Overview



We are a late-stage biopharmaceutical company focused on the development and
commercialization of serlopitant for the treatment of pruritus, or itch,
associated with various conditions such as prurigo nodularis, or PN and
psoriasis. We believe that serlopitant, a highly selective small molecule
inhibitor of the neurokinin 1 receptor, or NK1-R, given as a once-daily, oral
tablet, has the potential to significantly alleviate pruritus.

Since commencing operations in 2011, we have devoted substantially all of our
efforts and financial resources to the clinical development of serlopitant. We
have not generated any revenue from product sales and, as a result, we have
never been profitable and have incurred net losses in each year since
commencement of our operations. As of December 31, 2019, we had an accumulated
deficit of $184.3 million, primarily as a result of research and development and
general and administrative expenses. We incurred net losses of approximately
$73.7 million, $51.4 million and $29.1 million in the years ended December 31,
2019, 2018 and 2017, respectively. We are focused on managing our operating
expenses and maintaining adequate capital to run our business through
consummation of the proposed merger with Foamix Pharmaceuticals Ltd., or Foamix
(discussed below). There can be no assurance that we will be successful in
completing the merger with Foamix or maintaining or raising sufficient
additional capital to fund continued operations.

We have financed our operations primarily through private placements of
convertible preferred stock and the sale and issuance of common stock in
connection with our January 2018 initial public offering. In our initial public
offering, we sold 8,050,000 shares of our common stock and received cash
proceeds of approximately $125.4 million, net of underwriting commissions and
related expenses. In addition, in February 2019, we filed a shelf registration
statement on Form S-3, which permitted: (a) the offering, issuance and sale by
us of up to a maximum aggregate offering price of $150.0 million of our common
stock, preferred stock, debt securities, warrants, purchase contracts and/or
units; and (b) as part of the $150.0 million, the offering, issuance and sale by
us of up to a maximum aggregate offering price of $50.0 million of our common
stock that may be issued and sold under a sales agreement with Cantor
Fitzgerald & Co in one or more at-the-market offerings. During the year ended
December 31, 2019, we issued 613,522 shares of common stock pursuant to our
at-the-market offering program for aggregate net proceeds of $4.8 million after
$0.1 million of commission and before $0.2 million of offering costs.

As of December 31, 2019, our cash, cash equivalents and investments totaled
$76.9 million. We believe that our existing cash, cash equivalents and
investments will be sufficient to fund our planned operations for at least the
next 12 months from the issuance of our financial statements as of and for the
year ended December 31, 2019. We have based this estimate on assumptions that
may prove to be wrong.

Merger with Foamix and Change of Control



On November 10, 2019, we signed a definitive Merger Agreement with Foamix, to
create a combined biopharmaceutical company, or the Combined Company, focused on
the commercialization and development of therapeutics to serve patients in the
dermatology space. The transaction contemplated by the Merger Agreement will
result in a change in control of our company. On February 6, 2020, the Merger
was approved by both our stockholders and Foamix's shareholders. The Merger is
expected to close on March 9, 2020.

The Combined Company will have a diversified portfolio including an approved product and three late-stage product candidates focused on dermatologic indications:

• Foamix recently received FDA approval for AMZEEQTM (minocycline) topical

foam, 4%, for the treatment of inflammatory lesions of non-nodular

moderate-to-severe acne vulgaris in adults and pediatric patients nine

years of age and older. AMZEEQTM is the first approved topical formulation

of minocycline. Foamix commercially launched AMZEEQTM in the United States

in January 2020.

• Foamix has submitted a New Drug Application, or NDA to the U.S. Food and

Drug Administration (FDA) for FMX103 (minocycline) topical foam, 1.5% for

the treatment of moderate-to-severe papulopustular rosacea. The FDA set a

Prescription Drug User Fee Act, or PDUFA, action date of June 2, 2020. If

approved, FMX103 would be the first minocycline product available for

rosacea patients. Foamix is also conducting a Phase II trial for FCD105, a


        topical combination foam of minocycline and adapalene, currently being
        evaluated in a phase 2 clinical trial for the treatment of
        moderate-to-severe acne vulgaris.

• Our lead late-stage product candidate, serlopitant, is being developed as

a novel treatment for pruritus. Two Phase 3 clinical trials of serlopitant


        for the treatment of pruritus associated with prurigo nodularis are fully
        enrolled, with results expected in March or April 2020.


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See Part I, Item 1, "Business," in this report for additional information about the Merger Agreement and proposed merger with Foamix.

Components of Operating Results

Revenue



We have not generated any revenue from the sale of products since our inception
and do not expect to generate any revenue from the sale of products in the near
future.

Collaboration and License Revenue



We recognized revenue pursuant to our license and collaboration agreement,
referred to as the Collaboration Agreement and our services agreement with Japan
Tobacco Inc. and Torii Pharmaceutical Co. Ltd., together referred to as JT
Torii, in connection with the clinical development and commercialization of
products covered by the collaboration, including non-refundable upfront license
fees, contingent consideration payments based on the achievement of defined
collaboration milestones and royalties on sales of commercialized products.

Under the Collaboration Agreement, we granted to JT Torii the right to develop
and commercialize products containing serlopitant in Japan, for the treatment of
diseases and conditions other than nausea or vomiting. In exchange, JT Torii
paid us an upfront, non­refundable payment of $11.0 million in August 2016. In
addition, we were entitled to receive aggregate payments of up to $28.0 million
upon the achievement of specified development and regulatory milestones, of
which we earned and received $4.0 million, and $15.0 million upon the
achievement of a commercial milestone, as well as tiered royalties from the
mid-single digits up to the mid­teens on sales of licensed products in Japan.

Revenue from the upfront payment was being amortized over the period of performance of the Collaboration Agreement, the period which we expected to provide research and development services to JT Torii.



On September 1, 2017, we entered into a services agreement with JT Torii to
provide research and development services, including regulatory, chemistry and
manufacturing support and related materials, that is distinct from the original
Collaboration Agreement. We evaluated the services agreement and determined that
the research and materials delivered to JT Torii represented a separate
contractual arrangement that provided standalone value to JT Torii. The fees
received under the services agreement were recognized as and when such services
were performed by us and JT Torii consumed the benefits of those services.

In the second quarter of 2018, we and JT Torii agreed to terminate the
Collaboration Agreement and JT Torii halted development activities in Japan. As
a result, we accelerated recognition of the remaining deferred revenue balance
of $8.1 million. In the second quarter of 2018, we also earned and recognized a
$2.0 million milestone payment related to JT Torii's receipt of all of the
IND-enabling past clinical study reports we delivered prior to the termination
of the Collaboration Agreement.

Operating Expenses

Research and Development Expenses



Substantially all of our research and development expenses consist of expenses
incurred in connection with the development of serlopitant. These expenses
include certain payroll and personnel expenses including stock­based
compensation, consulting costs, contract manufacturing costs and fees paid to
clinical research organizations or CROs to conduct certain research and
development activities on our behalf. We do not allocate our costs by each
indication for which we are developing serlopitant, as a significant amount of
our development activities broadly support all indications. In addition, several
of our departments support our serlopitant drug candidate development program
and we do not identify internal costs for each potential indication. We did not
separately track costs incurred in connection with our agreements with JT Torii,
which are also included in research and development expenses. Nonrefundable
advance payments for goods or services that will be used or rendered for future
research and development activities are deferred and capitalized and recognized
as an expense as the goods are delivered or the related services are performed.

We expense both internal and external research and development expenses as they
are incurred. We are focusing substantially all of our resources and development
efforts on the development of serlopitant. Predicting the timing or the final
cost to complete our clinical program is difficult and delays may occur because
of many factors, including factors outside of our control. For example, if the
U.S. Food and Drug Administration or FDA, or other regulatory authorities were
to require us to conduct clinical trials beyond those that we currently
anticipate, or if we experience significant delays in enrollment in any of our
clinical trials, we could be required to expend significant additional financial
resources and

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time on the completion of clinical development. Furthermore, we are unable to
predict when or if serlopitant will receive regulatory approval in the United
States and Europe with any certainty.

General and Administrative Expenses



General and administrative expenses consist principally of personnel­related
costs, including stock­based compensation, for personnel in executive, finance,
and other administrative functions, professional fees for legal, consulting,
accounting services, rent and other general operating expenses not otherwise
classified as research and development expenses.

Interest Income and Other Expense, Net

Interest income consists primarily of interest earned on our investments in corporate notes and government agency notes.

Results of Operations

Comparison of the Years Ended December 31, 2019 and 2018



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



                                             Year Ended December 31,
                                               2019             2018        $ Change       % Change
Collaboration and license revenue          $          -       $  10,640     $ (10,640 )         -100 %
Operating expenses:
Research and development                         53,761          52,989           772              1 %
General and administrative                       22,481          12,186        10,295             84 %
Loss from operations                            (76,242 )       (54,535 )     (21,707 )           40 %
Interest income and other expense, net            2,539           3,090          (551 )          -18 %
Net loss                                   $    (73,703 )     $ (51,445 )   $ (22,258 )           43 %

Collaboration and License Revenue



Collaboration and license revenue for the year ended December 31, 2019 was zero,
compared to $10.6 million for the same period in 2018. Collaboration and license
revenue for the year ended December 31, 2018 primarily consisted of revenue we
recognized during the period from the initial upfront payment of $11.0 million
under the Collaboration Agreement with JT Torii. The Collaboration Agreement was
terminated in June 2018.

Research and Development Expenses



Research and development expenses for the year ended December 31, 2019 increased
to $53.8 million from $53.0 million for the same period in 2018. The increase
was primarily due to increases of $0.9 million in manufacturing related
costs, $0.9 million in clinical trial expenses, $0.5 million in
personnel expenses as a result of an increase in stock-based compensation
expense, $0.5 million in allocated expenses, such as facilities related costs,
$0.5 million in medical affairs related costs and $0.3 million in preclinical
costs. These increases were partially offset by a $3.0 million milestone expense
to Merck in May 2018. For the periods presented, substantially all of our
research and development expenses are related to our development activity for
serlopitant.

General and Administrative Expenses



General and administrative expenses for the year ended December 31, 2019
increased to $22.5 million from $12.2 million for the same period in 2018. The
increase was primarily due to increases of $3.1 million in personnel expenses as
a result of an increase in our employee headcount and stock-based compensation
expense, $3.0 million in transaction-related expenses in connection with
negotiating and executing the merger agreement with Foamix, $2.5 million in
legal expenses, $1.1 million in professional and insurance fees and $0.8 million
in commercial launch planning related costs.

Interest Income and Other Expense, Net

Interest income and other expense, net for the years ended December 31, 2019 and 2018 primarily consisted of interest income generated from our cash, cash equivalents and investments.


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Comparison of the Years Ended December 31, 2018 and 2017



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



                                             Year Ended December 31,
                                               2018             2017        $ Change       % Change
Collaboration and license revenue          $     10,640       $   4,582     $   6,058            132 %
Operating expenses:
Research and development                         52,989          29,007        23,982             83 %
General and administrative                       12,186           5,168         7,018            136 %
Loss from operations                            (54,535 )       (29,593 )     (24,942 )           84 %
Interest income and other expense, net            3,090             517         2,573            498 %
Net loss                                   $    (51,445 )     $ (29,076 )   $ (22,369 )           77 %

Collaboration and License Revenue



Collaboration and license revenue for the year ended December 31, 2018 was $10.6
million, compared to $4.6 million for the same period in 2017. Collaboration and
license revenue for the year ended December 31, 2018 primarily consisted of
revenue we recognized during the period from the initial upfront payment of
$11.0 million under the Collaboration Agreement with JT Torii. The increase in
collaboration and license revenue was primarily due to the accelerated
recognition of the initial upfront payment as a result of the termination of the
Collaboration Agreement in June 2018 and a $2.0 million milestone payment
related to completion of certain clinical study reports pursuant to the
Collaboration Agreement which was earned and received prior to its termination.

Research and Development Expenses



Research and development expenses for the year ended December 31, 2018 increased
to $53.0 million from $29.0 million for the same period in 2017. The increase
was primarily due to an increase of $14.1 million in clinical trial expenses, an
increase of $4.3 million in personnel expenses as a result of an increase in our
employee headcount and stock-based compensation expense, and an increase of $3.3
million in manufacturing expenses. In May 2018, we made a $3.0 million milestone
payment to Merck associated with the initiation of our Phase 3 clinical trials
for pruritus associated with prurigo nodularis. For the periods presented,
substantially all of our research and development expenses are related to our
development activity for serlopitant.

General and Administrative Expenses



General and administrative expenses for the year ended December 31, 2018
increased to $12.2 million from $5.2 million for the same period in 2017. The
increase was primarily due to an increase of $2.9 million in professional fees
as a result of becoming a public company as well as an increase of $4.0 million
in personnel expenses as a result of an increase in our employee headcount and
stock-based compensation expense.

Interest Income and Other Expense, Net

Interest income and other expense, net for the years ended December 31, 2018 and 2017 primarily consisted of interest income generated from our cash, cash equivalents and investments.

Liquidity and Capital Resources



Through December 31, 2019, we have financed our operations primarily through the
sale of equity securities. We received net proceeds of $109.3 million from the
sale and issuance of preferred stock through December 31, 2017, including gross
proceeds of $50.5 million from the sale of Series C convertible preferred stock
in July 2017. In January 2018, we completed our initial public offering. We sold
8,050,000 shares of our common stock and received cash proceeds of approximately
$125.4 million, net of underwriting commissions and related expenses. As of
December 31, 2019, we had cash, cash equivalents and investments of $76.9
million. Our cash, cash equivalents and investments are held in money market
accounts and investments in commercial paper, corporate notes, asset backed
securities, agency bonds, and government notes. We believe that our existing
cash, cash equivalents and investments will be sufficient to fund our planned
operations for at least the next 12 months from the issuance of our financial
statements as of and for the year ended December 31, 2019. We have based this
estimate on assumptions that may prove to be wrong, and we could utilize our
available capital resources sooner than we expect.

On February 1, 2019, we entered into a Sales Agreement with Cantor Fitzgerald &
Co., or Cantor Fitzgerald, to sell shares of the Company's common stock, from
time to time, with aggregate gross sales proceeds of up to $50 million through
an at-the-market equity offering program under which Cantor will act as our
sales agent. The issuance and sale of shares of common stock by us pursuant to
the Sales Agreement are deemed an "at-the-market" offering under the Securities
Act of

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1933, as amended. Cantor Fitzgerald is entitled to compensation for its services
equal to up to 3.0% of the gross proceeds of any shares of common stock sold
through Cantor Fitzgerald under the Sales Agreement. During the year ended
December 31, 2019, we issued 613,522 shares of common stock pursuant to our
at-the-market offering program for aggregate net proceeds of $4.8 million after
$0.1 million of commission and before $0.2 million of offering costs.

Our Merger Agreement with Foamix provides that, immediately following the
consummation of the Merger, the executive officers of the Combined Company will
be designated by Foamix and we do not anticipate that any of our current
executive officers will continue to serve as executive officers of the Combined
Company. We also anticipate the termination of employment during 2020 of all our
employees in connection with the consummation of the Merger. As a result, and in
accordance with the Executive Severance Agreements between us and each of our
current executive officers and the severance arrangements for our non-officer
employees approved by our board of directors, we expect to make cash severance
payments to our existing employees totaling approximately $8.7 million after the
Merger is completed.



We have incurred, and expect to incur additional, significant
transaction-related expenses in connection with negotiating and executing the
Merger Agreement with Foamix and completing the transactions contemplated by the
Merger Agreement. Transaction-related expenses, which include legal, accounting
and financial advisor fees and other service provider costs, are currently
estimated to total approximately $7.2 million. We incurred $3.0 million of these
costs during the fourth quarter of 2019 on our statements of operations and
comprehensive loss. As of December 31, 2019, $0.7 million of these costs were
accrued on our balance sheet. We expect to incur the remainder of the
anticipated transaction-related expenses in the first half of 2020.

We expect to incur substantial expenditures in the foreseeable future as we
advance serlopitant through clinical development, the regulatory approval
process and, if approved, commercial launch activities. In the near term, we
expect to incur substantial expenses relating to our ongoing clinical trials and
the development and validation of our commercial manufacturing process for
serlopitant drug substance and drug product. Furthermore, we expect to continue
to incur additional costs associated with operating as a public company,
including significant legal, accounting, investor relations and other expenses
that we did not incur as a private company. We also expect to incur expenses
related to the recruitment and retention of personnel, working capital and other
general corporate purposes. We may incur additional expenses in connection with
expanding our pipeline, including by pursuing additional indications for
serlopitant or the in-license or acquisition of additional drug candidates or
commercial products. In November 2018 and January 2019, putative securities
class action complaints were filed against us, certain of our current executive
officers and directors, and certain underwriters in our initial public offering
alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act of
1933 due to allegedly false and misleading statements in connection with the
initial public offering. The parties have mediated the consolidated lawsuit and
reached a settlement. The settlement is subject to final documentation and Court
approval. This litigation could divert management's attention, as well as
resources, from our business.

We will need substantial additional funding to support our continuing operations
and pursue our growth strategy. Until such time as we can generate significant
revenue from sales of serlopitant, if ever, we expect to finance our operations
through the sale of equity, debt financings or other capital sources, including
potential collaborations with other companies or other strategic transactions.
Adequate funding may not be available to us on acceptable terms, or at all. If
we fail to raise capital or enter into such agreements as, and when, needed, we
may have to significantly delay, scale back, or discontinue the development and
commercialization of serlopitant for one or more indications or delay our
efforts to expand our product pipeline. Our failure to raise capital as and when
needed could have a negative impact on our financial condition and our ability
to pursue our business strategies. We anticipate that we will need to raise
substantial additional capital, the requirements of which will depend on many
factors, including:

• whether the Merger is successfully completed;

• the time and cost necessary to complete our ongoing clinical trials of

serlopitant, as well as the success of such trials;

• the number, size, type and duration of any additional clinical trials or

studies we may choose to initiate or that we may be required to complete

prior to obtaining regulatory approval of serlopitant;

• the timing of, and costs involved in, seeking and obtaining approvals from

the U.S. Food and Drug Administration, or FDA and comparable foreign

regulatory authorities, including the potential by the FDA or comparable

regulatory authorities to require that we perform more studies than those

that we current expect, and the costs of post­marketing studies that could

be required by regulatory authorities;

• the costs of preparing to manufacture serlopitant drug substance and drug

product on a commercial scale;

• the cost of ongoing securities litigation or any future litigation to


        which we may become a party;


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  • our ability to successfully commercialize serlopitant;


    •   the manufacturing, selling and marketing costs associated with

        serlopitant, including the cost and timing of forming and expanding our
        sales organization and marketing capabilities;

• the amount of sales and other revenues from serlopitant, including the

sales price and the availability of adequate third­party reimbursement;

• the degree and rate of market acceptance of any products launched by us or

our partners;

• the cash requirements of any future acquisitions of product candidates;

• the progress, timing, scope and costs of our non-clinical studies and

clinical trials, including the ability to enroll patients in a timely

manner for potential future clinical trials;

• the time and cost necessary to respond to technological and market

developments;

• the costs of filing, prosecuting, defending and enforcing any patent


        claims and other intellectual property rights;


  • our need and ability to hire additional personnel;


    •   our decision to enter into additional collaboration, licensing,

commercialization or other arrangements and the terms and timing of such

arrangements; and

• the emergence of competing technologies or other adverse market developments.




If the Merger is successfully completed, the size and timing of the Combined
Company's future funding requirements would depend on many similar factors as
applicable to the combined company's and the status of its collective products
and product candidates. If we raise additional funds by issuing equity
securities, our stockholders may experience dilution. Any future debt financing
into which we enter may impose upon us additional covenants that restrict our
operations, including limitations on our ability to incur liens or additional
debt, pay dividends, repurchase our common stock, make certain investments and
engage in certain merger, consolidation or asset sale transactions. Any debt
financing or additional equity that we raise may contain terms that are not
favorable to us or our stockholders. If we are unable to raise additional funds
when needed, we may be required to delay, reduce, or terminate some or all of
our development programs and clinical trials. We may also be required to sell or
license to others, rights to serlopitant in certain territories or indications
that we would prefer to develop and commercialize ourselves.

See "Risk Factors" for additional risks associated with our substantial capital requirements.

Summary Statement of Cash Flows

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





                                                  Year Ended December 31,
                                             2019          2018          2017
         Net cash (used in) provided by:
         Operating activities              $ (65,101 )   $ (52,733 )   $ (28,222 )
         Investing activities                 41,374       (33,876 )     (15,090 )
         Financing activities                  4,994       125,913

49,491

Net increase (decrease) in cash $ (18,733 ) $ 39,304 $ 6,179

Cash Used In Operating Activities



Cash used in operating activities for the year ended December 31, 2019 was $65.1
million, primarily due to the net loss of $73.7 million, offset by stock-based
compensation of $6.7 million and changes in operating assets and liabilities,
including a decrease in prepaids and other current assets of $1.9 million.

Cash used in operating activities for the year ended December 31, 2018 was $52.7
million, primarily due to the net loss of $51.4 million, offset by stock-based
compensation of $3.6 million and changes in operating assets and liabilities,
including a decrease in deferred revenue of $8.5 million, an increase in accrued
expenses and other current liabilities of $2.7 million, and an increase in
accounts payable of $0.8 million.

Cash used in operating activities for the year ended December 31, 2017 was $28.2
million, primarily due to the net loss of $29.1 million, offset by stock-based
compensation of $1.5 million and changes in operating assets and liabilities,
including

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an increase in prepaid and other assets of $1.8 million, a decrease in deferred
revenue of $1.8 million and an increase in accounts payable and accrued expenses
and other current liabilities of $3.6 million.

Cash Provided by (used in) Investing Activities



Cash provided by investing activities for the year ended December 31, 2019
represented purchases of investments of $83.4 million, offset by proceeds
received from maturities and sales of investments of $124.8 million. Cash used
in investing activities for the year ended December 31, 2018 represented
purchases of investments of $126.7 million, offset by proceeds received from
maturities and sales of investments of $93.0 million. Cash used in investing
activities for the year ended December 31, 2017 represented purchases of
investments of $64.1 million, offset by proceeds received from maturities and
sales of investments of $49.1 million.

Cash Provided by Financing Activities



During the year ended December 31, 2019 cash provided by financing activities
primarily consisted of $4.5 million from our at-the-market offering
program after $0.1 million of commission and $0.2 million of offering costs
and $0.4 million in proceeds from the issuance of common shares under the
Employee Stock Purchase Plan. During the year ended December 31, 2018 cash
provided by financing activities consisted of $125.4 million of net proceeds
from our initial public offering and $0.5 million in proceeds from the exercise
of stock options. During the year ended December 31, 2017 cash provided by
financing activities was $50.4 million, consisting primarily of net proceeds
from the sale of Series C convertible preferred stock.

Contractual Obligations and Commitments



The following table summarizes our contractual obligations as of December 31,
2019 (in thousands):



                                            Payments due by period
                                           Less than
                                            1 year             Total
                 Lease obligations, net   $       732         $   732




In December 2012, we entered into an exclusive worldwide royalty­free license
agreement with Merck for exclusive worldwide rights for the development and
commercialization of serlopitant and two other NK1 receptor antagonists in all
human diseases, disorders or conditions, except for the treatment and prevention
of nausea or vomiting. We have agreed to make aggregate payments of up to $25.0
million dollars upon the achievement of specified development and regulatory
milestones for serlopitant, of which, $3.0 million was paid in May 2018.
However, because the achievement of these milestones is not fixed and
determinable, such commitments have not been included on our balance sheet or in
the Contractual Obligations and Commitments table above.

We enter into contracts in the normal course of business with CROs for clinical
trials, non­clinical studies and testing, manufacturing and other services and
products for operating purposes. These contracts generally provide for
termination upon notice, and therefore we believe that our non­cancelable
obligations under these agreements are not material.

Critical Accounting Policies, Significant Judgments and Use of Estimates



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

While our significant accounting policies are described in the Notes to our financial statements, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results.

Revenue Recognition



We record revenue based on a five-step model in accordance with Accounting
Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC
606"). For the Collaboration Agreement under ASC 606, we identify the
performance obligations, determine the transaction price, allocate the contract
transaction price to the performance obligations, and recognize the revenue when
(or as) the performance obligation is satisfied.

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We identify the performance obligations included within the agreement and
evaluate which performance obligations are distinct. Upfront payments for
licenses are evaluated to determine if the license is capable of being distinct
from the obligations to participate on certain development and/or
commercialization committees with the collaboration partners and supply
manufactured drug product for clinical trials. For performance obligations that
are satisfied over time, we utilize the input method and revenue is recognized
by consistently applying a method of measuring progress toward complete
satisfaction of that performance obligation. We periodically review our
estimated periods of performance based on the progress under each arrangement
and account for the impact of any changes in estimated periods of performance on
a prospective basis.

Milestone payments are a form of variable consideration as the payments are
contingent upon achievement of a substantive event. Milestone payments are
estimated and included in the transaction price when we determine that it is
probable that there will not be a significant reversal of cumulative revenue
recognized in future periods.

Research and development revenues and cost reimbursements are based upon negotiated rates for our full-time employee equivalents ("FTE") and actual out-of-pocket costs. FTE rates are set based upon our costs, and which we believe approximate fair value. None of the revenues recognized to date are refundable if the relevant research effort is not successful.

Research and Development Expenses



Research and development costs are expensed as incurred. Nonrefundable advance
payments for goods or services that will be used or rendered for future research
and development activities are deferred and capitalized and recognized as an
expense as the goods are delivered or the related services are performed.

We estimate non­clinical study and clinical trial expenses based on the services
performed pursuant to contracts with research institutions and clinical research
organizations that conduct and manage non­clinical studies and clinical trials
on our behalf. 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 will adjust the accrual accordingly.
Payments made to third parties under these arrangements in advance of the
receipt of the related services are recorded as prepaid expenses until the
services are rendered.

Stock-Based Compensation Expense

We measure and recognize compensation expense for all stock­based awards made to employees, directors and non­employees, based on estimated fair values recognized using the straight­line method over the requisite service period.



The fair value of options to purchase common stock granted to employees,
directors and non-employees is estimated on the grant date using the
Black­Scholes option valuation model. The calculation of stock­based
compensation expense requires us to make certain assumptions and judgments about
a number of complex and subjective variables used in the Black­Scholes model,
including the expected term, expected volatility of the underlying common stock,
risk­free interest rate, as well as estimating future forfeitures of unvested
stock options. To the extent actual forfeiture results differ from the
estimates, the difference will be recorded as a cumulative adjustment in the
period the estimates are revised. Such value is recognized as an expense over
the requisite service period using the straight-line method.

The fair value of restricted stock units used in the Company's expense recognition method is based on the closing price of the Company's common stock on the date of the grant. Such value is recognized as an expense over the requisite service period using the straight-line method.



Stock-based compensation expense related to the ESPP is recognized based on the
fair value of each award estimated on the first day of the offering period using
the Black-Scholes option pricing model and recorded as expense over the service
period using the straight-line method.

Common Stock Valuations



Prior to our initial public offering, we were required to periodically estimate
the fair value of our common stock when issuing stock options and computing our
estimated stock-based compensation expense. The fair value of our common stock
was determined on a periodic basis by our board of directors, with the
assistance of an independent third-party valuation expert. The assumptions
underlying these valuations represented management's best estimates, which
involved inherent uncertainties and the application of significant levels of
management judgment. As a result, if factors or expected outcomes change and we
use significantly different assumptions or estimates, our stock-based
compensation could be materially different. In determining the fair value of our
common stock, our board of directors considered valuation

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methods intended to comply with Section 409A of the Internal Revenue Code that
create a presumption that the resulting valuation is reasonable for federal tax
purposes.

The fair value of the common stock underlying our stock options was estimated at
each grant date by our board of directors. Our board of directors intended all
options granted to be exercisable at a price per share not less than the
estimated per share fair value of our common stock underlying those options on
the date of grant. The valuations of our common stock were determined in
accordance with the guidelines outlined in the American Institute of Certified
Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity
Securities Issued as Compensation.

Income Taxes



We provide for income taxes under the asset and liability method. Current income
tax expense or benefit represents the amount of income taxes expected to be
payable or refundable for the current year. Deferred income tax assets and
liabilities are determined based on differences between the financial statement
reporting and tax bases of assets and liabilities and net operating loss and
credit carryforwards, and are measured using the enacted tax rates and laws that
will be in effect when such items are expected to reverse. We record a valuation
allowance to reduce our deferred tax assets to reflect the net amount that we
believe is more likely than not to be realized. Realization of our deferred tax
assets is dependent on the generation of future taxable income, the amount and
timing of which are uncertain. The valuation allowance requires an assessment of
both positive and negative evidence when determining whether it is more likely
than not that deferred tax assets are recoverable. Based upon the weight of
available evidence at December 31, 2019, we continue to maintain a full
valuation allowance against all of our deferred tax assets after management
considered all available evidence both positive and negative, including but not
limited to our historical operating results, income or loss in recent periods,
cumulative income in recent years, forecasted earnings, future taxable income,
and significant risk and uncertainty related to forecasts.

We account for uncertain tax positions in accordance with ASC 740­10, Accounting
for Uncertainty in Income Taxes. We recognize the tax effects of an uncertain
tax position only if it is more likely than not to be sustained based solely on
its technical merits as of the reporting date and only in an amount more likely
than not to be sustained upon review by the tax authorities. We evaluate
uncertain tax positions on a quarterly basis and adjust the liability for
changes in facts and circumstances, such as new regulations or interpretations
by the taxing authorities, new information obtained during a tax examination,
significant amendment to an existing tax law, or resolution of an examination.
To the extent that the final tax outcome of these matters is different than the
amounts recorded, such differences will impact the income tax provision in the
period in which such determination is made. The resolution of our uncertain
income tax positions is dependent on uncontrollable factors such as law changes,
new case law, and the willingness of the income tax authorities to settle,
including the timing thereof and other factors. Although we do not anticipate
significant changes to our uncertain income tax positions in the next 12 months,
items outside of our control could cause our uncertain income tax positions to
change in the future, which would be recorded in our consolidated statements of
operations. Interest and/or penalties related to income tax matters are
recognized as a component of income tax expense.

As of December 31, 2019 our total deferred tax assets were $44.2 million. Due to
our lack of earnings history and uncertainties surrounding our ability to
generate future taxable income, the net deferred tax assets have been fully
offset by a valuation allowance. The deferred tax assets were primarily
comprised of federal and state tax net operating losses, or NOLs. Utilization of
NOLs may be limited by the "ownership change" rules, as defined in Section 382
of the Code. Similar rules may apply under state tax laws. Our ability to use
our remaining NOLs may be further limited if we experience an ownership change
in connection with future offerings, future offerings or as a result of future
changes in our stock ownership.

Investment Securities

We have an investment policy which limits us to investing in highly rated corporate and government notes, and no individual investment may comprise more than 5% of the total portfolio.



We classify our investment securities as available­for­sale. Those investments
with maturities less than 12 months at the date of purchase are considered
short­term investments. Those investments with maturities greater than 12 months
at the date of purchase are considered long­term investments. Our investment
securities classified as available­for­sale are recorded at fair value based
upon quoted market prices at period end. Unrealized gains and losses, deemed
temporary in nature, are reported as a separate component of comprehensive
income or loss.

A decline in the fair value of any security below cost that is deemed other than
temporary results in a charge to earnings and the corresponding establishment of
a new cost basis for the security. Premiums (discounts) are amortized (accreted)
over the life of the related security as an adjustment to yield using the
straight­line interest method. Dividend and interest

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income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold.



We determine the fair value of our assets and liabilities based on the exchange
price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the
measurement date. Valuation techniques used to measure fair value maximize the
use of observable inputs and minimize the use of unobservable inputs. We use a
fair value hierarchy with three levels of inputs, of which the first two are
considered observable and the last unobservable, to measure fair value:

• Level 1-Quoted prices in active markets for identical assets or liabilities;

• Level 2-Inputs other than Level 1 that are observable, either directly or

indirectly, such as quoted prices for similar assets or liabilities;


        quoted prices in markets that are not active; or other inputs that are
        observable or can be corroborated by observable market data for
        substantially the full term of the assets or liabilities; and

• Level 3-Unobservable inputs that are supported by little or no market


        activity and that are significant to the fair value of the assets or
        liabilities.

Off-Balance Sheet Arrangements



Since our inception, we have not engaged in any off­balance sheet arrangements,
as defined in the rules and regulations of the SEC. See Note 6 of our financial
statements included in this Annual Report on Form 10-K, Commitments and
Contingencies, regarding our guarantees and indemnifications.

Indemnification



As permitted under Delaware law and in accordance with our bylaws, we are
required to indemnify our officers and directors for certain events or
occurrences while the officer or director is or was serving in such capacity. We
are also party to indemnification agreements with our directors. We believe the
fair value of the indemnification rights and agreements is minimal. Accordingly,
we have not recorded any liabilities for these indemnification rights and
agreements as of December 31, 2019.

JOBS Act Accounting Election



The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits an
"emerging growth company" such as us to take advantage of an extended transition
period to comply with new or revised accounting standards applicable to public
companies. We are choosing to "opt out" of this provision and, as a result, we
will comply with new or revised accounting standards as required when they are
adopted. This decision to opt out of the extended transition period under the
JOBS Act is irrevocable.

Recently Issued and Adopted Accounting Pronouncements

See "Recent Accounting Pronouncements" in Note 2, "Significant Accounting Policies" in the Notes to Financial Statements for a discussion of recently adopted accounting pronouncements and accounting pronouncements not yet adopted, and their expected impact on our financial position and results of operations.

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