TANGO THERAPEUTICS, INC. The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q, with our audited consolidated financial statements and related notes for the year endedDecember 31, 2020 included in the Prospectus as filed with theSEC pursuant to Rule 424(b)(3) onOctober 8, 2021 , or the Prospectus. Unless otherwise indicated, references in this Management's Discussion and Analysis of Financial Condition and Results of Operations section to "Tango," "we," "us," "our" and other similar terms refer to Old Tango (as defined below) and its subsidiary prior to the closing of the business combination withBCTG Acquisition Corp. and to Tango and its consolidated subsidiaries after giving effect to the Business Combination.
Overview
We are a precision oncology company leveraging our state-of-the-art target discovery platform to identify novel targets and develop new drugs directed at tumor suppressor gene loss in defined patient populations with high unmet medical need. Tumor suppressor gene loss remains a largely untouched target space specifically because these genetic events cannot be directly targeted. Empowered by recent advances in CRISPR technology, we are now able to employ a unique functional genomics approach and apply the principles of synthetic lethality to target the loss of specific tumor suppressor genes at scale. We believe this will result in establishing a sustainable pipeline designed to deliver meaningfully clinical benefit to patients. Our novel small molecules are designed to be selectively active in cancer cells with specific tumor suppressor gene loss, killing those cancer cells while being relatively inert in normal cells. We also are extending this target space beyond the classic, cell-autonomous effects of tumor suppressor gene loss to include the discovery of novel targets that reverse the effects of tumor suppressor gene loss that prevent the immune system from recognizing and killing cancer cells (immune evasion). We believe this approach will provide the ability to deliver the deep, sustained target inhibition necessary for prolonged tumor regression and meaningful clinical benefit as a result of the unique ability of synthetic lethal targeting to spare normal cells. Our lead program, TNG908, a protein arginine methyl transferase 5, or PRMT5, inhibitor is synthetic lethal with MTAP deletion, is being developed as a treatment for cancers with MTAP deletions. MTAP deletions occur in 10% to 15% of all human cancers. In preclinical studies, TNG908 demonstrated 15-fold greater potency in cells with MTAP deletions than those without and showed strong regressions in multiple cancer types. We plan to file an Investigational New Drug, or IND, application for TNG908 in the fourth quarter of 2021 and initiate a Phase 1/2 clinical trial in the first half of 2022. We are also developing a ubiquitin-specific protease 1, or USP1, inhibitor that is synthetic lethal with BRCA1 mutations, which are present in approximately 15% of ovarian cancers, 5% of breast cancers, and 1% of prostate cancers. In vitro and in vivo preclinical data for USP1 demonstrated potent anti-tumor activity. We plan to file an IND in 2022 and expect this molecule to have both single agent activity in PARPi-naïve and PARPi-resistant BRCA1 mutant cancers and to synergize with PARP inhibitors. Our Target 3 program, an undisclosed synthetic lethal target, reverses the immune evasion effect of serine-threonine kinase 11 (STK11) loss-of-function mutations, which are present in approximately 20% of non-small cell lung cancers. In combination with a PD-1 inhibitor, Target 3 sustained strong regressions in animal models. We plan to file an IND for this program in 2023. Business Combination OnApril 13, 2021 , the Company,BCTG Merger Sub Inc. , aDelaware corporation, andTango Therapeutics, Inc. (now known asTango Therapeutics Sub, Inc. "Old Tango") signed a definitive merger agreement, or the Merger Agreement, memorializing the terms of BCTG's acquisition of 100% of Old Tango's issued and outstanding equity securities in exchange for$550.0 million worth of consideration in the form of BCTG common stock, or the Business Combination. The Business Combination was approved onAugust 9, 2021 by shareholders of BCTG, resulting in BCTG acquiring 100% of our issued and outstanding equity securities onAugust 10, 2021 . Upon the closing of the Business Combination,BCTG Merger Sub Inc. merged with and into Tango, with Tango as the surviving company in the Merger, and BCTG changed its name to "Tango Therapeutics, Inc. ", or New Tango. For additional information on the Business Combination, see Note 3 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. We received gross proceeds of$167.1 million upon the closing of the Business Combination. Simultaneous with the closing of the Business Combination, thePIPE Investors purchased an aggregate of 18,610,000 shares of our common stock at a price of$10.00 per share, which resulted in gross proceeds of an additional$186.1 million upon the closing of the PIPE Financing. Total transaction costs and redemptions approximated$26.7 million , resulting in total net proceeds of$326.5 million . Subject to the terms of the Merger Agreement, at the effective time of the Business Combination, each share of Old Tango redeemable convertible preferred stock issued and outstanding immediately prior to the effective time of the Business Combination was converted into a share of New Tango common stock. At the effective time of the Business Combination, each option to purchase 17 --------------------------------------------------------------------------------
Old Tango common stock became an option to purchase shares of New Tango common stock, subject to adjustment in accordance with the exchange ratio.
Financial Overview
Since the Company's inception, we have focused primarily on organizing and staffing our company, business planning, raising capital, discovering product candidates, securing related intellectual property, and conducting research and development activities for our programs. Since our inception, we have funded our operations primarily through equity financings and from the proceeds received from our collaboration agreement with Gilead Sciences, Inc., or Gilead. Since inception, we have raised an aggregate of approximately$166.9 million of gross proceeds from the sale of our preferred shares, approximately$342.1 million in gross proceeds through the closing of the Business Combination and PIPE Financing transactions (as described below) and another$210.1 million through our collaboration with Gilead. We believe that our existing cash, cash equivalents and marketable securities on hand as ofSeptember 30, 2021 of$503.8 million will enable us to fund our operating expenses and capital expenditure requirements at least into the second half of 2024. Since inception, we have incurred significant operating losses. For the nine months endedSeptember 30, 2021 and 2020, our net losses were$36.2 million and$43.1 million , respectively. We had an accumulated deficit of$139.3 million and$103.1 million as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. We expect to continue to incur significant and increasing expenses and operating losses for the foreseeable future, as we advance our product candidates through preclinical and clinical development and seek regulatory approvals, manufacture drug product and drug supply, maintain and expand our intellectual property portfolio, as well as hire additional personnel, pay for accounting, audit, legal, regulatory and consulting services, and pay costs associated with maintaining compliance with Nasdaq listing rules and the requirements of theU.S. Securities and Exchange Commission , orSEC , director and officer liability insurance, investor and public relations activities and other expenses associated with operating as a public company. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our preclinical studies, our clinical trials and our expenditures on other research and development activities. We do not have any product candidates approved for sale and have not generated any revenue from product sales. We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates, if ever. In addition, if we obtain regulatory approval for our product candidates and do not enter into a third-party commercialization partnership, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing, manufacturing and distribution activities. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity offerings and debt financings or other sources, such as potential collaboration agreements, strategic alliances and licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on acceptable terms, or at all. Our failure to raise capital or enter into such agreements as, and when needed, could have a negative effect on our business, results of operations and financial condition. Revenue To date, we have not recognized any revenue from product sales, and we do not expect to generate any revenue from the sale of products in the next several years. If our development efforts for our product candidates are successful and result in regulatory approval, or license agreements with third parties, we may generate revenue in the future from product sales. However, there can be no assurance as to when we will generate such revenue, if at all.
Collaboration Agreements with Gilead Sciences
InOctober 2018 , we entered into a collaboration agreement with Gilead, or the "2018 Gilead Agreement". Pursuant to the terms of the 2018 Gilead Agreement, we received an initial upfront payment of$50.0 million . The upfront payment was initially recorded as deferred revenue on our balance sheet and is recognized as revenue as or when the performance obligation under the contract is satisfied. InJuly 2019 , Gilead licensed a program from us, and also separately contracted for additional services related to the program through a letter agreement. As ofDecember 31, 2019 , we had substantially completed our required obligations under the license and side letter agreement, and as a result, recognized$9.4 million of revenue. As ofDecember 31, 2020 , all remaining obligations under the license and side letter agreement were completed, resulting in the recognition of the remaining consideration of$0.7 million of revenue.
In
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upfront payment of
InDecember 2020 andSeptember 2021 , Gilead elected to extend two programs for research extension fees totaling$24.0 million , which was added to our estimate of the transaction price to total$199.0 million . A total of$18.0 million of fees related to the research extensions have not been received as ofSeptember 30, 2021 as these were determined to be conditional upon the satisfaction of additional research obligations, and thus a contract asset, however, we determined that achievement of the entire research extension fees was probable and that a significant reversal in the amount of cumulative revenue recognized would not occur. InApril 2021 , Gilead licensed a program for an$11.0 million fee. The$11.0 million license fee was received and recognized as revenue in the second quarter of 2021 since we have no continued involvement in the advancement of the program, Gilead can benefit from the license on its own and the license is separately identifiable from the research services. As ofSeptember 30, 2021 ,$44.6 million has been recognized as collaboration revenue related to the upfront and research extension payments from the Gilead Agreement. During the three and nine months endedSeptember 30, 2021 , the Company recognized$6.8 million and$20.3 million , respectively, of revenue associated with the Gilead Agreement based on performance completed during each period. During the three and nine months endedSeptember 30, 2020 , the Company recognized a reduction in revenue in the amounts of$11.3 million and$2.2 million , respectively, driven by a cumulative catch-up adjustment that was recorded during the third quarter in connection with the execution of the Gilead Agreement inAugust 2020 . Refer to Note 4 to our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes for the year endedDecember 31, 2020 included in the Company's Prospectus, for additional information regarding our revenue recognition accounting policy and our collaboration agreement with Gilead.
Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our
research activities, including our drug discovery efforts and the development of
our product candidates. We expense research and development costs as incurred,
which include:
?
employee-related expenses, including salaries, bonuses, benefits, stock-based
compensation, other related costs for those employees involved in research and
development efforts;
?
external research and development expenses incurred under agreements with
contract research organizations, or CROs, as well as consultants that conduct
our preclinical studies and development services;
?
costs related to manufacturing material for our preclinical studies;
?
laboratory supplies and research materials;
?
costs to fulfill our obligations under the collaboration with Gilead;
?
costs related to compliance with regulatory requirements; and
?
facilities, depreciation and other allocated expenses, which include direct and
allocated expenses for rent, utilities and insurance.
Costs for certain activities are recognized based on an evaluation of the
progress to completion of specific tasks using data such as information provided
to us by our vendors and analyzing the progress of our preclinical studies or
other services performed. Significant judgment and estimates are made in
determining the accrued expense balances at the end of any reporting period.
Our direct external research and development expenses consist primarily of fees
paid to CROs and outside consultants in connection with our preclinical
development and manufacturing activities. Our direct external research and
development expenses also include fees incurred under license agreements. We
track these external research and development costs on a program-by-program
basis once we have identified a product candidate.
We do not allocate employee costs, costs associated with our target discovery
efforts, laboratory supplies, and facilities, including depreciation or other
indirect costs, to specific programs because these costs are deployed across
multiple programs and, as
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-------------------------------------------------------------------------------- such, are not separately classified. We characterize research and development costs incurred prior to the identification of a product candidate as discovery costs. We use internal resources primarily to conduct our research and discovery activities as well as for managing our preclinical development and manufacturing activities.
The following table summarizes our research and development expenses:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands) (in thousands)
TNG908 direct program expenses $ 2,822 $ 3,017 $ 8,349 $ 7,077
USP1 direct program expenses 2,209 1,213 5,698 3,035
Discovery direct program expenses 7,750 3,167 19,118 8,749
Unallocated research and development
expenses
Personnel related expenses 6,709 3,752 16,180 10,420
Facilities and other related expenses 2,433 1,828 6,657 5,647
Total research and development
expenses $ 21,923 $ 12,977 $ 56,002 $ 34,928
The successful development of our product candidates is highly uncertain. We
plan to substantially increase our research and development expenses for the
foreseeable future as we continue the development of our product candidates and
manufacturing processes and conduct discovery and research activities for our
preclinical programs. We cannot determine with certainty the timing of
initiation, the duration or the completion costs of current or future
preclinical studies and clinical trials of our product candidates or the timing
of regulatory filings in connection with clinical trials or regulatory approval,
due to the inherently unpredictable nature of preclinical and clinical
development. Clinical and preclinical development timelines, the probability of
success and development costs can differ materially from expectations. We
anticipate that we will make determinations as to which product candidates to
pursue and how much funding to direct to each product candidate on an ongoing
basis in response to the results of ongoing and future preclinical studies and
clinical trials, regulatory developments and our ongoing assessments as to each
product candidate's commercial potential. Our clinical development costs are
expected to increase significantly as we commence clinical trials. We anticipate
that our expenses will increase substantially, particularly due to the numerous
risks and uncertainties associated with developing product candidates, including
the uncertainty of:
?
the scope, rate of progress, and expenses of our ongoing research activities as
well as any preclinical studies, clinical trials and other research and
development activities;
?
establishing an appropriate safety profile with IND enabling studies;
?
successful enrollment in and completion of clinical trials;
?
whether our product candidates show safety and efficacy in our clinical trials;
?
receipt of marketing approvals from applicable regulatory authorities;
?
the progress of our collaboration with Gilead;
?
establishing commercial manufacturing capabilities or making arrangements with
third-party manufacturers;
?
obtaining and maintaining patent and trade secret protection and regulatory
exclusivity for our product candidates;
?
commercializing product candidates, if and when approved, whether alone or in
collaboration with others; and
?
continued acceptable safety profile and efficacy profile of products following
any regulatory approval.
Any changes in the outcome of any of these variables with respect to the
development of our product candidates in preclinical and clinical development
could mean a significant change in the costs and timing associated with the
development of these product candidates. We may never succeed in achieving
regulatory approval for any of our product candidates. We may obtain unexpected
results from our clinical trials. We may elect to discontinue, delay or modify
clinical trials of some product candidates or focus on other product candidates.
For example, if the U.S. Food and Drug Administration , or FDA, European
Medicines Agency , or EMA, or another regulatory authority were to delay our
planned start of clinical trials or require us to conduct clinical trials or
other testing beyond those that we currently expect or if we experience
significant delays in enrollment in any of our planned clinical trials, we could
be required to expend significant additional financial resources and time on the
completion of clinical development of that product candidate.
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--------------------------------------------------------------------------------General and Administrative Expenses
General and administrative expense consists primarily of employee related costs, including salaries, bonuses, benefits, stock-based compensation and other related costs. General and administrative expense also includes professional services, including legal, accounting and audit services and other consulting fees as well as facility costs not otherwise included in research and development expenses, insurance and other general administrative expenses. We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our product candidates. We also anticipate that we will incur significantly 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.
Other Income (Expense), Net
Interest Income (Expense)
Interest income (expense) consists of income earned and losses incurred in
connection with our investments in money market funds,
Other (Expense) Income, Net
Other (expense) income, net consists of miscellaneous income and expense unrelated to our core operations.
Provision for Income Taxes
Our provision for income tax consists of an estimate forU.S. federal and state income taxes based on enacted rates, as adjusted for allowable credits, deductions, uncertain tax positions, changes in deferred tax assets and liabilities and changes in tax law. We have recorded an insignificant provision for income taxes for the three and nine months endedSeptember 30, 2021 . There is no provision for income taxes for the three and nine months endedSeptember 30, 2020 because we have historically incurred net operating losses and maintain a full valuation allowance against our deferred tax assets. 21 --------------------------------------------------------------------------------
Results of Operations
Comparison of the Three Months ended
The following table summarizes our results of operations for the three months
ended
Three Months Ended September 30,
2021 2020 Change
(in thousands)
Collaboration revenue $ 6,787 $ (11,275 ) $ 18,062
License revenue - 14 (14 )
Operating expenses:
Research and development 21,923 12,977 8,946
General and administrative 4,433 2,518 1,915
Total operating expenses 26,356 15,495 10,861
Loss from operations (19,569 ) (26,756 ) 7,187
Other income (expense), net:
Interest income (expense) 91 (50 ) 141
Other (expense) income, net (50 ) 4 (54 )
Total other income (expense), net 41 (46 ) 87
Loss before income taxes (19,528 ) (26,802 ) 7,274
Provision for income taxes (62 ) - (62 )
Net loss (19,590 ) (26,802
) 7,212
Net loss and comprehensive loss $ (19,602 ) $ (26,787 )
Collaboration Revenue Collaboration revenue of$6.8 million and($11.3) million for the three months endedSeptember 30, 2021 and 2020, respectively, was derived from the Gilead collaboration. The increase of$18.1 million is primarily due the charge against revenue of$11.3 million for the three months endedSeptember 30, 2020 driven by a cumulative catch-up adjustment to the revenue previously recognized from the Gilead collaboration due to a change to the transaction price resulting from the execution of the Gilead Agreement during the third quarter of 2020.
License Revenue
License revenue was$0 for the three months endedSeptember 30, 2021 compared to an amount of less than$0.1 million for the three months endedSeptember 30, 2020 . License revenue was not significant for both the three months endedSeptember 30, 2021 and 2020.
Research and Development Expenses
Research and development expense was$21.9 million for the three months endedSeptember 30, 2021 compared to$13.0 million for the three months endedSeptember 30, 2020 . The increase of$8.9 million was primarily due to a$4.9 million increase in external CRO expenses and lab supplies primarily relating to our lead product candidate, TNG908, and the advancement of our other drug discovery programs. Additionally, personnel-related costs increased$3.1 million primarily due to an increase of share-based compensation expense and additional headcount to support our research and development activities, as well as a$0.9 million increase in IT spend, consulting and professional fees.
General and Administrative Expenses
General and administrative expense was$4.4 million for the three months endedSeptember 30, 2021 compared to$2.5 million for the three months endedSeptember 30, 2020 . The increase of$1.9 million was primarily due to a$1.2 million increase in personnel-related costs due to an increase in share-based compensation expense and additional headcount.
Interest Income
Interest income was
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--------------------------------------------------------------------------------Other (Expense) Income, Net
Other expense, net was less than$0.1 million for the three months endedSeptember 30, 2021 compared to other income, net of$0.1 million for the three months endedSeptember 30, 2020 . Other expense and income was not significant for both the three months endedSeptember 30, 2021 and 2020.
Provision for Income Taxes
Provision for income taxes was$0.1 million for the three months endedSeptember 30, 2021 compared to$0 for the three months endedSeptember 30, 2020 . The increase of$0.1 million is primarily attributable to taxable deferred revenue partially offset by the utilization of federal and state net operating losses and federal and state tax credits.
Comparison of the Nine Months Ended
The following table summarizes our results of operations for the nine months
ended
Nine Months Ended September 30,
2021 2020 Change
(in thousands)
Collaboration revenue $ 20,326 $ (2,169 ) $ 22,495
License revenue 11,000 683 10,317
Operating expenses:
Research and development 56,002 34,928 21,074
General and administrative 11,530 6,849 4,681
Total operating expenses 67,532 41,777 25,755
Loss from operations (36,206 ) (43,263 ) 7,057
Other income, net:
Interest income 299 37 262
Other (expense) income, net (167 ) 118 (285 )
Total other income, net 132 155 (23 )
Loss before income taxes (36,074 ) (43,108 ) 7,034
Provision for income taxes (115 ) - (115 )
Net loss (36,189 ) (43,108 ) 6,919
Net loss and comprehensive loss $ (36,216 ) $ (43,092 ) $ 6,876
Collaboration Revenue
Collaboration revenue of $20.3 million and $(2.2) million for the nine months
ended September 30, 2021 and 2020, respectively, was derived from the Gilead
collaboration. The increase of $22.5 million is primarily due to an increase in
the total transaction price allocated to the combined performance obligation
related to the execution of the Gilead Agreement during the third quarter of
2020, which resulted in a cumulative catch-up adjustment to reduce a portion of
the revenue previously recognized from the Gilead collaboration, as well as
incremental costs incurred under the Gilead Agreement during the nine months
ended September 30, 2021 as compared to the nine months ended September 30,
2020 .
License Revenue
License revenue was$11.0 million for the nine months endedSeptember 30, 2021 compared to$0.7 million for the nine months endedSeptember 30, 2020 . The increase of$10.3 million is primarily due to the incremental revenue recognized during the nine months endedSeptember 30, 2021 from Gilead licensing a program for an$11.0 million fee as compared to residual 2019 Gilead Letter Agreement revenue of$0.7 million recognized during the nine months endedSeptember 30, 2020 .
Research and Development Expenses
Research and development expense was$56.0 million for the nine months endedSeptember 30, 2021 compared to$34.9 million for the nine months endedSeptember 30, 2020 . The increase of$21.1 million was primarily due to a$14.0 million increase in external CRO expenses and lab supplies primarily relating to our lead product candidate, TNG908, and the advancement of our other drug discovery programs. Additionally, personnel-related costs increased$5.4 million primarily due to an increase in share-based compensation expense and additional headcount to support our research and development activities, as well as a$1.7 million increase in IT spend, consulting and professional fees. 23 --------------------------------------------------------------------------------
General and Administrative Expenses
General and administrative expense was$11.5 million for the nine months endedSeptember 30, 2021 compared to$6.8 million for the nine months endedSeptember 30, 2020 . The increase of$4.7 million was primarily due to a$2.8 million increase in personnel-related costs due to an increase in share-based compensation expense and additional headcount and a$1.2 million increase in consulting and professional fees.
Interest Income
Interest income was$0.3 million for the nine months endedSeptember 30, 2021 compared to$0.1 million for the nine months endedSeptember 30, 2020 . Interest income was not significant for the nine month periods primarily due to low interest rates in each period.
Other (Expense) Income, Net
Other expense, net was$0.2 million for the nine months endedSeptember 30, 2021 compared to other income, net of$0.1 million for the nine months endedSeptember 30, 2020 . Other expense and income was not significant for both the nine months endedSeptember 30, 2021 and 2020.
Provision for Income Taxes
Provision for income taxes was$0.1 million for the nine months endedSeptember 30, 2021 compared to$0 for the nine months endedSeptember 30, 2020 . The increase of less than$0.1 million is primarily attributable to taxable deferred revenue partially offset by the utilization of federal and state net operating losses and federal and state tax credits.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have generated recurring net losses. 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. Since our inception, we have funded our operations primarily through proceeds from the issuance of equity in the form of stock and from the proceeds received from our collaboration with Gilead. To date, we have raised an aggregate of approximately$166.9 million of gross proceeds from the private placement of preferred shares,$342.1 million of gross proceeds from the Business Combination and PIPE Financing transactions, and$210.1 million through the collaboration and license agreement with Gilead. As ofSeptember 30, 2021 , we had cash and cash equivalents and marketable securities of$503.8 million .
Funding Requirements
We believe that our existing cash, cash equivalents and marketable securities on hand as ofSeptember 30, 2021 of$503.8 million will enable us to fund our operating expenses and capital expenditure requirements at least into the second half of 2024. We have based this estimate on assumptions that may prove to be wrong, and we could expend our capital resources sooner than we expect.
Cash Flows
Comparison of the Nine Months Ended
The following table summarizes our cash flows for each of the nine month periods
presented:
Nine Months Ended September 30,
2021 2020 Change
(in thousands)
Net cash (used in) provided by operating
activities $ (42,625 ) $ 88,136 $ (130,761 )
Net cash used in investing activities (138,227 ) (86,256 ) (51,971 )
Net cash provided by financing activities 357,445 80,945 276,500
Net increase in cash, cash equivalents and
restricted cash $ 176,593 $ 82,825 $ 93,768
Operating Activities
Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. Operating cash flow is derived by adjusting our net loss for non-cash operating items such as
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depreciation, and stock-based compensation as well as changes in operating
assets and liabilities, which reflect timing differences between the receipt and
payment of cash associated with transactions and when they are recognized in our
results of operations.
Net cash used in operating activities was $42.6 million for the nine months
ended September 30, 2021 compared to net cash provided by operating activities
of $88.1 million for the nine months ended September 30, 2020 . The increase in
net cash used in operating activities for the nine months ended September 30,
2021 was primarily driven by our net loss of $36.2 million for the period, along
with a higher non-cash items, including an increase in accounts receivable of
$6.0 million and a decrease in deferred revenue of $8.3 million , and a partial
offset attributable to an increase in stock-based compensation expense of $5.6
million . The increase in net cash provided by operating activities for the nine
months ended September 30, 2020 is primarily due to an upfront, non-refundable
payment of $125.0 million from Gilead paid upon execution of the Gilead
Agreement in the third quarter of 2020, partially offset by the net loss of
$43.1 million during the period.
Investing Activities
Net cash used in investing activities was$138.3 million for the nine months endedSeptember 30, 2021 compared to net cash used in investing activities of$86.3 million for the nine months endedSeptember 30, 2020 . The increase in cash used in investing activities was primarily due to increase in purchases of marketable securities partially offset by increased sales and maturities of marketable securities.
Financing Activities
Net cash provided by financing activities was$357.4 million for the nine months endedSeptember 30, 2021 compared to net cash provided by financing activities of$80.9 million for the nine months endedSeptember 30, 2020 . The increase net cash provided by financing activities for the nine months endedSeptember 30, 2021 was primarily due to net proceeds of$326.5 million received upon the closing of the Business Combination and PIPE Financing inAugust 2021 , as well as$30.0 million in proceeds related to the issuance of shares of redeemable convertible Series B preferred stock inMarch 2021 . The increase in net cash provided by financing activities for the nine months endedSeptember 30, 2020 was primarily due to net proceeds of$30.0 million related to the issuance of shares of redeemable convertible Series B preferred stock inApril 2020 and net proceeds of$51.2 million related to the issuance of shares of redeemable convertible Series-B-1 preferred stock inAugust 2020 .
Contractual Obligations and Commitments
The following table summarizes our contractual obligations atSeptember 30, 2021 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods: Payments Due by Period Less than More than Total 1 Year 1 -3 Years 3 -5 Years 5 Years (in thousands) Operating lease commitments$ 9,424 $ 1,877 $ 3,926 $ 3,621 $ - Total$ 9,424 $ 1,877 $ 3,926 $ 3,621 $ - The commitment amounts in the table above reflect the minimum payments due under our operating lease for office and laboratory space at our100 Binney Street ,Cambridge, Massachusetts location, which expiresJune 2026 . These commitments are also recognized as operating lease liabilities in our balance sheet atSeptember 30, 2021 . InNovember 2021 , the Company entered into a lease termination agreement for the Company's leased office and laboratory space at100 Binney Street inCambridge, Massachusetts . The lease termination agreement is a modification of the lease agreement for these premises that provides, among other things, the acceleration of the expiration of the original term of the lease fromJune 30, 2026 to an earlier lease termination date, which earlier date shall be no later thanOctober 15, 2022 . See Note 13 of the unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q for additional discussion of the impact resulting from the lease termination agreement that was executed as a subsequent event. The table does not include the minimum payments due under our new operating lease for office and laboratory space at the201 Brookline Avenue ,Boston, Massachusetts as we have not occupied the premises and the lease payments in connection with this lease are yet to commence as ofSeptember 30, 2021 . Commitments pertaining to the201 Brookline Avenue lease will be added to the table above, and also recognized as operating lease liabilities on our balance sheet once the new lease payments commence. The fixed annual rent payable under the lease is$5.1 million , increasing by 3% annually from the rent commencement date. We will also be required to pay the remaining security deposit balance of$1.7 million for the201 Brookline Avenue lease on the delivery date notice, which is expected to occur in the first half of 2022. 25 --------------------------------------------------------------------------------
Purchase Obligations
In the normal course of business, we enter into contracts with third parties for preclinical studies and research and development supplies. These contracts generally do not contain minimum purchase commitments and provide for termination on notice, and therefore are cancellable contracts. These payments are not included in the table above as the amount and timing of such payments are not known as ofSeptember 30, 2021 .
License Agreement Obligations
We have also entered into license agreements under which we may be obligated to make milestone and royalty payments. We have not included future milestone or royalty payments under these agreements in the table above since the payment obligations are contingent upon future events, such as achieving certain development, regulatory, and commercial milestones or generating product sales. As ofSeptember 30, 2021 andDecember 31, 2020 , we were unable to estimate the timing or likelihood of achieving these milestones or generating future product sales. See Note 8 to our audited consolidated financial statements and related notes for the year endedDecember 31, 2020 included in the Prospectus.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements have been prepared in accordance withU.S. GAAP. The preparation of these consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts, and experience. The effects of material revisions in estimates, if any, will be reflected in the consolidated financial statements prospectively from the date of change in estimates. While our significant accounting policies are described in more detail in Note 2 to our audited consolidated financial statements and related notes for the year endedDecember 31, 2020 included in the Company's Prospectus, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
The terms of our collaboration agreements may include consideration such as non-refundable up-front payments, license fees, research extension fees, and clinical, regulatory and sales-based milestones and royalties on product sales.
We recognize revenue under ASC Topic 606, Revenue from Contracts with Customers,
or ASC 606, which 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. ASC 606 provides a
five-step framework whereby revenue is recognized when control of promised goods
or services is transferred to a customer at an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those
goods or services. To determine revenue recognition for arrangements that we
determine are within the scope of the revenue standard, we perform the following
five steps: (i) identify the promised goods or services in the contract; (ii)
determine whether the promised goods or services are performance obligations
including whether they are distinct in the context of the contract; (iii)
measure the transaction price, including the constraint on variable
consideration; (iv) allocate the transaction price to the performance
obligations; and (v) recognize revenue when (or as) we satisfy each performance
obligation. We only apply the five-step model to contracts when collectability
of the consideration to which we are entitled in exchange for the goods or
services we transfer to the customer is determined to be probable. At contract
inception, once the contract is determined to be within the scope of ASC 606, we
assess whether the goods or services promised within each contract are distinct
and, therefore, represent a separate performance obligation. Goods and services
that are determined not to be distinct are combined with other promised goods
and services until a distinct bundle is identified. We then allocate the
transaction price (the amount of consideration we expect to be entitled to from
a customer in exchange for the promised goods or services) to each performance
obligation and recognize the associated revenue when (or as) each performance
obligation is satisfied. Our estimate of the transaction price for each contract
includes all variable consideration to which we expect to be entitled.
We recognize the transaction price allocated to license payments as revenue upon
delivery of the license to the customer and resulting ability of the customer to
use and benefit from the license, if the license is determined to be distinct
from the other performance obligations identified in the contract. If the
license is considered to not be distinct from other performance obligations, we
utilize judgment to assess the nature of the combined performance obligation to
determine whether the combined performance obligation is satisfied (i) at a
point in time, but only for licenses determined to be distinct from other
performance obligations in the contract, or (ii) over time; and, if over time,
the appropriate method of measuring progress for purposes of recognizing revenue
from
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license payments. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.
We evaluate whether it is probable that the consideration associated with each milestone payment will not be subject to a significant reversal in the cumulative amount of revenue recognized. Amounts that meet this threshold are included in the transaction price using the most likely amount method, whereas amounts that do not meet this threshold are considered constrained and excluded from the transaction price until they meet this threshold. Milestones tied to regulatory approval, and therefore not within our control, are considered constrained until such approval is received. Upfront and ongoing development milestones under our collaboration agreements are not subject to refund if the development activities are not successful. At the end of each subsequent reporting period, we re-evaluate the probability of a significant reversal of the cumulative revenue recognized for the milestones, and, if necessary, adjust the estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues from collaborators in the period of adjustment. We exclude sales-based milestone payments and royalties from the transaction price until the sale occurs (or, if later, until the underlying performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied), because the license to our intellectual property is deemed to be the predominant item to which the royalties relate as it is the primary driver of value. ASC 606 requires us to allocate the arrangement consideration on a relative standalone selling price basis for each performance obligation after determining the transaction price of the contract and identifying the performance obligations to which that amount should be allocated. The relative standalone selling price is defined in ASC 606 as the price at which an entity would sell a promised good or service separately to a customer. If other observable transactions in which we have sold the same performance obligation separately are not available, we are required to estimate the standalone selling price of each performance obligation. Key assumptions to determine the standalone selling price may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success. Whenever we determine that multiple promises to a customer are not distinct and comprise a combined performance obligation that includes services, we recognize revenue over time using the cost-to-cost input method, based on the total estimated cost to fulfill the obligation. Significant management judgment is required in determining the level of effort required under an arrangement and the period over which we are expected to complete our performance obligations under an arrangement. Consideration that does not meet the requirements to satisfy the above revenue recognition criteria is a contract liability and is recorded as deferred revenue in the consolidated balance sheets. We have recorded short-term and long-term deferred revenue on our consolidated balance sheets based on our best estimate of when such revenue will be recognized. Short-term deferred revenue consists of amounts that are expected to be recognized as revenue in the next 12 months. Amounts that we expect will not be recognized within the next 12 months are classified as long-term deferred revenue. In certain instances, the timing of and total costs of satisfying these obligations under our collaboration agreement can be difficult to estimate. Accordingly, our estimates may change in the future. Such changes to estimates would result in a change in revenue recognition amounts. If these estimates and judgments change over the course of these agreements, it may affect the timing and amount of revenue that we will recognize and record in future periods. Under ASC 606, we will recognize revenue when we fulfill our performance obligations under the agreement with Gilead. As the required performance obligation is satisfied, we will recognize revenue for the portion satisfied and record a receivable for any fees that have not been received. Amounts are recorded as short-term collaboration receivables when our right to consideration is unconditional. A contract liability is recognized when a customer prepays consideration or owes payment to an entity in advance of our performance according to a contract. We do not assess whether a contract has a significant financing component if the expectation at contract inception is that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that we would have recognized is one year or less or the amount is immaterial.
As part of the process of preparing our consolidated financial statements, we
are required to estimate our accrued research and development expenses. This
process involves 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 actual costs. The majority of our service providers invoice us in
arrears for services performed, on a pre-determined schedule or when contractual
milestones are met; however, some require advance payments, which would be
recorded as a prepaid expense in other assets, or if there is the right of
offset, offset against our liability balance with the counterparty. We make
estimates of our accrued expenses as of each balance sheet date in the
consolidated financial statements based on facts and circumstances known to us
at that time. At each period end, we corroborate the accuracy of these estimates
with the service providers and make adjustments, if necessary.
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We record the expense and accrual related to research and development activities
performed by our vendors based on our estimates of the services received and
efforts expended considering a number of factors, including our knowledge of the
progress towards completion of the research and development activities;
invoicing to date under the contracts; communication from the vendors of any
actual costs incurred during the period that have not yet been invoiced; and the
costs included in the contracts and purchase orders. The financial terms of
these agreements are subject to negotiation, vary from contract to contract and
may result in uneven payment flows. 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 prepaid expense
accordingly. Although we do not expect our estimates to be materially different
from amounts actually incurred, our understanding of the status and timing of
services performed relative to the actual status and timing of services
performed may vary and may result in reporting amounts that are too high or too
low in any particular period. To date, there have not been any material
adjustments to our prior estimates of accrued research and development expenses.
Stock-Based Compensation
We estimate the fair value of our stock option awards using the Black Scholes method utilizing the "simplified method," for determining the expected life of the award, which is based on the mid-point between the vesting date and the end of the contractual term as all options granted after becoming a public entity will be granted "at-the-money." We determine the volatility for options granted based on an analysis of reported data for a peer group of companies. The expected volatility of granted options has been determined using a weighted-average of the historical volatility measures of this peer group of companies. We will continue to apply this method until a sufficient amount of historical information regarding the volatility of our own stock price becomes available. Our board of directors determines the fair value of each share of common stock underlying stock-based awards based on the closing price of our common stock as reported by Nasdaq on the date of grant. The risk-free interest rate utilized in our calculations is based on a treasury instrument whose term is consistent with the expected life of the stock options. The expected dividend yield is assumed to be zero as we have never paid dividends and do not have current plans to pay any dividends on our common stock. We measured stock-based awards granted to employees, non-employees and directors based on their fair value on the date of the grant using the Black-Scholes option-pricing model for options or the difference between the purchase price per share of the award, if any, and the fair value of our common stock for restricted common stock awards. Prior to the consummation of the Business Combination, as there was not a public market for our common stock prior to becoming publicly traded inAugust 2021 , the estimated fair value of our common stock was determined by our board of directors as of the date of grant of each option or restricted stock award, 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 theAmerican 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 either an option pricing method, or OPM, or a hybrid method, both of 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 had value only if the funds available for distribution to stockholders exceed the value of the preferred stock liquidation preferences at the time of the liquidity event, such as a strategic sale or a merger. The hybrid method was a probability-weighted expected return method, or PWERM, where the equity value in one or more scenarios is calculated using an OPM. The PWERM is a scenario-based methodology that estimated the fair value of common stock based upon an analysis of future values for the company, assuming various outcomes. The common stock value was based on the probability-weighted present value of expected future investment returns considering each of the possible outcomes available as well as the rights of each class of stock. The future value of the common stock under each outcome was discounted back to the valuation date at an appropriate risk-adjusted discount rate and probability weighted to arrive at an indication of value for the common stock. A discount for lack of marketability of the common stock is then applied to arrive at an indication of value for the common stock. The Black-Scholes option-pricing model also uses as inputs the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term of our common stock options, the risk-free interest rate for a period that approximates the expected term of our common stock options, and our expected dividend yield. Compensation expense for awards is recognized over the requisite service period, which is generally the vesting period of the respective award for employees and directors and the period during which services are performed for non-employees. We use the straight-line method to record the expense of awards with service-based vesting conditions. We believe our methodologies are reasonable based upon our internal peer company analyses. If different assumptions had been made, equity-based compensation expense, consolidated net loss and consolidated net loss per share could have been significantly 28
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different.
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 in the rules and regulations of theSEC .
Recently Adopted Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed within the unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and also in Note 2 to our audited consolidated financial statements and related notes for the year endedDecember 31, 2020 included in the Company's Prospectus.
Emerging Growth Company Status
We are an "emerging growth company," under the JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of delayed adoption of new or revised accounting standards and, therefore, we will be subject to the same requirements to adopt new or revised accounting standards as private entities. As an emerging growth company, we may take advantage of certain exemptions and reduced reporting requirements under the JOBS Act. Subject to certain conditions, as an emerging growth company: ? we may present only two years of audited financial statements and only two years of related Management's Discussion and Analysis of Financial Condition and Results of Operations in our periodic reports and registration statements; ? we may avail ourselves of the exemption from providing an auditor's attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; ? we may provide reduced disclosure about our executive compensation arrangements; and ? we may not require nonbinding advisory votes on executive compensation or stockholder approval of any golden parachute payments. We will remain an emerging growth company until the earliest of (i)December 31, 2025 , (ii) the last day of the fiscal year in which we have total annual gross revenues of$1.07 billion or more, (iii) the last day of the fiscal year in which we are deemed to be a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded$700.0 million as of the last business day of the second fiscal quarter of such year, provided we have been subject to the Exchange Act for at least 12 calendar months and have filed at least one annual report pursuant to the Exchange Act or (iv) the date on which we have issued more than$1.0 billion in non-convertible debt securities during the prior three-year period. We may choose to take advantage of some but not all of these exemptions.
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