PLIANT THERAPEUTICS, 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 financial statements and related notes appearing elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intention, beliefs and projections. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth in the section titled “Risk Factors” under Part I, Item 1A and elsewhere in this Annual Report. See “Special Note Regarding Forward-Looking Statements” in this Annual Report. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “should,” “will” or the negative of these terms or other similar expressions. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate we have conducted exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Overview We are a clinical stage biopharmaceutical company focused on discovering and developing novel therapies for the treatment of fibrosis and related diseases. Our initial focus is on treating fibrosis by inhibiting integrin-mediated activation of TGF-β. We have applied our deep understanding of fibrosis biology, along with our medicinal chemistry and translational medicine expertise to develop a set of proprietary tools designed to discover and de-risk product candidates quickly and efficiently. Our wholly owned lead product candidate, PLN-74809, is an oral, small-molecule, dual selective inhibitor of αvß6 and αvß1 integrins that we are developing for the treatment of idiopathic pulmonary fibrosis, or IPF, and primary sclerosing cholangitis, or PSC. We have completed a Phase 1a SAD/MAD trial and a Phase 1b proof-of-mechanism trial of PLN-74809 in IPF and are currently recruiting three Phase 2a trials in our lead indications: two in IPF and one in PSC. Our second product candidate, PLN-1474, is a small-molecule selective inhibitor of αvß1 for the treatment of liver fibrosis associated with nonalcoholic steatohepatitis, or NASH, which we have partnered with Novartis. PLN-1474 successfully completed a Phase 1 SAD/MAD trial in March 2021, and the Investigational New Drug, or IND, application was transferred to Novartis in the first quarter of 2021. Novartis is responsible for all PLN-1474 development, manufacturing and commercialization activities and we earn research and development services revenue in supporting certain aspects of the development plan. In addition to our clinical programs, we currently have preclinical integrin-based programs targeting oncology and muscular dystrophies. Recent Highlights • Results from expanded PLN-74809 Phase 1b proof-of-mechanism trial demonstrated clear evidence of on-target biological activity in the lungs of healthy participants. Earlier today, the Company announced that positive data from an expanded PLN-74809 Phase 1b proof-of-mechanism trial demonstrated clear evidence of on-target biological activity in the lungs of 36 healthy participants. Results demonstrated that PLN-74809 inhibited TGF-β activation by up to 92% and 76% at 6- and 24-hours, respectively, following seven days of once-daily dosing. At all dose levels, PLN-74809 demonstrated 95 Table of Contents durable pSmad suppression relative to placebo at 6 hours and 24 hours. PLN-74809 was well tolerated with mostly mild adverse events, and no severe adverse events. • Enrollment was completed in the PLN-74809 Phase 2a INTEGRIS-IPF trial in idiopathic pulmonary fibrosis. INTEGRIS-IPF is a 12-week randomized, dose-ranging, double-blind, placebo-controlled trial evaluating the safety, tolerability and pharmacokinetics of PLN-74809 at doses of 40, 80 or 160 mg in approximately 84 IPF patients. Exploratory endpoints include quantitative lung fibrosis (QLF) imaging, pulmonary function tests as well as select biomarkers. Topline data is anticipated mid-2022. • The U.S. Food and Drug Administration (FDA) authorized the evaluation of long-term treatment with PLN-74809 in patients with IPF. The FDA has authorized evaluation of long-term dosing of PLN-74809 up to 320 mg daily in patients with IPF. This authorization will facilitate longer-term pivotal trials in IPF. PLN-74809 has been administered to over 450 study participants, including healthy volunteers and patients, with no drug-related serious adverse events or severe adverse advents reported to date. • Independent Data Safety Monitoring Board (DSMB) recommended INTEGRIS-IPF Phase 2a Trial continue without modifications. Following the full enrollment of the INTEGRIS-IPF Phase 2a trial, on February 17, 2022, the DSMB recommended the INTEGRIS-IPF trial continue without modification. This review included all patients enrolled in all dose cohorts of the trial. To date, no safety concerns have been identified by the DSMB. • Commenced enrollment of a Phase 2a trial of PLN-74809 at a dose of 320 mg in patients with IPF. The Company began enrollment in a randomized, double-blind, placebo-controlled trial evaluating PLN-74809 at doses of 320 mg administered daily over at least six months, and up to 48 weeks, in approximately 28 patients with IPF. The primary endpoint is the evaluation of PLN-74809 safety and tolerability and the secondary endpoint is the assessment of pharmacokinetics. Exploratory endpoints will measure QLF imaging and pulmonary function tests as well as select biomarkers over 6 months of treatment. • PLN-74809 Phase 2a trial in primary sclerosing cholangitis (PSC) enrollment on track to be completed mid-2022. INTEGRIS-PSC is a 12-week randomized, dose-ranging, double-blind, placebo-controlled trial evaluating the safety, tolerability, and pharmacokinetics of PLN-74809 at doses of 40, 80 or 160 mg in approximately 84 PSC patients. Exploratory endpoints include fibrosis biomarkers such as Pro-C3 and ELF, changes in ALP and liver imaging. Topline data is expected in late 2022 or early 2023. • Oncology and muscular dystrophy programs progressing through Investigational New Drug (IND) enabling studies. Both programs on track with IND application submissions planned by the end of 2022. COVID-19 Pandemic In March 2020, the World Health Organization declared the outbreak of a coronavirus, or COVID-19, as a pandemic, which, to date, continues to spread throughout the United States and worldwide. We have been, and in the future could be, materially and adversely affected by the risks, or the public perception of the risks, related to an epidemic, pandemic, outbreak, or other public health crisis, such as the outbreak of COVID-19. While difficult to predict or quantify the overall impact to our operations, among other things, our clinical trials have experienced delays, and may experience additional delays in the future, extending the timelines and increasing the overall costs to finish the clinical trials, as our fixed costs are not substantially reduced while the clinical trials are delayed. For example, the clinical site conducting our Phase 2a PET trial of PLN-74809 in IPF was closed to clinical research in March 2020, but resumed enrollment and trial activities in the third quarter of 2020. The ultimate extent of the impact of any epidemic, pandemic, outbreak, or other public health crisis on our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of such epidemic, pandemic, outbreak, or other public health crisis and actions taken to contain or prevent the further spread, among others. Accordingly, we cannot predict the extent to which our business, financial condition and results of operations have been and will be affected. We remain focused on maintaining a strong balance sheet, liquidity and financial flexibility and continue to monitor developments as we deal with the disruptions and uncertainties from a business and financial perspective relating to COVID-19. 96 Table of Contents Financial Operations Overview Revenue We have not generated any revenue from product sales and do not expect to do so in the near future. Our revenue to date is derived from a Collaboration and License Agreement with Novartis, or the "Novartis Agreement," that was executed in 2019. The Novartis Agreement is for the development and commercialization of PLN-1474 and up to three additional integrin research targets. Under the terms of the Novartis Agreement, we received an upfront license fee payment of $50.0 million for the worldwide, exclusive license to PLN-1474 and an additional $25.0 million upon first patient dosed in our Phase 1 trial of PLN-1474 in the first quarter of 2020. We are eligible to receive additional milestone payments of up to $391.0 million in total, if defined developmental, regulatory and commercialization milestones are achieved, and tiered royalties on a product-by-product basis based on annual nets sales of products. Additionally, Novartis agreed to provide up to $19.6 million and up to $13.4 million in funding for the research and development activities associated with PLN-1474 and integrin research targets, respectively. As of December 31, 2021 approximately $2.0 million of aggregate research and development funding remains available for use under the arrangement. Revenues for the years ended December 31, 2021, 2020 and 2019 were $7.6 million, $41.8 million and $57.1 million, respectively. Operating Expenses Research and Development Our research and development expenses consist of expenses incurred in connection with the development of our product candidates. Research and development expenses include: • employee-related expenses, which include salaries, benefits and stock-based compensation for our research and development personnel; • expenses incurred under agreements with third-party contract organizations for pre-clinical studies, clinical trials and consultants that conduct research and development activities on our behalf; • costs associated with the manufacture of supplies to support research and development, preclinical studies and clinical trials; • depreciation of laboratory equipment and costs of equipment and supplies; • costs associated with technology and intellectual property licenses; and • facilities and other allocated expenses, which include expenses for rent and other facility related costs and other supplies. The following table summarizes our research and development expenses for the years ended December 31, 2021, 2020 and 2019 (in thousands): Year Ended December 31, 2021 2020 2019 Employee-related expenses $ 20,730 $ 15,301 $ 10,385 Outside and consulting services for preclinical studies and research and development activities by third party contract organizations 15,674 14,677 22,043 Clinical trials expenses 29,263 23,907 6,667 Depreciation of lab equipment and costs of equipment and supplies 5,968 4,801 4,829 Technology and intellectual property licenses 33 2,442 288 Facilities and other allocated expenses 5,880 5,065 3,141 Total research and development expenses $ 77,548 $ 66,193 $ 47,353 We expense all research and development costs in the periods in which they are incurred. We do not allocate our internal costs by product candidates or by preclinical programs as these are in early stages of development. Additionally, 97 Table of Contents although external third-party costs are allocable between product candidates and programs, we do not perform this allocation. We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates and our preclinical programs and as they advance into later stages of development. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates. General and Administrative Our general and administrative expenses consist primarily of salaries, benefits and stock-based compensation for our general and administrative personnel, allocated facilities costs, insurance and other expenses for outside professional services, including legal, marketing, investor relations, human resource and accounting services. We expect general and administrative expenses to increase for the foreseeable future as does the size of our administrative function to support the growth of our business. In addition, if we obtain regulatory approval for any of our product candidates and do not enter into a third-party commercialization collaboration, we expect to incur significant expenses related to building a sales and marketing team to support product sales, marketing and distribution activities. Interest and Other Income (Expense), net Our interest and other income (expense), net consists of interest income earned on cash and cash equivalents, money market funds and short-term investments, realized gains and losses on investments. Results of Operations Comparison of the Years Ended December 31, 2021 and 2020 (In thousands, except percentages) Year Ended December 31, 2021 2020 $ Change % Change Revenue $ 7,572 $ 41,817 $ (34,245) (81.9 %) Operating expenses: Research and development (77,549) (66,193) (11,356) 17.2 % General and administrative (27,558) (17,269) (10,289) 59.6 % Total operating expenses (105,107) (83,462) (21,645) 25.9 % Loss from operations (97,535) (41,645) (55,890) NM Interest and other income (expense), net 272 112 160 142.9 % Net loss $ (97,263) $ (41,533) $ (55,730) 134.2 % _________________________ NM: Results not meaningful Revenue Revenue was $7.6 million and $41.8 million for the years ended December 31, 2021 and 2020, respectively. The decrease of $34.2 million was primarily due to the recognition of a $25.0 million milestone payment in the first quarter of 2020 due to the achievement of first patient dosing in the Phase 1 trial of PLN-1474 as well as decreased research and development services revenues associated with PLN-1474, which were substantially complete in the first quarter of 2021. We expect our revenue to be derived from the Novartis Agreement for the foreseeable future and may fluctuate significantly based on the amount of research and development services required to further the development of PLN-1474 and integrin research targets as well as the potential achievement of developmental, regulatory and commercial milestones identified in the Novartis Agreement. 98 Table of Contents Research and Development Expenses Research and development expenses was $77.5 million and $66.2 million for the years ended December 31, 2021 and 2020, respectively. The increase of $11.4 million was primarily due to: • $5.4 million increase in employee-related costs owing to the increase in our research and development workforce and stock-based compensation; • $1.0 million increase in outside and consulting services for preclinical studies and research and development activities by third party contract organizations; • $5.4 million increase in clinical trial expenses largely due to ramping costs in our Phase 2 trials of PLN-74809 and the commencement of several Phase 1 trials, which was partially offset by a decrease in the Phase 1 clinical trial costs for PLN-1474 which was substantially completed in the first quarter of 2021; • $1.2 million increase in depreciation of lab equipment and costs of equipment and supplies; • $2.4 million decrease in technology and intellectual property licenses resulting from the payment to the Regents of the University of California in connection with our IPO in the second quarter of 2020; and • $0.8 million increase in facilities and other allocated expenses General and Administrative Expenses General and administrative expenses was $27.6 million and $17.3 million for the years ended December 31, 2021 and 2020, respectively. The increase of $10.3 million was primarily due to a $7.3 million increase in employee-related costs, including stock-based compensation, and a $1.1 million increase in legal, accounting and other professional services largely due to operating as a public company. Interest and other income (expense), net Interest and other income (expense), net was $272,000 and $112,000 for the years ended December 31, 2021 and 2020, respectively. The increase of $160,000 was due to higher average investment balances in 2021 compared to 2020 resulting from significant financing activities occurring mid-year 2020. Comparison of the Years Ended December 31, 2020 and 2019 (In thousands, except percentages) Year Ended December 31, 2020 2019 $ Change % Change Revenue $ 41,817 $ 57,052 $ (15,235) (26.7 %) Operating expenses: Research and development (66,193) (47,353) (18,840) 39.8 % General and administrative (17,269) (10,930) (6,339) 58.0 % Total operating expenses (83,462) (58,283) (25,179) 43.2 % Loss from operations (41,645) (1,231) (40,414) NM Interest and other income (expense), net 112 600 (488) (81.3 %) Net loss $ (41,533) $ (631) $ (40,902) 6,482.1 % _________________________ NM: Results not meaningful Revenue The decrease of 15.2 million, or 26.7%, in revenue-related party for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the recognition of $50.0 million in upfront license fee revenue in 2019, offset by the recognition of $25.0 million milestone payment from the achievement with the first patient dosing under the Novartis agreement in the first quarter of 2020 and the $9.8 million increase in research and development services revenue in 2020. 99 Table of Contents Research and Development Expenses Research and development expenses was $66.2 million and $47.4 million for the years ended December 31, 2020 and 2019, respectively. The increase of $18.8 million was primarily due to: • $4.9 million increase in employee related costs owing to the increase in our research and development workforce and stock based compensation, including the introduction of our employee stock purchase plan in the third quarter of 2020; • 7 million decrease in outside and consulting services for preclinical studies and research and development activities by third party contract organizations as our lead programs moved into clinical development stage in 2020; • $17.2 million increase in clinical trial expenses primarily attributable to our Phase 1 and Phase 2 trials of PLN-74809 and the Phase 1 clinical trial for PLN-1474; • $2.2 million increase in technology and intellectual property licenses resulting from the payment to the Regents of the University of California in connection with our IPO in the second quarter of 2020; and • $1.9 million increase in facilities and other allocated expenses General and Administrative Expenses General and administrative expenses was $17.3 million and $10.9 million for the years ended December 31, 2020 and 2019, respectively. The increase of $6.3 million was primarily due to $2.8 million of increased professional and consulting services costs, $1.6 million of increased compensation costs, $0.9 million of increased stock-based compensation expense, $0.5 million of increased charitable contributions and $0.5 million of increased insurance expenses, partially offset by $0.5 million decrease in travel expenses. Professional and consulting costs increased primarily as a result of increased legal, marketing, investor relations and accounting fees. Compensation costs and stock-based compensation costs increased as a result of increased headcount and the implementation of the employee stock purchase plan in the third quarter of 2020. Insurance expenses increased due to additional cost for insurance as a public company. Travel expenses decreased primarily due to decreased executive travel as a result of the COVID-19 pandemic. Interest and other income (expense), net Interest and other income (expense), net was $112,000 and $600,000 for the years ended December 31, 2020 and 2019, respectively. The decrease of $488,000 was primarily due to lower interest rates in 2020 when compared to 2019. Liquidity and Capital Resources Overview As of December 31, 2021, we had cash, cash equivalents and short-term investments of $200.6 million. Our cash, cash equivalents and short-term investments consist of U.S. Treasury securities, U.S. Government agency securities and highly rated, investment-grade corporate debt securities. Our operations have been financed primarily through the issuance and sale of convertible preferred stock, our collaboration with Novartis and issuance of common stock via our IPO. We completed our IPO in June 2020 and received $148.3 million, net of underwriting discounts, commissions and offering expenses. Concurrent with the completion of the IPO, we also issued 625,000 shares of our common stock to Novartis for proceeds of $10.0 million. During the third quarter of 2021, we entered into a Controlled Equity Offering SM Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co., as sales agent, pursuant to which we may issue and sell up to $150.0 million of shares of common stock from time to time. The issuance and sale of these shares pursuant to the Sales Agreement are deemed an “at-the-market” offering and are registered under the Securities Act of 1933, as amended. We have not issued any shares pursuant to any at-the-market offerings but may do so at a future date. We believe that our existing capital resources, together with interest thereon, will be sufficient to meet our projected operating requirements for at least the next 12 months from the date of this filing and into the second half of 2023. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for product development and commercialization sooner than planned. We currently have no credit facility or committed sources of capital other than potential milestones receivable under our current collaboration and license agreements. 100 Table of Contents Funding Requirements Our primary use of cash is to fund operating expenses, primarily research and development expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable, accrued expenses and prepaid expenses. Our future funding requirements will depend on many factors, including the following: • the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our product candidates; • the clinical development plans we establish for these product candidates; • the timelines of our clinical trials and the overall costs to conduct and complete the clinical trials, which may be impacted by the COVID-19 pandemic; • the number and characteristics of product candidates that we develop; • the outcome, timing and cost of meeting regulatory requirements established by the U.S. Food and Drug Administration, or FDA, and other comparable foreign regulatory authorities; • whether we enter into any collaboration agreements and the terms of any such agreements; • the cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights; • the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us or our product candidates; • the effect of competing technological and market developments; • the cost and timing of completion of commercial-scale outsourced manufacturing activities; • the cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval in regions where we choose to commercialize our products on our own; and • the cost of operating as a public company. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development expenditures. If we need to raise additional capital to fund our operations, funding may not be available to us on acceptable terms, or at all. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of or suspend one or more of our preclinical studies, clinical trials, research and development programs or commercialization efforts. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, collaborations and other licensing arrangements. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain valuable rights to our product candidates, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. Cash Flows The following summarizes our cash flows for the periods indicated (in thousands): Year Ended December 31, 2021 2020 2019 Net cash used in operating activities $ (75,443) $ (37,271) $ (2,750) Net cash provided by (used in) investing activities 73,699 (210,866) (17,931) Net cash provided by financing activities 2,527 213,212 45,539 Net increase (decrease) in cash and cash equivalents $ 783 $ (34,925) $ 24,858 101 Table of Contents Cash Used in Operating Activities Net cash used in operating activities was $75.4 million for the year ended December 31, 2021 compared to $37.3 million for the year ended December 31, 2020. The increase in cash used in operating activities of $38.2 million between the year ended December 31, 2021 and 2020 was primarily due to decreased revenues and related receipts from our collaboration partner, Novartis, during 2021 coupled with an increase in operating expenses of $21.6 million. Net cash used in operating activities was $37.3 million for the year ended December 31, 2020 compared to $2.8 million for the year ended December 31, 2019. The increase in cash used in operating activities of $34.5 million between the year ended December 31, 2020 and 2019 was primarily due to an overall increase in operating expenses of $25.2 million plus decreased revenues from Novartis of $15.2 million as the $25.0 million milestone earned in the first quarter of 2020 was more than offset by the $50.0 million upfront license fee earned in 2019 plus. Cash Provided by (Used in) Investing Activities Net cash provided by investing activities during the year ended December 31, 2021 was $73.7 million compared to net cash used in investing activities of $210.9 million during the year ended December 31, 2020. The increase in cash provided by investing activities of $284.6 million between the year ended December 31, 2021 and 2020 is a function of the timing of investment purchases versus maturities between the years. The significant shift from 2020 to 2021 is a result of significant financing inflows in 2020 compared to 2021 resulting in increased purchases of short-term investments in 2020. Net cash used in investing activities during the year ended December 31, 2020 was $210.9 million compared to net cash used in investing activities of $17.9 million during the year ended December 31, 2019. The increase in cash used in investing activities of $192.9 million between the year ended December 31, 2020 and 2019 is a function of the timing of investment purchases versus maturities between the years. The significant shift from 2019 to 2020 resulted from increased financing activities in 2020 compared to 2019 resulting in increased purchases of short-term investments in 2020. Cash Provided by Financing Activities Net cash provided by financing activities was $2.5 million during the year ended December 31, 2021 as compared to $213.2 million during the year ended December 31, 2020. The decrease in cash provided by financing activities of $210.7 million between the year ended December 31, 2021 and 2020 was primarily due to 2020 financing activities including the issuance of common stock upon completion of our IPO of $150.8 million, issuance of common stock upon completion of the private placement with Novartis of $10.0 million and the issuance of our Series C convertible preferred stock of $52.0 million. Net cash provided by financing activities was $213.2 million during the year ended December 31, 2020 as compared to $45.5 million during the year ended December 31, 2019. The increase in cash provided by financing activities of $167.7 million between the year ended December 31, 2020 and 2019 was primarily due to the above mentioned 2020 financing events, partially offset by net proceeds from the 2019 issuance of our Series C redeemable convertible preferred stock of $47.9 million. Off-Balance Sheet Arrangements During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements or holdings in any variable interest entities. Material Cash Requirements The following table summarizes our material cash requirements as of December 31, 2021 (in thousands): Payments Due by Period Less than 1 Year 1 to 3 Years 3 to 5 Years More Than 5 Years Total Operating lease $ 2,098 $ 4,418 $ 1,144 $ — $ 7,660 Total obligations $ 2,098 $ 4,418 $ 1,144 $ — $ 7,660 We enter into contracts in the normal course of business with third-party contract organizations for clinical trials, non-clinical studies and testing, manufacturing and other services and products. These contracts generally provide for 102 Table of Contents termination following a certain period after notice and therefore we believe that our cancelable obligations under these agreements are not material and they are not included in the table above. We have not included milestone or royalty payments or other contractual payment obligations in the table above if the timing and amount of such obligations are unknown or uncertain. Critical Accounting Polices and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 2 to our financial statements appearing elsewhere in this Annual Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements. Revenue Recognition As of December 31, 2021, all of our revenue to date has been generated from the Novartis Agreement. We recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, ("Topic 606") we perform the following five steps: (i) identification of the contract(s) with the customer, (ii) identification of the promised goods or services in the contract and determination of whether the promised goods or services are performance obligations, (iii) measurement of the transaction price, (iv) allocation of the transaction price to the performance obligations, and (v) recognition of revenue when (or as) we satisfy each performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to our customer. Identification of the Contracts with the Customers We evaluate every contract to determine whether it in its entirety or in part represent a contract with a customer, or a collaboration agreement and, based on this determination, apply appropriate accounting guidance. We account for a contract with a customer that is within the scope of Topic 606 when all of the following criteria are met: (i) the arrangement has been approved by the parties and the parties are committed to perform their respective obligations, (ii) each party’s rights regarding the goods or services to be transferred can be identified, (iii) the payment terms for the goods or services to be transferred can be identified, (iv) the arrangement has commercial substance and (v) collection of substantially all of the consideration to which we will be entitled in exchange for the goods or services that will be transferred to the customer is probable. Identification of the Performance Obligations The promised goods or services in our collaboration and option arrangements consist of license and research and development services. The arrangements also have options for additional items (i.e., license rights). Options are considered to be marketing offers and are to be accounted for as separate contracts when the customer elects such options, unless we determine the option provides a material right which would not be provided without entering into the contract. The determination as to whether such options are material rights requires significant management judgment, and management considers factors such as other similar arrangements, market data and the terms of the contractual arrangement to make such conclusion. Performance obligations are promised goods or services in a contract to transfer a distinct good or service to the customer. Promised goods or services are considered distinct when: (i) the customer can benefit from the good or service on its own or together with other readily available resources and (ii) the promised good or service is separately identifiable from other promises in the contract. In assessing whether promised goods or services are distinct, we consider factors such as the stage of development of the underlying intellectual property, the capabilities of our customer to develop the intellectual property on their own and whether the required expertise is readily available. 103 Table of Contents Determination of the Transaction Price We estimate the transaction price based on the amount of consideration we expect to receive for transferring the promised goods or services in the contract. The consideration may include both fixed consideration and variable consideration. At the inception of each arrangement that includes variable consideration, we evaluate the amount of the potential payments and the likelihood that the payments will be received. We utilize either the most likely amount method or expected value method to estimate the transaction price based on which method better predicts the amount of consideration expected to be received. If it is probable that a significant revenue reversal would not occur, the variable consideration is included in the transaction price. All contingent future payments, which include research, development, regulatory, and sales-based royalty payments, have not been considered in the initial analysis, as they are contingent upon option(s) being exercised or are subject to significant risk of achievement. Allocation of Transaction Price We allocate the transaction price based on the estimated standalone selling price. We must develop assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract. We utilize key assumptions to determine the standalone selling price, which may include other comparable transactions, pricing considered in negotiating the transaction, and the estimated costs. Certain variable consideration is allocated specifically to one or more performance obligations in a contract when the terms of the variable consideration relate to the satisfaction of the performance obligation and the resulting amounts allocated to each performance obligation are consistent with the amounts we would expect to receive for satisfying each performance obligation. Recognition of Revenue We recognize revenue at the point in time when distinct, functional licenses are transferred to the licensee and/or over the period of time which we perform research and development services. We utilize a cost-based input method to measure proportional performance, as such costs have direct relationship between our effort and the progress made towards satisfying its performance obligations to Novartis. Accrued and Prepaid Research and Development Expenses We record accrued expenses for estimated costs of our research and development activities activities which include the conduct of clinical studies and preclinical studies by third-party service providers. We record the estimated costs of research and development activities based upon the estimated amount of services provided but not yet invoiced and include these costs in accrued liabilities in the balance sheets and within research and development expenses in the statements of operations and comprehensive loss. These costs are a significant component of our research and development expenses. We record accrued expenses for these costs based on factors such as estimates of the work completed and in accordance with agreements established with these third-party service providers. Any payments made in advance of services provided are recorded as prepaid assets, which are expensed as the contracted services are performed. We estimate the amount of work completed through review of detailed budgets and timelines included in our contracts and agreements, and update these estimates with information obtained from third-party service providers and internal personnel on a quarterly basis. We make significant judgments and estimates in determining the accrued and/or prepaid balance in each reporting period. As actual costs become known, we adjust our estimates. Our accrued expenses and prepaid research and development expenses are dependent, in part, upon the receipt of timely and accurate reporting from clinical research organizations, other third-party service providers and internal research and development personnel. If we under estimate or over-estimate the level of services performed or the costs of these services, our accrued expenses could differ from our estimates. For the periods presented, we have experienced no material differences between our accrued expenses and actual expenses. Emerging Growth Company Status and JOBS Act Accounting Election Based on the market value of our common stock held by our non-affiliates as of June 30, 2021, we are considered a “large accelerated filer” on December 31, 2021 and thus lost our status as an emerging growth company as of such date. Accordingly, we can no longer rely upon exemptions and reduced reporting requirements provided by the JOBS Act. 104 Table of Contents Recent Accounting Pronouncements The information set forth under Note 2 to the financial statements under the caption “Recently Issued Accounting Pronouncements” is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable 105 Table of Contents