The following discussion and analysis of our financial condition and operating results should be read together with the section captioned "Selected Consolidated Financial Data" and our consolidated financial statements and the related notes included elsewhere in the Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth in the section of the Annual Report on Form 10-K captioned "Risk Factors" and elsewhere in this Annual Report on Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
We are a clinical-stage immuno-oncology company focused on using our specialized knowledge of the biological pathways critical to the immunosuppressive tumor microenvironment, or the TME, for the development of next-generation cancer therapies. While first-generation immuno-oncology therapies, such as checkpoint inhibitors, represent a remarkable therapeutic advancement, we believe most patients do not achieve durable clinical benefit primarily because these therapies focus on only one element of the complex and interconnected immunosuppressive TME. We believe there is a significant opportunity to more broadly engage both the innate and adaptive arms of the immune system in a multi-faceted, coordinated and patient-specific approach, to meaningfully improve cure rates for patients with a variety of cancers. We aim to identify key components within the TME to gain a deep understanding of its biology, leverage this understanding to define the optimal therapeutic targets and the patients most likely to benefit, and develop novel antibody therapeutics with differentiated biologic activity. By utilizing our expertise in immunology, oncology, assay development, antibody selection and characterization, and translational research, we are developing and advancing a broad pipeline of TME-focused programs that we believe are the next generation of immuno-oncology therapies. Our programs demonstrate our multi-faceted approach by targeting several critical components of the immunosuppressive TME. NZV930 (formerly SRF373) and SRF617 are antibodies inhibiting CD73 and CD39, respectively, and illustrate how our specialized knowledge of TME biology can be leveraged across programs. CD73 and CD39 are both critical enzymes involved in the production of extracellular adenosine, a key metabolite with strong immunosuppressive properties within the TME. In addition, inhibition of CD39 results in an increase in the pro-inflammatory metabolite adenosine triphosphate, or ATP, within the TME. InJune 2018 , a Phase 1 trial of NZV930 was initiated by our partner,Novartis Institutes for Biomedical Research, Inc. , or Novartis, and we filed an investigational new drug application, or IND, for SRF617 inNovember 2019 and received permission to proceed from the FDA onDecember 12, 2019 . SRF388 is an antibody targeting interleukin 27, or IL-27, an immunosuppressive cytokine, or protein secreted by cells, in the TME that is overexpressed in certain cancers, including hepatocellular and renal cell carcinoma. IL-27 is a cytokine secreted by macrophages and antigen presenting cells that plays an important physiologic role in suppressing the immune system. Due to its immunosuppressive nature, there is a rationale for inhibiting IL-27 to treat cancer as this approach will influence the activity of multiple types of immune cells that are necessary to recognize and attack a tumor. We filed an IND for SRF388 inDecember 2019 and received permission to proceed from the FDA onJanuary 17, 2020 . SRF813 is an antibody targeting CD112R, an inhibitory protein expressed on natural killer, or NK, and T cells. SRF813 binds a distinct epitope on CD112R and blocks the interaction of CD112R with CD112, its binding partner that is expressed on tumor cells. SRF813 can promote the activation of both NK and T cells, with potential to elicit a strong anti-tumor response and promote immunological memory. InOctober 2019 , we formally declared SRF813 as a development candidate resulting in the initiation of IND-enabling activities. SRF231 is an antibody targeting CD47, a protein expressed on many cells that is often overexpressed on tumor cells. By targeting CD47, we believe we can promote macrophage activation to attack such tumors. We initiated a Phase 1 clinical trial of SRF231 inFebruary 2018 . InDecember 2018 , we announced the deprioritization of SRF231 as a result of toxicities seen during the dose escalation portion of the ongoing Phase 1 trial and the evolving competitive landscape. We expect to conclude the Phase 1 trial in 2020, and do not plan to further develop SRF231. We also have an earlier stage program targeting regulatory T cells, another critical component of the TME. We expect that the unique insights generated in any one of our product programs will accelerate the development of the other programs in a synergistic fashion due to the interconnections between these TME pathways. 76
-------------------------------------------------------------------------------- OnApril 23, 2018 , we completed an initial public offering of our common stock by issuing 7,200,000 shares of our common stock, at$15.00 per share for net proceeds of$97.2 million . Concurrent with the initial public offering, we issued 766,666 shares of our common stock to Novartis at$15.00 per share for proceeds of$11.5 million in a private placement. We were incorporated and commenced principal operations in 2014. We have devoted substantially all of our resources to developing our programs, including NZV930, SRF617, SRF388, SRF813, and SRF231, building our intellectual property portfolio, business planning, raising capital and providing general and administrative support for these operations. To date, we have financed our operations with proceeds from the sales of preferred stock, payments received under the Collaboration Agreement with Novartis, a debt financing, and proceeds from our initial public offering of common stock and concurrent private placement. As ofDecember 31, 2019 , we had cash, cash equivalents and marketable securities of$105.2 million . Since our inception, we have incurred significant losses. Our ability to generate product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more of the product candidates we develop. Our net loss was$54.8 million ,$6.6 million , and$45.4 million for the years endedDecember 31, 2019 , 2018, and 2017, respectively. As ofDecember 31, 2019 and 2018 we had an accumulated deficit of$121.6 million and$66.8 million , respectively. We expect to continue to incur significant expenses and operating losses for at least the next several years, particularly as we:
• pursue the clinical development of product candidates;
• leverage our programs to advance product candidates into preclinical and
clinical development;
• seek regulatory approvals for any product candidates that successfully
complete clinical trials; • hire additional clinical, quality control, and scientific personnel;
• expand our operational, financial, and management systems and increase
personnel, including personnel to support our clinical development, manufacturing, and commercialization efforts, and our operations as a public company;
• maintain, expand and protect our intellectual property portfolio;
• establish a sales, marketing, medical affairs, and distribution
infrastructure to commercialize any products for which we may obtain
marketing approval and intend to commercialize on our own or jointly with a
commercial partner; and • acquire or in-license other product candidates and technologies. As a result, we will need additional financing to support our continuing operations. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources, which may include collaborations with third parties. We may be unable to raise additional funds or enter into other agreements or arrangements, when needed, on favorable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates. Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. We believe that our existing cash, cash equivalents and marketable securities, as ofDecember 31, 2019 will enable us to fund our operating expenses, debt service obligations and capital expenditure requirements into 2022, excluding any future milestone payments from Novartis. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect.
Components of Our Results of Operations
Revenue
To date, we have not generated any revenue from product sales and do not expect to do so in the near future. All of our revenue to date has been derived from the Collaboration Agreement. If our development efforts for our programs are successful and result in regulatory approval or additional license or collaboration agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from additional collaboration or license agreements that we may enter into with third parties. We expect that our revenue for the next several years will be derived primarily from the Collaboration Agreement as well as any additional collaborations that we may enter into in the future. 77
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Collaboration Agreement with Novartis
InJanuary 2016 , we entered into the Collaboration Agreement to develop next-generation cancer therapies. Under the Collaboration Agreement, as amended, we were responsible for performing research on antibodies that bind to CD73 and four other specified targets. We were responsible for all costs and expenses incurred by, or on behalf of, us in connection with the research. Upon entering into the agreement, we received an upfront payment of$70.0 million from Novartis and granted Novartis a worldwide exclusive license to research, develop, manufacture and commercialize antibodies that target CD73. In addition, we initially granted Novartis the right to purchase exclusive option rights, each an Option, to up to four specified targets, including certain research, development, manufacturing and commercialization rights. Pursuant to the Collaboration Agreement, Novartis initially had the right to exercise up to three purchased Options. InMarch 2018 , Novartis notified us of its decision to not exercise its previously purchased Option for SRF231, our CD47 product candidate. InMarch 2018 , we and Novartis also mutually agreed to cease development of one of the undisclosed programs subject to the Collaboration Agreement. InFebruary 2019 , Novartis notified us of its decision not to purchase its Option related to IL-27. As ofDecember 31, 2019 , Novartis had one Option remaining eligible for purchase and potential exercise. InJanuary 2020 , Novartis did not purchase and exercise its single remaining Option under the Collaboration Agreement and, as a result, the option purchase period expired. Accordingly, there are no Options remaining eligible for purchase and exercise by Novartis, and our performance obligations under the Collaboration Arrangement have ended. We are currently entitled to potential milestones of$525.0 million , as well as tiered royalties on annual net sales of NZV930 by Novartis ranging from high single-digit to mid-teens percentages. Such amount of potential milestone payments assumes the successful clinical development and achievement of all sales milestones for NZV930. Under ASC 606 we account for (i) the license conveyed with respect to CD73 and (ii) our obligations to perform research on CD73 and other specified targets as a single performance obligation under the Collaboration Agreement. We recognize revenue using the cost-to-cost method, which we believe best depicts the transfer of control to the customer. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation. Under this method, revenue is recorded as a percentage of the estimated transaction price based on the extent of progress towards completion. ThroughDecember 31, 2019 , we had received an aggregate of$150.0 million from Novartis in upfront payments, milestone payments, and option purchase payments. During the year endedDecember 31, 2019 , 2018, and 2017, we recognized revenue of$15.4 million ,$59.4 million and$12.8 million , respectively, related to the Collaboration Agreement. As ofJanuary 2020 , we no longer have any performance obligations under the Collaboration Agreement. We will remove all costs associated with the remaining performance obligation for the single remaining Option from the cost-to-cost model in the first quarter of 2020. This will result in our recognizing the remaining deferred revenue of$38.6 million to collaboration revenue - related party in the first quarter of 2020.
Operating Expenses
Research and Development Expenses
Research and development expenses are expensed as incurred and consist of costs incurred for our research activities, including our discovery efforts, and the development of our programs. These expenses include:
• salaries, benefits and other related costs, including stock-based
compensation, for personnel engaged in research and development functions;
• expenses incurred in connection with the preclinical development of our
programs and clinical trials of our product candidates, including under
agreements with third parties, such as consultants, contractors, and contract research organizations, or CROs;
• the cost of manufacturing drug products for use in our preclinical studies
and clinical trials, including under agreements with third parties, such as
consultants, contractors, and contract manufacturing organizations, or CMOs; 78
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• laboratory supplies;
• facilities, depreciation and other expenses, which include direct and
allocated expenses for depreciation and amortization, rent and maintenance
of facilities, insurance and supplies; and • third-party license fees. We do not track our internal research and development expenses on a program-by-program basis as they primarily relate to personnel, early research and consumable costs, which are deployed across multiple projects under development. These costs are included in unallocated research and development expenses in the table below. A portion of our research and development costs are external costs, which we do track on a program-by-program basis. The following table summarizes our research and development expenses by program: Year Ended December 31, 2019 2018 2017 2019 v 2018 2018 v 2017 SRF231$ 6,156 $ 19,781 $ 22,072 $ (13,625 ) $ (2,291 ) NZV930 (formerly SRF373) - 956 2,295 (956 ) (1,339 ) SRF388 7,295 3,981 2,767 3,314 1,214 SRF617 13,311 4,784 - 8,527 4,784 SRF813 1,496 - - 1,496 -
Other early-stage programs 1,218 3,618 4,737
(2,400 ) (1,119 ) Unallocated research and discovery expenses 22,642 19,372 15,912 3,270 3,460 Total research and development expenses$ 52,118 $ 52,492 $ 47,783 $ (374 ) $ 4,709 Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We anticipate that our research and development expenses will decrease in the future as a result of the strategic restructuring and the reduction in force announced inJanuary 2020 , however, we still anticipate incurring increased clinical development costs as we advance our SRF617 and SRF388 clinical trials. At this time, we cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete the development of any of our product candidates that we develop from our programs. We are also unable to predict when, if ever, net cash inflows will commence from sales of product candidates we develop. This is due to the numerous risks and uncertainties associated with developing product candidates, including the uncertainty of:
• successful completion of clinical trials and preclinical studies;
• sufficiency of our financial and other resources to complete the necessary
clinical trials and preclinical studies;
• acceptance of INDs for our planned clinical trials or future clinical trials;
• successful enrollment and completion of clinical trials;
• successful data from our clinical program that supports an acceptable
risk-benefit profile of our product candidates in the intended populations;
• receipt of regulatory and marketing approvals from applicable regulatory
authorities;
• receipt and maintenance of marketing approvals from applicable regulatory
authorities;
• establishing agreements with third-party manufacturers for clinical supply
for our clinical trials and commercial manufacturing, if any of our product
candidates are approved;
• entry into collaborations to further the development of our product
candidates;
• obtaining and maintaining patent and trade secret protection or regulatory
exclusivity for our product candidates;
• successfully launching commercial sales of our product candidates, if and
when approved; 79
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• acceptance of our product candidates' benefits and uses, if and when
approved, by patients, the medical community and third-party payors;
• maintaining a continued acceptable safety profile of the product candidates
following approval; • effectively competing with other therapies; and
• obtaining and maintaining healthcare coverage and adequate reimbursement
from third-party payors.
A change in the outcome of any of these variables with respect to the development of any of our programs or any product candidate we develop would significantly change the costs, timing, and viability associated with the development of such program or product candidate.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and personnel-related costs, including stock-based compensation, for our personnel in executive, legal, finance and accounting, human resources, and other administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees paid for accounting, auditing, consulting and tax services; insurance costs; travel expenses; and facility costs not otherwise included in research and development expenses. We anticipate that our general and administrative expenses will decrease in the future as a result of the strategic restructuring and the reduction in force announced inJanuary 2020 , however, we still anticipate incurring increased accounting, audit, legal, regulatory, compliance, and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company.
Interest and Other Income (Expense), Net
Interest and other income consist primarily of interest earned on our cash, cash equivalents, and marketable securities.
Income Taxes
We have not recorded any income tax benefits for the net losses we incurred or for the research and development tax credits we generated during the years endedDecember 31, 2019 and 2018 as we believed, based upon the weight of available evidence, that it was more likely than not that all of the net operating loss carryforwards and tax credits will not be realized. As ofDecember 31, 2019 , we had federal and state net operating loss carryforwards of$71.5 million and$73.0 million , respectively, which may be available to offset future income tax liabilities and begin to expire in 2034. As ofDecember 31, 2019 , we also had federal and state research and development tax credit carryforwards of$4.5 million and$2.0 million , respectively, which begin to expire in 2034 and 2030, respectively. ThroughDecember 31, 2019 , we had recorded a full valuation allowance against our net deferred tax assets at each balance sheet date.
Results of Operations
Comparison of Years Ended
The following table summarizes our results of operations for the years ended
Year Ended December 31, 2019 2018 2017 2019 v 2018 2018 v 2017 (in thousands) Collaboration revenue - related party$ 15,360 $ 59,417 $ 12,826 $ (44,057 ) $ 46,591 Operating expenses: Research and development 52,118 52,492 47,783 (374 ) 4,709 General and administrative 20,608 16,076 11,033 4,532 5,043 Total operating expenses 72,726 68,568 58,816 4,158 9,752 Loss from operations (57,366 ) (9,151 ) (45,990 ) (48,215 ) 36,839 Interest and other income, net 2,577 2,554 613 23 1,941 Net loss$ (54,789 ) $ (6,597 ) $ (45,377 ) $ (48,192 ) $ 38,780 80
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Collaboration Revenue -
Collaboration revenue - related party was$15.4 million ,$59.4 million , and$12.8 million for the years endedDecember 31, 2019 , 2018, and 2017, respectively, all of which was derived from the Collaboration Agreement. The decrease in collaboration revenue - related party during the year endedDecember 31, 2019 was primarily due to a reduction in costs incurred in the current year resulting from Novartis' decision not to purchase its Option related to IL-27 inFebruary 2019 . This decision reduced the number of remaining specified targets in our Collaboration Agreement from two in the year endedDecember 31, 2018 , to one in the year endedDecember 31, 2019 . The increase in collaboration revenue - related party during the year endedDecember 31, 2018 was primarily due to the partial recognition of$27.9 million in revenue related to a milestone payment of$45.0 million that we received inFebruary 2018 from Novartis upon Novartis' receipt and acceptance of the first final audited GLP toxicology study report for NZV930. Additionally, we recognized$5.0 million of revenue upon Novartis' decision not to exercise its Option relating to CD47 inMarch 2018 . InJanuary 2020 , Novartis did not purchase and exercise its single remaining Option under the Collaboration Agreement and, as a result, the option purchase period expired. Accordingly, there are no Options remaining eligible for purchase and exercise, and our performance obligations under the Collaboration Arrangement have ended. As such, the remaining deferred revenue will be recognized as collaboration revenue - related party in the first quarter of 2020.
Research and Development Expenses
Year Ended December 31, 2019 2018 2017 2019 v 2018 2018 v 2017 (in thousands) Direct research and development expenses by program: SRF231$ 6,156 $ 19,781 $ 22,072 $ (13,625 ) $ (2,291 ) NZV930 (formerly SRF373) - 956 2,295 (956 ) (1,339 ) SRF388 7,295 3,981 2,767 3,314 1,214 SRF617 13,311 4,784 - 8,527 4,784 SRF813 1,496 - - 1,496 -
Other early-stage programs 1,218 3,618 4,737
(2,400 ) (1,119 ) Research and discovery and unallocated expenses: Personnel related (including stock -based compensation) 15,971 13,646 10,212 2,325 3,434
Facility related and other 6,671 5,726 5,700
945 26 Total research and development expenses$ 52,118 $ 52,492 $ 47,783 $ (374 ) $ 4,709 Research and development expenses were$52.1 million for the year endedDecember 31, 2019 , compared to$52.5 million for the year endedDecember 31, 2018 . The decrease of$0.4 million was primarily due to decreases of$13.6 million in external costs for our SRF231 program,$1.0 million in external costs for our NZV930 program, and$2.4 million in external costs for our other early-stage programs, which were partially offset by increases of$3.3 million in external costs for our SRF388 program,$8.5 million in external costs for our SRF617 program, and$3.3 million for research and discovery and unallocated costs. The decrease in research and development expenses for our SRF231 program was primarily due to a reduction in contract manufacturing work completed in 2019 compared to 2018, as well as the deprioritization of SRF231, which we announced inDecember 2018 . The decrease in research and development expenses for our NZV930 program was primarily due to initiation of the Phase 1 clinical trial by Novartis inJune 2018 . Novartis has worldwide exclusive rights to this program, and as a result of the initiation of the Phase 1 clinical by Novartis, we are no longer incurring expenses for this program.
The decrease in research and development expenses for our other early-stage programs was primarily a result of costs related to SRF813, which were not tracked as a separate program until 2019, as well as our strategic focus on filing INDs for SRF617 and SRF388 in the fourth quarter of 2019.
81 -------------------------------------------------------------------------------- The increase in research and development expenses for our SRF388 program was primarily due to increased contract manufacturing work and additional costs incurred in advancing the program, which led to the successful filing of an IND in theDecember 2019 . The increase in research and development expenses for our SRF617 program was primarily due to increased contract manufacturing work and additional costs incurred in advancing the program, which led to the successful filing of an IND in the fourth quarter of 2019. The increase in research and discovery and unallocated expenses was primarily due to the increase of$2.3 million in personnel-related costs due to increased headcount, and an increase of$0.9 million in facility related costs. Research and development expenses were$52.5 million for the year endedDecember 31, 2018 , compared to$47.8 million for the year endedDecember 31, 2017 . The increase of$4.7 million was primarily due to increases of$1.2 million in external costs for our SRF388 program,$4.8 million in external costs for our SRF617 program, and$3.5 million for research and discovery and unallocated costs, partially offset by decreases of$2.3 million in external costs for our SRF231 program,$1.3 million in external costs for our SRF373 program, and$1.1 million in external costs for our other early-stage programs.
The increase in research and development expenses for our SRF388 program was primarily due to a payment made for an exclusive license to the antibodies related to this program as well as increased contract manufacturing work.
The increase in research and development expenses for our SRF617 program was primarily due to the commencement of contract manufacturing work.
The increase in research and discovery and unallocated expenses was primarily due to the increase of$3.4 million in personnel-related costs due to increased headcount. The decrease in research and development expenses for our NZV930 program was primarily due to initiation of the Phase 1 clinical trial by Novartis inJune 2018 . Novartis has worldwide exclusive rights to this program, and as a result of the initiation of the Phase 1 clinical by Novartis, we are no longer incurring expenses for this program.
The decrease in research and development expenses for our other early-stage programs was primarily a result of costs related to SRF617, which were not tracked as a separate program until 2018. This decrease was offset by increases relating to the advancement and initiation of new early discovery programs.
General and Administrative Expenses
General and administrative expenses were$20.6 million for the year endedDecember 31, 2019 , compared to$16.1 million for the year endedDecember 31, 2018 . The increase of$4.5 million was primarily due to an increase of$2.4 million in personnel-related costs as a result of an increase in headcount; an increase of$ 0.4 million for professional fees related to legal and audit services, and an increase of$1.3 million in facility costs. General and administrative expenses were$16.1 million for the year endedDecember 31, 2018 , compared to$11.0 million for the year endedDecember 31, 2017 . The increase of$5.1 million was primarily due to an increase of$2.6 million in personnel-related costs as a result of an increase in headcount; an increase of$1.0 million for professional fees related to legal and audit services, and an increase of$1.1 million in facility costs.
Interest and Other Income (Expense), Net
Interest and other income was approximately$2.6 million ,$2.6 million , and$0.6 million during the years endedDecember 31, 2019 , 2018, and 2017, respectively, due primarily to interest income on invested balances of our cash, cash equivalents and marketable securities. 82
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Liquidity and Capital Resources
Since our inception, we have incurred significant operating losses. We have generated limited revenue to date from the Collaboration Agreement. We have not yet commercialized any product and we do not expect to generate revenue from sales of any products for several years, if at all. To date, we have financed our operations with proceeds from the sales of preferred stock, payments received under the Collaboration Agreement, debt financing and proceeds from our initial public offering of common stock and concurrent private placement. ThroughDecember 31, 2019 , we had received gross proceeds of$48.6 million from our sales of preferred stock,$7.5 million from our loan and security agreement with K2 HealthVentures (see Note 12 to our consolidated financial statements), and$150.0 million from the Collaboration Agreement. OnApril 23, 2018 , we completed an initial public offering of our common stock by issuing 7,200,000 shares of common stock, at$15.00 per share for gross proceeds of$108.0 million , or net proceeds of$97.2 million . Concurrent with the initial public offering, we issued Novartis 766,666 shares of our common stock at$15.00 per share for proceeds of$11.5 million , in a private placement. InMay 2019 , we entered into a Capital on DemandTM Sales Agreement, or the Sales Agreement, with JonesTrading Institutional Services to issue and sell up to$30.0 million in shares of our common stock, from time to time. In 2019, we sold 10,581 shares under the ATM Facility for net proceeds of less than$0.1 million . As ofDecember 31, 2019 , we had cash, cash equivalents and marketable securities of$105.2 million . Future Funding Requirements We expect our expenses to decrease in connection with our strategic restructuring, in particular as we shift focus to initiating and advancing Phase 1 clinical trials for SRF617 and SRF388, as well as the reduction in our workforce. However, we expect to continue to incur additional costs associated with operating as a public company. We believe that our existing cash, cash equivalents, and marketable securities, as ofMarch 10, 2020 , will enable us to fund our operating expenses, debt service obligations and capital expenditure requirements into 2022, excluding any future milestone payments from Novartis. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical product candidates, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on and could increase significantly as a result of many factors, including:
• completing clinical development of existing product candidates and
programs, identifying new product candidates, and completing pre-clinical
and clinical development of such product candidates;
• seeking and obtaining marketing approvals for any of product candidates
that we develop;
• launching and commercializing product candidates for which we obtain
marketing approval by establishing a sales force, marketing, medical
affairs and distribution infrastructure or, alternatively, collaborating
with a commercialization partner;
• achieving adequate coverage and reimbursement by hospitals, government and
third-party payors for product candidates that we develop;
• establishing and maintaining supply and manufacturing relationships with
third parties that can provide adequate, in both amount and quality,
products and services to support clinical development and the market demand
for product candidates that we develop, if approved;
• obtaining market acceptance of product candidates that we develop as viable
treatment options; • addressing any competing technological and market developments;
• negotiating favorable terms in any collaboration, licensing or other
arrangements into which we may enter and performing our obligations in such
collaborations;
• maintaining, protecting and expanding our portfolio of intellectual
property rights, including patents, trade secrets and know-how;
• defending against third-party interference or infringement claims, if any;
and • attracting, hiring and retaining qualified personnel. 83
-------------------------------------------------------------------------------- A change in the outcome of any of these or other variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. Further, our operating plans may change in the future, and we may need additional funds to meet operational needs and capital requirements associated with such operating plans. In addition to the variables described above, if and when any product candidate we develop successfully completes development, we will incur substantial additional costs associated with regulatory filings, marketing approval, post-marketing requirements, maintaining our intellectual property rights, and regulatory protection, in addition to other costs. We cannot reasonably estimate these costs at this time. Until such time, if ever, that we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity or debt financings and collaboration arrangements, including the Collaboration Agreement. To the extent that we raise additional capital through the future sale of equity or debt, the ownership interests of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. If we raise additional funds through the issuance of debt securities, these securities could contain covenants that would restrict our operations. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available on reasonable terms, or at all. If we raise additional funds through collaboration arrangements in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates, or 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, limit, reduce or terminate development or future commercialization efforts.
Cash Flows
The following table summarizes information regarding our cash flows for each of the periods presented: Year Ended December 31, 2019 2018 2017 (in thousands)
Net cash provided by (used in):
Operating activities$ (60,140 ) $ (13,222 ) $ (12,422 ) Investing activities 16,965 (36,584 ) 25,918 Financing activities 7,415 110,376 (1,036 )
Net increase (decrease) in cash and cash
equivalents and restricted cash
Operating Activities During the year endedDecember 31, 2019 , net cash used in operating activities was$60.1 million , primarily due to our net loss of$54.8 million and net cash used in our operating assets and liabilities of$14.3 million , partially offset by non-cash charges of$8.9 million . Net cash used in changes in our operating assets and liabilities for the year endedDecember 31, 2019 consisted primarily of a$15.4 million decrease in deferred revenue, a$0.7 million decrease in accrued expenses and other current liabilities, a decrease of$1.8 million in our lease liability and a$3.0 million decrease in prepaid expenses and other current assets. The decrease in deferred revenue was due to recognition of revenue under the Collaboration Agreement in 2019. The decrease in accrued expenses and other current liabilities was primarily due to the reduction of manufacturing costs incurred in the current year offset increased payroll related accruals. The decrease in our lease liability is a result of rent payments made on our corporate lease in 2019. The decrease in prepaid expenses and other current assets was primarily due to the collection of the insurance claim in 2019. During the year endedDecember 31, 2018 , net cash used in operating activities was$13.2 million , primarily due to changes in our operating assets and liabilities of$12.8 million and our net loss of$6.6 million , partially offset by non-cash charges of$6.2 million . Net cash used in changes in our operating assets and liabilities for the year endedDecember 31, 2018 consisted primarily of a$14.4 million decrease in deferred revenue, a$0.5 million decrease in accrued expenses and other current liabilities, and a$2.2 million decrease in prepaid expenses and other current assets. The decrease in deferred revenue was due to the cumulative effect adjustment upon the adoption of ASC 606 inJanuary 2018 . The decrease in accrued expenses and other current liabilities was primarily due to the payment of$3.4 million of manufacturing costs to Novartis in the current year offset increased manufacturing costs incurred to support ongoing clinical trial activities and payroll related accruals. The decrease in prepaid expenses and other current assets was primarily due to a reduction in prepaid taxes, offset by an increase in other assets resulting from an insurance claim that had not been received as ofDecember 31, 2018 . 84 -------------------------------------------------------------------------------- During the year endedDecember 31, 2017 , net cash used in operating activities was$12.4 million , primarily due to our net loss of$45.4 million partially offset by changes in our operating assets and liabilities of$26.7 million and non-cash charges of$6.2 million . Net cash provided by changes in our operating assets and liabilities for the year endedDecember 31, 2017 consisted primarily of a$17.2 million increase in deferred revenue, a$5.0 million decrease in amounts due from Novartis, a related party, a$2.9 million increase in accrued expenses and other current liabilities, and a$1.1 million decrease in prepaid expenses and other current assets. The increase in deferred revenue was due to the$35.0 million of aggregate milestone and option purchase payments received from Novartis during the year endedDecember 31, 2017 , which were not fully recognized as revenue at that time. The increase in accrued expenses and other current liabilities was primarily due to increased manufacturing costs incurred to support ongoing clinical trial activities and payroll related accruals. The decrease in prepaid expenses and other current assets was primarily due to a reduction in prepaid taxes.
Investing Activities
During the year endedDecember 31, 2019 , net cash provided by investing activities was$17.0 million , primarily due to$136.9 million in proceeds from sales or maturities of marketable securities. This was partially offset by purchases of marketable securities of$118.3 million and$1.5 million of purchases of property and equipment, primarily related to leasehold improvements in our corporate headquarters facility. During the year endedDecember 31, 2018 , net cash used in investing activities was$36.6 million , primarily due to purchases of marketable securities of$107.3 million and$ 2.0 million of purchases of property and equipment, primarily related to leasehold improvements in our corporate headquarters facility. This was partially offset by$72.7 million in proceeds from sales or maturities of marketable securities.
During the year ended
Financing Activities
During the year ended
During the year endedDecember 31, 2018 , net cash provided by financing activities was$110.4 million , consisting primarily of$100.4 million of net proceeds received upon the completion of the initial public offering inApril 2018 ,$11.5 million from a private placement of common stock with Novartis, a related party, and$0.5 million of proceeds received from the exercise of stock options, partially offset by$2.0 million paid for initial public offering costs. During the year endedDecember 31, 2017 , net cash used in financing activities was$1.0 million , consisting primarily of payments of initial public offering costs of$1.2 million , partially offset by$0.1 million of proceeds received from the exercise of stock options.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as ofDecember 31, 2019 and the effects that such obligations are expected to have on our liquidity and cash flow in future periods: Payments Due by Period Less Than 1 to 3 4 to 5 More Than Total 1 Year Years Years 5 Years (in thousands)
Operating lease commitments (1)
$ 10,946 $ 31,827 Note payable commitments (2) 7,834 - 7,834 - - Research and manufacturing 5,171 4,263 908 commitments (3) - - Total$ 69,793 $ 7,804 $ 19,216 $ 10,946 $ 31,827
(1) Reflects payments due for leases of office and laboratory space that expire
in
(2) Reflects payments due under our debt facility with
(3) Reflects commitments for costs associated with external CMOs and CROs
engaged to manufacture clinical trial materials as well as to conduct our
clinical trials and discovery research and preclinical development activities. 85
-------------------------------------------------------------------------------- Under various license and collaboration agreements to which we are a party, we may be required to make milestone payments and pay royalties and other amounts to third parties. We have not included any such contingent payment obligations in the table above as the amount, timing and likelihood of such payments are not known. Under our license agreement withHarbour Antibodies B.V. , or Harbour, we are required to pay a nominal annual maintenance fee during the term of the agreement. In addition, we are obligated to pay up to an aggregate of$4.75 million upon the achievement of specified development and commercial milestones for each product licensed under the agreement. We are also obligated to pay Harbour royalties of a low single-digit percentage on the worldwide net sales of any licensed product on a country-by-country basis. Under our development and option agreement withAdimab LLC , orAdimab , we are obligated to make milestone payments and to pay specified fees upon the exercise of the research or commercialization options under the agreement. During the discovery term, we may be obligated to payAdimab up to$250,000 for technical milestones achieved against each biological target. Upon exercise of a research option, we are obligated to pay a nominal research maintenance fee on each of the next four anniversaries of the exercise. Upon the exercise of each commercialization option, we will be required to pay an option exercise fee of a low seven-digit dollar amount, and we may be responsible for milestone payments of up to an aggregate of$13.0 million for each licensed product that receives marketing approval. For any licensed product that is commercialized, we are obligated to payAdimab tiered royalties of a low to mid single-digit percentage on worldwide net sales of such product. We may also partially exercise a commercialization option with respect to ten antibodies against a biological target by paying 65% of the option fee and later either (i) paying the balance and choosing up to 20 antibodies for commercialization or (ii) foregoing the commercialization option entirely.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which we have prepared in accordance with the rules and regulations of theSEC , and generally accepted accounting principles inthe United States , or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenue and expenses during the reporting period. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on 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. Our actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements, 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.
Revenue Recognition
EffectiveJanuary 1, 2018 , we adopted Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers, using the modified retrospective transition method. Under this method, we recognized the cumulative effect of initially adopting ASC Topic 606, as an adjustment to the opening balance of accumulated deficit. Additionally, under this method of adoption, we apply the guidance to all incomplete contracts in scope as of the date of initial application. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. In accordance with ASC Topic 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of ASC Topic 606, we perform the following five steps: i. identify the contract(s) with a customer; ii. identify the performance obligations in the contract; iii. determine the transaction price
iv. allocate the transaction price to the performance obligations within the
contract; and v. recognize revenue when (or as) the entity satisfies a performance obligation. 86
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We only apply the five-step model to contracts when we determine that it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer.
At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within the contract to determine whether each promised good or service is a performance obligation. The promised goods or services in our arrangements typically consist of a license to our intellectual property and/or research and development services. We may provide options to additional items in such arrangements, which are accounted for as separate contracts when the customer elects to exercise such options, unless the option provides a material right to the customer. Performance obligations are promises in a contract to transfer a distinct good or service to the customer that (i) the customer can benefit from on its own or together with other readily available resources, and (ii) is separately identifiable from other promises in the contract. Goods or services that are not individually distinct performance obligations are combined with other promised goods or services until such combined group of promises meet the requirements of a performance obligation. We determine transaction price based on the amount of consideration we expect to receive for transferring the promised goods or services in the contract. Consideration may be fixed, variable, or a combination of both. At contract inception for arrangements that include variable consideration, we estimate the probability and extent of consideration we expect to receive under the contract utilizing either the most likely amount method or expected amount method, whichever best estimates the amount expected to be received. We then consider any constraints on the variable consideration and includes in the transaction price variable consideration to the extent it is deemed probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We then allocate the transaction price to each performance obligation based on the relative standalone selling price and recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) control is transferred to the customer and the performance obligation is satisfied. For performance obligations which consist of licenses and other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. We record amounts as accounts receivable when the right to consideration is deemed unconditional. When consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract, a contract liability is recorded for deferred revenue. Amounts received prior to satisfying the revenue recognition criteria are recognized as deferred revenue in our balance sheet. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current portion of deferred revenue. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, non-current.
Our revenue arrangement includes the following:
Up-front License Fees: If a license is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from nonrefundable, up-front fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. Milestone Payments: At the inception of an agreement that includes research and development milestone payments, we evaluate each milestone to determine when and how much of the milestone to include in the transaction price. We first estimate the amount of the milestone payment that we could receive using either the expected value or the most likely amount approach. We primarily use the most likely amount approach as that approach is generally most predictive for milestone payments with a binary outcome. Then, we consider whether any portion of that estimated amount is subject to the variable consideration constraint (that is, whether it is probable that a significant reversal of cumulative revenue would not occur upon resolution of the uncertainty.) We update the estimate of variable consideration included in the transaction price at each reporting date which includes updating the assessment of the likely amount of consideration and the application of the constraint to reflect current facts and circumstances. 87
-------------------------------------------------------------------------------- Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we will recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any revenue related to sales-based royalties or milestone payments based on the level of sales.
All of our revenues to date have been generated through the Collaboration
Agreement with
As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed, or when contractual milestones are met; however, some require advanced payments. We make estimates of our accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. The significant estimates in our accrued research and development expenses include the costs incurred for services performed by our vendors in connection with research and development activities for which we have not yet been invoiced. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or the amount of prepaid expenses accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred.
Off-Balance Sheet Arrangements
We did not have, during the periods presented, and we do not currently have, any
off-balance sheet arrangements, as defined under applicable
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our consolidated financial statements.
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