Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties, such as our plans, objectives, expectations, intentions and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors” included elsewhere in this Annual Report on Form 10-K.
Overview
We are a clinical stage biotechnology company discovering and developing allogeneic gamma delta T cell therapies for autoimmune diseases and cancer. We are advancing a pipeline of “off-the-shelf” gamma delta T cells, engineered with chimeric antigen receptors (CARs), to facilitate durable activity in patients.
Our approach to activate, engineer and manufacture allogeneic gamma delta T cell product candidates derived from the peripheral blood cells of unrelated donors allows us to generate new product candidates in a rapid and cost-efficient manner. Our allogeneic "off-the-shelf" manufacturing process is designed to allow product from unrelated donors to be stored and sold on demand to treat patients without inducing a graft versus host immune response. This is in contrast to products based on alpha beta T cells, which either must be manufactured for each patient from his or her own T cells, or require significant gene editing to manufacture if the T cells are derived from donors that are unrelated to the patient.
Our lead product candidate, ADI-001, a first-in-class allogeneic gamma delta T cell therapy expressing a CAR targeting CD20, is being developed for the potential treatment of autoimmune diseases and relapsed or refractory aggressive B cell non-Hodgkin's lymphoma (NHL). Our pipeline also includes our lead preclinical candidate, ADI-270, an armored gamma delta CAR T cell product candidate targeting renal cell carcinoma, with potential for other CD70+ solid tumor and hematological malignancies indications. Our pipeline has several additional internal gamma delta T cell therapy programs in discovery and preclinical development for both hematological malignancies and solid tumors. We expect to continue to develop product candidates in autoimmune diseases and cancer based on our gamma delta T cell platform using either previously validated antigens or those that we identify and target using CAR and other technology. We plan to file one new Investigational New Drug (IND) application every 12-18 months, including an IND for ADI-270 in the first half of 2024.
ADI-001
Autoimmune Diseases
In December 2023, the U.S. Food and Drug Administration (FDA) cleared our IND application for ADI-001 in lupus nephritis, an autoimmune disease caused by systemic lupus erythematosus (SLE). Lupus nephritis is a serious complication of SLE which affects approximately 40% of the estimated 325,000 patients with SLE in the U.S. We expect to initiate a Phase 1 clinical trial of ADI-001 for the treatment of lupus nephritis in the second quarter of 2024 and expand development of the candidate into one to two additional autoimmune indications in the second and third quarters of 2024, subject to clearance of INDs in those indications. We believe the potential market opportunity for ADI-001 in B cell mediated autoimmune diseases is substantial based on the prevalence in the U.S., EU5, China and Japan of greater than 1.7 million patients with autoimmune diseases where CAR-T cell therapy has demonstrated clinical proof-of-concept, including SLE (which includes lupus nephritis), systemic sclerosis and idiopathic inflammatory myopathies.
We anticipate providing preliminary clinical data from our Phase 1 clinical trial of ADI-001 in lupus nephritis in the fourth quarter of 2024 or first quarter of 2025, subject to study site activation and enrollment, and to begin to provide preliminary clinical data in the additional autoimmune indications starting in the fourth quarter of 2024 or first half of 2025, subject to clearance of INDs in those indications as well as successful site initiation and patient enrollment in the relevant clinical protocols.
Relapsed or Refractory Aggressive B cell NHL
In March 2021, we initiated the first-in-human Phase 1 (GLEAN) trial to assess safety and efficacy of ADI-001 in patients with relapsed or refractory aggressive B cell NHL. The study includes a dose escalation portion followed by dose expansion cohorts to explore the activity of ADI-001 in multiple subtypes of NHL. In April 2022, the FDA granted fast track designation for ADI-001 for NHL. As of the May 4, 2023 cutoff date, of the 24 evaluable subjects in the GLEAN trial, 18 had
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large B cell lymphoma (LBCL), five had mantle cell lymphoma (MCL), and one patient had follicular lymphoma. Most patients were heavily pre-treated, with a median four lines of prior therapy, and twelve patients (50%) had previously progressed following CAR T cell therapy. Despite the advanced nature of patients at baseline, we observed a high complete response (CR) rate and favorable durability in MCL patients. Across all doses of MCL patients, we observed an 80% (4/5 patients) overall response rate (ORR), an 80% CR rate (4/5 patients) and a 60% CR rate (3/5 patients) at six months. As of May 4, 2023, the safety profile of ADI-001 was generally favorable, with no significant risk of cytokine release syndrome (CRS), immune effector cell-associated neurotoxicity syndrome (ICANS), or T cell malignancy observed. In November 2023, we initiated an expansion cohort, EXPAND, in post-CAR T LBCL. In January 2024, we announced our decision to deprioritize enrolling LBCL patients in the GLEAN trial in order to focus on advancing MCL enrollment.
We expect to provide a clinical update from the Phase 1 study in NHL patients which will include efficacy data, including six-month CR rate, and safety data from additional MCL patients in the second half of 2024. Subject to clinical data and regulatory feedback, in the first half of 2025, we plan to define the regulatory path for a potentially pivotal Phase 2 study for ADI-001 in MCL and provide a further clinical update in the second half of 2025.
We have expanded manufacturing capabilities of ADI-001 by transferring the manufacturing process to an additional contract development and manufacturing organization (CDMO) that is capable of operating at a larger scale of production.
ADI-270
ADI-270 is an investigational allogeneic gamma delta CAR T cell therapy targeting CD70 via the CD27-ligand for the treatment of renal cell carcinoma (RCC) and with potential in other solid tumor indications. ADI-270 is designed to home to solid tumors, with a highly specific targeting moiety for CD70 and an armoring technology of transforming growth factor (TGF) beta dominant-negative receptor to address immunosuppressive factors in the tumor microenvironment. Building on gamma delta 1 tissue tropism to solid tumors and three mechanisms of anti-tumor activity (CAR, innate and adaptive), CAR gamma delta 1 T cells may be well positioned to address solid tumors. We plan to file an IND application for ADI-270 in RCC in the second quarter of 2024 and provide clinical data in the first half of 2025, subject to regulatory clearance and study initiation activities. We are also considering potential expansion into additional CD70+ tumor indications in the first half of 2025, with potential clinical data from such studies in the second half of 2025, subject to regulatory clearance and study initiation activities.
Recent Developments
1000 Bridge Parkway Lease and Letter of Credit
On January 9, 2023, we entered into a third lease amendment (the Third Amendment) with Westport Office Park, LLC (Westport). The Third Amendment further amends the Redwood City Lease and increases the tenant improvement allowance as of January 1, 2023 by an additional $3.0 million. We expect to utilize the full allowance for the continued buildout of office and laboratory space at 1000 Bridge Parkway. Per the terms of this amendment, this additional allowance will be repaid through equal monthly payments of principal amortization and interest on a monthly basis over the term of the lease at an interest rate of eight percent (8%) per annum. We received the allowance on February 21, 2023.
On August 7, 2023, we entered into a fourth lease amendment (the Fourth Amendment) with Westport. The Fourth Amendment amended the period over which the tenant improvement allowance received in the Third Amendment will be amortized and identified our monthly amortization payable.
On September 1, 2023, we amended our letter of credit with Westport. The amendment reduced the amount of the letter of credit associated with our 1000 Bridge Parkway facility by $2.1 million resulting in an updated letter of credit amount of $2.1 million.
Option Repricing
On August 8, 2023, our board of directors approved a stock option repricing (the Option Repricing) to be effective on August 14, 2023 (the Effective Date) in accordance with the terms of our 2015 Stock Incentive Plan and 2018 Plan (together, the Plans). Pursuant to the Option Repricing and subject to a one year cliff period, the exercise price of each stock option previously granted under the Plans, totaling 6,431,910 options, was amended to reduce the exercise price of such options to $2.14 per share, the closing price of our common stock on the Nasdaq Global Market on the Effective Date. Under the terms of the Option Repricing, a repriced option will revert to its original exercise price if, prior to the one-year anniversary of the Effective Date, (a) the option holder’s employment is terminated by us with cause or by the option holder or (b) the option is exercised. The repriced options otherwise retained their existing terms and conditions as set forth in the Plans and applicable award agreements.
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In addition, as of the Effective Date, we issued 1,418,042 options to purchase shares of common stock under the 2018 Plan to eligible employees who held inducement awards as of August 8, 2023. These new options were issued to eligible employees because their inducement awards granted under Nasdaq Listing Rule 5635(c)(4) are not eligible for repricing. The prior inducement awards remain outstanding under their original terms.
Underwritten Public Offering
On January 22, 2024, we entered into an Underwriting Agreement (the Underwriting Agreement) with Jefferies LLC and Guggenheim Securities, LLC, as representatives of the underwriters (the Underwriters), related to an underwritten public offering (the Offering) of 32,379,667 shares of our common stock, which included 5,325,000 shares sold and issued upon the exercise in full by the Underwriters of their option to purchase additional shares of common stock, and, in lieu of common stock to certain investors, pre-funded warrants to purchase 8,445,333 shares of common stock. The shares of common stock were sold at a public offering price of $2.40 per share and the pre-funded warrants were sold at a public offering price of $2.3999 per pre-funded warrant, which represents the per share public offering price of each share of common stock minus the $0.0001 per share exercise price for each pre-funded warrant. We received net proceeds from the Offering, after deducting the underwriting discount and commissions and other estimated offering expenses, of approximately $91.8 million. We may receive nominal proceeds, if any, from the exercise of the pre-funded warrants.
At-the-Market (ATM) Offering
In January 2024, we sold an aggregate of 6,350,000 shares of common stock in a series of sales in accordance with our “at-the-market” offering program (ATM Program) with JonesTrading Institutional Services LLC (Sales Agent), at an average price of $3.13 per share, for aggregate net proceeds of approximately $19.3 million, after deducting sales agent commissions, but before deducting any expenses related to such sales. As of the date of this Annual Report on Form 10-K, up to $80.1 million of our common stock remains available for sale from time to time under our ATM Program. In March 2024, we terminated our ATM Program.
Financial Operations Overview
Revenue
We have no products approved for commercial sale and do not expect to generate revenue from product sales unless and until we successfully complete development and obtain regulatory approval for our product candidates, which we expect will not be for at least several years, if ever. Our revenues to date have been generated from our License and Collaboration Agreement with Regeneron Pharmaceuticals, Inc. (Regeneron) and the agreement referred to as the “Regeneron Agreement.”
We received a non-refundable upfront payment of $25.0 million from Regeneron upon execution of the Regeneron Agreement on July 29, 2016 and have received an aggregate of $20.0 million of additional payments for research funding from Regeneron as of December 31, 2023. Our obligations under the Regeneron Agreement were completed during the first quarter of 2022. Regeneron may have to pay us additional amounts in the future consisting of up to an aggregate of $80.0 million of option exercise fees for a certain number of Interprofessional Collaboration Practices (ICPs). On January 28, 2022, we received a payment of $20.0 million from Regeneron for exercise of its option to license exclusive rights to ADI-002 and Regeneron potentially has additional options to other Collaboration ICP targets under the Regeneron Agreement. We declined to exercise our option to co-fund the development of ADI-002 with Regeneron, and accordingly, Regeneron must also pay us high single digit royalties as a percentage of net sales for ADI-002 or any other optioned ICPs to targets for which it has exclusive rights and low single digit royalties as a percentage of net sales on any non-ICP product comprising a target generated by us through the use of Regeneron’s proprietary mice. We must pay Regeneron mid-single to low double digit royalties as a percentage of net sales of Collaboration ICPs to targets for which we have exercised exclusive rights, and low to mid-single digit royalties as a percentage of net sales of targeting moieties generated from our license to use Regeneron’s proprietary mice. Royalties are payable until the longer of the expiration or invalidity of the licensed patent rights or 12 years from first commercial sale.
We used a cost-based input method to measure proportional performance and to calculate the corresponding amount of revenue to recognize under the Regeneron Agreement. In applying the cost-based input method of revenue recognition, we used actual costs incurred relative to budgeted costs to fulfill the combined performance obligation. Revenue was recognized based on actual costs incurred as a percentage of total budgeted costs as we completed our performance obligations over the research term. A cost-based input method of revenue recognition requires us to estimate costs to complete our performance obligations, which requires significant judgment to evaluate assumptions related to cost estimates. The cumulative effect of revisions to estimated costs to complete our performance obligations is recorded in the period in which changes are identified and amounts can be reasonably estimated.
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Expenses
Research and Development
Research and development expenses, which consist primarily of costs incurred in connection with the development of our product candidates, are expensed as incurred. Research and development expenses consist primarily of:
• employee related costs, including salaries, benefits and stock-based compensation expenses for research and development employees;
• costs incurred under agreements with consultants, CDMOs and contract research organizations (CROs);
• lab materials, supplies and maintenance of equipment used for research and development activities; and
• allocated facility-related costs, such as rent, utilities, insurance, repairs and maintenance, depreciation and amortization, information technology costs and general support services.
We do not allocate our costs by product candidate, as a significant amount of research and development expenses are not tracked by product candidate, and we believe the allocation of such costs would be arbitrary and would not provide a meaningful assessment as we have used our employee and infrastructure resources across multiple product candidate research and development programs.
We are focusing substantially all of our resources on the development of our product candidates. At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of our product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from sales of our product candidates. The duration, costs, and timing of clinical trials and development of our product candidates will depend on a variety of factors, including:
• the scope, rate of progress and expense of clinical trials and other research and development activities;
• clinical trial results;
• uncertainties in clinical trial enrollment rate or design;
• significant and changing government regulation;
• the timing and receipt of any regulatory approvals;
• the FDA’s or other regulatory authority’s influence on clinical trial design;
• establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;
• commercializing product candidates, if and when approved, whether alone or in collaboration with others;
• obtaining and maintaining patent and trade secret protection and regulatory exclusivity for product candidates;
• continued applicable safety profiles of the products following approval; and
• retention of key research and development personnel.
A change in the outcome of any of these or other variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. Furthermore, our operating plans may change in the future, and we will continue to require additional capital to meet operational needs and capital requirements associated with such operating plans.
Adequate funding may not be available to us on acceptable terms or at all. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategies. If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials or we may also be required to sell or license to other rights to our product candidates in certain territories or indications that we would prefer to develop and commercialize ourselves. If we are required to enter into collaborations and other
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arrangements to supplement our funds, we may have to give up certain rights that limit our ability to develop and commercialize our product candidates or may have other terms that are not favorable to us or our stockholders, which could materially affect our business and financial condition.
General and Administrative
General and administrative expenses consist principally of payroll and personnel expenses, including salaries and bonuses, benefits and stock based compensation expenses, professional fees for legal, consulting, accounting and tax services, allocated overhead expenses, including rent, equipment, depreciation, information technology costs and utilities, and other general operating expenses not otherwise classified as research and development expenses.
We anticipate that our general and administrative expenses will increase for the foreseeable future due to expenses related to operating as a public company, including expenses related to personnel costs, expanded infrastructure and higher consulting, legal and accounting services costs associated with complying with the applicable Nasdaq and SEC requirements, investor relations costs and director and officer insurance premiums.
Goodwill Impairment
Goodwill represents the excess of the purchase price over the fair value of net tangible and identified intangible assets acquired in our merger with resTORbio, Inc. in September 2020. Goodwill is not amortized but is evaluated at least annually for impairment or when a change in facts and circumstances indicate that the fair value of the goodwill may be below the carrying value. If the fair value of the reporting unit is less than the carrying value, we measure the amount of impairment loss, if any, as the excess of the carrying value over the fair value of the reporting unit. This amount is recognized as a goodwill impairment charge for the period. The Company performed an interim test for goodwill impairment in the third quarter of 2023 and determined that the entire balance of goodwill was impaired.
Interest Income
Interest income consists primarily of interest earned on our cash and cash equivalents.
Interest Expense
Interest expense consists primarily of the non-cash amortization of costs incurred in connection with the Loan Agreement (as defined below).
Other Expense, Net
Other expense, net primarily consists of state franchise and capital taxes not related to income.
Results of Operations
Comparison of the Years Ended December 31, 2023 and 2022
The following table summarizes our results of operations for the periods indicated (in thousands, except percentages):
Twelve Months Ended December 31,
2023
2022
Change
% Change
Revenue – related party
$
—
$
24,990
$
(24,990
)
(100
%)
Operating expenses
Research and development
106,043
71,246
34,797
49
%
General and administrative
26,533
26,295
238
1
%
Goodwill impairment
19,462
—
19,462
100
%
Total operating expenses
152,038
97,541
54,497
56
%
Loss from operations
(152,038
)
(72,551
)
(79,487
)
110
%
Interest income
9,978
3,760
6,218
165
%
Interest expense
(25
)
(80
)
55
69
%
Other expense, net
(573
)
(919
)
346
38
%
Loss before income tax benefit
(142,658
)
(69,790
)
(72,868
)
104
%
Income tax provision
—
—
—
0
%
Net loss
$
(142,658
)
$
(69,790
)
$
(72,868
)
104
%
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Revenue
Revenue decreased by $25.0 million, or 100%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease was due to no revenue recognized under the Regeneron Agreement in the current period. Our obligations under the combined performance obligation with Regeneron were completed during the first quarter of 2022, resulting in revenue fully recognized under the agreement as of March 31, 2022.
Research and Development
Twelve Months Ended December 31,
2023
2022
Payroll and personnel expenses(1)
$
42,744
$
31,201
Costs incurred under agreements with consultants, CDMOs, and CROs
29,963
19,233
Lab materials, supplies and maintenance of equipment
used for research and development activities
11,065
6,929
Other research and development expenses(2)
22,271
13,883
Total research and development expenses
$
106,043
$
71,246
(1) Employee related costs, including salaries, benefits, bonuses, and stock-based compensation expenses for research and development employees.
(2) Allocated facility-related costs, such as rent, utilities, insurance, repairs and maintenance, depreciation and amortization, information technology costs and general support services.
Research and development expenses increased by $34.8 million, or 49%, during the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase in research and development expenses was primarily due to a $10.7 million increase in expenses related to CDMOs and other externally conducted research and development and a $11.5 million increase in payroll and personnel expenses resulting from an increase in overall headcount. In addition, there was an $8.5 million increase in allocated facility expenses and a $4.1 million increase in laboratory expenses for the period. This increase was partially offset by a $0.2 million decrease in professional fees.
General and Administrative
General and administrative expenses increased by $0.2 million, or 1%, during the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase in general and administrative expenses was primarily due to a $3.3 million increase in payroll and personnel expenses, which includes an increase in salaries and benefits of $1.0 million, contractor fees of $0.9 million, stock-based compensation of $1.2 million and recruiting fees of $0.3 million. These increases were the result of increased headcount for the period. The increase was partially offset by a $2.6 million decrease in allocated facility expenses. There was also a $0.5 million decrease in professional fees for the period.
Goodwill Impairment
Goodwill impairment charges increased by $19.5 million, or 100%, during the year ended December 31, 2023 compared to the year ended December 31, 2022. Beginning in the third quarter of 2023, we experienced a significant decline in our stock price. We concluded that the decrease in stock price was sustained and that it was more likely than not that the fair value of our single reporting unit was less than its carrying amount. As such, we performed an interim goodwill impairment test as of
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September 30, 2023. Based on our interim impairment test, we recorded a goodwill impairment charge of $19.5 million during the year ended December 31, 2023, representing the entire balance of goodwill.
Interest Income
Interest income increased by $6.2 million, or 165%, during the year ended December 31, 2023 compared to the year ended December 31, 2022, which was primarily due to higher interest rates as well as our investments in treasury securities and money market funds.
Other Expense, Net
Other expense decreased by $0.3 million, or 38%, during the year ended December 31, 2023 compared to the year ended December 31, 2022, which was primarily due to a decrease in franchise and capital taxes for the period.
Income Tax Benefit
There was no income tax expense or benefit for the years ended December 31, 2023 and 2022.
Liquidity and Capital Resources
Sources of Liquidity
We have historically funded our operations primarily through a collaboration and licensing arrangement, public and private placements of equity securities and debt, and cash received in our merger with resTORbio, Inc.
In August 2022, we received net proceeds of $43.6 million from the sale of shares of our common stock under our ATM Program with the Sales Agent and, in January 2024, we received net proceeds of $19.3 million from the sale of shares of our common stock under our ATM Program. Up to $80.1 million of shares of our common stock remains available for sale under our ATM Program, providing us with an additional source of liquidity, subject to market conditions. In March 2024, we terminated our ATM Program.
In addition, in January 2024, we completed the Offering, which resulted in net proceeds to us, after deducting the underwriting discount and commissions and other estimated offering expenses, of approximately $91.8 million. We may also receive nominal proceeds, if any, from the exercise of the Pre-Funded Warrants.
As of December 31, 2023, we had cash and cash equivalents of $159.7 million. We expect that our cash and cash equivalents, together with the proceeds raised subsequent to year-end through our ATM Program and the Offering, will be sufficient to fund our forecasted operating expenses, capital expenditure requirements and debt service payments for at least the next twelve months from the issuance of the consolidated financial statements included in this Annual Report on Form 10-K.
Loan Agreement
On April 28, 2020, we entered into a Loan and Security Agreement, as amended on July 8, 2020, September 14, 2020, September 15, 2020, October 21, 2021, December 2, 2022 and May 30, 2023 (the Loan Agreement), with Banc of California (formerly known as Pacific Western Bank) to finance leasehold improvements for our facilities in Redwood City, California and other purposes permitted under the Loan Agreement.
On May 30, 2023, we amended our Loan Agreement with Banc of California (the 2023 Loan Amendment). Pursuant to the 2023 Loan Amendment, we must maintain the lesser of (i) $35.0 million or (ii) all of our combined balances in demand deposit accounts, money market accounts, and/or insured cash sweep accounts with Banc of California. If our total cash and investments drop to less than $35.0 million, the 2023 Loan Amendment permits us to maintain cash and/or investments in one or more accounts outside of Banc of California up to a total of $2.5 million.
As of December 31, 2023, we have $12.7 million available under the Loan Agreement. As of the date of this Annual Report on Form 10-K, we were in compliance with such covenants and had no indebtedness outstanding under the Loan Agreement.
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Future Funding Requirements
We have incurred losses since inception and have incurred losses of $142.7 million and $69.8 million for the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023, we had an accumulated deficit of $380.8 million.
As of December 31, 2023, we had cash and cash equivalents of $159.7 million. Subsequent to December 31, 2023, we raised aggregate net proceeds of approximately $19.3 million through our ATM Program and approximately $91.8 million through the Offering. We believe that our cash and cash equivalents, together with the proceeds raised subsequent to year-end through our ATM Program and the Offering, will be sufficient for us to fund our operations for at least 12 months from the issuance date of our consolidated financial statements as of, and for the year ended, December 31, 2023 included elsewhere in this Annual Report on Form 10-K. We have based these estimates on assumptions that may prove to be wrong, and we could deplete our available capital resources sooner than we expect. Because of the 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.
All of our revenue to date has been generated from the Regeneron Agreement, which is a collaboration and license agreement. We do not expect to generate any significant product revenue until we obtain regulatory approval of and commercialize any of our product candidates or enter into additional collaborative agreements with third parties, and we do not know when, or if, either will occur. We expect to continue to incur significant losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek regulatory approvals for, our product candidates and begin to commercialize any approved products. We are subject to all of the risks typically related to the development of new product candidates, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business.
We will continue to require additional capital to develop our product candidates and fund operations for the foreseeable future. We may seek to raise capital through private or public equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. We anticipate that we will need to raise substantial additional capital, the requirements for which will depend on many factors, including:
• the scope, timing, rate of progress and costs of our drug discovery efforts, preclinical development activities, laboratory testing and clinical trials for our product candidates;
• the timing, number and scope of clinical programs we decide to pursue;
• the cost, timing and outcome of preparing for and undergoing regulatory review of our product candidates;
• the scope and costs of development and commercial manufacturing activities;
• the cost and timing associated with commercializing our product candidates, if they receive marketing approval;
• the extent to which we acquire or in-license other product candidates and technologies;
• the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
• our ability to establish and maintain collaborations on favorable terms, if at all;
• our efforts to enhance operational systems and our ability to attract, hire and retain qualified personnel, including personnel to support the development of our product candidates and, ultimately, the sale of our products, following FDA approval;
• our implementation of operational, financial and management systems;
• the impact of potential health emergencies on United States and global economic conditions that may impact our ability to access capital on terms anticipated, or at all; and
• the post-merger costs associated with being a public company.
A change in the outcome of any of these or other variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. Furthermore, our operating plans may change in the future, and we will continue to require additional capital to meet operational needs and capital requirements associated with such operating plans. Adequate funding may not be available to us on acceptable terms or at all.
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Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategies. If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials or we may also be required to sell or license to other rights to our product candidates in certain territories or indications that we would prefer to develop and commercialize ourselves. If we are required to enter into collaborations and other arrangements to supplement our funds, we may have to give up certain rights that limit our ability to develop and commercialize our product candidates or may have other terms that are not favorable to us or our stockholders, which could materially affect our business and financial condition.
See the section of this Annual Report on Form 10-K titled “ Risk Factors ” for additional risks associated with our substantial capital requirements.
Summary Statement of Cash Flows
The following table sets forth the primary sources and uses of our cash, cash equivalents, and restricted cash for each of the periods presented below (in thousands):
Twelve Months Ended December 31,
2023
2022
Net cash provided by (used in):
Operating activities
$
(93,717
)
$
(44,765
)
Investing activities
(4,464
)
(16,782
)
Financing activities
236
41,509
Net decrease in cash and cash equivalents
$
(97,945
)
$
(20,038
)
Cash Flows from Operating Activities
Net cash used in operating activities was $93.7 million for the year ended December 31, 2023. Cash used in operating activities consisted of net loss offset by non-cash adjustments of $48.7 million and a net increase in operating assets and liabilities of $0.3 million. Non-cash items primarily included goodwill impairment of $19.5 million, stock-based compensation expense of $20.3 million, depreciation and amortization of $6.1 million and non-cash lease expense of $2.8 million. The net increase in assets and liabilities was primarily due to an increase of $0.9 million in prepaid expenses and other current assets and an increase of $0.4 million in other non-current assets accounts. There was also an increase in accrued and other current and non-current liabilities of $0.8 million. The increase was partially offset by a decrease in accounts payable of $1.7 million.
Net cash used in operating activities was $44.8 million for the year ended December 31, 2022. Cash used in operating activities consisted of net loss and non-cash adjustments of $22.3 million as well as an increase in assets and liabilities of $2.7 million. Non-cash items primarily included stock-based compensation expense of $17.1 million, non-cash lease expense of $2.4 million and depreciation and amortization of $2.6 million. The net change in assets and liabilities was primarily due to an increase in accrued and other current and non-current liabilities of $5.8 million, an increase in accounts payable of $1.7 million and an increase in prepaid expenses and other current assets of $1.3 million. The increase was partially offset by a decrease in deferred revenue of $4.8 million related to the Regeneron Agreement and a decrease in operating lease liability of $2.3 million.
Cash Flows from Investing Activities
Net cash used in investing activities was $4.5 million for the year ended December 31, 2023, which consisted of purchases of property and equipment related to the construction of our facilities in Redwood City, California.
Net cash used in investing activities was $16.8 million for the year ended December 31, 2022, which consisted of purchases of property and equipment related to the construction of our facilities in Redwood City, California.
Cash Flows from Financing Activities
Net cash provided by financing activities was $0.2 million for the year ended December 31, 2023, which was primarily related to $0.4 million in net proceeds from the issuance of common stock in connection with our employee stock purchase plan. This was partially offset by $0.2 million of cash paid for taxes withheld on the net share settlement of equity awards.
Net cash provided by financing activities was $41.5 million for the year ended December 31, 2022, which primarily consisted of $43.4 million in proceeds from the issuance of common stock pursuant to our ATM Program and $1.7 million in cash proceeds from the exercise of stock options and purchases under our Employee Stock Purchase Plan. Net cash provided by financing activities was partially offset by $3.2 million of taxes withheld and paid related to net share settlement of employee equity awards and $0.4 million related to deferred issuance costs.
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Critical Accounting Policies, Significant Judgments and Use of Estimates
Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting practices (GAAP). The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities in our consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions and could have a material impact on our reported results. While our significant accounting policies are more fully described in the Notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be the most critical in understanding the judgments and estimates we use in preparing our consolidated financial statements:
Accrued CDMO, CRO, and Research and Development Expenses
We have entered into various agreements with CDMOs and CROs. Our research and development accruals are estimated based on the level of services performed, progress of the studies, including the phase or completion of events, and contracted costs. The estimated costs of research and development provided, but not yet invoiced, are included in accrued and other current liabilities on the consolidated balance sheet. If the actual timing of the performance of services or the level of effort varies from the original estimates, we will adjust the accrual accordingly. Payments made to CDMOs and CROs under these arrangements in advance of the performance of the related services are recorded as prepaid expenses and other current assets on the consolidated balance sheets until the services are rendered. To date, our estimated accruals have not differed materially from the actual costs.
Stock-Based Compensation
We use a fair value-based method to account for all stock-based compensation arrangements with employees and non-employees, including stock options and restricted stock awards. Our determination of the fair value of stock options on the date of grant utilizes the Black-Scholes option pricing model. The fair value of the option granted is recognized on a straight-line basis over the period during which an optionee is required to provide services in exchange for the option award, known as the requisite service period, which usually is the vesting period. For awards that have a performance condition, the Company recognizes compensation expense based on its assessment of the probability that the performance condition will be achieved, using an accelerated attribution model, over the explicit or implicit service period. We account for forfeitures as they occur. In determining fair value of the stock options granted, we use the Black–Scholes option-pricing model, which requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (expected term), the estimated volatility of our common stock price over the expected term (expected volatility), risk-free interest rate and expected dividends. Changes in the following assumptions can materially affect the estimate of fair value and ultimately how much stock-based compensation expense is recognized; and the resulting change in fair value, if any, is recognized in our consolidated statements of operations during the period the related services are rendered. These inputs are subjective and generally require significant analysis and judgment to develop. Changes in the following assumptions can materially affect the estimate of the fair value of stock-based compensation:
• Expected Term — The expected term is calculated using the simplified method which is used when there is insufficient historical data about exercise patterns and post-vesting employment termination behavior. The simplified method is based on the vesting period and the contractual term for each grant, or for each vesting-tranche for awards with graded vesting. The mid-point between the vesting date and the maximum contractual expiration date is used as the expected term under this method. For awards with multiple vesting-tranches, the times from grant until the mid-points for each of the tranches may be averaged to provide an overall expected term.
• Expected Volatility — The Company has limited trading history. As such, the expected volatility was determined by examining the historical volatilities of a peer group of comparable publicly traded companies in biotechnology and pharmaceutical related industries to be representative of our expected future stock price volatility. For purposes of identifying these peer companies, we consider the industry, stage of development, size and financial leverage of potential comparable companies. For each grant, we measure historical volatility over a period equivalent to the expected term.
• Risk-Free Interest Rate — The risk-free interest rate is based on the implied yield currently available on United States Treasury zero-coupon issues with a remaining term equivalent to the expected term of the stock award.
• Expected Dividend Rate — We have not paid and do not anticipate paying dividends in the near future. Accordingly, we estimate the dividend yield to be zero.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net tangible and identified intangible assets acquired in a business combination. Goodwill is not amortized but is evaluated at least annually for impairment or when a change in facts and circumstances indicate that the fair value of the goodwill may be below the carrying value.
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Goodwill is tested for impairment at the reporting unit level annually in the fourth quarter, or more frequently when events or changes in circumstances indicate that the asset might be impaired. Examples of such events or circumstances include, but are not limited to, a significant adverse change in legal or business climate, an adverse regulatory action or unanticipated competition. We have determined that we operate in a single operating segment and have a single reporting unit.
Prior to performing the impairment test, we assess qualitative factors to determine whether the existence of events or circumstances would indicate that it is more likely than not that the fair value of the reporting unit was less than the carrying amount. If after assessing the totality of events or circumstances, we were to determine that it is more likely than not that the fair value of the reporting unit is less than the carrying amount, we would perform a quantitative impairment test.
The quantitative impairment test involves comparing the fair value of the reporting unit to the carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets, goodwill is not impaired, and no further testing is required. If the fair value of the reporting unit is less than the carrying value, we measure the amount of impairment loss, if any, as the excess of the carrying value over the fair value of the reporting unit. We performed an interim test for goodwill impairment in the third quarter of the fiscal year ended December 31, 2023 and determined that goodwill was impaired.
Smaller Reporting Company
We are a “smaller reporting company” as defined in the Exchange Act. As a smaller reporting company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable, in general, to public companies that are not smaller reporting companies. These provisions include (i) not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes Oxley Act of 2002, as amended; (ii) scaled executive compensation disclosures; and (iii) the option to provide only two years of audited financial statements, instead of three years.
We will continue to be a smaller reporting company for as long as we continue to have (i) less than $250 million in market value of our shares held by non-affiliates as of the last business day of our second fiscal quarter or (ii) less than $100 million of annual revenues in our most recent fiscal year completed before the last business day of our second fiscal quarter and a market value of our shares held by non-affiliates of less than $700 million as of the last business day of our second fiscal quarter.
We may choose to take advantage of some but not all of these exemptions. Accordingly, the information contained herein may be different from the information you receive from other public companies in which you hold stock. We have elected to avail ourselves of the exemption for the delayed adoption of certain accounting standards and, therefore, are not subject to the same new or revised accounting standards as other public companies that are not smaller reporting companies.
Recently Issued and Adopted Accounting Pronouncements
See the section titled “ Summary of Significant Accounting Policies ” in Note 2 to our financial statements included elsewhere in this Annual Report on Form 10-K for additional information.
Item 7A. Quantitative and Qualitat ive Disclosures About Market Risk.
Interest Rate Risk
As of December 31, 2023, we had cash and cash equivalents of $159.7 million, which consisted of cash and treasury securities. Interest income is sensitive to general level of interest rates; however, due to the nature of these investments, an immediate 10% change in interest rates would not have a material impact on our cash and cash equivalents, financial position, or results of operations.
Foreign Currency Exchange Risk
Our headquarters are located in the United States, where a majority of our general and administrative expenses and research and development costs are incurred in U.S. Dollars. As we grow our business, our results of operations and cash flows may be subject to fluctuations due to foreign currency exchange rates. To date, we do not believe foreign currency exchange rate fluctuations have had a significant impact on our results of operations for any periods presented herein.
Inflation Risk
Our assets are primarily monetary, consisting of cash and cash equivalents. Because of their liquidity, these assets are not directly affected by inflation. Since we intend to retain and continue to use our equipment, furniture, fixtures and office equipment, computer hardware and software and leasehold improvements, we believe that the incremental inflation related to
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replacement costs of such items will not materially affect our operations. Inflation generally affects us by increasing our cost of labor, clinical trial and manufacturing costs. We do not believe that inflation had a material effect on our business, financial condition or results of operations during the years ended December 31, 2023 and 2022.
Item 8. Financial Statemen ts and Supplementary Data.
All financial statements and supplementary data required to be filed hereunder are filed as listed under Item 15(a) of this Annual Report on Form 10-K and are incorporated herein by this reference.
Item 9. Changes in and Disagreements with Accou ntants on Accounting and Financial Disclosure.
None.