ANAPTYSBIO, INC 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk We hold certain financial instruments for which a change in prevailing interest rates may cause the principal amount of the marketable securities to fluctuate. Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash and cash equivalents, short-term and long-term investments. We invest our excess cash primarily in money market funds, commercial paper and debt instruments of financial institutions, corporations, U.S. government-sponsored agencies and the U.S. Treasury. The primary objectives of our investment activities are to ensure liquidity and to preserve principal while at the same time maximizing the income we receive from our marketable securities without significantly increasing risk. Additionally, we established guidelines regarding approved investments and maturities of investments, which are designed to maintain safety and liquidity. For marketable investment securities with short-term maturities, we do not believe that an increase or decrease in market rates would have a significant impact on the realized values or the statements of operations and comprehensive loss. As of December 31, 2021, we held $119.5 million in debt securities for which the accumulated other comprehensive loss was approximately $0.4 million. As such, we believe that should a 10.0% change in interest rates were to have occurred on December 31, 2021, this change would not have had a material effect on the fair value of our investment portfolio as of that date. Foreign Currency Exchange Risk We conduct a portion of our business with CROs in currencies other than our U.S. dollar functional currency. These transactions give rise to monetary assets and liabilities that are denominated in currencies other than the U.S. dollar. The value of these monetary assets and liabilities are subject to changes in currency exchange rates from the time the transactions are originated until settlement in cash. Our foreign currency exposures are primarily concentrated in the euro, British pound, 73 Australian dollar, and Canadian dollar. Both realized and unrealized gains or losses on the value of these monetary assets and liabilities are included in the determination of net income. We do not hedge our foreign currency exchange rate risk, however, we may do so in the future. As of December 31, 2021, we had no material accounts payable or receivable denominated in foreign currencies, and a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our consolidated financial statements. Inflation Risk Inflation generally affects us by increasing our clinical trial costs. We do not believe that inflation has had a material effect on our business, financial condition or results of operations during the years ended December 31, 2021, 2020 or 2019. 74 Item 8. Consolidated Financial Statements and Supplementary Data AnaptysBio, Inc. Annual Report on Form 10-K Index to Audited Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm 76 Consolidated Financial Statements Consolidated Balance Sheets 78 Consolidated Statements of Operations and Comprehensive Loss 79 Consolidated Statements of Stockholders’ Equity 80 Consolidated Statements of Cash Flows 81 Notes to Consolidated Financial Statements 82 75 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors AnaptysBio, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of AnaptysBio, Inc. and subsidiary (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Evaluation of Research and Development Costs As discussed in Note 2 to the consolidated financial statements, the Company has entered into various contracts with third parties to perform research and development, including clinical manufacturing. When billing terms under these contracts do not coincide with the timing of when the work is performed, the Company makes estimates of the costs incurred by third parties during the period and the outstanding obligations to those third parties as of period end. Estimates of costs incurred during the period that are included in period-end prepaid or accrued expense balances are based on a number of factors, including the Company’s knowledge of the research and development programs and clinical manufacturing activities associated with project status and milestones, invoicing to date, and the provisions in the contract. Significant judgments and estimates are made by the Company in determining the costs incurred during the period that are included in prepaid or accrued expense balances at the end of each reporting period . We identified the evaluation of research and development costs as a critical audit matter. These estimates are based on certain assumptions and inputs that were challenging to assess, including the Company’s knowledge of the status of research and development programs and associated completion status, project milestones achieved, raw materials used in manufacturing, and, for larger clinical trials, per patient costs, patient enrollment status, project costs, and site costs. 76 Significant auditor judgment, subjectivity, and effort were required to evaluate the assumptions and inputs to these estimates. The following are the primary procedures we performed to address this critical audit matter. On a sample basis, we examined contracts, invoices, and third-party confirmations and compared them to the assumptions and inputs that are described above. We also examined certain invoices received after December 31, 2021 and evaluated whether services received prior to December 31, 2021 were included in the Company’s estimate of costs incurred as of December 31, 2021. /s/ KPMG LLP We have served as the Company’s auditor since 2009. San Diego, California March 7, 2022 77 AnaptysBio, Inc. Consolidated Balance Sheets (in thousands, except par value) December 31, 2021 December 31, 2020 ASSETS Current assets: Cash and cash equivalents $ 495,729 $ 250,456 Receivables from collaborative partners 876 — Short-term investments 52,368 143,197 Prepaid expenses and other current assets 4,903 2,908 Total current assets 553,876 396,561 Property and equipment, net 2,283 1,783 Operating lease right-of-use assets 19,558 344 Long-term investments 67,097 17,546 Other long-term assets 256 258 Long-term restricted cash — 60 Total assets $ 643,070 $ 416,552 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 1,741 $ 4,217 Accrued expenses 12,853 15,262 Current portion of operating lease liability 1,505 342 Total current liabilities 16,099 19,821 Liability related to sale of future royalties 251,093 — Operating lease liability, net of current portion 19,450 — Stockholders’ equity: Preferred stock, $ 0.001 par value, 10,000 shares authorized and no shares, issued or outstanding at December 31, 2021 and December 31, 2020, respectively — — Common stock, $ 0.001 par value, 500,000 shares authorized, 27,647 shares and 27,356 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively 28 27 Additional paid in capital 678,575 660,665 Accumulated other comprehensive loss ( 422 ) ( 4 ) Accumulated deficit ( 321,753 ) ( 263,957 ) Total stockholders’ equity 356,428 396,731 Total liabilities and stockholders’ equity $ 643,070 $ 416,552 See accompanying notes to consolidated financial statements. 78 AnaptysBio, Inc. Consolidated Statements of Operations and Comprehensive Loss (in thousands, except per share data) Year Ended December 31, 2021 2020 2019 Collaboration revenue $ 63,175 $ 75,000 $ 8,000 Operating expenses: Research and development 98,496 80,025 99,338 General and administrative 21,493 18,854 16,094 Total operating expenses 119,989 98,879 115,432 Loss from operations ( 56,814 ) ( 23,879 ) ( 107,432 ) Other income (expense), net: Interest expense — — ( 1,041 ) Interest income 431 3,959 10,984 Non-cash interest expense for the sale of future royalties ( 1,450 ) — — Other income (expense), net 37 ( 11 ) 1 Total other income (expense), net ( 982 ) 3,948 9,944 Loss before income taxes ( 57,796 ) ( 19,931 ) ( 97,488 ) Provision for income taxes — — 152 Net loss ( 57,796 ) ( 19,931 ) ( 97,336 ) Other comprehensive (loss) income: Unrealized (loss) income on available for sale securities, net of tax of $ 0 , $ 0 , and $ 153 , respectively ( 418 ) ( 342 ) 561 Comprehensive loss $ ( 58,214 ) $ ( 20,273 ) $ ( 96,775 ) Net loss per common share: Basic and diluted $ ( 2.11 ) $ ( 0.73 ) $ ( 3.60 ) Weighted-average number of shares outstanding: Basic and diluted 27,431 27,302 27,059 See accompanying notes to consolidated financial statements. 79 AnaptysBio, Inc. Consolidated Statements of Stockholders’ Equity (in thousands) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive (Loss) Income Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance, January 1, 2019 26,922 $ 27 $ 633,251 $ ( 223 ) $ ( 146,690 ) $ 486,365 Issuance of common stock from exercises of options 333 — 3,007 — — 3,007 Stock-based compensation — — 12,411 — — 12,411 Comprehensive income — — — 561 — 561 Net loss — — — — ( 97,336 ) ( 97,336 ) Balance, December 31, 2019 27,255 27 648,669 338 ( 244,026 ) 405,008 Issuance of common stock from exercises of options 101 — 497 — — 497 Stock-based compensation — — 11,499 — — 11,499 Comprehensive loss — — — ( 342 ) — ( 342 ) Net loss — — — — ( 19,931 ) ( 19,931 ) Balance, December 31, 2020 27,356 27 660,665 ( 4 ) ( 263,957 ) 396,731 Issuance of common stock from exercises of options and employee stock purchase plan 291 1 2,563 — — 2,564 Stock-based compensation — — 15,347 — — 15,347 Comprehensive loss — — — ( 418 ) — ( 418 ) Net loss — — — — ( 57,796 ) ( 57,796 ) Balance, December 31, 2021 27,647 $ 28 $ 678,575 $ ( 422 ) $ ( 321,753 ) $ 356,428 See accompanying notes to consolidated financial statements. 80 AnaptysBio, Inc. Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2021 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 57,796 ) $ ( 19,931 ) $ ( 97,336 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 619 559 514 Stock-based compensation 15,347 11,499 12,411 Accretion/amortization of investments, net 493 461 ( 2,633 ) Amortization of right-of-use assets – operating 1,471 1,058 893 Non-cash interest expense 1,450 — 676 (Gain) loss on disposal of property and equipment, net of gain on lease termination ( 15 ) 26 — Changes in operating assets and liabilities: Receivables from collaborative partners ( 876 ) — — Australian tax incentive receivable — — 174 Prepaid expenses and other assets ( 1,801 ) 1,048 3,580 Accounts payable and other liabilities ( 4,740 ) ( 7,694 ) 13,203 Operating lease liabilities ( 72 ) ( 1,183 ) ( 999 ) Net cash used in operating activities ( 45,920 ) ( 14,157 ) ( 69,517 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investments ( 118,662 ) ( 194,927 ) ( 251,815 ) Sales and maturities of investments 158,848 289,971 384,051 Proceeds from the sale of property and equipment 15 — — Purchases of property and equipment ( 1,366 ) ( 569 ) ( 805 ) Net cash provided by investing activities 38,835 94,475 131,431 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 2,553 496 3,007 Proceeds from the sale of future royalties 250,000 — — Payments on notes payable — ( 1,375 ) ( 7,500 ) Payments for issuance costs related to the sale of future royalties ( 255 ) — — Net cash provided (used in) by financing activities 252,298 ( 879 ) ( 4,493 ) Net increase in cash, cash equivalents, and restricted cash 245,213 79,439 57,421 Cash, cash equivalents and restricted cash, beginning of period 250,516 171,077 113,656 Cash, cash equivalents and restricted cash, end of period $ 495,729 $ 250,516 $ 171,077 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ — $ 4 $ 424 Non-cash investing and financing activities: Leased assets obtained in exchange for operating lease liabilities $ 20,685 $ — $ 2,295 Amounts accrued for property and equipment $ 31 $ 279 $ 41 Receivable related to issuance of common stock, upon exercise of stock options $ 11 $ — $ — Amounts accrued for issuance costs related to the sale of future royalties $ 102 $ — $ — See accompanying notes to consolidated financial statements. 81 AnaptysBio, Inc. Notes to Consolidated Financial Statements 1. Description of the Business AnaptysBio, Inc. (“we,” “us,” “our,” or the “Company”) was incorporated in the state of Delaware in November 2005. We are a clinical-stage biotechnology company developing first-in-class immunology therapeutic product candidates focused on emerging immune control mechanisms applicable to inflammation and immuno-oncology indications. We develop our product candidates using our proprietary antibody discovery technology platform, which is based upon a breakthrough understanding of the natural process of antibody generation, known as somatic hypermutation, and replicates this natural process of antibody generation in vitro . We currently generate revenue from milestones and royalties achieved under our collaborative research and development arrangements. Since our inception, we have devoted our primary effort to research and development activities. Our financial support has been provided primarily from the sale of our common and preferred stock, royalty monetization, as well as through funds received under our collaborative research and development agreements. Going forward, as we continue our expansion, we may seek additional financing and/or strategic investments. However, there can be no assurance that any additional financing or strategic investments will be available to us on acceptable terms, if at all. If events or circumstances occur such that we do not obtain additional funding, we will most likely be required to reduce our plans and/or certain discretionary spending, which could have a material adverse effect on our ability to achieve our intended business objectives. Our management believes our currently available resources will provide sufficient funds to enable us to meet our operating plans for at least the next twelve months from the issuance of our consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP. Certain reclassifications have been made to 2020 and 2019 financial information to conform to the current year presentation of other long-term assets, operating lease right-of-use, or “ROU” asset, and operating lease liabilities on the Consolidated Balance Sheets and Consolidated Statements of Cash Flows. Basis of Consolidation The accompanying consolidated financial statements include us and our wholly-owned Australian subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. We operate in one reportable segment, and our functional and reporting currency is the U.S. dollar. Use of Estimates The preparation of the accompanying consolidated financial statements in conformity with U.S. GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. We base our estimates and assumptions on historical experience when available and on various factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations, and financial condition, including expenses, reserves and allowances, manufacturing, clinical trials, research and development costs, and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat it, as well as the economic impact on local, regional, national and international markets. Our actual results could differ from these estimates under different assumptions or conditions. Cash and Cash Equivalents We consider all highly liquid investments with a maturity at date of purchase of three months or less to be cash equivalents. Cash equivalents consist primarily of money market and mutual funds with original maturities of 90 days or less. 82 Restricted Cash We held restricted cash of $ 0 and $ 60,000 at December 31, 2021 and 2020, respectively, which was used to secure a letter of credit provided as security for the operating lease for our prior corporate headquarters. The letter of credit expired in December 2021. Short-Term and Long-Term Investments All investments have been classified as “available-for-sale” and are carried at fair value as determined based upon quoted market prices or pricing models for similar securities at period end. Investments with contractual maturities less than 12 months at the balance sheet date are considered short-term investments. Those investments with contractual maturities 12 months or greater at the balance sheet date are considered long-term investments. Dividend and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Unrealized gains and losses are reported as a component of accumulated other comprehensive income (loss). We review our portfolio of available-for-sale debt securities, using both quantitative and qualitative factors, to determine if declines in fair value below cost have resulted from a credit-related loss or other factors. If the decline in fair value is due to credit-related factors, a loss is recognized in net income, whereas if the decline in fair value is not due to credit-related factors, the loss is recorded in other comprehensive income (loss). Concentration of Credit Risk Financial instruments that potentially subject us to a concentration of credit risk consist of cash and cash equivalents and certain investments in money market funds, certificates of deposit, agency securities, commercial obligations and U.S. Treasury securities. Bank deposits are diversified between three financial institutions and these deposits may exceed insured limits. We are exposed to credit risk in the event of default by the financial institutions holding our cash and cash equivalents and issuers of investments that are recorded on our consolidated balance sheets. We mitigate our risk by investing in high-grade instruments and limiting the concentration in any one issuer, which limits our exposure. Property and Equipment Property and equipment are stated at cost, less accumulated depreciation. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets, which range from three to seven years . Leasehold improvements are amortized using the straight-line method over the term of the lease. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in operations. Long Lived Assets Long-lived assets, consisting of property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on undiscounted cash flows. If long-lived assets are impaired, an impairment loss is recognized and is measured as the amount by which the carrying value exceeds the estimated fair value of the assets. No impairment charges were recorded during the years ended December 31, 2021, 2020, or 2019. Leases Our leases consist of a lease for office and lab space that is classified as an operating lease. We determine if an arrangement is a lease at inception. Rent expense is recognized on a straight-line basis. When an operating lease includes rent abatements or requires fixed escalations of the minimum lease payments, the aggregate rental expense is recognized on a straight-line basis over the term of the lease. When an operating lease includes lease incentives such as leasehold improvement allowances, the lease incentive is included in ROU asset. For leases that have greater than a 12-month lease term, the ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term. For this purpose, we consider only payments that are fixed and determinable at the time of commencement. As our lease does not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. We account for fixed lease components separately from non-lease components. We keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of operations on a straight-line basis over the lease term. 83 Liability Related to the Sale of Future Royalties We treat the liability related to the sale of future royalties as debt, amortized under the effective interest rate method over the estimated life of the Royalty Monetization Agreement. See Note 5. The amortization of the liability related to the sale of future revenue is based on our current estimates of future royalty payments. Royalty and milestone revenue will be recognized as earned and the payments made will be recorded as a reduction of the liability when paid. Debt Issuance Costs Debt issuance costs related to a recognized debt liability are deferred and amortized over the term of the debt using the effective interest method. These costs are recorded as a direct reduction to the carrying value of the debt on the balance sheet and the amortization expense is included in non-cash interest expense in the statement of operations. Non-Cash Interest Expense on the Liability Related to the Sale of Future Royalties The total threshold of royalties paid, less the net proceeds received will be recorded as interest expense over the life of the liability. We impute interest on the unamortized portion of the liability using the effective interest method and record expense based on the timing of payments received over the term of the Royalty Monetization Agreement. Over the course of the agreement, the actual interest rate will be affected by the timing of royalty and milestone payments made and changes in the forecasted revenue. Revenue Recognition Revenue is recognized in accordance with revenue recognition accounting guidance, which utilizes five basic steps to determine whether revenue can be recognized and to what extent: (i) identify the contract with a customer; (ii) identify the performance obligation; (iii) determine the transaction price; (iv) allocate the transaction price; and (v) determine the recognition period. Performance Obligations. We evaluate deliverables on a contract-by-contract basis to determine whether each deliverable represents a good or service that is distinct or has the same pattern of transfer as other deliverables. A deliverable is considered distinct if the customer can benefit from the good or service independently of other goods/services either in the contract or that can be obtained elsewhere, without regard to contract exclusivity, and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contact. If the deliverable is not considered distinct, we combine such deliverables and account for them as a single performance obligation. We allocate the consideration to each deliverable at the inception of the arrangement based on the transaction price. Our performance obligations may include the following: • License Arrangements. The performance obligations under our collaboration and license agreements generally include exclusive or nonexclusive licenses to one or more products generated using our technologies. Licenses for multiple antibodies within a single contract are generally combined as they have substantially the same pattern of transfer to the customer. Historically, our licenses have held no value to the customer, as the antibodies were in the discovery phase and required our expertise for further development. Accordingly, licenses are not considered distinct. • Research and Development Services. The performance obligations under our collaboration and license agreements generally include research and development services we perform on behalf of or with our collaborators. As discussed within license arrangements above, our licenses have historically held no value without the research and development services we provide. As we generally only provide research and development services for internally generated antibodies that require a license to be utilized by a third party, our research and development services are not considered distinct. • Steering Committee Meetings. The performance obligations under our collaboration and license agreements may also include our participation on steering committees, which allows us to direct the progression of our discovery programs. As these steering committees would not occur or benefit the customer without the use of our licenses, these are not considered distinct. We recognize consideration allocated to a performance obligation as the performance obligation is satisfied, and the determination as to whether consideration is recognized over time or at a point in time is made upon contract inception. For our collaboration agreements, this is generally over the period in which research and development services have been performed. Transaction Price. Our collaboration and license agreements generally include both fixed and variable consideration. Fixed payments, such as those for upfront fees are included in the transaction price at contract value, while variable consideration such as reimbursement for research and development services, milestone and royalty payments are estimated and then evaluated for constraints upon inception of the contract and evaluated on a quarterly basis thereafter. Research and 84 development services are updated for actual invoices. Given the nature of our agreements, milestones are estimated using the most likely amount and are evaluated on a quarterly basis. Upon commercialization, royalty payments will be recognized in the period incurred. Royalty Revenue We receive royalty revenue on sales by our partners of products covered by patents or contract rights that we own and net sales of their approved drugs, where we have concluded the license is the predominant item to which the royalties relate. We do not have future performance obligations under these license arrangements. We generally satisfy our obligation to grant intellectual property rights on the effective date of the contract. However, we apply the royalty recognition constraint required under the guidance for sales-based royalties, which requires a sales-based royalty to be recorded when the underlying sale occurs. Therefore, royalties on sales of products commercialized by our partners are recognized in the quarter the product is sold. Our partners generally report sales information to us on a quarter lag. Thus, we estimate the expected royalty proceeds based on an analysis of our partners’ historical experience including their publicly announced sales. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known, typically the following quarter. As of December 31, 2021, there have not been material differences between actual and estimated royalty revenues. Research and Development Expenses Research and development costs primarily include third-party clinical and preclinical research and development services such as manufacturing, laboratory and related supplies, salaries and personnel-related costs, in-licensing fees, outside services, and an allocation of information technology, and facility overhead costs. Costs associated with research and development activities are expensed as incurred. We account for nonrefundable advance payments for goods and services that will be used in future research and development activities as expense when the service has been performed or when the goods have been received. We estimate research and development costs incurred during the period, which impacts the amount of accrued expenses and prepaid balances related to such costs as of each balance sheet date. This process involves reviewing open contracts and purchase orders, communicating with our personnel and service providers to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. The significant estimates in our accrued research and development expenses include the costs incurred for services performed by our vendors in connection with research and development activities for which we have not yet been invoiced. Upfront and milestone payments incurred under our in-licensing agreements are expensed as acquired in-process research and development in the period in which they are incurred, provided that the technology or method has no alternative future use. Stock-Based Compensation We recognize stock-based compensation expense using a fair-value-based method for costs related to all share-based payments, including stock options. Stock-based compensation cost for stock options granted to our employees and directors is measured at the grant date based on the fair-value of the award which is estimated using the Black-Scholes option-pricing model, and is recognized as expense over the requisite service period on a straight-line basis. We recognize forfeitures in the period in which forfeitures occur and record stock-based compensation expense as though all awards are expected to vest. We record the expense for stock-based compensation awards subject to performance-based milestone vesting over the requisite service period when management determines that achievement of the milestone is probable. Management evaluates when the achievement of a performance-based milestone is probable based on the expected satisfaction of the performance conditions at each reporting date. No tax benefits for stock-based compensation have been recognized in the statements of changes in stockholders’ equity or cash flows. We have not recognized, and do not expect to recognize in the near future, any tax benefit related to stock-based compensation cost as a result of our full valuation allowance on net deferred tax assets and net operating loss carryforwards. Income Taxes We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered or settled. Realization of deferred tax assets is dependent upon future taxable income. A valuation allowance is recognized if it is more 85 likely than not that some portion or all of a deferred tax asset will not be realized based on the weight of available evidence, including expected future earnings. We recognize an uncertain tax position in our consolidated financial statements when we conclude that a tax position is more likely than not to be sustained upon examination based solely on technical merits. Only after a tax position passes the first step of recognition will measurement be required. Under the measurement step, the tax benefit is measured as the largest amount of benefit that is more likely than not to be realized upon effective settlement. This is determined on a cumulative probability basis. The full impact of any change in recognition or measurement is reflected in the period in which such change occurs. We have elected to accrue any interest or penalties related to income taxes as part of our income tax expense. Functional Currency of Foreign Operations Our Australian subsidiary operates in a U.S. dollar functional currency environment. Assets and liabilities of our foreign subsidiary that are not denominated in the functional currency are remeasured into U.S. dollars at foreign currency exchange rates in effect at the balance sheet date except for nonmonetary assets and capital accounts, which are remeasured at historical foreign currency exchange rates in effect at the date of transaction. Expenses are generally remeasured at monthly foreign currency exchange rates which approximate average rates in effect during each period. Net realized and unrealized gains and losses from foreign currency transactions and remeasurement are reported in other income (expense), net, in the consolidated statements of operations. Comprehensive Income (Loss) Comprehensive income (loss) represents all changes in stockholders’ equity except those resulting from distributions to stockholders. Our unrealized gain and losses on available for sale investments represent the only component of other comprehensive income (loss) that is excluded from the reported net income (loss). Net Loss Per Common Share Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common equivalent shares outstanding for the period, as well as any dilutive effect from outstanding stock options and warrants using the treasury stock method. For each period presented, there is no difference in the number of shares used to calculate basic and diluted net loss per share. The following table sets forth the weighted-average outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because to do so would be anti-dilutive (in common stock equivalent shares): Year Ended December 31, (in thousands) 2021 2020 2019 Options to purchase common stock 3,631 2,901 2,462 Accounting Pronouncements Recently Adopted We have implemented all new accounting pronouncements that are in effect and may have an impact on our consolidated financial statements. Unless otherwise discussed, we believe the impact of any recently issued pronouncements, not yet effective will not have a material impact on our consolidated financial statements. In December 2019, the Financial Accounting Standards Board (the “FASB”) issued ASU 2019-12, Income Taxes (Topic 740) intended to simplify the accounting for income taxes. The guidance removes the following exceptions: (1) exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items, (2) exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, (3) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary, and (4) exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. Additionally, the guidance simplifies the accounting for income taxes by: (1) requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, (2) requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction, (3) specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements (although the entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority), 86 (4) requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date, and (5) making minor improvements for income tax accounting related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. The guidance will be effective for fiscal years and interim periods beginning after December 15, 2020. Different components of the guidance require retrospective, modified retrospective or prospective adoption, and early adoption is permitted. We early adopted this standard on January 1, 2020, and the adoption of the standard did not have a material impact to our consolidated financial statements. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326) , which changes the accounting treatment for recognizing the impairment of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also eliminates the other-than-temporary impairment model for available-for-sale (“AFS”) debt securities. Entities will begin to recognize credit losses on AFS debt securities as allowances rather than as reductions in the carrying value of the securities. Impairment that is not credit-related impairment will continue to be recognized in other comprehensive income and entities will no longer consider the length of time a security has been in an unrealized loss position when determining whether a credit loss exists. ASU 2016-13 becomes effective for annual and interim periods beginning after December 15, 2019. We adopted this standard prospectively on January 1, 2020, and the adoption of the standard did not have a material impact to our consolidated financial statements as credit losses are not expected to be significant based on historical trends, the financial condition of our investments and external market factors. We will continue to actively monitor the impact of the COVID-19 pandemic on expected credit losses. 3. Balance Sheet Accounts and Supplemental Disclosures Property and Equipment Property and equipment consist of the following: (in thousands) December 31, 2021 December 31, 2020 Laboratory equipment $ 5,683 $ 5,225 Office furniture and equipment 1,319 976 Leasehold improvements 203 527 Property and equipment, gross 7,205 6,728 Less: accumulated depreciation and amortization ( 4,922 ) ( 4,945 ) Total property and equipment, net $ 2,283 $ 1,783 Accrued Expenses Accrued expenses consist of the following: (in thousands) December 31, 2021 December 31, 2020 Accrued compensation and related expenses $ 4,177 $ 3,688 Accrued professional fees 569 408 Accrued research and development expenses 7,953 10,936 Other 154 230 Total accrued expenses $ 12,853 $ 15,262 87 4. Collaborative Research and Development Agreements GlaxoSmithKline Collaboration In March 2014, we entered into a Collaboration and Exclusive License Agreement (the “GSK Agreement”) with TESARO, Inc. (“Tesaro”), an oncology-focused biopharmaceutical company now a part of GlaxoSmithKline (Tesaro and GlaxoSmithKline are hereinafter referred to, collectively, as “GSK”). Under the terms of the GSK Agreement, we agreed to perform certain discovery and early preclinical development of therapeutic antibodies with the goal of generating immunotherapy antibodies for subsequent preclinical, clinical, regulatory, and commercial development to be performed by GSK. Under the terms of the GSK Agreement, GSK paid an upfront license fee of $ 17.0 million in March 2014 and agreed to provide funding to us for research and development services related to antibody discovery programs for three specific targets. In November 2014, Amendment No. 1 to the GSK Agreement was agreed by both parties to add an antibody discovery program against an undisclosed four th target for an upfront license fee of $ 2.0 million. For each development program, we are eligible to receive milestone payments of up to $ 18.0 million if certain preclinical and clinical trial events are achieved by GSK, up to an additional $ 90.0 million if certain U.S. and European regulatory submissions and approvals in multiple indications are achieved, and up to an additional $ 165.0 million upon the achievement of specified levels of annual worldwide net sales. We will also be eligible to receive tiered single-digit royalties related to worldwide net sales of products developed under the collaboration. Unless earlier terminated by either party upon specified circumstances, the GSK Agreement will terminate, with respect to each specific developed product, upon the later of the 12 th anniversary of the first commercial sale of the product or the expiration of the last to expire of any patent. Prior to the adoption of ASC 606, Revenue from Contracts with Customers , we determined that the upfront license fees and research funding under the GSK Agreement, as amended, should be accounted for as a single unit of accounting and that the upfront license fees should be deferred and recognized as revenue over the same period that the research and development services are performed. In February 2016, Amendment No. 2 to the GSK Agreement was agreed by both parties to define the effective dates of the development programs of the GSK Agreement. We determined that the research and development services would be extended through December 31, 2016. As a result, the period over which the unrecognized license fees and discovery milestones were recognized was extended through December 31, 2016 and have since been recognized in full. We assessed these arrangements in accordance with ASC 606 and concluded that the contract counterparty, GSK, is a customer. We identified the following material promises under the GSK Agreement: (1) the licenses under certain patent rights relating to six discovery programs (four targets) and transfer of certain development and regulatory information, (2) research and development (“R&D”) services, and (3) joint steering committee meetings. We considered the research and discovery capabilities of GSK for these specific programs, GSK’s inability to sub-license, and the fact that the discovery and optimization of these antibodies is proprietary and could not, at the time of contract inception, be provided by other vendors, to conclude that the license does not have stand-alone functionality and is therefore not distinct. Additionally, we determined that the joint steering committee participation would not have been provided without the R&D services and license agreement. Based on these assessments, we identified all services to be interrelated and therefore concluded that the promises should be combined into a single performance obligation at the inception of the arrangement. On October 23, 2020, Amendment No. 3 to the GSK Agreement (the “Amendment”) was agreed to by both parties to permit GSK to conduct development and commercialization of Zejula, an oral, once-daily poly (ADP-ribose) polymerase (PARP) inhibitor, which has received U.S. approval for the maintenance treatment of adult patients with advanced epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to first-line platinum-based chemotherapy, and is under development for additional cancer indications. In addition, under the Amendment, we were granted increased royalties upon sales of JEMPERLI (dostarlimab), an anti-PD-1 antagonist antibody under development by GSK for multiple oncological disorders, equal to 8 % of Net Sales (as defined in the GSK Agreement) below $ 1.0 billion and from 12 % up to 25 % of Net Sales above $ 1.0 billion. The Amendment also provided for a one-time, non-refundable cash payment of $ 60.0 million that we received and recognized as revenue in the fourth quarter of 2020. GSK also agreed, starting January 1, 2021, to pay us a 1 % royalty less third-party royalty deduction on all GSK net sales of Zejula. The $ 1.1 billion in cash milestone payments due under the GSK Agreement remain unchanged. Additionally, under the terms of the Amendment, GSK has agreed to certain diligence commitments with respect to the future development of JEMPERLI, and the parties have agreed to review such commitments under regular joint review committee meetings going forward. We assessed this Amendment in accordance with ASC 606 and concluded the Amendment was a contract modification to the GSK Agreement. Based on our assessment, we identified the terms of the Amendment to be interrelated to the GSK Agreement’s single performance obligation, noting completion and delivery of terms under the Amendment were satisfied by both parties with the execution of the Amendment. As of December 31, 2021, the transaction price for the GSK Agreement and Amendment includes the upfront payment, research reimbursement revenue, one-time payment associated with the Amendment, and milestones earned to date, which are allocated in their entirety to the single performance obligation. 88 We earned and recognized $ 3.2 million in royalty revenue during the year ended December 31, 2021 related to GSK’s net sales of Zejula and JEMPERLI during the period based on estimates of GSK’s sales historical experience. Of the royalty revenue recognized, $ 0.2 million is JEMPERLI non-cash revenue related to the Royalty Monetization Agreement, see Note 5. GSK reports sales information to us on a one quarter lag and differences between actual and estimated royalty revenues will be adjusted in the following quarter. There was no royalty revenue recognized during the years ended December 31, 2020 and 2019. We earned and recognized four clinical milestones totaling $ 60.0 million during the year ended December 31, 2021. No other future clinical or regulatory milestones have been included in the transaction price, as all milestone amounts were subject to the revenue constraint. As part of the constraint evaluation, we considered numerous factors including the fact that the receipt of milestones is outside of our control and contingent upon success in future clinical trials, an outcome that is difficult to predict, and GSK’s efforts. Any consideration related to sales-based milestones, including royalties, will be recognized when the related sales occur as they were determined to relate predominantly to the intellectual property license granted to GSK and therefore have also been excluded from the transaction price. We will re-evaluate the variable transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur. Milestones recognized through December 31, 2021 under the GSK Agreement are as follows: Anti-PD-1 (JEMPERLI/Dostarlimab) Anti-TIM-3 (GSK4069889A/Cobolimab) Anti-LAG-3 (GSK40974386) Milestone Event Amount Quarter Recognized Amount Quarter Recognized Amount Quarter Recognized Initiated in vivo toxicology studies using good laboratory practices (GLPs) $ 1.0 M Q2'15 $ 1.0 M Q4'15 $ 1.0 M Q3'16 IND clearance from the FDA $ 4.0 M Q1'16 $ 4.0 M Q2'16 $ 4.0 M Q2'17 Phase 2 clinical trial initiation $ 3.0 M Q2'17 $ 3.0 M Q4'17 $ 3.0 M Q4'19 Phase 3 clinical trial initiation - first indication $ 5.0 M Q3'18 — — — — Phase 3 clinical trial initiation - second indication $ 5.0 M Q2'19 — — — — Filing of the first BLA (1) - first indication $ 10.0 M Q1'20 — — — — Filing of the first MAA (2) - first indication $ 5.0 M Q1'20 — — — — Filing of the first BLA - second indication $ 10.0 M Q1'21 — — — — First BLA approval - first indication $ 20.0 M Q2'21 — — — — First MAA approval - first indication $ 10.0 M Q2'21 — — — — First BLA approval - second indication $ 20.0 M Q3'21 — — — — (1) Biologics License Application (“BLA”) (2) Marketing Authorization Application (“MAA”) Milestones achieved during the discovery period were recognized as revenue pro-rata through December 31, 2016. Milestones achieved during fiscal 2017 were recognized as revenue in the period earned, while milestones after December 31, 2017 are recognized upon determination that a significant reversal of revenue would not be probable. Cash is generally received within 30 days of milestone achievement. We recognized $ 63.2 million in revenue under the GSK Agreement during the year ended December 31, 2021, of which $ 60.0 million was related to four milestones and $ 3.2 million was related to royalty revenue. We recognized $ 75.0 million in revenue during the year ended December 31, 2020, of which $ 60.0 million was related to terms under Amendment No. 3 to the GSK Agreement that were satisfied and $ 15.0 million in milestone revenue related to two milestones. We recognized $ 8.0 million during the year ended December 31, 2019 related to two milestones. Antibody Generation Agreement with Bristol-Myers Squibb In December 2011, we entered into a license and collaboration agreement (the “BMS Agreement”) with Celgene, now a part of Bristol-Myers Squibb (Celgene and Bristol-Myers Squibb are hereinafter referred to, collectively, as “BMS”), to develop therapeutic antibodies against multiple targets. We granted BMS the option to obtain worldwide commercial rights to 89 antibodies generated against each of the targets under the agreement, which option was triggered on a target-by-target basis by our delivery of antibodies meeting certain pre-specified parameters pertaining to each target under the agreement. The BMS Agreement provided for an upfront payment of $ 6.0 million from BMS, which we received in 2011 and recognized through 2014, milestone payments of up to $ 53.0 million per target, low single-digit royalties on net sales of antibodies against each target, and reimbursement of specified research and development costs. We assessed this arrangement in accordance with ASC Topic 606 and concluded that the contract counterparty, BMS, is a customer. We identified the following material promises under the BMS Agreement: (1) the licenses under certain patent rights relating to four targets and transfer of certain development and regulatory information, (2) R&D services, (3) a written report documenting findings, and (4) steering committee meetings. We considered the research and discovery capabilities of BMS, BMS’s inability to sub-license the four targets, and the fact that the discovery and optimization of these antibodies is proprietary and could not, at the time of contract inception, be provided by other vendors, to conclude that the license does not have stand-alone functionality and is therefore not distinct. Additionally, we determined that the report of findings and steering committee participation would not have been provided without the R&D services and license agreement. Based on these assessments, we identified all services to be interrelated, and therefore concluded that the promises should be combined into a single performance obligation at the inception the arrangement. As of December 31, 2021, the transaction price of the BMS Agreement includes the upfront payment, success fees, expense reimbursement, and milestones earned to date, which are allocated in their entirety to the single performance obligation. None of the future clinical or regulatory milestones have been included in the transaction price, as all milestone amounts were subject to the revenue constraint. As part of the constraint evaluation, we considered numerous factors, including the fact that the receipt of milestones is outside of our control and contingent upon success in future clinical trials and BMS’s efforts. Any consideration related to sales-based milestones, including royalties, will be recognized when the related sales occur as they were determined to relate predominantly to the intellectual property license granted to BMS and therefore have also been excluded from the transaction price. We will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur. Milestones achieved through December 31, 2021 under the BMS Agreement are as follows: Anti-PD-1 (CC-90006) Milestone Event Amount Quarter Recognized Completion of first in vivo toxicology studies using GLPs $ 0.5 M Q2'16 Phase 1 clinical trial initiation $ 1.0 M Q4'16 Revenue from future contingent milestone payments will be recognized when it is more likely than not that the revenue will not be reversed in future periods. Cash is generally received within 30 days of milestone achievement. There was no revenue recognized under this agreement during the years ended December 31, 2021, 2020, and 2019. 5. Sale of Future Royalties In October 2021, we signed a royalty monetization agreement (“Royalty Monetization Agreement”) with Sagard Healthcare Royalty Partners, LP (“Sagard”). Under the terms of the Royalty Monetization Agreement, we received $ 250.0 million in exchange for royalties payable to us under our GSK collaboration on annual global net sales of JEMPERLI below $ 1.0 billion starting in October 2021. The aggregate JEMPERLI royalties and milestones to be received by Sagard under the Royalty Monetization Agreement is capped at certain fixed multiples of the upfront payment based on time. Once Sagard receives an aggregate amount of either $ 312.5 million ( 125 % of the upfront) by the end of 2026, or $ 337.5 million ( 135 % of the upfront) during 2027, or $ 412.5 million ( 165 % of the upfront) at any time after 2027, the Royalty Monetization Agreement will expire resulting in AnaptysBio regaining all subsequent JEMPERLI royalties and milestones. The Royalty Monetization Agreement includes a call option, which at any time after the third anniversary of the closing date of the transaction, we may reacquire our interest in the specified royalties by paying Sagard (in cash) a specified amount described as (a) in the case of a Reacquisition Date that falls within the period from (but excluding) the third anniversary of the Closing Date to (and including) December 31, 2026, the greater of (i) $ 312.5 million minus the total Net Amount actually received by Purchaser prior to such Reacquisition Date, and (ii) an amount that, when paid to Sagard on such Reacquisition Date, will generate an internal rate of return (“IRR”) for Sagard of 9.0 % over the Relevant Period; (b) in the case of a Reacquisition Date that falls within the period from (and including) January 1, 2027 to (and including) December 31, 2027, the 90 greater of (i) $ 337.5 million minus the total Net Amount actually received by Purchaser prior to such Reacquisition Date and (ii) an amount that, when paid to Sagard on such Reacquisition Date, will generate an IRR for Sagard of 10 % over the Relevant Period; and (c) in the case of a Reacquisition Date that occurs on or after January 1, 2028, the greater of (i) $ 412.5 million minus the total Net Amount actually received by Purchaser prior to such Reacquisition Date and (ii) an amount that, when paid to Sagard on such Reacquisition Date, will generate an IRR for Sagard of 10 % over the Relevant Period. The proceeds received from Sagard of $ 250.0 million were recorded as a liability, net of transaction costs of $ 0.4 million, which will be amortized over the estimated life of the arrangement using the effective interest rate method. Royalty and milestone revenue will be recognized as earned on net sales of JEMPERLI, and we will record the royalty payments to Sagard as a reduction of the liability when paid. As such payments are made to Sagard, the balance of the liability will be effectively repaid over the life of the Royalty Monetization Agreement. We estimate the effective interest rate used to record non-cash interest expense under the Agreement based on its estimate of future royalty payments to be received by Sagard. As of December 31, 2021, the estimated effective rate under the agreement was 7.0 %. Over the life of the arrangement, the actual effective interest rate will be affected by the amount and the timing of the royalty payments received by Sagard and changes in the Company’s forecasted royalties. At each reporting date, we will reassess our estimate of total future royalty payments to be received and if such payments are materially different than our original estimates, we will prospectively adjust the imputed interest rate and the related amortization of the royalty obligation. We recognized non-cash royalty revenue of approximately $ 0.2 million and non-cash interest expense of approximately $ 1.5 million for the year ended December 31, 2021. The interest and amortization of issuance costs is reflected as non-cash interest expense for the sale of future royalties in the Consolidated Statements of Operations. The following table shows the activity within the liability account for the year ended December 31, 2021: (in thousands) December 31, 2021 Liability related to sale of future royalties - beginning balance $ — Proceeds from sale of future royalties 250,000 Issuance costs related to the sale of future royalties ( 357 ) Amortization of issuance costs 7 Non-cash interest expense recognized 1,443 Liability related to sale of future royalties - ending balance $ 251,093 6. Fair Value Measurements and Available for Sale Investments Fair Value Measurements Our financial instruments consist principally of cash, cash equivalents, short-term and long-term investments, receivables, and accounts payable. Certain of our financial assets and liabilities have been recorded at fair value in the consolidated balance sheet in accordance with the accounting standards for fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Accounting guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 - Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and Level 3 - Unobservable inputs that are supported by little or no market activities, therefore requiring an entity to develop its own assumptions. 91 Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table summarizes our assets and liabilities that require fair value measurements on a recurring basis and their respective input levels based on the fair value hierarchy: Fair Value Measurements at End of Period Using: (in thousands) Fair Value Quoted Market Prices for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) At December 31, 2021 Money market funds (1) $ 445,647 $ 445,647 $ — $ — Mutual funds (1) 50,326 50,326 — — U.S. Treasury securities (2) 87,831 87,831 — — Certificates of deposit (2) 3,766 — 3,766 — Agency securities (2) 5,814 — 5,814 — Commercial and corporate obligations (2) 22,054 — 22,054 — At December 31, 2020 Money market funds (1) $ 188,297 $ 188,297 $ — $ — Mutual funds (1) 57,153 57,153 — — U.S. Treasury securities (2) 107,697 107,697 — — Certificates of deposit (2) 2,436 — 2,436 — Agency securities (2) 21,169 — 21,169 — Commercial and corporate obligations (2) 29,441 — 29,441 — (1) Included in cash and cash equivalents in the accompanying consolidated balance sheets. (2) Included in short-term or long-term investments in the accompanying consolidated balance sheets depending on the respective maturity date. The following methods and assumptions were used to estimate the fair value of our financial instruments for which it is practicable to estimate that value: Marketable Securities. For fair values determined by Level 1 inputs, which utilize quoted prices in active markets for identical assets, the level of judgment required to estimate fair value is relatively low. For fair values determined by Level 2 inputs, which utilize quoted prices in less active markets for similar assets, the level of judgment required to estimate fair value is also considered relatively low. Fair Value of Other Financial Instruments The carrying amounts of certain of our financial instruments, including cash and cash equivalents, accounts payable, and accrued expenses approximate fair value due to their short-term nature. Available for Sale Investments We invest our excess cash in agency securities, debt instruments of financial institutions and corporations, commercial obligations, and U.S. Treasury securities, which we classify as available-for-sale investments. These investments are carried at fair value and are included in the tables above. The aggregate market value, cost basis, and gross unrealized gains and losses of available-for-sale investments by security type, classified in cash equivalents, short-term and long-term investments as of December 31, 2021 are as follows: (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Total Fair Value Agency securities (1) $ 5,821 $ — $ ( 7 ) $ 5,814 Certificates of deposit (2) 3,770 — ( 4 ) 3,766 Commercial and corporate obligations (3) 22,094 2 ( 42 ) 22,054 US Treasury securities (4) 87,995 — ( 164 ) 87,831 Total available-for-sale investments $ 119,680 $ 2 $ ( 217 ) $ 119,465 92 (1) Of our outstanding agency securities, $ 1.0 million have maturity dates of less than one year and $ 4.8 million have a maturity date of between one to two years as of December 31, 2021. (2) Of our outstanding certificates of deposit, $ 1.3 million have a maturity date of less than one year and $ 2.5 million have a maturity date of between one to two years as of December 31, 2021. (3) Of our outstanding commercial and corporate obligations, $ 4.8 million have maturity dates of less than one year and $ 17.3 million have a maturity date of between one to two years as of December 31, 2021. (4) Of our outstanding U.S. Treasury securities, $ 45.3 million have maturity dates of less than one year and $ 42.5 million have a maturity date of between one to two years as of December 31, 2021. The aggregate market value, cost basis, and gross unrealized gains and losses of available-for-sale investments by security type, classified in cash equivalents, short-term and long-term investments as of December 31, 2020 are as follows: (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Total Fair Value Agency securities (1) $ 21,169 $ 1 $ ( 1 ) $ 21,169 Certificates of deposit (2) 2,427 9 — 2,436 Commercial and corporate obligations (3) 29,414 28 ( 1 ) 29,441 US Treasury securities (4) 107,530 170 ( 3 ) 107,697 Total available-for-sale investments $ 160,540 $ 208 $ ( 5 ) $ 160,743 (1) Of our outstanding agency securities, $ 10.0 million have maturity dates of less than one year and $ 11.2 million have a maturity date of between one to two years as of December 31, 2020. (2) Of our outstanding certificates of deposit, $ 1.1 million have a maturity date of less than one year and $ 1.3 million have a maturity date of between one to two years as of December 31, 2020. (3) Of our outstanding commercial and corporate obligations, $ 29.4 million have maturity dates of less than one year and $ 0.0 million have a maturity date of between one to two years as of December 31, 2020. (4) Of our outstanding U.S. Treasury securities, $ 102.7 million have maturity dates of less than one year and $ 5.0 million have a maturity date of between one to two years as of December 31, 2020. The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of December 31, 2021 and December 31, 2020, aggregated by investment category and the length of time that individual securities have been in a continuous loss position: December 31, 2021 Less than 12 Months 12 Months or Greater Total (in thousands) Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Agency securities $ 4,477 $ ( 7 ) $ — $ — $ 4,477 $ ( 7 ) Certificates of Deposit 2,870 ( 4 ) — — 2,870 ( 4 ) Commercial and corporate obligations 18,524 ( 42 ) — — 18,524 ( 42 ) US Treasury Securities 82,823 ( 164 ) — — 82,823 ( 164 ) Total $ 108,694 $ ( 217 ) $ — $ — $ 108,694 $ ( 217 ) 93 December 31, 2020 Less than 12 Months 12 Months or Greater Total (in thousands) Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Agency securities $ 4,999 $ ( 1 ) $ — $ — $ 4,999 $ ( 1 ) Commercial and corporate obligations 6,503 ( 1 ) 2,399 — 8,902 ( 1 ) US Treasury Securities 35,211 ( 3 ) — — 35,211 ( 3 ) Total $ 46,713 $ ( 5 ) $ 2,399 $ — $ 49,112 $ ( 5 ) As of December 31, 2021 and 2020, unrealized losses on available-for-sale investments were no t material, and accordingly, no allowance for credit losses were recorded. 7. Stockholders’ Equity Common Stock Of the 500,000,000 shares of common stock authorized, 27,647,250 shares were issued and outstanding as of December 31, 2021. Common stock reserved for future issuance upon the exercise, issuance or conversion of the respective equity instruments at December 31, 2021 are as follows: Issued and Outstanding: Stock options 3,460,295 Shares Reserved For: 2017 Equity Incentive Plan 3,268,267 2017 Employee Stock Purchase Plan 1,252,024 Total 7,980,586 8. Equity Incentive Plans 2017 Equity Incentive Plan On January 12, 2017, our board of directors and stockholders approved and adopted the 2017 Equity Incentive Plan (the “2017 Plan”). The 2017 Plan became effective upon the execution and delivery of the underwriting agreement for our initial public offering on January 26, 2017, and replaced our existing 2006 Equity Incentive Plan. Under the 2017 Plan, we may grant stock options, stock appreciation rights, restricted stock, restricted stock units and other awards to individuals who are then our employees, officers, directors or consultants. In addition, the number of shares of stock available for issuance under the 2017 Plan will be automatically increased each January 1, beginning on January 1, 2018, by 4 % of the aggregate number of outstanding shares of our common stock as of the immediately preceding December 31 or such lesser number as determined by our board of directors. The 2017 Plan automatically increased by 1,094,223 shares as of January 1, 2021. Employee Stock Purchase Plan On January 12, 2017, our board of directors and stockholders approved and adopted the 2017 Employee Stock Purchase Plan or the ESPP. The ESPP became effective upon the execution and delivery of the underwriting agreement for our initial public offering on January 26, 2017. In addition, the number shares of stock available for issuance under the ESPP will be automatically increased each January 1, beginning on January 1, 2018, by 1 % of the aggregate number of outstanding shares of our common stock as of the immediately preceding December 31 or such lesser number as determined by our board of directors. The ESPP automatically increased by 273,555 shares as of January 1, 2021. The initial offering period for the ESPP began in May 2021, completed in November 2021, and a new offering period began in November 2021. Future offering periods are expected to start in May and November each year. Stock Options Stock options granted to employees and non-employees generally vest over a four-year period while stock options granted to directors vest over a one-year period. Each stock option award has a maximum term of 10 years from the date of grant, subject to earlier cancellation prior to vesting upon cessation of service to us. A summary of the activity related to stock 94 option awards during the year ended December 31, 2021 is as follows: Shares Subject to Options Weighted-Average Exercise Price per Share Weighted-Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Outstanding at January 1, 2021 2,920,700 $ 26.67 7.29 $ 17,434 Granted 1,105,845 $ 29.49 Exercises ( 272,462 ) $ 7.85 Forfeitures and cancellations ( 293,788 ) $ 29.24 Outstanding at December 31, 2021 3,460,295 $ 28.84 7.17 $ 42,987 Exercisable at December 31, 2021 1,852,668 $ 30.32 5.93 $ 27,400 Total cash received from the exercise of stock options was approximately $ 2.1 million during the year ended December 31, 2021. Stock-Based Compensation Expense We recognize stock-based compensation expense for awards issued to employees and non-employees over the requisite service period based on the estimated grant-date fair value of such awards. We record the expense for stock-based compensation awards subject to performance-based milestone vesting over the requisite service period when management determines that achievement of the milestone is probable. Management evaluates when the achievement of a performance-based milestone is probable based on the expected satisfaction of the performance conditions at each reporting date. The estimated fair values of stock option awards granted to employees were determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions: Year Ended December 31, 2021 2020 2019 Risk-free interest rate 0.7 % 0.5 % 2.0 % Expected volatility 92.9 % 90.2 % 77.98 % Expected dividend yield — % — % — % Expected term (in years) 6.18 6.25 6.25 Weighted average grant date fair value per share $ 22.34 $ 14.51 $ 21.99 We determine the appropriate risk-free interest rate, expected term for employee stock-based awards, contractual term for non-employee stock-based awards, and volatility assumptions. The weighted-average expected option term for employee and non-employee stock-based awards reflects the application of the simplified method, which defines the life as the average of the contractual term of the options and the weighted-average vesting period for all option tranches. Expected volatility for 2021 incorporates the historical volatility of our stock price, and volatility for 2020 and 2019 incorporates our stock price as well as similar entities whose share prices are publicly available. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected or contractual term of the stock-based payment awards. The assumed dividend yield is based on our expectation of not paying dividends in the foreseeable future. Total non-cash stock-based compensation expense for all stock awards that was recognized in the consolidated statements of operations and comprehensive loss is as follows: Year Ended December 31, (in thousands) 2021 2020 2019 Research and development $ 5,856 $ 4,122 $ 5,564 General and administrative 9,491 7,377 6,847 Total $ 15,347 $ 11,499 $ 12,411 At December 31, 2021, there was $ 27.2 million of unrecognized compensation cost related to unvested stock option awards, which is expected to be recognized over a remaining weighted average vesting period of 2.26 years. At December 31, 2021, there was $ 0.1 million of unrecognized compensation cost related to the ESPP, which is expected to be recognized over a remaining weighted-average vesting period of 0.37 years. 95 9. Employee Benefit Plan We have a defined contribution 401(k) plan available to eligible employees. Employee contributions are voluntary and are determined on an individual basis, limited to the maximum amount allowable under U.S. federal tax regulations. We elected to match 100 % of an employee’s contributions up to 6 % of the employees’ eligible salary with a maximum annual match limit of $ 8,000 in 2021 and 50 % of an employee’s contributions up to 6 % of the employees’ eligible salary with a maximum annual match limit of $ 6,000 in 2020 and 2019. For the years ended December 31, 2021, 2020, and 2019, we incurred approximately $ 0.6 million, $ 0.5 million and $ 0.3 million, respectively of costs related to the 401(k) plan. 10. Commitments and Contingencies Operating Leases On November 11, 2020, we entered into an agreement to terminate our sublease (the “Sublease Termination”) with Trex Enterprises Corporation, with respect to facilities in the building at 10455 Pacific Center Court in San Diego, California (the “10455 Building”). The terms of the original sublease with Trex provided for a November 12, 2021 lease expiration. Under the Sublease Termination, we agreed to terminate the sublease agreement on December 15, 2020 with no associated penalty. We recorded a non-cash gain of approximately $ 0.1 million as other income, in connection with the write-off of the lease liability and corresponding ROU asset. As of December 31, 2021, there was no lease liability and corresponding ROU asset related to the 10455 Building Lease. The non-cancellable office lease for our facilities at 10421 Pacific Center Court in San Diego, California, expired on August 31, 2021, and as of December 31, 2021, there was no related lease liability and corresponding ROU asset. On May 4, 2020, we entered into a lease agreement with Wateridge Property Owner, LP, with respect to facilities in the building at 10770 Wateridge Circle, San Diego, California 92121 (the “Lease Agreement”). Under the Lease Agreement, we agreed to lease approximately 45,000 square feet of space for a term of 124 months, beginning on April 5, 2021. The terms of the Lease Agreement provide us with an option to extend the term of the lease for an additional five years , as well as a one-time option to terminate the lease after seven years with the payment of a termination fee. The exercise of the lease option is at our sole discretion, which we currently do not anticipate exercising and as such was not recognized as part of the ROU asset and lease liability. The monthly base rent will be $ 4.20 per rentable square foot and will be increased by 3 % annually. Under the Lease Agreement, we are also responsible for our pro rata share of real estate taxes, building insurance, maintenance, direct expenses, and utilities. Upon lease commencement, on April 5, 2021, we recognized an ROU asset of $ 20.6 million, with a corresponding lease liability of $ 20.7 million on the consolidated balance sheets. The ROU asset includes adjustments for prepayments, initial direct costs, and lease incentives. As of December 31, 2021, we have recorded $ 0.3 million as a security deposit in accordance with the terms of the Lease Agreement. Our lease payments are fixed, and we recognize lease expense for leases on a straight-line basis over the lease term. Operating lease ROU assets and lease liabilities are recorded based on the present value of the future minimum lease payments over the lease term at commencement date. As our lease does not provide an implicit rate, we used our incremental borrowing rate based on the information available at effective date of adoption in determining the present value of future payments. The weighted-average discount rate used was 4.0 % and the weighted-average remaining lease term is approximately 9.7 years. The following non-cancellable office lease costs are included in our consolidated statements of cash flow (in thousands): Year Ended December 31, Leases Classification on the Cash Flow 2021 2020 2019 Operating lease cost Operating $ 2,213 $ 865 $ 879 Cash paid for amounts included in the measurement of lease liabilities Operating 705 938 937 96 At December 31, 2021, the future minimum annual obligations for the Company’s operating lease commitments are as follows: Years Ending December 31, (in thousands) 2022 $ 2,316 2023 2,386 2024 2,457 2025 2,531 2026 2,607 Thereafter 13,239 Total minimum payments required $ 25,536 Less: Imputed interest ( 4,581 ) Present value of lease liabilities $ 20,955 License Agreements We have certain obligations under licensing agreements with third parties that are contingent upon achieving various development, regulatory and commercial milestones. Pursuant to these license agreements, we are required to make milestone payments if certain development, regulatory and commercial sales milestones are achieved. Also, pursuant to the terms of each of these license agreements, when and if commercial sales of a product commence, we will pay royalties to our licensors on net sales of the respective products. Certain of the licensing agreements require guaranteed minimum annual payments. Terms of the licensing agreements generally range from the remaining life of the patent up to 19 years and, in some cases, may be subject to earlier termination by either party upon specified circumstances. Total expense incurred under all collaborative licensing agreements for upfront, milestone and royalty payments were $ 0.2 million, $ 0.2 million, and $ 0.5 million during the years ended December 31, 2021, 2020 and 2019, respectively. Total cash paid under these agreements was $ 0.2 million, $ 0.3 million, and $ 0.1 million during the years ended December 31, 2021, 2020, and 2019, respectively. Future minimum annual obligations under all such license agreements will be $ 0.7 million in aggregate during 2022, and $ 0.2 million thereafter. These obligations are payable through ten years from the first commercial sale, if any, or expiration of the last patent to expire, the dates of which are not determinable at this time. Other Commitments and Contingencies We have entered into agreements with certain vendors for the provision of goods and services, which includes manufacturing services with contract manufacturing organizations and development services with contract research organizations. These agreements may include certain provisions for purchase obligations and termination obligations that could require payments for the cancellation of committed purchase obligations or for early termination of the agreements. The amount of the cancellation or termination payments vary and are based on the timing of the cancellation or termination and the specific terms of the agreement. Guarantees and Indemnifications We enter into standard indemnification arrangements in the ordinary course of business. Pursuant to certain of these arrangements, we indemnify, hold harmless, and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified party for third-party claims in connection with our breach of the agreement, our negligence or willful misconduct in connection with the agreement, or any trade secret, copyright, patent or other intellectual property infringement claim with respect to our technology. The term of these indemnification arrangements is generally perpetual. The maximum potential amount of future payments we could be required to make under these agreements is not determinable because it involves claims that may be made against us in the future, but have not yet been made. We indemnify our officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving in such capacity, as permitted under Delaware law, in accordance with our certificate of incorporation and bylaws, and pursuant to agreements providing for indemnification entered into with our officers and directors. The term of the indemnification period lasts as long as an officer or director may be subject to any proceeding arising out of acts or omissions of such officer or director in such capacity. 97 The maximum amount of potential future indemnification of directors and officers is unlimited; however, we currently hold director and officer liability insurance. This insurance allows the transfer of risk associated with our exposure and may enable us to recover a portion of any future amounts paid. We believe that the fair value of these indemnification obligations is minimal. Accordingly, we have not recognized any liabilities relating to these obligations for any period presented. Letter of Credit At December 31, 2020, we were contingently liable for a standby letter of credit issued by a commercial bank for $ 60,000 for security on our lease and a restricted cash account with this amount was held as cash collateral for the letter of credit. As of December 31, 2021, the letter of credit has expired and the related restricted cash has been released. Shareholder Litigation On March 25, 2020, a putative securities class action was filed in the United States District Court for the Southern District of California naming the Company and certain of its current or former officers as defendants. The complaint purports to assert claims under Section 10(b) of the Exchange Act Rule 10b-5, and Section 20(a) of the Exchange Act, on behalf of persons and entities who acquired our common stock between October 10, 2017 and November 7, 2019 (the “Class Period”). An amended complaint was filed on September 30, 2020 alleging that, during the Class Period, the defendants made material misrepresentations or omissions regarding our etokimab product candidate that artificially inflated our stock price. The plaintiff sought, among other things, damages in an unspecified amount, as well as costs and expenses. On September 20, 2021, the Court granted defendants’ motion to dismiss the amended complaint with leave to amend. Plaintiff did not file a further amended complaint and, on November 30, 2021, the Court dismissed the action with prejudice. On May 3, 2021, a shareholder derivative complaint was filed in the same Court based on allegations substantially similar to those in the class action, and purporting to assert claims on the Company’s behalf against current or former officers and directors for alleged violation of Sections 14(a) and 20(a) of the Exchange Act, breach of fiduciary duties, unjust enrichment, waste of corporate assets and insider selling. The parties to that derivative action have agreed to the following: (1) the action should be dismissed without prejudice, meaning that the dismissal would not preclude the company, or another shareholder acting on behalf of the company, from asserting such claims in the future; (2) the plaintiffs and the defendants will all bear their own fees and costs incurred in connection with the action; and (3) neither the plaintiffs nor their counsel have received, or will receive, payment, compensation or consideration of any kind, directly or indirectly, in connection with the action or its dismissal. By Order dated January 14, 2022, the Court directed the Company to provide, in its filing on Form 10-K for the year ending December 31, 2021, notice to shareholders of the proposed dismissal without prejudice. The Court further directed the parties to notify the Court following the filing of the Form 10-K, and ordered that the action will be dismissed without prejudice fourteen (14) days thereafter unless, within such time, a shareholder moves to intervene in the action. We are unable to estimate a reasonably possible loss or range of loss, if any, that may result from these matters. From time to time, we may be involved in legal proceedings arising in the ordinary course of our business. We investigate these claims as they arise and accrue estimates for resolution of legal and other contingencies when losses are probable and estimable. Regardless of outcome, litigation can have an adverse impact on us due to defense and settlement costs, diversion of management resources, negative publicity and reputational harm, and other factors. 11. Income Taxes The components of loss before income tax benefit consist of the following: Year Ended December 31, (in thousands) 2021 2020 2019 U.S. $ ( 57,741 ) $ ( 19,832 ) $ ( 97,187 ) Foreign ( 55 ) ( 99 ) ( 301 ) Consolidated net loss before income taxes $ ( 57,796 ) $ ( 19,931 ) $ ( 97,488 ) 98 Significant components of our deferred tax assets and liabilities are as follows: December 31, (in thousands) 2021 2020 Deferred Tax Assets: Net operating loss carryforwards $ 67,203 $ 57,772 Research and development credits 9,527 17,614 Equity compensation 8,091 5,329 Lease liability 4,451 — Other, net 1,201 769 Total deferred tax assets 90,473 81,484 Deferred Tax Liabilities: ROU asset ( 4,154 ) — Fixed assets ( 115 ) ( 150 ) Total deferred tax liabilities ( 4,269 ) ( 150 ) Net deferred tax assets 86,204 81,334 Less: valuation allowance ( 86,204 ) ( 81,334 ) Deferred tax assets, net of valuation allowance $ — $ — We have recorded a full valuation allowance against our net deferred tax assets due to the uncertainty surrounding the realization of such assets. Management has determined it more likely than not that the deferred tax assets are not realizable due to our historical loss position. At December 31, 2021, we had federal and state net operating loss carryforwards (“NOLs”), of $ 293.4 million and $ 65.6 million, respectively. The federal and state NOLs generated prior to 2018 will both begin to expire in 2028, unless previously utilized. The federal NOL includes $ 233.4 million of net operating losses generated in 2018 and after. Federal net operating losses generated in 2018 and after carryover indefinitely and may generally be used to offset up to 80% of future taxable income. At December 31, 2021, we had federal and California research tax credit carryforwards of approximately $ 3.2 million and $ 10.6 million, respectively. The federal research tax credit carryforwards will begin to expire in 2041 and the California research tax credits carryforward indefinitely. We also have foreign tax losses of $ 3.3 million, which will carry forward indefinitely, subject to a continuity of ownership test. The above NOL carryforward and the federal and state research tax credit carryforwards may be subject to an annual limitation under section 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), and similar state provisions if we experience one or more ownership changes which would limit the amount of NOL and tax credit carryforwards that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change as defined by Section 382 and 383, results from transactions increasing ownership of certain stockholders or public groups in the stock of the corporation by more than 50 percentage points over a three-year period. In September 2015, we completed a Section 382 analysis through December 31, 2014 and determined that there was an ownership change in 2007 that may limit the utilization of approximately $ 5.3 million and $ 5.4 million in federal and state NOLs, respectively, and $ 0.2 million in both federal and state research tax credits. During 2021, we extended the analysis period of the study through September 30, 2021, noting ownership changes on January 31, 2017 and March 8, 2021. We reduced federal research credit carryforward by approximately $ 15.0 million. Our use of federal and state NOLs and research credits could be limited further by the provisions of Section 382 of the U.S. Internal Revenue Code of 1986, as amended, depending upon the timing and amount of additional equity securities that we have issued or will issue. State NOL carryforwards may be similarly limited. If a change in ownership were to have occurred, NOL and tax credits carryforwards could be eliminated or restricted. If eliminated, the related asset would be removed from the deferred tax asset schedule with a corresponding reduction in the valuation allowance. Due to the existence of the valuation allowance, limitations created by ownership changes, if any, will not impact our effective tax rate. 99 The following is a reconciliation of the expected statutory federal income tax provision to our actual income tax provision: Year Ended December 31, (in thousands) 2021 2020 2019 Expected income tax benefit at federal statutory tax rate $ ( 12,138 ) $ ( 4,186 ) $ ( 20,473 ) State income taxes, net of federal benefit ( 142 ) ( 21 ) ( 377 ) Permanent items 17 18 34 Equity compensation (1) ( 708 ) 871 ( 1,122 ) Return to provision adjustment 76 ( 11 ) ( 661 ) Rate differential ( 34 ) 40 ( 53 ) Research credits 8,087 ( 3,389 ) ( 4,405 ) Change in the valuation allowance 4,842 6,678 26,905 Income tax benefit $ — $ — $ ( 152 ) (1) Includes non-deductible stock-based compensation and excess tax benefits from stock-based compensation. During 2021, our tax provision includes $ 0.1 million of excess tax benefits associated with the exercise of non-qualified stock options and $ 0.9 million associated with the disqualifying dispositions of incentive stock options and $ 0 associated with the employee stock purchase plan. During 2020, our tax provision includes $ 0 of excess tax benefits associated with the exercise of non-qualified stock options and $ 0.2 million associated with the disqualifying dispositions of incentive stock options. During 2019, our tax provision includes $ 1.1 million of excess tax benefits associated with the exercise of non-qualified stock options and $ 0.3 million associated with the disqualifying dispositions of incentive stock options. We recognize a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more likely than not recognition at the effective date to be recognized. At December 31, 2021 and 2020, we had no unrecognized tax benefits that, if recognized and realized, would affect the effective tax rate due to the valuation allowance against deferred tax assets. The following table summarizes the activity related to our unrecognized tax benefits: Year Ended December 31, (in thousands) 2021 2020 Balance at the beginning of the year $ 4,044 $ 3,146 Decrease related to prior year tax positions ( 2,555 ) — Increase related to current year tax positions 984 898 Balance at the end of the year $ 2,473 $ 4,044 If recognized, these amounts would not affect our effective tax rate, since they would be offset by an equal corresponding adjustment in the deferred tax asset valuation allowance. We do not anticipate there will be a significant change in unrecognized tax benefits within the next 12 months. Our policy is to recognize interest and penalties related to income tax matters in the provision for income taxes. At December 31, 2021 and 2020, there were no interest or penalties on uncertain tax benefits. We file income tax returns in the United States, California, Pennsylvania, and Australia. Due to our losses incurred, we are essentially subject to income tax examination by tax authorities from inception to date. 100 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.