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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________________
FORM 10-Q
___________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _ TO _
COMMISSION FILE NUMBER 001-38501
___________________________________________
BLACK DIAMOND THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
________________________________________________________________________________
Delaware81-4254660
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification No.)
139 Main Street
Cambridge, Massachusetts
(Address of principal executive offices)
02142
(Zip Code)
(617) 252-0848
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, par value $0.0001BDTXThe Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer




Non-accelerated filerSmaller reporting company






Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of November 2, 2020, the registrant had 35,995,660 shares of common stock, $0.0001 par value per share, outstanding.



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Summary of the Material and Other Risks Associated with Our Business
Our business is subject to numerous material and other risks and uncertainties that you should be aware of in evaluating our business. These risks include, but are not limited to, the following:
We are very early in our development efforts and are substantially dependent on our lead product candidate, BDTX-189. If we are unable to advance BDTX-189 or any of our other product candidates through clinical development, obtain regulatory approval and ultimately commercialize BDTX-189 or any of our other product candidates, or experience significant delays in doing so, our business will be materially harmed.
Difficulty in enrolling patients could delay or prevent clinical trials of our product candidates. We may find it difficult to enroll patients in our open-label Phase 1/2 clinical trial for BDTX-189 with the genetic mutations that BDTX-189 is designed to target.
Our discovery and preclinical development is focused on the development of precision medicines for patients with genetically defined cancers, which is a rapidly evolving area of science, and the approach we are taking to discover and develop drugs is novel and may never lead to marketable products.
Our approach to the discovery and development of product candidates is unproven, and we may not be successful in our efforts to use and expand our MAP platform to build a pipeline of product candidates with commercial value.
Business or economic disruptions or global health concerns could seriously harm our development efforts and increase our costs and expenses.
Our limited operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.
We have incurred significant losses since inception, and we expect to incur losses over the next several years and may not be able to achieve or sustain revenues or profitability in the future.
We have not generated any revenue from our product candidates and may never be profitable.
We will need substantial additional funding. If we are unable to raise capital when needed, we would be compelled to delay, reduce or eliminate our product development programs or commercialization efforts.
If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals for our product candidates, we will not be able to commercialize, or will be delayed in commercializing, our product candidates, and our ability to generate revenue will be materially impaired.
Our clinical trials may fail to demonstrate adequately the safety and efficacy of any of our product candidates, which would prevent or delay regulatory approval and commercialization.
We do not currently own or in-license any issued patents relating to our product candidates or technology, including BDTX-189. If we are unable to obtain and maintain patent and other intellectual property protection for BDTX-189, our MAP platform and our other product candidates and technology, or any other product candidates or technology we may develop, or if the scope of intellectual property protection obtained is not sufficiently broad, our competitors could develop and commercialize products and technology similar or identical to ours, and our ability to commercialize BDTX-189 or any other product candidates or technology may be adversely affected.
We plan to rely on third parties to conduct our preclinical studies and clinical trials. If these third parties do not properly and successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval of or commercialize our product candidates.
We may form or seek collaborations or strategic alliances or enter into additional licensing arrangements in the future, and we may not realize the benefits of such collaborations, alliances or licensing arrangements.
We are highly dependent on our key personnel and anticipate hiring new key personnel. If we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business strategy.



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The price of our stock is volatile, and you could lose all or part of your investment.
We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect our business.
Data collection is governed by restrictive regulations governing the use, processing and cross-border transfer of personal information.
Changes in tax law could adversely affect our business and financial condition.
We may be unable to adequately protect our information systems from cyberattacks, which could result in the disclosure of confidential or proprietary information, including personal data, damage our reputation, and subject us to significant financial and legal exposure.
The material and other risks summarized above should be read together with the text of the full risk factors below and in the other information set forth in this Quarterly Report, including our consolidated financial statements and the related notes, as well as in other documents that we file with the SEC. If any such material and other risks and uncertainties actually occur, our business, prospects, financial condition and results of operations could be materially and adversely affected. The risks summarized above or described in full below are not the only risks that we face. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial may also materially adversely affect our business, prospects, financial condition and results of operations.




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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Quarterly Report”), contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, “continue” or the negative of these terms or other comparable terminology. These statements are not guarantees of future results or performance and involve substantial risks and uncertainties. Forward-looking statements in this Quarterly Report include, but are not limited to, statements about:
the initiation, timing, progress and results of our research and development programs, preclinical studies, any clinical trials and investigational new drug applications, or IND, and other regulatory submissions;
our ability to obtain and maintain regulatory approval for BDTX-189 or any of our other current or future product candidates that we may identify or develop;
our need to raise additional funding before we can expect to generate any revenues from product sales;
our ability to identify future product candidates for treatment of additional disease indications;
our ability to develop our current product candidates for the treatment of various cancers;
the rate and degree of market acceptance and clinical utility for any current or future product candidates we may develop;
the effects of competition with respect to BDTX-189 or any of our other current or future product candidates, as well as innovations by current and future competitors in our industry;
the implementation of our strategic plans for our business, any product candidates we may develop, and our MAP platform;
our ability to successfully develop companion diagnostics for use with our current or future product candidates;
our intellectual property position, including the scope of protection we are able to establish, maintain and enforce for intellectual property rights covering our product candidates and MAP platform;
our ability to use the proceeds of our initial public offering in ways that increase the value of your investment;
our ability to obtain additional funding for our operations, when needed, including funding necessary to complete further development and commercialization of our product candidates, if approved, and to further expand our MAP platform;
the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;
our financial performance and our ability to effectively manage our anticipated growth;
our estimates regarding the market opportunities for our product candidates;
our ability to remediate our existing material weaknesses and to maintain an effective system of internal controls;
the ultimate impact of the current coronavirus pandemic, or any other health epidemic, on our business, our clinical trials, our research programs, healthcare systems or the global economy as a whole; and
other material risks and uncertainties, including those discussed in Part II, Item 1A, “Risk Factors” in this Quarterly Report.

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Any forward-looking statements in this Quarterly Report reflect our current views with respect to future events and with respect to our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those described under Part II, Item 1A, “Risk Factors” and elsewhere in this Quarterly Report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
All of our forward-looking statements are as of the date of this Quarterly Report only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of or any material adverse change in one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the Securities and Exchange Commission, or the SEC, could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report that modify or impact any of the forward-looking statements contained in this Quarterly Report will be deemed to modify or supersede such statements in this Quarterly Report.
We may from time to time provide estimates, projections and other information concerning our industry, the general business environment, and the markets for certain diseases, including estimates regarding the potential size of those markets and the estimated incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties, and actual events, circumstances or numbers, including actual disease prevalence rates and market size, may differ materially from the information reflected in this Quarterly Report. Unless otherwise expressly stated, we obtained this industry, business information, market data, prevalence information and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sources, in some cases applying our own assumptions and analysis that may, in the future, prove not to have been accurate.
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TABLE OF CONTENTS

Page
PART I - FINANCIAL INFORMATION
PART II - OTHER INFORMATION

We have applied for various trademarks that we use in connection with the operation of our business. This Quarterly Report may also contain trademarks, service marks and trade names of third parties, which are the property of their respective owners. Our use or display of third parties’ trademarks, service marks, trade names or products in this Quarterly Report is not intended to, and does not imply a relationship with, or endorsement or sponsorship by us. Solely for convenience, the trademarks, service marks and trade names referred to in this Quarterly Report may appear without the ®, TM or SM symbols, but the omission of such references is not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or that the applicable owner of these trademarks, service marks and trade names will not assert, to the fullest extent under applicable law, its rights.
From time to time, we may use our website or our LinkedIn profile at www.linkedin.com/company/black-diamond-therapeutics to distribute material information. Our financial and other material information is routinely posted to and accessible on the Investors section of our website, available at www.blackdiamondtherapeutics.com. Investors are encouraged to review the Investors section of our website because we may post material information on that site that is not otherwise disseminated by us. Information that is contained in and can be accessed through our website or our LinkedIn page is not incorporated into, and does not form a part of, this Quarterly Report.


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Part I - FINANCIAL INFORMATION
Item I. Condensed Consolidated Financial Statements (Unaudited)
Black Diamond Therapeutics, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except share and per share data)

As of

September 30,
2020
December 31,
2019
Assets



Current assets:



Cash and cash equivalents$56,197 

$154,666 
Investments276,875  
Prepaid expenses and other current assets3,356 

1,048 
Total current assets336,428 

155,714 
Equipment, net229 

164 
Restricted cash1,223 

55 
Deferred offering costs 

2,303 
Right-of-use asset8,463 — 
Other non-current assets92 

59 
Total assets$346,435 

$158,295 
Liabilities, Convertible Preferred Stock and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable$2,932 

$1,964 
Amounts due to related party190 

 
Accrued expenses and other current liabilities8,219 

2,899 
Total current liabilities11,341 

4,863 
Derivative liabilities 

16 
Non-current operating lease liability7,749 — 
Total liabilities19,090 

4,879 
Commitments and contingencies (Note 11) 

 
Convertible preferred stock (Note 7) 

200,573 
Stockholders' equity (deficit):

Common stock; $0.0001 par value; 500,000,000 shares authorized at September 30, 2020 and 80,000,000 shares authorized at December 31, 2019; 35,963,447 shares issued and outstanding at September 30, 2020 and 2,236,672 shares issued and outstanding at December 31, 2019
5 

1 
Additional paid-in capital422,063 

3,812 
Accumulated other comprehensive income875  
Accumulated deficit(95,598)

(50,970)
Total stockholders' equity (deficit)327,345 

(47,157)
Total liabilities, convertible preferred stock and stockholders' equity (deficit)$346,435 

$158,295 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Black Diamond Therapeutics, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
(in thousands, except share and per share data)

Three Months Ended
September 30,
Nine Months Ended
September 30,

2020201920202019
Operating expenses:
Research and development (inclusive of $190, $3,480, $2,293 and $8,497 respectively, with a related party)
$12,929 $5,634 $30,453 $14,293 
General and administrative (inclusive of $0, $176, $0 and $357 respectively, with a related party)
5,551 2,514 15,934 4,695 
Total operating expenses18,480 8,148 46,387 18,988 
Loss from operations(18,480)(8,148)(46,387)(18,988)
Other income (expense):
Interest expense  (1) 
Interest income1,162 1 2,787 21 
Change in fair value of derivative liabilities (1,116) (6,416)
Other (expense) income(594)(5)(1,027) 
Total other income (expense), net568 (1,120)1,759 (6,395)
Net loss attributable to common stockholders$(17,912)$(9,268)$(44,628)$(25,383)
Net loss per share attributable to common stockholders, basic and diluted$(0.50)$(4.50)$(1.42)$(12.36)
Weighted average common shares outstanding, basic and diluted35,927,485 2,065,676 31,860,716 2,054,115 
Comprehensive loss:
Net loss$(17,912)$(9,268)$(44,628)$(25,383)
Other comprehensive income:
Change in unrealized (loss) gain on investments(137) 875  
Comprehensive loss$(18,049)$(9,268)$(43,753)$(25,383)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Black Diamond Therapeutics, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Nine Months Ended
September 30,
2020

2019
Cash flows from operating activities:



Net loss$(44,628)$(25,383)
Adjustment to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense5,295 1,133 
Change in fair value of derivative liabilities 6,416 
Depreciation expense37 38 
Accretion of discount on investments(990) 
Noncash rent expense287  
Changes in current assets and liabilities:
Prepaid expenses and other current assets(2,308)(270)
Other non-current assets(33)(25)
Accounts payable1,528 496 
Amounts due to related party190 (453)
Accrued expenses and other current liabilities4,551 860 
Non-current operating lease liability(301)— 
Net cash used in operating activities(36,372)(17,188)
Cash flows from investing activities:
Purchases of equipment(33)(19)
Proceeds from sales and maturities of investments17,765  
Purchases of investments(292,775) 
Net cash used in investing activities(275,043)(19)
Cash flows from financing activities:
Proceeds from issuance of convertible preferred stock, net 44,669 
Proceeds from exercise of common stock options270  
Proceeds from initial public offering, net of issuance costs of $1,275
213,844  
Payment of deferred offering costs (408)
Net cash provided by financing activities214,114 44,261 
Net decrease in cash and cash equivalents(97,301)27,054 
Cash, cash equivalents and restricted cash, beginning of period154,721 51,660 
Cash, cash equivalents and restricted cash, end of period$57,420 $78,714 
Cash and cash equivalents, end of period$56,197 $78,659 
Restricted cash, end of period1,223 55 
Cash, cash equivalents and restricted cash, end of period$57,420 $78,714 
Supplemental disclosure of non-cash investing and financing activities:
Deferred offering and stock issuance costs included in accounts payable and accrued expenses and other current liabilities$ $1,169 
Conversion of preferred stock into common stock upon closing of initial public offering$200,573 $ 
Right-of-use assets obtained in exchange for operating lease obligation $8,274 $— 
Exercise of series B convertible preferred stock tranche right$ $6,393 
Line of credit for operating lease obligation$1,168 $ 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Black Diamond Therapeutics, Inc.
Condensed Consolidated Statements of Stockholders' Equity (Deficit) (Unaudited)
(in thousands, except share data)

Convertible preferred stockCommon stock

Additional
paid-in capital

Accumulated other comprehensive incomeAccumulated deficit

Total
stockholders’
equity (deficit)

Shares

AmountShares

Par Value



BALANCE - December 31, 201833,668,075 

$60,770 2,173,684 

$1 

$169 

$ $(15,712)

$(15,542)
Grant of restricted common stock awards— 

— 46,416 

— 

— 

— — 

 
Stock-based compensation— 

— — 

— 

91 

— — 

91 
Net loss— 

— — 

— 

— 

— (3,828)

(3,828)
BALANCE - March 31, 201933,668,075 60,770 2,220,100 1 260  (19,540)(19,279)
Stock-based compensation— — — — 192 — — 192 
Net loss— — — — — — (12,287)(12,287)
BALANCE - June 30, 201933,668,075 60,770 2,220,100 1 452  (31,827)(31,374)
Issuance of series B convertible preferred stock, net 11,751,154 55,070 — — — — — — 
Stock-based compensation— — — — 850 — — 850 
Net loss— — — — — — (9,268)(9,268)
BALANCE - September 30, 201945,419,229 115,840 2,220,100 1 1,302  (41,095)(39,792)
BALANCE - December 31, 201964,839,353 $200,573 2,236,672 $1 $3,812 $ $(50,970)$(47,157)
Conversion of preferred stock to common stock upon closing of the initial public offering(64,839,353)(200,573)21,499,770 3 200,570 — — 200,573 
Issuance of common stock, net of issuance costs— — 12,174,263 1 212,100 — — 212,101 
Reclassification of warrants to additional paid-in capital— — — — 16 — — 16 
Stock-based compensation— — — — 1,877 — — 1,877 
Net loss— — — — — — (12,145)(12,145)
BALANCE - March 31, 2020  35,910,705 5 418,375  (63,115)355,265 
Stock-based compensation— — — — 1,419 — — 1,419 
Change in unrealized gain on investments— — — — — 1,012 — 1,012 
Net loss— — — — — — (14,571)(14,571)
BALANCE - June 30, 2020  35,910,705 5 419,794 1,012 (77,686)343,125 
Exercise of common stock options— — 51,076 — 270 — — 270 
Vesting of restricted stock units— — 1,666 — — — —  
Stock-based compensation— — — — 1,999 — — 1,999 
Change in unrealized loss on investments— — — — — (137)— (137)
Net loss— — — — — — (17,912)(17,912)
BALANCE - September 30, 2020 $ 35,963,447 $5 $422,063 $875 $(95,598)$327,345 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Black Diamond Therapeutics, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Amounts in thousands, except share and per share amounts)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Black Diamond Therapeutics, Inc. (the “Company”) is a precision oncology medicine company pioneering the discovery and development of small molecule, tumor-agnostic therapies. The Company was originally organized as a limited liability company in December 2014 under the name ASET Therapeutics LLC. In September 2016, the Company was converted to a corporation under the laws of the State of Delaware under the name ASET Therapeutics, Inc. The Company changed its name to Black Diamond Therapeutics, Inc. in January 2018. Since its inception, the Company has devoted substantially all of its efforts to raising capital, obtaining financing, and incurring research and development costs related to the development of BDTX-189 and its earlier-stage pipeline programs as well as its mutation, allostery, and pharmacology computational and discovery platform.
The Company is subject to risks and uncertainties common to early stage companies in the biotechnology industry. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s technology will be obtained, that any products developed will obtain necessary government regulatory approval or that any products, if approved, will be commercially viable. The Company operates in an environment of rapid technological innovation and substantial competition from pharmaceutical and biotechnological companies. In addition, the Company is dependent upon the services of its employees, consultants and service providers including a related party Ridgeline Therapeutics GmbH (“Ridgeline”). Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.
On January 21, 2020, the Company effected a 1-for-3.01581 reverse stock split of the Company’s common stock. All shares, stock options, warrants and per share information presented in the condensed consolidated financial statements have been adjusted to reflect the reverse stock split on a retroactive basis for all periods presented. There was no change in the par value of the Company’s common stock.
On February 3, 2020, the Company completed an initial public offering (the “IPO”) of 12,174,263 shares of its common stock, including the exercise in full by the underwriters of their option to purchase up to 1,587,947 additional shares of common stock, for aggregate gross proceeds of $231,311 and its shares started trading on The Nasdaq Global Select Market under the ticker symbol “BDTX.” The Company received $212,101 in net proceeds after deducting underwriting discounts and commissions and other estimated offering expenses payable by the Company. Upon closing of the IPO, all of the Company's outstanding shares of convertible preferred stock automatically converted into 21,499,770 shares of common stock.
The accompanying condensed consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets, and the satisfaction of liabilities and commitments in the ordinary course of business. Historically, the Company has funded its operations primarily with proceeds from the sale of convertible preferred stock. The Company expects to continue to generate operating losses for the foreseeable future.
As of November 10, 2020, the issuance date of the condensed consolidated financial statements, the Company expects that its cash, cash equivalents and investments will be sufficient to fund its operating expenses and capital requirements into 2023.
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The Company may seek additional funding through private or public equity financings, debt financings, collaborations, strategic alliances, and marketing, distribution or licensing arrangements. The Company may not be able to obtain financing on acceptable terms, or at all, and the Company may not be able to enter into collaborations or other arrangements. The terms of any financing may adversely affect the holdings or the rights of the Company's stockholders. If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate some or all of its research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.
The ongoing global outbreak of the novel coronavirus disease (“COVID-19”), which began in December 2019, was reported to have surfaced in Wuhan, China, and has since spread to other regions and countries worldwide. The COVID-19 pandemic is evolving, and to date has led to the implementation of various responses, including government-imposed quarantines, stay-at-home orders, travel restrictions, mandated business closures and other public health safety measures. Such orders, restrictions and recommendations, and the perception that additional orders, restrictions or recommendations could occur, have resulted in widespread closures of businesses not deemed “essential,” work stoppages, slowdowns and delays, work-from-home policies, travel restrictions and cancellation of events.
The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of the Company’s business, including how it has and will continue to impact the Company’s operations and the operations of its suppliers, vendors and business partners, and may take further precautionary and preemptive actions as may be required by federal, state or local authorities. In addition, the Company has taken steps to minimize the current environment’s impact on its business and strategy, including devising contingency plans and securing additional resources from third party service providers. Furthermore, for the safety of the Company’s employees and families, the Company has introduced enhanced safety measures for scientists to be present in its labs and increased the use of third party service providers for the conduct of certain experiments and studies for research programs. Certain of the Company’s third party service providers have also experienced shutdowns or other business disruptions. The Company does not yet know the full extent of potential delays or impacts on the Company’s business, clinical trials, research programs, healthcare systems or the global economy and cannot presently predict the scope and severity of any potential business shutdowns or disruptions.
The extent to which COVID-19 ultimately impacts the Company’s business, results of operations or financial condition will depend on future developments, which remain highly uncertain and cannot be predicted with confidence, such as the duration of the outbreak, new information that may emerge concerning the severity of COVID-19 or the effectiveness of actions taken to contain the pandemic or treat its impact, among others. In addition, a recurrence or “additional waves” of COVID-19 cases could cause other widespread or more severe impacts depending on where infection rates are highest. While states and jurisdictions have rolled back “stay at home” and quarantine orders and reopened in phases, it is difficult to predict what the lasting impact of the pandemic will be, and any prolonged material disruption to the Company’s employees or third party service providers could negatively impact the Company’s ability to conduct business in the manner and on the timelines presently planned, which could have a material adverse impact on the Company’s business, results of operations and financial condition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and include the accounts of the Company and its wholly owned subsidiaries, Black Diamond Therapeutics (Canada), Inc. and Black Diamond Therapeutics Security Corporation, after elimination of all significant intercompany accounts and transactions.
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Unaudited interim financial information
The condensed consolidated financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this Quarterly Report, as is permitted by such rules and regulations. Accordingly, these condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on March 24, 2020. In the opinion of the Company’s management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair statement of the results for the interim periods presented have been included.
Use of estimates
The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these condensed consolidated financial statements include, but are not limited to, the accrual of research and development expenses, the valuation of common stock and the valuation of stock-based awards. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results may differ from those estimates or assumptions.
The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including expenses, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat COVID-19, as well as the economic impact on local, regional, national and international markets. The Company has considered the impact of COVID-19 on estimates within its financial statements and there may be changes to those estimates in future periods. As of the date of issuance of these unaudited condensed consolidated financial statements, the Company has not experienced material business disruptions or incurred impairment losses in the carrying value of its assets as a result of the pandemic and is not aware of any specific related event or circumstance that would require it to update its estimates.
Deferred offering costs
As of December 31, 2019, the Company recorded deferred offering costs of $2,303. The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process preferred stock or common stock financings as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded as a reduction to the carrying value of convertible preferred stock or in stockholders’ equity (deficit) as a reduction of additional paid-in capital generated as a result of the offering. Should a planned equity financing be abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the condensed consolidated statements of operations and comprehensive loss. After consummation of the IPO, which closed on February 3, 2020, these costs were recorded in stockholders' equity (deficit) as a reduction of additional paid-in capital generated as a result of the offering.

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Investments
Investments consist of marketable securities with original maturities greater than 90 days. The Company has classified its investments with maturities beyond one year as short-term, based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. The Company considers its investment portfolio of marketable securities to be available-for-sale. Accordingly, these investments are recorded at fair value, which is based on quoted market prices. Unrealized gains and losses are reported as the accumulated other comprehensive items in stockholders’ equity. Amortization and accretion of premiums and discounts are recorded in other income (expense). Realized gains or losses on debt securities are included in interest income or interest expense, respectively.
If any adjustment to fair value reflects a decline in value of the investment, the Company considers all available evidence to evaluate the extent to which the decline is other than temporary and, if so, marks the investment to market on the Company’s statement of operations and comprehensive income (loss).
Restricted cash
Cash accounts that are restricted as to withdrawal or usage are presented as restricted cash. Restricted cash includes amounts held as security deposits in the form of letters of credit for the Company’s leased facilities.
Comprehensive loss
Comprehensive loss is composed of net loss and other comprehensive income (loss). Other comprehensive income (loss) consists of unrealized gains and losses on investments.
Leases
Effective January 1, 2020, the Company adopted Accounting Standards Updated (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02” or “ASC 842”), using the modified retrospective method and utilized the effective date as its date of initial application, with prior periods presented in accordance with previous guidance under ASC 840, Leases (“ASC 840”). At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and current and non-current lease liabilities, as applicable.
Operating lease liabilities and their corresponding right-of-use assets are initially recorded based on the present value of lease payments over the expected remaining lease term. Certain adjustments to the right-of-use asset may be required for items such as incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate to discount lease payments, which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment. Prospectively, the Company will adjust the right-of-use assets for straight-line rent expense or any incentives received and remeasure the lease liability at the net present value using the same incremental borrowing rate that was in effect as of the lease commencement or transition date. The Company has elected not to recognize leases with an original term of one year or less on the condensed consolidated balance sheet. The Company typically only includes an initial lease term in its assessment of a lease arrangement. Options to renew a lease are not included in the Company’s assessment unless there is reasonable certainty that the Company will renew.
Assumptions made by the Company at the commencement date are re-evaluated upon occurrence of certain events, including a lease modification. A lease modification results in a separate contract when the modification grants the lessee an additional right of use not included in the original lease and when lease payments increase commensurate with the standalone price for the additional right of use. When a lease modification results in a separate contract, it is accounted for in the same manner as a new lease.
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The Company elected the following practical expedients, which must be elected as a package and applied consistently to all of its leases at the transition date (including those for which the entity is a lessee or a lessor): i) the Company did not reassess whether any expired or existing contracts are or contain leases; ii) the Company did not reassess the lease classification for any expired or existing leases (that is, all existing leases that were classified as operating leases in accordance with ASC 840 are classified as operating leases, and all existing leases that were classified as capital leases in accordance with ASC 840 are classified as finance leases); and iii) the Company did not reassess initial direct costs for any existing leases.
For leases that existed prior to the date of initial application of ASC 842 (which were previously classified as operating leases), a lessee may elect to use either the total lease term measured at lease inception under ASC 840 or the remaining lease term as of the date of initial application of ASC 842 in determining the period for which to measure its incremental borrowing rate. In transition to ASC 842, the Company utilized the remaining lease term of its leases in determining the appropriate incremental borrowing rates.
In accordance with ASC 842, components of a lease should be split into three categories: lease components, non-lease components, and non-components. The fixed and in-substance fixed contract consideration (including any consideration related to non-components) must be allocated based on the respective relative fair values to the lease components and non-lease components.
Entities may elect not to separate lease and non-lease components. The Company has elected to account for lease and non-lease components together as a single lease component for all underlying assets and allocate all of the contract consideration to the lease component only.
Recently issued accounting pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes-Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for annual periods beginning after December 15, 2020 and interim periods within, with early adoption permitted. Adoption of the standard requires certain changes to be made prospectively, with some changes to be made retrospectively. The Company is currently assessing the impact of this standard on our financial condition and results of operations.
3. FAIR VALUE MEASUREMENTS
The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy used to determine such fair values:

Fair value measurements at September 30, 2020 using:

Level 1

Level 2Level 3Total
Assets:





Cash equivalents:
Money market funds$52,018 $ $ $52,018 
Investments:
Commercial paper 69,968  69,968 
Corporate bonds 186,863  186,863 
U.S. Government agencies 20,044  20,044 
Total$52,018 $276,875 $ $328,893 

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Fair value measurements at December 31, 2019 using:

Level 1Level 2

Level 3

Total
Assets:






Money market funds$24,157 $ $ $24,157 
Total$24,157 $ $ $24,157 
Liabilities:






Derivative liabilities$ $ $16 $16 
Total$ $ $16 $16 

When developing fair value estimates, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs. When available, the Company uses quoted market prices to measure fair value. The valuation technique used to measure fair value for the Company's Level 1 and Level 2 assets is a market approach, using prices and other relevant information generated by market transactions involving identical or comparable assets. If market prices are not available, the fair value measurement is based on models that use primarily market-based parameters including yield curves, volatilities, credit ratings and currency rates. In certain cases where market rate assumptions are not available, the Company is required to make judgments about assumptions market participants would use to estimate the fair value of a financial instrument.
There were no transfers in or out of Level 3 categories in the periods presented.
Valuation of derivative liabilities
The fair value of the derivative liabilities related to the warrants to purchase series A convertible preferred stock is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy.
Upon completion of the IPO in February 2020, the warrants to purchase series A convertible preferred stock converted to warrants to purchase 10,757 shares of common stock and the fair value of the derivative liability was reclassified to additional paid-in capital. As a result, we will no longer remeasure the fair value of the warrant liability at each reporting date. Derivative liabilities consisted of the following:

September 30,
2020
Balance - December 31, 2019$16 
Reclassification to additional paid-in capital in connection with IPO(16)
Balance - September 30, 2020$ 
4. INVESTMENTS
As of September 30, 2020, investments were comprised of the following:
Amortized Cost

Unrealized GainsUnrealized LossesFair Value
Commercial paper$69,860 $108 $ $69,968 
Corporate bonds186,098 765  186,863 
U.S. Government agencies20,042 2  20,044 
Total$276,000 $875 $ $276,875 
As of December 31, 2019, the Company did not hold any investments.
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5. PROPERTY AND EQUIPMENT
Equipment, net consisted of the following:

September 30,
2020

December 31,
2019
Laboratory equipment$226 $218 
Computer and office equipment83 58 
Construction in process69  
Equipment378 276 
Less: accumulated depreciation(149)(112)
Total Equipment, net$229 $164 

Depreciation expense for the nine months ended September 30, 2020 and 2019 was $37 and $38, respectively.
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:

September 30,
2020

December 31,
2019
Contracted research services$1,088 $434 
Payroll and related expenses2,733 1,182 
Professional and consulting fees3,141 984 
Legal fees320 299 
Current portion of operating lease liability937 — 
Total accrued expenses and other current liabilities$8,219 $2,899 

7. STOCKHOLDERS’ EQUITY
Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are not entitled to receive dividends, unless declared by the board of directors.
Upon closing of the IPO on February 3, 2020, all of the preferred stock converted into an aggregate of 21,499,770 shares of common stock.
On February 3, 2020, in connection with the closing of the IPO, the Company filed an amended and restated certificate of incorporation, which, among other things, restated the number of shares of all classes of stock that the Company has authority to issue to 510,000,000 shares, of which (i) 500,000,000 shares shall be a class designated as common stock, par value $0.0001 per share, and (ii) 10,000,000 shares shall be a class designated as undesignated preferred stock, par value $0.0001 per share.
8. STOCK-BASED COMPENSATION
2017 Equity Incentive Plan
The Company’s 2017 Employee, Director and Consultant Equity Incentive Plan, as amended (the “2017 Plan”), provided for the Company to grant qualified incentive options, nonqualified options, stock grants and other stock-based awards to employees and non-employees to purchase the Company’s common stock. Upon the effectiveness of the 2020 Plan (as defined below), no further issuances were made under the 2017 Plan.
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2020 Stock Option and Incentive Plan
The 2020 Stock Option and Incentive Plan (the “2020 Plan”) was approved by our board of directors on December 5, 2019, and the Company’s stockholders on January 14, 2020 and became effective on the date immediately prior to the date on which the registration statement for the Company’s IPO was declared effective. The 2020 Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock units, restricted stock awards, unrestricted stock awards, cash-based awards and dividend equivalent rights to the Company’s officers, employees, directors and consultants. The number of shares initially reserved for issuance under the 2020 Plan is 6,665,891, which shall be cumulatively increased on January 1, 2021 and each January 1 thereafter by 4% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31 or such lesser number of shares determined by the Company’s board of directors or compensation, nomination, and corporate governance committee of the board of directors.
2020 Employee Stock Purchase Plan
The 2020 Employee Stock Purchase Plan (the “2020 ESPP”) was approved by the Company’s board of directors on December 5, 2019, and our stockholders on January 14, 2020, and became effective on the date immediately prior to the date on which the registration statement for the Company’s IPO was declared effective. A total of 326,364 shares of common stock were initially reserved for issuance under this plan, which shall be cumulatively increased on January 1, 2021 and each January 1 thereafter by 1% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31 or such lesser number of shares determined by the Company’s board of directors or compensation, nomination and corporate governance committee of the board of directors.
Stock-based compensation expense
The Company recorded stock-based compensation expense in the following expense categories of its condensed consolidated statements of operations and comprehensive loss:
Three Months Ended
September 30,
Nine Months Ended
September 30,

2020

201920202019
Research and development$1,044 

$738 $2,263 $984 
General and administrative955 

112 3,032 149 

$1,999 

$850 $5,295 $1,133 
Options
During the nine months ended September 30, 2020, the Company granted options to purchase 1,351,593 shares of common stock. The total fair value of options vested during the nine months ended September 30, 2020 was $2,043. As of September 30, 2020, there were 3,639,228 options outstanding, 39,763 options were forfeited and 51,076 options were exercised during the period. The weighted-average grant-date fair value per share of options granted during the nine months ended September 30, 2020 was $14.47.
For the nine months ended September 30, 2020, total unrecognized compensation cost related to the unvested stock-options was $26,283, which is expected to be recognized over a weighted average period of 3.0 years.
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Restricted stock units
The fair values of restricted stock units are based on the market value of the Company’s stock on the date of the grant. Under terms of the restricted stock agreements covering the common stock, shares of restricted common stock are subject to a vesting schedule. During the nine months ended September 30, 2020, the Company granted 61,000 restricted stock units during the period. The total fair value of restricted stock units vested during the nine months ended September 30, 2020 was $50. As of September 30, 2020, there were 59,334 restricted stock units outstanding and 1,666 units were vested during the period. The weighted-average grant-date fair value per share of restricted stock units granted during the nine months ended September 30, 2020 was $29.65.
For the nine months ended September 30, 2020, total unrecognized compensation cost related to the unvested restricted stock units was $1,631, which is expected to be recognized over a weighted average period of 2.2 years.
9. NET LOSS PER SHARE
Net loss per share
The following table summarizes the computation of basic and diluted net loss per share attributable to common stockholders of the Company (in thousands, except share and per share amounts):

Three Months Ended
September 30,
Nine Months Ended
September 30,

2020

201920202019
Net loss attributable to common stockholders$(17,912)

$(9,268)$(44,628)$(25,383)
Weighted average common shares outstanding, basic and diluted35,927,485 

2,065,676 31,860,716 2,054,115 
Net loss per share, basic and diluted$(0.50)

$(4.50)$(1.42)$(12.36)

The Company’s potentially dilutive securities, which include options, unvested restricted stock, convertible preferred stock and warrants to purchase convertible preferred stock, have been excluded from the computation of diluted net loss per share attributable to common stockholders as the effect would be to reduce the net loss per share attributable to common stockholders. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect:
Nine Months Ended
September 30,

20202019
Options to purchase common stock3,639,228 1,608,411 
Unvested restricted stock59,334 125,497 
Preferred stock (as converted to common stock) 15,060,346 
Warrants to purchase shares of series A preferred stock (as converted to common stock) 10,757 

3,698,562 16,805,011 
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10. LEASES
The Company has historically entered into lease arrangements for its facilities. As of September 30, 2020, the Company had two operating leases with required future minimum payments. In applying the transition guidance under ASC 842, the Company determined the classification of these leases to be operating leases and recorded right-of-use assets and lease liabilities as of the effective dates. The Company’s leases generally do not include termination or purchase options.
Operating Leases
In February 2019, the Company entered into an agreement to lease approximately 2,357 square feet of office space for its principal office, which is located in Cambridge, MA. The lease expires on April 30, 2022, subject to an option to extend the lease for three additional years.
In July 2020, the Company entered into a seven-year agreement with an option to extend for five additional years to lease two floors totaling approximately 25,578 square feet of office space in Cambridge, MA. The lease on the first floor commenced on August 1, 2020 and the Company currently expects the lease of the second floor to commence in the fourth quarter 2020 when the landlord delivers the space in accordance with the lease terms. The Company recognizes the respective lease balances on the condensed consolidated balance sheets when the lease of each floor has commenced. Under the terms of the lease, the Company is required to make up to $17,048 in total minimum payments during the term and is required to issue a $1,168 letter of credit as security for the lease.
The following table contains a summary of the lease costs recognized under ASC 842 and other information pertaining to the Company’s operating lease for the three and nine months ended September 30, 2020:
Three Months Ended
September 30, 2020
Nine Months Ended
September 30, 2020
Lease Cost
Operating lease cost$274 $386 
Short-term lease cost211 476 
Variable lease cost9 31 
Total lease cost$494 $893 

Other Operating Lease InformationSeptember 30, 2020
Cash paid for amounts included in the measurement of lease liability$167 
Weighted-average remaining lease term7.4
Weighted-average discount rate5.4 %
The variable lease costs for the three and nine months ended September 30, 2020 include common area maintenance and other operating charges. As the Company’s leases do not provide an implicit rate, the Company utilized its incremental borrowing rate to discount lease payments, which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment.

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Future minimum lease payments under the Company’s operating leases as of September 30, 2020 were as follows:
As of September 30, 2020
2020 (excluding the nine months ended September 30, 2020)
$266 
20211,485 
20221,351 
20231,306 
20241,339 
Thereafter4,829 
Total lease payments10,576 
Less: interest(1,891)
Total lease liability$8,685 

As of December 31, 2019, future minimum lease payments under the Company’s lease obligations under ASC 840 were as follows:
Years Ending December 31,
2020$223 
2021228 
202277 
2023 
Total$528 

11. COMMITMENTS AND CONTINGENCIES
We enter into contracts in the normal course of business with contract research organizations ("CROs"), contract manufacturing organizations ("CMOs") and other third parties for preclinical research studies, clinical trials and testing and manufacturing services. These contracts do not contain minimum purchase commitments and are cancelable upon prior written notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including noncancelable obligations of service providers, up to the date of cancellation.
Indemnification agreements
In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors and executive officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnifications. The Company is not aware of any indemnification arrangements that could have a material effect on its financial position, results of operations or cash flows, and it has not accrued any liabilities related to such obligations in its condensed consolidated financial statements as of September 30, 2020 or December 31, 2019.
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Legal proceedings
The Company is not currently party to and is not aware of any material legal proceedings. At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company expenses as incurred the costs related to such legal proceedings.
12. BENEFIT PLANS
In 2018 the Company established a Simplified Employee Pension (“SEP”) defined-contribution savings plan. This plan covers substantially all employees who meet minimum age and service requirements. The Company provides contributions of 6% of each participant’s salary. Employees are immediately and fully vested in the Company’s contribution. During the three and nine months ended September 30, 2020 and 2019, the Company contributed $161, $428, $64 and $125 to the plan, respectively.
13. RELATED-PARTY TRANSACTIONS
The Company is party to a services agreement, which was entered into in March 2017 and amended in November 2017 and March 2020, with Ridgeline. Ridgeline is an entity owned by one of the Company’s investors, whereby an individual who is a Company director and was executive officer until September 2019 and other employees of Ridgeline provide the Company with scientific consulting services. The services agreement is effective until December 31, 2020. Under the November 2017 amended services agreement the Company paid Ridgeline $950 per month, which was reconciled on a quarterly basis with the actual expenses incurred by Ridgeline on its behalf. In connection with the March 2020 amendment to the services agreement, the Company transitioned to a more limited consulting arrangement whereby Ridgeline invoices the Company for services performed on an ongoing monthly basis. Total amounts due to related party were $190 as of September 30, 2020. Total prepaids with Ridgeline were $916 as of December 31, 2019. Total service fees incurred were $190, $2,293, $3,656 and $8,854, for the three and nine months ended September 30, 2020 and 2019, respectively.

* * * * * *
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report and our audited consolidated financial statements and related notes thereto for the year ended December 31, 2019 included in our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on March 24, 2020. This discussion and analysis and other parts of this Quarterly Report contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under Part II, Item 1A, “Risk Factors” and elsewhere in this Quarterly Report. You should carefully read the “Risk Factors” section of this Quarterly Report to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled “Special Note Regarding Forward-Looking Statements.”
Overview
We are a precision oncology medicine company pioneering the discovery and development of small molecule, tumor-agnostic therapies. We target undrugged oncogenic driver mutations in patients with genetically defined cancers. The foundation of our company is built upon a deep understanding of cancer genetics, protein structure and function, and medicinal chemistry. Our proprietary technology platform, which we refer to as our Mutation-Allostery-Pharmacology, or MAP, platform, is designed to allow us to analyze population-level genetic sequencing data to discover oncogenic mutations that promote cancer across tumor types. Our goal is to identify families of mutations that can be inhibited with a single small molecule therapy in a tumor-agnostic manner. We have designed our lead product candidate, BDTX-189, to potently and selectively inhibit a family of oncogenic proteins defined by mutations which occur outside the adenosine triphosphate, or ATP, site, and which we refer to as non-canonical mutations. Non-canonical mutations occur across a range of tumor types that affect both the epidermal growth factor receptor, or EGFR, and the tyrosine-protein kinase ErbB-2, or HER2. We have designed BDTX-189 to bind to the active site of these mutant kinases and inhibit their function. BDTX-189 is also designed to spare normal, or wild type, EGFR, which we believe will improve upon the toxicity profiles of current ErbB kinase inhibitors. We are also leveraging our MAP platform to identify other families of non-canonical mutations in validated oncogenes beyond ErbB, which has the potential to expand the reach of targeted therapies.
Since our inception in 2014, we have devoted substantially all of our efforts and financial resources to organizing and staffing our company, business planning, raising capital, discovering product candidates and securing related intellectual property rights while conducting research and development activities for our programs. We do not have any products approved for sale and have not generated any revenue from product sales. We may never be able to develop or commercialize a marketable product. We have not yet successfully completed any pivotal clinical trials, obtained any regulatory approvals, manufactured a commercial-scale drug, or conducted sales and marketing activities. Through September 30, 2020, we have received net proceeds of $200.6 million and $212.4 million from sales of our preferred and common stock, respectively.
We submitted our IND for BDTX-189 in November 2019, which was allowed by the U.S. Food and Drug Administration (“FDA”) on December 13, 2019. We have since begun enrollment and dosing of patients in the Phase 1 portion of our MasterKey-01 trial to pursue a tumor-agnostic development strategy and expect to complete the Phase 1 portion of the trial by the first half of 2021. In July 2020, we were granted Fast Track designation for BDTX-189 for the treatment of adult patients with solid tumors harboring an allosteric human epidermal growth factor receptor 2 (HER2) mutation or an epidermal growth factor receptor (EGFR) or HER2 Exon 20 insertion mutation who have progressed following prior treatment and who have no satisfactory treatment options.

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Since inception we have incurred significant operating losses. Our net losses were $44.6 million and $25.4 million for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, we had an accumulated deficit of $95.6 million. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current or future product candidates. We expect that our expenses and capital requirements will increase substantially in connection with our ongoing activities, particularly if and as we:
continue preclinical studies and initiate or advance clinical trials for BDTX-189, our glioblastoma (GBM) program and other product candidates;
advance the development of our product candidate pipeline;
continue to develop and expand our proprietary MAP platform to identify additional product candidates;
obtain, maintain, expand and protect our intellectual property portfolio;
seek marketing approvals for our product candidates that successfully complete clinical trials, if any;
hire additional clinical, scientific and commercial personnel;
acquire or in-license additional product candidates;
expand our infrastructure and facilities to accommodate our growing employee base; and
add operational, financial and management information systems and personnel, including personnel to support our research and development programs, any future commercialization efforts and our transition to operating as a public company.
Furthermore, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.
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, scale back or discontinue 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, 2020, we had cash, cash equivalents and investments of $333.1 million, which we believe will fund our operating expenses and capital expenditure requirements into 2023. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “—Liquidity and capital resources.” To finance our operations beyond that point, we will need to raise additional capital, which cannot be assured. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of our product candidates or other research and development initiatives.

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COVID-19 Considerations
In December 2019, a novel strain of a virus named SARS-CoV-2 (severe acute respiratory syndrome coronavirus 2), or coronavirus, which causes coronavirus disease (“COVID-19”), was reported to have surfaced in Wuhan, China, and has since spread to other regions and countries worldwide. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, which continues to spread throughout the U.S. and around the world. The COVID-19 pandemic is evolving, and to date has led to the implementation of various responses, including government-imposed quarantines, stay-at-home orders, travel restrictions, mandated business closures and other public health safety measures. Such orders, restrictions and recommendations, and the perception that additional orders, restrictions or recommendations could occur, have resulted in widespread closures of businesses not deemed “essential,” work stoppages, slowdowns and delays, work-from-home policies, travel restrictions and cancellation of events. Although some states have relaxed quarantines and similar restrictions, the regulations vary on a state by state basis and the impact of loosening of those restrictions is not yet known.
We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including how it has and will continue to impact our operations and the operations of our suppliers, vendors and business partners, and may take further precautionary and preemptive actions as may be required by federal, state or local authorities. In addition, we have taken steps to minimize the current environment’s impact on our business and strategy, including devising contingency plans and securing additional resources from third party service providers. For the safety of the Company’s employees and families, the Company has introduced enhanced safety measures for scientists to be present in our labs and increased the use of third party service providers for the conduct of certain experiments and studies for research programs. Certain of our third party service providers have also experienced shutdowns or other business disruptions. We do not yet know the full extent of potential delays or impacts on our business, our clinical trials, our research programs, healthcare systems or the global economy and we cannot presently predict the scope and severity of any potential business shutdowns or disruptions. In particular, our ability to conduct our MasterKey-01 trial in a timely manner that meets our current projected timelines could be adversely impacted. While the Phase 1 portion of the trial currently remains on track to complete by the first half of 2021, potential COVID-19-associated risks include delays in patient recruitment and principal investigator availability, clinical trial site shutdowns or other interruptions and potential limitations on the quality, completeness and interpretability of data we are able to collect. Additionally, our drug product supply chain, early stage research & development programs and activities and other aspects of our business operations could be negatively impacted by the pandemic and COVID-19-related delays or disruptions.
Beyond the impact on our pipeline, the extent to which COVID-19 ultimately impacts our business, results of operations and financial condition will depend on future developments, which remain highly uncertain and cannot be predicted with confidence, such as the duration of the outbreak, new information that may emerge concerning the severity of COVID-19 or the effectiveness of actions taken to contain COVID-19 or treat its impact, among others. In addition, a recurrence or “additional waves” of COVID-19 cases could cause other widespread or more severe impacts depending on where infection rates are highest. If we or any of the third parties with whom we engage, however, were to experience any additional shutdowns or other prolonged business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially or negatively affected, which could have a material adverse impact on our business, results of operations and financial condition.
Components of our results of operations
Revenue
To date, we have not generated any revenue from any sources, including from product sales, and we do not expect to generate any revenue from the sale of products in the foreseeable future. If our development efforts for our product candidates are successful and result in regulatory approval, or license agreements with third parties, we may generate revenue in the future from product sales. However, there can be no assurance as to when we will generate such revenue, if at all.
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Operating expenses
Research and development expenses (inclusive of amounts with a related party)
Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts and the development of our product candidates. We expense research and development costs as incurred, which include:
expenses incurred to conduct the necessary preclinical studies and clinical trials required to obtain regulatory approval;
expenses incurred under agreements with contract research organizations, or CROs, that are primarily engaged in the oversight and conduct of our drug discovery efforts and preclinical studies, clinical trials and contract manufacturing organizations, or CMOs, that are primarily engaged to provide preclinical and clinical drug substance and product for our research and development programs;
other costs related to acquiring and manufacturing materials in connection with our drug discovery efforts and preclinical studies and clinical trial materials, including manufacturing validation batches, as well as investigative sites and consultants that conduct our clinical trials, preclinical studies and other scientific development services;
payments made in cash or equity securities under third-party licensing, acquisition and option agreements;
employee-related expenses, including salaries and benefits, travel and stock-based compensation expense for employees engaged in research and development functions;
expenses incurred under our services agreement with Ridgeline Therapeutics GmbH, or Ridgeline;
costs related to compliance with regulatory requirements; and
allocated facilities-related costs, depreciation and other expenses, which include rent and utilities.
We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. Any nonrefundable 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 expensed as the related 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.
We do not track our research and development expenses on a program-by-program basis. Our direct external research and development expenses consist primarily of external costs, such as fees paid to outside consultants, CROs, CMOs and research laboratories in connection with our preclinical development, process development, manufacturing and clinical development activities. Our direct research and development expenses also include fees incurred under license, acquisition and option agreements. We do not allocate employee costs, costs associated with our discovery efforts, laboratory supplies, and facilities, including depreciation or other indirect costs, to specific programs because these costs are deployed across multiple programs and, as such, are not separately classified. We use internal resources primarily to conduct our research and discovery as well as for managing our preclinical development, process development, manufacturing and clinical development activities. These employees work across multiple programs and, therefore, we do not track their costs by program.

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Research and development activities are central to our business model. Product candidates in later stages of clinical development 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. As a result, we expect that our research and development expenses will increase substantially over the next several years as we continue our clinical trials for BDTX-189, as well as conduct other preclinical and clinical development, including submitting regulatory filings for our other product candidates. Historically, many of our research and development activities were conducted pursuant to our services agreement with Ridgeline, a related party, and we have transitioned many of these activities internally as we’ve increased our internal capacity. While the service fee we have historically paid under our Ridgeline Services Agreement has been reduced significantly as a result of this transition, we expect that we will incur increased personnel and overhead costs associated with moving those functions in-house, which we expect will offset that reduction in Ridgeline services fees. In addition, we expect our discovery research efforts and our related personnel costs will increase and, as a result, we expect our research and development expenses, including costs associated with stock-based compensation, will increase above historical levels. In addition, we may incur additional expenses related to milestone and royalty payments payable to third parties with whom we may enter into license, acquisition and option agreements to acquire the rights to future product candidates.
At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our product candidates or when, if ever, material net cash inflows may commence from any of our product candidates. The successful development and commercialization of our product candidates is highly uncertain. This uncertainty is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of the following:
the scope, progress, outcome and costs of our preclinical development activities, clinical trials and other research and development activities;
establishing an appropriate safety and efficacy profile with IND enabling studies;
successful patient enrollment in and the initiation and completion of clinical trials;
the timing, receipt and terms of any marketing approvals from applicable regulatory authorities including the FDA and non-U.S. regulators;
the extent of any required post-marketing approval commitments to applicable regulatory authorities;
establishing clinical and commercial manufacturing capabilities or making arrangements with third-party manufacturers in order to ensure that we or our third-party manufacturers are able to make product successfully;
development and timely delivery of clinical-grade and commercial-grade drug formulations that can be used in our clinical trials and for commercial launch;
obtaining, maintaining, defending and enforcing patent claims and other intellectual property rights;
significant and changing government regulation;
launching commercial sales of our product candidates, if and when approved, whether alone or in collaboration with others; and
maintaining a continued acceptable safety profile of our product candidates following approval, if any, of our product candidates.
Any changes in the outcome of any of these variables with respect to the development of our product candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect or if we experience significant delays in enrollment in any of our planned clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate.
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General and administrative expenses (inclusive of amounts with a related party)
General and administrative expenses consist primarily of salaries and benefits, travel and stock-based compensation expense for personnel in executive, business development, finance, human resources, legal, information technology, pre-commercial and support personnel functions. General and administrative expenses also include direct and allocated facility-related costs as well as insurance costs and professional fees for legal, patent, consulting, investor and public relations, accounting and audit services.
We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our product candidates and prepare for potential commercialization activities. We also anticipate that we will incur significantly increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company. Additionally, if and when we believe a regulatory approval of a product candidate appears likely, we anticipate an increase in payroll and other employee-related expenses as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of that product candidate.
Other income (expense)
Other income (expense) consists primarily of interest income earned on our cash equivalents and investment balances, realized and unrealized foreign currency transaction gains and losses, and changes in fair value of derivative liabilities.
Our issuance of Series B preferred stock provided investors the right to participate in subsequent offerings of Series B preferred stock, in the event specified developmental and regulatory milestones were achieved. We classified the tranche right as a derivative liability on our condensed consolidated balance sheets. We remeasured the derivative liability associated with tranche right to fair value at each reporting date, and recognized change in the fair value of the derivative liability in the condensed consolidated statements of operations.
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Results of operations
Comparison of the three months ended September 30, 2020 and 2019
The following table summarizes our results of operations for the three months ended September 30, 2020 and 2019:

Three Months Ended
September 30,



2020

2019

Change

(in thousands)
Operating expenses:
Research and development (inclusive of $190 and $3,480 respectively, with a related party)
$12,929 $5,634 $7,295 
General and administrative (inclusive of $0 and $176, respectively, with a related party)
5,551 2,514 3,037 
Total operating expenses18,480 8,148 10,332 
Loss from operations(18,480)(8,148)(10,332)
Other income (expense):
Interest income1,162 1,161 
Change in fair value of derivative liabilities— (1,116)1,116 
Other (expense) income(594)(5)(589)
Total other income (expense), net568 (1,120)1,688 
Net loss attributable to common stockholders$(17,912)$(9,268)$(8,644)
Research and development (inclusive of amounts with a related party)
Research and development expenses were $12.9 million for the three months ended September 30, 2020, compared to $5.6 million for the three months ended September 30, 2019. The increase of $7.3 million was primarily due to an increase in headcount expenses of $2.3 million and external fees of $4.2 million related to the continued development of our MAP platform and our product candidates, including BDTX-189. We do not currently track expenses on a program-by-program basis.
General and administrative (inclusive of amounts with a related party)
General and administrative expenses were $5.6 million for the three months ended September 30, 2020, compared to $2.5 million for the three months ended September 30, 2019. The increase of $3.0 million was primarily a result of higher personnel-related costs due to additional headcount and higher legal and other professional fees due to operating as a public company.
Other income (expense)
Other income was $0.6 million for the three months ended September 30, 2020, compared to other expense of $1.1 million for the three months ended September 30, 2019. The increase was primarily attributable to no derivative liability in 2020 as well as interest income on investments and accretion of discount on investments in 2020 and none in 2019.
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Comparison of the nine months ended September 30, 2020 and 2019
The following table summarizes our results of operations for the nine months ended September 30, 2020 and 2019:

Nine Months Ended
September 30,



20202019

Change

(in thousands)
Operating expenses:
Research and development (inclusive of $2,293 and $8,497 respectively, with a related party)
$30,453 $14,293 $16,160 
General and administrative (inclusive of $0 and $357, respectively, with a related party)
15,934 4,695 11,239 
Total operating expenses46,387 18,988 27,399 
Loss from operations(46,387)(18,988)(27,399)
Other income (expense):
Interest expense(1)— (1)
Interest income2,787 21 2,766 
Change in fair value of derivative liabilities— (6,416)6,416 
Other (expense) income(1,027)— (1,027)
Total other income (expense), net1,759 (6,395)8,154 
Net loss attributable to common stockholders$(44,628)$(25,383)$(19,245)
Research and development (inclusive of amounts with a related party)
Research and development expenses were $30.5 million for the nine months ended September 30, 2020, compared to $14.3 million for the nine months ended September 30, 2019. The increase of $16.2 million was primarily due to an increase in headcount of $5.8 million and external fees of $8.4 million related to the continued development of our MAP platform and our product candidates, including BDTX-189. We do not currently track expenses on a program-by-program basis.
General and administrative (inclusive of amounts with a related party)
General and administrative expenses were $15.9 million for the nine months ended September 30, 2020, compared to $4.7 million for the nine months ended September 30, 2019. The increase of $11.2 million was primarily a result of higher personnel-related costs due to additional headcount and higher legal and other professional fees due to preparing to operate as a public company.
Other income (expense)
Other income was $1.8 million for the nine months ended September 30, 2020, compared to other expense of $6.4 million for the nine months ended September 30, 2019. The increase was primarily attributable to no derivative liability in 2020 as well as interest income on investments and accretion of discount on investments in 2020 and none in 2019.
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Liquidity and capital resources
Sources of liquidity
Since our inception, we have not generated any revenue from any product sales or any other sources and have incurred significant operating losses and negative cash flows from our operations. We have not yet commercialized any of our product candidates, and we do not expect to generate revenue from sales of any product candidates for several years, if at all. We have funded our operations to date primarily with proceeds from the sale of preferred stock. On February 3, 2020, we completed an IPO of 12,174,263 shares of our common stock, including the exercise in full by the underwriters of their option to purchase up to 1,587,947 additional shares of common stock, for aggregate gross proceeds of $231.3 million. We received $212.1 million in net proceeds after deducting underwriting discounts and commissions and other estimated offering expenses payable by us. Through September 30, 2020, we had received net cash proceeds of $200.6 million from previous sales of our preferred stock and as of September 30, 2020, we had cash, cash equivalents and investments of $333.1 million.
Cash flows
The following table summarizes our sources and uses of cash for each of the periods presented (in thousands):

Nine Months Ended
September 30,

2020

2019
Cash used in operating activities$(36,372)

$(17,188)
Cash used in investing activities(275,043)

(19)
Cash provided by financing activities
214,114 

44,261 
Net (decrease) increase in cash and cash equivalents
$(97,301)

$27,054 
Operating activities
During the nine months ended September 30, 2020, we used cash in operating activities of $36.4 million, primarily resulting from our net loss of $44.6 million, partially offset by the non-cash charge related to stock compensation expense of $5.3 million.
During the nine months ended September 30, 2019, we used cash in operating activities of $17.2 million, primarily resulting from our net loss of $25.4 million, partially offset by a increase in accrued expenses and prepaid expenses as well as the change in fair value of derivative liabilities.
Changes in accounts payable and accrued expenses in all periods were generally due to growth in our business, the advancement of our product candidates, and the timing of vendor invoicing and payments.
Investing activities
During the nine months ended September 30, 2020, we had cash used in investing activities of $275.0 million for the purchase of investments.
During the nine months ended September 30, 2019, we used cash in investing activities of less than $0.1 million, consisting solely of purchases of equipment.
Financing activities
During the nine months ended September 30, 2020, we had cash provided by financing activities of $214.1 million, consisting primarily of proceeds from the IPO.
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During the nine months ended September 30, 2019, we had cash provided by financing activities of $44.3 million consisting of proceeds from issuance of convertible preferred stock.
Funding requirements
We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities and clinical trials of our product candidates. In addition, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses. The timing and amount of our operating expenditures will depend largely on our ability to:
advance BDTX-189 through clinical trials;
advance preclinical development of our early stage programs, including in GBM;
manufacture, or have manufactured on our behalf, our preclinical and clinical drug material and develop processes for late state and commercial manufacturing;
seek regulatory approvals for any product candidates that successfully complete clinical trials;
establish a sales, marketing, medical affairs and distribution infrastructure to commercialize any product candidates for which we may obtain marketing approval and intend to commercialize on our own;
hire additional clinical, quality control and scientific personnel;
expand our operational, financial and management systems and increase personnel, including personnel to support our clinical development, manufacturing and commercialization efforts and our operations as a public company; and
obtain, maintain, expand and protect our intellectual property portfolio.
As of September 30, 2020, we had cash, cash equivalents and investments of $333.1 million, which we believe will fund our operating expenses and capital expenditure requirements into 2023. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. We anticipate that we will require additional capital as we seek regulatory approval of our product candidates and if we choose to pursue in-licenses or acquisitions of other product candidates. If we receive regulatory approval for BDTX-189 or our other product candidates, we expect to incur significant commercialization expenses related to product manufacturing, sales, marketing and distribution, depending on where we choose to commercialize.
Because of the numerous risks and uncertainties associated with research, development and commercialization of product candidates, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on and could increase significantly as a result of many factors, including:
the scope, progress, results and costs of researching and developing our product candidates, and conducting preclinical and clinical trials;
the costs, timing and outcome of regulatory review of our product candidates;
the costs, timing and ability to manufacture our product candidates to supply our clinical and preclinical development efforts and our clinical trials;
the costs of future activities, including product sales, medical affairs, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval;
the costs of manufacturing commercial-grade product and necessary inventory to support commercial launch;
the ability to receive additional non-dilutive funding;
the revenue, if any, received from commercial sale of our products, should any of our product candidates receive marketing approval;
the costs of preparing, filing and prosecuting patent applications, obtaining, maintaining, expanding and enforcing our intellectual property rights and defending intellectual property-related claims;
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our ability to establish and maintain collaborations on favorable terms, if at all; and
the extent to which we acquire or in-license other product candidates and technologies.
Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operations through a combination of public or private equity offerings, debt financings, collaborations, strategic partnerships and alliances or 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, your 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 limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. In addition, debt financing would result in fixed payment obligations.
If we raise additional funds through collaborations, strategic partnerships and 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, limit, reduce or terminate our research, 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.
Off-balance sheet arrangements
We did not have during the periods presented, and we do not have, any off-balance sheet arrangements, as defined under applicable SEC rules.
Critical accounting policies and significant judgments and use of estimates
Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of our condensed consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.
Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Critical Accounting Policies and Use of Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on March 24, 2020. During the three and nine months ended September 30, 2020, there were no material changes to our critical accounting policies from those previously disclosed.
Recently issued accounting pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report.
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Emerging growth company and smaller reporting company status
The Jumpstart Our Business Startups Act of 2012 permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected to not “opt out” of this provision and, as a result, we will adopt new or revised accounting standards at the time private companies adopt the new or revised accounting standard and will do so until such time that we either (i) irrevocably elect to “opt out” of such extended transition period or (ii) no longer qualify as an emerging growth company.
We are also a “smaller reporting company” meaning that the market value of our stock held by non-affiliates is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report were not effective at a reasonable assurance level due to the material weaknesses in internal control over financial reporting described below. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (ii) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Internal Control Over Financial Reporting
In preparation of our financial statements to meet the requirements of our IPO, we determined that material weaknesses in our internal control over financial reporting existed during fiscal 2017 and remain unremediated as of September 30, 2020. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual and interim financial statements will not be detected or prevented on a timely basis.

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The material weaknesses we identified are related to the design and maintenance of an effective control environment commensurate with our financial reporting requirements. Specifically, we lacked a sufficient complement of professionals with an appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately and we did not design and maintain controls to ensure adequate segregation of duties within our financial reporting function including the preparation and review of journal entries.
The material weaknesses contributed to the restatement of our previously issued 2017 annual financial statements. Specifically, the material weaknesses resulted in errors in our accounting for and reporting of derivative liabilities, loss on extinguishment of convertible promissory notes and expense classification.
Remediation Activities
Management has been actively engaged in remediating the above described material weaknesses. The following remedial actions have been taken during the quarter ended September 30, 2020:
strengthened our internal policies, processes and reviews, including drafting of related documentation thereof;
implemented an enterprise resource planning system to support key financial processes and controls; and
completed the design and implementation of internal controls to address the relevant risks and continued to engage with outside consultants to finalize the related documentation.
The process of implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligations. As we continue to evaluate and take actions to improve our internal control over financial reporting, we may take additional actions to address control deficiencies or modify certain of the remediation measures described above.
We believe the above actions will be effective in remediating the material weaknesses described above and we will continue to devote significant time and attention to these remedial efforts. The material weaknesses cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded that these controls are operating effectively.
Changes in Internal Control over Financial Reporting
The items described in “Remediation Activities” above are considered a change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the third quarter of 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not currently aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations.
Item 1A. Risk Factors