Sana Biotechnology, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. SANA BIOTECHNOLOGY, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) 153 Consolidated Balance Sheets 154 Consolidated Statements of Operations 155 Consolidated Statements of Comprehensive Loss 156 Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit ) 157 Consolidated Statements of Cash Flows 158 Notes to Consolidated Financial Statements 159 152 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Sana Biotechnology, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Sana Biotechnology Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2018. Seattle, Washington March 16, 2023 153 Sana Biotechnology, Inc. Consolidated Balance Sheets (in thousands, except per share amounts) December 31, 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 176,765 $ 253,029 Marketable securities 247,198 297,967 Restricted cash 6,100 - Prepaid expenses and other current assets 14,374 7,105 Total current assets 444,437 558,101 Long-term marketable securities 10,051 195,881 Property and equipment, net 66,917 65,464 Operating lease right-of-use assets 92,486 96,320 Long-term restricted cash 4,408 8,819 Intangible asset 59,195 59,195 Goodwill 140,627 140,627 Other non-current assets 4,599 5,000 TOTAL ASSETS $ 822,720 $ 1,129,407 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,857 $ 2,219 Accrued compensation 26,362 21,131 Accrued expenses and other current liabilities 14,547 10,344 Operating lease liabilities 12,393 9,159 Contingent consideration 55,345 51,382 Success payment liabilities - 5,000 Total current liabilities 111,504 99,235 Operating lease liabilities, net of current portion 95,860 101,784 Contingent consideration, net of current portion 95,034 102,361 Success payment liabilities, net of current portion 21,007 97,525 Total liabilities 323,405 400,905 Commitments and contingencies (Note 9) Stockholders' equity: Preferred stock, $ 0.0001 par value; 50,000 shares authorized; zero shares issued and outstanding as of December 31, 2022 and 2021, respectively - - Common stock, $ 0.0001 par value; 750,000 shares authorized; 191,022 and 184,929 shares issued and outstanding as of December 31, 2022 and 2021, respectively 19 18 Additional paid-in capital 1,558,459 1,515,210 Accumulated other comprehensive loss ( 4,327 ) ( 1,366 ) Accumulated deficit ( 1,054,836 ) ( 785,360 ) Total stockholders' equity 499,315 728,502 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 822,720 $ 1,129,407 The accompanying notes are an integral part of these consolidated financial statements. 154 Sana Biotechnology, Inc. Consolidated Statements of Operations (in thousands, except per share amounts) Year Ended December 31, 2022 2021 2020 Operating expenses: Research and development $ 285,885 $ 248,626 $ 132,944 Research and development related success payments and contingent consideration ( 84,882 ) 57,873 124,935 General and administrative 71,561 50,410 28,270 Total operating expenses 272,564 356,909 286,149 Loss from operations ( 272,564 ) ( 356,909 ) ( 286,149 ) Interest income, net 3,762 676 747 Other income (expense), net ( 674 ) 305 97 Net loss $ ( 269,476 ) $ ( 355,928 ) $ ( 285,305 ) Net loss per common share - basic and diluted $ ( 1.43 ) $ ( 2.14 ) $ ( 21.92 ) Weighted-average number of common shares - basic and diluted 188,344 166,433 13,014 The accompanying notes are an integral part of these consolidated financial statements. 155 Sana Biotechnology, Inc. Consolidated Statements of Comprehensive Loss (in thousands) Year Ended December 31, 2022 2021 2020 Net loss $ ( 269,476 ) $ ( 355,928 ) $ ( 285,305 ) Other comprehensive loss, net of tax: Unrealized gain (loss) on marketable securities, net ( 2,961 ) ( 1,396 ) 4 Total comprehensive loss $ ( 272,437 ) $ ( 357,324 ) $ ( 285,301 ) The accompanying notes are an integral part of these consolidated financial statements. 156 Sana Biotechnology, Inc. Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) (in thousands) Convertible Preferred Stock Common Stock Additional Paid-In Accumulated Other Comprehensive Accumulated Total Stockholders' Shares Amount Shares Amount Capital Income (Loss) Deficit Equity (Deficit) Balance as of December 31, 2019 106,890 $ 417,359 10,003 $ 1 $ 1,558 $ 26 $ ( 144,127 ) $ ( 142,542 ) Issuance of Series B convertible preferred stock, net of $ 33 in issuance costs 27,223 435,538 - - - - - - Issuance of common stock in connection with license agreements - - 100 - 680 - - 680 Vesting of restricted stock - - 5,964 1 - - - 1 Stock-based compensation - - - - 5,829 - - 5,829 Exercise of stock options - - 103 - 149 - - 149 Unrealized gain on marketable securities, net - - - - - 4 - 4 Net loss - - - - - - ( 285,305 ) ( 285,305 ) Balance as of December 31, 2020 134,113 $ 852,897 16,170 $ 2 $ 8,216 $ 30 $ ( 429,432 ) $ ( 421,184 ) Conversion of convertible preferred stock into common stock upon initial public offering ( 134,113 ) (852,897 ) 134,113 13 852,884 - - 852,897 Issuance of common stock in initial public offering, net of $ 49,220 in offering costs - - 27,025 3 626,402 - - 626,405 Vesting of restricted stock - - 5,916 - - - - - Exercise of stock options - - 1,586 - 3,167 - - 3,167 Issuance of common stock related to employee stock purchase plan - - 119 - 2,179 - - 2,179 Stock-based compensation - - - - 22,362 - - 22,362 Unrealized loss on marketable securities, net - - - - - ( 1,396 ) - ( 1,396 ) Net loss - - - - - - ( 355,928 ) ( 355,928 ) Balance as of December 31, 2021 - $ - 184,929 $ 18 $ 1,515,210 $ ( 1,366 ) $ ( 785,360 ) $ 728,502 Issuance of common stock from at the market offering, net of issuance costs of $ 625 - - 149 - 601 - - 601 Vesting of restricted stock - - 4,395 1 - - 1 Exercise of stock options - - 1,062 - 2,253 - - 2,253 Issuance of common stock related to employee stock purchase plan - - 487 - 2,058 - - 2,058 Stock-based compensation - - - - 38,337 - - 38,337 Unrealized loss on marketable securities, net - - - - - ( 2,961 ) - ( 2,961 ) Net loss - - - - - - ( 269,476 ) ( 269,476 ) Balance as of December 31, 2022 - $ - 191,022 19 1,558,459 ( 4,327 ) ( 1,054,836 ) 499,315 The accompanying notes are an integral part of these consolidated financial statements. 157 Sana Biotechnology, Inc. Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2022 2021 2020 OPERATING ACTIVITIES: Net loss $ ( 269,476 ) $ ( 355,928 ) $ ( 285,305 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 15,625 11,070 5,921 Stock-based compensation expense 38,337 22,362 5,828 Change in the estimated fair value of contingent consideration ( 3,364 ) 31,842 52,793 Change in the estimated fair value of success payment liabilities ( 81,518 ) 26,031 72,142 Non-cash expense for operating lease right-of-use assets 12,106 6,844 4,250 Other non-cash items, net ( 9,302 ) ( 3,076 ) 233 Changes in operating assets and liabilities: Prepaid expenses and other assets ( 5,988 ) ( 861 ) ( 1,436 ) Operating lease right-of-use assets and liabilities 1,562 5,088 91 Accounts payable 1,058 ( 266 ) 1,982 Accrued expenses and other liabilities 10,910 5,840 5,519 Net cash used in operating activities ( 290,050 ) ( 251,054 ) ( 137,982 ) INVESTING ACTIVITIES: Purchases of marketable securities ( 78,688 ) ( 491,387 ) ( 387,432 ) Proceeds from maturities of marketable securities 310,126 280,025 158,741 Purchases of property and equipment ( 20,876 ) ( 29,862 ) ( 23,872 ) Other investing activities - ( 4,574 ) - Net cash provided by (used in) investing activities 210,562 ( 245,798 ) ( 252,563 ) FINANCING ACTIVITIES: Proceeds from initial public offering, net of issuance costs - 626,405 - Proceeds from issuance of convertible preferred stock, net of issuance costs - - 435,538 Proceeds from employee stock purchase plan and exercise of stock options, net 4,312 5,346 149 Proceeds from at the market offering of common stock, net of issuance costs 601 - - Net cash provided by financing activities 4,913 631,751 435,687 Net (decrease) increase in cash, cash equivalents, and restricted cash ( 74,575 ) 134,899 45,142 Cash, cash equivalents, and restricted cash at beginning of period 261,848 126,949 81,807 Cash, cash equivalents, and restricted cash at end of period $ 187,273 $ 261,848 $ 126,949 RECONCILITION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH: Cash and cash equivalents $ 176,765 $ 253,029 $ 124,806 Restricted cash 6,100 - - Long-term restricted cash 4,408 8,819 2,143 Total cash, cash equivalents, and restricted cash $ 187,273 $ 261,848 $ 126,949 SUPPLEMENTAL CASH FLOW INFORMATION: Operating lease right-of-use assets obtained in exchange for lease obligations $ 21,073 $ 39,996 $ 26,521 Purchases of property and equipment included in accounts payable and accrued liabilities $ 1,234 $ 3,015 $ 3,140 Cash received for amounts related to tenant improvement allowances $ 2,014 $ 5,445 $ 91 Remeasurement of operating lease right-of-use asset for lease modification $ ( 12,801 ) $ - $ - The accompanying notes are an integral part of these consolidated financial statements. 158 Sana Biotechnology, Inc. Notes to Consolidated Financial Statements 1. Organization Sana Biotechnology, Inc. (the Company or Sana) is a biotechnology company focusing on utilizing engineered cells as medicines. The Company’s operations to date have included identifying and developing potential product candidates, executing preclinical studies, establishing manufacturing capabilities, preparing for clinical trials of our product candidates, acquiring technology, organizing and staffing the Company, business planning, establishing and maintaining the Company’s intellectual property portfolio, raising capital, and providing general and administrative support for these operations. Liquidity and capital resources The Company is subject to a number of risks and uncertainties similar to other biotechnology companies in the development stage, including, but not limited to, those related to the need to obtain adequate additional funding, possible failure of preclinical testing or clinical trials, the need to obtain marketing approval for its product candidates, building out internal and external manufacturing capabilities, competitors developing new technological innovations, the need to successfully commercialize and gain market acceptance of the Company’s products, the need to protect the Company’s intellectual property and proprietary technologies, and the need to attract and retain key scientific and management personnel. If the Company does not successfully commercialize or partner any of its product candidates, it will be unable to generate product revenue or achieve profitability. Until such time as the Company can generate significant revenue from product sales, if ever, it expects to finance its operations with the proceeds from additional equity or debt financings or capital obtained in connection with strategic collaborations or licensing or other arrangements. In the event that additional financing is required, the Company may not be able to raise it on terms acceptable to it or at all. In November 2022, the Company underwent a portfolio prioritization and corporate restructuring designed to optimize development of programs at or nearing clinical development, to continue investments in core research platforms and innovation, and to maintain a strong balance sheet. That process was substantially completed in 2022 and resulted in a reduction of the Company’s workforce by approximately 15 %. During the year ended December 31, 2022, the Company recognized $ 6.8 million of expenses related to employee severance, benefits, and related costs, and a non-cash stock-based compensation charge of $ 1.9 million related to equity awards for employees impacted by the restructuring in general and administrative expense. In August 2022, the Company entered a sales agreement with Cowen and Company, LLC (Cowen), acting as sales agent, pursuant to which it may offer and sell through Cowen shares of the Company’s common stock having an aggregate offering price of up to $ 150.0 million from time to time in a series of one or more at the market equity offerings (collectively, the ATM facility). As of December 31, 2022, the Company had raised approximately $ 0.6 million in net proceeds under the ATM facility. In February 2021, the Company successfully completed its initial public offering (IPO) of its common stock. In connection with its IPO, the Company issued 27.0 million shares of its common stock, including 3.5 million shares pursuant to the full exercise of the underwriters’ option to purchase additional shares, at a price of $ 25.00 per share, and received $ 626.4 million in net proceeds, after deducting underwriting discounts and commissions of $ 45.2 million and offering expenses of $ 4.0 million. The Company has incurred operating losses each year since inception and expects such losses to continue for the foreseeable future. As of December 31, 2022, the Company had cash, cash equivalents, and marketable securities of $ 434.0 million, and an accumulated deficit of $ 1.1 billion, which includes non-cash charges related to the revaluation of the success payment liabilities and contingent consideration of $ 18.6 million and $ 99.1 million, respectively. 2. Summary of significant accounting policies Basis of presentation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The Company’s consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP). Certain prior period amounts have been reclassified to conform to current period presentation. Use of estimates The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could materially differ from those estimates. The most significant estimates in the Company’s consolidated financial statements relate to success payment liabilities, contingent consideration, business combinations, accrued expenses, and operating lease right of use assets and liabilities. 159 Cash and cash equivalents Cash and cash equivalents include cash and highly liquid investments with original maturities of three months or less at acquisition. Cash equivalents include investments in money market funds with commercial banks and financial institutions and are stated at fair value. Marketable securities Marketable securities are classified as available-for-sale debt securities and are carried at fair value, which is derived from independent pricing sources based on quoted prices in active markets for similar securities. Investments in securities with maturities of less than one year, or those for which management intends to use to fund current operations, are included in current assets. Unrealized gains and losses that are deemed to be temporary in nature are reported as a component of accumulated comprehensive income (loss). Amortization, accretion, and dividends are included in other income (expense), net on the consolidated statement of operations. The cost of securities sold is based on the specific-identification method. Each reporting period, the Company evaluates whether declines in fair value below carrying value are due to expected credit losses, as well as the Company’s ability and intent to hold the investment until a forecasted recovery occurs. Expected credit losses are recorded as an allowance through other income (expense), net. Concentrations of credit risk and off-balance sheet risk The Company maintains its cash, cash equivalents, and marketable securities with high quality, accredited financial institutions. These amounts, at times, may exceed federally insured limits. The Company has not experienced any credit losses in such accounts and does not believe it is exposed to significant risk on these funds. The Company has no off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts, or other hedging arrangements. Fair value measurement The Company accounts for certain assets and liabilities at fair value and is required to disclose information that enables an assessment of the inputs used in determining the reported fair values. The fair value hierarchy prioritizes valuation inputs based on the observable nature of those inputs. The hierarchy applies only to the valuation inputs used to determine the reported fair value of the investments and is not a measure of the investment credit quality. The hierarchy defines three levels of valuation inputs: Level 1 – Quoted prices in active markets for identical assets or liabilities. Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 – Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. The Company’s financial instruments include cash and cash equivalents, short- and long-term marketable securities, accounts payable, contingent consideration, success payment liabilities, and other accrued liabilities. The carrying amounts of cash, cash equivalents, accounts payable, and accrued liabilities approximate fair value due to the short-term nature of these instruments. To the extent the valuation of financial instruments is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. See Note 6, Fair value measurements for more information on how the Company determines fair value. Property and equipment, net Property and equipment are stated at cost, net of accumulated depreciation. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the respective assets, generally three to five years . Leasehold improvements are depreciated over the lesser of their useful lives or the remaining life of the lease. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from the balance sheet and the resulting gain or loss is recorded in other income (expense), net in the period realized. Maintenance and repairs are expensed as incurred. Impairment of long-lived assets The Company reviews the carrying value and estimated lives of its long-lived assets whenever events or circumstances indicate the carrying values may not be recoverable. Should an impairment exist, the impairment loss would be measured based on the excess of the asset’s carrying amount over its fair value. The Company has not recognized any impairment losses since inception. 160 Acquisitions The Company accounts for business combinations using the acquisition method of accounting, which requires the assets acquired, including in-process research and development (IPR&D), and liabilities assumed be recorded at fair value as of the acquisition date. Any excess of the purchase price over the fair value of net assets acquired is recorded as goodwill. The determination of the estimated fair value of these items requires significant estimates and assumptions. Transaction costs associated with business combinations are recorded in general and administrative expense as they are incurred. If the Company determines the acquisition does not meet the definition of a business combination under the acquisition method of accounting, the transaction is accounted for as an asset acquisition. In an asset acquisition, up-front payments allocated to IPR&D are recorded in research and development expense if it is determined that there is no alternative future use, and subsequent milestone payments are recorded in research and development expense when achieved. Goodwill and intangible assets Goodwill represents the excess of the purchase price over the estimated fair value of the identifiable assets acquired and liabilities assumed in a business combination. The Company evaluates goodwill for impairment annually or when a triggering event occurs that could indicate a potential impairment. The evaluation for impairment includes assessing qualitative factors or performing a quantitative analysis to determine whether it is more-likely-than-not that the fair value of net assets is below the carrying amount. As of December 31, 2022, the Company had goodwill of $ 140.6 million related to its acquisition of Cobalt Biomedicine, Inc. (Cobalt) in 2019 (the Cobalt acquisition), which represents the excess of the purchase price over the estimated fair value of the net assets acquired. There have been no impairments of goodwill since the acquisition. Intangible assets acquired in a business combination are recognized separately from goodwill and are initially recognized at fair value at the acquisition date. The fair value of the IPR&D is estimated using the replacement cost method. Under this method, the Company estimates the cost to recreate the technology and derive an estimated value to develop the technology. IPR&D assets are required to be classified as indefinite-lived assets and are not amortized until they become finite-lived assets upon the successful completion of the associated research and development technology. At that time, the useful life of the asset will be determined, and amortization will begin. If the associated research and development technology is abandoned, the related IPR&D asset will be written off and an impairment charge recorded. Intangible assets are reviewed for impairment at least annually or when a triggering event occurs that could indicate a potential impairment. There has been no amortization or impairment of the intangible asset since the Cobalt acquisition. Contingent consideration from business combinations Contingent consideration from a business combination is recorded at fair value on the acquisition date and remeasured at each subsequent reporting period with changes in fair value recognized in research and development related success payments and contingent consideration. Changes in fair values reflect changes to the Company’s assumptions regarding probabilities of successful achievement of related milestones, the timing in which the milestones are expected to be achieved, and the discount rate used to estimate the fair value of the obligation. Pursuant to the terms and conditions of the Cobalt acquisition agreement, we are obligated to pay to certain former Cobalt stockholders contingent consideration (Cobalt Contingent Consideration). See Note 3, Acquisitions for more details on the Cobalt Consideration. Success payments The Company agreed to pay success payments to Cobalt (Cobalt Success Payment) pursuant to the terms of its acquisition agreement with Cobalt and to the President and Fellows of Harvard College (Harvard) (Harvard Success Payments) pursuant to the terms of its exclusive license agreement with Harvard. See Note 3, Acquisitions and Note 4, License and collaboration agreements for more details on these success payments. The success payments are accounted for under Accounting Standards Codification (ASC) 815, Derivatives and Hedging . The Cobalt Success Payment was recorded as a liability on the consolidated balance sheet at fair value on the acquisition date and is remeasured at each subsequent reporting period, with changes in fair value recognized in research and development related success payments and contingent consideration. For the Harvard Success Payments, both the initial value and subsequent changes in fair value are recorded in research and development related success payments and contingent consideration. 161 To determine the estimated fair value of the success payment liabilities, the Company uses a Monte Carlo simulation methodology , which models the value of the liabilities based on several key assumptions , including the remaining terms of the success payments, risk-free interest rate, estimated number and timing of valuation measurement dates on the basis of which payments may be triggered, and expected volatility of the Company’s common stock. Expected volatility is estimated using the volatility of peer companies for a period of time commensurate with the remaining terms of the success payments. Additionally, the computation of the estimated fair value of the Cobalt Success Payment liability incorporate s the market capitalization of the Company at the end of each reporting period , and the computation of the estimated fair value of the Harvard Success Payments incorporate s the per share fair market value of the Company’s common stock at the end of each reporting period. Leases At the inception of an arrangement with a third party, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Lease liabilities represent an obligation to make payments arising from a lease and are measured at the present value of the remaining future lease payments over the term of the lease. The present value of the lease payments is determined using an incremental borrowing rate (IBR), which reflects the fixed rate at which the Company could borrow the amount of the lease payments, on a collateralized basis, for a similar term and economic environment. The lease terms may include the impact of options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option. Assumptions made by the Company at the lease commencement date are re-evaluated upon the occurrence of certain events, including a lease modification. When a lease modification results in a separate contract, it is accounted for in the same manner as a new lease. Right-of-use (ROU) assets represent the right to use the underlying asset identified in the lease for the term of the agreement. The calculation of the ROU asset incorporates the value of the lease liability and excludes any lease incentives received and initial direct costs incurred. The Company’s lease portfolio consists of operating leases related to its facilities for office, laboratory, and industrial and manufacturing space. The Company does not have any financing leases. Leases with a term of 12 months or less are considered short-term and do not require recognition on the balance sheet, and payments associated with short-term leases are expensed as incurred. Rent expense for operating leases is recognized on a straight-line basis over the lease term. Claims and contingencies From time to time, the Company may become involved in litigation and proceedings relating to claims arising in the ordinary course of business. The Company accrues a liability if the likelihood of an adverse outcome is probable, and the amount can be reasonably estimated. If the likelihood of an adverse outcome is only reasonably possible, or if an adverse outcome is probable, but an estimate is not determinable, the Company provides disclosure of the material claim or contingency. Stock-based compensation The Company recognizes compensation costs related to restricted stock awards (RSAs), restricted stock units (RSUs), and stock options granted to employees and nonemployees based on the estimated fair value of the awards on the date of grant and recognizes expense on a straight-line basis over the requisite service period, which is generally the vesting period of the award. Forfeitures are recognized as they occur. For RSAs and RSUs, the fair value of the Company’s common stock is used to determine the resulting stock-based compensation expense. The fair value of stock options is estimated on the date of grant using a Black-Scholes option pricing model which requires management to apply judgment and make estimates, including: • Fair Value of Common Stock —The fair value of common stock is based on the closing price as reported on The Nasdaq Global Select Market on the date of grant. • Expected Term —The expected term represents the period that a stock-based award is expected to be outstanding. The Company uses the simplified method to determine the expected term, which is based on the average of the time-to-vesting and the contractual life of the option. • Expected Volatility — Due to the Company’s limited operating history and lack of company-specific historical and implied volatility data, the expected volatility is estimated based on the average historical volatilities of common stock of comparable publicly traded entities over a period of time commensurate with the expected term of the stock option grants. The comparable companies are chosen based on their size, stage in the product development cycle, or area of specialty. The Company will continue to apply this process until sufficient historical information regarding the volatility of its own stock price becomes available. • Risk-Free Interest Rate— The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the expected term of the awards. 162 • Expected Dividend— The Company has never paid dividends on its common stock and has no plans to pay dividends on its common stock. Therefore, the Company used an expected dividend yield of zero . Research and development expense The Company records expense for research and development costs as incurred. Nonrefundable, advance payments for goods or contracts for services are deferred, and expense is recognized in the period in which the goods are received or the services are rendered. Research and development expense consist of personnel-related costs, including salaries, benefits, and non-cash stock-based compensation, external research and development expenses incurred under arrangements with third parties, costs for laboratory supplies, costs to acquire and license technologies aligned with the Company’s goal of translating engineered cells to medicines, facility and other allocated expenses, including rent, depreciation, and allocated overhead costs. Research and development related success payment and contingent consideration Research and development related success payments and contingent consideration include the change in the estimated fair value of the Cobalt Success Payment and Harvard Success Payment liabilities and Cobalt Contingent Consideration. Research and development expense related to the success payment liabilities and contingent consideration is unpredictable and may vary significantly from quarter-to-quarter and year-to-year due to changes in the assumptions used in the calculations. General and administrative expenses General and administrative expenses consist of personnel costs, including salaries, benefits, and non-cash stock-based compensation, for employees in finance, legal, executive, human resources, information technology, and other administrative functions, legal and consulting fees, recruiting costs, and facility costs not otherwise included in research and development expenses. Legal fees include those related to corporate and patent matters. General and administrative expenses for the twelve months ended December 31, 2022 include costs related to the November 2022 restructuring and construction in progress costs incurred in connection with the write-off of our previously planned manufacturing facility in Fremont, California (Fremont facility), which we plan to replace with our manufacturing facility in Bothell, Washington (the Bothell facility). Income taxes The Company determines its deferred tax assets and liabilities based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that the deferred tax asset will not be recovered. The Company applies judgment in the determination of the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recognizes any material interest and penalties related to unrecognized tax benefits in income tax expense. The Company is required to file income tax returns in the United States (U.S.) federal jurisdiction, and other state and local jurisdictions. The Company is generally subject to examination by U.S. federal and local income tax authorities for all tax years in which the loss carryforward is available. The Company is currently not under examination by the Internal Revenue Service or other jurisdictions for any tax years. Segments Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business in one operating segment. JOBS Act accounting election The Company is an emerging growth company (EGC), as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act). Under the JOBS Act, an EGC can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies; however, the Company may adopt new or revised accounting standards early if the standard allows for early adoption. In addition, the Company will utilize other exemptions and reduced reporting requirements provided to EGCs by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, an EGC is not required to, among other things, (i) provide an auditor’s attestation report on the company’s system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes- 163 Oxley Act of 2002, (ii) provide all of the compensation disclosure that may be required of non- EGC public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis) , or (iv) disclose certain executive compensation-related items , such as the correlation between executive compensation and performance and comparisons of the c hief e xecutive o fficer’s compensation to median employee compensation. Recent accounting pronouncements Recently adopted ASU No. 2017-04 , Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). To address concerns over the cost and complexity of the two-step goodwill impairment test, the amendments in ASU 2017-04 remove the second step of the test. An entity will instead apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The adoption of ASU 2017-04 had no effect on our financial statements and disclosures. 3. Acquisitions Cobalt Biomedicine, Inc. In February 2019, the Company acquired 100 % of the outstanding equity in Cobalt, a privately-held early-stage biotechnology company developing a platform technology using its fusogen technology to specifically and consistently deliver various biological payloads to cells (the Cobalt acquisition). As part of the Cobalt acquisition, the Company recorded an intangible asset of $ 59.2 million, which consists of IPR&D that is classified as indefinite-lived until the successful completion of the associated research and development technology, at which point it becomes a finite-lived asset and will be amortized over its estimated useful life. If the research and development technology is abandoned, an impairment charge will be recorded. The Company is actively developing the fusogen technology and, accordingly, the intangible asset is not complete. Amortization will begin when regulatory approval of a product candidate developed using the fusogen technology is obtained in a major market, typically either the United States or the European Union. The Company recognized $ 140.6 million of goodwill as a result of the Cobalt acquisition, which is primarily attributable to the value the acquisition provides the Company by complementing the Company’s ex vivo portfolio with in vivo cell engineering technology and furthering the Company’s research in using engineered cells as medicines. The goodwill is not deductible for income tax purposes. Pursuant to the terms and conditions in the Cobalt acquisition agreement, the Company has an obligation to pay to certain former Cobalt stockholders contingent consideration (Cobalt Contingent Consideration) of up to an aggregate of $ 500.0 million upon the achievement of certain pre-specified development milestones and a success payment (Cobalt Success Payment) of up to $ 500.0 million, each of which is payable in cash or stock. The Cobalt Success Payment is payable if, at pre-determined valuation measurement dates, the Company’s market capitalization equals or exceeds $ 8.1 billion, and the Company is advancing a program based on the fusogen technology in a clinical trial pursuant to an investigational new drug application (IND), or has filed for, or received approval for, a biologics license application (BLA) or new drug application (NDA) for a product developed using the fusogen technology. A valuation measurement date would also be triggered upon a change of control of the Company if at least one of the Company’s programs based on the fusogen technology is an active research program at the time of such change of control. If the Company’s market capitalization is below $ 8.1 billion as of the date of a change of control, the amount of the potential Cobalt Success 164 Payment will decrease, and the amount of potential Cobalt Contingent Consideration will increase. As of December 31 , 202 2 , a Cobalt Success Payment had not been triggered. The following table sets forth various thresholds for the Company’s market capitalizations as of the date of a change of control and the resulting potential Cobalt Success Payment and additional potential Cobalt Contingent Consideration: Sana market capitalization upon a change of control and resulting impact to Cobalt Success Payment and additional potential Cobalt Contingent Consideration Cobalt Success Payment Additional potential Cobalt Contingent Consideration (in millions) Equal to or exceeds $ 8.1 billion $ 500 $ - Equal to or exceeds $ 7.4 billion, but less than $8.1 billion 150 350 Equal to or exceeds $ 6.8 billion, but less than $7.4 billion 100 400 Less than $ 6.8 billion - 500 The Cobalt Success Payment and Cobalt Contingent Consideration liabilities are carried at fair value with changes in fair value recognized in research and development related success payments and contingent consideration. As of December 31, 2022 and 2021, the estimated fair value of the Cobalt Success Payment liability was $ 19.0 million and $ 88.3 million, respectively, and was recorded in long-term liabilities. For the years ended December 31, 2022, 2021, and 2020 the Company recognized a gain of $ 69.3 million and expenses of $ 23.6 million and $ 62.3 million, respectively, in connection with the change in fair value of the Cobalt Success Payment. As of December 31, 2022, the estimated fair value of the Cobalt Contingent Consideration was $ 150.4 million, of which $ 55.4 million was recorded in short-term liabilities and $ 95.0 million was recorded in long-term liabilities. As of December 31, 2021, the estimated fair value of the Cobalt Contingent Consideration was $ 153.7 million of which $ 51.4 million was recorded in short-term liabilities and $ 102.3 million was recorded in long-term liabilities. For the years ended December 31, 2022, 2021, and 2020, the Company recognized a gain of $ 3.4 million and expenses of $ 31.8 million and $ 52.8 million, respectively, in connection with the change in fair value of the Cobalt Contingent Consideration. 4. License and collaboration agreements Beam Therapeutics Inc. In October 2021, the Company entered into an option and license agreement with Beam Therapeutics Inc. (Beam), pursuant to which the Company was granted a non-exclusive license to use Beam’s proprietary CRISPR Cas12b nuclease editing technology to research, develop, and commercialize engineered cell therapy products that (i) are directed to certain antigen targets, with respect to the Company’s allogeneic T cell programs, or (ii) comprise certain human cell types, with respect to the Company’s stem cell-derived programs. The Company made an upfront payment of $ 50.0 million to Beam, which was recorded in research and development expense for the year ended December 31, 2021. Additionally, under the terms of the agreement, the Company may be obligated to pay up to $ 65.0 million for each licensed product in specified developmental and commercial milestone payments and royalties on licensed products. At the time of the entry into the option and license agreement, a member of the Company’s board of directors was a beneficial owner of greater than 10 % of the outstanding shares of Beam and is affiliated with a member of the board of directors of Beam. President and Fellows of Harvard College In March 2019, the Company entered into an exclusive license agreement with Harvard to access certain intellectual property for the development of hypoimmune cells. The Company paid aggregate consideration of $ 12.0 million, comprising $ 9.0 million in common stock and $ 3.0 million in cash. Under the terms of the agreement, the Company may be required to make up to an aggregate of $ 175.0 million in success payments to Harvard, payable in cash, based on increases in the fair value of the Company’s common stock. The potential Harvard Success Payments are based on multiples of increased value ranging from 5x to 40x, based on a comparison of the fair market value of the Company’s common stock relative to the original issuance price of $ 4.00 per share at ongoing pre-determined valuation measurement dates. The Harvard Success Payments can be achieved over a maximum of 12 years from the effective date of the agreement. If a higher success payment tier is first met at the same time a lower tier is first met, both tiers will be owed. Any previous success payments made to Harvard would be credited against the success payment owed as of any valuation measurement date so that Harvard does not receive multiple success payments in connection with the same threshold. As of December 31, 2022, a Harvard Success Payment had not been triggered. 165 Multiple of Equity Value at Issuance 5x 10x 20x 30x 40x Per share common stock price required for payment $ 20.00 $ 40.00 $ 80.00 $ 120.00 $ 160.00 Success payment(s) (in millions) $ 5.0 $ 15.0 $ 30.0 $ 50.0 $ 75.0 The Harvard Success Payment liabilities are carried at fair value, with the initial value and changes in fair value recognized in the consolidated statements of operations in research and development related success payments and contingent consideration. As of December 31, 2022 the estimated fair value of the Harvard Success Payment liability was $ 2.0 million and was recorded in long-term liabilities. As of December 31, 2021 the estimated fair value of the Harvard Success Payment liability was $ 14.2 million, of which $ 5.0 million was recorded in short-term liabilities and $ 9.2 million was recorded in long-term liabilities. In connection with the change in the estimated fair value of the Harvard Success Payment liability the Company recognized a gain of $ 12.2 million, and expenses of $ 2.4 million, and $ 9.9 million, respectively, for the years ended December 31, 2022, 2021, and 2020. 5. Restricted cash As of December 31, 2022 and 2021, the Company maintained two standby letters of credit of $ 10.5 million and $ 8.8 million, respectively, which are collateralized with a bank account at a financial institution in accordance with the applicable lease agreements. The Company’s letter of credit related to its lease for industrial space located in Fremont, California will reduce from $ 6.7 million to $ 0.6 million in July 2023, and as such, $ 6.1 million in restricted cash is included in current assets on the balance sheet as of December 31, 2022. 6. Fair value measurements The following tables summarize the Company’s financial assets and liabilities measured at fair value on a recurring basis based on the three-tier fair value hierarchy: December 31, 2022 Valuation Hierarchy Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Estimated Fair Value (in thousands) Financial assets: Cash equivalents: Money market funds Level 1 $ 114,363 $ - $ - $ 114,363 U.S. government and agency securities Level 2 40,532 10 - 40,542 Corporate debt securities Level 2 9,796 1 ( 2 ) 9,795 Total cash equivalents 164,691 11 ( 2 ) 164,700 Short-term marketable securities: U.S. government and agency securities Level 2 222,435 2 ( 3,711 ) 218,726 Corporate debt securities Level 2 28,836 - ( 364 ) 28,472 Total short-term marketable securities 251,271 2 ( 4,075 ) 247,198 Long-term marketable securities: U.S. government and agency securities Level 2 10,314 - ( 263 ) 10,051 Total long-term marketable securities 10,314 - ( 263 ) 10,051 Other assets Level 3 369 - - 369 Total financial assets $ 426,645 $ 13 $ ( 4,340 ) $ 422,318 Financial liabilities: Short-term financial liabilities: $ - Contingent consideration Level 3 $ 55,345 $ - $ - $ 55,345 Total short-term financial liabilities 55,345 - - 55,345 Long-term financial liabilities: Contingent consideration Level 3 95,034 - - 95,034 Success payment liabilities Level 3 21,007 - - 21,007 Total long-term financial liabilities 116,041 - - 116,041 Total financial liabilities $ 171,386 $ - $ - $ 171,386 166 December 31, 2021 Valuation Hierarchy Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Estimated Fair Value (in thousands) Financial assets: Cash equivalents: Money market funds Level 1 $ 224,671 $ - $ - $ 224,671 Corporate debt securities Level 2 2,345 - - 2,345 Total cash equivalents 227,016 - - 227,016 Short-term marketable securities: U.S. government and agency securities Level 2 162,854 1 ( 195 ) 162,660 Corporate debt securities Level 2 135,441 - ( 134 ) 135,307 Total short-term marketable securities 298,295 1 ( 329 ) 297,967 Long-term marketable securities: U.S. government and agency securities Level 2 176,492 - ( 925 ) 175,567 Corporate debt securities Level 2 20,427 - ( 113 ) 20,314 Total long-term marketable securities 196,919 - ( 1,038 ) 195,881 Other assets Level 3 426 - - 426 Total financial assets $ 722,656 $ 1 $ ( 1,367 ) $ 721,290 Financial liabilities: Short-term financial liabilities: Contingent consideration Level 3 $ 51,382 $ - $ - $ 51,382 Success payment liabilities Level 3 5,000 - - 5,000 Total short-term financial liabilities 56,382 - - 56,382 Long-term financial liabilities: Contingent consideration Level 3 102,361 - - 102,361 Success payment liabilities Level 3 97,525 - - 97,525 Total long-term financial liabilities 199,886 - - 199,886 Total financial liabilities $ 256,268 $ - $ - $ 256,268 The Company measures the fair value of money market funds based on quoted prices in active markets for identical assets or liabilities. The Level 2 marketable securities include U.S. government and agency securities and corporate debt securities and are valued based on either recent trades of securities in inactive markets or quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data. The following table summarizes available-for-sale debt securities in a continuous unrealized loss position for less than and greater than twelve months, for the periods presented: Less than 12 months 12 months or greater Total Fair value Unrealized losses Fair value Unrealized losses Fair value Unrealized losses (in thousands) December 31, 2022 U.S. government and agency securities $ 49,253 $ ( 673 ) $ 172,845 $ ( 3,301 ) $ 222,098 $ ( 3,974 ) Corporate debt securities 13,333 ( 16 ) 19,664 ( 350 ) 32,997 ( 366 ) Total $ 62,586 $ ( 689 ) $ 192,509 $ ( 3,651 ) $ 255,095 $ ( 4,340 ) December 31, 2021 U.S. government and agency securities $ 329,883 $ ( 1,120 ) $ - $ - $ 329,883 $ ( 1,120 ) Corporate debt securities 156,662 ( 247 ) - - 156,662 ( 247 ) Total $ 486,545 $ ( 1,367 ) $ - $ - $ 486,545 $ ( 1,367 ) The Company determined that there was no material change in the credit risk of the above investments during the year ended December 31, 2022. As such, an allowance for credit losses has not been recognized. As of December 31, 2022, the Company does 167 not intend to sell such securities, and it is not more-likely-than-not that the Company will be required to sell the securities prior to the recovery of the amortized cost basis. As of December 31, 2021, all marketable securities had an effective maturity date of two years or less. Investments in securities with maturities of less than one year , or those for which management intends to use to fund current operations, are included in current assets and classified as available-for-sale. As of December 31, 2022 and 2021, the balance in accumulated other comprehensive loss included net unrealized gains (losses) related to the Company’s available-for-sale debt securities. The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities: Contingent Consideration Cobalt Success Payment Liability Harvard Success Payment Liability (in thousands) Balance as of December 31, 2021 $ 153,743 $ 88,353 $ 14,172 Changes in fair value - gain ( 528 ) ( 46,823 ) ( 8,087 ) Balance as of March 31, 2022 153,215 41,530 6,085 Changes in fair value - gain ( 3,830 ) ( 12,073 ) ( 2,025 ) Balance as of June 30, 2022 149,385 29,457 4,060 Changes in fair value - expense (gain) ( 8,255 ) 2,439 ( 246 ) Balance as of September 30, 2022 141,130 31,896 3,814 Changes in fair value - expense (gain) 9,249 ( 12,880 ) ( 1,823 ) Balance as of December 31, 2022 $ 150,379 $ 19,016 $ 1,991 Contingent consideration The Company utilizes significant estimates and assumptions it believes would be made by a market participant in determining the estimated fair value of the Cobalt Contingent Consideration at each balance sheet date. The fair value of the Cobalt Contingent Consideration was determined by calculating the probability-weighted estimated value of the pre-specified development milestone payments based on the assessment of the likelihood and estimated timing that the milestones would be achieved and the applicable discount rates. The discount rate captures the credit risk associated with the payment of the contingent consideration when earned and due. The Company assesses these estimates on an ongoing basis as additional data impacting the assumptions are obtained. The fair value of the Cobalt Contingent Consideration was calculated using the following unobservable inputs: December 31, 2022 2021 Unobservable Input Range Weighted-Average Range Weighted-Average Discount rates 13.4% - 15.1% 14.6 % 10.9% - 11.6% 11.2 % Probability of milestone achievement 5.0% - 85.0% 36.0 % 5.0% - 75.0% 33.8 % The weighted-average unobservable inputs were calculated based on the relative value of the pre-specified development milestones. The estimated fair value of the Cobalt Contingent Consideration may change significantly as development progresses and additional data are obtained, impacting the assumptions regarding probabilities of successful achievement of the milestones used to estimate the fair value of the liability and the timing in which they are expected to be achieved. In evaluating the fair value assumptions, judgment is required to interpret the market data used to develop the estimates. The estimates of fair value may not be indicative of the amounts that could be realized in a current market exchange. Accordingly, the use of different market assumptions, inputs, and/or different valuation techniques could result in materially different fair value estimates. Success payments The Company utilizes significant estimates and assumptions in determining the estimated fair value of the success payment liabilities and the associated expense or gain at each balance sheet date. The estimated fair value of the Cobalt Success Payment and Harvard Success Payment liabilities was determined using a Monte Carlo simulation methodology, which models the estimated fair value of the liability based on several key assumptions, including the expected volatility, remaining term, risk-free interest rate, estimated number and timing of valuation measurement dates on the basis of which payment may be triggered, and for the Cobalt Success Payment, the Company’s market capitalization, and for the Harvard Success Payments, the per share fair value of the Company’s common stock. 168 The fair values of the Cobalt Success Payments and Harvard success Payments were calculated using the following unobservable inputs: December 31, 2022 2021 Unobservable Input Cobalt Harvard Cobalt Harvard Expected stock price volatility 70 % 70 % 70 % 70 % Expected term (years) 16.1 8.2 17.1 9.2 7. Property and equipment, net Property and equipment, net consists of the following: December 31, 2022 2021 (in thousands) Laboratory equipment $ 61,842 $ 47,684 Leasehold improvements 34,427 33,848 Construction in progress 1,711 1,388 Computer equipment, software, and other 2,914 1,318 Total property and equipment, at cost 100,894 84,238 Less: Accumulated depreciation ( 33,977 ) ( 18,774 ) Property and equipment, net $ 66,917 $ 65,464 Depreciation expense was $ 15.6 million, $ 11.1 million, and $ 5.9 million for the years ended December 31, 2022, 2021, and 2020, respectively. 8. Accrued liabilities Accrued compensation and accrued expenses and other current liabilities consist of the following: December 31, 2022 2021 (in thousands) Accrued compensation: Accrued bonuses $ 16,455 $ 13,814 Accrued paid time off 4,794 4,429 Accrued payroll 5,113 2,888 Total accrued compensation $ 26,362 $ 21,131 Accrued expenses and other current liabilities: Accrued research and development services $ 8,733 $ 3,419 Accrued professional fees 1,158 1,971 Accrued property and equipment 1,790 2,566 Other accrued current liabilities 2,866 2,388 Total accrued expenses and other current liabilities $ 14,547 $ 10,344 9. Commitments and contingencies Lease commitments The Company’s lease portfolio primarily comprises operating leases for office, laboratory, non-good manufacturing practices pilot plant manufacturing, and industrial space. These leases contain various rent abatement periods, after which they require monthly lease payments that may be subject to annual increases throughout the lease term. Certain leases include options to extend the term. The renewal option is considered in the remaining lease term for the lease only when the Company is reasonably certain it will renew the lease. Certain leases provide the Company with the right to make tenant improvements, including the addition of laboratory space or build-out of manufacturing capabilities, and include a lease incentive allowance. 169 In June 2022, the Company entered into a lease agreement for 79,565 square feet of office, laboratory, and industrial space located in Bothell, Washington. The initial term of the lease is 16 years from the date the premises are delivered to the Company for construction of certain tenant improvements and includes the option to extend the lease for up to three additional five-year terms. The lease agreement also provides for up to $ 19.9 million for reimbursement of tenant improvements, as well as an additional $ 8.0 million for tenant improvements, available at the Company’s election, which the Company would be obligated to repay to the landlord monthly over the initial term of the lease with interest at a rate of 6.5 % per annum. The Company is obligated to pay base rent of approximately $ 68.8 million over the initial term of the lease. In accordance with the lease agreement, the Company has obtained a letter of credit in the amount of $ 1.6 million. The Company will recognize the right-of-use asset and lease liability when the lease commences in January 2023. In July 2021, the Company entered into a lease for industrial space located in Fremont, California (the Fremont facility), with the intent to establish and develop its manufacturing operations at the Fremont facility. However, the Company determined in June 2022 to establish and develop its manufacturing operations at the Bothell facility rather than the Fremont facility. The original right-of-use asset and lease liability for the Fremont facility was calculated assuming the Company would exercise its option to renew the lease for two additional five-year terms. The Company remeasured the lease for the Fremont facility due to the shorter expected lease term, which resulted in a $ 12.8 million reduction in the related right-of-use asset and lease liability. Additionally, for the twelve months ended December 30, 2022, the Company wrote-off $ 4.5 million of construction in progress costs incurred in connection with the Fremont facility in general and administrative expense. The following table contains additional information related to the Company’s operating leases: Location Use Approximate Square Footage Commencement Dates Expiration Dates Seattle, WA Office/Laboratory 48,000 March 2019 to September 2020 December 2026 to April 2028 Cambridge, MA Office/Laboratory 60,000 March 2019 to January 2022 December 2025 to February 2028 South San Francisco, CA Office/Laboratory 100,000 December 2019 to April 2022 April 2024 to April 2030 Fremont, CA Industrial 163,000 July 2021 November 2031 Rochester, NY Office/Laboratory 3,000 January 2022 January 2025 Bothell, WA Office/Laboratory/Industrial 80,000 January 2023 January 2039 Throughout the term of the lease agreements, the Company is responsible for paying certain operating costs in addition to rent, such as common area maintenance, taxes, utilities, and insurance. These additional charges are considered variable lease costs and are recognized in the period in which the costs are incurred. The following table summarizes the Company’s lease costs: Year Ended December 31, 2022 2021 2020 (in thousands) Operating lease cost $ 23,881 $ 16,425 $ 10,757 Short-term lease cost - 512 1,886 Variable lease cost 7,193 5,230 3,081 Total lease cost $ 31,074 $ 22,167 $ 15,724 As of December 31, 2022, the weighted-average remaining lease term was 6.2 years and the weighted-average IBR was 9.68 %. 170 The following table reconciles the Company’s undiscounted operating lease cash flows by fiscal year to the present value of the operating lease liabilities as of December 31, 2022 (in thousands): 2023 $ 23,523 2024 24,321 2025 24,298 2026 21,343 2027 18,736 2028 and thereafter 36,367 Total undiscounted lease payments 148,588 Less: imputed interest ( 39,018 ) Less: tenant improvement allowances ( 1,317 ) Present value of operating lease liabilities 108,253 Less: current portion of operating lease liabilities ( 12,393 ) Operating lease liabilities, net of current portion $ 95,860 10. Stockholders’ equity As of December 31, 2022, there were 191.0 million shares of the Company’s common stock outstanding. As of December 31, 2021, there were 184.9 million shares of the Company’s common stock outstanding, excluding 4.4 million shares of restricted common stock outstanding that are subject to vesting requirements. In August 2022, the Company put in place the ATM facility, under which the Company entered a sales agreement with Cowen, acting as sales agent, pursuant to which the Company may offer and sell through Cowen shares of the Company’s common stock having an aggregate offering price of up to $ 150.0 million from time to time in a series of one or more at the market equity offerings. As of December 31, 2022, the Company had raised approximately $ 0.6 million in net proceeds under the ATM facility. 11. Stock-based compensation Equity Incentive Plans In February 2021, the Company adopted the 2021 Incentive Award Plan (2021 Plan) and the 2021 Employee Stock Purchase Plan (2021 ESPP), both of which became effective on the completion of the Company’s IPO. The 2021 Plan provides for a variety of stock-based compensation awards, including stock options, restricted stock awards (RSAs), and restricted stock units (RSUs). The 2021 ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15 % of their earnings, subject to plan limitations. Unless otherwise determined by the Company’s board of directors, employees may purchase shares at 85 % of the lower of the fair market value of the Company’s common stock on the first date of an offering period or on the purchase date. As of December 31, 2022, 14.4 million shares and 3.3 million shares were available for future issuance under the 2021 Plan and the 2021 ESPP, respectively. Stock-based compensation expense Stock-based compensation expense is recognized in the consolidated statements of operations as follows: Year Ended December 31, 2022 2021 2020 (in thousands) Research and development $ 26,583 $ 15,239 $ 4,888 General and administrative (1) 11,754 7,123 940 Total stock-based compensation expense $ 38,337 $ 22,362 $ 5,828 (1) During the year ended December 31, 2022 the Company recognized stock-based compensation expense of $ 1.9 million related to equity awards for employees impacted by the November 2022 restructuring. 171 Unrecognized stock-based compensation costs related to unvested awards and the weighted-average period over which the costs are expected to be recognized as of December 31, 2022 are as follows: Stock Options RSAs RSUs Unrecognized stock-based compensation expense (in thousands) $ 73,291 $ 13 $ 4,209 Weighted-average period costs expected to be recognized (in years) 2.7 0.3 2.2 Stock options A summary of the Company’s stock option activity is as follows: Stock Options (in thousands) Weighted-Average Exercise Price per Share Weighted-Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in thousands) Outstanding as of December 31, 2021 17,337 $ 8.96 8.7 $ 141,718 Granted 11,949 6.09 Exercised ( 1,062 ) 2.10 Forfeited/Cancelled ( 4,538 ) 9.12 Outstanding as of December 31, 2022 23,686 $ 7.79 8.3 $ 10,628 Exercisable as of December 31, 2022 7,402 $ 7.32 7.3 $ 7,648 The fair value of stock options granted to employees, directors, and consultants was estimated on the date of grant using the Black-Scholes option pricing model using the following assumptions: Assumptions 2022 2021 2020 Risk free interest rate 1.56% - 4.31% 0.46% - 1.38% 0.36% - 1.51% Expected volatility 70 % 70 % 70 % Expected term (years) 5.50 - 6.25 5.50 - 6.40 6.25 - 6.75 Expected dividend 0 % 0 % 0 % The following table summarizes additional information related to stock option activity: 2022 2021 2020 Weighted average grant date fair value per share for options granted $ 3.92 $ 14.22 $ 3.52 Aggregate intrinsic value of stock options exercised (in thousands) $ 6,133 $ 29,880 $ 605 Restricted stock A summary of the Company’s RSA and RSU activity is as follows: RSAs (in thousands) RSAs Weighted-Average Grant Date Fair Value per Share RSUs (in thousands) RSUs Weighted-Average Grant Date Fair Value per Share Unvested shares as of December 31, 2021 4,365 $ 0.43 141 $ 9.43 Granted - - 1,075 6.21 Vested ( 4,309 ) 0.42 ( 86 ) 9.52 Forfeited ( 44 ) 0.94 ( 245 ) 5.38 Unvested shares as of December 31, 2022 12 $ 1.44 885 $ 6.66 The fair value of vested RSAs was $ 1.8 million, $ 1.5 million, and $ 1.5 million, respectively, for the years ended December 31, 2022, 2021, and 2020. The fair value of vested RSUs was $ 0.5 million and $ 4.1 million for the years ended December 31, 2022 and 2021, and immaterial for the year ended December 31, 2020. 172 12. Income taxes As of December 31, 2022, the Company had U.S. federal and state tax-effected net operating loss (NOL) carryforwards of $ 120.2 million and $ 34.6 million, respectively, which are available to reduce future taxable income. As of December 31, 2022, the Company also had federal and state research tax credits of $ 30.8 million and $ 13.3 million, respectively, which may be used to offset future liabilities. The Tax Cuts and Jobs Act enacted on December 22, 2017 altered the carryforward period for federal net operating losses and as a result, all net operating losses generated in 2018 and forward have an indefinite life. Of the federal net operating losses reported, we have accumulated $ 118.6 million with an indefinite life as of December 31, 2022. The state NOL will begin to expire in 2036 . The federal tax credit carryforward will begin to expire in 2037 , and the state tax credit will carry forward indefinitely. The NOL and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. Subsequent ownership changes may further affect the limitation in future years. A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows: Year Ended December 31, 2022 2021 2020 Federal statutory tax 21.00 % 21.00 % 21.00 % State income tax, net of federal benefit 13.49 2.75 2.09 Valuation allowance ( 43.69 ) ( 24.06 ) ( 15.18 ) Success payment liabilities 5.40 ( 1.40 ) ( 4.58 ) Contingent consideration 0.26 ( 1.88 ) ( 3.89 ) Tax credits 4.93 2.58 1.88 Other ( 1.39 ) 1.01 ( 1.32 ) Effective income tax rate 0.00 % 0.00 % 0.00 % The principal components of the Company’s net deferred tax assets are as follows: December 31, 2022 2021 (in thousands) Deferred tax assets: Net operating loss carryforwards $ 154,888 $ 114,368 Capitalized research and development 49,687 - Tax credit carryforwards 44,051 24,008 Lease liabilities 28,050 25,754 Intangibles 7,949 5,986 Stock-based compensation 6,958 1,854 Accrued liabilities and allowances 6,807 4,401 Success payment liabilities 516 3,290 Other 155 - Gross deferred tax assets 299,061 179,661 Valuation allowance ( 274,348 ) ( 156,622 ) Deferred tax assets, net of valuation allowance 24,713 23,039 Deferred tax liabilities: Right-of-use assets ( 23,554 ) ( 21,940 ) Fixed assets ( 1,159 ) ( 1,050 ) Other - ( 49 ) Deferred tax liabilities ( 24,713 ) ( 23,039 ) Net deferred taxes assets $ - $ - The Tax Cuts and Jobs Act contained a provision which requires the capitalization of Section 174 costs incurred in years beginning on or after January 1, 2022. Section 174 costs are expenditures which represent research and development costs that are incident to the development or improvement of a product, process, formula, invention, computer software, or technique. This provision changes the treatment of Section 174 costs such that the expenditures are no longer allowed as an immediate deduction but rather must be capitalized and amortized. We have included the impact of this provision, which results in a deferred tax asset of approximately $ 49.7 million as of December 31, 2022. 173 The valuation allowance relates primarily to net U.S. deferred tax assets from operating losses, research tax credit carryforwards, capitalized research and development, and amounts paid and accrued to enter into various agreements for which the tax treatment requires capitalization and amortization. The Company maintains a full valuation allowance on its net U.S. deferred tax assets. The assessment regarding whether a valuation allowance is required considers both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. In making this assessment, significant weight is given to evidence that can be objectively verified. In its evaluation, the Company considered its cumulative losses and its forecasted losses in the near term as significant negative evidence. Based upon a review of the four sources of income identified within ASC 740, Accounting for Income Taxes , the Company determined that the negative evidence outweighed the positive evidence, and a full valuation allowance on its net deferred tax assets should be maintained. The Company will continue to assess the realizability of its deferred tax assets going forward and will adjust the valuation allowance as needed. The Company determines its uncertain tax positions based on a determination of whether and how much of the tax benefit the Company takes in its tax filings or positions is more likely than not to be sustained upon examination by the relevant income tax authorities. The Company is generally subject to examination by U.S. federal and local income tax authorities for all tax years in which the loss carryforward is available. The Company applies judgment in its determination of the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. As of December 31, 2022 and 2021, the Company’s uncertain tax positions were immaterial. 13. Net loss per share Basic and diluted net loss per common share are calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. The Company was in a loss position for all periods presented, and basic net loss per share and diluted net loss per share are therefore the same for all periods, as the inclusion of all potential common securities outstanding would have been anti-dilutive. The following securities were excluded from the computation of net loss per diluted share of common stock for periods presented as their effect would have been anti-dilutive: Year Ended December 31, 2022 2021 2020 (in thousands) Convertible preferred stock - - 134,113 Options to purchase common stock 23,686 17,337 15,677 Unvested restricted common stock 12 4,365 10,079 Unvested RSUs 885 141 326 Total 24,583 21,843 160,195 14. Employee benefit plan In January 2019, the Company adopted a 401(k) retirement and savings plan (the 401(k) Plan) covering all employees. The 401(k) Plan allows employees to make pre- and post-tax contributions up to the maximum allowable amount set by the IRS. Effective as of January 1, 2022, the Company began matching each participant’s 401(k) contributions, up to $ 4,000 per year per participant. 174 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.