Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with the historical consolidated financial statements and the notes thereto included in “Financial Statements and Supplementary Data”. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including but not limited to those described in the “Risk Factors” section of this Annual Report. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” and “Risk Factors.”
Overview
We are a clinical stage immuno-oncology company pioneering the development of genetically engineered allogeneic T cell product candidates for the treatment of cancer and autoimmune diseases. We are developing a pipeline of “off-the-shelf” T cell product candidates that are designed to target and kill cancer cells in patients or eliminate pathogenic autoreactive cells in patients with autoimmune disorders. Our engineered T cells are allogeneic, meaning they are derived from healthy donors for intended use in any patient, rather than from an individual patient for that patient’s use, as in the case of autologous T cells. We believe this key difference will enable us to deliver readily available treatments faster, more reliably, at greater scale, and to more patients.
We have a deep pipeline of allogeneic chimeric antigen receptor (CAR) T cell product candidates targeting multiple promising antigens in a host of hematological malignancies, solid tumors and autoimmune disease. Earlier this year, however, we announced our 2024 Platform Vision under which we are now focusing on four core programs.
We are currently focused on developing cemacabtagene ansegedleucel (cema-cel, previously ALLO-501A) in large B-cell lymphoma (LBCL) and chronic lymphocytic leukemia (CLL). We plan to initiate a pivotal Phase 2 clinical trial (ALPHA3) in mid-2024 for cema-cel as part of a first line (1L) treatment plan for newly diagnosed and treated LBCL patients who are likely to relapse and need further therapy. The design of the ALPHA3 1L consolidation trial builds upon the results demonstrated in the Phase 1 ALPHA2 trial and leverages an investigational diagnostic test developed by Foresight Diagnostics, Inc. that we believe will identify patients who have achieved remission by standard disease assessment but who have minimal residual disease (MRD) at the completion of 1L chemoimmunotherapy. The ALPHA3 trial is designed to study the impact of treating MRD positive patients with cema-cel. The study will randomize approximately 230 patients who achieve a complete response or partial response to 1L therapy, but who are MRD positive. The patients will be randomized to either consolidation with cema-cel or the current standard of care, which is observation. The design, with a primary endpoint of event free survival (EFS), will initially include two lymphodepletion arms (one with standard fludarabine and cyclophosphamide plus ALLO-647 and one with standard fludarabine and cyclophosphamide but without ALLO-647). One lymphodepletion arm will be discontinued following a planned interim analysis in mid-2025 designed to select the most appropriate regimen for this patient population. In view of the potential of the earlier line ALPHA3 trial, we have deprioritized the third line (3L) LBCL ALPHA2 and EXPAND trials.
We have initiated the Phase 1b cohort of our ALPHA2 trial to evaluate cema-cel following lymphodepletion with fludarabine/cyclophosphamide and ALLO-647 in patients with relapsed/refractory chronic lymphocytic leukemia/small lymphocytic lymphoma (CLL/SLL). This cohort will include up to 40 patients, and we expect to release initial data by year-end 2024.
We are enrolling a Phase 1 clinical trial (TRAVERSE) of ALLO-316, an allogeneic CAR T cell product candidate targeting CD70, in adult patients with advanced or metastatic RCC. We presented interim results from the TRAVERSE trial at the American Association of Cancer Research (AACR) Annual Meeting in April 2023. We have implemented a protocol
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amendment that incorporates a diagnostic and treatment algorithm into the study design. The algorithm is designed to mitigate the treatment-associated hyperinflammatory response without compromising the CAR T function needed to eradicate solid tumors. The next update from this trial is planned for a medical forum in the second quarter of 2024 and will discuss the algorithm. A more robust data update from the ongoing trial with the updated protocol is planned for later in 2024.
We are developing ALLO-329, a next-generation allogeneic CAR T cell product candidate targeting both CD19 and CD70 for the treatment of certain autoimmune diseases (AID). Inclusion of an anti-CD70 CAR in ALLO-329 incorporates the Dagger® technology, which is designed to reduce or eliminate the need for standard chemotherapy by preventing premature rejection while targeting CD19+ B-cells and CD70+ activated T-cells, both of which play a role in AID. Initiation of this Phase 1 trial with ALLO-329 is expected in early 2025.
We are developing an anti-CD52 monoclonal antibody, ALLO-647, which is a proprietary component of our lymphodepletion regimen. ALLO-647 may be able to reduce the likelihood of a patient’s immune system rejecting the engineered allogeneic T cells for a sufficient period of time to enable a window of persistence during which our engineered allogeneic T cells can actively target and destroy cancer cells. During Part A of our pivotal ALPHA3 trial, we will be assessing ALLO-647’s contribution to the overall benefit to risk ratio of the lymphodepletion regimen for cema-cel. Patients will be randomized to receive cema-cel and a lymphodepletion regimen with fludarabine and cyclophosphamide either with or without ALLO-647. We plan to select the lymphodepletion regimen with which we will complete enrollment in the study (Part B) in the first half of 2025.
While we have additional programs in our pipeline, our development priorities are focused on cema-cel (1L Consolidation and CLL), ALLO-316, and ALLO-329. We will explore opportunities to partner with collaborators on product candidates across our pipeline.
On January 4, 2024, our board of directors approved a reduction in our workforce of approximately 22% of our employees in connection with our pipeline prioritization and clinical development strategy.
Since inception, we have had significant operating losses. Our net loss was $327.3 million for the year ended December 31, 2023. As of December 31, 2023, we had an accumulated deficit of $1.6 billion. As of December 31, 2023, we had $448.7 million in cash and cash equivalents and investments and we expect our cash runway to fund operations into 2026. We expect to continue to incur net losses for the foreseeable future, and we expect our research and development expenses and general and administrative expenses will continue to increase.
Our Research and Development and License Agreements
Asset Contribution Agreement with Pfizer
In April 2018, we entered into an Asset Contribution Agreement (Pfizer Agreement) with Pfizer pursuant to which we acquired certain assets and assumed certain liabilities from Pfizer, including agreements with Cellectis and Servier as described below, and other intellectual property for the development and administration of CAR T cells for the treatment of cancer. See Note 6 to our consolidated financial statements included elsewhere in this Annual Report for further description of the Pfizer Agreement.
Research Collaboration and License Agreement with Cellectis
In June 2014, Pfizer entered into a Research Collaboration and License Agreement with Cellectis. In April 2018, Pfizer assigned the agreement to us pursuant to the Pfizer Agreement. In March 2019, we terminated the agreement with Cellectis and entered into a new license agreement with Cellectis. See Note 6 to our consolidated financial statements included elsewhere in this Annual Report for further descriptions of the prior agreement with Cellectis and the new license agreement with Cellectis.
Exclusive License and Collaboration Agreement with Servier
In October 2015, Pfizer entered into an Exclusive License and Collaboration Agreement (Servier Agreement) with Servier to develop, manufacture and commercialize certain allogeneic anti-CD19 CAR products, including UCART19, in the United States with the option to obtain the rights over certain additional allogeneic anti-CD19 CAR product candidates and for allogeneic CAR T cell product candidates directed against one additional target. In April 2018, Pfizer assigned the agreement to us pursuant to the Pfizer Agreement. In October 2019, we agreed to waive our rights to the one additional target.
On September 15, 2022, Servier sent a notice of discontinuation (Discontinuation) of its involvement in the development of all licensed products directed against CD19, including UCART19, ALLO-501 and cema-cel (collectively,
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CD19 Products), pursuant to the Servier Agreement. Servier’s Discontinuation provides us with the right to elect a license to the CD19 Products outside of the United States (Ex-US Option) and does not otherwise affect our current exclusive license for the development and commercialization of CD19 Products in the United States. Upon any exercise of the Ex-US Option by us, our potential milestone payments with respect to ALLO-501A would increase for any first dosing in Phase 2, first dosing in Phase 3 and regulatory approval by €46 million in the aggregate. In addition, upon any such exercise of the Ex-US Option, Servier's obligation to reimburse us for 40% of the development costs for CD19 Products would cease. However, Servier has disputed the implications of the Discontinuation, namely whether development cost contributions continue and the timeframe during which we have the right to elect a license to CD19 Products outside of the United States. Moreover, in December 2022, Servier sent us a notice for material breach due to our purported refusal to allow an audit of certain manufacturing costs under our cost share arrangement. While we do not believe Servier has such an audit right, we submitted to a review of our manufacturing costs of CD19 Products to recover outstanding manufacturing costs owed by Servier to us. In July 2023, Servier sent us a second notice for material breach alleging that we overcharged Servier based on Servier and its accounting firm’s review of costs eligible for cost-sharing under the Servier Agreement. We disagree with the material breach allegations and we are disputing such allegations. For more information, see “Risk Factors— Servier’s discontinuation of its involvement in the development of CD19 Products and Servier's disputes with us and Cellectis may have adverse consequences. "
See Note 6 to our consolidated financial statements included elsewhere in this Annual Report for further description of the Servier Agreement.
Collaboration and License Agreement with Notch
On November 1, 2019, we entered into a Collaboration and License Agreement (the Notch Agreement) with Notch Therapeutics Inc. (Notch), pursuant to which Notch granted us an exclusive, worldwide, royalty-bearing, sublicensable license under certain of Notch’s intellectual property to develop, make, use, sell, import, and otherwise commercialize therapeutic gene-edited T cell and/or natural killer cell products from induced pluripotent stem cells directed at certain CAR targets for initial application in NHL, B-cell precursor acute lymphoblastic leukemia (ALL) and multiple myeloma. In addition, Notch has granted us an option to add certain specified targets to our exclusive license in exchange for an agreed upon per-target option fee.
The Notch Agreement includes a research collaboration to conduct research and pre-clinical development activities to generate engineered cells directed to our exclusive targets, which will be conducted in accordance with an agreed research plan and budget under the oversight of a joint development committee. In connection with the execution of the Notch Agreement, we made an upfront payment to Notch of $10.0 million. In addition, we made a $5.0 million investment in Notch’s series seed convertible preferred stock, resulting in us having a 25% ownership interest in Notch’s outstanding capital stock on a fully diluted basis immediately following the investment. In February 2021, we made an additional $15.9 million investment in Notch's Series A preferred stock. In October 2021, we made an additional $1.8 million investment in Notch's common stock. Immediately following this transaction, our share in Notch was 23.0% on a voting interest basis. See Note 6 to our consolidated financial statements included elsewhere in this Annual Report for further description of the Notch Agreement.
On January 25, 2024, we entered into an Amended and Restated Collaboration and License Agreement (the Amended Notch Agreement) with Notch. The Amended Notch Agreement amends and restates the Notch Agreement, dated as of November 1, 2019. Under the Amended Notch Agreement, we have relinquished our exclusive rights to all original CAR targets (the Released Targets) except for one CAR target, and have agreed to limit our option right to only one additional CAR target. If the option is exercised, we will have a minimum funding commitment for the overall development program. If Notch subsequently out-licenses any of the Released Targets, we will be entitled to receive a percentage of upfront and/or milestone payments associated therewith up to a set cap, and will be entitled to a low, single-digit royalty on net sales of products containing a Released Target. In addition, with respect to our previous equity investments in Notch, the Amended Notch Agreement grants us certain anti-dilution protections up to certain limits for certain pre-IPO equity financings.
Strategic Alliance with The University of Texas MD Anderson Cancer Center
On October 6, 2020, we entered into a strategic five-year collaboration agreement with The University of Texas MD Anderson Cancer Center (MD Anderson) for the preclinical and clinical investigation of allogeneic CAR T cell product candidates. See Note 6 to our consolidated financial statements included elsewhere in this Annual Report for further description of the agreement with MD Anderson.
License Agreement with Allogene Overland Biopharm (CY) Limited
On December 14, 2020, we entered into a License Agreement with Allogene Overland Biopharm (CY) Limited (Allogene Overland), a joint venture established by us and Overland Pharmaceuticals (CY) Inc. (Overland), pursuant to a Share
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Purchase Agreement, dated December 14, 2020, for the purpose of developing, manufacturing and commercializing certain allogeneic CAR T cell therapies for patients in greater China, Taiwan, South Korea and Singapore (the JV Territory). Allogene Overland subsequently assigned the License Agreement to a wholly-owned subsidiary, Allogene Overland Biopharm (HK) Limited (Allogene Overland HK). On April 1, 2022, Allogene Overland HK assigned the License Agreement to Allogene Overland Biopharm (PRC) Co., Limited. See Note 6 to our consolidated financial statements included elsewhere in this Annual Report for further description of the License Agreement and Share Purchase Agreement with Allogene Overland.
Collaboration and License Agreement with Antion
On January 5, 2022, we entered into an exclusive collaboration and global license agreement (Antion Collaboration and License Agreement) with Antion Biosciences SA (Antion) for Antion’s miRNA technology (miCAR), to advance multiplex gene silencing as an additional tool to develop next generation allogeneic CAR T products. On July 11, 2023, we entered into an amendment to the Antion Collaboration and License Agreement, which included a $2 million investment in Antion’s preferred shares and the acquisition of warrants to purchase an additional $3 million of Antion’s preferred shares. See Note 6 to our consolidated financial statements included elsewhere in this Annual Report for further description of the Antion Agreement and the July 2023 amendment.
Strategic Collaboration Agreement with Foresight Diagnostics
On January 3, 2024, we entered into a Strategic Collaboration Agreement (the Foresight Agreement) with Foresight Diagnostics, Inc. (Foresight Diagnostics). Pursuant to the Foresight Agreement, the parties have agreed to collaborate on a non-exclusive basis in the development of Foresight Diagnostics' MRD assay as an in vitro diagnostic to identify the MRD+ patient population to be enrolled in our planned ALPHA3 trial of cemacabtagene ansegedleucel, or cema-cel (previously known as ALLO-501A) for treatment of large B cell lymphoma (LBCL). Under the Foresight Agreement, we have agreed to use the commercially reasonable efforts to obtain regulatory approval of cema-cel, and Foresight Diagnostics has agreed to use its commercially reasonable efforts to obtain regulatory approval of an MRD assay for use as an in vitro diagnostic with cema-cel.
Components of Results of Operations
Revenues
As of December 31, 2023, our revenue has been exclusively generated from our collaboration and license agreement with Allogene Overland Biopharm (PRC) Co., Limited. See Notes 1 and 6 to our consolidated financial statements appearing elsewhere in this Annual Report for more information related to our recognition of revenue and the Allogene Overland agreement.
In the future, we may generate revenue from a combination of product sales, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements or a combination of these approaches. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of license fees, milestones and other payments, and the amount and timing of payments that we receive upon the sale of our products, to the extent any are successfully commercialized. If we fail to complete the development of our product candidates in a timely manner or obtain regulatory approval of them, our ability to generate future revenue, and our results of operations and financial position, will be materially adversely affected.
Operating Expenses
Research and Development
To date, our research and development expenses have related primarily to discovery efforts, preclinical and clinical development, and manufacturing of our product candidates. Research and development expenses for the year ended December 31, 2023 included costs associated with our clinical and preclinical stage pipeline candidates and research into newer technologies. The most significant research and development expenses relate to costs incurred for the development of our most advanced product candidates and include:
• expenses incurred under agreements with our collaboration partners and third-party contract organizations, investigative clinical trial sites that conduct research and development activities on our behalf, and consultants;
• costs related to production of clinical materials, including fees paid for raw materials and to contract manufacturers;
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• laboratory and vendor expenses related to the execution of preclinical and clinical trials;
• employee-related expenses, which include salaries, benefits and stock-based compensation;
• facilities and other expenses, which include expenses for rent and maintenance of facilities, depreciation and amortization expense and supplies; and
• other significant research and development costs including overhead costs.
We expense all research and development costs in the periods in which they are incurred. We accrue for costs incurred as the services are being provided by monitoring the status of the project and the invoices received from our external service providers. We adjust our accrual as actual costs become known. Where contingent milestone payments are due to third parties under research and development arrangements or license agreements, the milestone payment obligations are expensed when the milestone results are achieved.
We have reimbursed Servier for 60% of the costs associated with the prior development of UCART19, including for the long-term follow-up of patients in the CALM and PALL clinical trials of UCART19. We believe Servier is required to reimburse us for 40% of the costs associated with the development of ALLO-501 and cema-cel.
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. We expect our research and development expenses to increase in the future as our clinical programs progress and as we seek to initiate clinical trials of additional product candidates. The cost of advancing our manufacturing process as well as the cost of manufacturing product candidates for clinical trials are included in our research and development expense. We also expect to incur increased research and development expenses as we selectively identify and develop additional product candidates. However, it is difficult to determine with certainty the duration and completion costs of our current or future preclinical programs and clinical trials 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 that include, but are not limited to, the following:
• per patient trial costs;
• biomarker analysis costs;
• the cost and timing of manufacturing for the trials;
• the number of patients that participate in the trials;
• the number of sites included in the trials;
• the countries in which the trials are conducted;
• the length of time required to enroll eligible patients;
• the total number of cells that patients receive;
• the drop-out or discontinuation rates of patients;
• potential additional safety monitoring or other studies requested by regulatory agencies, including to resolve any future clinical hold;
• the duration of patient follow-up; and
• the efficacy and safety profile of the product candidates.
In addition, the probability of success for each product candidate will depend on numerous factors, including safety, efficacy, competition, manufacturing capability and commercial viability. We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate, as well as an assessment of each product candidate’s commercial potential.
Because our product candidates are still in clinical and preclinical development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of product candidates or whether, or when, we may achieve profitability.
We do not track most of our external research and development expenses by programs or product candidates because most of our external research and development expenses could be used for different programs or product candidates.
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General and Administrative
General and administrative expenses consist primarily of salaries and other staff-related costs, including stock-based compensation for options and restricted stock units granted. Other significant costs include costs relating to facilities and overhead costs, legal fees relating to corporate and patent matters, insurance, investor relations costs, fees for accounting and consulting services, information technology, costs and support for our board of directors and board committees, and other general and administrative costs. General and administrative costs are expensed as incurred, and we accrue for services provided by third parties related to the above expenses by monitoring the status of services provided and receiving estimates from our service providers, and adjusting our accruals as actual costs become known.
We expect our general and administrative expenses to increase over the next several years to support our continued research and development activities, manufacturing activities, potential commercialization of our product candidates and operating as a public company. These increases are anticipated to include increased costs related to the hiring of additional personnel, developing commercial infrastructure, fees to outside consultants, lawyers and accountants, and costs associated with being a public company such as expenses related to services associated with maintaining compliance with Nasdaq listing rules and SEC requirements, complying with and advancing environmental, social and governance matters, and insurance and investor relations costs.
Other Income (Expense), Net:
Interest and Other Income, Net
Interest and other income, net primarily consists of interest earned on our cash and cash equivalents and investments, as well as investment gains and losses recognized during the period.
Other Income (Expenses)
Other income (expenses) consists of non-operating income and expenses, including primarily our share of net losses for the period from, and impairment of, our equity method investments and impairment of our equity investment.
Results of Operations
Comparison of the Years Ended December 31, 2023, 2022 and 2021
The following sets forth our results of operations for the years ended December 31, 2023, 2022, and 2021 (in thousands):
Year Ended December 31, Change
2023 2022 2021 2023 vs 2022 2022 vs 2021
(As Restated) (As Restated)
Collaboration revenue - related party $ 95 $ 156 $ 114,089 $ (61) $ (113,933)
Operating expenses:
Research and development 242,914 256,387 220,176 (13,473) 36,211
General and administrative 71,673 79,305 74,105 (7,632) 5,200
Impairment of long-lived asset 13,245 — — 13,245 —
Total operating expenses 327,832 335,692 294,281 (7,860) 41,411
Loss from operations (327,737) (335,536) (180,192) 7,799 (155,344)
Other income (expense), net:
Interest and other income, net 18,307 4,566 1,714 13,741 2,852
Other expenses (17,835) (9,444) (3,573) (8,391) (5,871)
Total other income (expense), net 472 (4,878) (1,859) 5,350 (3,019)
Net loss $ (327,265) $ (340,414) $ (182,051) $ 13,149 $ (158,363)
Collaboration revenue - related party
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Collaboration revenue was $0.1 million and $0.2 million for the years ended December 31, 2023 and 2022, respectively. Revenue recognized in the years ended December 31, 2023 and 2022 was mainly due to participation in the joint steering committee performance obligation related to the License Agreement entered into with Allogene Overland on December 14, 2020.
Collaboration revenue was $0.2 million and $114.1 million for the years ended December 31, 2022 and 2021, respectively. The decrease of $113.9 million was due to the revenue recognized related to the license of intellectual property and delivery of the know-how, which was delivered in the first quarter of 2021, under the License Agreement entered into with Allogene Overland in December 2020.
Research and Development Expenses
The following table shows the primary components of our research and development expenses for the periods presented:
Year Ended December 31, Change
2023 2022 2021 2023 vs. 2022 2022 vs. 2021
Personnel $ 112,457 $ 129,604 $ 112,903 $ (17,147) $ 16,701
Development costs 74,644 71,293 69,025 3,351 2,268
Facilities and depreciation 44,684 43,457 29,300 1,227 14,157
Other 11,129 12,033 8,948 (904) 3,085
Total research and development expenses 242,914 256,387 220,176 (13,473) 36,211
Our research and development expenses included $119.0 million of internal expense and $123.9 million of external expenses for the year ended December 31, 2023. Our research and development expenses included $133.6 million of internal expenses and $122.8 million of external expenses for the year ended December 31, 2022.
Research and development expenses were $242.9 million and $256.4 million for the years ended December 31, 2023 and 2022, respectively. The net decrease of $13.5 million was primarily due to a decrease in personnel related costs of $17.1 million, of which $13.5 million was decreased stock-based compensation expense, offset by an increase in external costs related to the advancement of our product candidates of $3.4 million due to the timing of process development activities and manufacturing runs.
Research and development expenses were $256.4 million and $220.2 million for the years ended December 31, 2022 and 2021, respectively. The net increase of $36.2 million was primarily due to an increase in building rent and facilities costs of $14.2 million, an increase in personnel related costs of $16.7 million, of which $3.5 million was increased stock-based compensation expense, and an increase in external costs relating to the advancement of our product candidates of $2.3 million due to the timing of process development activities and manufacturing runs.
General and Administrative Expenses
General and administrative expenses were $71.7 million and $79.3 million for the years ended December 31, 2023 and 2022, respectively. The net decrease of $7.6 million was primarily due to a decrease in personnel related costs of $5.7 million, of which $4.1 million was decreased stock-based compensation expense, and a decrease in expenses related to corporate communications of $1.8 million.
General and administrative expenses were $79.3 million and $74.1 million for the years ended December 31, 2022 and 2021, respectively. The net increase of $5.2 million was primarily due to an increase in personnel related costs of $3.4 million, an increase in expenses related to corporate communications of $2.8 million, partially offset by a $1.5 million decrease in business and consulting fees.
Impairment of long-lived asset
In December 2023, we made a decision to sublease one of our leased buildings in South San Francisco. We vacated and ceased occupancy of this building in December 2023 and currently we are actively marketing the leased building for sublease. We determined that the change in how this property is being used could indicate impairment and recorded long-lived asset impairment loss based on the performed impairment analysis.
Interest and Other Income, Net
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Interest and other income, net was $18.3 million and $4.6 million for the years ended December 31, 2023 and 2022, respectively. The $13.7 million increase was primarily due to higher yields and a corresponding increase in the interest earned on our cash, cash equivalents and investments.
Interest and other income, net was $4.6 million and $1.7 million for the years ended December 31, 2022 and 2021, respectively. The $2.9 million increase was due to higher yields and a corresponding increase in the interest earned on our cash, cash equivalents and investments.
Other expenses
Other expenses were $17.8 million and $9.4 million for the years ended December 31, 2023 and 2022, respectively. The $8.4 million increase was primarily due to impairment loss of $7.0 million related to our equity method investment and equity investment recorded for the year ended December 31, 2023.
Other expenses were $9.4 million and $3.6 million for the years ended December 31, 2022 and 2021, respectively. The $5.9 million increase was primarily due to higher share of net losses in our equity method investments.
Quarterly Discussion and Analysis
The following discussion should be read in conjunction with our accompanying restated unaudited interim condensed consolidated financial statements disclosed in Part II. Item 8. Financial Statements and Supplementary Data, Note 15 "Selected Quarterly Financial Data (Unaudited)", of this Annual Report.
The following sets forth our results of operations for the three months ended March 31, 2023 and 2022 (in thousands):
Three Months Ended March 31, Change
2023 2022 $ %
(As Restated) (As Restated)
Collaboration revenue - related party $ 30 $ 39 $ (9) (23) %
Operating expenses:
Research and development 80,238 60,156 20,082 33 %
General and administrative 18,884 19,897 (1,013) (5) %
Total operating expenses 99,122 80,053 19,069 24 %
Loss from operations (99,092) (80,014) (19,078) 24 %
Other income (expense), net:
Interest and other income, net 2,059 492 1,567 318 %
Other income (expenses), net (2,936) 914 (3,850) (421) %
Total other income (expense), net (877) 1,406 (2,283) (162) %
Net loss (99,969) (78,608) (21,361) 27 %
Collaboration revenue - related party
Collaboration revenue recognized for the three months ended March 31, 2023 and 2022 was mainly due to participation in the joint steering committee performance obligation related to the License Agreement entered into with Allogene Overland on December 14, 2020.
Research and Development Expenses
The following table shows the primary components of our research and development expenses for the periods presented:
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Three Months Ended March 31,
2023 2022 Change
Personnel $ 34,173 $ 33,079 $ 1,094
Development costs 31,261 14,323 16,938
Facilities and depreciation 11,193 10,070 1,123
Other 3,611 2,684 927
Total research and development expenses 80,238 60,156 20,082
Our research and development expenses included $35.2 million of internal expenses and $45.0 million of external expenses for the three months ended March 31, 2023. Our research and development expenses included $33.9 million of internal expenses and $26.2 million of external expenses for the three months ended March 31, 2022.
Research and development expenses were $80.2 million and $60.1 million for the three months ended March 31, 2023 and 2022, respectively. The increase of $20.1 million was driven primarily by an increase in external costs relating to the advancement of our product candidates due to the timing of development activities and manufacturing runs of $16.9 million and an increase in facilities costs and depreciation expense of $1.1 million.
General and Administrative Expense
General and administrative expenses were $18.9 million and $19.9 million for the three months ended March 31, 2023 and 2022, respectively. The decrease of $1.0 million was primarily due to an decrease in personnel related costs.
Interest and Other Income, Net
Interest and other income, net was $2.1 million and $0.5 million for the three months ended March 31, 2023 and 2022, respectively. The increase of $1.6 million was primarily due to higher yields and a corresponding increase in the interest earned on our cash, cash equivalents and investments.
Other income (expenses), Net
Other expenses were $2.9 million for the three months ended March 31, 2023 and other income was $0.9 million for the three months ended March 31, 2022. The increase in other expenses of $3.8 million was primarily due to higher share of net losses in our equity method investments.
The following sets forth our results of operations for the three and six months ended June 30, 2023 and 2022 (in thousands):
Three Months Ended June 30, Change Six Months Ended June 30, Change
2023 2022 $ 2023 2022 $
(As Restated) (As Restated) (As Restated) (As Restated)
Collaboration revenue - related party $ 22 $ 64 $ (42) $ 52 $ 103 $ (51)
Operating expenses:
Research and development 62,038 57,171 4,867 142,276 117,327 24,949
General and administrative 18,524 19,509 (985) 37,408 39,406 (1,998)
Total operating expenses 80,562 76,680 3,882 179,684 156,733 22,951
Loss from operations (80,540) (76,616) (3,924) (179,632) (156,630) (23,002)
Other income (expense), net:
Interest and other income, net 3,778 315 3,463 5,837 807 5,030
Other expenses (2,470) (3,990) 1,520 (5,406) (3,076) (2,330)
Total other income (expense), net 1,308 (3,675) 4,983 431 (2,269) 2,700
Net loss (79,232) (80,291) 1,059 (179,201) (158,899) (20,302)
Collaboration revenue - related party
Collaboration revenue recognized for the three and six months ended June 30, 2023 and 2022 was mainly due to participation in the joint steering committee performance obligation related to the License Agreement entered into with Allogene Overland on December 14, 2020.
Research and Development Expenses
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The following table shows the primary components of our research and development expenses for the periods presented:
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 Change 2023 2022 Change
Personnel $ 29,574 $ 34,926 $ (5,352) $ 63,748 $ 68,005 $ (4,257)
Development costs 18,218 8,078 10,140 49,479 22,401 27,078
Facilities and depreciation 11,457 11,039 418 22,650 21,110 1,540
Other 2,789 3,128 (339) 6,399 5,811 588
Total research and development expenses 62,038 57,171 4,867 142,276 117,327 24,949
Our research and development expenses included $31.1 million of internal expenses and $30.9 million of external expenses for the three months ended June 30, 2023. Our research and development expenses included $36.1 million of internal expenses and $21.1 million of external expenses for the three months ended June 30, 2022.
Research and development expenses were $62.0 million and $57.2 million for the three months ended June 30, 2023 and 2022, respectively. The increase of $4.9 million was driven primarily by a decrease in Servier cost recoveries of $11.0 million, offset by a decrease in personnel related costs of $5.4 million and a decrease in external costs relating to the advancement of our product candidates due to the timing of development activities and manufacturing runs of $0.9 million.
Our research and development expenses included $66.3 million of internal expenses and $75.9 million of external expenses for the six months ended June 30, 2023. Our research and development expenses included $70.1 million of internal expenses and $47.2 million of external expenses for the six months ended June 30, 2022.
Research and development expenses were $142.3 million and $117.3 million for the six months ended June 30, 2023 and 2022, respectively. The increase of $24.9 million was driven primarily by a decrease in Servier cost recoveries of $16.1 million and an increase in external costs relating to the advancement of our product candidates due to the timing of development activities and manufacturing runs of $11.0 million, offset by a decrease in personnel related costs of $4.3 million.
General and Administrative Expense
General and administrative expenses were $18.5 million and $19.5 million for the three months ended June 30, 2023 and 2022, respectively. The decrease of $1.0 million was primarily due to a decrease in personnel related costs of $0.4 million and a decrease in expenses related to corporate communications and outside services of $0.3 million.
General and administrative expenses were $37.4 million and $39.4 million for the six months ended June 30, 2023 and 2022, respectively. The decrease of $2.0 million was primarily due to a decrease in personnel related costs of $1.4 million and a decrease in expenses related to corporate communications and outside services of $0.6 million.
Interest and Other Income, Net
Interest and other income, net was $3.8 million and $0.3 million for the three months ended June 30, 2023 and 2022, respectively. The increase of $3.5 million was primarily due to higher yields and a corresponding increase in the interest earned on our cash, cash equivalents and investments.
Interest and other income, net was $5.8 million and $0.8 million for the six months ended June 30, 2023 and 2022, respectively. The increase of $5.0 million was primarily due to higher yields and a corresponding increase in the interest earned on our cash, cash equivalents and investments.
Other expenses
Other expenses were $2.5 million and $4.0 million for the three months ended June 30, 2023 and 2022, respectively. The decrease of $1.5 million was primarily due to lower share of net losses in our equity method investments.
Other expenses were $5.4 million and $3.1 million for the six months ended June 30, 2023 and 2022, respectively. The increase of $2.3 million was primarily due to higher share of net losses in our equity method investments.
The following sets forth our results of operations for the three and nine months ended September 30, 2023 and 2022 (in thousands):
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Three Months Ended September 30, Change Nine Months Ended September 30, Change
2023 2022 $ 2023 2022 $
(As Restated) (As Restated) (As Restated) (As Restated)
Collaboration revenue - related party $ 22 $ 27 $ (5) $ 74 $ 130 $ (56)
Operating expenses:
Research and development 45,977 63,641 (17,664) 188,253 180,968 7,285
General and administrative 17,041 18,897 (1,856) 54,449 58,303 (3,854)
Total operating expenses 63,018 82,538 (19,520) 242,702 239,271 3,431
Loss from operations (62,996) (82,511) 19,515 (242,628) (239,141) (3,487)
Other income (expense), net:
Interest and other income, net 6,205 1,002 5,203 12,042 1,809 10,233
Other expenses (5,496) (2,733) (2,763) (10,902) (5,809) (5,093)
Total other income (expense), net 709 (1,731) 2,440 1,140 (4,000) 5,140
Net loss (62,287) (84,242) 21,955 (241,488) (243,141) 1,653
Collaboration revenue - related party
Collaboration revenue recognized for the three and nine months ended September 30, 2023 and 2022 was mainly due to participation in the joint steering committee performance obligation related to the License Agreement entered into with Allogene Overland on December 14, 2020.
Research and Development Expenses
The following table shows the primary components of our research and development expenses for the periods presented:
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 Change 2023 2022 Change
Personnel $ 26,170 $ 32,748 $ (6,578) $ 89,917 $ 100,753 $ (10,836)
Development costs 6,494 16,799 (10,305) 55,973 39,200 16,773
Facilities and depreciation 11,104 11,349 (245) 33,754 32,459 1,295
Other 2,209 2,745 (536) 8,609 8,556 53
Total research and development expenses 45,977 63,641 (17,664) 188,253 180,968 7,285
Our research and development expenses included $28.1 million of internal expenses and $17.9 million of external expenses for the three months ended September 30, 2023. Our research and development expenses included $33.6 million of internal expenses and $30.0 million of external expenses for the three months ended September 30, 2022.
Research and development expenses were $46.0 million and $63.6 million for the three months ended September 30, 2023 and 2022, respectively. The decrease of $17.7 million was driven primarily by a decrease in external costs relating to the advancement of our product candidates due to the timing of development activities and manufacturing runs of $10.3 million and a decrease in personnel related costs of $6.6 million, of which $4.3 million was stock-based compensation expense.
Our research and development expenses included $94.5 million of internal expenses and $93.8 million of external expenses for the nine months ended September 30, 2023. Our research and development expenses included $103.8 million of internal expenses and $77.2 million of external expenses for the nine months ended September 30, 2022.
Research and development expenses were $188.3 million and $181.0 million for the nine months ended September 30, 2023 and 2022, respectively. The increase of $7.3 million was driven primarily by a decrease in Servier cost recoveries of $19.7 million and an increase in facilities costs of $1.3 million, offset by a decrease in personnel related costs of $10.8 million, of which $12.4 million was a decrease in stock-based compensation expense, and a decrease in external costs relating to the advancement of our product candidates due to the timing of development activities and manufacturing runs of $2.9 million.
General and Administrative Expense
General and administrative expenses were $17.0 million and $18.9 million for the three months ended September 30, 2023 and 2022, respectively. The decrease of $1.9 million was primarily due to a decrease in personnel related costs of $2.1 million, of which $1.5 million was stock-based compensation expense.
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General and administrative expenses were $54.4 million and $58.3 million for the nine months ended September 30, 2023 and 2022, respectively. The decrease of $3.9 million was primarily due to a decrease in personnel related costs of $3.6 million, of which $3.3 million was stock-based compensation expense.
Interest and Other Income, Net
Interest and other income, net was $6.2 million and $1.0 million for the three months ended September 30, 2023 and 2022, respectively. The increase of $5.2 million was primarily due to higher yields and a corresponding increase in the interest earned on our cash, cash equivalents and investments.
Interest and other income, net was $12.0 million and $1.8 million for the nine months ended September 30, 2023 and 2022, respectively. The increase of $10.2 million was primarily due to higher yields and a corresponding increase in the interest earned on our cash, cash equivalents and investments.
Other expenses
Other expenses were $5.5 million and $2.7 million for the three months ended September 30, 2023 and 2022, respectively. The increase of $2.8 million was primarily due to impairment loss related to our equity method investment recorded for the three months ended September 30, 2023.
Other expenses were $10.9 million and $5.8 million for the nine months ended September 30, 2023 and 2022, respectively. The increase of $5.1 million was primarily due to higher share of net losses and impairment of our equity method investments.
Liquidity and Capital Resources
To date, we have incurred significant net losses and negative cash flows from operations. As of December 31, 2023, we had $448.7 million in cash, cash equivalents and investments. We believe that the aggregate of our current cash, cash equivalents and investments available for operations will be sufficient to fund our operations for at least the next 12 months from the date this Annual Report on Form 10-K is filed with the SEC.
Our operations have been financed primarily by net proceeds from the sale and issuance of our convertible preferred stock, the issuance of convertible promissory notes, net proceeds from our IPO, our at-the-market (ATM) offerings, our June 2020 underwritten public offering, and upfront cash payment of $40.0 million received in December 2020 pursuant to our License Agreement with Allogene Overland. In November 2019, we entered into a sales agreement with Cowen and Company, LLC (Cowen), as amended on November 2, 2022 and November 2, 2023, under which we may from time to time issue and sell shares of our common stock through Cowen in ATM offerings. During the year ended December 31, 2023, we sold an aggregate of 20,894,565 shares of common stock in ATM offerings resulting in net proceeds of $91.1 million. The specified dollar limit on the amount of common stock that may be sold under the sales agreement was removed pursuant to the November 2, 2023 amendment to the sales agreement.
Capital Resources
Our primary use of cash is for operating expenses, which consist primarily of clinical manufacturing and research and development expenditures related to our lead product candidates, other research efforts, and to a lesser extent, general and administrative expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses and other current liabilities.
Our product candidates are still in the early stages of clinical and preclinical development and the outcome of these efforts is uncertain. Accordingly, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of our product candidates or whether, or when, we may achieve profitability. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity or debt financings and collaboration and license arrangements. If, and when, we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we are unable to raise capital when needed, we will need to delay, reduce or terminate planned activities to reduce costs. Doing so will likely harm our ability to execute our business plans.
Cash Flows
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The following table summarizes our cash flows for the periods indicated:
Year Ended December 31,
2023 2022 2021
(in thousands)
Net cash (used in) provided by:
Operating activities $ (237,733) $ (220,519) $ (184,812)
Investing activities 163,289 106,159 163,655
Financing activities 95,695 2,950 11,963
Net increase (decrease) in cash, cash equivalents and restricted cash $ 21,251 $ (111,410) $ (9,194)
Operating Activities
During the year ended December 31, 2023, cash used in operating activities of $237.7 million was attributable to a net loss of $327.3 million, substantially offset by non-cash charges of $104.8 million and a net change of $15.3 million in our net operating assets and liabilities. The non-cash charges consisted primarily of stock-based compensation of $66.0 million, depreciation and amortization of $14.2 million, share of losses from equity method investments of $10.7 million, impairment of long-lived assets of $13.2 million, impairment of equity investment and equity method investment of $7.0 million, net amortization and accretion on investment securities of $6.8 million, and non-cash rent expense of $0.6 million. The net change in operating assets and liabilities was primarily due to a $7.5 million decrease in accounts payable, a $6.8 million decrease in accrued and other current liabilities, a $1.5 million increase in other long-term assets, and a $0.6 million decrease in other long-term liabilities, offset by a $1.1 million decrease in prepaid expenses and other current assets.
During the year ended December 31, 2022, cash used in operating activities of $220.5 million was attributable to a net loss of $340.4 million, substantially offset by non-cash charges of $116.0 million and a net change of $3.9 million in our net operating assets and liabilities. The non-cash charges consisted primarily of stock-based compensation of $83.6 million, depreciation and amortization of $14.3 million, share of losses from equity method investments of $12.9 million, net amortization and accretion on investment securities of $2.9 million, and non-cash rent expense of $2.4 million. The net change in operating assets and liabilities was primarily due to a $4.9 million increase in accounts payable, a $2.5 million decrease in prepaid expense and other current assets, and a $1.7 million increase in accrued and other current liabilities, offset by an increase in other long-term assets of $3.3 million and a decrease in other long-term liabilities of $1.9 million.
During the year ended December 31, 2021, cash used in operating activities of $184.8 million was attributable to a net loss of $182.1 million, a net change of $31.9 million in our net operating assets and liabilities substantially offset by non-cash charges of $29.2 million. The non-cash charges consisted primarily of stock-based compensation of $80.8 million, non-cash collaboration revenue from related party of $75.7 million, depreciation and amortization of $10.5 million, net amortization and accretion on investment securities of $7.0 million, share of losses from equity method investments of 4.1 million, and non-cash rent expense of $2.6 million. The net change in operating assets and liabilities was primarily due to a $38.3 million decrease in deferred revenue within current liabilities, a $0.8 million decrease in accounts payable, and a $0.6 million increase in other long-term assets, offset by a $3.7 million increase in accrued and other current liabilities, a $3.2 million decrease in prepaid expenses and other current assets and a $0.9 million increase in other long-term liabilities.
Investing Activities
During the year ended December 31, 2023, net cash provided by investing activities of $163.3 million was related to cash inflows from maturities of investments of $597.8 million and cash provided by investment sales of $5.6 million, offset by the purchase of investments of $438.6 million and purchases of property and equipment of $1.5 million.
During the year ended December 31, 2022, net cash provided by investing activities of $106.2 million was related to cash inflows from maturities of investments of $359.5 million, offset by the purchase of investments of $248.1 million and purchases of property and equipment of $5.2 million.
During the year ended December 31, 2021, net cash used in investing activities of $163.7 million was related to cash inflows from maturities of investments of $728.4 million, offset by the purchase of investments of $525.6 million, purchases of property and equipment of $21.4 million, and purchase of stock in equity method investment of $17.7 million.
Financing Activities
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During the year ended December 31, 2023, net cash provided by financing activities of $95.7 million was related to $91.1 million in net proceeds from the issuance of common stock through ATM transactions, $2.5 million of cash provided by the sale of common stock through our employee stock purchase plan, and $2.1 million of cash provided by the issuance of common stock upon exercise of stock options.
During the year ended December 31, 2022, net cash provided by financing activities of $3.0 million was related to proceeds from the employee stock purchase plan of $2.5 million and proceeds from the issuance of common stock upon the exercise of stock options of $0.5 million.
During the year ended December 31, 2021, net cash provided by financing activities of $12.0 million was related to proceeds from the issuance of common stock upon the exercise of stock options of $8.3 million and proceeds from the employee stock purchase plan of $3.6 million.
Contractual Obligations and Commitments
Material Cash Commitments and Requirements
Our commitments primarily consist of obligations under our agreements with Pfizer, Cellectis, Servier and Notch. Under these agreements we are required to make milestone payments upon successful completion of certain regulatory and sales milestones on a target-by-target and country-by-country basis. The payment obligations under the license agreements are contingent upon future events such as our achievement of specified development, regulatory and commercial milestones and we will be required to make development milestone payments and royalty payments in connection with the sale of products developed under these agreements. As of December 31, 2023, we were unable to estimate the timing or likelihood of achieving the milestones or making future product sales. For additional information regarding our agreements, see Note 6 to our consolidated financial statements included elsewhere in this Annual Report.
Our operating lease obligations primarily consist of lease payments on our research, lab and office facilities in South San Francisco, California, as well as lease payments on our cell manufacturing facility in Newark, California. For additional information regarding our lease obligations, see Note 7 to our consolidated financial statements included elsewhere in this Annual Report.
Additionally, we have entered into agreements with third-party contract manufacturers for the manufacture and processing of certain of our product candidates for clinical testing purposes, and we have entered and will enter into other contracts in the normal course of business with contract research organizations for clinical trials and other vendors for other services and products for operating purposes. These agreements generally provide for termination or cancellation, other than for costs already incurred. As of December 31, 2023, we had non-cancellable purchase commitments of $2.1 million.
On October 6, 2020, we announced we entered into a strategic five-year collaboration agreement with MD Anderson for the preclinical and clinical investigation of allogeneic CAR T cell product candidates. We and MD Anderson are collaborating on the design and conduct of preclinical and clinical studies with oversight from a joint steering committee. Under the terms of the agreement, we have committed up to $15.0 million of funding for the duration of the agreement. Payment of this funding is contingent on mutual agreement to study orders in order for any study to be included under the alliance. We made an upfront payment of $3.0 million to MD Anderson in the year ended December 31, 2020 and made an additional upfront payment of $3.0 million to MD Anderson in October 2023. We are obligated to make further payments to MD Anderson each year upon the anniversary of the agreement effective date through the duration of the agreement term. The agreement may be terminated by either party for material breach by the other party. Individual studies may be terminated for, among other things, material breach, health and safety concerns or where the institutional review board, the review board at the clinical site with oversight of the clinical study, requests termination of any study. Where any legal or regulatory authorization is finally withdrawn or terminated, the relevant study will also terminate automatically.
In July 2020, we entered into a Solar Power Purchase and Energy Services Agreement for the installation and operation of a solar photovoltaic generating system and battery energy storage system at our manufacturing facility in Newark, California. The agreement has a term of 20 years and commenced in September 2022. We are obligated to pay for electricity generated from the system at an agreed rate for the duration of the agreement term. Termination of the agreement by us will result in a termination payment due of approximately $4.3 million. In connection with the agreement, we maintain a letter of credit for the benefit of the service provider in the amount of $4.3 million.
We also have a Change in Control and Severance Plan that requires the funding of specific payments, if certain events occur, such as a change of control and the termination of employment without cause.
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Critical Accounting Policies and Significant Judgments and Estimates
Our management’s 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 United States generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe that the assumptions and estimates associated with accrued research and development expenditures, revenue recognition, research and development expenses, stock-based compensation and leases have the most significant impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
Accrued Research and Development Costs
We accrue liabilities for estimated costs of research and development activities conducted by our collaboration partners and third-party service providers, which include the conduct of preclinical and clinical studies, and contract manufacturing activities. We recorded the estimated costs of research and development activities based upon the estimated amount of services provided but not yet invoiced, and includes these costs in the accrued and other current liabilities on the consolidated balance sheets and within research and development expense on the consolidated statements of operations and comprehensive loss.
We accrue for these costs based on factors such as estimates of the work completed in accordance with agreements established with our collaboration partners and third-party service providers. We make estimates in determining the accrued liabilities balance in each reporting period. As actual costs become known, we adjust its accrued liabilities. We have not experienced any material differences between accrued costs and actual costs incurred since our inception.
Revenue Recognition
Our revenue is generated through collaboration research and license agreements. The terms of these agreements may contain multiple deliverables which may include (i) grant of licenses, (ii) transfer of know-how, (iii) research and development activities, (iii) clinical manufacturing, and (iv) product supply. The payment terms of these agreements may include nonrefundable upfront fees, payments for research and development activities, payments based upon the achievement of certain milestones, royalty payments based on product sales derived from the collaboration, and payments for supplying product.
We analyze our collaboration arrangements to assess whether they are within the scope of ASC 808, Collaborative Arrangements (ASC 808) to determine whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. For collaboration arrangements within the scope of ASC 808 that contain multiple elements, we first determine which elements of the collaboration are deemed to be within the scope of ASC 808 and those that are more reflective of a vendor-customer relationship and, therefore, within the scope of Topic 606, Revenue from Contracts with Customers (ASC 606). For elements of collaboration arrangements that are accounted for pursuant to ASC 808, an appropriate recognition method is determined and applied consistently, generally by analogy to Topic 606.
For elements of those arrangements that we determine should be accounted for under ASC 606, we assess which activities in our collaboration agreements are performance obligations that should be accounted for separately and determine the transaction price of the arrangement, which includes the assessment of the probability of achievement of future milestones and other potential consideration. A performance obligation represents a promise in a contract to transfer a distinct good or service to a customer, which represents a unit of accounting in accordance with ASC 606. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once we have transferred control of a good or service to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. A portion of the consideration should be allocated to each distinct performance obligation. The total consideration which we expect to collect in exchange for our products is an estimate and may be fixed or variable. We constrain the estimated variable consideration when we assess it is probable that a significant reversal
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in the amount of cumulative revenue recognized may occur in future periods. The transaction price is re-evaluated, including the estimated variable consideration included in the transaction price and all constrained amounts, in each reporting period and as uncertain events are resolved or other changes in circumstances occur. The allocation of the transaction price is performed based on standalone selling prices, which are based on estimated amounts that we would charge for a performance obligation if it were sold separately. Revenue is recognized when, or as, performance obligations in the contracts are satisfied, in the amount reflecting the expected consideration to be received from the goods or services transferred to the customers. Funds received in advance are recorded as deferred revenue and are recognized as the related performance obligation is satisfied.
Research and Development Expenses
We expense research and development costs as incurred. Acquired intangible assets are expensed as research and development costs if, at the time of payment, the technology is under development; is not approved by the FDA or other regulatory agencies for marketing; has not reached technical feasibility; or otherwise has no foreseeable alternative future use.
Research and development expenses also include costs incurred for internal and sponsored and collaborative research and development activities. Research and development costs consist of salaries and benefits, including associated stock-based compensation, and laboratory supplies and facility costs, as well as fees paid to other entities that conduct certain research and development activities on our behalf. Costs associated with co-development activities performed under the various license and collaboration agreements, including milestones achieved, are included in research and development expenses.
Stock-Based Compensation
We recognize compensation costs related to stock-based awards granted to employees and directors, including stock options, based on the estimated fair value of the awards on the date of grant. We estimate the grant date fair value, and the resulting stock-based compensation, using the Black-Scholes option-pricing model, the lattice option pricing model or Monte Carlo simulation, whichever provides us the more precise grant fair value. The gr ant date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards.
The Black-Scholes option-pricing model and the lattice option pricing model require the use of subjective assumptions to determine the fair value of stock-based awards. These assumptions include:
‑ Expected term — The expected term represents the period that stock-based awards are expected to be outstanding. The expected term for option grants is determined using the simplified method. The simplified method deems the term to be the average of the time-to-vesting and the contractual life of the stock-based awards.
‑ Expected volatility — We use an average historical stock price volatility of comparable public companies within the biotechnology and pharmaceutical industry that were deemed to be representative of future stock price trends, in addition to some consideration to our own stock price volatility. We continue to utilize comparable public companies as part of this process as we do not have sufficient trading history for our common stock. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available.
‑ Risk-free interest rate —The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.
‑ Expected dividend —We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we used an expected dividend yield of zero.
‑ Expected exercise barrier —The modified options in accordance with the Stock Option Exchange Program are assumed to be exercised upon vesting and when the ratio of stock market price to exercise price reaches 2.57, or expiration, whichever is earlier. For additional information regarding our Stock Option Exchange Program, see Note 10 to our consolidated financial statements included elsewhere in this Annual Report.
For the years ended December 31, 2023, 2022 and 2021, stock-based compensation was $66.0 million, $83.6 million and $80.8 million, respectively. As of December 31, 2023 and 2022, we had $108.7 million and $153.6 million, respectively, of total unrecognized stock-based compensation.
Leases
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We early adopted Accounting Standards Update (ASU) No. 2016-02, Leases as of January 1, 2018. For our long-term operating leases, we recognized right-of-use assets and lease liabilities on our consolidated balance sheet. The lease liabilities are determined as the present value of future lease payments using an estimated rate of interest that we would have to pay to borrow equivalent funds on a collateralized basis at the lease commencement date. The right-of-use assets are based on the liability adjusted for any prepaid or deferred rent. For each lease, the lease term at the commencement date is determined by considering whether renewal options and termination options are reasonably assured of exercise.
Rent expense for the operating lease is recognized on a straight-line basis over the lease term and is included in operating expenses on the consolidated statements of operations and comprehensive loss. Variable lease payments include lease operating expenses.
We elected to exclude from our consolidated balance sheets recognition of leases having a term of 12 months or less (short-term leases) and elected to not separate lease components and non-lease components for our long-term real estate leases.
Our long-lived assets, including right-of-use assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amount of an asset group to the future net undiscounted cash flows that the assets are expected to generate. The long-lived assets recoverability test is performed at the asset group level, i.e., the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If this test indicates that the carrying amount of the asset group is not recoverable, an impairment loss is measured as the amount by which the carrying amount of an asset group exceeds its fair value. Any impairment loss is allocated to the long-lived assets of the group on a pro rata basis using the relative carrying amounts of those assets, except that the carrying amount of an individual asset shall not be reduced below its fair value.
Recent Accounting Pronouncements
Please refer to Note 2 to our consolidated financial statements for a discussion of new accounting standards and updates that may impact us.