SUTRO BIOPHARMA, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

Edgar Glimpses |

You should read the following discussion of our financial condition and results of operations in conjunction with our condensed financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended . In addition to historical financial information, this discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as statements of our plans, objectives, expectations, intentions and belief. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled "Risk Factors" under Part II, Item 1A below. These forward-looking statements may include, but are not limited to, statements regarding our future results of operations and financial position, business strategy, market size, potential growth opportunities, preclinical and clinical development activities, efficacy and safety profile of our product candidates, use of net proceeds from our public offering, our ability to maintain and recognize the benefits of certain designations received by product candidates, the timing and results of preclinical studies and clinical trials, commercial collaborations with third parties and the receipt and timing of potential regulatory designations, approvals and commercialization of product candidates. The words "believe," "may," "will," "potentially," "estimate," "continue," "anticipate," "predict," "target," "intend," "could," "would," "should," "project," "plan," "expect," and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

Overview

We are a clinical stage drug discovery, development and manufacturing company focused on deploying our proprietary integrated cell-free protein synthesis and site-specific conjugation platform, XpressCF™, to create a broad variety of optimally designed, next-generation protein therapeutics initially for cancer and autoimmune disorders. We aim to design therapeutics using the most relevant and potent modalities, including cytokine-based targets, immuno-oncology, or I/O, agents, antibody-drug conjugates, or ADCs, and bispecific antibodies that are directed primarily against clinically validated targets where the current standard of care is suboptimal. We believe our platform allows us to accelerate the discovery and development of potential first-in-class and best-in-class molecules by enabling the rapid and systematic evaluation of protein structure-activity relationships to create optimized homogeneous product candidates. Our mission is to transform the lives of patients by using our XpressCF™ Platform to create medicines with improved therapeutic profiles for areas of unmet need.

Once identified, production of protein drug candidates can be rapidly and predictably scaled in our current Good Manufacturing Practices compliant manufacturing facility. We have the ability to manufacture our cell-free extract that supports our production of proteins on a large scale using a semi-continuous fermentation process. Our two most advanced product candidates are wholly owned: STRO-001, an ADC directed against CD74, for patients with multiple myeloma and non-Hodgkin lymphoma, or NHL, and STRO-002, an ADC directed against folate receptor-alpha, or FolR?, for patients with ovarian and endometrial cancers. STRO-001 is currently enrolling patients in a Phase 1 trial. We presented initial safety data in and expect to present initial efficacy data by year end 2019. In , we were granted Orphan Drug Designation by the U.S. Food and Drug Administration, or FDA, for STRO-001 for the treatment of multiple myeloma. We began enrolling patients in a STRO-002 Phase 1 trial focused on ovarian and endometrial cancers in , with initial safety data expected by year end 2019. We have also entered into multi-target, product-focused collaborations with leaders in the field of oncology, including a cytokine derivatives collaboration with Merck Sharp & Dohme Corp., a subsidiary of Merck & Co., Inc., Kenilworth, NJ, USA, or Merck, an ADC targeting B-cell maturation antigen, or BCMA, and an immuno-oncology directed alliance with Celgene Corporation, or Celgene, and an oncology-focused collaboration with Merck KGaA, Darmstadt, Germany (operating in the United States and Canada under the name "EMD Serono").

Since the commencement of our operations, we have devoted substantially all of our resources to performing research and development and manufacturing activities in support of our own product development efforts and those of our collaborators, raising capital to support and expand such activities and providing general and administrative support for these operations. We have funded our operations to date primarily from upfront, milestone and other payments under our collaboration agreements with Merck, Celgene and EMD Serono, the issuance and sale of redeemable convertible preferred stock, our initial public offering, or IPO, of common stock and debt proceeds.


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On , we closed our IPO and issued and sold an aggregate of 5,667,000 shares of common stock at a price of $15.00 per share for gross proceeds of approximately $85.0 million. We received net proceeds from the IPO of approximately $74.4 million, after underwriting discounts, commissions and offering expenses. In addition to the shares of common stock sold in the IPO, we concurrently sold in a private placement to Merck, 666,666 shares of common stock at the IPO offering price of $15.00 per share, for proceeds of approximately $10.0 million.

We have no products approved for commercial sale and have not generated any revenue from commercial product sales. We had a net loss of $28.0 million and $23.6 million for the six months ended and 2018, respectively. Although we had net income for the year ended of $1.7 million, we cannot assure you that we will ever have net income again or that we will generate positive cash flow from operating activities. As of , we had an accumulated deficit of $168.0 million. We do not expect to generate any revenue from commercial product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. We expect our operating expenses to increase significantly as we continue to develop, and seek regulatory approvals for, our product candidates, engage in other research and development activities, expand our pipeline of product candidates, continue to develop our manufacturing facility and capabilities, maintain and expand our intellectual property portfolio, seek regulatory and marketing approval for any product candidates that we may develop, acquire or in-license other assets or technologies, ultimately establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval and operate as a public company. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials, our expenditures on other research and development activities and the timing of achievement, receipt and revenue recognition of upfront, milestones and other collaboration agreement payments.

Recent Developments

In , we presented interim safety data from our ongoing Phase 1 trial of STRO-001. The ongoing Phase 1, open-label, multicenter, dose escalation trial of STRO-001 is designed to evaluate the safety, tolerability and preliminary anti-tumor activity of STRO-001 in adults with B-cell malignancies. Based on interim data from the trial through , STRO-001 has been generally well-tolerated. The most common treatment emergent adverse events included fatigue, nausea, chills and infusion reactions, and neither ocular toxicity signals nor anti-drug antibodies were observed. The interim data from the trial included 21 patients and separate dosing cohorts for multiple myeloma (10 patients) and non-Hodgkin lymphoma (11 patients). The data also showed encouraging preliminary anti-tumor activity, including one complete response and one partial response among a cohort of heavily pre-treated patients with recurrent diffuse large B-cell lymphoma. The trial continues to enroll patients in dose escalation in both multiple myeloma and non-Hodgkin lymphoma cohorts.

Financial Operations Overview

Total Revenue

We have no products approved for commercial sale and have not generated any revenue from commercial product sales. Our total revenue to date has been generated principally from our collaboration and license agreements with Celgene, Merck and EMD Serono, and to a lesser extent, from manufacturing, supply and services and products we provide to Celgene, SutroVax, Inc., or SutroVax, and EMD Serono.

As described in Note 2 to our Condensed Financial Statements, on , we adopted ASC 606, Revenue from Contracts with Customers. ASC 606 supersedes the guidance in ASC 605, Revenue Recognition. We adopted ASC 606 on a modified retrospective basis under which we recognized the $10.3 million cumulative effect of adoption as a reduction to the opening accumulated deficit balance. Revenue for the three and six months ended was recorded under ASC 605, while revenue for the three and six months ended was recorded under ASC 606. If we had continued to use ASC 605 during 2019, revenue would have been $11.4 million and $19.1 million in the three and six months ended , respectively, as compared to the $10.5 million and $19.2 million reported in the three and six months ended , respectively.


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Collaboration revenue

We derive revenue from collaboration arrangements, under which we may grant licenses to our collaboration partners to further develop and commercialize our proprietary product candidates. We may also perform research and development activities under the collaboration agreements. Consideration under these contracts generally includes a nonrefundable upfront payment, development, regulatory and commercial milestones and other contingent payments, and royalties based on net sales of approved products. Additionally, the collaborations may provide options for the customer to acquire from our materials and reagents, clinical product supply or additional research and development services under separate agreements.

We assess which activities in the collaboration agreements are considered distinct performance obligations that should be accounted for separately. We develop assumptions that require judgement to determine whether the license to our intellectual property is distinct from the research and development services or participation in activities under the collaboration agreements.

At the inception of each agreement, we determine the arrangement transaction price, which includes variable consideration, based on the assessment of the probability of achievement of future milestones and contingent payments and other potential consideration.

For arrangements that include multiple performance obligations, we allocate the transaction price to the identified performance obligations based on the standalone selling price, or SSP, of each distinct performance obligation. In instances where SSP is not directly observable, we develop assumptions that require judgment to determine the SSP for each performance obligation identified in the contract. These key assumptions may include full-time equivalent, or FTE, personnel effort, estimated costs, discount rates and probabilities of clinical development and regulatory success.

Upfront Payments: For collaboration arrangements that include a nonrefundable upfront payment, if the license fee and research and development services cannot be accounted for as separate performance obligations, the transaction price is deferred and recognized as revenue over the expected period of performance using a cost-based input methodology. We use judgement to assess the pattern of delivery of the performance obligation. In addition, amounts paid in advance of services being rendered may result in an associated financing component to the upfront payment. Accordingly, the interest on such borrowing cost component will be recorded as interest expense and revenue, based on an appropriate borrowing rate applied to the value of services to be performed by us over the estimated service performance period.

License Grants: For collaboration arrangements that include a grant of a license to our intellectual property, we consider whether the license grant is distinct from the other performance obligations included in the arrangement. For licenses that are distinct, we recognize revenues from nonrefundable, upfront payments and other consideration allocated to the license when the license term has begun and we have provided all necessary information regarding the underlying intellectual property to the customer, which generally occurs at or near the inception of the arrangement.

Milestone and Contingent Payments: At the inception of the arrangement and at each reporting date thereafter, we assess whether it should include any milestone and contingent payments or other forms of variable consideration in the transaction price using the most likely amount method. If it is probable that a significant reversal of cumulative revenue would not occur upon resolution of the uncertainty, the associated milestone value is included in the transaction price. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of each such milestone and any related constraint and, if necessary, adjusts its estimate of the overall transaction price. Since milestone and contingent payments may become payable to us upon the initiation of a clinical study or filing for or receipt of regulatory approval, we review the relevant facts and circumstances to determine when we should update the transaction price, which may occur before the triggering event. When we update the transaction price for milestone and contingent payments, we allocate the changes in the total transaction price to each performance obligation in the agreement on the same basis as the initial allocation. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment, which may result in recognizing revenue for previously satisfied performance obligations in such period. Our collaborators generally pay milestones and contingent payments subsequent to achievement of the triggering event.

Research and Development Services: For amounts allocated to our research and development obligations in a collaboration arrangement, we recognize revenue over time using a cost-based input methodology, representing the transfer of goods or services as activities are performed over the term of the agreement.


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Materials Supply: We provide materials and reagents, clinical materials and services to certain of our collaborators under separate agreements. The consideration for such services is generally based on FTE personnel effort used to manufacture those materials reimbursed at an agreed upon rate in addition to agreed-upon pricing for the provided materials. The amounts billed are recognized as revenue as the performance obligations are met by us.

Our revenue recognition policies under ASC 605 are described in our Annual Report on Form 10-K for the year ended .

Operating Expenses

Research and Development

Research and development expenses represent costs incurred in performing research, development and manufacturing activities in support of our own product development efforts and those of our collaborators, and include salaries, employee benefits, stock-based compensation, laboratory supplies, outsourced research and development expenses, professional services and allocated facilities-related costs. We expense both internal and external research and development costs as they are incurred. Non-refundable advance payments for services that will be used or rendered for future research and development activities are recorded as prepaid expenses and recognized as expenses as the related services are performed.

We expect our research and development expenses to increase in the future as we advance our product candidates into and through preclinical studies and clinical trials, pursue regulatory approval of our product candidates, expand our pipeline of product candidates and continue to develop our manufacturing facility and capabilities. The process of conducting the necessary preclinical and clinical research to obtain regulatory approval is costly and time consuming. The actual probability of success for our product candidates may be affected by a variety of factors including: the safety and efficacy of our product candidates, early clinical data, investment in our clinical programs, the ability of collaborators to successfully develop our licensed product candidates, competition, manufacturing capability and commercial viability. We may never succeed in achieving regulatory approval for any of our product candidates. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of our product candidates.

The following table summarizes our research and development expenses incurred during the periods indicated. The internal costs include personnel, facility costs and research and scientific related activities associated with our pipeline. The external program costs reflect external costs attributable to our clinical development candidates and preclinical candidates selected for further development. Such expenses include third-party costs for preclinical and clinical studies and research services, and other consulting costs.



                                             Three Months Ended          Six Months Ended
                                                  June 30,                   June 30,
                                              2019          2018         2019         2018
 Internal costs:
 Research and drug discovery               $    4,473     $  3,943     $  8,918     $  7,620
 Process and product development                2,161        2,147        4,582        4,185
 Manufacturing                                  5,822        4,270       10,722        8,266
 Clinical development                             528          308          958          599
 Total internal costs                          12,984       10,668       25,180       20,670

External Program Costs:

 Research and drug discovery                      206          280          431          515
 Toxicology and translational science             487          613          967        1,122
 Process and product development                   78          151          167          240
 Manufacturing                                  1,203        1,425        2,116        2,946
 Clinical development                           1,185          614        2,462        1,340
 Total external program costs                   3,159        3,083        6,143        6,163

Total research and development expenses $ 16,143 $ 13,751 $ 31,323 $ 26,833




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General and Administrative

Our general and administrative expenses consist primarily of personnel costs, expenses for outside professional services, including legal, human resources, audit, accounting and tax services and allocated facilities-related costs. Personnel costs include salaries, employee benefits and stock-based compensation. We expect to incur additional expenses operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and listing standards applicable to companies listed on the Nasdaq Global Market, additional insurance expenses, investor relations activities and other administrative and professional services. We also expect to increase the size of our administrative function to support the anticipated growth of our business.

Interest Income

Interest income consists primarily of interest received on our invested funds.

Interest Expense and Other Expense, Net

Interest expense includes interest incurred on our debt and amortization of debt issuance costs. Additionally, under ASC 606, the Company identified a financing component under the Merck 2018 Agreement and recorded interest expense associated with the upfront payment.

Other expense, net in the three months ended primarily includes increases from the revaluation of the SutroVax option liability. In the three months ended , we adjusted the liability for changes in estimated fair value until the earlier of the exercise of the warrants, expiration of the warrants, or conversion of the redeemable convertible preferred stock warrants upon the completion of our IPO, into common stock warrants. With the completion of our IPO on , the redeemable convertible preferred stock warrant liability was reclassified to additional paid-in-capital and we will no longer record any related periodic fair value adjustments.

Comparison of the Three Months Ended and 2018



                                         Three Months Ended
                                               June30,
                                                                                 Change
                                         2019          2018         Change        (%)
                                              (dollars in thousands)
     Revenue                           $  10,525     $   5,704     $  4,821           85 %
     Operating expenses
     Research and development             16,143        13,751        2,392           17 %
     General administrative                8,067         4,041        4,026          100 %
     Total operating expenses             24,210        17,792        6,418           36 %
     Loss from operations                (13,685 )     (12,088 )     (1,597 )         13 %
     Interest income                       1,124            40        1,084            *
     Interest and other expense, net      (1,232 )         507       (1,739 )          *
     Net loss                          $ (13,793 )   $ (11,541 )   $ (2,252 )         20 %




* Percentage not meaningful


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Revenue

We have recognized revenue as follows during the periods indicated:



                                              Three Months Ended
                                                   June 30,
                                                                                         Change
                                              2019           2018         Change          (%)
                                                (in thousands)

Celgene Corporation ("Celgene") (1) $ 1,670 $ 2,835 $ (1,165 ) (41 )% Merck Sharp & Dohme Corporation ("Merck")-related party

                    $     5,497             -     $   5,497              *
Merck KGaA, Darmstadt, Germany
(operating in the United
  States and Canada under the name "EMD
Serono")                                   $     3,358         1,967         1,391             71 %
SutroVax-related party                               -           902          (902 )         (100 )%
Total revenue                              $    10,525     $   5,704     $   4,821             85 %



(1) Celgene was a related party during the three months ended as it

held more than 10% of our common stock for the periods presented until the

closing of our IPO on .




* Percentage not meaningful

Total revenue increased by $4.8 million, or 85%, during the three months ended compared to the three months ended , due primarily to the 2018 Merck Agreement which added revenue of $5.5 million, of which $1.5 million represents additional revenue from a new supply agreement. These increases were partially offset by a $0.9 million decrease in supply and other revenue from SutroVax, and a $1.2 million decrease in revenue from Celgene, of which $0.5 million represents a decrease in clinical materials supply and $0.7 million is due to the change from ASC 605 to ASC 606.

Research and Development Expense

Research and development expense increased by $2.4 million, or 17%, during the three months ended compared to the three months ended . The increase was due primarily to increases of $1.5 million in compensation-related expenses due to higher headcount and $1.3 million in preclinical research and clinical development expenses, of which $0.5 million was related to external clinical trial services for STRO-001 and STRO-002. These increases were offset by a $0.6 million decrease in consulting and outside services.

General and Administrative Expense

General and administrative expense increased by $4.0 million, or 100%, during the three months ended compared to the three months ended . The increase was due primarily to increases of $2.1 million in personnel-related expenses, $0.6 million in equipment-related expenses, $0.5 million in legal, insurance and external audit fees, and $0.6 million in licenses and other fees associated with being a public company.

Interest Income

Interest income increased by $1.1 million during the three months ended compared to the three months ended , due primarily to a higher cash balance resulting from the proceeds from the Series E financing, the upfront payment received under the 2018 Merck Agreement, and combined net proceeds from the completion of our IPO and the private placement of common stock to Merck.

Interest and Other Expense, Net

Interest and other expense, changed by $1.7 million during the three months ended compared to the three months ended , due primarily to $0.8 million of interest expense associated with a financing component under ASC 606 related to the 2018 Merck Agreement in the three months ended , and $0.9 million related to the remeasurement of the fair value of our redeemable convertible preferred stock warrant liability in the three months ended .


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Comparison of the Six Months Ended and 2018



                                           Six Months Ended
                                                June30,
                                                                                 Change
                                          2019          2018         Change        (%)
                                               (dollars in thousands)
      Revenue                           $  19,154     $  11,497     $  7,657          67 %
      Operating expenses
      Research and development             31,323        26,833        4,490          17 %
      General administrative               15,782         8,455        7,327          87 %
      Total operating expenses             47,105        35,288       11,817          33 %
      Loss from operations                (27,951 )     (23,791 )     (4,160 )        17 %
      Interest income                       2,300            80        2,220           *
      Interest and other expense, net      (2,392 )         124       (2,516 )         *
      Net loss                          $ (28,043 )   $ (23,587 )   $ (4,456 )        19 %




* Percentage not meaningful


Revenue

We have recognized revenue as follows during the periods indicated:



                                              Six Months Ended
                                                  June 30,
                                                                                       Change
                                             2019          2018         Change          (%)
                                               (in thousands)

Celgene Corporation ("Celgene") (1) $ 3,245 $ 6,919 $ (3,674 ) (53 )% Merck Sharp & Dohme Corporation ("Merck")-related party

                    $  10,132             -     $  10,132              *
Merck KGaA, Darmstadt, Germany
(operating in the United
  States and Canada under the name "EMD
Serono")                                   $   5,496         3,676         1,820             50 %
SutroVax-related party                     $     281           902          (621 )          (69 )%
Total revenue                              $  19,154     $  11,497     $   7,657             67 %



(1) Celgene was a related party during the six months ended as it

held more than 10% of our common stock for the periods presented until the

closing of our IPO on .




* Percentage not meaningful

Total revenue increased by $7.7 million, or 67%, during the six months ended compared to the six months ended , due primarily to the 2018 Merck Agreement which added revenue of $10.1 million, of which $1.5 million represents additional revenue from a new supply agreement. Further, the Company recorded an additional $0.3 million in license fee and research development services from EMD Serono. The increases were partially offset by a $0.6 million decrease from SutroVax, and a $3.7 million decrease from Celgene, of which $2.4 million was due to a decrease in option fees, research and development services, and clinical materials and services, and $ 1.3 million was due to the change from ASC 605 to ASC 606.

Research and Development Expense

Research and development expense increased by $4.5 million, or 17%, during the six months ended compared to the six months ended . The increase was due primarily to increases of $3.0 million in compensation-related expenses due to higher headcount and $2.3 million in preclinical research and clinical development expenses, of which $1.1 million was related to external clinical trial services for STRO-001 and STRO-002. The increases were partially offset by a decrease of $1.0 million in outside services.


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General and Administrative Expense

General and administrative expense increased by $7.3 million, or 87%, during the six months ended compared to the six months ended . The increase was due primarily to increases of $4.4 million in personnel-related expenses, $0.6 million in equipment-related expenses, $0.7 million in legal, insurance and external audit fees, and $1.2 million in licenses and other fees associated with being a public company.

Interest Income

Interest income increased by $2.2 million during the six months ended compared to the six months ended , due primarily to a higher cash balance resulting from the proceeds from the Series E financing, the upfront payment received under the 2018 Merck Agreement, and combined net proceeds from the completion of our IPO and the private placement of common stock to Merck.

Interest and Other Expense, Net

Interest and other expense, changed by $2.5 million during the six months ended compared to the six months ended , due primarily to $1.7 million of interest expense associated with a financing component under ASC 606 related to the 2018 Merck Agreement, and $0.9 million related to the remeasurement of the fair value of our redeemable convertible preferred stock warrant liability in the six months ended .

Liquidity and Capital Resources

Sources of Liquidity

To date, we have incurred net losses, except for 2016, and negative cash flows from operations. Prior to our IPO, our operations had been financed primarily by payments received from our collaborators, net proceeds from the sale and issuance of our preferred stock, and debt proceeds. As of , we had $168.2 million in cash, cash equivalents and marketable securities, and outstanding debt of $12.8 million, which is net of $0.2 million unamortized debt discount.

Funding Requirements

Based upon our current operating plan, we believe that our existing capital resources will enable us to fund our operating expenses and capital expenditure requirements through at least the next twelve months after the date of this filing. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. We will continue to require additional financing to advance our current product candidates into and through clinical development, to develop, acquire or in-license other potential product candidates, pay our obligations and to fund operations for the foreseeable future.

We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements, marketing and distribution arrangements, or other sources of financing. Adequate additional funding may not be available to us on acceptable terms, or at all. Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies, and may cause us to delay, reduce the scope of or suspend one or more of our preclinical and clinical studies, research and development programs or commercialization efforts, and may necessitate us to delay, reduce or terminate planned activities in order to reduce costs. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates and the extent to which we may enter into additional collaborations with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical studies.

To the extent we raise additional capital through new collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we do raise additional capital through public or private equity or convertible debt offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders' rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.


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Cash Flows

The following table summarizes our cash flows during the periods indicated:



                                                            Six Months Ended
                                                                June 30,
                                                           2019          2018
                                                             (in thousands)
     Cash used in operating activities                  $  (35,746 )   $ (28,955 )
     Cash used in investing activities                     (68,885 )        (400 )
     Cash (used in) provided by financing activities        (1,277 )      32,755
     (Decrease) increase in cash and cash equivalents   $ (105,908 )   $   3,400



Cash Flows from Operating Activities

Cash used in operating activities for the six months ended was $35.7 million. Our net loss of $28.0 million was decreased by non-cash charges of $4.7 million for stock-based compensation, $2.3 million for depreciation and amortization, and a $0.2 million loss on disposal of property and equipment, which were offset partially by a $1.3 million increase in the accretion of discount on our marketable securities and a $0.1 million reduction of a liability attributable to an agreement. Cash used in operating activities also reflected a net decrease in operating assets and liabilities of $13.8 million, due to a decrease in our deferred revenue balance of $8.9 million from revenue recognized under our collaboration agreements, a decrease of $2.7 million in accrued compensation expense primarily due to bonuses paid in connection with certain goal achievements, and an increase in accounts receivable of $4.0 million from higher research and development services revenues from our collaborators. This was offset partially by a decrease in $0.4 million in prepaid expenses and other current assets, a $1.3 million increase in accounts payable due to timing of payments, and a $0.1 million increase in other liabilities.

Cash used in operating activities for the six months ended was $29.0 million. Our net loss of $23.6 million was decreased by non-cash charges of $2.3 million for depreciation and amortization and $0.5 million for stock-based compensation, which were partially offset by the gain of $0.9 million for the change in fair value of our redeemable convertible preferred stock warrant liability. Cash used in operating activities reflected a change in net operating assets of $7.2 million, primarily due to a decrease in our deferred revenue balance of $5.3 million from the recognition of revenue pertaining to payments received from our collaborators Celgene and EMD Serono during prior periods, an increase in accounts receivable of $1.6 million due to higher research and development services revenues from our collaborators Celgene and EMD Serono and a $0.7 million decrease in accounts payable due to the timing of payments.

Cash Flows from Investing Activities

Cash used in investing activities of $68.9 million for the six months ended was primarily related to purchases of marketable securities of $147.4 million and purchases of property and equipment of $0.8 million, principally for laboratory and manufacturing equipment, offset partially by maturities and sales of marketable securities of $79.3 million.

Cash used in investing activities of $0.4 million for the six months ended was related to purchases of property and equipment, principally for laboratory and manufacturing equipment and leasehold improvements.

Cash Flows from Financing Activities

Cash used in financing activities of $1.3 million for the six months ended was primarily related to commencement of the repayment of the Loan in of $2.0 million, offset by $0.7 million of proceeds received from participants of our employee stock purchase plan.

Cash provided by financing activities of $32.8 million for the six months ended was primarily related to the net proceeds from our issuance of Series E redeemable convertible preferred stock of $33.2 million, partially offset by the payment of $0.5 million in financing costs related to this offering.


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Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements, as defined under SEC rules. While we have an investment classified as variable interest entity, its purpose is not to provide off-balance sheet financing.

Critical Accounting Policies and Estimates

Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with United States generally accepted accounting principles. 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 revenue generated and 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 assumptions and estimates associated with revenue recognition, research and development expenditures, stock-based compensation and redeemable convertible preferred stock warrants have the most significant impact on our condensed financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

Other than as the result of the adoption of the new revenue recognition guidance under ASC 606 as described in Note 2, Adoption of New Accounting Principles, to our Condensed Financial Statements, there have been no material changes to our critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the year ended .

JOBS Act Accounting Election

We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.

We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

We will remain an emerging growth company until the earliest of (1) the last day of our first fiscal year (a) in which we have total annual gross revenues of at least $1.07 billion, or (b) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior , (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period and (3) .

Recent Accounting Pronouncements

See Note 2 to our financial statements included elsewhere in this document for more information.


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