AKERO THERAPEUTICS, INC. Management report and analysis of the financial situation and operating results. (Form 10-Q)

The following discussion should be read in conjunction with our financial
statements and accompanying footnotes appearing elsewhere in this Quarterly
Report on Form 10-Q and the audited financial statements and related notes
contained in our Annual Report on Form 10-K for the year ended December 31,
2021. Some of the information contained in this discussion and analysis or set
forth elsewhere in this Quarterly Report on Form 10-Q, including information
with respect to our plans and strategy for our business and related financing,
includes forward-looking statements that involve risks and uncertainties. See
"Special Note Regarding Forward-Looking Statements." Because of many factors,
including those factors set forth in the "Risk Factors" section of this
Quarterly Report on Form 10-Q, our actual results could differ materially from
the results described in or implied by the forward-looking statements contained
in the following discussion and analysis. We do not assume any obligation to
update any forward-looking statements, whether as a result of new information,
future events or otherwise, except as required by law.

Insight

We are a clinical-stage company dedicated to developing transformational
treatments for patients with serious metabolic diseases marked by high unmet
medical need, including non-alcoholic steatohepatitis, or NASH, a disease
without any approved therapies. NASH is a severe form of nonalcoholic fatty
liver disease, or NAFLD, characterized by inflammation and fibrosis in the liver
that can progress to cirrhosis, liver failure, cancer and death. Our lead
product candidate, efruxifermin, or EFX, is an analog of fibroblast growth
factor 21, or FGF21, which is an endogenously expressed hormone that protects
against cellular stress and regulates metabolism of lipids, carbohydrates and
proteins throughout the body. Based on statistically significant fibrosis
regression and NASH resolution among patients with biopsy-confirmed
pre-cirrhotic NASH, as well as consistent results across multiple clinical
trials, we believe EFX has the potential, if approved, to be a best-in-class
medicine for treating NASH.

EFX has been evaluated in four randomized, double-blind, placebo-controlled
clinical trials, in which a total of 245 adult patients with either NASH (N=162)
or T2D (N=83) were treated with EFX and evaluated for up to 24 weeks. We
recently reported Week 24 results of the Phase 2b HARMONY study in patients with
pre-cirrhotic NASH (F2-F3) fibrosis. Both the 50mg and 28mg EFX dose groups
achieved statistical significance on primary and secondary histology endpoints
after 24 weeks. On the primary endpoint of at least a one-stage improvement of
fibrosis without worsening of NASH, the 50mg group (41%) and 28mg group (39%)
had a response rate approximately double that of placebo (20%). In addition, 76%
of patients treated with 50mg EFX and 47% of those treated with 28mg achieved
NASH resolution without worsening of fibrosis, which represented response rates
approximately three to five times the placebo rate of 15%. We also observed 41%
and 29% response rates for the 50mg and 28mg dose groups, respectively, on a
combined endpoint of at least a one-stage improvement in fibrosis and NASH
resolution, which were approximately six to eight times the 5% placebo rate.
Significant improvements in non-invasive fibrosis markers, liver fat, liver
enzymes, lipoproteins, and glycemic control were also observed for both EFX dose
groups, with an additional significant reduction in body weight observed for the
50mg dose group. Across EFX groups, the most frequent adverse events were mild
gastrointestinal events. We believe these results favorably differentiate EFX
within the NASH landscape.


EFX is currently being evaluated in two Phase 2b clinical trials in patients
with biopsy-confirmed NASH: a long-term follow-up period for the HARMONY study
in patients with pre-cirrhotic NASH (F2-F3 fibrosis), for which we recently
reported results after 24 weeks of treatment, and the SYMMETRY study in patients
with cirrhotic NASH (F4 fibrosis, compensated). The SYMMETRY study includes an
expansion cohort, known as Cohort D, evaluating the safety and tolerability of
EFX compared to placebo when added to an existing GLP-1 receptor agonist in
patients with pre-cirrhotic NASH (F1-F3 fibrosis) and Type 2 diabetes. We expect
to report the results of Cohort D in the first half of 2023 and the results of
the SYMMETRY study in the second half of 2023.

Results from the 16-week BALANCED study, which included an expansion cohort of
patients who had cirrhotic NASH, as well as the recent results from the 24-week
HARMONY study, support our confidence that we will observe statistically
significant histological improvements in the SYMMETRY main study evaluating EFX
for the treatment of patients with cirrhotic NASH. For example, we observed that
4 of 12, or 33%, of patients with cirrhosis due to NASH (F4 fibrosis,
compensated) achieved a one-stage improvement in fibrosis without worsening of
NASH after

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Table of Contents only 16 weeks of treatment with EFX, compared to 0 out of 5, or 0%, for the placebo group.


The FDA and European Medicines Agency, or EMA, have respectively granted a Fast
Track designation and a Priority Medicines, or PRIME, designation for EFX for
the treatment of NASH. The Fast Track and PRIME programs are designed to enhance
regulatory support for the development of promising investigational medicines
where early clinical data suggest the potential to meet a high unmet medical
need. Benefits of these programs may include more frequent regulatory
interactions, enhanced guidance on the overall development plan and regulatory
strategy, and accelerated assessment of marketing authorization applications.

As demonstrated across four separate clinical trials in patients with NASH
and/or T2D, EFX has a unique ability to reproduce the actions of native FGF21.
Consequently, we believe EFX holds the potential to be a highly differentiated,
best-in-class FGF21 analog and promising monotherapy for the treatment of NASH,
if approved. NASH is a complex disease, and its ideal treatment would include
intervening at each stage of its pathogenesis. We believe EFX could potentially
address all stages of NASH pathogenesis in a single treatment: reversing
fibrosis, resolving steatohepatitis, and helping to restore healthy metabolism
to the whole body. We also believe EFX may be able to be used in combination
with other therapies for potentially greater effect in certain subpopulations,
particularly among the substantial proportion of patients with both NASH and T2D
who are expected to be treated with GLP-1 therapeutics to manage their T2D.

We were incorporated in January 2017 and have devoted substantially all of our
efforts to organizing and staffing our company, business planning, raising
capital, in-licensing rights to EFX, research and development activities for
EFX, building our intellectual property portfolio, exploring pipeline expansion
opportunities, and providing general and administrative support for these
operations. To date, we have principally raised capital through the issuance of
convertible preferred stock, the initial public offering of our common stock in
June 2019, and follow-on public offerings of our common stock in July 2020 and
September 2022. We have incurred significant operating losses since inception.
Our ability to generate product revenue sufficient to achieve profitability will
depend heavily on the successful development and eventual commercialization of
EFX and any future product candidates. Our net losses were $35.5 million and
$89.0 million for the three and nine months ended September 30, 2022,
respectively. Our net losses were $24.3 million and $68.4 million for the three
and nine months ended September 30, 2021, respectively. As of September 30,
2022, we had an accumulated deficit of $399.3 million.

We expect to continue to incur significant expenses for at least the next
several years as we advance EFX through later-stage clinical development,
develop additional product candidates and seek regulatory approval of any
product candidates that complete clinical development. In addition, if we obtain
marketing approval for any product candidates, we expect to incur significant
commercialization expenses related to product manufacturing, marketing, sales
and distribution.

We may also incur expenses in connection with the in-licensing or acquisition of
additional product candidates. As a result, we will need substantial additional
funding to support our continuing operations and pursue our growth strategy.
Until such time as we can generate significant revenue from product sales, if
ever, we expect to finance our operations through the sale of equity, debt
financings, or other capital sources, which may include collaborations with
other companies or other strategic transactions. We may be unable to raise
additional funds or enter into such other agreements or arrangements when needed
on favorable terms, or at all. If we fail to raise capital or enter into such
agreements as and when needed, we may have to significantly delay, reduce or
eliminate the development and commercialization of one or more of our product
candidates or delay our pursuit of potential in-licenses or acquisitions.

Because of the numerous risks and uncertainties associated with product
development, we are unable to predict the timing or amount of increased expenses
or when or if we will be able to achieve or maintain profitability. Even if we
are able to generate product sales, we may not become profitable. If we fail to
become profitable or are unable to sustain profitability on a continuing basis,
then we may be unable to continue our operations at planned levels and be forced
to reduce or terminate our operations.

As of September 30, 2022, we had cash and cash equivalents of $374.0 million,
which we believe will be sufficient, if combined with funds available to us from
Hercules Capital, Inc., upon satisfaction of certain contingent milestones, to
fund our current operating plan into 2025.

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Impact of the COVID-19 Pandemic

As of November 2022, the ongoing COVID-19 pandemic continues to evolve with
emerging variants, such as BA.4 and BA.5 subvariants and other SARS-CoV-2
viruses. The effects of restrictions previously implemented by the United
States, Europe and Asia led to delays in the commencement of
non-COVID-19-related clinical trials. As a result, the COVID-19 pandemic has
caused significant disruptions to the U.S., regional and global economies and
has contributed to significant volatility and negative pressure in financial
markets.

We have been carefully monitoring the COVID-19 pandemic and its potential impact
on our business and have taken important steps to help ensure the safety of
employees and their families and to reduce the spread of COVID-19. We have
established, and maintained without interruption, a work-from-home policy for
all employees. We have also maintained efficient communication with our
manufacturing and supply partners as the COVID-19 situation has progressed. We
have taken these precautionary steps while maintaining business continuity so
that we can continue to progress our programs. Our financial results for the
three and nine months ended September 30, 2022 and for the years ended December
31, 2021 were not significantly impacted by COVID-19, and the COVID-19 pandemic
did not materially impact data collection for the main portion of the BALANCED
study, which was completed in 2021. In addition, our ongoing Phase 2b HARMONY
trial, for which we reported topline results in September 2022, and our ongoing
SYMMETRY trial, for which enrollment remains open, have not been materially
impacted by the COVID-19 pandemic.

Our manufacturing efforts to date have progressed without any adverse impact
from COVID-19. Specifically, commercial-scale manufacture of GMP drug substance,
or API, and drug product for our Phase 2b HARMONY and SYMMETRY studies was
completed during 2020 and 2021. Manufacture of API for Phase 3 clinical trials
was initiated on schedule in May 2021 and completed during the first quarter of
2022. Scale-up of manufacturing of a new drug product formulation and delivery
device for self-administration by patients in Phase 3 clinical trials was
completed in the first quarter of 2022 and manufacture of GMP drug product
commenced in the second quarter of 2022. Sufficient drug product/device has been
released to support initiation of Phase 3 clinical trials, subject to regulatory
approval.

Notwithstanding the foregoing, the future impact of the COVID-19 pandemic on our
industry, the healthcare system and our current and future operations and
financial condition will depend on future developments, which are highly
uncertain and cannot be predicted with confidence, including the scope, severity
and duration of the pandemic, the impact of new strains of the virus, the
effectiveness and availability of vaccines and antiviral medications, the pace
of these efforts, the actions taken to contain the pandemic or mitigate its
impact, any additional preventative and protective actions that governments may
direct, and the direct and indirect economic effects of the pandemic and
containment measures, among others. See "Item 1A. Risk Factors" for a discussion
of the potential adverse impact of COVID-19 on our business, results of
operations and financial condition.

Components of our operating results

Revenue

We have not generated any revenue since our inception and do not expect to
generate any revenue from the sale of products in the near future, if at all. If
our development efforts for EFX or additional product candidates that we may
develop in the future are successful and result in marketing approval or if we
enter into collaboration or license agreements with third parties, we may
generate revenue in the future from a combination of product sales or payments
from such collaboration or license agreements.

Operating Expenses

Research and development costs

Research and development expenses consist primarily of costs incurred in
connection with the development of EFX, as well as unrelated discovery program
expenses. We expense research and development costs as incurred. These expenses
include:

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•
employee-related expenses, including salaries, related benefits and stock-based
compensation expense for employees engaged in research and development
functions;
•
expenses incurred under agreements with CROs that are primarily engaged in the
oversight and conduct of our clinical trials; CMOs that are primarily engaged to
provide drug substance and product for our clinical trials, research and
development programs, as well as investigative sites and consultants that
conduct our clinical trials, nonclinical studies and other scientific
development services;
•
the cost of acquiring and manufacturing nonclinical and clinical trial
materials, including manufacturing registration and validation batches;
•
costs related to compliance with quality and regulatory requirements; and
•
payments made under third-party licensing agreements.

Advance payments that we make for goods or services to be received in the future
for use in research and development activities are recorded as prepaid expenses.
Such amounts are recognized as an expense as the goods are delivered or the
related services are performed, or until it is no longer expected that the goods
will be delivered or the services rendered.

Product candidates in later stages of clinical development, such as EFX,
generally have higher development costs than those in earlier stages of clinical
development, primarily due to the increased size and duration of later-stage
clinical trials. We expect that our research and development expenses will
increase substantially in connection with our planned clinical development
activities in the near term and in the future. At this time, we cannot
accurately estimate or know the nature, timing and costs of the efforts that
will be necessary to complete the clinical development of EFX and any future
product candidates.

Our clinical development costs can vary significantly depending on factors such as:

•
per patient trial costs;
•
the number of sites included in the trials;
•
the countries in which the trials are conducted;
•
the length of time required to enroll eligible patients;
•
the number of patients that participate in the trials;
•
the number of doses that patients receive;
•
the drop-out or discontinuation rates of patients enrolled in clinical trials;
•
potential additional safety monitoring requested by regulatory agencies;
•
the duration of patient participation in the trials and follow-up;
•
any setbacks or delays to the initiation or completion of preclinical or
non-clinical studies, product development or clinical trials due to the COVID-19
pandemic;
•
the cost and timing of manufacturing our product candidates, including on
account of any disruption or delays to the supply of our product candidates due
to the COVID-19 pandemic;
•
the phase of development of our product candidates; and
•
the efficacy and safety profile of our product candidates.

The successful development and commercialization of product candidates is highly
uncertain. This is due to the numerous risks and uncertainties associated with
product development and commercialization, including the following:

the timing and progress of nonclinical and clinical development activities;
•
the number and scope of nonclinical and clinical programs we decide to pursue;
•
the ability to raise necessary additional funds;
•
the progress of the development efforts of parties with whom we may enter into
collaboration arrangements;
•
our ability to maintain our current development program and to establish new
ones;
•
our ability to establish new licensing or collaboration arrangements;
•
the successful initiation and completion of clinical trials with safety,
tolerability and efficacy profiles that are satisfactory to the FDA or any
comparable foreign regulatory authority;
•
the receipt and related terms of regulatory approvals from applicable regulatory
authorities;
•
the availability of drug substance, drug product, and delivery devices utilized
in the production of our product candidate;

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•
establishing and maintaining agreements with third-party manufacturers for
clinical supply for our clinical trials and commercial manufacturing, if our
product candidate is approved;
•
our ability to obtain and maintain patents, trade secret protection and
regulatory exclusivity, both in the United States and internationally;
•
our ability to protect our rights in our intellectual property portfolio;
•
the commercialization of our product candidate, if and when approved;
•
obtaining and maintaining third-party insurance coverage and adequate
reimbursement;
•
the acceptance of our product candidate, if approved, by patients, the medical
community and third-party payors;
•
competition with other products;
•
the impacts of a pandemic, epidemic or outbreak of an infectious disease,
including COVID-19, on the supply of our product candidate and ability to
successfully initiate and complete preclinical and non-clinical studies and
clinical trials, to receive regulatory approval for our product candidate and to
commercialize our product candidate, if approved; and
•
a continued acceptable safety profile of our therapy following approval.

A change in the outcome of any of these variables with respect to the
development of our product candidates could significantly change the costs and
timing associated with the development of that product candidate. We may never
succeed in obtaining regulatory approval for any of our product candidates.

General and administrative expenses

General and administrative expenses consist primarily of salaries and related
costs for personnel in executive, finance, corporate and business development,
and administrative functions. General and administrative expenses also include
legal fees relating to patent and corporate matters; professional fees for
accounting, auditing, tax and administrative consulting services; insurance
costs; administrative travel expenses; marketing expenses and other operating
costs.

We anticipate that our general and administrative expenses will increase in the
future as we increase our headcount to support development of EFX and our
continued research activities. We also anticipate that we will incur increased
accounting, audit, legal, tax, regulatory, compliance, and director and officer
insurance costs, as well as investor and public relations expenses associated
with maintaining compliance with exchange listing and SEC requirements.

Interest expense

Interest expense primarily consists of interest expense on our term loan with Hercules.

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Other income

Other income consists primarily of interest income earned on our cash, cash equivalents and short-term marketable securities.

Operating results

Comparison of the three months ended September 30, 2022 and 2021

The following table summarizes our operating results for the three months ended September 30, 2022 and 2021:

                                   Three Months Ended
                                     September 30,
                                  2022             2021          $ Change        % Change
                                   (in thousands, except percentages)
Operating expenses:
Research and development     $       25,087     $    19,470     $     5,617             29   %
General and administrative           11,004           4,883           6,121            125   %
Total operating expenses             36,091          24,353          11,738             48   %
Loss from operations                (36,091 )       (24,353 )       (11,738 )           48   %
Interest expense                       (324 )             -            (324 )            -   -
Other income, net                       873              23             850          3,696   %
Net loss                     $      (35,542 )   $   (24,330 )   $   (11,212 )           46   %



Research and development costs

The following table summarizes our research and development expenses incurred during the three months ended September 30, 2022 and 2021:

                                        Three Months Ended
                                           September 30,
                                       2022            2021           $ Change         % Change
                                                 (in thousands, except percentages)
Research and development
expenses:
Direct EFX program expenses         $    18,873     $    16,883     $       1,990              12   %
Personnel and other R&D related
expenses                                  6,214           2,587             3,627             140   %
Total research and development
expenses                            $    25,087     $    19,470     $       5,617              29   %



Research and development expenses were $25.1 million and $19.5 million for the
three months ended September 30, 2022 and 2021, respectively, an increase of
$5.6 million. Direct costs for our EFX program increased $2.0 million,
attributed primarily to a $3.2 million increase in CRO expenses related to our
ongoing HARMONY and SYMMETRY clinical trials and a $0.7 million increase in
other research and development costs offset by a $1.9 million decrease due to
the timing of third-party contract manufacturing expenses for EFX. Personnel and
other research and development expenses increased $3.6 million, due to a $3.4
million increase in stock-based compensation and a $0.2 million increase in wage
and wage-related expenses resulting from increased staff. We expect that our
research and development expenses will increase substantially in connection with
our planned manufacturing and clinical development activities in the near term
and in the future to support the ongoing programs.

General and administrative expenses

General and administrative expenses were $11.0 million and $4.9 million for the
three months ended September 30, 2022 and 2021, respectively, an increase of
$6.1 million which was due primarily to a $5.7 million increase in stock-based
compensation and a $0.4 increase in other expenses and wage and wage-related
expenses resulting from increased staff.

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Interest expense

Interest expense for the three months ended September 30, 2022 mainly consists of $0.3 million interest expense related to the Hercules term loan.

Other income

Other income for the three months ended September 30, 2022 is comprised
primarily of $0.9 million of interest income from our cash, cash equivalents and
short-term marketable securities compared to less than $0.1 million for the
three months ended September 30, 2021. This increase is related to increased
investment returns on our cash, cash equivalents and short-term and marketable
securities.

Comparison of the nine months ended September 30, 2022 and 2021

The following table summarizes our operating results for the nine months ended September 30, 2022 and 2021:

                                   Nine Months Ended
                                     September 30,
                                  2022             2021          $ Change        % Change
                                   (in thousands, except percentages)
Operating expenses:
Research and development     $       66,964     $    54,048     $    12,916             24   %
General and administrative           22,772          14,399           8,373             58   %
Total operating expenses             89,736          68,447          21,289             31   %
Loss from operations                (89,736 )       (68,447 )       (21,289 )           31   %
Interest expense                       (377 )             -            (377 )            -   -
Other income, net                     1,139              94           1,045          1,112   %
Net loss                     $      (88,974 )   $   (68,353 )   $   (20,621 )           30   %


Research and development costs

The following table summarizes our research and development expenses incurred during the nine months ended September 30, 2022 and 2021:

                                         Nine Months Ended
                                           September 30,
                                       2022            2021           $ Change         % Change
                                                 (in thousands, except percentages)
Research and development
expenses:
Direct EFX program expenses         $    54,110     $    47,179     $      6,931               15   %
Personnel and other R&D related
expenses                                 12,854           6,869            5,985               87   %
Total research and development
expenses                            $    66,964     $    54,048     $     12,916               24   %




Research and development expenses were $67.0 million and $54.0 million for the
nine months ended September 30, 2022 and 2021, respectively, an increase of
$13.0 million. Direct costs for our EFX program increased $6.9 million,
attributed primarily to a $11.0 million increase in CRO expenses related to our
ongoing HARMONY and SYMMETRY clinical trials and a $0.9 million increase in
other research and development costs offset by a $5.0 million decrease due to
the timing of third-party contract manufacturing expenses for EFX. Personnel and
other research and development expenses increased $6.0 million, due to a $4.6
million increase in stock-based compensation and a $1.4 million increase in
other R&D, wage and wage-related expenses resulting from increased staff. We
expect that our

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research and development expenses will increase substantially in connection with
our planned manufacturing and clinical development activities in the near term
and in the future to support the ongoing programs.

General and administrative expenses

General and administrative expenses were $22.8 million and $14.4 million for the
nine months ended September 30, 2022 and 2021, respectively, an increase of $8.4
million which was due primarily to a $7.2 million increase in stock-based
compensation and a $1.1 million increase in other expenses and wage and
wage-related expenses resulting from increased staff.

Interest expense

Interest expense for the nine months ended September 30, 2022 mainly consists of $0.4 million interest expense related to the Hercules term loan.

Other income

Other income for the nine months ended September 30, 2022 is comprised primarily
of $1.1 million of interest income from our cash, cash equivalents and
short-term marketable securities compared to $0.1 million for the nine months
ended September 30, 2021. This increase is related to increased investment
returns on our cash, cash equivalents and short-term and marketable securities.

Cash and capital resources

From our inception through September 30, 2022, we have incurred significant
operating losses. We have not yet commercialized any products and we do not
expect to generate revenue from sales of products for several years, if at all.
Through September 30, 2022, we had funded our operations primarily with proceeds
from the sale of our redeemable convertible preferred stock, the initial public
offering of our common stock in June 2019, and follow-on public offerings of our
common stock in July 2020 and in September 2022. In June 2022, we received $25.0
million from an equity investment from Pfizer, Inc. and $10.0 million from a
Term Loan provided by Hercules. From our inception through September 30, 2022,
these and other funding sources have provided gross proceeds totaling $677.7
million. As of September 30, 2022, we had cash and cash equivalents of $374.0
million. We have invested our cash resources primarily in liquid money market
accounts.

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

                                                               Nine Months Ended
                                                                 September 30,
                                                            2022              2021
                                                                (in thousands)
Net cash used in operating activities                   $     (67,009 )   $     (52,986 )
Net cash provided by investing activities                      37,620       

30 280

Net cash provided by financing activities                     252,909       

359

Net increase (decrease) in cash, cash equivalents and
restricted cash                                         $     223,520     $     (22,347 )



Cash flow from operating activities

Cash used in operating activities for the nine months ended September 30, 2022
was $67.0 million, consisting of a net loss of $89.0 million offset by non-cash
charges of $19.7 million, including $19.2 million of stock-based compensation
expense, and changes in our operating assets and liabilities of $2.3 million.
The changes in operating assets and liabilities was primarily due to the timing
of prepayments and payments to our CMOs and CROs for ongoing clinical trial and
manufacturing activities.

Cash used in operating activities for the nine months ended September 30, 2021
was $53.0 million, consisting of a net loss of $68.4 million which was partially
offset by non-cash charges of $8.2 million and changes in our operating assets
and liabilities of $7.2 million. The non-cash charges are primarily related to
$7.4 million of stock-based compensation expense. The change in operating assets
and liabilities was primarily due to increases of $3.2 million in

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prepaid expenses and other assets, $3.5 million in accounts payable and $7.1
million in accrued expenses and other current liabilities, all of which are
related to the timing of payments and prepayments to our CROs and CMOs.




Cash flow from investing activities

Cash flow from investing activities for the nine months ended September 30, 2022 has been $37.6 million maturities of short-term negotiable securities.

Cash flow from investing activities for the nine months ended September 30, 2021 has been $30.3 million made up of $73.8 million from the maturities of short-term marketable securities offset by $43.6 million in purchases of short-term negotiable securities.

Cash flow from financing activities

Cash provided by financing activities for the nine months ended September 30,
2022 was $252.9 million, including $216.2 million from follow-on public offering
proceeds, net of underwriting discounts, $25.0 million from an equity investment
from Pfizer, Inc. through a registered direct common stock offering, $10.0
million from a Term Loan provided by Hercules and $2.4 million in proceeds from
the exercise of stock options and the issuance of employee stock purchase plan
shares.

Cash flow from financing activities for the nine months ended September 30, 2021 has been $0.4 million primarily from the exercise of stock options and the issuance of stock options reserved for employees.

Description of the debt

We have outstanding borrowings of $10.0 million under a loan and security
agreement with Hercules. We may borrow an additional $10.0 million at our sole
discretion. Upon the occurrence of certain clinical development milestones, an
additional $15.0 million may become available to us and upon the occurrence of
certain clinical and financial milestones, an additional $20.0 million may
become available to us. In addition, up to an additional $45.0 million will
become available to us at Hercules' sole discretion. Borrowings under the loan
are repayable in monthly interest-only payments until July 1, 2024, with the
option to extend. The interest-only period will be followed by equal monthly
payments of principal plus interest until the loan maturity date of January 1,
2027. Outstanding borrowings bear interest at the greater of (i) 7.65% and (ii)
the prime rate as reported in the Wall Street Journal plus 3.65%.

Financing needs

Our primary uses of capital are, and we expect will continue to be, research and
development services, compensation and related expenses and general overhead
costs. We expect to continue to incur significant expenses and operating losses
for the foreseeable future. In addition, since the closing of our IPO, we have
incurred and expect to continue to incur additional costs associated with
operating as a public company. We anticipate that our expenses will increase
significantly in connection with our ongoing activities. The timing and amount
of our operating expenditures will depend largely on:

the initiation, progress, timing, costs and results of nonclinical studies and
clinical trials for EFX or any future product candidates we may develop;
•
timing delays, if any, with respect to preclinical and clinical development of
EFX or any future product candidates we may develop as a result of a pandemic,
epidemic or outbreak of an infectious disease, including COVID-19;
•
our ability to maintain our license to EFX from Amgen;
•
the outcome, timing and cost of seeking and obtaining regulatory approvals from
the FDA and comparable foreign regulatory authorities, including the potential
for such authorities to require that we perform more nonclinical studies or
clinical trials than those that we currently expect or change their requirements
on studies or trials that had previously been agreed to;

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•
the cost to establish, maintain, expand, enforce and defend the scope of our
intellectual property portfolio, including the amount and timing of any payments
we may be required to make, or that we may receive, in connection with
licensing, preparing, filing, prosecuting, defending and enforcing any patents
or other intellectual property rights;
•
the effect of competing technological and market developments;
•
market acceptance of any approved product candidate, including product pricing,
as well as product coverage and the adequacy of reimbursement by third-party
payors;
•
the cost of acquiring, licensing or investing in additional businesses,
products, product candidates and technologies;
•
the cost and timing of selecting, auditing and potentially validating a
manufacturing site for commercial scale manufacturing;
•
the cost of establishing sales, marketing and distribution capabilities for any
product candidates for which we may receive regulatory approval and that we
determine to commercialize; and
•
our need to implement additional internal systems and infrastructure, including
financial and reporting systems.

We expect that we will require additional funding to complete the clinical
development of EFX, commercialize EFX, if we receive regulatory approval, and
pursue in-licenses or acquisitions of other product candidates. If we receive
regulatory approval for EFX or other product candidates, we expect to incur
significant commercialization expenses related to product manufacturing, sales,
marketing and distribution, depending on whether we choose to commercialize EFX
ourselves.

Until such time, if ever, as we can generate substantial product revenue, we
expect to finance our cash needs through a combination of equity offerings, debt
financings, collaborations, strategic alliances, and marketing, distribution or
licensing arrangements with third parties. To the extent that we raise
additional capital through the sale of equity or convertible debt securities,
ownership interest may be materially diluted, and the terms of such securities
could include liquidation or other preferences that adversely affect your rights
as a common stockholder. Debt financing and preferred equity financing, if
available, may involve agreements that include restrictive covenants that limit
our ability to take specified actions, such as incurring additional debt, making
capital expenditures or declaring dividends. If we raise funds through
collaborations, strategic alliances or marketing, distribution or licensing
arrangements with third parties, we may have to relinquish valuable rights to
our technologies, future revenue streams, research programs or product
candidates or grant licenses on terms that may not be favorable to us. If we are
unable to raise additional funds through equity or debt financings or other
arrangements when needed, we may be required to delay, reduce or eliminate our
product development or future commercialization efforts, or grant rights to
develop and market product candidates that we would otherwise prefer to develop
and market ourselves.

Contractual obligations and other commitments

During the three and nine months ended September 30, 2022, there have been no
material changes outside the ordinary course of business to our contractual
obligations and commitments from those disclosed in Management's Discussion and
Analysis of Financial Condition and Results of Operations, set forth in Part II,
Item 7, of our Fiscal 2021 Form 10-K, other than the Term Loan to Hercules
Capital, Inc. discussed in Part I, Item 1, Footnote 6 to the Unaudited Condensed
Consolidated Financial Statements of this Quarterly Report on Form 10-Q and to
changes in our non-cancelable purchase arrangements.

Non-cancelable purchase and other arrangements increased to $9.4 million as of
September 30, 2022, compared to $9.3 million as of December 31, 2021. The
increase of $0.1 million was primarily attributable to $0.3 million increase in
the purchase and other obligations to support the growth and expansion of our
clinical trials activities and a $0.2 million decrease in operating lease
obligations for the office space in South San Francisco, California.

Significant Accounting Policies and Estimates

This discussion and analysis of our financial condition and results of
operations is based on our financial statements, which we have prepared in
accordance with United States generally accepted accounting principles. The
preparation of our financial statements and related disclosures requires us to
make estimates, assumptions and judgments that affect the reported amount of
assets, liabilities, revenue, costs and expenses, and related disclosures. Our
critical accounting policies are described under the heading "Management's
Discussion and Analysis of Financial Condition and

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  Table of Contents
Results of Operations- Critical Accounting Policies and Significant Judgments
and Estimates" in our Annual Report on Form 10-K for the year ended December 31,
2021 which was filed with the Securities and Exchange Commission on February 25,
2022. There were no material changes to our critical accounting policies through
September 30, 2022 from those discussed in our Annual Report on Form 10-K for
the year ended December 31, 2021.

Recent accounting statements

See Note 2 to our unaudited condensed consolidated financial statements included
in Part I, Item 1, "Notes to Unaudited Condensed Consolidated Financial
Statements," of this Quarterly Report on Form 10-Q for a description of recent
accounting pronouncements applicable to our business.

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