Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of the financial condition and results of operations of Kura Oncology, Inc. should be read in conjunction with the financial statements and the notes to those statements appearing in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks, assumptions and uncertainties. Important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis include, but are not limited to, those set forth in “Item 1A. Risk Factors” in this Annual Report.All forward-looking statements included in this Annual Report are based on information available to us as of the time we file this Annual Report and, except as required by law, we undertake no obligation to update publicly or revise any forward-looking statements. For the comparison of the financial results for the fiscal years ended December 31, 2020 and 2019, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 24, 2021.
References to “Kura Oncology, Inc.,” “we,” “us” and “our” refer to Kura Oncology, Inc.
Overview
We are a clinical-stage biopharmaceutical company committed to realizing the promise of precision medicines for the treatment of cancer. Our pipeline consists of small molecule product candidates that target cancer signaling pathways where there is a strong scientific and clinical rationale to improve outcomes, and we intend to pair them with molecular or cellular diagnostics to identify those patients most likely to respond to treatment. We presently have two clinical-stage product candidates, ziftomenib (KO-539) and tipifarnib, one preclinical-stage product candidate, KO-2806, currently in IND-enabling studies, as well as additional programs that are at a discovery stage. We own global commercial rights to all of our programs and product candidates. We plan to advance our product candidates through a combination of internal development and strategic partnerships while maintaining significant development and commercial rights.
Our first product candidate, ziftomenib, is a potent, selective, reversible and oral small molecule inhibitor which blocks the interaction of two proteins, menin and the protein expressed by the KMT2A gene (formerly referred to as the mixed-lineage leukemia 1 gene). We have generated preclinical data that support the potential anti-tumor activity of ziftomenib in genetically defined subsets of acute leukemia, including those with rearrangements or partial tandem duplications in the KMT2A gene as well as those with oncogenic driver mutations in genes such as NPM1. Our preclinical data support the hypothesis that ziftomenib targets epigenetic dysregulation and removes a key block to cellular differentiation to drive anti-tumor activity. We believe ziftomenib has the potential to address approximately 35% of AML, including NPM1-mutant AML and KMT2A-rearranged AML. In the pediatric population, KMT2A-rearranged leukemias make up approximately 10% of acute leukemias in all age groups and in the case of infant leukemias, the frequency of KMT2A rearrangements is 70–80%. These pediatric leukemia sub-types portend a poorer prognosis and five-year survival rate that is lower than other leukemia sub-types and therefore represent a significant unmet medical need given the lack of curative therapeutic options.
We received orphan drug designation for ziftomenib for the treatment of AML from the FDA in July 2019. We initiated our menin-KMT2A Phase 1/2 clinical trial of ziftomenib in relapsed or refractory AML which we call the Kura Oncology MEnin-KMT2A Trial, or KOMET-001, in September 2019. The Phase 1a dose escalation portion of the KOMET-001 trial used an accelerated design and the Phase 1b portion of the study seeks to validate a RP2D.
On December 5, 2020, we announced preliminary results from our KOMET-001 trial at an oral presentation at the 2020 ASH. As of the data cutoff date for the ASH presentation, November 2, 2020, the trial had enrolled 12 patients with relapsed or refractory AML, of whom ten were evaluable for safety and tolerability and eight were evaluable for efficacy. Clinical or biological activity was reported in six of the eight efficacy-evaluable patients, including two patients achieving a complete remission, one patient achieving a morphological leukemia-free state, and one patient experiencing a marked decrease in hydroxyurea requirements and having attained peripheral blood count stabilization. As presented at ASH, ziftomenib has been well tolerated with a manageable safety profile to date. As of the data cutoff date, no drug discontinuations due to treatment-related adverse events and no evidence of QTc prolongation were reported. Treatment related adverse effects (grade 3 3) were reported to include pancreatitis, increased lipase, decreased neutrophil count, tumor lysis syndrome and deep venous thrombosis.
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On May 6, 2021, we reported that we amended the KOMET-001 trial protocol to include two Phase 1b expansion cohorts at doses that cleared the safety threshold in dose escalation. The Phase 1b portion of the study is designed to determine the lowest dose of ziftomenib that provides maximum biologic and clinical effect, consistent with guidance from the FDA relating to targeted oncology therapies, known as Project Optimus.
On June 24, 2021, we reported that we dosed our first patient in the Phase 1b expansion cohorts. Each cohort – a lower dose (200 mg) and a higher dose (600 mg) – is comprised of NPM1-mutant and KMT2A-rearranged relapsed/refractory AML patients. Both doses demonstrated preliminary evidence of activity and safety and were determined to be well tolerated in the Phase 1a portion of the study. We expect to enroll 12 evaluable patients in each cohort and assess those patients for safety and tolerability, pharmacokinetics and efficacy in order to determine the RP2D. The study protocol gives us the flexibility to enroll up to 30 patients in the selected cohort while we transition into the registration-directed portion of the study. We believe data from all patients treated at the RP2D will contribute to the registrational patient population.
Pending determination of the RP2D, we are preparing to conduct a comprehensive clinical development plan for ziftomenib, aimed at broadening the opportunity to develop treatments for patients with acute leukemias. Additional development opportunities include combination studies, other genetic subtypes, a pediatric development strategy and other indications, such as acute lymphocytic leukemia and myelodysplastic syndrome.
On November 24, 2021, we reported that the FDA had placed the KOMET-001 trial on a partial clinical hold. The partial clinical hold was initiated following our report to the FDA of a Grade 5 serious adverse event potentially associated with differentiation syndrome, a known adverse event related to differentiating agents in the treatment of AML. Patients who were enrolled in the Phase 1b expansion cohort at the time of the partial clinical hold were permitted to continue to receive ziftomenib, although no additional patients were to be enrolled until the partial clinical hold was lifted. On January 20, 2022, we announced that the FDA had lifted the partial clinical hold on the KOMET-001 trial following agreement on our mitigation strategy for differentiation syndrome, and that the study would resume screening and enrollment of new patients. We anticipate completing enrollment in the Phase 1b expansion cohorts of the KOMET-001 trial in the second quarter of 2022, and identifying the RP2D and reporting top-line data in the third quarter of 2022.
On December 13, 2021, we reported the presentation of preclinical data for ziftomenib and its potential for synergistic activity in combination with the BCL2 inhibitor venetoclax, a current standard of care in the treatment of patients with AML. These data confirm that treatment with ziftomenib drives dose-dependent induction of growth inhibition, differentiation and loss of viability of AML cells with KMT2A rearrangements or NPM1 mutations, while also reducing key protein levels such as MEIS1, FLT3 and BCL2 and menin itself. In addition, the new findings show that co-treatment with ziftomenib and venetoclax induces synergistic activity in patient-derived AML cells expressing KMT2A rearrangements or NPM1 mutations, with or without mutant FLT3 expression, and prolongs survival in an aggressive disseminated model of KMT2A-rearranged, FLT3-mutant AML.
Our second product candidate, tipifarnib, is a potent, selective and orally bioavailable inhibitor of farnesyl transferase that has been previously studied in more than 5,000 cancer patients and demonstrated compelling and durable anti-cancer activity in certain patients with a manageable side effect profile. We are currently evaluating tipifarnib in multiple solid tumor and hematologic indications.
Our most advanced solid tumor indication for tipifarnib is in patients with HNSCC that carry mutations in the HRAS gene. We are conducting a global, multi-center, open-label, non-comparative registration-directed clinical trial of tipifarnib in HRAS mutant HNSCC designed with two cohorts: a treatment cohort, which we call AIM-HN, and a prospective observational cohort, which we call SEQ-HN.
In July 2020, we amended the AIM-HN trial protocol to enable enrollment of patients with any HRAS mutation, in addition to patients with a high HRAS variant allele frequency, in order to assess the potential for clinical benefit in the overall HRAS mutant HNSCC population. We also introduced a number of modifications to the protocol that seek to enable us to enroll patients in the study more efficiently as well as modifications that we believe better reflect the evolving standards of care for recurrent/metastatic HNSCC. While these amendments do not change the primary outcome measure of an ORR in patients with high HRAS mutant variant allele frequency, the modifications will require us to enroll an increased number of evaluable HNSCC patients. As a result of the COVID-19 pandemic and the additional patients required for the trial, we anticipate we will continue to face delays in our timelines and milestones for the AIM-HN trial and, accordingly, are unable to reasonably forecast at this time when our AIM-HN trial will become fully enrolled.
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On February 24, 2021, we announced that tipifarnib was granted Breakthrough Therapy Designation from the FDA for the treatment of patients with recurrent or metastatic HRAS mutant HNSCC with variant allele frequency ≥ 20% after disease progression on platinum-based chemotherapy. The Breakthrough Therapy Designation is based upon data from our Phase 2 RUN-HN trial, which was published in the Journal of Clinical Oncology on June 10, 2021.
In addition to evaluating tipifarnib as a monotherapy in patients with recurrent or metastatic HRAS mutant HNSCC, we have been evaluating the use of tipifarnib in combination with other oncology therapies to address larger patient populations and to pursue earlier lines of therapy. Among these potential combinations, we have prioritized the combination of tipifarnib and an inhibitor of the PI3 kinase alpha enzyme for clinical evaluation in patients with biomarker-defined subsets of HNSCC. On July 6, 2021, we announced a clinical collaboration with Novartis to evaluate the combination of tipifarnib and alpelisib, a PI3 kinase alpha inhibitor, in patients with HNSCC whose tumors have HRAS overexpression and/or PIK3CA mutation and/or amplification. In the fourth quarter of 2021, we commenced a Phase 1/2 open-label, biomarker-defined cohort study, which we call the KURRENT trial, to evaluate the safety and tolerability of the combination, determine the recommended dose and schedule for the combination, and assess early antitumor activity of the combination for the treatment of such patients. Under the terms of our collaboration agreement with Novartis, we sponsor the KURRENT trial and supply tipifarnib, and Novartis supplies alpelisib. On December 16, 2021, we announced dose administration for the first patient in KURRENT.
We believe tipifarnib also has potential to drive clinical benefit in patients with PTCL, including patients with AITL, as well as other subtypes of PTCL. We presented clinical data from our Phase 2 study in patients with relapsed and/or refractory PTCL at the 2021 ASH, demonstrating an overall response rate of 56% and median overall survival of 32.8 months in patients with advanced AITL, an aggressive form of T-cell lymphoma.
As previously reported, we are developing a next-generation farnesyl transferase inhibitor which we believe demonstrates improved potency, pharmacokinetic and physicochemical properties relative to tipifarnib. In June 2021, we nominated a development candidate, KO-2806, which we have advanced into IND-enabling studies. We intend to direct this development candidate at innovative biology and larger disease indications in combination with other targeted therapies, and we expect to submit an IND for KO-2806 by the end of 2022.
Liquidity Overview
As of December 31, 2021, we had cash, cash equivalents and short-term investments of $518.0million. We have an ATM facility with SVB Leerink LLC and Stifel, Nicolaus & Company, Incorporated, under which we may offer and sell, from time to time, at our sole discretion, shares of our common stock having an aggregate offering price of up to $75.0 million. We have not yet sold any shares of our common stock under the ATM facility. To date, we have not generated any revenues from product sales, and we do not have any approved products. Since our inception, we have funded our operations primarily through equity and debt financings. We anticipate that we will require significant additional financing in the future to continue to fund our operations as discussed more fully below under the heading “Liquidity and Capital Resources.”
Financial Operations Overview
Research and Development Expenses
We focus on the research and development of our product programs. Our research and development expenses consist of costs associated with our research and development activities including salaries, benefits, share-based compensation and other personnel costs, clinical trial costs, manufacturing costs for non-commercial products, fees paid to external service providers and consultants, facilities costs and supplies, equipment and materials used in clinical and preclinical studies and research and development. All such costs are charged to research and development expense as incurred. Payments that we make in connection with in-licensed technology for a particular research and development project that have no alternative future uses in other research and development projects or otherwise and therefore, no separate economic values, are expensed as research and development costs at the time such costs are incurred. As of December 31, 2021, we have no in-licensed technologies that have alternative future uses in research and development projects or otherwise.
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. At this time, due to the inherently unpredictable nature of preclinical and clinical development, we are unable to estimate with any certainty the costs we will incur and the timelines we will require in the continued development of our product candidates and our other pipeline programs. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. Our future research and development expenses will depend on the preclinical and clinical success of each product candidate that we develop, as well as ongoing assessments of the commercial potential of such product candidates. In addition, we cannot forecast
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which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.
Completion of clinical trials may take several years or more, and the length of time generally varies according to the type, complexity, novelty and intended use of a product candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others:
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managing the impact of COVID-19 pandemic and related precautions on the operation of our clinical trials;
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per patient clinical trial costs;
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the number of clinical trials required for approval;
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the number of sites included in the clinical trials;
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the length of time required to enroll suitable patients;
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the number of doses that patients receive;
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the number of patients that participate in the clinical trials;
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the drop-out or discontinuation rates of patients;
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the duration of patient follow-up;
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potential additional safety monitoring or other studies requested by regulatory agencies;
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the number and complexity of analyses and tests performed during the clinical trial;
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the phase of development of the product candidate; and
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the efficacy and safety profile of the product candidate.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries, benefits, share-based compensation and other personnel costs for employees in executive, finance, business development and support functions. Other significant general and administrative expenses include the costs associated with obtaining and maintaining our patent portfolio, professional services for audit, legal, pre-commercial planning, investor and public relations, corporate activities and allocated facilities.
Other Income (Expense), Net
Other income (expense), net, consists primarily of interest income and interest expense.
Income Taxes
We have incurred net losses and have not recorded any U.S. federal or state income tax benefits for the losses as they have been offset by valuation allowances.
Results of Operations
Comparison of Fiscal Years Ended December 31, 2021 and 2020
The following table sets forth our results of operations for the years presented, in thousands:
Years Ended December 31,
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Research and Development Expenses. The following table illustrates the components of our research and development expenses for the years presented, in thousands:
Years Ended December 31,
The increase in ziftomenib-related research and development expenses for the year ended December 31, 2021 compared to 2020 was primarily due to increases in costs related to our Phase 1/2 clinical trial of ziftomenib which was initiated in September 2019 and manufacturing development activities. The increase in tipifarnib-related research and development expenses for the year ended December 31, 2021 compared to 2020 was primarily due to increases in companion diagnostics development activities, patient screening costs and other clinical costs related to our registration-directed trial of tipifarnib. The increase in discovery stage programs for the year ended December 31, 2021 compared to 2020 was primarily due to increased research activities for new programs. The increase in personnel costs and other expenses for the year ended December 31, 2021 compared to 2020 was to support our Phase 1/2 clinical trial of ziftomenib and our registration-directed clinical trial of tipifarnib. Personnel costs and other expenses include employee salaries and related expenses, facilities expense and overhead expenses and costs related to the terminated ERK inhibitor program. The increase in share-based compensation expense for the year ended December 31, 2021 compared to 2020 was primarily due to increases in our headcount and grant date fair value. We expect our research and development expenses to increase in future periods as we continue clinical development activities for ziftomenib and tipifarnib.
General and Administrative Expenses. The increase in general and administrative expenses for the year ended December 31, 2021 compared to 2020 was primarily due to increases of $7.3 million in non-cash share-based compensation expense, $4.8 million in personnel expenses and $1.5 million in professional and legal services. We expect our general and administrative expenses to increase in future periods to support our planned increase in research and development activities.
Other income (expense), net. The decrease in other income (expense), net for the year ended December 31, 2021 compared to 2020 was primarily due to a decrease in interest income.
Liquidity and Capital Resources
Since our inception, we have funded our operations primarily through equity and debt financings. We have devoted our resources to funding research and development programs, including discovery research, preclinical and clinical development activities.
In March 2019, we entered into the ATM facility under which we may offer and sell, from time to time, at our sole discretion, shares of our common stock having an aggregate offering price of up to $75.0 million. We have not yet sold any shares of our common stock under the ATM facility.
We have incurred operating losses and negative cash flows from operating activities since inception. As of December 31, 2021, we had an accumulated deficit of $433.0 million. We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development of, continue and initiate clinical trials of, and seek marketing approval for, our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution to the extent that such sales, marketing and distribution are not the responsibility of potential collaborators. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.
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As of December 31, 2021, we had cash, cash equivalents and short-term investments of $518.0 million. Based on our current plans, we believe that our existing cash, cash equivalents and short-term investments will be sufficient to enable us to fund our operating expenses and capital expenditure requirements into 2024. Our future capital requirements will depend on many factors, including:
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the scope, progress, results and costs of drug discovery, preclinical development, laboratory testing and clinical trials for our product candidates;
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the costs, timing and outcome of regulatory review of our product candidates;
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the costs of establishing or contracting for sales, marketing and distribution capabilities if we obtain regulatory approvals to market our product candidates;
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the costs of securing and producing drug substance and drug product material for use in preclinical studies, clinical trials and for use as commercial supply;
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the costs of securing manufacturing arrangements for development activities and commercial production;
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the scope, prioritization and number of our research and development programs;
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the extent to which we are obligated to reimburse, or entitled to reimbursement of, clinical trial costs under future collaboration agreements, if any;
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the extent to which we acquire or in-license other product candidates and technologies;
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the success of our current or future companion diagnostic test collaborations for companion diagnostic tests; and
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the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims.
To date, we have not generated any revenues from product sales, and we do not have any approved products. We do not know when, or if, we will generate any revenues from product sales. We do not expect to generate significant revenues from product sales unless and until we obtain regulatory approval of and commercialize one of our current or future product candidates. We are subject to all of the risks incident in the development of new therapeutic products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. We anticipate that we will need substantial additional funding in connection with our continuing operations.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of stock offerings, debt financings, collaborations, strategic partnerships or licensing arrangements. We do not have any committed external source of funds. Additional capital may not be available on reasonable terms, if at all. To the extent that we raise additional capital through the sale of stock or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include increased fixed payment obligations and covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, declaring dividends, selling or licensing intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we raise additional funds through collaborations, strategic partnerships or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, including our other technologies, future revenue streams or research programs, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we may be unable to carry out our business plan. As a result, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and commercialize our product candidates even if we would otherwise prefer to develop and commercialize such product candidates ourselves, and our business, financial condition and results of operations would be materially adversely affected.
The following table provides a summary of our net cash flow activities for the years presented, in thousands:
Years Ended December 31,
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Operating Activities.The increase of $34.7 million in net cash used in operating activities for the year ended December 31, 2021 compared to 2020 was primarily due to the increase of $40.8 million in net loss and $8.2 million in changes in accounts payable and accrued expenses, partially offset by increases of $10.8 million in non-cash share-based compensation expense and $4.0 million in amortization of premiums and accretion of discounts on marketable securities, net.
Investing Activities. The increase of $26.9 million in net cash used in investing activities for the year ended December 31, 2021 compared to 2020 was primarily due to an increase of $124.7 million in purchases of marketable securities, partially offset by an increase of $96.8 million in maturities of marketable securities.
Financing Activities.Net cash used in financing activities for the year ended December 31, 2021 primarily related to the repayment of all amounts owed under our prior term loan facility with Silicon Valley Bank, including a final payment and prepayment fees, totaling $7.9 million, partially offset by proceeds of $4.4 million from exercises of stock options and purchases under our employee stock purchase plan. Net cash provided by financing activities for the year ended December 31, 2020 consisted of proceeds of $459.3 million from our sale of common stock from our public offerings in May 2020 and December 2020 and $10.2 million from exercises of stock options and purchases under our employee stock purchase plan.
Contractual Obligations
The following is a summary of our significant contractual obligations as of December 31, 2021, in thousands:
Payments Due by Period
Less than 1-3 3-5 More than
Total 1 Year Years Years 5 Years
______________________
(1)
Future minimum lease payments under our operating leases in San Diego, California and Boston, Massachusetts.
We enter into short-term and cancellable agreements in the normal course of operations with clinical sites and contract research organizations, or CROs, for clinical research studies, professional consultants and various third parties for preclinical research studies, clinical supply manufacturing and other services through purchase orders or other documentation, or that are undocumented except for an invoice. Such short-term agreements are generally outstanding for periods less than one year and are settled by cash payments upon delivery of goods and services. The nature of the work being conducted under these agreements is such that, in most cases, the services may be cancelled upon prior notice of 90 days or less. Payments due upon cancellation generally consist only of payments for services provided and expenses incurred, including non-cancellable obligations of our service providers, up to the date of cancellation. These payments are not included in the table of contractual obligations above.
Excluded from the table above are milestone or contractual payment obligations contingent upon the achievement of certain milestones or events if the amount and timing of such obligations are unknown or uncertain. Our in-license agreements are cancelable by us with written notice within 180 days or less. We may be required to pay up to approximately $80.1 million in milestone payments, plus sales royalties, in the event that regulatory and commercial milestones under the in-license agreements are achieved.
Critical Accounting Policies and Management Estimates
The SEC defines critical accounting policies as those that are, in management’s view, important to the portrayal of our financial condition and results of operations and demanding of management’s judgment. Management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements required estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in the financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and share-based compensation. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be 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. Actual results may differ from these estimates under different assumptions or conditions. Though the impact of the COVID-19 pandemic to our business and operating results presents additional uncertainty, we continue to use the best information available to form our critical accounting estimates.
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While our significant accounting policies are described in more detail in Note 2 in the Notes to Financial Statements of this Annual Report, we believe the following accounting policies are critical to the judgments and estimates used in the preparation of our financial statements.
Research and Development Expenses
We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the accrual accordingly. Non-refundable advance payments for goods and services, including fees for process development or manufacturing and distribution of clinical supplies that will be used in future research and development activities, are deferred and recognized as expense in the period that the related goods are consumed or services are performed. Payments that we make in connection with in-licensed technology for a particular research and development project that have no alternative future uses, in other research and development projects or otherwise, and therefore no separate economic values are expensed as research and development costs at the time such costs are incurred.
Clinical Trial Costs and Accruals
We accrue clinical trial costs based on work performed. In determining the amount to accrue, we rely on estimates of total costs incurred based on enrollment, the completion of clinical trials and other events. We follow this method because we believe reasonably dependable estimates of the costs applicable to various stages of a clinical trial can be made. However, the actual costs and timing of clinical trials are highly uncertain, subject to risks and may change depending on a number of factors. Differences between the actual clinical trial costs and the estimated clinical trial costs that we have accrued in any prior period are recognized in the subsequent period in which the actual costs become known. Historically, our estimated accrued expenses have approximated actual expenses incurred; however, material differences could occur in the future.
Recently Adopted Accounting Pronouncements
See Note 2 in the Notes to Financial Statements of this Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We hold certain financial instruments for which a change in prevailing interest rates may cause the principal amount of the marketable securities to fluctuate. Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash, cash equivalents and short-term investments. We invest our excess cash primarily in money market funds, corporate debt securities, U.S. Treasury securities, commercial paper, non-U.S. government debt securities, supranational debt securities and U.S. Agency bonds. The primary objectives of our investment activities are to ensure liquidity and to preserve principal while at the same time maximizing the income we receive from our marketable securities without significantly increasing risk. Additionally, we established guidelines regarding approved investments and maturities of investments, which are designed to maintain safety and liquidity. For our short-term investments, we do not believe that an increase or decrease in market rates would have a significant impact on the realized values or the statements of operations and comprehensive loss. We believe that should a 10.0% change in interest rates were to have occurred on December 31, 2021, this change would not have had a material effect on the fair value of our investment portfolio as of that date. Any changes would only be realized if we sold the investments prior to maturity.
Inflation Risk
Inflation generally affects us by increasing our clinical trial costs. We do not believe that inflation has had a material effect on our business, financial condition or results of operations during the years ended December 31, 2021, 2020 or 2019.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data required pursuant to this item are included in Item 15 of this Annual Report and are presented beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
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Item 9A. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports required by the Exchange Act is recorded, processed, summarized and reported within the timelines specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report. Based on the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in the framework in Internal Control — Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2021.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report, which is included herein.
Change in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting identified in connection with management’s evaluation of such internal control that occurred during our most recent quarter ended December 31, 2021 that have materially affected, or are reasonably likely to material affect, our internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Kura Oncology, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Kura Oncology, Inc.’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Kura Oncology, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the balance sheets of Kura Oncology, Inc. as of December 31, 2021 and 2020, the related statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”) and our report dated February 24, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Diego, California
February 24, 2022
81
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
82
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this item and not set forth below will be set forth in the sections headed “Election of Directors” and “Executive Officers” in our definitive proxy statement for our 2022 Annual Meeting of Stockholders, or Proxy Statement, to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2021, and is incorporated herein by reference.
We have adopted a written code of ethics for directors, officers, including our principal executive officer and our principal financial and accounting officer, and employees, known as the Code of Business Conduct and Ethics. The Code of Business Conduct and Ethics is available on our website at www.kuraoncology.com under the Corporate Governance section of our Investors and Media page. We will promptly disclose on our website (i) the nature of any amendment to the Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and (ii) the nature of any waiver, including an implicit waiver, from a provision of the Code of Business Conduct and Ethics that is granted to one of these specified individuals that is required to be disclosed pursuant to SEC rules and regulations, the name of such person who is granted the waiver and the date of the waiver.
Item 11. Executive Compensation.
The information required by this item will be set forth in the sections headed “Executive Compensation” and “Non-Employee Director Compensation” in our Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item will be set forth in the section headed “Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statement and is incorporated herein by reference.
The information required by Item 201(d) of Regulation S-K will be set forth in the section headed “Executive Compensation” in our Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item will be set forth in the sections headed “Certain Relationships and Related Party Transactions” and “Information Regarding the Board of Directors and Corporate Governance” in our Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
The information required by this item will be set forth in the section headed “Ratification of Selection of Independent Registered Public Accounting Firm” in our Proxy Statement and is incorporated herein by reference.
83
PART IV
Item 15. Exhibits and Financial Statement Schedules.
1. Financial Statements. We have filed the following documents as part of this Annual Report:
Page
Report of Independent Registered Public Accounting Firm F-1
Balance Sheets F-3
Statements of Operations and Comprehensive Loss F-4
Statements of Stockholders’ Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
2. Financial Statement Schedules.
There are no financial statement schedules provided because the information called for is either not required or is shown either in the financial statements or the notes thereto.
3. Exhibits
84
85
23.1 Consent of Independent Registered Public Accounting Firm. X
24.1 Power of Attorney (see signature page). X
86
101.SCH Inline XBRL Taxonomy Extension Schema Document. X
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. X
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. X
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. X
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. X
+ Indicates management contract or compensatory plan.
* Certain portions of this exhibit (indicated by “[***]”) have been omitted as the Registrant has determined (i) the omitted information is not material and (ii) the omitted information would likely cause harm to the Registrant if publicly disclosed.
** Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC.
Item 16. Form 10-K Summary.
None.
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Kura Oncology, Inc.
Date: February 24, 2022 By: /s/ Troy E. Wilson, Ph.D., J.D.
Troy E. Wilson, Ph.D., J.D.
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Troy E. Wilson, Ph.D., J.D. and Thomas Doyle, and each of them, as his or her true and lawful attorneys-in-fact, each with full power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the SEC, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Name Title Date
Troy E. Wilson, Ph.D., J.D. (Principal Executive and Financial Officer)
/s/ Thomas Doyle Senior Vice President, Finance & Accounting February 24, 2022
Thomas Doyle (Principal Accounting Officer)
/s/ Helen Collins, M.D. Director February 24, 2022
Helen Collins, M.D.
/s/ Faheem Hasnain Director February 24, 2022
Faheem Hasnain
/s/ Thomas Malley Director February 24, 2022
Thomas Malley
/s/ Diane Parks Director February 24, 2022
Diane Parks
/s/ Carol Schafer Director February 24, 2022
Carol Schafer
/s/ Steven H. Stein, M.D. Director February 24, 2022
Steven H. Stein, M.D.
/s/ Mary Szela Director February 24, 2022
Mary Szela
88
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Kura Oncology, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Kura Oncology, Inc. (the Company) as of December 31, 2021 and 2020, the related statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 24, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
F-1
Clinical Trial Research and Development Expenses and Accruals
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2015.
San Diego, California
February 24, 2022
F-2
KURA ONCOLOGY, INC.
BALANCE SHEETS
(In thousands, except par value data)
December 31,
Assets
Current assets:
Prepaid expenses and other current assets 4,329 3,972
Operating lease right-of-use assets 5,573 6,334
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses $ 22,455 $ 23,024
Current portion of long-term debt — 3,000
Long-term debt — 4,250
Long-term operating lease liabilities 4,612 5,638
Other long-term liabilities 375 395
Commitments and contingencies (Note 8)
Stockholders’ equity:
Accumulated other comprehensive income (loss) (1,789 ) 46
Total liabilities and stockholders’ equity $ 534,051 $ 647,212
See accompanying notes to financial statements.
F-3
KURA ONCOLOGY, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
Years Ended December 31,
Operating Expenses:
Other Income (Expense):
Net loss per share, basic and diluted $ (1.97 ) $ (1.69 ) $ (1.51 )
Comprehensive Loss:
Other comprehensive income (loss):
See accompanying notes to financial statements.
F-4
KURA ONCOLOGY, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
Accumulated
Additional Other Total
Common Stock Paid-In Comprehensive Accumulated Stockholders’
Shares Par Value Capital Income (Loss) Deficit Equity
Share-based compensation expense — — 9,409 — — 9,409
Other comprehensive income — — — 462 — 462
Share-based compensation expense — — 12,807 — — 12,807
Other comprehensive loss — — — (285 ) — (285 )
Share-based compensation expense — — 23,579 — — 23,579
Other comprehensive loss — — — (1,835 ) — (1,835 )
See accompanying notes to financial statements.
F-5
KURA ONCOLOGY, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
Operating Activities
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash interest expense 399 — —
Loss from extinguishment of debt 212 — —
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (357 ) (711 ) (875 )
Accounts payable and accrued expenses (2,518 ) 5,677 856
Other long-term liabilities (20 ) 213 210
Investing Activities
Purchases of property and equipment (1,147 ) (2,171 ) —
Financing Activities
Repayment of long-term debt (7,250 ) (250 ) —
Payment of fees related to extinguishment of debt (611 ) — —
Proceeds from issuances of common stock, net — 459,335 108,165
Supplemental disclosure of cash flow information:
See accompanying notes to financial statements.
F-6
KURA ONCOLOGY, INC.
Notes to Financial Statements
1. Description of Business
Kura Oncology, Inc., is a clinical-stage biopharmaceutical company committed to realizing the promise of precision medicines for the treatment of cancer. Our pipeline consists of small molecule product candidates that target cancer signaling pathways where there is a strong scientific and clinical rationale to improve outcomes, and we intend to pair them with molecular or cellular diagnostics to identify those patients most likely to respond to treatment. We plan to advance our product candidates through a combination of internal development and strategic partnerships while maintaining significant development and commercial rights.
References in these Notes to Financial Statements to “Kura Oncology, Inc.,” “we,” “our” or “us,” refer to Kura Oncology, Inc.
2. Summary of Significant Accounting Policies
Reclassifications
Certain prior period balances have been reclassified to conform to the current period presentation.
Use of Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period.
Reported amounts and note disclosures reflect the overall economic conditions that are most likely to occur and anticipated measures management intends to take. Actual results could differ materially from those estimates. All revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. We operate in a single industry segment which is the discovery and development of precision medicines for the treatment of cancer. Our chief operating decision-maker reviews the operating results on an aggregate basis and manages the operations as a single operating segment in the United States.
Cash and Cash Equivalents
Cash and cash equivalents consist of checking, money market and highly liquid investments that are readily convertible to cash and that have an original maturity of three months or less from date of purchase. The carrying amounts approximate fair value due to the short maturities of these instruments.
F-7
Restricted Cash
Under the terms of an office lease entered into in March 2020, we are required to maintain a standby letter of credit during the term of the lease. As of December 31, 2021, restricted cash of $0.2 million was pledged as collateral for the letter of credit.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the balance sheets that sum to the total of the amounts shown on the statements of cash flows, in thousands:
December 31,
Short-Term Investments
Short-term investments are marketable securities with maturities greater than three months from date of purchase that are specifically identified to fund current operations. These investments are classified as current assets, even though the stated maturity date may be one year or more beyond the current balance sheet date, which reflects management’s intention to use the proceeds from sales of these securities to fund our operations, as necessary. The cost of short-term investments is adjusted for amortization of premiums or accretion of discounts to maturity, and such amortization or accretion is included in interest income. Dividend and interest income is recognized as interest income on the statements of operations and comprehensive loss when earned. Short-term investments are classified as available-for-sale securities and carried at fair value with unrealized gains and non-credit related losses recorded in other comprehensive income (loss) and included as a separate component of stockholders’ equity. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis and included in interest and other income, net on the statements of operations and comprehensive loss.
Allowance for Credit Losses
For available-for-sale securities in an unrealized loss position, we first assess whether we intend to sell, or if it is more likely than not that we will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through earnings. For available-for-sale securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, we consider the severity of the impairment, any changes in interest rates, market conditions, changes to the underlying credit ratings and forecasted recovery, among other factors. The credit-related portion of unrealized losses, and any subsequent improvements, are recorded in interest income through an allowance account. Any impairment that has not been recorded through an allowance for credit losses is included in other comprehensive income (loss) on the statements of operations and comprehensive loss.
We elected the practical expedient to exclude the applicable accrued interest from both the fair value and amortized costs basis of our available-for-sale securities for purposes of identifying and measuring an impairment. Accrued interest receivable on available-for-sale securities is recorded within prepaid expenses and other current assets on our balance sheets. Our accounting policy is to not measure an allowance for credit loss for accrued interest receivable and to write-off any uncollectible accrued interest receivable as a reversal of interest income in a timely manner, which we consider to be in the period in which we determine the accrued interest will not be collected by us.
Concentration of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash, cash equivalents and short-term investments. We maintain deposits in federally insured financial institutions in excess of federally insured limits. We have established guidelines to limit our exposure to credit risk by placing investments with high credit quality financial institutions, diversifying our investment portfolio and placing investments with maturities that maintain safety and liquidity. We periodically review and modify these guidelines to maximize trends in yields and interest rates without compromising safety and liquidity.
F-8
Fair Value Measurements
Fair value is defined as the exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
•
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities;
•
Level 2 - Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable;
•
Level 3 - Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.
Property and Equipment
Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Computer software and equipment are depreciated over their estimated useful lives of three years. Laboratory equipment is depreciated over its estimated useful life of five years. Furniture and fixtures are depreciated over their estimated useful lives of five years. Leasehold improvements are depreciated over the lesser of the term of the related lease or the useful life of the asset.
Impairment of Long-Lived Assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, including its eventual residual value, is compared to the carrying value to determine whether impairment exists. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written-down to their estimated fair values. For the years ended December 31, 2021, 2020 and 2019, there were no impairments of the value of long-lived assets.
Leases
We determine if an arrangement is a lease or contains lease components at inception. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet. For operating leases with an initial term greater than 12 months, we recognize operating lease right-of-use, or ROU, assets and operating lease liabilities based on the present value of lease payments over the lease term at commencement date. Operating lease ROU assets are comprised of the lease liability plus any lease payments made and excludes lease incentives. Lease terms may include options to extend or terminate when we are reasonably certain that the options will be exercised. We do not separate lease components from non-lease components. For our operating leases, we generally cannot determine the interest rate implicit in the lease, in which case we use our incremental borrowing rate as the discount rate for the lease. We estimate our incremental borrowing rate for our operating leases based on what we would normally pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments. Operating lease expense is recognized on a straight-line basis over the lease term.
If a lease is modified, the modified contract is evaluated to determine whether it is or contains a lease. If a lease continues to exist, the lease modification is determined to be a separate contract when the modification grants the lessee an additional ROU that is not included in the original lease and the lease payments increase commensurate with the standalone price for the additional ROU. A lease modification that results in a separate contract will be accounted for in the same manner as a new lease. For a modification that is not a separate contract, we reassess the lease classification using the modified terms and conditions and the facts and circumstances as of the effective date of the modification and recognize the amount of the remeasurement of the lease liability for the modified lease as an adjustment to the corresponding operating lease ROU asset.
Research and Development Expenses
Research and development expenses consist of costs associated with our research and development activities including salaries, benefits, share-based compensation and other personnel costs, clinical trial costs, manufacturing costs for non-commercial products, fees paid to external service providers and consultants, facilities costs and supplies, equipment and materials used in clinical and preclinical studies and research and development. All such costs are charged to research and development expense as incurred when these expenditures have no alternative future uses. We are obligated to make upfront
F-9
payments upon execution of certain research and development agreements. Advance payments, including nonrefundable amounts, for goods or services that will be used or rendered for future research and development activities are deferred. Such amounts are recognized as expense as the related goods are delivered or the related services are performed or such time when we do not expect the goods to be delivered or services to be performed. Payments that we make in connection with in-licensed technology for a particular research and development project that have no alternative future uses, in other research and development projects or otherwise, and therefore no separate economic values are expensed as research and development costs at the time such costs are incurred. As of December 31, 2021, we had no in-licensed technologies that have alternative future uses in research and development projects or otherwise.
Clinical Trial Costs and Accruals
A significant portion of our clinical trial costs relate to contracts with contract research organizations, or CROs. The financial terms of our CRO contracts may result in payment flows that do not match the periods over which materials or services are provided to us under such contracts. Our objective is to reflect the appropriate clinical trial expenses in our financial statements by matching those expenses with the period in which services and efforts are expended. As part of the process of preparing our financial statements, we rely on cost information provided by our CROs, concerning monthly expenses as well as reimbursement for pass through costs. We are also required to estimate certain of our expenses resulting from our obligations under our CRO contracts. Accordingly, our clinical trial expense accrual is dependent upon the timely and accurate reporting of CROs and other third-party vendors. If the contracted amounts are modified, for instance, as a result of changes in the clinical trial protocol or scope of work to be performed, we modify our accruals accordingly on a prospective basis. Revisions in the scope of a contract are charged to expense in the period in which the facts that give rise to the revision become reasonably certain. Historically, we have had no material changes in clinical trial expense that had a material impact on our results of operations or financial position.
Patent Costs
We expense all costs as incurred in connection with patent applications, including direct application fees, and the legal and consulting expenses related to making such applications, and such costs are included in general and administrative expenses on the statements of operations and comprehensive loss.
Share-Based Compensation
Our share-based awards are measured at fair value on the date of grant based upon the estimated fair value of common stock. The fair value of awards expected to vest are recognized and amortized on a straight-line basis over the requisite service period of the award less actual forfeitures. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model, or Black-Scholes model, that requires the use of assumptions including volatility, expected term, risk-free rate and the fair value of the underlying common stock. We estimate the fair value of restricted stock units granted based on the closing market price of our common stock on the date of grant. Actual forfeitures are applied as they occur, and any compensation cost previously recognized for awards for which the requisite service has not been completed is reversed in the period that the award is forfeited.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates applicable to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance against deferred tax assets is recorded if, based upon the weight of all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. For uncertain tax positions that meet “a more likely than not” threshold, we recognize the benefit of uncertain tax positions in the financial statements.
Comprehensive Loss
Comprehensive loss is defined as the change in equity during the period from transactions and other events and non-owner sources. For the periods presented, accumulated other comprehensive income (loss) consisted of unrealized gains and losses on marketable securities and foreign currency.
F-10
Net Loss per Share
Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is calculated by dividing the net loss by the weighted-average number of common shares and common stock equivalents outstanding for the period determined using the treasury-stock method. As we have reported net loss for the years ended December 31, 2021, 2020 and 2019, dilutive net loss per common share is the same as basic net loss per common share for those periods. Common stock equivalents outstanding are comprised of stock options, restricted stock units, a warrant and employee stock purchase plan rights and are only included in the calculation of diluted earnings per common share when net income is reported and their effect is dilutive. Common stock equivalents outstanding at December 31, 2021, 2020 and 2019 totaling approximately 7,156,000, 5,059,000 and 4,120,000, respectively, were excluded from the computation of dilutive weighted-average shares outstanding because their effect would be anti-dilutive.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that we adopt as of the specified effective date. We have evaluated recently issued accounting pronouncements and, based on our preliminary assessment, we do not believe any will have a material impact on our financial statements or related footnote disclosures.
F-11
3. Investments
We invest in available-for-sale securities consisting of money market funds, corporate debt securities, U.S. Treasury securities, commercial paper, non-U.S. government debt securities, supranational debt securities and U.S. Agency bonds. Available-for-sale securities are classified as either cash and cash equivalents or short-term investments on the balance sheets.
The following tables summarize, by major security type, our short-term investments that are measured at fair value on a recurring basis, in thousands:
Cash equivalents:
Short-term investments:
Cash equivalents:
Short-term investments:
Short-term investments are classified as current assets, even though the stated maturity date may be one year or more beyond the current balance sheet date, which reflects management’s intention to use the proceeds from sales of these securities to fund our operations, as necessary. As of December 31, 2021 and 2020, short-term investments of $246.9 million and $242.6 million, respectively, had maturities less than one year, and short-term investments of $180.4 million and $65.2 million, respectively, had maturities between one to three years. Realized gains and losses were de minimis for the years ended December 31, 2021, 2020 and 2019.
As of December 31, 2021 and 2020, 36 available-for-sale securities with a fair market value of $373.9 million and 10 available-for-sale securities with a fair market value of $85.2 million, respectively, were in gross unrealized loss positions, none of which were in a continuous unrealized loss position for greater than 12 months. We do not intend to sell these available-for-sale securities, and it is not more likely than not that we will be required to sell these securities prior to recovery of their amortized cost basis. Based on our review of these available-for-sale securities, the unrealized losses at December 31, 2021 were primarily due to changes in interest rates and not due to increased credit risks associated with specific securities. We have no allowance for credit losses as of December 31, 2021 and 2020. Unrealized gains and losses that are not credit-related are included in accumulated other comprehensive income (loss).
F-12
Accrued interest receivable on available-for-sale securities were $1.4 million and $0.9 million at December 31, 2021 and 2020, respectively. We have not written off any accrued interest receivables for the years ended December 31, 2021, 2020 and 2019.
4. Fair Value Measurements
As of December 31, 2021 and 2020, we had cash equivalents and short-term investments measured at fair value on a recurring basis.
Available-for-sale securities consist of U.S. Treasury securities, which are measured at fair value using Level 1 inputs, and corporate debt securities, commercial paper, non-U.S. government debt securities, supranational debt securities and U.S. Agency bonds which are measured at fair value using Level 2 inputs. We determine the fair value of Level 2 related securities with the aid of valuations provided by third parties using proprietary valuation models and analytical tools. These valuation models and analytical tools use market pricing or prices for similar instruments that are both objective and publicly available, including matrix pricing or reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids and/or offers. We validate the fair values of Level 2 financial instruments by comparing these fair values to a third-party pricing source.
The following tables summarize, by major security type, our cash equivalents and short-term investments that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy, in thousands:
Total Level 1 Level 2
Cash equivalents:
Short-term investments:
Non-U.S. government and supranational debt securities 22,908 — 22,908
Total Level 1 Level 2
Cash equivalents:
Short-term investments:
F-13
5. Balance Sheet Detail
Property and equipment consisted of the following, in thousands:
December 31,
Laboratory and computer equipment 953 276
Property and equipment, gross 3,517 2,307
Less: accumulated depreciation (844 ) (286 )
Property and equipment, net $ 2,673 $ 2,021
Depreciation expense was $0.6 million and $0.2 million for the years ended December 31, 2021 and 2020, respectively, and de minimis for the year ended December 31, 2019.
Accounts payable and accrued expenses consisted of the following, in thousands:
December 31,
Accrued clinical trial research and development expenses 2,619 4,080
Accrued other research and development expenses 5,341 5,581
Accrued compensation and benefits 7,923 7,016
Operating lease liability, current portion 2,263 2,089
Total accounts payable and accrued expenses $ 22,455 $ 23,024
6. Long-Term Debt
In November 2018, we entered into a loan and security agreement with Silicon Valley Bank, or the SVB Loan Agreement, providing for up to $20.0 million in a series of term loans. Upon entering into the SVB Loan Agreement, we borrowed $7.5 million, or the Term Loan. The Term Loan had a scheduled maturity date of May 1, 2023. In May 2021, we paid $6.6 million to repay all amounts owed under the Term Loan, which included a final payment of $0.6 million, representing 7.75% of the Term Loan which was being accrued through interest expense using the effective interest method, and a prepayment fee of $30,000. In accordance with ASC 470-50, Debt Modifications and Extinguishments, we accounted for the transaction as an extinguishment of debt. Accordingly, we recorded a loss of approximately $0.2 million in the second quarter of 2021, which is included in interest expense on the statements of operations and comprehensive loss for the year ended December 31, 2021.
7. License Agreements
The University of Michigan License Agreement
In December 2014, we entered into a license agreement with the Regents of the University of Michigan, or the University of Michigan, which was amended in March 2015, July 2015, September 2016, February 2017, May 2017 and August 2017, under which we received certain license rights for a non-refundable upfront license, annual maintenance fees and payments upon achievement of certain development and sales-based milestones. The licensed asset consists of several compounds, including our development candidate ziftomenib (KO-539). All future development, regulatory and commercial work on the asset will be completed fully and at our sole expense. The University of Michigan retains the right to use the asset for non-commercial research, internal and/or educational purposes, with the right to grant the same limited rights to other non-profit research institutions.
The agreement will terminate upon the last-to-expire patent rights, or may be terminated by us at any time with 90 days written notice of termination or terminated by the University of Michigan upon a bankruptcy by us, payment failure by us that is not cured within 30 days or a material breach of the agreement by us that is not cured within 60 days.
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Janssen License Agreement
In December 2014, we entered into a license agreement with Janssen Pharmaceutica NV, or Janssen, which was amended in June 2016, under which we received certain intellectual property rights related to tipifarnib in all indications other than virology for a non-refundable $1.0 million upfront license fee and payments upon achievement of certain development and sales-based milestones. Tipifarnib is a clinical-stage compound and all ongoing development, regulatory and commercial work will be completed fully and at our sole expense. Under the license agreement, Janssen had a first right to negotiate for an exclusive license back from us to develop and commercialize tipifarnib on terms to be negotiated in good faith. Janssen could exercise this right of first negotiation during a 60-day period following delivery of clinical data as specified in the agreement. In June 2018, Janssen declined to exercise this first right to negotiate.
The agreement will terminate upon the last-to-expire patent rights or last-to-expire royalty term, or may be terminated by us with 180 days written notice of termination. Either party may terminate the agreement in the event of material breach of the agreement that is not cured within 45 days. Janssen may also terminate the agreement due to our lack of diligence that is not cured within a three-month period.
Future Milestone Payments under License Agreements
Collectively, all of our license agreements provide for specified development, regulatory and sales-based milestone payments up to a total of $80.2 million payable upon occurrence of each stated event, of which $0.5 million relates to the initiation of certain development activities, $28.9 million relates to the achievement of specified regulatory approvals for the first indication and up to $50.8 million relates to the achievement of specified levels of product sales. Additional payments will be due for each subsequent indication if specified regulatory approvals are achieved. As of December 31, 2021, we have paid milestone payments totaling $0.1 million under the above-mentioned license agreements. Furthermore, if all the programs are successfully commercialized, we will be required to pay tiered royalties on annual net product sales ranging from the low single digits to the low teens, depending on the volume of sales and the respective agreement.
8. Commitments and Contingencies
Operating Leases
We currently have three operating leases for administrative and research and development office and lab space in San Diego, California and Boston, Massachusetts that expire between July 2024 and November 2025. Under the terms of the operating leases, we are required to pay our proportionate share of property taxes, insurance and normal maintenance costs. Two of our leases include renewal options for an additional five years, which were not included in the determination of the ROU asset or lease liability as the renewal was not reasonably certain at the inception of the lease. Our San Diego corporate headquarters lease and our San Diego lease for lab and office space provided for $1.0 million and $0.1 million, respectively, in reimbursements for allowable tenant improvements, which effectively reduced the total lease payments owed. Under the terms of our office lease in Boston, we are required to maintain a standby letter of credit of approximately $0.2 million during the term of the lease. Additionally, we had other operating leases including a sublease with a related party for office space in San Diego, California and a lease for office space in Cambridge, Massachusetts that ended in 2020, and a sublease for lab space in San Diego that ended in August 2021.
Maturities of our lease liabilities as of December 31, 2021 are as follows, in thousands:
Year Ending December 31,
Total lease payments 7,486
Less: imputed interest (611 )
Total operating lease liabilities $ 6,875
As of December 31, 2021 and 2020, total operating lease ROU assets were $5.6 million and $6.3 million, respectively. As of December 31, 2021, total operating lease liabilities were $6.9 million, of which $4.6 million were recorded as long-term lease liabilities. As of December 31, 2020, total operating lease liabilities were $7.7 million, of which $5.6 million were
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recorded as long-term lease liabilities. As of December 31, 2021 and 2020, the weighted-average discount rate was 5.5% for both periods, and the weighted-average remaining lease term was 3.3 years and 4.1 years, respectively.
Total cash paid for amounts included in the measurement of operating lease liabilities, net of tenant improvement reimbursements, was $2.1 million, $0.3 million and $0.5 million for the years ended December 31, 2021, 2020 and 2019, respectively. Operating lease ROU assets obtained in exchange for operating lease liabilities were $1.0 million, $7.5 million and $0.7 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Total operating lease expense was approximately $2.0 million, $1.7 million and $0.5 million for the years ended December 31, 2021, 2020 and 2019, respectively. We had also entered into short-term operating leases that expired in 2020. Total rent expense for the years ended December 31, 2021, 2020 and 2019 was approximately $2.0 million, $2.0 million and $0.6 million, respectively.
Litigation
From time to time, we may be involved in disputes, including litigation, relating to claims arising out of operations in the normal course of our business. Any of these claims could subject us to costly legal expenses and, while we generally believe that we have adequate insurance to cover many different types of liabilities, our insurance carriers may deny coverage or our policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of any such awards could have a material adverse effect on our results of operations and financial position. Additionally, any such claims, whether or not successful, could damage our reputation and business. We currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our results of operations or financial position.
9. Stockholders’ Equity
In December 2020, we completed a public offering in which we sold an aggregate of 9,326,500 shares of common stock at a price of $37.00 per share. Net proceeds from the public offering, after deducting underwriting discounts, commissions and offering expenses, were approximately $324.1 million.
In May 2020, we completed a public offering in which we sold an aggregate of 10,465,000 shares of common stock at a price of $13.75 per share. Net proceeds from the public offering, after deducting underwriting discounts, commissions and offering expenses, were approximately $134.9 million.
In June 2019, we completed a public offering in which we sold an aggregate of 6,785,000 shares of common stock at a price of $17.00 per share. Net proceeds from the public offering, after deducting underwriting discounts, commissions and offering expenses, were approximately $108.1 million.
In March 2019, we entered into an at-the-market issuance sales agreement with SVB Leerink LLC and Stifel, Nicolaus & Company, Incorporated, or ATM facility, under which we may offer and sell, from time to time, at our sole discretion, shares of our common stock having an aggregate offering price of up to $75.0 million. We have not yet sold any shares of our common stock under the ATM facility.
In connection with the loan and security agreement with Oxford Finance LLC and Silicon Valley Bank in 2016, a warrant issued to Oxford Finance LLC to purchase up to 33,988 shares of our common stock at an exercise price of $3.31 per share remains outstanding as of December 31, 2021.
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10. Share-Based Compensation
Equity Incentive Plan
In March 2015, our board of directors adopted our Amended and Restated 2014 Equity Incentive Plan, or 2014 Plan, which provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards, performance-based stock awards and other forms of equity compensation to our employees, consultants and members of our board of directors. The number of shares of our common stock available for future grant under the 2014 Plan will automatically increase on January 1 of each year through January 1, 2025 by 4% of the total number of shares of our common stock outstanding on December 31 of the preceding calendar year, subject to the ability of our board of directors to take action to reduce the size of the increase in any given year. On January 1, 2022, an automatic increase pursuant to the 2014 Plan occurred, resulting in 2,662,882 additional shares of common stock available for future grants under the 2014 Plan. We issue shares of common stock upon the exercise of options and vesting of restricted stock unit awards with the source of those shares of common stock being newly issued shares. As of December 31, 2021, 14,882,245 shares of common stock had been reserved for issuance, and 905,809 shares of common stock were available for future grants of equity awards, under the 2014 Plan.
Employee Stock Purchase Plan
In March 2015, our board of directors adopted the 2015 Employee Stock Purchase Plan, or ESPP. The ESPP permits eligible employees to purchase our common stock at a discount through payroll deductions during defined six-month offering periods. Eligible employees may elect to withhold up to 15% of their base earnings to purchase shares of our common stock at a price equal to 85% of the fair market value on the first day of the offering period or the purchase date, whichever is lower. The number of shares of our common stock reserved for issuance under the ESPP will automatically increase on January 1 of each calendar year through January 1, 2025 by the lesser of 1% of the total number of shares of our common stock outstanding on December 31 of the preceding calendar year and 2,000,000 shares of common stock, subject to the ability of our board of directors to take action to reduce the size of the increase in any given year. On January 1, 2022, an automatic increase pursuant to the ESPP occurred, resulting in 665,720 additional shares of common stock available for future grants under the ESPP. As of December 31, 2021, we have issued 110,699 shares of common stock, and 128,006 shares of common stock are reserved for future issuance, under the ESPP. Share-based compensation expense related to the ESPP for the years ended December 31, 2021, 2020 and 2019 was $0.3 million, $0.2 million and $0.1 million, respectively.
Stock Options and Restricted Stock Unit Awards
Stock Options
The exercise price of all stock options granted was equal to the fair market value of such stock on the date of grant. Stock options generally vest over a four-year period. The maximum contractual term for all stock options is ten years. The following is a summary of stock option activity for the year ended December 31, 2021, in thousands (except per share and years data):
The aggregate intrinsic value in the above table is calculated as the difference between the closing price of our common stock at December 31, 2021 of $14.00 per share and the exercise price of stock options that had strike prices below the closing price.
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The following summarizes certain information regarding stock options, in thousands (except per share data):
Years Ended December 31,
Weighted-average grant date fair value per share $ 17.84 $ 10.15 $ 10.93
As of December 31, 2021, unrecognized estimated compensation expense related to stock options was $52.3 million, which is expected to be recognized over the weighted-average remaining requisite service period of approximately 2.6 years.
Restricted Stock Unit Awards
Restricted stock unit awards, or RSUs, are share awards that, upon vesting, will deliver to the holder shares of our common stock. We began issuing RSUs in 2021. The RSUs generally vest annually over four years.
The following is a summary of RSU activity for the year ended December 31, 2021, in thousands (except per share and years data):
Outstanding at December 31, 2020 — $ —
Released — $ —
As of December 31, 2021, unrecognized estimated compensation expense related to RSUs was $4.1 million, which is expected to be recognized over the weighted-average remaining requisite service period of approximately 3.1 years.
Share-Based Compensation Expense
Total share-based compensation expense included on the statements of operations and comprehensive loss was comprised of the following, in thousands:
Years Ended December 31,
We estimated the fair value of employee stock options and ESPP using the Black-Scholes model based on the date of grant with the following assumptions:
Options ESPP
Years Ended December 31, Years Ended December 31,
Expected dividend yield — — — — — —
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Expected term. The expected term of stock options represents the period that the stock options are expected to remain outstanding. Due to limited historical exercise behavior, we determined the expected life assumption using the simplified method. The expected term of the ESPP stock purchase rights is six months, which represents the length of each purchase period.
Expected volatility. The expected volatility was based, in part, on our historical volatility and the historical volatility of comparable publicly-traded companies due to our limited trading history. Expected volatility for the ESPP stock purchase rights is based on our historical volatility.
Risk-free interest rate. The risk-free interest rates are based on the U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued.
Expected dividend yield. The expected dividend yield of zero reflects that we have not paid cash dividends since inception and do not intend to pay cash dividends in the foreseeable future.
11. Related Party Transactions
Our president and chief executive officer is also the sole managing member and a significant stockholder of Araxes Pharma LLC, or Araxes. The following is a summary of related party transactions for the years ended December 31, 2021, 2020 and 2019:
•
Facility Sublease
We subleased office space in San Diego, California from Araxes between June 2017 and June 2020. The monthly rent expense was between $16,000 to $24,000 per month during the sublease term. Rent expense, including operating costs, related to the sublease for the years ended December 31, 2020 and 2019 was approximately $0.2 million and $0.4 million, respectively.
•
Management Fees
We have a management services agreement with Araxes pursuant to which Araxes pays us monthly fees for management services calculated based on costs incurred by us in the provision of services to Araxes, plus a reasonable mark-up. For the years ended December 31, 2021, 2020 and 2019, we recorded approximately $0.1 million, $0.1 million and $0.2 million, respectively, of management fee income included in interest and other income, net on the statements of operations and comprehensive loss. In addition, the agreement allows for Araxes to reimburse us an amount equal to the number of full-time equivalents, or FTE, performing research and development services for Araxes, at an annual FTE rate of approximately $382,000, plus actual expenses as reasonably incurred. For the years ended December 31, 2021 and 2020, we did not record any reimbursements for research and development expenses provided to Araxes. For the year ended December 31, 2019, we recorded reimbursements of approximately $0.1 million, for research and development services provided to Araxes, which was recorded as a reduction to research and development expenses on the statements of operations and comprehensive loss.
•
Services Agreements
We have a services agreement with Wellspring Biosciences, Inc., or Wellspring, a wholly-owned subsidiary of Araxes, pursuant to which we pay Wellspring for research and development services provided to us in an amount equal to the number of FTE’s performing the services, at an annual FTE rate of $400,000, plus actual expenses as reasonably incurred. For the year ended December 31, 2021, we did not recognize any expense under this service agreement. For the years ended December 31, 2020 and 2019, we recognized approximately $0.1 million and $0.2 million, respectively, from research and development services provided to us under this agreement as research and development expense on the statements of operations and comprehensive loss.
We had a services agreement with ALG Partners, Inc., or ALG Partners, a recruiting and temporary staffing agency. Our chief operating officer is an immediate family member of the president of ALG Partners. There were no related party expenses with ALG Partners for the year ended December 31, 2021. For the years ended December 31, 2020 and 2019, expenses recognized as related party transactions with ALG Partners were approximately $0.1 million in both years.
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Araxes Asset Purchase Agreement
In December 2014, we entered into an asset purchase agreement with Araxes which was amended and restated in February 2015, under which we purchased certain early-stage patent rights related to compounds in the field of oncology for a purchase price of $0.5 million payable under a convertible promissory note. The agreement allows for contingent milestone payments of $9.7 million throughout development and commercialization of the asset, additional payments for each subsequent indication if specified regulatory approvals are achieved and tiered royalties on annual net product sales upon successful commercialization. To date, we have paid Araxes $0.3 million in milestone payments. Additionally, during the year ended December 31, 2020, we announced the termination of our KO-947 ERK inhibitor program and as such do not anticipate having any further obligations due under this agreement. There were no milestone payments to Araxes for the years ended December 31, 2021, 2020 and 2019.
12. Employee Benefit Plan
We have a defined contribution 401(k) plan for all employees. Under the terms of the plan, employees may make voluntary contributions as a percentage or defined amount of compensation. We provided a safe harbor contribution of 4.0% of the employee’s compensation in 2021 and 3.0% in 2020 and prior years, not to exceed eligible limits. For the years ended December 31, 2021, 2020 and 2019, we incurred approximately $1.0 million, $0.6 million and $0.3 million, respectively, in expenses related to the safe harbor contribution.
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13. Income Taxes
For the years ended December 31, 2021, 2020 and 2019, we did not record a provision for income taxes due to a full valuation against our deferred taxes.
Our effective income tax rate differs from the statutory federal rate of 21% for the years ended December 31, 2021, 2020 and 2019, due to the following, in thousands:
Years Ended December 31,
State income tax, net of federal benefit (9,758 ) (7,684 ) (4,810 )
Research and development tax credits (5,850 ) (3,169 ) (1,664 )
Income tax expense $ — $ — $ —
Significant components of our deferred tax assets and liabilities are shown below, in thousands:
December 31,
Deferred tax assets:
Research and development tax credit carryforwards 13,794 7,944
Deferred tax liabilities:
Operating lease right-of-use assets (1,638 ) (1,868 )
Total gross deferred tax liabilities (1,873 ) (2,123 )
Net deferred tax assets $ — $ —
As of December 31, 2021, we had federal net operating loss, or NOL, carryforwards of $380.5 million, of which $305.1 million can be carried forward indefinitely. The remaining federal net operating loss carryforwards of $75.4 million will begin to expire in 2034, unless previously utilized. In addition, as of December 31, 2021, we had state loss carryforwards of $456.5 million, of which $456.0 million begin to expire in 2034 and $0.5 million begin to expire in 2030, unless previously utilized. We also have federal and state research and development credit carryforwards of $14.6 million and $4.0 million, respectively, as of December 31, 2021. The federal research and development credits will begin to expire in 2034, unless previously utilized. Of the state research and development credits, $2.4 million will carryforward indefinitely and approximately $1.6 million will begin to expire in 2031, unless previously utilized.
We file tax returns as prescribed by the tax laws of the jurisdictions in which we operate. Our tax years since inception are subject to examination by the federal and state jurisdictions due to the carryforward of unutilized net operating losses and research and development credits. We have not been, nor are we currently, under examination by the federal or any state tax authority.
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Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use existing deferred tax assets. Based on the weight of the evidence, including our limited existence and losses since inception, management has determined that it is more likely than not that the deferred tax assets will not be realized and therefore has recorded a full valuation allowance against the deferred taxes. The valuation allowance increased by $40.7 million from December 31, 2020.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, or IRC, annual use of our NOL or research and development credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period. We previously completed a study to assess whether an ownership change, as defined by IRC Section 382, had occurred from our formation through March 31, 2016. Based upon this study, we determined that an ownership change occurred but concluded the annual utilization limitation would be sufficient to utilize our pre-ownership change NOLs and research and development credits prior to expiration. We completed additional studies and concluded no further ownership changes occurred through December 31, 2018. We are currently in the process of completing a study for 2019, 2020, and 2021, however, we do not expect any material limitations to the utilization of NOLs or research and development credits. Future ownership changes may limit our ability to utilize remaining tax attributes. Any carryforwards that will expire prior to utilization as a result of such additional limitations will be removed from deferred tax assets, with a corresponding reduction of the valuation allowance.
In accordance with authoritative guidance, the impact of an uncertain income tax position is recognized at the largest amount that is “more likely than not” to be sustained upon audit by the relevant taxing authority. An uncertain tax position will not be recognized if it has less than a 50% likelihood of being sustained.
The following table summarizes the activity related to our unrecognized tax benefits, in thousands:
December 31,
Increases related to prior year tax positions — — —
Increases from tax positions taken in the current year 1,424 1,237 678
Gross unrecognized tax benefits at the end of the year $ 4,402 $ 2,978 $ 1,741
Our practice is to recognize interest and penalties related to income tax matters in income tax expense. There was no accrued interest or penalties included on the balance sheets as of December 31, 2021 and 2020, and we have not recognized interest and penalties on the statements of operations and comprehensive loss for the years ended December 31, 2021, 2020 or 2019.
We do not expect that there will be a significant change in the unrecognized tax benefits over the next 12 months. Due to the existence of the valuation allowance, future changes in our unrecognized tax benefits will not impact our effective tax rate.
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