PRECISION BIOSCIENCES INC 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many important factors, including those set forth in Part I. Item 1A. “Risk Factors” of this Annual Report on Form 10-K, our actual results could differ materially from the results described in, or implied by, these forward-looking statements. As used in this Annual Report on Form 10-K, unless the context otherwise requires, references to “we,” “us,” “our,” the “Company” and “Precision” refer to Precision BioSciences, Inc. and its subsidiaries on a consolidated basis. A discussion regarding our financial condition and results of operation for the year ended December 31, 2021 compared to the year ended December 31, 2020 is presented below. A discussion regarding our financial condition and results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019 is included under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on 10-K for the year ended December 31, 2020 filed on March 18, 2021 Overview We are a clinical stage gene editing company dedicated to improving life by developing ex vivo allogeneic CAR T immunotherapies and in vivo therapies for genetic and infectious diseases with the application of our wholly owned proprietary ARCUS genome editing platform. The foundation of ARCUS is a natural homing endonuclease which allows us to replicate precise gene editing as it evolved in nature. ARCUS is designed to be precise in its specificity and versatile in its design for gene knock out as well as complex edits with gene insertion and gene repair. ARCUS is also unique in its relatively small size which potentially allows delivery to a wider range of cells and tissues using viral and non-viral gene delivery methods. We believe our CAR T cells are the only allogeneic CAR T cells in human clinical trials made with a single gene editing step designed to specifically avoid the potentially deleterious effects of making multiple edits to T cells. We are simultaneously conducting a Phase 1/2a clinical trial evaluating PBCAR0191 as a potential first-in-class and a Phase 1 clinical trial evaluating PBCAR19B as, if approved, a potential best-in-class CD19-targeting CAR T cell therapies in adult patients with R/R, B-cell malignancies. Made from donor-derived T cells modified using our ARCUS genome editing technology, PBCAR0191 recognizes the well characterized tumor cell surface protein CD19, an important and validated target in several B-cell cancers, and PBCAR0191 is designed to avoid GvHD, a significant complication associated with donor-derived, cell-based therapies. We presented updated data from the PBCAR0191 study utilizing an enhanced lymphodepletion regimen in December 2021 at the 63rd ASH Annual Meeting. PBCAR19B is a novel immune-evading stealth cell candidate employing a single-gene edit in an effort to knock-down β2m designed for evading T cell rejection, while also inserting a HLA-E transgene to further evade rejection from natural killer cells. We initiated a clinical trial of PBCAR19B in patients with R/R NHL in mid-2021 and completed dosing at Dose Level one. We plan to commence dosing at the next dose level with clinical trial material from an optimized manufacturing process once released and expect to provide a program update in mid-2022. In January 2021, we closed the Development and License Agreement with Lilly to discover and develop in vivo gene editing product candidates incorporating our ARCUS nucleases. Lilly has initially nominated DMD, a genetic disease affecting the muscles. Lilly has also nominated a liver-directed target and a CNS directed target and has the right to nominate up to three additional gene targets over the first four years of the agreement. We will be responsible for conducting certain pre-clinical research and IND-enabling activities with respect to such gene targets. In April 2021, we entered into the Program Purchase Agreement with Servier, pursuant to which we reacquired all of our global development and commercialization rights previously granted to Servier pursuant to the Servier Agreement, and mutually terminated the Servier Agreement. This includes our two clinical stage CD19-targeting allogeneic CAR T candidates, PBCAR0191 and PBCAR19B stealth cell, as well as four additional product targets. In September 2021, we entered into an exclusive license agreement with Tiziana to evaluate foralumab, a fully human anti-CD3 mAb, as a lymphodepleting agent in conjunction with our allogeneic CAR T cells for the potential treatment of cancers. This agreement reflects our ongoing pursuit of a potential best-in-class allogeneic CAR T cell therapy. 93 In November 2021, we announced that we will not continue development of PBCAR20A based on data observed to date in a heterogeneous R/R NHL population previously treated with anti-CD20 monoclonal antibodies, as treatment with PBCAR20A did not result in compelling response rates in a Phase 1/2a clinical study . While this study provided important information regarding allogeneic CAR T dosing and lymphodepletion regimens, we intend to focus our clinical efforts in R/R lymphoma on CD19 targeting programs, as we believe CD19 is a more robust antigenic target in R/R heterogeneous NHL populations. All subjects enrolled in the study and evaluated for treatment with PBCAR20A had acceptable tolerability with no GvHD, no Grade ≥ 3 cytokine release syndrome, and no Grade ≥ 3 neurotoxicity. In December 2021, we announced that we entered into an agreement with a syndicate of investors led by ACCELR8 to separate our wholly owned Elo Life Systems subsidiary and create an independent food and agriculture business. The transaction enables us to focus exclusively on human therapeutics. We expect in vivo therapies for genetic and infectious diseases to be a significant focus of our operations long-term because the differentiated attributes of ARCUS are particularly advantageous for this type of application. In vivo gene correction involves the delivery of ARCUS nucleases directly into a patient’s cells to treat disease at the level of the underlying DNA. In vivo genome editing is more complex and challenging than ex vivo approaches like CAR T cells due to the need to safely deliver ARCUS directly to cells in the body. We believe that in vivo applications are particularly well suited to ARCUS because they require extremely low levels of off-target editing and efficient delivery. Looking ahead to the remainder of 2022 and beyond, we aim to further evaluate ARCUS clinically with the goal of positively impacting human health. In mid-2022, we plan to provide updates on PBCAR0191, PBCAR19B, and PBCAR269A. In the in vivo gene editing pipeline, we expect to submit three INDs or CTAs in the next three years, including trials to evaluate: PBGENE-PCSK9 for the treatment of FH, PBGENE-PH1 for the treatment of PH1 and PBGENE-HBV for the treatment of chronic HBV. In August 2021, we entered into a development and license agreement with iECURE, a mutation-agnostic in vivo gene editing company co-founded by James M. Wilson, M.D., Ph.D. Under the iECURE Agreement, iECURE will advance our wholly owned PBGENE-PCSK9 candidate through preclinical activities as well as a Phase 1 clinical trial in FH, with a CTA filing expected as early as the end of 2022. iECURE will also use our PCSK9-directed ARCUS nuclease to develop gene-insertion therapies for four other pre-specified rare genetic diseases, including OTC deficiency, Citrullinemia Type 1, PKU, and another program focused on liver disease . We received a partial equity stake in iECURE and are eligible to receive milestone and mid-single digit to low double digit royalty payments on sales of iECURE products developed with ARCUS. Pre-clinical research continues to progress for our wholly owned in vivo gene correction program applying ARCUS to knock out the HAO1 gene as a potential one-time treatment for PH1. In September 2021, we presented NHP data showing on average, a 98.0% reduction in HAO1 mRNA and a 97.9% reduction in the encoded protein after a single administration of an AAV vector encoding ARCUS. We have initiated IND-enabling activities and expect to submit an IND/CTA in 2023 for PBGENE-PH1 delivered by LNP. Our gene editing program for chronic HBV applies ARCUS to knock out persistent cccDNA and potentially reduce viral persistence. Previously reported preclinical data has shown that ARCUS efficiently targeted and degraded HBV cccDNA in HBV-infected primary human hepatocytes and reduced expression of HBsAg by as much as 95%. Similar levels of HBsAg reduction were observed in a newly developed mouse model of HBV infection following administration of ARCUS mRNA using LNP delivery. We expect to submit an IND/CTA in 2024 for our HBV program. Since our formation in 2006, we have devoted substantially all of our resources to developing ARCUS, conducting research and development activities, recruiting skilled personnel, developing manufacturing processes, establishing our intellectual property portfolio and providing general and administrative support for these operations. We have financed our operations primarily through proceeds from upfront and milestone payments from collaboration and licensing agreements, our IPO, private placements of our convertible preferred stock and convertible debt financings, at-the-market offerings of common stock, and borrowings on credit facilities. Since our inception, we have incurred significant operating losses and have not generated any revenue from the sale of products. Our ability to generate any product revenue or product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more of our product candidates or the product candidates of our collaborators for which we may receive milestone payments or royalties. As of December 31, 2021, we had an accumulated deficit of $316.7 million. We expect our operating expenses to increase substantially in connection with our ongoing CAR T clinical trials and the expansion of our in vivo product development programs and capabilities. We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for one of our product candidates or the product candidates of our collaborators for which we may receive milestone payments or royalties. If we obtain regulatory approval for any of our 94 product candidates, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing and distribution. In addition, we expect to continue to incur additional costs associated with operating as a public company. As a result of these anticipated expenditures, we will need additional financing to support our continuing operations. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our cash needs through a combination of public equity, debt financings or other sources, which may include current and new collaborations with third parties. Adequate additional financing may not be available to us on acceptable terms, or at all. Our inability to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We cannot assure you that we will ever generate significant revenue to achieve profitability. Because of the numerous risks and uncertainties associated with the development of therapeutic products, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be required to raise additional capital on terms that are unfavorable to us or we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. Impact of the COVID-19 Pandemic We are closely monitoring how the ongoing COVID-19 pandemic and variants thereof continues to affect our employees, business, preclinical studies and clinical trials. The Company has taken steps in line with guidance from the U.S. Centers for Disease Control and Prevention (“CDC”) and the State of North Carolina to protect the health and safety of its employees and the community. We have implemented measures to mitigate exposure risks and support operations. We initiated a health and safety program addressing mandatory use of face masks, mandatory vaccinations, social distancing, sanitary handwashing practices, use of personal protective equipment stations, stringent cleaning and sanitization of all facilities and measures to reduce total occupancy in facilities. We have also implemented temperature and symptom screening procedures at each location, and we have continuously communicated to all our Precisioneers that if they are not comfortable coming to work, regardless of role, then they do not have to do so. We are working closely with our clinical sites, physician partners and the patient community to monitor and manage the impact of the COVID-19 pandemic and variants thereof. We remain committed to our clinical programs and development plans, however, disruptions, competing resource demands and safety concerns caused by the COVID-19 pandemic and variants thereof have caused, and are likely to continue to cause delays in our clinical trial site activation and impact our ability to enroll patients. We may also experience other difficulties, disruptions or delays in conducting preclinical studies or initiating, enrolling, conducting or completing our planned and ongoing clinical trials, and we may incur other unforeseen costs as a result. We expect that the COVID-19 pandemic and variants thereof may continue to impact our business, including our preclinical studies and clinical trials. At this time, there is still significant uncertainty relating to the trajectory of the COVID-19 pandemic and variants thereof and impact of related responses. The impact of the COVID-19 pandemic and variants thereof on our preclinical studies and any further impact to our clinical trials will largely depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the pandemic, travel restrictions and social distancing in the United States and other countries, business closures or business disruptions, the ultimate impact of the COVID-19 pandemic and variants thereof on financial markets and the global economy, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease. The CARES Act was signed into law on March 27, 2020, which provides for, among other things, the deferral of the deposit and payment of certain taxes. Pursuant to the CARES Act, we continue to elect to defer payment of the employer’s share of social security taxes since May 1, 2020. See “ Risk Factors— The ongoing novel coronavirus disease, COVID-19 has impacted, and may continue to impact, our business, and any other pandemic, epidemic or outbreak of an infectious disease may materially and adversely impact our business, including our preclinical studies and clinical trials. ” In Part I. Item 1A. of this Annual Report on Form 10-K. Collaborations Eli Lilly and Company In November 2020, we entered into the Development and License Agreement with Lilly to utilize ARCUS for the research and development of potential in vivo therapies for genetic disorders. Lilly has initially nominated DMD and two gene targets for other genetic disorders, and has the right to nominate up to three additional gene targets for genetic disorders over the Nomination Period. Lilly may extend the Nomination Period for an additional two years from the date on which such initial Nomination Period ends, upon Lilly’s election and payment of an extension fee. Under the terms of the Development and License Agreement, Lilly will receive an exclusive license to research, develop, manufacture and commercialize the resulting licensed products to diagnose, prevent and treat any and all diseases by in vivo gene editing directed against the applicable gene target. The Development and License Agreement provides that we will be responsible for conducting certain pre-clinical research and IND-enabling activities with respect to the gene targets nominated by Lilly to be subject to the collaboration, including manufacture of initial clinical trial material for the first licensed 95 product. Lilly will be responsible for, and must use commercially reasonable efforts with respect to, conducting clinical development and commercialization activities for licensed products resulting from the collaboration, and may engage us for additional clinical and/or initial commercial manufacture of licensed products. In January 2021, we and Lilly closed the Development and License Agreement following clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”). In connection with the closing, we received an upfront cash payment of $100.0 million as well as $35.0 million from Lilly’s purchase of 3,762,190 newly issued shares of our common stock pursuant to a stock purchase agreement as described below (the “Stock Purchase Agreement”). We will also be eligible to receive milestone payments of up to an aggregate of $420.0 million per licensed product as well as nomination fees for additional targets and certain research funding. If licensed products resulting from the collaboration are approved and sold, we will also be entitled to receive tiered royalties ranging from the mid-single digit percentages to the low-teens percentages on world-wide net sales of the licensed products, subject to customary potential reductions. Lilly’s obligation to pay royalties to us expires on a country-by-country and licensed product-by-licensed product basis, upon the latest to occur of certain events related to expiration of patents, regulatory exclusivity or a period of ten years following first commercial sale of the licensed product. We have the right to elect to co-fund the clinical development of one licensed product, which may be selected from among the third or any subsequent licensed products to reach IND or CTA filing. If we elect to co-fund such licensed product, we would reimburse Lilly for a portion of the clinical development expenses for such product and, in exchange, each royalty tier with respect to net sales of such licensed product would be increased by a low single digit percentage. During the term of the Development and License Agreement, we may not (and may not license or collaborate with any third party to) research, develop, or commercialize any in vivo gene editing product directed against any gene targets that have been nominated and are subject to the Development and License Agreement. Unless earlier terminated, the Development and License Agreement will remain in effect on a licensed product-by-licensed product and country-by-country basis until the expiration of a defined royalty term for each licensed product and country. Lilly has the right to terminate the Development and License Agreement for convenience by providing advance notice to us. Either party may terminate the Development and License Agreement (i) for material breach by the other party and a failure to cure such breach within the time period specified in the agreement or (ii) due to a challenge to its patents brought by the other party. During the twelve months ended December 31, 2021 we recognized revenue under the agreement with Lilly of approximately $21.0 million. We did not recognize any revenue under the agreement with Lilly in 2020. Deferred revenue related to the agreement with Lilly amounted to $88.3 million as of December 31, 2021, of which $21.2 million was included in current liabilities. No deferred revenue related to the Lilly Agreement was recorded as of December 31, 2020. iECURE In August 2021, we entered into the iECURE Agreement, under which iECURE plans to advance our PBGENE-PCSK9 candidate through preclinical activities as well as a Phase 1 clinical trial as partial consideration for a license to our PCSK9-directed ARCUS nuclease to develop gene-insertion therapies for four other rare genetic diseases, including OTC deficiency, Citrullinemia Type 1, PKU, and another program focused on liver disease. Pursuant to the iECURE Agreement, we retain the rights to PBGENE-PCSK9, including all products developed for indications with increased risk of severe cardiovascular events such as FH. Simultaneously with the entry into the iECURE Agreement, we entered into an Equity Issuance Agreement with iECURE, pursuant to which iECURE granted us partial equity ownership in iECURE as partial consideration for the license to use its PCSK9-directed ARCUS nuclease. We concluded that the iECURE Equity Issuance Agreement is to be combined with the iECURE Agreement (together, the “iECURE Agreements”) for accounting purposes. Additionally, we are eligible to receive milestone and mid-single digit to low double digit royalty payments on sales of iECURE products developed with ARCUS. We assessed the iECURE Agreements in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”) and concluded that the promises in the iECURE Agreements represent a transaction with a customer. Further, we concluded that the iECURE Agreements contain the following promises: (i) the PCSK9 license and (ii) JSC Participation. The JSC participation was determined to be an immaterial promise as the time commitment and related cost associated with performance of JSC participation is expected to be inconsequential to the total consideration in the contract. Accordingly, we concluded that the promise of the PCSK9 license is the sole performance obligation in the iECURE Agreements. The fair value of the iECURE equity and the estimated fair value of the costs to be incurred by iECURE to progress our PBGENE-PCSK9 candidate through preclinical activities as well as a Phase 1 clinical trial were concluded to be non-cash consideration, and as such were included in the transaction price of the iECURE Agreements. We concluded the PCSK9 license represents functional intellectual property in accordance with ASC 606 given we will not be providing any additional services to iECURE outside of the right to use the PCSK9 license. Therefore, the fair value of the iECURE equity and the fair value of the costs to be incurred by 96 iECURE to progress our PBGENE-PCSK9 candidate through a Phase 1 clinical trial was recognized at the inception of the iECURE Agreements. The fair value of the iECURE equity at inception of the iECURE agreements was assessed to be $0.5 million and was initially recorded to the investment in equity securities line item of the consolidated balance sheets. As further discussed in Note 12 to the consolidated financial statements, “ Fair Value Measurements ” , on issuance, we elected to account for the iECURE equity at fair value under ASC 825, Financial Instruments (“ASC 825”). Accordingly, we adjust the carrying value of the iECURE equity to fair value each reporting period with any changes in fair value recorded to other income (expense). The fair value of the costs to be incurred by iECURE to progress our PBGENE-PCSK9 candidate through a Phase 1 clinical trial was assessed to be $17.4 million and was recorded to the prepaid expenses and other assets line items of the consolidated balance sheets. The PCSK9 Prepaid will be amortized to research and development expense on a pro-rata basis as iECURE incurs costs to progress our PBGENE-PCSK9 candidate through a Phase 1 clinical trial. During the year ended December 31, 2021, we recognized revenue under the iECURE agreements of $17.9 million and $4.4 million of research and development expense related to amortization of the PCSK9 Prepaid. As of December 31, 2021, the remaining balance of the PCSK9 Prepaid was $13.0 million, which is included in the prepaid expenses and other assets line items of the consolidated balance sheets in the amounts of $10.4 million and $2.6 million, respectively. Servier On April 9, 2021, we entered into the Program Purchase Agreement with Servier, pursuant to which we reacquired all of our global development and commercialization rights previously granted to Servier pursuant to the Servier Agreement, and mutually terminated the Servier Agreement. Pursuant to the Servier Agreement, we had developed certain allogeneic CAR T candidates, including PBCAR0191 and the stealth cell PBCAR19B, each targeting CD19, as well as four additional product targets. Pursuant to the Program Purchase Agreement, we regained full global rights to research, develop, manufacture and commercialize products resulting from such programs, with sole control over all activities. Additionally, per the terms of the Program Purchase Agreement we do not have an obligation to continue development of the Servier Targets. With respect to products directed to CD19, Servier has certain rights of negotiation, which may be exercised during a specified time period if we elect to initiate a process or entertain third party offers for partnering such products. Pursuant to the terms of the Program Purchase Agreement, we made a payment of $1.25 million in cash to Servier and agreed to waive earned milestones totaling $18.75 million that would have been otherwise payable to us. The $1.25 million cash payment to Servier is classified as research and development expense in the consolidated statement of operations for the year ended December 31, 2021. The waiver of earned milestones resulted in a $18.75 million reduction in accounts receivable and deferred revenue. The Program Purchase Agreement also requires us to make certain payments to Servier based on the achievement of regulatory and commercial milestones for each product, and a low- to mid-single-digit percentage royalty (subject to certain reductions) based on net sales of approved products, if any, resulting from any continued development and commercialization of the programs by us, for a period not to exceed ten years after first commercial sale of the applicable product in the United States or certain countries in Europe. If we enter into specified product partnering transactions, the Program Purchase Agreement requires us to pay to Servier a portion of certain consideration received pursuant to such product partnering transactions in lieu of the foregoing milestones (with the exception of a one-time clinical phase development milestone) and royalties. For additional discussion of accounting for payment obligations arising from the Program Purchase Agreement, refer to Note 7, “Commitments and Contingencies,” in the consolidated financial statements. Upon the closing of the Program Purchase Agreement, management concluded that the combined performance obligation associated with the Servier Agreement was fully satisfied as we are no longer required to perform research and development work on the Servier targets and we regained all of our global development and commercialization rights previously granted to under the Servier Agreement. Accordingly, all remaining deferred revenue related to the Servier agreement was recognized as revenue in the year ended December 31, 2021. Under the Servier Agreement, we recognized $72.9 million and $18.0 million in revenue during the years ended December 31, 2021 and December 31, 2020, respectively. No deferred revenue related to the Server Agreement was recorded as of December 31, 2021, while deferred revenue as of December 31, 2020 amounted to $82.9 million. Gilead In July 2020, Gilead notified us of its termination of the Gilead Agreement, to develop genome editing tools using ARCUS to target viral DNA associated with HBV. Pursuant to the termination notice, the Gilead Agreement terminated on September 4, 2020. Upon 97 termination, we regained full rights and all data we generated for the in vivo chronic HBV program developed under the Gilead Agreement. During the years ended December 31, 2021 and 2020, we recognized no revenue and approximately $3.9 million of revenue under the Gilead Agreement, respectively. The Company did not have deferred revenue related to the Gilead Agreement as of December 31, 2021 or December 31, 2020. No development or sales-based milestone payments were received under the Gilead Agreement. Tiziana In September 2021, we entered into an exclusive license agreement to evaluate Tiziana’s foralumab, a fully human anti-CD3 mAb, as a lymphodepleting agent in conjunction with our allogeneic CAR T cells for the potential treatment of cancers. We will investigate foralumab first in combination with an anti-CD19 CAR T and plan an IND update in 2022 to enable combination use. SpringWorks Therapeutics In September 2020, we entered into a Clinical Trial Collaboration Agreement with SpringWorks. Pursuant to such agreement, PBCAR269A will be evaluated in combination with nirogacestat, SpringWorks’ investigational GSI, in patients with R/R multiple myeloma. Under the terms of the agreement, we will bear all costs with the conduct of the clinical trial including providing PBCAR269A for use in the trial, and SpringWorks is responsible for providing nirogacestat at its sole cost and expense. The first patient was dosed in the combination arm in June 2021. Trustees of the University of Pennsylvania In January 2018, we entered into a research, collaboration and license agreement with Penn to collaborate on the preclinical development for gene editing products involving the delivery of an ARCUS nuclease. In April 2020, both parties agreed to coordinate a wind-down of all activities in their entirety under the agreement, effective as of June 2020, however, in August 2020 and subsequently in January 2021, both parties agreed to extend certain portions of the agreement through 2022. We will not be required to make termination payments to Penn. Components of Our Results of Operations Revenue To date, we have not generated any revenue from product sales and do not expect to generate any revenue from product sales in the foreseeable future. We record revenue from collaboration agreements, including amounts related to upfront payments, milestone payments, annual fees for licenses of our intellectual property and research and development funding. Research and Development Expenses Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts and the development of our product candidates. These include the following: • salaries, benefits and other related costs, including share-based compensation expense, for personnel engaged in research and development functions; • expenses incurred under agreements with third parties, including CROs and other third parties that conduct preclinical research and development activities and clinical trials on our behalf; • costs of developing and scaling our manufacturing process and manufacturing drug products for use in our preclinical studies and ongoing and future clinical trials, including the costs of CMOs, and our MCAT facility that will manufacture our clinical trial material for use in our preclinical studies and ongoing and potential future clinical trials; • costs of outside consultants, including their fees and related travel expenses; • costs of laboratory supplies and acquiring, developing and manufacturing preclinical study and clinical trial materials; • license payments made for intellectual property used in research and development activities; and • facility-related expenses, which include direct depreciation costs and expenses for rent and maintenance of facilities and other operating costs if specifically identifiable to research activities. We expense research and development costs as incurred. We track external research and development costs, including the costs of laboratory supplies and services, outsourced research and development, clinical trials, contract manufacturing, laboratory equipment 98 and maintenance and certain other development costs, by product candidate when the program IND application is accepted by the FDA . Internal and external costs associated with infrastructure resources, other research and development costs, facility related costs and depreciation and amortization that are not identifiable to a specific product candidate are included in the platform development and early-stage research expenses category. Research and development activities are central to our business model. We expect that our research and development expenses will continue to increase substantially for the foreseeable future and will comprise a larger percentage of our total expenses as we continue our clinical trials for our ex vivo allogeneic CAR T immunotherapies and development of our in vivo therapies for genetic and infectious diseases. These expected increases in research and development expenses related to development of human therapeutic product candidates are expected to be partially offset by reductions in research and development expenses related to food and agricultural product candidates as we completed the Elo transaction in 2021 and will no longer be contributing capital towards the development of food and agricultural product candidates. We cannot determine with certainty the duration and costs of ongoing and future clinical trials of our CD19, CD19B, and BCMA product candidates, or any other product candidate we may develop or if, when or to what extent we will generate revenue from the commercialization and sale of any product candidate for which we obtain marketing approval. We may never succeed in obtaining marketing approval for any product candidate. The duration, costs and timing of clinical trials and development of our CD19, CD19B, and BCMA product candidates, and any other our product candidate we may develop will depend on a variety of factors, including: • the scope, rate of progress, expense and results of clinical trials of our CD19, CD19B and BCMA product candidates, as well as of any future clinical trials of other product candidates and other research and development activities that we may conduct; • increased costs of additional clinical sites to address slowed enrollment due to the impact of the COVID-19 pandemic and variants thereof or any similar pandemic; • uncertainties in clinical trial design and patient enrollment rates; • the actual probability of success for our product candidates, including their safety and efficacy, early clinical data, competition, manufacturing capability and commercial viability; • significant and changing government regulation and regulatory guidance; • the timing and receipt of any marketing approvals; and • the expense of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in our clinical trials due to slower than expected patient enrollment or other reasons, we would be required to expend significant additional financial resources and time on the completion of clinical development. General and Administrative Expenses General and administrative expenses consist primarily of salaries and other related costs, including share-based compensation, for personnel in our executive, finance, business development, operations and administrative functions. General and administrative expenses also include legal fees relating to intellectual property and corporate matters; professional fees for accounting, auditing, tax and consulting services; insurance costs; travel expenses; and facility-related expenses, which include direct depreciation costs and expenses for rent and maintenance of facilities and other operating costs that are not specifically attributable to research activities. We expect that our general and administrative expenses will increase in the future to meet our growing infrastructure needs. Change in Fair Value of Equity Investment On issuance, we elected to account for the iECURE equity at fair value under ASC 825. Accordingly, the Change in fair value of equity investment represents the change in fair value of the iECURE equity investment between reporting periods. 99 Gain on Deconsolidation of Subsidiary The gain on deconsolidation of subsidiary was determined based on the difference between the book value of the net assets that we contributed to New Elo as part of the Elo Transaction as well as the fair value of the Promissory Note we received from New Elo and the fair value of our ownership in New Elo as of December 17, 2021. Income from Equity Method Investments Income from equity method investments represents our proportionate share of New Elo’s net income. Interest Income Interest income consists of interest income earned on our cash and cash equivalents and Note Receivable. Income Taxes Since our inception in 2006, we have generated cumulative federal and state NOL and R&D credit carryforwards for which we have not recorded any net tax benefit due to the uncertainty around utilizing these tax attributes within their respective carryforward periods. As of December 31, 2021, we had federal, state, and foreign NOL carryforwards of $181.0 million, $122.2 million, and $0.4 million, respectively, which may be available to offset future taxable income. A portion of the U.S. federal NOL carryforwards in the amount of $19.7 million will begin to expire in 2030 while the remaining federal NOL carryforwards of $161.2 million carry forward indefinitely. The state NOL carryforwards begin to expire in 2025. The foreign NOLs carryforward indefinitely. As of December 31, 2021, we also had federal R&D tax credit carryforwards of $11.4 million, which begin to expire in 2027, and an amount less than $0.1 million, which begin to expire in 2030. As of December 31, 2021 and December 31, 2020, we had federal Orphan Drug credits of $9.5 million and $6.0 million, respectively, which begin to expire in 2038. As of December 31, 2021, we also have federal contribution carryforwards of $0.2 million, which begin to expire in 2022. We have recorded a full valuation allowance against our net deferred tax assets at each balance sheet date. Results of Operations Comparison of the Years Ended December 31, 2021 and December 31, 2020 The following table summarizes our results of operations for the years ended December 31, 2021 and December 31, 2020, together with the changes in those items in dollars: Years ended December 31, (in thousands) 2021 2020 Change Revenue $ 115,529 $ 24,285 $ 91,244 Operating expenses: Research and development 115,238 98,061 17,177 General and administrative 39,693 36,052 3,641 Total operating expenses 154,931 134,113 20,818 Loss from operations (39,402 ) (109,828 ) 70,426 Other income (expense), net: Gain on changes in fair value 2,555 — 2,555 Gain on deconsolidation of subsidiary 5,985 — 5,985 Income from equity method investments 184 — 184 Interest expense (132 ) — (132 ) Interest income 208 822 (614 ) Total other income (expense), net 8,800 822 7,978 Net loss $ (30,602 ) $ (109,006 ) $ 78,404 Revenue Revenue for the year ended December 31, 2021 was $115.5 million, compared to $24.3 million for the year ended December 31, 2020. The increase of $91.2 million in revenue during the year ended December 31, 2021 was the result of a $54.8 million increase in revenue recognized under the Servier Agreement as the performance obligation was deemed fully satisfied upon the execution of the Program Purchase Agreement, a $21.0 million increase in revenue recognized under the Lilly Agreement as work began in 2021, a 100 $ 17.9 million increase in revenue recognized under the iECURE Agreement as the iECURE Agreement was executed in 2021 , and a $2.9 million increase in revenue recognized from a n agricultural partnering collaboration . These increases in revenue were partially offset by a $3.9 million decrease in revenue recognized from Gilead due to the termination of the Gilead Agreement in 2020 and a $1.5 million decrease in milestone revenue recognized from an agriculture industry collaboration partner. Research and Development Expenses Years ended December 31, (in thousands) 2021 2020 Change Direct research and development expenses by product candidate: CD19 external development costs $ 8,486 $ 8,586 $ (100 ) CD20 external development costs 3,666 6,660 (2,994 ) BCMA external development costs 3,337 3,144 193 CD19B external development costs 2,948 — 2,948 Platform development and early-stage research expenses: Employee-related costs 41,620 37,301 4,319 Program Purchase Agreement costs and contract liability 11,250 — 11,250 Amortization of PCSK9 Prepaid 4,421 — 4,421 Laboratory supplies and services 14,529 12,225 2,304 Sublicensing royalty payable to Duke 1,111 — 1,111 Outsourced research and development 2,336 7,514 (5,178 ) CMOs and research organizations 5,347 7,730 (2,383 ) Laboratory equipment and maintenance 2,065 1,412 653 Facility-related costs 3,562 3,354 208 Depreciation and amortization 7,574 7,441 133 Licensing fees 2,585 2,415 170 Other research and development costs 401 279 122 Total research and development expenses $ 115,238 $ 98,061 $ 17,177 Research and development expenses for the year ended December 31, 2021 were $115.2 million, compared to $98.1 million for the year ended December 31, 2020. The increase of $17.1 million was primarily due to a $17.1 million increase in platform development and early-stage research expenses, a $2.9 million increase in external development costs for our CD19B program as the CD19B Phase 1 clinical trial commenced in June 2021, and a $0.2 million increase in external development costs for our BCMA program, partially offset by decreases of $3.0 million in CD20 external development costs as development of PBCAR20A has been discontinued, and a $0.1 million decrease in CD19 external development costs. Platform development and early-stage research expenses increased primarily due to a $11.3 million increase in expenses related to the Program Purchase Agreement in which a $10.0 million financial contract liability was accrued as it was deemed probable to occur and the $1.3 million cash payment to Servier, $4.4 million in expense related to amortization of the iECURE PCSK9 prepaid as a result of costs incurred by iECURE in the year ended December 31, 2021 to progress the Company’s PBGENE-PCSK9 candidate through a Phase 1 clinical trial , a $4.3 million increase in employee-related expense associated with increased wages and share-based compensation expense, a $3.0 million increase in laboratory-related expenses, a $1.1 million sublicensing royalty payable to Duke on the Lilly upfront payment received. These increases in platform development and early-stage research expenses were partially offset by a $5.2 million decrease in outsourced research and development expense, and a $2.4 million decrease in CMO and research organization expense as costs associated with our CD19B program were allocated directly to the program beginning in 2021. General and Administrative Expenses General and administrative expenses were $39.7 million for the year ended December 31, 2021 compared to $36.1 million for the year ended December 31, 2020. The increase of $3.6 million was primarily due to an increase of $3.9 million in employee-related expense associated with increased wages, share-based compensation, and recruiting costs for key management personnel, a $0.6 million increase in information technology expenses, and a $0.5 million increase in insurance expense, partially offset by a $1.5 million decrease in legal fees. Gain on Changes in Fair Value The gain on changes in fair value was $2.6 million for the year ended December 31, 2021. The change in fair value is primarily attributed to an increase in the assessed fair value of our equity investment in iECURE from issuance in August 2021 to December 31, 2021. No change in fair value was recorded in the year ended December 30, 2020 as we did not account for any assets or liabilities at fair value in the consolidated balance sheets in the year ended December 31, 2020. 101 Gain on Deconsolidation of Subsidiary The Gain on Deconsolidation of Subsidiary was $6.0 million for the year ended December 31, 2021 and represents the difference between the book value of the net assets that we contributed to New Elo as part of the Elo Transaction and the sum of the fair value of the Promissory Note we received from New Elo and the fair value of our Ownership in New Elo as of December 17, 2021. There was no gain on deconsolidation in the year ended December 31, 2020 as the Elo Transaction occurred in December 2021, and there were no such transactions that occurred in the year ended December 31, 2020. Income from Equity Method Investments Income from equity method investments was $0.2 million and represents our proportionate share of New Elo’s net income from December 18, 2021 through December 31, 2021. We did not have any equity method investments in the year ended December 31, 2020. Interest Expense Interest expense was $0.1 million for the year ended December 31, 2021 consists of interest payments and debt discount amortization on debt outstanding during the year ended December 31, 2021. No interest expense was incurred during the year ended December 31, 2020. Interest Income Interest income was $0.2 million for the year ended December 31, 2021 compared to $0.8 million for the year ended December 31, 2020. The decrease of $0.6 million of interest income generated on our cash and cash equivalent balances was the result of lower interest rates in the year ended December 31, 2021, compared to the year ended December 31, 2020, partially offset by interest income earned on the Note Receivable that was issued in the year ended December 31, 2021. Segment Results The following tables summarize segment revenues and segment operating loss (see Note 14, “Segment Reporting,” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information regarding our segments): For the Years Ended December 31, (in thousands) 2021 2020 Revenue: Therapeutics $ 111,723 $ 21,863 Food 3,806 2,422 Total segment revenue 115,529 24,285 Segment operational cash expenditures: Therapeutics $ 79,746 $ 71,841 Food 7,635 7,587 Total segment operational cash expenditures 87,381 79,428 Segment operating income (loss): Therapeutics $ 31,977 $ (49,978 ) Food (3,829 ) (5,165 ) Total segment operating income (loss) $ 28,148 $ (55,143 ) Prior to the Elo Transaction on December 17, 2021, we evaluated the operating performance of our Therapeutics and Food segments based on segment operating income (loss). Segment operating income (loss) is derived by deducting operational cash expenditures, net, from GAAP revenue. Operational cash expenditures are cash disbursements made that are specifically identifiable to the reportable segment (including specifically identifiable research and development and property, equipment and software expenditures). The reportable segment operational cash expenditures include cash disbursements for compensation, laboratory supplies, purchases of property, equipment and software and procuring services from CROs, CMOs and research organizations. We did not allocate general operational expenses or non-cash income statement amounts to our reportable segments. 102 Therapeutics Segment Revenue for the year ended December 31, 2021 was $111.7 million, compared to $21.9 million for the year ended December 31, 2020. The increase of $89.8 million was the result of a $54.8 million increase in revenue recognized under the Servier Agreement as the performance obligation was deemed fully satisfied upon the execution of the Program Purchase Agreement, a $21.0 million increase in revenue recognized under the Lilly Agreement as work began in 2021, and a $17.9 million increase in revenue recognized under the iECURE Agreement as the iECURE Agreement was executed in 2021. These increases in revenue were partially offset by a $3.9 million decrease in revenue recognized from Gilead due to the termination of the Gilead Agreement in 2020. Segment operational cash expenditures were $79.7 million for the year ended December 31, 2021, compared to $71.8 million for the year ended December 31, 2020. The increase of $7.9 million in operational cash expenditures was primarily due to an increase in employee-related costs, payments under the Duke License, and the payment made to Servier in connection with the Program Purchase Agreement. These were partially offset by a decrease in capital expenditures for fixed assets and a reduction in payments to external vendors for early-stage research. Segment operating profit increased $82.0 million from a $50.0 million operating loss for the year ended December 31, 2020 to a $32.0 million operating profit for the year ended December 31, 2021 primarily due to the factors discussed above. Food Segment Revenue for the year ended December 31, 2021 was $3.8 million, compared to $2.4 million for the year ended December 31, 2020. The increase of $1.4 million was the result of a $2.9 million increase in revenue recognized from an agricultural partnering collaboration partially offset by a $1.5 million decrease in milestone revenue recognized from an agriculture industry collaboration partner. Segment operational cash expenditures were $7.6 million for the years ended December 31, 2021 and December 31, 2020. Segment operating loss decreased $1.4 million from $5.2 million for the year ended December 31, 2020 to $3.8 million for the year ended December 31, 2021 primarily due to the factors discussed above. Due to the completion of the Elo Transaction in December 2021, we no longer expect to generate revenue or incur cash expenditures related to the development of food and agricultural product candidates. Liquidity and Capital Resources Since our inception, we have incurred significant operating losses. We expect to incur significant expenses and operating losses for the foreseeable future as we advance the preclinical and clinical development of our product candidates. We expect that our research and development and general and administrative costs will continue to increase, including in connection with conducting preclinical studies and clinical trials for our product candidates, contracting with CROs and CMOs, the addition of laboratory equipment to MCAT in support of preclinical studies and clinical trials, expanding our intellectual property portfolio and providing general and administrative support for our operations. As a result, we will need additional capital to fund our operations, which we may obtain from additional equity or debt financings, collaborations, licensing arrangements or other sources. There are no assurances that we will be successful in obtaining an adequate level of financing as and when needed to finance our operations on terms acceptable to us or at all, particularly in light of the economic downturn and ongoing uncertainty related to the COVID-19 pandemic and variants thereof. If we are unable to secure adequate additional funding as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more product candidates. In addition, the magnitude and duration of the COVID-19 pandemic and variants thereof and its impact on our liquidity and future funding requirements remains uncertain as of the filing date of this Annual Report on Form 10-K, as the pandemic continues to evolve globally. See “Impact of the COVID-19 Pandemic” above and “ Risk Factors— The ongoing novel coronavirus disease, COVID-19 has impacted, and may continue to impact, our business, and any other pandemic, epidemic or outbreak of an infectious disease may materially and adversely impact our business, including our preclinical studies and clinical trials” in Part I. Item 1A. of this Annual Report on Form 10-K for a further discussion of the potential impact of the COVID-19 pandemic and its variants on our business. We do not currently have any approved products and have never generated any revenue from product sales. Through the date of filing this Annual Report on Form 10-K, we have financed our operations primarily through proceeds from upfront and milestone payments from collaboration and licensing agreements, our IPO, private placements of our convertible preferred stock and convertible debt financings, at-the-market offerings of common stock, and borrowings on credit facilities. As of December 31, 2021, we had raised approximately $659.4 million of proceeds from third parties through a combination of financings including our IPO, preferred stock and convertible note financings, at-the-market offerings of common stock as part of our shelf registration statement, upfront and milestone payments from customers, and funding from other strategic alliances and grants. 103 We also currently have an effective shelf registration statement on Form S-3 (No. 333-238857) filed with the SEC on June 1, 2020 (the “Form S-3”) under which we may offer from time to time in one or more offerings any combination of common and preferred stock, debt securities, warrants and units of up to $200.0 million in the aggregate. As of December 31, 202 1 , we had sold 2,322,676 shares of our common stock in at-the-market offerings as part of our shelf registration statement, resulting in net proceeds of $ 25. 5 million , after deducting agent commissions and issuance costs. Cash Flows Our cash and cash equivalents totaled $143.7 million as of December 31, 2021, compared to $89.8 million as of December 31, 2020. The following table summarizes our sources and uses of cash for the periods presented: For the Years Ended December 31, (in thousands) 2021 2020 Net cash used in operating activities $ (10,853 ) $ (87,386 ) Net cash used in investing activities (5,803 ) (5,031 ) Net cash provided by financing activities 70,521 1,329 Increase (decrease) in cash and cash equivalents $ 53,865 $ (91,088 ) Cash Used in Operating Activities Our primary use of cash is to fund operating expenses, which consist primarily of research and development and general and administrative expenses. Our losses have resulted from expenses incurred in connection with our research and development activities, including our clinical programs, preclinical development activities, and general and administrative costs associated with our operations. The use of cash in operating activities during the years ended December 31, 2021 and December 31, 2020 resulted from our net loss adjusted for non-cash items and changes in working capital. Cash used in operating activities during the year ended December 31, 2021 was $10.9 million, compared to $87.4 million during the year ended December 31, 2020. The decrease in cash used in operating activities in the year ended December 31, 2021 was primarily driven by the $100.0 million upfront payment received from Lilly in January 2021, partially offset by increases in employee-related costs. Cash Used in Investing Activities Cash used in investing activities primarily relates to cash expenditures to acquire leasehold additions, equipment, software, and intangible assets. Net cash used in investing activities during the year ended December 31, 2021 was $5.8 million, compared to $5 million in the year ended December 31, 2020. The increase in cash used in investing activities during the year ended December 31, 2021 was primarily driven by a $0.8 million cash expenditure for the license to evaluate Tiziana’s foralumab as a lymphodepletion agent in conjunction with our allogeneic CAR T therapeutics, which was capitalized as an intangible asset. Cash Provided by Financing Activities Net cash provided by financing activities during the year ended December 31, 2021 was $70.5 million, compared to $1.3 million during the year ended December 31, 2020. The higher cash provided by financing activities during the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to the $35.0 million in proceeds received under the Stock Purchase Agreement with Lilly, $25.5 million in net proceeds received from sales of our common stock under our shelf registration statement , a $6.1 million increase in proceeds from stock option exercises and $2.5 million in net proceeds received from borrowings on our revolving credit facility. Debt Obligations On May 19, 2021, Elo entered into a loan and security agreement with PWB for a term loan (the “Elo Loan”) in the amount of $2.5 million. On December 14, 2021, the Company repaid all outstanding principal and interest on the Elo Loan with proceeds from the Revolving Line. We may request advances on the Revolving Line up to an aggregate principal of $30.0 million. The Revolving Line matures and all outstanding principal amounts are due on June 23, 2023. The Company must also maintain an aggregate balance of unrestricted cash at PWB (not including amounts in certain specified accounts) equal to or greater than $10.0 million. The interest rate on Revolving 104 Line borrowings is a variable annual rate equal to the greater of (a) 2.75% above the Prime Rate (as defined in the Revolving Line ), or (b) 6.00%. As of December 31, 2021, the outstanding principal balance on the Revolving Line was $2.5 million . Funding Requirements Our operating expenses increased substantially in 2021 and are expected to continue to increase in the short term in connection with the continuation of our current clinical trials and in the long term with planned initiation of additional clinical trials, expected IND and CTA filings, potential BLA filings and expected growth in our ex vivo and in vivo portfolios. We believe that, as of the date of this Annual Report on Form 10-K, existing cash and cash equivalents, expected operational receipts and available credit will allow us to fund our operating expense and capital expenditure requirements into mid-2023 . We have based these estimates on assumptions that may prove to be imprecise, and we could utilize our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, it is difficult to estimate with certainty the amount of our working capital requirements. Our future funding requirements will depend on many factors, including: • the progress, costs and results of our clinical development for our CD19, CD19B, and BCMA programs as we progress clinical trials, including CRO costs; • the progress, costs and results of our additional research and preclinical development programs including our in vivo pipeline and our planned IND or CTA submissions; • the outcome, timing and cost of meeting regulatory requirements established by the FDA and other comparable foreign regulatory authorities; • the costs and timing of internal process development and manufacturing scale-up activities and contract with CMOs associated with our CD19, CD19B, and BCMA programs and other programs we advance through preclinical and clinical development; • our ability to establish and maintain strategic collaborations, licensing or other agreements and the financial terms of such agreements; • the scope, progress, results and costs of any product candidates that we may derive from ARCUS or any other product candidates we may develop alone or with collaborators; • the extent to which we in-license or acquire rights to other products, product candidates or technologies; • the costs and timing of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against any intellectual property-related claims; and • the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any product candidates for which we or our collaborators obtain marketing approval. Until such time, if ever, that we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through a combination of public or private equity or debt financings, collaboration agreements, other third‑party funding, strategic alliances, licensing arrangements and marketing and/or distribution arrangements. See “ Risk Factors – We will need substantial additional funding, and if we are unable to raise a sufficient amount of capital when needed on acceptable terms, or at all, we may be forced to delay, reduce or eliminate some or all of our research programs, product development activities and commercialization efforts.” in Part I, Item 1A. of this Annual Report on Form 10-K for a further discussion of our ability to generate and obtain adequate amounts of funding in connection with our continuing operations. To the extent that we raise additional capital through the sale of equity or convertible debt securities, shareholders’ ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our shareholders. Debt financing and preferred equity financing, if available, may involve agreements that include 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 funds through other third-party funding, collaboration agreements, strategic alliances, licensing arrangements or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, product development and research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves. 105 Contractual Obligations The following is a summary of our contractual obligations and commitments as of December 31, 2021: Payments Due by Period (in thousands) Total Less Than 1 Year 1-3 Years 3-5 Years More than 5 Years Lease Obligations ( 1) $ 10,563 $ 2,743 $ 4,929 $ 2,148 $ 743 Revolving Line of Credit ( 2) 2,727 150 2,577 - - Total $ 13,290 $ 2,893 $ 7,506 $ 2,148 $ 743 (1 ) Represents future minimum lease payments under our leases for office and/or lab space at the following locations: 302 East Pettigrew Street, Durham, North Carolina expiring in July 2024, and 20 TW Alexander Drive, Research Triangle Park, North Carolina expiring in August 2027. The lease obligations amounts above also represent future minimum lease payments on the MCAT Expansion Space as we are contractually obligated to make such payments on the MCAT Expansion Space notwithstanding that the lease commencement date for accounting purposes was not reached as of December 31, 2021 (see Note 7, “Commitments and Contingencies,” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information on our lease agreements). ( 2 ) Represents principal and estimated interest payments on our $2.5 million in outstanding Revolving Line borrowings as of December 31, 2021. Under the Revolving Line we may request advances up to an aggregate principal of $30.0 million. The revolving line matures on June 23, 2023 and bears interest at a variable annual rate equal to the greater of (a) 2.75% above the Prime Rate (as defined in the Original Agreement), and (b) 6.00%. As of December 31, 2021, the stated interest rate on the Revolving line was 6.0% and the effective interest rate was 6.8%. If the Revolving Line is terminated prior to the maturity date, we are required to pay an early termination fee equal to $0.6 million. Upon maturity or termination of the revolving line, we are required to pay an amount equal to 1% of the maximum principal amount of the advances outstanding at any time. We also enter into contracts in the normal course of business with CROs, CMOs, universities and other third parties for preclinical research studies, clinical trials and testing and manufacturing services. These contracts do not contain minimum purchase commitments and are cancelable by us upon prior written notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including non-cancelable obligations of our service providers, up to the date of cancellation. These payments are not included in the table above as the amount and timing of such payments are not known. Critical Accounting Policies and Use of Estimates Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, costs and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in the notes to our consolidated financial statements included elsewhere 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 Our revenues are generated primarily through collaborative research, license, development and commercialization agreements. The terms of these agreements generally contain multiple elements, or deliverables, which may include (1) licenses, or options to obtain licenses, to use our technology, (2) research and development activities to be performed on behalf of the collaborative partner, and (3) in certain cases, services in connection with the manufacturing of preclinical and clinical material. Payments we receive under these arrangements typically include one or more of the following: non-refundable, upfront license fees; option exercise fees; funding of research and/or development efforts; clinical and development, regulatory, and sales milestone payments; and royalties on future product sales. We classify payments received under these agreements as revenues within our consolidated statements of operations. 106 ASC 606 applies to all contracts with customers, except for contracts that are within the scope of other standards. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. At contract inception, once the contract is determined to be within the scope of ASC 606, we evaluate the performance obligations promised in the contract that are based on goods and services that will be transferred to the customer and determine whether those obligations are both (i) capable of being distinct and (ii) distinct in the context of the contract. Goods or services that meet these criteria are considered distinct performance obligations. If both these criteria are not met, the goods and services are combined into a single performance obligation. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally considered options. We assess if these options provide a material right to the customer and, if so, these options are considered performance obligations. The exercise of a material right is accounted for as a contract modification for accounting purposes. We recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) each performance obligation is satisfied at a point in time or over time, and if over time this is based on the use of an output or input method. Invoices issued as stipulated in contracts prior to revenue recognition are recorded as deferred revenue. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue within current liabilities in our consolidated balance sheets. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as noncurrent deferred revenue. Amounts recognized as revenue, but not yet invoiced are generally recognized as contract assets in the other current assets line item in our consolidated balance sheets. Milestone Payments – If an arrangement includes development and regulatory milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price 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. Milestone payments that are not within our control or the licensee’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received. Royalties – For arrangements that include sales-based royalties, including milestone payments based on a level of sales, which are the result of a customer-vendor relationship and for which the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, we have not recognized any royalty revenue resulting from any of our licensing arrangements. Significant Financing Component – In determining the transaction price, we adjust consideration for the effects of the time value of money if the timing of payments provides us with a significant benefit of financing. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensees and the transfer of the promised goods or services to the licensees will be one year or less. We assessed each of our revenue arrangements in order to determine whether a significant financing component exists and concluded that a significant financing component does not exist in any of our arrangements. Collaborative Arrangements – We have entered into collaboration agreements, which are within the scope of ASC 606, to discover, develop, manufacture and commercialize product candidates. The terms of these agreements typically contain multiple promises or obligations, which may include: (1) licenses, or options to obtain licenses, to use our technology, (2) research and development activities to be performed on behalf of the collaboration partner, and (3) in certain cases, services in connection with the manufacturing of preclinical and clinical material. Payments we receive under these arrangements typically include one or more of the following: non-refundable, upfront license fees; option exercise fees; funding of research and/or development efforts; clinical and development, regulatory, and sales milestone payments; and royalties on future product sales. We analyze our collaboration arrangements to assess whether they are within the scope of ASU No. 2018-18 Collaborative Arrangements , or ASC 808, to determine whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. For collaboration arrangements within the scope of ASC 808 that contain multiple elements, we first determine 107 which elements of the collaboration are deemed to be within the scope of ASC 808 and those that are more reflective of a vendor-customer relationship and, therefore, are within the scope of ASC 606. For elements of collaboration arrangements that are accounted for pursuant to ASC 808, an appropriate recognition method is determined and applied consistently, generally by analogy to ASC 606. For those elements of the arrangement that are accounted for pursuant to ASC 606, we apply the five-step model described above. Revenue related to performance obligations satisfied over time could be materially impacted as a result of changes in the estimated research effort to satisfy performance obligations or changes in the transaction price related to variable consideration. For example, in in the year ended December 31, 2021, we recorded cumulative catch up adjustments on that increased revenue recognition by $61.2 million as a result of changes in the transaction price related to variable consideration for development milestones as well as changes in total estimated effort required to satisfy performance obligations. If we were to increase total estimated effort required to satisfy the performance obligations related to the agreement with Lilly by 10%, it would result in a cumulative catch up adjustments that decrease revenue recognition by $1.9 million. Alternatively, if we were to decrease total estimated effort required to satisfy the performance obligations related to the agreement with Lilly by 10%, it would result in a cumulative catch up adjustments that increase revenue recognition by $2.3 million. Accrued Research and Development Expenses As part of the process of preparing our consolidated financial statements, we are required to make certain estimates and judgements in our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. Actual costs incurred could differ materially from estimates. Examples of estimated accrued research and development expenses include fees paid to the following: • CROs and other third parties in connection with performing research and development activities, conducting preclinical studies and clinical trials on our behalf; • Vendors in connection with preclinical development activities; and • CMOs and other vendors in connection with product manufacturing and development and distribution of preclinical supplies. We base our expenses related to preclinical studies on our estimates of the services received and efforts expended pursuant to quotes and contracts with CROs that conduct and manage preclinical studies and clinical trials and CMOs that manufacture product for our research and development activities on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. In accruing fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or amount of prepaid expense accordingly. Share-Based Compensation We measure stock options and other share-based awards granted to our employees, directors, consultants and advisors based on the fair value on the date of the grant and recognize compensation expense for those awards, net of actual forfeitures, over the requisite service period, which is generally the vesting period of the respective award. We estimate the fair value of each stock option grant on the date of grant using the Black-Scholes option-pricing model, which uses as inputs the fair value of our common stock and assumptions we make for the expected volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield. As we have limited trading history, we estimate our expected volatility based on the historical volatility of publicly traded peer companies and expect to continue to do so until such time as we have adequate historical data regarding the volatility of our traded share price. The expected term of our options has been determined utilizing a weighted value considering actual exercise history and estimated expected term based on the midpoint of final vest date and expiration date. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future. 108 Recent Accounting Pronouncements A description of recent accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in Note 1, “Description of Business and Summary of Significant Accounting Policies,” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Emerging Growth Company Status We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of reduced reporting requirements that are otherwise applicable to public companies. Section 107 of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with those standards. We have elected to take advantage of the extended transition period for complying with new or revised accounting standards. As an “emerging growth company,” we are also exempted from having to provide an auditor attestation of internal control over financial reporting under Sarbanes-Oxley Act Section 404(b). We will remain an “emerging growth company” until the earliest of (1) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more, (2) December 31, 2024, (3) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years or (4) the date on which we are deemed to be a large accelerated filer under the rules of the SEC, which means the market value of our common stock held by non-affiliates exceeds $700 million as of the prior June 30th, we have been a public company for at least 12 months and have filed one Annual Report on Form 10-K.