Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes included in this Annual Report on Form 10-K. This discussion and analysis contain forward-looking statements, including statements regarding our intentions, plans, objections and expectations for our business. Forward-looking statements are based upon current beliefs, plans and expectations related to future events and our future financial performance and are subject to risks, uncertainties and assumptions. Our actual results and the timing of certain events could differ materially from those described in or implied by these forward-looking statements as a result of various factors, including those set forth in the “Risk Factors” section of this Annual Report on Form 10-K. See also the Special Note Regarding Forward-Looking Statements section of this Annual Report on Form 10-K.
Overview
We are a clinical-stage C lustered R egularly I nterspaced S hort P alindromic R epeats (“CRISPR”) genome-editing biopharmaceutical company dedicated to developing transformative therapies for patients with devastating diseases. Our genome-editing platform, including our novel chRDNA ( C RISPR h ybrid R NA- DNA , or “chRDNA,” pronounced “chardonnay”) technologies, enables superior editing precision to develop cell therapies that are armored to improve antitumor activity. We are advancing a pipeline of allogeneic, or off-the-shelf, cell therapies from our chimeric antigen receptor (“CAR”) T (“CAR-T”) cell and CAR-natural killer (“CAR-NK”) cell platforms as readily available therapeutic treatments for patients.
We are initially focused on advancing multiple allogeneic cell therapies for the treatment of hematologic malignancies and solid tumors. Our therapies are directed at established tumor cell surface targets for which autologous CAR-T cell therapeutics have already demonstrated clinical proof of concept, including CD19 and B cell maturation antigen (“BCMA”), as well as targets such as C-type lectin-like molecule-1 (“ CLL-1 ,” also known as CD371). We use our chRDNA technologies to armor our cell therapies’ antitumor activity by using multiple genome-editing strategies, such as checkpoint disruption, immune cloaking, or a combination of these two strategies.
Our lead product candidate, CB-010, to our knowledge, is the first clinical-stage allogeneic anti-CD19 CAR-T cell therapy with programmed cell death protein 1 (“PD-1”) removed from the CAR-T cell surface by a genome-edited knockout of the PDCD1 gene. We have demonstrated in preclinical models that the PD-1 knockout improved the durability of antitumor activity by disrupting a pathway that leads to rapid T cell exhaustion. CB-010 is being evaluated in our ANTLER phase 1 clinical trial in patients with relapsed or refractory B cell non-Hodgkin lymphoma (“r/r B-NHL”).
Our CB-011 product candidate is an allogeneic CAR-T cell product candidate that targets B cell maturation antigen (“BCMA”). To our knowledge, it is the first anti-BCMA CAR-T cell therapy incorporating an immune cloaking approach that includes both the removal of the endogenous beta-2 microglobulin (“B2M”) protein by a genome-edited knockout of the B2M gene and insertion of a B2M–human-leukocyte-antigen-E–peptide transgene (“B2M–HLA-E”), enabling expression of HLA-E on the CAR-T cell surface. This strategy is designed to reduce CAR-T cell rejection by both patient T cells and natural killer (“NK”) cells to potentially enable more durable antitumor activity. CB-011 is being evaluated in our CaMMouflage phase 1 clinical trial in patients with relapsed or refractory multiple myeloma (“r/r MM”).
CB-012 is our allogeneic CAR-T cell product candidate targeting CLL-1, currently in preclinical development for the treatment of relapsed or refractory acute myeloid leukemia (“r/r AML”). CB-012 is, to our knowledge, the first allogeneic CAR-T cell therapy with both checkpoint disruption and immune cloaking strategies. We believe that CLL-1 is an attractive target for acute myeloid leukemia (“AML”) due to its expression on myeloid cancer cells, its enrichment in leukemic stem cells, and its absence on hematopoietic stem cells (“HSCs”). CB-012 is being evaluated in investigational new drug (“IND”)-enabling studies to support a planned IND application submission for relapsed or refractory AML (“r/r AML”) in the second half of 2023.
We are also developing allogeneic CAR-NK cell therapies derived from genome-edited induced pluripotent stem cells (“iPSCs”) for the treatment of solid tumors. CB-020 is our first CAR-NK product candidate from our CAR-NK platform and we have selected receptor tyrosine kinase like orphan receptor 1 (“ROR1”) as the tumor cell-surface target for CB-020. CB-020 and potential future CAR-NK cell therapy product candidates will contain genome edits designed to overcome some of the challenges of targeting solid tumors, such as trafficking, tumor infiltration, heterogeneity, and the immunosuppressive tumor microenvironment.
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Since our founding in 2011, we have devoted substantially all of our resources to organizing and staffing, business planning, raising capital, developing our genome-editing platform technologies, developing our product candidates and building our pipeline, creating and maintaining our intellectual property portfolio, and establishing arrangements with third parties for the manufacture and testing of our product candidates. We do not have any products approved for commercial sale and have not generated any revenue from product sales. We have incurred net losses since commencement of our operations.
To date, we have primarily funded our operations through revenue from our license agreements, license and collaboration agreements, and a service agreement; the sale of shares of Intellia Therapeutics, Inc. (“Intellia”) common stock that we received as consideration for a License Agreement (as amended, the “Intellia License Agreement”) with Intellia, LLC, to which Intellia is a successor in interest; the sale of our convertible preferred stock in private placements before our initial public offering (“IPO”) in 2021; and proceeds from our IPO.
Our net losses for the years ended December 31, 2022 and 2021 were $99.4 million and $66.9 million, respectively. We had an accumulated deficit of $197.2 million as of December 31, 2022. Our net losses and operating losses may fluctuate from quarter to quarter and year to year depending primarily on the timing of expenses associated with our clinical trials and nonclinical studies and our other research and development expenses. In addition, we are incurring increased costs associated with operating as a public company, including legal, audit, and accounting fees; maintaining compliance with the rules and regulations of the SEC and Nasdaq; director and officer insurance premiums; costs for investor and public relations activities; and other accompanying compliance and governance requirements. We anticipate that our expenses will increase substantially if and as we:
• progress our ANTLER phase 1 clinical trial for our CB-010 product candidate and our CaMMouflage phase 1 clinical trial for our CB-011 product candidate;
• continue our current research programs and our preclinical and clinical development of our other current product candidates, including CB-012 and CB-020, and any other product candidates we identify and choose to develop;
• hire additional clinical, quality control, regulatory, and scientific personnel;
• seek to identify additional research programs and additional product candidates;
• further develop our genome-editing technologies;
• acquire or in-license technologies;
• expand, maintain, enforce, and defend our intellectual property portfolio;
• seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical trials, if any;
• establish and expand manufacturing capabilities and supply chain capacity for our product candidates;
• add operational, legal, financial, and management information systems and personnel;
• experience any delays, challenges, or other issues associated with any of the above, including the failure of clinical trials meeting endpoints, the generation of unanticipated preclinical results or clinical trial data subject to differing interpretations, or the occurrence of potential safety issues or other development or regulatory challenges;
• make royalty, milestone, or other payments under current, and any future, in-license or assignment agreements;
• establish a sales, marketing, and distribution infrastructure to commercialize any product candidates for which we obtain marketing approval; and
• continue to operate as a public company.
We do not own or operate any manufacturing facilities and we outsource a substantial portion of our clinical trial studies to third parties. We use multiple contract manufacturing organizations (“CMOs”) to individually manufacture,
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under current good manufacturing processes, chRDNA guides, Cas9 and Cas12a proteins, plasmids, and adeno-associated virus serotype 6 vectors used in the manufacture of our CAR-T cells as well as our CAR-NK cell therapy product candidates. We expect to rely on our CMOs for the manufacturing of our product candidates to expedite readiness for future clinical trials, and most of these CMOs have capabilities for commercial manufacturing. Additionally, we may decide to build our own manufacturing facility in the future to provide us greater flexibility and control over our clinical or commercial manufacturing needs.
Because of the numerous risks and uncertainties associated with therapeutic product development, we may never achieve profitability and, unless and until we are able to develop and commercialize our product candidates, we will need to continue to raise additional capital. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through equity offerings (including our at-the-market facility), debt financings, collaborations and strategic alliances, licensing arrangements, or other sources. There are no assurances that we will be successful in obtaining an adequate level of financing to support our business plans as needed on acceptable terms, or at all. If we raise additional funds through collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our intellectual property, future revenue streams, research programs, or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise capital as and when needed or on attractive terms, we may have to significantly delay, reduce, or discontinue the development and commercialization of our product candidates or scale back or terminate our pursuit of new in-licenses and acquisitions.
Impact of the COVID-19 Pandemic and Geopolitical Events
Although the COVID-19 pandemic has not had a significant adverse impact on our operations to date, we are unable to predict the effect that the ongoing COVID-19 pandemic or other public health crises may have on our company in the future. Furthermore, we cannot predict the impact that national or international geopolitical events, such as the ongoing war in Ukraine, may have on our operations. To the extent the COVID-19 pandemic or other public health crises or geopolitical events adversely affect our business prospects, financial condition, and results of operation, they may also have the effect of exacerbating many of the other risks described or referenced in the Risk Factors section in Item 1A of this Annual Report on Form 10-K, such as those relating to the supply of materials for our product candidates, and the timing and possible disruptions to our ongoing and future preclinical studies and clinical trials and our access to the financial markets.
Components of Results of Operations
Licensing and Collaboration Revenue
We have not generated any revenue from product sales to date and do not expect to generate any revenue from the sale of products in the foreseeable future. If our development efforts for our product candidates are successful and result in regulatory approval and commercialization, we may generate revenue in the future from product sales. We cannot predict if, when, or to what extent we will generate revenue from the commercialization and sale of our product candidates if we succeed in obtaining regulatory approval for these product candidates.
To date, all of our revenue consists of licensing and collaboration revenue earned from collaboration and/or licensing agreements entered into with third parties, including related parties. Under these agreements, we license rights to certain intellectual property controlled by us. The terms of these arrangements typically include payments to us of one or more of the following: nonrefundable, upfront license fees or exclusivity fees; annual maintenance fees; regulatory and/or commercial milestone payments; research and development payments; and royalties on the net sales of products and/or services. Each of these payments results in licensing and collaboration revenue. Revenue under such licensing and collaboration agreements was $13.9 million and $9.6 million for the years ended December 31, 2022 and 2021, respectively. See Note 4 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.
For the foreseeable future, we expect substantially all of our revenue will be generated from licensing and collaboration agreements.
Operating Expenses
Research and Development Expenses
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Our research and development expenses consist of internal and external expenses incurred in connection with the development of our product candidates and our platform technologies, and our in-licensing and assignment agreements.
External costs include:
• costs associated with acquiring technology and intellectual property licenses that have no alternative future uses, sublicensing revenue, and milestones under our licensing agreements;
• costs incurred in connection with the preclinical and clinical development and manufacturing of our product candidates, including under agreements with contract research organizations (“CROs”), CMOs, and clinical sites; and
• other research and development costs, including laboratory materials and supplies, and consulting services.
Internal costs include:
• personnel-related costs, including salaries, benefits, and share-based compensation expense, for our research and development personnel; and
• allocated facilities and other overhead expenses, including expenses for rent, facilities maintenance, and depreciation.
We expense research and development costs as incurred. Costs of certain activities are recognized based on an evaluation of the progress to completion of specific tasks. However, payments made prior to the receipt of goods or services that will be used or rendered for future research and development activities are deferred and capitalized as prepaid expenses and other current assets on our consolidated balance sheets. The capitalized amounts are recognized as expense as the goods are delivered or as related services are performed. Historically, we have not tracked external costs by clinical program. We intend to separately track certain external costs for each clinical program. However, we do not currently track, and do not intend to track, costs that are deployed across multiple programs.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will increase substantially for the foreseeable future as we continue to implement our business strategy; advance our CB-010 and CB-011 product candidates through clinical trials and later stages of development; conduct preclinical studies and clinical trials for our other product candidates; seek regulatory approvals for any product candidates that successfully complete clinical trials; expand our research and development efforts and incur expenses associated with hiring additional personnel to support our research and development efforts; and seek to identify, in-license, acquire, and/or develop additional product candidates.
The successful development of our CB-010, CB-011, CB-012, and CB-020 product candidates, as well as other potential future product candidates, is highly uncertain. Accordingly, at this time, we cannot reasonably estimate or know the nature, timing, and costs of the efforts that will be necessary to complete the development of our product candidates. We are also unable to predict when, if ever, we will generate revenue and material net cash inflows from the commercialization and sale of any of our product candidates for which we may obtain marketing approval. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs, and timing of preclinical studies, clinical trials, and development of our product candidates will depend on a variety of factors, including:
• sufficiency of our financial and other resources;
• acceptance of our CRISPR chRDNA genome-editing technology;
• ability to develop differentiating features so that our products have a competitive edge;
• completion of preclinical studies;
• establishment, maintenance, enforcement, and defense of our patents and other intellectual property rights;
• our ability to not infringe, misappropriate, or otherwise violate third-party intellectual property rights;
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• clearance of IND applications to initiate clinical trials on product candidates;
• successful enrollment in, and completion of, our clinical trials on our product candidates;
• data from our clinical trials that support an acceptable risk-benefit profile of our product candidates for the intended patient populations and that demonstrate safety and efficacy;
• entry into collaborations to further the development of our product candidates or for the development of new product candidates;
• successful development of our internal process development and transfer to larger-scale facilities;
• establishment of agreements with CMOs for clinical and commercial supplies and scaling up manufacturing processes and capabilities to support our clinical trials;
• receipt of marketing approvals from applicable regulatory authorities;
• grant of regulatory exclusivity for our product candidates;
• establishment of sales, marketing, and distribution capabilities necessary for commercialization of our product candidates if and when approved, whether by us or in collaboration with third parties;
• maintenance of a continued acceptable safety profile of our products post-approval;
• acceptance of our product candidates, if and when approved by the applicable regulatory authorities, by patients, the medical community, and third-party payors;
• ability of our products to compete with other therapies and treatment options;
• establishment and maintenance of healthcare coverage and adequate reimbursement; and
• expanded indications and patient populations for our products.
The following table summarizes our research and development expenses for the periods indicated:
Year Ended December 31,
2022 2021 Change
(in thousands)
External costs:
Expenses related to licenses, sublicensing revenue, and milestones $ 3,169 $ 3,960 $ (791)
Services provided by CROs, CMOs, and other third parties that conduct preclinical studies and clinical trials on our behalf 30,367 20,032 10,335
Other research and development expenses 16,703 9,393 7,310
Total external costs 50,239 33,385 16,854
Internal costs:
Personnel-related expenses 24,123 13,361 10,762
Facilities and other allocated expenses 7,868 5,509 2,359
Total internal costs 31,991 18,870 13,121
Total research and development expenses $ 82,230 $ 52,255 $ 29,975
General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel-related costs, intellectual property costs, consulting costs, and allocated overhead, including rent, equipment depreciation, and utilities. Personnel-related costs consist of salaries, benefits, and stock-based compensation for our general and administrative personnel. Intellectual property costs include expenses for filing, prosecuting, and maintaining patents and patent applications, including certain patents and patent applications that we license from third parties. We are entitled to receive reimbursement from third
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parties of a portion of the costs for filing, prosecuting, and maintaining certain patents and patent applications. We accrue for these reimbursements as the respective expenses are incurred and classify such reimbursements as a reduction of general and administrative expenses. During the years ended December 31, 2022 and 2021, we recorded $3.5 million and $7.1 million, respectively, of patent cost reimbursements as a reduction to general and administrative expense.
We expect that our general and administrative expenses may increase in the future as a result of expanding our operations, including hiring personnel, preparing for potential commercialization of our product candidates, and additional facility occupancy costs, as well as other expenses necessary to support the growth and operations of a clinical-stage public company.
Other Income (Expense)
Other income (expense) consists primarily of interest income earned on cash and marketable securities, change in the fair value of our equity investments, change in fair value of the Memorial Sloan Kettering Cancer Center (“MSKCC”) success payments liability under the Exclusive License Agreement with MSKCC (the “MSKCC Agreement”).
Results of Operations
Comparison of the Years Ended December 31, 2022 and 2021
The following table summarizes our results of operations for the years ended December 31, 2022 and 2021:
Years Ended December 31, Change
2022 2021 $
(in thousands)
Licensing and collaboration revenue $ 13,851 $ 9,598 $ 4,253
Operating expenses
Research and development 82,230 52,255 29,975
General and administrative 38,020 24,322 13,698
Total operating expenses 120,250 76,577 43,673
Loss from operations (106,399) (66,979) (39,420)
Other income (expense)
Change in fair value of equity securities (133) — (133)
Change in fair value of the MSKCC success payments liability 2,429 (1,426) 3,855
Gain on extinguishment of PPP Loan — 1,584 (1,584)
Other income, net 4,752 219 4,533
Total other income 7,048 377 6,671
Net loss before provision for income taxes (99,351) (66,602) (32,749)
Provision for income taxes 70 321 (251)
Net loss $ (99,421) $ (66,923) $ (32,498)
Licensing and Collaboration Revenue
Licensing and collaboration revenue increased by $4.3 million to $13.9 million for the year ended December 31, 2022 from $9.6 million for the year ended December 31, 2021. This increase primary relates to a $4.0 million increase in revenue recognized under the Collaboration and License Agreement (as amended, the “AbbVie Agreement”) with AbbVie Manufacturing Management Unlimited Company (“AbbVie”). The remaining increase of $0.3 million relates to other license agreements with various licensees.
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The following table summarizes our revenue by licensee for the years ended December 31, 2022 and 2021:
Years Ended December 31,
2022 2021 Change
(in thousands)
AbbVie $ 7,956 $ 3,972 $ 3,984
Other licensees 5,895 5,626 269
Total licensing revenue $ 13,851 $ 9,598 $ 4,253
Research and Development Expenses
Research and development expenses increased by $30.0 million to $82.2 million for the year ended December 31, 2022 from $52.3 million for the year ended December 31, 2021. This increase was primarily related to increases of $10.8 million in personnel-related expenses (which include an increase in stock-based compensation expense of $3.0 million) due to incremental hiring; $10.3 million in external CMO manufacturing and CRO clinical activities, driven by increases of $3.7 million due to timing of CMO manufacturing activities for our product candidates, and $6.6 million in CRO clinical activities primarily to advance our ANTLER phase 1 trial for CB-010; $7.3 million in other research and development expenses to advance IND-enabling studies for CB-011 and preclinical research for additional programs, as well as other consulting services related to research and development; and $2.4 million in other facilities and allocated expenses. These increases were partially offset by a $0.8 million decrease in expenses related to licenses, sublicensing revenue, and milestones.
General and Administrative Expenses
General and administrative expenses increased by $13.7 million to $38.0 million for the year ended December 31, 2022 from $24.3 million for the year ended December 31, 2021. This increase was primarily related to increases of $9.2 million in personnel-related expenses (which include an increase in stock-based compensation expense of $5.3 million) due to incremental hiring; $2.6 million in legal, accounting, insurance, and other expenses necessary to support the growth and operations of a clinical-stage public company; and $1.9 million in other facilities and allocated expenses. These increases were partially offset by a $1.4 million net decrease in patent prosecution and maintenance costs.
Total Other Income
Total other income increased by $6.7 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021.
We recognized a gain related to the change in the fair value of the MSKCC success payments liability in the amount of $2.4 million for the year ended December 31, 2022. We recognized a loss related to the change in the fair value of the MSKCC success payments liability in the amount of $1.4 million for the year ended December 31, 2021.
Our promissory note with WebBank (the “Lender”) pursuant to the Paycheck Protection Program (the “PPP Loan”) was forgiven in May 2021, and we recognized a gain on the loan extinguishment of $1.6 million during the year ended December 31, 2021. No such gain was recognized for the year ended December 31, 2022.
We recognized a $4.5 million increase in other income during the year ended December 31, 2022 compared to December 31, 2021. The change primarily relates to a $4.5 million increase in interest income earned from marketable securities.
Income Tax
An income tax expense of $0.1 million was recognized for the year ended December 31, 2022, which was primarily related to current federal taxes and deferred state taxes. An income tax expense of $0.3 million was recognized for the year ended December 31, 2021, which was primarily related to state minimum taxes and an increase in the valuation allowance.
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Liquidity, Capital Resources, and Capital Requirements
Sources of Liquidity
Since our inception, we have not generated any revenue from product sales and have incurred significant operating losses and negative cash flows from our operations. We have funded our operations through sales of our convertible preferred stock, which generated approximately $150.1 million in aggregate net proceeds, and from our IPO, which generated approximately $321.0 million in net proceeds. We have also received approximately $88.4 million in net proceeds from the sale of Intellia common stock that we received under the Intellia Agreement. Additionally, through December 31, 2022, we received approximately $84.2 million from licensing agreements, licensing and collaboration agreements, a service agreement, patent assignments, and government grants, including $33.8 million that was received from AbbVie under the AbbVie Agreement.
In order to assist in funding our future operations, including our planned clinical trials, on August 9, 2022, we filed a universal shelf registration statement on Form S-3 (the “Shelf Registration Statement”) with the Securities and Exchange Commission (the “SEC”), which allows us to, from time to time, sell up to $400.0 million of common stock, preferred stock, debt securities, warrants, rights, or units comprised of any combination thereof (including the $100.0 million of common stock reserved for our at-the-market equity offering program described below). The Shelf Registration Statement was declared effective by the SEC on August 16, 2022.
On August 9, 2022, we entered into an Open Market Sale Agreement SM (the “ATM Sales Agreement”) with Jefferies LLC (“Jefferies”), pursuant to which, upon the terms and subject to the conditions and limitations set forth in the ATM Sales Agreement, we may, from time to time, in our sole discretion, issue and sell, through Jefferies, acting as sales agent, up to $100.0 million of our shares of common stock, by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415(a)(4) of the Securities Act of 1933, as amended (the “Securities Act”). Jefferies will use commercially reasonable efforts consistent with its normal sales and trading practices to sell shares from time to time, based upon our instructions (including any price or size limits or other customary parameters or conditions we may impose). We will pay Jefferies a commission equal to 3.0% of the aggregate gross proceeds of any shares sold through Jefferies pursuant to the ATM Sales Agreement. We are not obligated to sell any shares under the ATM Sales Agreement. As of December 31, 2022, there have been no sales under the ATM Sales Agreement and the full capacity remained available for issuance.
As of December 31, 2022, we had cash, cash equivalents, and marketable securities of $317.0 million. We will continue to be dependent upon equity financing, debt financing, collaboration and licensing arrangements, and/or other forms of capital raises at least until we are able to generate significant positive cash flows from our operations. We have no current ongoing material financing commitments, such as lines of credit or guarantees, that are expected to affect our liquidity over the next five years, except for our lease commitments as described in Note 9, and payments under certain of our license agreements as described in Note 4, in each case to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Based on our current operating plan, we expect that our existing cash, cash equivalents, and marketable securities will be sufficient to fund our current operating plan for at least the next 12 months from the date of this Annual Report on Form 10-K. We have based these estimates on our current assumptions, which may require future adjustments based on our ongoing business decisions.
Contractual Obligations and Commitments
We enter into contracts in the normal course of business with suppliers, CMOs, CROs, clinical trial sites, and the like. These agreements provide for termination at the request of either party generally with less than one-year notice and, therefore, we believe that our non-cancelable obligations under these agreements are not material.
We have milestones, royalties, and/or other payments due to third parties under our existing license and assignment agreements. See Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We cannot estimate when such payments will be due and none of these events is probable to occur as of December 31, 2022.
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MSKCC Agreement Success Payments
Under the MSKCC Agreement, we are obligated to make success payments to MSKCC of up to $35.0 million if our stock price increases by certain multiples of increasing value based on a comparison of the fair market value of our common stock with $5.1914 per share, adjusted for future stock splits, during a specified time period. As of December 31, 2022, the timing and likelihood of triggering the MSKCC success payments are uncertain. See Note 4 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information about the MSKCC success payments liability.
Leases
We have operating lease agreements for our office spaces. As of December 31, 2022, we had lease payment obligations totaling $45.4 million, of which $3.3 million is due within 12 months.
Funding Requirements
Our primary use of cash is to fund operating expenses and research and development expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable, accrued expenses, and prepaid expenses.
Our future funding requirements will depend on many factors, including the following:
• the initiation, progress, timing, costs, and results of preclinical studies and clinical trials for our product candidates;
• the clinical development plans we establish for these product candidates;
• the number and characteristics of the product candidates that we develop;
• the increase in the number of our employees and expansion of our physical facilities to support growth initiatives;
• the outcome, timing, and cost of meeting regulatory requirements established by the FDA and other comparable foreign regulatory authorities;
• whether we enter into any additional collaboration agreements and the terms of any such agreements;
• the cost of filing and prosecuting our patent applications, and maintaining and enforcing our patents and other intellectual property rights;
• the extent to which we acquire or in-license other product candidates and technologies;
• the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against our products after we receive regulatory approval;
• the effect of competing technological and market developments;
• the cost and timing of completion of commercial-scale outsourced manufacturing activities or the cost and timing of completion of clinical-scale and commercial-scale internal manufacturing activities;
• the cost of establishing sales, marketing, and distribution capabilities for any product candidates for which we may receive regulatory approval in regions where we choose to commercialize our products without a partner;
• the amount of revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval;
• the achievement of milestones or occurrence of other developments that trigger payments by or to third parties under any collaboration or licensing agreements;
• our implementation of various computerized informational systems and efforts to enhance operational systems;
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• the impact of the COVID-19 pandemic or other public health crises or geopolitical events on our clinical development or operations;
• the impact of inflationary pressures on the cost of our operations; and
• the costs associated with being a public company.
Furthermore, our operating plans may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development expenditures.
If we need to raise additional capital to fund our operations, funding may not be available to us on acceptable terms, or at all. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of, or suspend one or more of our preclinical studies, clinical trials, research and development programs, and/or commercialization efforts. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, collaborations, and licensing arrangements. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in dilution to our stockholders. If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish certain valuable rights to our product candidates, technologies, future revenue streams, or research programs or grant licenses on terms that may not be favorable to us.
Cash Flows
Comparison of the Years Ended December 31, 2022 and 2021
The following summarizes our cash flows for the periods indicated:
Years Ended December 31,
2022 2021 Change
(in thousands)
Cash used in operating activities $ (90,966) $ (32,519) $ (58,447)
Cash used in investing activities (93,249) (176,397) 83,148
Cash provided by financing activities 2,133 433,429 (431,296)
Net (decrease) increase in cash and cash equivalents $ (182,082) $ 224,513 $ (406,595)
Cash Used in Operating Activities
Net cash used in operating activities was $91.0 million and $32.5 million for the years ended December 31, 2022 and 2021, respectively.
Cash used in operating activities in the year ended December 31, 2022 was primarily due to our net loss of $99.4 million, adjusted by non-cash charges of $12.7 million and net changes in our net operating assets and liabilities of $4.2 million. Our 2022 non-cash charges were primarily comprised of $11.7 million of stock-based compensation, $2.0 million of non-cash lease expense, $1.6 million of depreciation and amortization expense, and $0.6 million of acquired in-process research and development, which were partially offset by the change in the fair value of the MSKCC success payments liability of $2.4 million, and amortization of premiums on marketable securities of $0.8 million. The changes in our net operating assets and liabilities were due to decreases of $4.8 million in deferred revenue, $2.7 million in accounts payable, $0.4 million in operating lease liabilities, and increases of $1.0 million in prepaid expenses and other current assets, $0.8 million in contract assets, and $0.6 million in other assets, partially offset by increases of $2.0 million in accrued expenses and other current liabilities, and decreases of $3.3 million in other receivables, and $1.0 million in accounts receivable.
Cash used in operating activities in the year ended December 31, 2021 was primarily due to our net loss of $66.9 million, adjusted by non-cash charges of $5.3 million and net changes in our net operating assets and liabilities of $29.1 million. Our 2021 non-cash charges were primarily comprised of $3.4 million of stock-based compensation, $1.4 million related to the change in the fair value of the MSKCC success payments liability, and $1.0 million of depreciation and amortization expense, which were offset by a gain of $1.6 million from the PPP Loan extinguishment upon the loan
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forgiveness. Acquired in-process research and development of $1.0 million consists of cash consideration reported in our investing activities. The changes in our net operating assets and liabilities were due to increases of $29.6 million in deferred revenue primarily from the upfront payment received from AbbVie, $4.3 million in accrued expenses and other current liabilities, $1.2 million in deferred rent and lease incentive liability, $1.1 million in accounts payable, $0.3 million in deferred tax liabilities, offset by increases of $4.0 million in prepaid expenses and other current assets, $1.8 million in other receivables, $1.0 million in accounts receivable, and $0.2 million in contract assets.
Cash Used in Investing Activities
During the year ended December 31, 2022 and 2021, cash used in investing activities was $93.2 million and $176.4 million, respectively.
Cash used in investing activities for the year ended December 31, 2022 was primarily due to purchases of marketable securities of $339.1 million, property and equipment of $6.5 million, and in-process research and development of $0.6 million, partially offset by the proceeds from maturities of marketable securities of $252.9 million.
Cash used in investing activities for the year ended December 31, 2021 was primarily due to our purchases of marketable securities of $173.3 million, purchases of property and equipment of $2.1 million, and payments to acquire in-process research and development of $1.0 million.
Cash Provided by Financing Activities
During the years ended December 31, 2022 and 2021, cash provided by financing activities was $2.1 million and $433.4 million, respectively.
Cash provided by financing activities for the year ended December 31, 2022 was due to the exercise of stock options and purchases of common stock under the 2021 Employee Stock Purchase Plan of $2.1 million.
Cash provided by financing activities for the year ended December 31, 2021 was primarily due to the receipt of net proceeds from our IPO in the amount of $321.0 million, net proceeds from the issuance of Series C convertible preferred stock in the amount of $108.8 million, proceeds from the exercise of stock options of $2.6 million, and repayment of the promissory note issued to our president and chief executive officer in the amount of $1.2 million, partially offset by principal payments for a capital lease of $0.1 million.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported expenses incurred during the reporting periods. These estimates and assumptions are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates and assumptions could occur in the future. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions.
Although our significant accounting policies are described in more details in Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We recognize revenue when a licensee or assignee, or a customer, obtains control of the promised goods or services (e.g., an intellectual property license), in an amount that reflects the consideration that we have received or expect to receive in exchange for those goods or services.
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We apply judgment to determine whether agreements are within the scope of revenue for customers or other accounting guidance at an agreement’s effective date. Our revenues are primarily derived through our license agreements and license and collaboration agreements. The terms of these types of agreements may include (i) licenses for our technology, (ii) research and development services, and (iii) services or obligations in connection with participation in research or governance committees. Payments to us under these arrangements typically include one or more of the following: nonrefundable upfront license or exclusivity fees; annual maintenance fees; regulatory and/or commercial milestone payments; research and development payments; and royalties on the net sales of licensed products and/or services.
We assess whether the promises in our arrangements with customers are considered as distinct performance obligations that should be accounted for separately. Judgment is required to determine whether the license to intellectual property is distinct from the research and development services or participation on steering committees.
If the license to intellectual property controlled by us is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues allocated to the license at the point in time when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are combined with other promises, we utilize our judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.
Certain of our license agreements have two performance obligations: a license and a material right for annual license renewals. Such license agreements require payments of non-refundable annual license fees by the licensees (referred to as maintenance fees in the license agreements), which are accounted for as material rights for license renewals. We recognize revenue when the license is delivered and the term commences. Revenue for the material right for license renewals is recognized at the point in time the annual license fee is paid by the licensee and the renewal period begins.
Our collaboration and license agreements may include contingent milestone payments. Such milestone payments are typically payable when the collaboration partner or licensee achieves certain predetermined clinical, regulatory, and/or commercial milestones. Milestone payments that are not within our or the licensee’s control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. At each reporting date, we re-evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price by using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price in such period of determination.
Our collaboration and license agreements may also include contingent payments related to sales-based milestones. Sales-based milestones are typically payable when annual sales of a covered product reach specified levels. Sales-based milestones are recognized at the later of when the associated performance obligation has been satisfied or when the sales occur. Unlike other contingency payments, such as regulatory milestones, sales-based milestones are not included in the transaction price based on estimates at the inception of the contract, but rather, are included when the sales or usage occur.
Accrued Research and Development Expenses
As part of the process of preparing our financial statements, we are required to estimate and accrue expenses. Research and development expenses are charged to expense as incurred. Research and development expenses include certain payroll and personnel expenses; laboratory supplies; consulting costs; external clinical research and development expenses; and allocated overhead, including rent, equipment depreciation, and utilities.
We record accrued liabilities for estimated costs of research and development activities conducted by third-party service providers, CROs, and CMOs. We accrue for these costs based on factors such as estimates of the work completed and in accordance with service agreements established with these third-party service providers.
We make significant judgments and estimates in determining the accrual balance in each reporting period. As actual costs become known, we adjust our accruals. Although we do not expect our estimates to be materially different than the actual amounts incurred, the estimates for the status and timing of services performed relative to the actual status and timing of services performed may vary and could result in us reporting amounts that are too high or too low in any one period. Our accrual is dependent, in part, upon the receipt of timely and accurate reporting from CROs, CMOs, and other third-party vendors. Variations in the assumptions used to estimate accruals including, but not limited to, the number of
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patients enrolled, the rate of patient enrollment and the actual services performed, may vary from our estimates, resulting in adjustments to clinical trial expenses in future periods. Changes in these estimates that result in material changes to our accruals could materially affect our financial condition and results of operations.
Stock-Based Compensation Expense
Stock-based compensation expense related to awards to employees is measured at the grant date based on the fair value of the award. The fair value of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service period of the awards, which is generally the vesting period, and is adjusted for pre-vesting forfeitures in the period in which the forfeitures occur.
We use the Black-Scholes valuation model as the method for determining the estimated fair market value of stock options and stock purchases under our 2021 Employee Stock Purchase Plan (“2021 ESPP”) with the following assumptions:
Fair Market Value of Common Stock — Prior to our IPO, the fair market value of our common stock was determined by our board of directors with assistance from management and external valuation experts. Our approach to estimating the fair market value of our common stock was consistent with the methods outlined in the American Institute of Certified Public Accountants’ Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Following our IPO, the fair market value of our common stock is based on its closing price on Nasdaq as reported on the date of the stock option grant.
Expected Term — Expected term represents the period that our stock-based awards are expected to be outstanding and is determined using the simplified method. The expected term for our 2021 ESPP is the offering period.
Expected Volatility — Expected volatility is estimated based on the average historical volatilities of common stock of comparable publicly traded entities over a period equal to the expected term of the stock option grants , as we do not have sufficient trading history for our common stock. Comparable companies are chosen based on their size, stage in the life cycle, or area of specialty. We will continue to apply this process for stock options awards and 2021 ESPP stock purchases until enough historical information regarding the volatility of our stock price becomes available.
Expected Dividends — Expected dividends is zero as we have never paid dividends on our common stock and have no plans to do so in the foreseeable future.
Risk-Free Interest Rate — Risk-free interest rate is based on the U.S. Treasury zero-coupon issued in effect at the time of grant for periods corresponding with the expected term of the award.
Stock-based compensation expense related to awards to non-employees, such as consultants, is recognized based on the then-current fair value at each grant date over the associated service period of the award, which is generally the vesting term, using the straight-line method. The fair value of non-employee stock options is estimated using the Black-Scholes valuation model with assumptions generally consistent with those used for employee stock options, with the exception of the expected term, which is the remaining contractual life at each measurement date. See Note 13 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information on assumptions used in estimated stock-based compensation expense.
We recorded stock-based compensation expense of $11.7 million and $3.4 million for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, there was $26.5 million of unrecognized stock-based compensation expense related to employee and non-employee stock options that is expected to be recognized over a weighted-average period of 2.7 years. As of December 31, 2022, the total unrecognized stock-based compensation expense related to unvested RSUs was $1.6 million, which is expected to be recognized over the remaining weighted-average vesting period of 2.1 years. We expect to continue to grant equity-based awards in the future, and to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase.
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Leases
We adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) on January 1, 2022, using the modified retrospective transition approach. There was no cumulative-effect adjustment recorded to retained earnings upon adoption.
Under ASC 842, we assess all arrangements that convey the right to control the use of property, plant and equipment, at inception, to determine if it is, or contains, a lease based on the unique facts and circumstances present in the arrangements. In addition, we determine whether leases meet the classification criteria of a finance or operating lease at the lease commencement date considering: (1) whether the lease transfers ownership of the underlying asset to the lessee at the end of the lease term, (2) whether the lease contains a bargain purchase option, (3) whether the lease term is for a major part of the remaining economic life of the underlying asset, (4) whether the present value of the sum of the lease payments and residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset, and (5) whether the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. As of December 31, 2022, our lease population consisted only of operating real estate leases.
Once a lease is identified and its classification determined, we recognize a right-of-use asset and a corresponding lease liability. Lease liabilities are recorded based on the present value of lease payments over the expected least term. The corresponding right-of-use asset is measured from the initial lease liability, adjusted by (i) accrued or prepaid rents, (ii) remaining unamortized initial direct costs and lease incentives, and (iii) any impairments of the right-of-use asset.
Significant assumptions utilized in recognizing the right-of-use assets and corresponding lease liabilities included the expected lease term and the incremental borrowing rate. The expected lease term includes both contractual lease periods and, as applicable, extensions of the lease term when we have determined the exercise of the option to extend is reasonably certain to occur. The incremental borrowing rate was utilized to discount lease payments over the expected term given our operating leases do not provide an implicit rate. We estimated the incremental borrowing rate based on an analysis of corporate bond yields with a credit rating similar to us. The determination of our incremental borrowing rate requires management judgment, including development of a synthetic credit rating and cost of debt, as we currently do not carry any debt. We believe that the estimates used in determining the incremental borrowing rate are reasonable based upon facts and circumstances.
For additional details regarding the impact of adoption and disclosure, see Note 2 and Note 9 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
MSKCC Success Payments Liability
Under the MSKCC Agreement, we are obligated to make success payments and a change of control payment to MSKCC of up to $35.0 million, as discussed above. The liability associated with these potential success payments is accounted for at fair value as a long-term liability. The MSKCC success payments liability is estimated at fair value at inception and at each subsequent balance sheet date, and changes in the fair value of the liability are recognized as expense or income as part of “other income (expense)” in our consolidated statements of operations and comprehensive loss until the success payments liability is paid or expires. We estimated the fair value of the success payments liability to be equal to $1.7 million and $4.1 million as of December 31, 2022 and 2021, respectively. Change in the fair value of the MSKCC success payments liability of $2.4 million and ($1.4 million) was recognized in other income (expense) for the year ended December 31, 2022 and 2021, respectively.
To determine the estimated fair value of the MSKCC success payments liability, we use a Monte Carlo simulation methodology, which models the future movement of our stock price based on several key variables. The following variables were incorporated in the estimated fair value of the success payments liability: estimated term of the success payments, fair value of common stock, expected volatility, risk-free interest rate, and estimated number and timing of valuation measurement dates on the basis of which payments may be triggered. The computation of expected volatility was estimated using a combination of available information about the historical volatility of stocks of similar publicly traded companies for a period matching the expected term assumption and its historical and projected volatility. There are several valuation measurement dates that will occur subsequent to the filing of this Annual Report on Form 10-K, on the basis of which payments may be triggered.
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Income Taxes
We account for income taxes using the asset and liability method. We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our consolidated financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the consolidated financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Tax benefits related to uncertain tax positions are recognized when it is more likely than not that a tax position will be sustained during an audit. Interest and penalties related to unrecognized tax benefits are included within the provision for income tax.
Recently Issued Accounting Pronouncements
See Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information regarding recently issued accounting pronouncements.
Indemnification Agreements
As permitted under Delaware General Corporation Law and in accordance with our amended and restated bylaws, we indemnify our executive officers and directors for certain events or occurrences while such officer or director is or was serving in such capacity. We are also party to indemnification agreements with our executive officers, directors, and controller. We believe the fair value of the indemnification rights and agreements is minimal. Accordingly, we have not recorded any liabilities for these indemnification rights and agreements as of December 31, 2022.
Emerging Growth Company and Smaller Reporting Company Status
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS”) Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (a) are no longer an emerging growth company or (b) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements may not be comparable to those of companies that comply with the new or revised accounting pronouncements as of public company effective dates.
We expect to use the extended transition period for any other new or revised accounting standards during the period in which we remain an emerging growth company. As described in Recent Accounting Pronouncements in Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we have early adopted certain accounting standards, because the JOBS Act does not preclude an emerging growth company from adopting a new or revised accounting standard earlier than the time that such standard applies to private companies, to the extent early adoption is allowed by the accounting standard.
We are also a “smaller reporting company.” If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company, we may choose to present only the two most recent fiscal years of audited consolidated financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
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