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 elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” (Part I, Item 1A) section of this Annual Report, our actual results could differ materially from the results described in or implied by these forward-looking statements. You should carefully read the “Risk Factors” (Part I, Item 1A) section of this Annual Report to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled “Special Note Regarding Forward-Looking Statements.”
Overview
We are a biopharmaceutical company focused on the development of targeted oncology therapies. We believe that the pursuit of novel or underexplored targets will be central to the next generation of transformative therapies. For that reason, we pursue therapeutics that we believe have best-in-class or first-in-class potential. Our goal is to establish a broad pipeline of preclinical and clinical assets which we can efficiently develop through successive value inflection points. To support that goal, we pair business development activity with significant investment in our internal discovery programs.
We are advancing a named pipeline comprising one clinical and three preclinical assets. The clinical asset is AL102, an investigational gamma secretase inhibitor, currently under evaluation in a Phase 3 trial for the treatment of desmoid tumors. The preclinical assets are IM-1021, a receptor tyrosine kinase-like orphan receptor 1, or ROR1, antibody-drug conjugate, or ADC; IM-3050, a fibroblast activation protein, or FAP, targeted radioligand therapy, or RLT, candidate; and IM-4320, an anti-IL-38 immunotherapy candidate. We anticipate submitting investigational new drug applications, or INDs, for IM-3050 and IM-1021 in the first quarter of 2025 and for IM-4320 at a later date. We believe that each of these drugs has the potential to improve outcomes for patients across multiple indications.
Recent Events
Collaboration with AbbVie
In January 2023, we entered into a collaboration and option agreement, or the Collaboration Agreement, with AbbVie. As part of the agreement, we will use our discovery platform to discover and validate targets derived from patients with three specified tumor types, and antibodies that bind to such targets, which may be the subject of further development and commercialization by AbbVie. The research term is at least 66 months, subject to extension in certain circumstances by specified extension periods. Under the Collaboration Agreement, AbbVie paid us an upfront payment of $30.0 million in January 2023 and may pay us certain additional platform access payments in the aggregate amount of up to $70.0 million based on our use of our discovery platform in connection with activities under each stage of the research plan, and delivery of VTPs (as defined in the Collaboration Agreement) to AbbVie. AbbVie will also pay an option exercise fee in the low single digit millions for each of the up to 10 VTPs for which it exercises an option. If AbbVie progresses development and commercialization of a Product (as defined in the Collaboration Agreement), AbbVie will pay us development and first commercial sale milestones of up to $120.0 million per target, and sales milestones based on achievement of specified levels of net sales of Products of up to $150.0 million in the aggregate per target, in each case, subject to specified deductions in certain circumstances. On a Product-by-Product basis, AbbVie will pay us tiered royalties on net sales of Products at a percentage in the low single digits, subject to specified reductions and offsets in certain circumstances. We are potentially eligible to receive up to approximately $2.8 billion from AbbVie under the Collaboration Agreement from the sources described above.
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Merger
In October 2023, we completed the merger with Morphimmune Inc., or Morphimmune a preclinical biotechnology company focused on developing targeted oncology therapeutics. Under the terms of the Agreement and Plan of Merger and Reorganization dated as of June 28, 2023, or the Merger Agreement, among the Company, Morphimmune and Ibiza Merger Sub, Inc., a wholly owned subsidiary of us, or Merger Sub, Morphimmune merged with and into Merger Sub, with Morphimmune surviving as a wholly-owned subsidiary of us, or the Merger. In connection with the Merger, on October 2, 2023, we issued and sold 21,690,871 shares of our common stock pursuant to the subscription agreements in a Private Investment in Public Equity, or PIPE, transaction which provided us with gross proceeds of $125.0 million.
Atreca, Inc. Asset Purchase Agreement
In December 2023, we entered into an asset purchase agreement, or the Atreca Purchase Agreement, with Atreca, Inc., or Atreca, pursuant to which we will acquire certain antibody-related assets and materials for an upfront payment of $5.5 million and up to $7.0 million in clinical development milestones. The closing of the transaction is subject to customary conditions, including the approval of Atreca’s stockholders. We expect the closing to occur in the second quarter of 2024.
Zentalis Pharmaceuticals, Inc License Agreement
In January 2024, we entered into a license agreement with Zentalis Pharmaceuticals, Inc., or the Zentalis Agreement, pursuant to which we received an exclusive, worldwide, royalty-bearing, sublicensable license under certain intellectual property relating to Zentalis’ proprietary antibody-drug conjugate, or ADC, platform technology, ROR1 antibodies and ADCs targeting ROR1 to exploit products covered by or incorporating the licensed intellectual property rights. Under the Zentalis Agreement, we are required to use commercially reasonable efforts to develop an ADC targeting ROR1, two additional ADCs, and commercialize any product that has received regulatory approval.
Under the Zentalis Agreement, we paid to Zentalis upfront consideration totaling $15 million in cash and $20 million in shares of our common stock with the shares valued at the trailing 30-day volume-weighted average price. We are obligated to pay Zentalis up to $150 million in development and regulatory milestones for the first product containing an ADC targeting ROR1, or a ROR1 ADC Product, to achieve such milestones and commercial milestones on ROR1 ADC Products. We are also obligated to pay to Zentalis mid-to-high single digit royalties on ROR1 ADC Products. In addition, we are obligated to pay Zentalis $25 million in development and regulatory milestones for the first product from each of the first five additional development programs using the licensed platform technology to generate products, and mid-single digit royalties on products from each such program. Our royalty payment obligation will commence, on a product-by-product and country-by-country basis, on the first commercial sale of such product in such country and will expire on the latest of (a) the ten (10)-year anniversary of such first commercial sale for such product in such country, (b) the expiration of regulatory exclusivity for such product in such country, and (c) the expiration of the last-to-expire valid claim of a licensed patent covering such product in such country.
Ayala Asset Purchase Agreement
In February 2024, we and Ayala Pharmaceuticals, Inc., or Ayala, entered into an Asset Purchase Agreement, or the Ayala Purchase Agreement, pursuant to which we acquired Ayala’s AL101 and AL102 programs and assumed certain of Ayala’s liabilities associated with the acquired assets. The Ayala Asset Purchase closed on March 25, 2024, or the Ayala Closing. At the Ayala Closing, we (i) paid Ayala $20.0 million in cash, less certain adjustments, (ii) issued Ayala 2,175,489 shares of our common stock with the shares valued at the trailing 30-day volume-weighted average price and (iii) assumed specified liabilities. Pursuant to the Ayala Purchase Agreement, we are obligated to pay Ayala up to $37.5 million in development and commercial milestones. No legal entities or employees were acquired from Ayala.
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Follow-On Public Offering
In February 2024, we raised $230.0 million, before deducting underwriting discounts and commissions and estimated offering expenses payable by us, through a public offering of our common stock, or the 2024 Financing. In connection with the closing of the public offering, we issued and sold 11,500,000 shares of our common stock.
Financial Overview
Since our inception in 2006, we have devoted substantially all our resources to research and development, raising capital, building our management team, building our intellectual property portfolio and entering and executing on collaborations and strategic transactions. To date, we have financed our operations primarily through sales of our equity securities, and strategic partnerships and transactions. In addition, we received $17.6 million in expense reimbursement from the Department of Defense, or the DoD, under the Other Transaction Authority for Prototype Agreement, or the OTA Agreement, from inception through 2022. As of December 31, 2023, our obligations under the OTA agreement with the DoD were completed.
To date, we have not generated any revenue from commercial sales and do not expect to generate revenue from commercial sale of products for the foreseeable future. Since inception, we have incurred significant operating losses. Our net losses were $106.8 million, including non-cash write off of in-process research and development of $80.8 million acquired in the Merger, and $36.9 million for the years ended December 31, 2023 and 2022, respectively.
As of December 31, 2023, we had cash, cash equivalents and marketable securities of $138.1 million. In addition, we raised gross proceeds of $230.0 million in the 2024 Financing. We expect to continue to incur significant expenses and increasing operating losses in connection with ongoing research and development activities related to our portfolio of programs as we continue advancement of our programs and development candidates, including the ongoing and future clinical development of AL102 and preclinical and potential clinical development of IM-1021, IM-3050, IM-4320 and any of our future product candidates, and our business development efforts to pursue and give effect to further strategic transactions and collaborations. We also plan to perform research activities as we seek to discover and develop additional programs and development candidates; carry out maintenance, expansion, enforcement, defense, and protection of our intellectual property portfolio; and hire research and development, clinical and administrative personnel. As a result of these anticipated expenditures and potential unanticipated expenditures, we will need substantial additional financing to support our continuing operations and pursue our growth strategy. Until such time as we generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of any stockholder will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our stockholders. 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 acquisitions or capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or drug 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 or other arrangements when needed, we may be required to delay, limit, reduce or terminate our research, product development or future commercialization efforts, or grant rights to develop and market programs and development candidates that we would otherwise prefer to develop and market ourselves. We may be unable to raise additional funds or enter into such other agreements when needed on favorable terms or at all. If we cannot obtain the necessary funding to support these activities on favorable terms, if at all, we will need to delay, scale back or eliminate some or all of our research and development programs, including our clinical and preclinical development of our product candidates.
In October 2023, we issued and sold 21,690,871 shares of our common stock pursuant to the subscription agreements in the PIPE transaction which provided us with gross proceeds of $125.0 million. In addition, in February 2024, we issued and sold 11,500,000 shares of our common stock in a public offering which provided us with gross proceeds of $230.0 million.
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We expect that our existing cash, cash equivalents and marketable securities as of December 31, 2023, in combination with the proceeds from the 2024 Financing, will enable us to fund our current and planned operating expenses and capital expenditures for at least 12 months from the filing date of this Annual Report on Form 10-K. We have based these estimates on assumptions that may prove to be imprecise, and we may exhaust our available capital resources sooner than we currently expect. See “Liquidity and capital resources.” Due to the numerous risks and uncertainties associated with the research and development of our programs, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the research and development of our programs and development candidates.
Components of our results of operations
Collaboration revenue
We have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products for the foreseeable future. To date, we have generated our revenue through the Collaboration Agreement with AbbVie. Our Collaboration revenue to date consists of payments from AbbVie that we recognize over the expected performance period under this agreement. We expect that revenues for the foreseeable future will be derived primarily from this agreement and any additional collaborations into which we may enter. We have not received any royalties under the Collaboration Agreement with AbbVie to date.
In-process research and development expenses, or IPR&D
Intangible assets acquired in an asset acquisition for use in research and development, or R&D, activities which have no alternative future use are expensed as IPR&D on the acquisition date. In-process research and development expenses for the year ended December 31, 2023 relate to the acquisition of Morphimmune’s assets.
Research and development expenses
Research and development expenses consist of costs incurred in performing research and development activities, which include:
● personnel-related expenses, including salaries, bonuses, benefits and share-based compensation for employees engaged in research and development functions;
● expenses incurred in connection with the advancement of our programs and development candidates, including under agreements with consultants, contractors, contract research organizations and other third-party vendors and suppliers;
● expenses to conduct clinical trials including regulatory and quality assurance;
● the cost of developing and validating our manufacturing process for use in our preclinical studies and clinical trials;
● laboratory supplies and research materials and other infrastructure-related expenses; and
● facilities, depreciation and amortization and other expenses which include direct and allocated expenses.
We expense research and development costs as incurred. Advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the benefits are consumed.
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Research and development activities are central to our business model. We expect that our research and development expenses will increase substantially in connection with the continuation of our activities and new agreements.
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, business development, 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, direct and allocated facility related expenses, Merger costs and other operating costs.
We anticipate that our general and administrative expenses will increase in the future to support increased and progressed research and development activities and to operate as a public company.
Interest income
Interest income consists of interest earned on our marketable securities and on our cash and cash equivalent balances held with financial institutions.
Results of operations
Comparison of the years ended December 31, 2023 and 2022:
Year Ended
December 31,
2023
2022
Change
(in thousands)
Collaboration Revenue
$
14,018
$
—
14,018
Operating expenses:
In-process research and development
80,802
—
80,802
Research and development
23,089
23,272
(183)
General and administrative
19,657
13,629
6,028
Total operating expenses
123,548
36,901
86,647
Loss from operations
(109,530)
(36,901)
(72,629)
Interest income
2,724
5
2,719
Net loss
$
(106,806)
$
(36,896)
$
(69,910)
Collaboration revenue
In January 2023, we entered into the Collaboration Agreement with AbbVie and recognized collaboration revenue of $14.0 million for the year ended December 31, 2023. No collaboration revenue was recognized for the year ended December 31, 2022.
In-process research and development expenses
In-process research and development expense for the year ended December 31, 2023 was related to the write-off of in-process research and development assets that were acquired in the Merger and determined to have no alternative future use . There were no similar transactions for the year ended December 31, 2022.
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Research and development expenses
Research and development expenses were $23.1 million and $23.3 million for the years ended December 31, 2023 and 2022, respectively.
We record direct research and development expenses , consisting principally of external costs, such as fees paid to investigators, consultants, central laboratories and CROs in connection with our clinical trials, and costs related to manufacturing, to specific product development programs. We do not allocate costs related to purchasing clinical trial materials, employee and contractor-related costs, and costs associated with our facility expenses, including depreciation or other indirect costs, to specific product programs because these costs support multiple product programs. The table below shows our research and development expenses incurred with respect to each active program.
Year Ended December 31,
2023
2022
Change
SARS-CoV-2 (IMM-BCP-01) (1)
$
(16)
$
5,635
$
(5,651)
IM-4320 (2)
1,881
6,332
(4,451)
AbbVie Collaboration (3)
2,915
-
2,915
Other Research and Development Activities (4)
6,498
3,012
3,486
Indirect Research and Development (5)
11,811
8,293
3,518
Total
$
23,089
$
23,272
$
(183)
(1) The decrease in 2023 compared to 2022 for SARS-CoV-2 (IMM-BCP-01) was due primarily to a decrease in clinical trial activity for this program following our decision in 2022 to cease further development of IMM-BCP-01 until we identify a development partner .
(2) The decrease in 2023 compared to 2022 for IM-4320 was due primarily to decreased development and manufacturing activities as we shifted available resources to the AbbVie Collaboration.
(3) The increase in 2023 compared to 2022 was due primarily to outsourced research and materials relating to the AbbVie Collaboration which was initiated in 2023.
(4) The increase in 2023 compared to 2022 was due primarily to the merger with Morphimmune and other research discovery related activities.
(5) The increase in 2023 compared to 2022 was due primarily to increased personnel and personnel-related costs in support of the AbbVie collaboration.
General and administrative expenses
General and administrative expenses were $19.7 million and $13.6 million for the years ended December 31, 2023 and 2022, respectively. The increase of $6.1 million is primarily a result of a $3.0 million increase in personnel-related costs including increases of $1.1 million in salary and benefits costs due to increased headcount associated with the Merger and supporting the AbbVie Collaboration Agreement, $1.1 million in severance costs, and $0.8 million in share-based compensation. In addition, professional fees increased $4.0 million due to merger related costs with Morphimmune, partially offset by a decrease of $1.0 million in D&O insurance and other overhead related costs.
Interest income
Interest income was $2.7 million and an immaterial amount for the years ended December 31, 2023 and 2022, respectively.
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Interest income increased by $2.7 million for the year ended December 31, 2023, primarily as a result of interest on marketable securities and also due to increased interest rates on our cash and cash equivalent balances held with a financial institution. Our average marketable securities and cash and cash equivalent balances were higher in 2023 as a result of the proceeds from the AbbVie Collaboration Agreement and PIPE financing.
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 continue advancement of our programs and development candidates. Through December 31, 2023, we raised an aggregate of $280.5 million in gross proceeds from strategic partnerships and transactions and the sale of our equity securities. In addition, we received $17.6 million in expense reimbursement from the DoD under the OTA Agreement, from inception through 2022. As of December 31, 2023, our obligation under the OTA agreement with the DoD were completed.
In February 2024, we raised $230.0 million, before deducting underwriting discounts and commissions and estimated offering expenses payable by us, in the 2024 Financing. In connection with the closing of the 2024 Financing we issued and sold 11,500,000 shares of our common stock.
In June 2023, we entered into subscription agreements with certain investors pursuant to which we sold 21,690,871 shares of our common stock, immediately following the completion of the Merger in October 2023, in exchange for gross proceeds of $125.0 million.
We will need to raise additional capital before we exhaust our current cash to continue to fund our research and development, including our plans to continue advancement of our programs and development candidates and new product development, strategic transactions, as well as to fund operations. As and if necessary, we will seek to raise additional funds through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. We can give no assurances that we will be able to secure such additional sources of funds to support our operations, or, if such funds are available to us, that such additional financing will be sufficient to meet our needs.
Cash flows
The following table summarizes our sources and uses of cash for the years ended December 31, 2023 and 2022:
Years Ended
December 31,
2023
2022
(in thousands)
Cash used in operating activities
$
(7,568)
$
(28,690)
Cash used in investing activities
(30,484)
(248)
Cash provided by financing activities
116,408
32
Net increase (decrease) in cash and cash equivalents and restricted cash
$
78,356
$
(28,906)
Operating activities
Net cash used in operating activities for the year ended December 31, 2023 was $7.6 million, consisting primarily of our net loss of $106.8 million, increases in prepaid expenses and other assets of $4.1 million, offset by a noncash charge of $80.8 million for the purchase of in-process research and development assets, a noncash charge of $6.2 million for share-based compensation expense, and a $16.0 million increase in deferred revenue.
Net cash used in operating activities for the year ended December 31, 2022 was $28.7 million, consisting primarily of our net loss of $36.9 million and decreases in accrued expenses and other liabilities, accounts payable, and other long-
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term liabilities of $2.8 million, offset by noncash charges of $5.3 million for share-based compensation expense and a $5.1 million decrease in prepaids expenses and other assets.
Investing activities
Net cash used in investing activities for the year ended December 31, 2023 was $30.5 million, consisting primarily of $38.9 million used to purchase marketable securities and $0.8 million to purchase property and equipment, offset by $9.3 million received in connection with the Morphimmune merger.
Net cash used in investing activities for the year ended December 31, 2022 was $0.2 million, consisting primarily of the purchase of property and equipment.
Financing activities
During the year ended December 31, 2023, financing activities provided $116.4 million consisting of gross proceeds of $125.4 million from the PIPE transaction, the exercise of options, and the issuance of common stock under the ATM, partially offset by the payment of $9.0 million for offering costs related to the PIPE transaction.
During the year ended December 31, 2022, financing activities provided $32,000 from exercise of stock options.
Funding requirements
We expect our expenses to increase substantially in connection with our ongoing and future activities, particularly as we advance and expand our clinical development of AL102, seek regulatory approval for AL102, continue the preclinical and potential clinical development of IM-1021, IM -4320, IM-3050, and any other future product candidates, and continue to pursue our business development strategy. We expect that our primary uses of capital will be for clinical development services, non-clinical research, strategic transactions, manufacturing, legal and other regulatory compliance expenses, compensation and related expenses, risk management, and general overhead costs.
We expect that our existing cash, cash equivalents and marketable securities as of December 31, 2023, in combination with the proceeds from the 2024 Financing, will enable us to fund our current and planned operating expenses and capital expenditures for at least 12 months from the filing date of this Annual Report on Form 10-K. We will need additional financing to support our continuing operations and pursue our research and development strategy. We have based these estimates on assumptions that may prove to be imprecise, and we may exhaust our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development of our programs, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the research and development of our programs and development candidates.
Our future funding requirements will depend on many factors including:
● the extent to which we acquire or in-license products, intellectual property , and other technologies, and the terms on which we acquire or in-license those assets;
● the scope, progress, results and costs of discovery, preclinical development, manufacturing and clinical trials for programs and development candidates that we currently own and those that we may acquire rights to in the future;
● the costs of continuing to operate and advance our discovery and ADC platforms;
● the costs of preparing, filing, and prosecuting patent applications, maintaining and enforcing our intellectual property and proprietary rights, and defending intellectual property-related claims and the success of our intellectual property portfolio;
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● the costs, timing, and outcome of regulatory review of the programs and development candidates we may develop;
● the costs of future activities, including product sales, medical affairs, marketing, manufacturing, distribution, coverage and reimbursement for any programs or development candidates for which we receive regulatory approval;
● t he success of our existing and any future license agreements, collaborations and other strategic transactions and the achievement of milestones or occurrence of other developments that trigger payments to or from us under any such agreements and transactions and ;
● the costs of operating as a public company.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, and licensing arrangements. As a result of the war between Russia and Ukraine, conflict in the Middle East, bank failures, inflationary pressures on the economy and monetary policy responses taken by government agencies and other macroeconomic and political factors, the global credit and financial markets have experienced extreme volatility, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth and uncertainty about economic stability. There can be no assurance that deterioration in credit and financial markets and confidence in economic conditions will not occur. If equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult to obtain, more costly and/or more dilutive. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of any purchaser will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and 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 acquisitions or capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or drug 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 or other arrangements when needed, we may be required to delay, limit, reduce or terminate our research, product development or future commercialization efforts, or grant rights to develop and market programs and development candidates that we would otherwise prefer to develop and market ourselves.
Contractual Obligations and Contingencies
We have no material non-cancelable purchase commitments with service providers, as we have generally contracted on a cancelable, purchase order basis. Our expected material cash requirements do not include potential contingent payments upon the achievement by us of development, regulatory or commercial milestones that we may be required to make under the terms of the Ayala Purchase Agreement or Atreca purchase agreement, nor do they include potential contingent payments upon the achievement by us of development, regulatory and commercial milestones or royalty payments that we may be required to make under license agreements we have entered into or may enter into with various entities pursuant to which we have in-licensed certain intellectual property. For further details on the potential contingent payments related to asset acquisitions and license agreements, see Notes 10 and 16 of the notes of our audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
Critical accounting policies and significant judgments
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known
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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 Note 2 to our audited consolidated financial statements appearing elsewhere in this Annual Report, we believe that the following accounting policies are the most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Asset Acquisitions
Acquisitions of assets or a group of assets that do not meet the definition of a business are accounted for as asset acquisitions, with a cost accumulation model used to determine the cost of the acquisition. Common stock issued as consideration in an acquisition of assets is generally measured based on the acquisition date fair value of the equity interests issued. Direct transaction costs are recognized as part of the cost of an acquisition of assets. Intangible assets that are acquired in an asset acquisition for use in research and development activities that have an alternative future use are capitalized as IPR&D. Acquired IPR&D that has no alternative future use is expensed immediately in the consolidated statements of operations and comprehensive loss.
Collaboration revenue
In January 2023, we entered into the Collaboration Agreement with AbbVie, which was determined to be within the scope of ASC 606, Revenue from Contracts with Customers, or ASC 606.
We evaluate our collaborative arrangements pursuant to ASC 808, Collaborative Arrangements, or ASC 808, and ASC 606. We consider the nature and contractual terms of collaborative arrangements and assesses whether the arrangement involves a joint operating activity pursuant to which we are an active participant and is exposed to significant risks and rewards with respect to the arrangement. If we are an active participant and are exposed to significant risks and rewards with respect to the arrangement, we account for the arrangement as a collaboration under ASC 808. If we are not exposed to significant risks and rewards and the contract is with a customer, we account for the collaboration under ASC 606.
Payments pursuant to collaborative arrangements may include non-refundable upfront payments, research option and license option payments, milestone payments upon the achievement of significant regulatory and development events, commercial sales milestones, and royalties on product sales. The amount of variable consideration is constrained until it is probable that the revenue is not at a significant risk of reversal in a future period.
In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under a collaboration arrangement, we apply the five-step model of ASC 606: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract, including whether they are capable of being distinct; (iii) determine the transaction price, including the constraint on variable consideration; (iv) allocate the transaction price to the performance obligations; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
We apply significant judgment when evaluating whether contractual obligations represent distinct performance obligations, allocating transaction price to performance obligations within a contract, determining when performance obligations have been met, and assessing the recognition of variable consideration. When consideration is received prior to us completing our performance obligation under the terms of a contract, a contract liability is recorded as deferred revenue. Deferred revenue expected to be recognized as revenue within the twelve months following the balance sheet date is classified as a current liability.
Share-based compensation
We recognize the grant-date fair value of share-based awards issued as compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period of the award. The fair value of stock options
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is estimated at the time of grant using the Black-Scholes option pricing model, which requires the use of inputs and assumptions such as the fair value of the underlying common stock, exercise price of the option, expected term, risk-free interest rate, expected volatility and dividend yield.
The inputs and assumptions used to estimate the fair value of share-based payment awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different inputs and assumptions, our share-based compensation expense could be materially different for future awards.
Expected volatility is a subjective assumption based on the historical stock volatility of several of our comparable publicly traded companies over a period of time equal to the expected term.
Accrued research and development expenses
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders and communicating with personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us on a pre-determined schedule or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in the consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of these estimates with the service providers and make adjustments, if necessary. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.
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Table of Contents
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required.
Item 8. Financial Statements and Supplementary Data
The information required by this Item 8 is set forth on pages 119 through 145 hereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.