and Development Expenses, Including Clinical Trial Accruals

Research costs consist of employee-related costs, contractor expenses, laboratory supplies and facility costs, for research and development of product candidates are expensed as incurred. Development costs, including clinical trial-related expenses, incurred by third parties, such as CROs, are expensed as the contracted work is performed. Where contingent milestone payments are due to third parties under research and development arrangements, the milestone payment obligations are expensed when the milestone results are probable of being achieved. When evaluating the adequacy of the accrued liabilities, we analyze progress of the studies, including the phase or completion of events, invoices received and contracted costs. For further discussion of research and development expenses, including clinical trial accruals, see Note 2 to our audited financial statements included elsewhere in this Annual Report.

Revenue Recognition

We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"). Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services in



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an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of ASC 606, we perform the following five steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation. We only apply the five-step model to contracts when it is probable that we will collect consideration to which we are entitled in exchange for the goods or services we transfer to the customer. For further discussion of revenue recognition, see Note 2 to our audited financial statements included elsewhere in this Annual Report.

Stock-Based Compensation

We account for stock-based compensation, including stock options and restricted stock units, based on the fair value of the award as of the grant date. We utilize the Black-Scholes option-pricing model as the method for estimating the fair value of our stock option grants. The Black-Scholes option-pricing model requires the use of highly subjective and complex assumptions, including the options' expected term and the price volatility of the underlying stock. The fair value of the portion of the award that is ultimately expected to vest is recognized as compensation expense over the award's requisite service period. We recognize stock-based compensation to expense using the straight-line method and recognize forfeitures as they occur. If there are any modifications or cancelations of stock-based awards, we may be required to accelerate, increase, or decrease any remaining unrecognized stock-based compensation expense.

Before our IPO, there was no public market for our common stock to date and the estimated fair value of our common stock was determined by our board of directors as of the date of each option grant, with input from management, considering our most recently available third-party valuations of common stock, and our board of directors' assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants.

Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Our common stock valuations were prepared using an option pricing method, or OPM, which used market approaches to estimate our enterprise value. The OPM treats common stock and preferred stock as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company's securities changes. Under this method, the common stock has value only if the funds available for distribution to stockholders exceeded the value of the preferred stock liquidation preferences at the time of the liquidity event, such as a strategic sale or a merger. A discount for lack of marketability of the common stock is then applied to arrive at an indication of value for the common stock.

Since the closing of our IPO, we have determined the fair value of our common stock based on the closing price of our common stock on the Nasdaq Global Select Market as reported on the date of grant.

For further discussion of our accounting for stock-based compensation, see Note 2 to our audited financial statements included elsewhere in this Annual Report.

Off-Balance Sheet Arrangements

Since our inception, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission.

JOBS Act Accounting Election

The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits an "emerging growth company" such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to take advantage of this extended transition period to enable us to comply with 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.



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For so long as we remain an emerging growth company, we are permitted and intend to rely on certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002. We will remain an emerging growth company until the earliest of (i) December 31, 2024, (ii) the last day of the first fiscal year in which we have total annual gross revenues of at least $1.07 billion, (iii) the last day of the first fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700.0 million on June 30th and (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

Recent Accounting Pronouncements

See Note 2 to our audited financial statements included elsewhere in this Annual Report for a discussion of recent accounting pronouncements that have impacted or may impact our financial position and results of operations.

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