ARS Pharmaceuticals, Inc. 10-Q

Item 1. Financial Statements (Unaudited) Silverback Therapeutics, Inc. Condensed Balance Sheets (in thousands, except share and par value data) (unaudited) June 30, December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 218,690 $ 254,045 Short-term investments $ 39,285 — Prepaid expenses and other current assets 5,154 7,447 Total current assets 263,129 261,492 Long-term investments 24,218 64,780 Restricted cash 250 250 Right-of-use asset 3,917 4,733 Property and equipment, net 2,485 2,212 Total assets $ 293,999 $ 333,467 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 2,114 $ 2,078 Accrued expenses 8,148 11,727 Current portion of lease liability 881 1,087 Total current liabilities 11,143 14,892 Lease liability, net of current portion 4,065 4,760 Total liabilities 15,208 19,652 Commitments and contingencies (Note 10) Stockholders’ equity: Preferred Stock, $ 0.0001 par value per share; 10,000,000 shares authorized at June 30, 2022 and December 31, 2021; no shares issued and outstanding at June 30, 2022 and December 31, 2021 — — Common stock, $ 0.0001 par value per share; 200,000,000 shares authorized at June 30, 2022 and December 31, 2021, 35,187,344 and 35,133,934 shares issued and 35,169,725 and 35,107,651 shares outstanding at June 30, 2022 and December 31, 2021, respectively 4 4 Additional paid-in capital 510,607 500,349 Accumulated other comprehensive loss ( 1,548 ) ( 326 ) Accumulated deficit ( 230,272 ) ( 186,212 ) Total stockholders’ equity 278,791 313,815 Total liabilities, and stockholders’ equity $ 293,999 $ 333,467 The accompanying notes are an integral part of these unaudited condensed financial statements. 5 Silverback Therapeutics, Inc. Condensed Statements of Operations and Comprehensive Loss (in thousands, except share and per share data) (unaudited) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Operating expenses: Research and development $ 12,245 $ 17,749 $ 29,142 $ 29,988 General and administrative 7,553 6,762 15,354 13,408 Total operating expenses 19,798 24,511 44,496 43,396 Loss from operations ( 19,798 ) ( 24,511 ) ( 44,496 ) ( 43,396 ) Interest income, net 369 15 436 33 Net loss ( 19,429 ) ( 24,496 ) ( 44,060 ) ( 43,363 ) Unrealized loss on available-for-sale securities ( 300 ) — ( 1,222 ) — Comprehensive loss ( 19,729 ) ( 24,496 ) ( 45,282 ) ( 43,363 ) Net loss per share, basic and diluted $ ( 0.55 ) $ ( 0.70 ) $ ( 1.25 ) $ ( 1.25 ) Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted 35,126,365 34,876,050 35,120,282 34,825,281 The accompanying notes are an integral part of these unaudited condensed financial statements. 6 Silverback Therapeutics, Inc. Condensed Statements of Stockholders’ Equity (Deficit) (in thousands, except share data) (unaudited) Common Stock Additional Paid-in Accumulated Other Accumulated Total Stockholders’ Shares Amount Capital Comprehensive Loss Deficit Equity Balance as of January 1, 2022 35,107,651 $ 4 $ 500,349 $ ( 326 ) $ ( 186,212 ) $ 313,815 Exercise of common stock options and vesting of early exercised common stock options 15,679 — 19 — — 19 Stock-based compensation — — 4,949 — — 4,949 Other comprehensive loss — — — ( 922 ) — ( 922 ) Net loss and comprehensive loss — — — — ( 24,631 ) ( 24,631 ) Balance as of March 31, 2022 35,123,330 $ 4 $ 505,317 $ ( 1,248 ) $ ( 210,843 ) $ 293,230 Exercise of common stock options, shares issued under the employee stock purchase plan, and vesting of early exercised common stock options 46,395 — 150 — 150 Stock-based compensation — — 5,140 — 5,140 Other comprehensive loss — — — ( 300 ) ( 300 ) Net loss and comprehensive loss — — — — ( 19,429 ) ( 19,429 ) Balance as of June 30, 2022 35,169,725 $ 4 $ 510,607 $ ( 1,548 ) $ ( 230,272 ) $ 278,791 Common Stock Additional Paid-in Accumulated Other Accumulated Total Stockholders’ Shares Amount Capital Comprehensive Loss Deficit Equity Balance as of January 1, 2021 34,701,274 $ 3 $ 479,608 $ — $ ( 96,734 ) $ 382,877 Exercise of common stock options and vesting of early exercised common stock options 125,930 — 254 — — 254 Stock-based compensation — — 4,285 — — 4,285 Net loss and comprehensive loss — — — — ( 18,867 ) ( 18,867 ) Balance as of March 31, 2021 34,827,204 $ 3 $ 484,147 $ — $ ( 115,601 ) $ 368,549 Exercise of common stock options, shares issued under the employee stock purchase plan, and vesting of early exercised common stock options 135,881 1 866 — — 867 Stock-based compensation — — 4,730 — — 4,730 Net loss and comprehensive loss — — — — ( 24,496 ) ( 24,496 ) Balance as of June 30, 2021 34,963,085 $ 4 $ 489,743 $ — $ ( 140,097 ) $ 349,650 The accompanying notes are an integral part of these unaudited condensed financial statements 7 Silverback Therapeutics, Inc. Condensed Statements of Cash Flows (in thousands) (unaudited) Six Months Ended June 30, 2022 2021 Cash flows from operating activities: Net loss $ ( 44,060 ) $ ( 43,363 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization expense 431 395 Stock-based compensation 10,089 9,015 Non-cash lease expense 513 565 Changes in operating assets and liabilities: Prepaid expenses and other current assets 2,293 749 Accounts payable and accrued expenses ( 3,563 ) 6,789 Lease liability ( 598 ) ( 486 ) Net cash used in operating activities ( 34,895 ) ( 26,336 ) Cash flows from investing activities: Purchase of property and equipment ( 618 ) ( 735 ) Net cash used in investing activities ( 618 ) ( 735 ) Cash flows from financing activities: Principal payments on term loan payable — ( 846 ) Proceeds from exercise of common stock options and employee stock purchase plan 158 1,037 Net cash provided by financing activities 158 191 Change in cash, cash equivalents, and restricted cash ( 35,355 ) ( 26,880 ) Cash, cash equivalents, and restricted cash at beginning of period 254,295 386,919 Cash, cash equivalents, and restricted cash at end of period $ 218,940 $ 360,039 Supplemental disclosure of cash flow information: Right-of-use assets and lease liabilities derecognized $ ( 303 ) $ — The accompanying notes are an integral part of these unaudited condensed financial statements. 8 Silverback Therapeutics, Inc. Notes to Unaudited Condensed Financial Statements 1. Organization and Nature of Business Silverback Therapeutics, Inc. (“Silverback” or “the Company”) is a biopharmaceutical company focused on leveraging its proprietary ImmunoTAC technology platform to develop systemically delivered and tissue targeted therapeutics for the treatment of chronic viral infections, cancer, and other serious diseases. The Company’s ImmunoTAC platform is the result of a focused effort to discover ways to systemically deliver disease-modifying small molecules in a directed fashion to sites of disease. The Company’s platform enables it to strategically pair proprietary linker-payloads that modulate key disease-modifying pathways with monoclonal antibodies directed at specific disease sites. The Company was formed in Seattle, Washington and incorporated in the state of Delaware on January 4, 2016. On March 28, 2022, the Company’s board of directors approved a corporate restructuring plan to discontinue the Company’s clinical development programs for SBT6050 and SBT6290 and to prioritize resources on the development of the Company’s SBT8230 program and early-stage discovery programs (the “March Restructuring Plan”). In connection with the March Restructuring Plan, the Company’s workforce was reduced by 27 %, with substantially all of the reduction in personnel completed by July 15, 2022. The Company initiated the reduction in force on March 31, 2022 and provided severance payments, continuation of group health insurance coverage, and other benefits for a specified period to the affected employees. On July 21, 2022, as amended on August 11, 2022, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with ARS Pharmaceuticals, Inc., a Delaware corporation (“ARS Pharma”), a biopharmaceutical company focused on the development of neffy , a needle-free epinephrine nasal spray, for the emergency treatment of Type I allergic reactions, and Sabre Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Silverback (“Merger Sub”). Upon the terms and subject to the satisfaction of the conditions described in the Merger Agreement, Merger Sub will be merged with and into ARS Pharma, with ARS Pharma surviving as a wholly owned subsidiary of Silverback (the “Merger”). The Merger is intended to qualify as a tax-free reorganization for U.S. federal income tax purposes. Risks and Uncertainties The Company is subject to a number of inherent risks which include, but are not limited to, the need to obtain adequate additional funding, possible failure of clinical trials or other events demonstrating a lack of clinical safety or efficacy of its product candidates, dependence on key personnel, reliance on third-party service providers for manufacturing drug product and conducting clinical trials, the ability to successfully secure its proprietary technology, and risks related to the regulatory approval and commercialization of a product candidate. Additionally, the development and commercialization of new drug products is highly competitive. Products or technologies developed by competitors may diminish or render obsolete the Company’s existing products under development. Liquidity and Capital Resources The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred net operating losses since its inception and had an accumulated deficit of $ 230.3 million as of June 30, 2022 . The Company had cash, cash equivalents, and investments of $ 282.2 million as of June 30, 2022 and has not generated positive cash flows from operations. To date, the Company has funded its operations primarily through the issuance of redeemable convertible preferred stock, convertible notes, and the sale of common stock in connection with the Company’s initial public offering (“IPO”). The Company’s currently available cash, cash equivalents, and restricted cash as of June 30, 2022 are sufficient to meet its anticipated cash requirements for the 12 months following the date the financial statements are issued. Management considers that there are no conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern for a period of at least 12 months from the date the financial statements are issued. Management expects operating losses to continue for the foreseeable future. There can be no assurance that the Company will ever earn revenues or achieve profitability, or if achieved, that they will be sustained on a continuing basis. The Company may be unable to secure financing when needed, or if available, such financings may be under terms that are unfavorable to the Company or the current stockholders. If the Company is unable to raise additional funds when needed, it may be required to delay, reduce the scope of, or eliminate development programs, which may adversely affect its business and operations. 9 2. Summary of Significant Accounting Policies Basis of Presentation The financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative U.S. GAAP as found in the Accounting Standards Codification (“ASC”), and Accounting Standards Update (“ASU”), of the Financial Accounting Standards Board (“FASB”). Unaudited Interim Condensed Financial Statements The accompanying condensed balance sheet as of June 30, 2022, the condensed statements of operations and comprehensive loss and condensed statements of stockholders’ equity (deficit) for the three and six months ended June 30, 2022 and 2021, and the condensed statements of cash flows for the six months ended June 30, 2022 and 2021, are unaudited. The balance sheet as of December 31, 2021 was derived from the audited financial statements as of and for the year ended December 31, 2021. The unaudited interim condensed financial statements have been prepared on a basis consistent with the audited annual financial statements as of and for the year ended December 31, 2021, and, in the opinion of management, reflect all adjustments, consisting solely of normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of June 30, 2022, the condensed results of its operations for the three and six months ended June 30, 2022 and 2021, and its cash flows for the six months ended June 30, 2022 and 2021. The financial data and other information disclosed in these notes related to the six months ended June 30, 2022 and 2021 are also unaudited. The condensed results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the full year ending December 31, 2022 or any other period. Use of Estimates The preparation of the Company’s financial statements requires it to make estimates and assumptions that impact the reported amounts of assets, liabilities and expenses in the Company’s financial statements and accompanying notes. The most significant estimates in the Company’s financial statements relate to accruals for research and development expenses, valuation of equity awards, and valuation allowances for deferred tax assets. These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results may differ materially and adversely from these estimates. The full extent to which the coronavirus (“COVID-19”) pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including expenses, clinical trials and research and development costs, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat COVID-19, as well as the economic impact on local, regional, national and international markets. The Company has considered potential impacts arising from the COVID-19 pandemic and is not presently aware of any events or circumstances that would require the Company to update its estimates, judgments or revise the carrying value of its assets or liabilities. Fair Value of Financial Instruments Cash and cash equivalents, restricted cash, and investments are carried at fair value. Accounts payable and accrued expenses are carried at cost, which approximates fair value given their short-term nature. The term loan payable is carried at cost, which approximates fair value as its effective interest rate approximates current market rates. Cash and Cash Equivalents Cash equivalents are comprised of short-term, highly-liquid investments with maturities of 90 days or less at the date of purchase. At June 30, 2022 and December 31, 2021 , the Company’s cash equivalents consisted of money market funds. Restricted Cash Restricted cash consists of a deposit securing a collateral letter of credit issued in connection with the Company’s facility operating lease. 10 The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed balance sheets that sum to the amounts shown in the condensed statements of cash flows (in thousands): June 30, 2022 December 31, 2021 Cash and cash equivalents $ 218,690 $ 254,045 Restricted cash 250 250 Total cash and cash equivalents and restricted cash $ 218,940 $ 254,295 Investments The Company invests excess cash in investment grade intermediate-term fixed income securities. These investments are included in short-term and long-term investments on the condensed balance sheets, classified as available-for-sale, and reported at fair value with unrealized gains and losses included in accumulated other comprehensive loss. Realized gains and losses on the sale of these securities are recognized in net loss. Securities with a maturity date within 1 year of the balance sheet date are classified as short-term. The Company periodically evaluates whether declines in fair values of its investments below their book value are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss as well as the Company’s ability and intent to hold the investment until a forecasted recovery occurs. Additionally, the Company assesses whether it has plans to sell the security or it is more likely than not it will be required to sell any investment before recovery of its amortized cost basis. Factors considered include quoted market prices, recent financial results and operating trends, implied values from any recent transactions or offers of investee securities, credit quality of debt instrument issuers, other publicly available information that may affect the value of the investments, duration and severity of the decline in value, and the Company's strategy and intentions for holding the investment. Concentrations of Credit Risk The Company is subject to credit risk from holding its cash and cash equivalents at a limited number of commercial banks. The Company limits its exposure to credit losses by investing in money market funds through a U.S. bank with high credit ratings and U.S. Treasury Securities. Cash may consist of deposits held with banks that may at times exceed federally insured limits, however, exposure to credit risk in the event of default by the financial institution is limited to the extent of amounts recorded on the balance sheets. The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. Leases Leases consist of the Company’s operating leases. In accordance with ASC 842, Leases, the Company determines if an arrangement is a lease at inception and evaluates each lease agreement to determine whether the lease is an operating or finance lease. For leases where the Company is the lessee, right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Operating lease ROU assets also include any prepaid lease payments, lease incentives received, and costs which will be incurred in exiting a lease. The Company’s leases include options to extend or terminate the leases. Periods covered by an option to extend a lease are included in the lease term when it is reasonably certain that the Company will exercise that option. Periods covered by an option to terminate a lease are included in the lease term when it is reasonably certain that the Company will not exercise that option. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company does not have material short-term lease costs. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. For real estate leases, the Company does not separate lease and non-lease components. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Research and Development Expenses 11 All research and development costs are expensed in the period incurred. Research and development expenses consist primarily of direct and indirect costs incurred in connection with the development of the Company’s ImmunoTAC technology platform, discovery efforts, and preclinical study and clinical trial activities related to the Company’s program pipeline. Direct costs include expenses incurred under agreements with CROs and other vendors that conduct the Company’s preclinical and clinical activities, expenses associated with manufacturing the Company’s product candidates including under agreements with contract development and manufacturing organizations and other vendors, and consulting fees. Indirect costs include personnel-related expenses, consisting of employee salaries, bonuses, benefits, and stock-based compensation expense and recruiting costs for personnel engaged in research and development activities, facility and equipment related expenses, consisting of indirect and allocated expenses for rent, depreciation, and equipment maintenance, and other unallocated research and development expenses incurred in connection with the Company’s research and development programs, including laboratory materials and supplies and license fees. Research and development expenses are charged to operating expenses as incurred when these expenditures relate to the Company’s research and development efforts and have no alternative future uses. The Company is obligated to make upfront payments upon execution of certain research and development agreements. Advance payments, including nonrefundable amounts, for goods or services that will be used or rendered for future research and development activities are capitalized until such goods are delivered or the related services are performed, or such time when the Company does not expect the goods to be delivered or services to be performed. The Company estimates the period over which such services will be performed and the level of effort to be expended in each period. If actual timing of performance or the level of effort varies from the estimate, the Company will adjust the amounts recorded accordingly. Since inception, the Company has not experienced any material differences between accrued or prepaid costs and actual costs. Stock-Based Compensation The cost of employee services received in exchange for an award of an equity instrument is measured at the grant date based on the award’s estimated fair value using the Black-Scholes option pricing model. The estimated fair value of the awards is recognized into expense on a straight-line basis over the requisite service period. Stock-based compensation expense for an award with a performance condition is recognized when the achievement of such performance condition is determined to be probable. If the outcome of such performance condition is not determined to be probable or is not met, no compensation expense is recognized, and any previously recognized compensation expense is reversed. Management evaluates when the achievement of a performance condition is probable based on the expected satisfaction of the performance condition at each reporting date. Forfeitures are recognized as a reduction of stock-based compensation expense as they occur. The option plan permits, but does not require, the inclusion of early exercise provisions in individual awards. Proceeds from early option exercises are recorded as a liability until the underlying restricted shares vest. While the restricted shares have voting rights, they are not considered outstanding for accounting purposes. Comprehensive Loss Comprehensive loss is defined as a change in equity during a period from transactions and other events and circumstances from non-owner sources. The Company presents one continuous Statement of Operations and Comprehensive Loss. The Company’s comprehensive loss includes unrealized gains and losses on investments. Net Loss Per Share Attributable to Common Stockholders Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period, without consideration of potentially dilutive securities. Diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders since the effect of potentially dilutive securities is anti-dilutive given the net loss of the Company. For purposes of this calculation, stock options, employee stock purchase rights, and unvested common stock subject to repurchase are considered to be common stock equivalents but are not included in the calculations of diluted net loss per share for the periods presented as their effect would be antidilutive. Emerging Growth Company Status The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with certain new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it is (1) no longer an emerging growth company or (2) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. 12 Recently Issued Accounting Pronouncements Not Yet Adopted In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . The objective of the standard is to provide information about expected credit losses on financial instruments at each reporting date and to change how other-than temporary impairments on investment securities are recorded. The guidance is effective for the Company beginning on January 1, 2023, with early adoption permitted. The Company is currently evaluating the impact the standard may have on its financial statements and related disclosures. 3. Fair Value Measurements The Company follows authoritative accounting guidance, which among other things, defines fair value, establishes a consistent framework for measuring fair value, and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (at exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The three levels of inputs that may be used to measure fair value include: Level 1: Quoted prices in active markets for identical assets or liabilities. Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3: Unobservable inputs that are supported by little or no market activity. The following table identifies the Company’s assets and liabilities that were measured at fair value on a recurring basis (in thousands): June 30, 2022 Level Amortized Cost Gross unrealized gains Gross unrealized losses Fair Value Money market funds 1 $ 218,690 $ — $ — $ 218,690 Short-term investments - U.S. Treasury securities 1 40,077 — ( 792 ) 39,285 Long-term investments - U.S. Treasury securities 1 24,974 — ( 756 ) 24,218 Total 283,741 — ( 1,548 ) 282,193 December 31, 2021 Money market funds 1 253,945 — — 253,945 Long-term investments - U.S. Treasury securities 1 65,106 — ( 326 ) 64,780 Total 1 $ 319,051 $ — $ ( 326 ) $ 318,725 There were no transfers between the Level 1 and Level 2 categories or into or out of the Level 3 category during the periods presented. The investments U.S. Treasury securities designated as short-term investments have an effective maturity date equal to or less than one year from the respective balance sheet date. Those designated as long-term investments have an effective maturity date that is more than one year, but less than two years, from the respective balance sheet date. The Company evaluated its investments for other-than-temporary impairment and considers the decline in market value for the securities to be primarily attributable to current economic and market conditions. For the investments, it is not more-likely-than-not that the Company will be required to sell the investments, and the Company does not intend to do so prior to the recovery of the amortized cost basis. 4. Accrued Expenses Accrued expenses consisted of the following (in thousands): June 30, December 31, 2022 2021 Research and development expenses $ 5,760 $ 6,528 Employee compensation and benefits 1,821 4,605 Professional services and other 567 594 Total accrued expenses $ 8,148 $ 11,727 13 5. Leases The Company leases office and laboratory space in Seattle, Washington. The components of lease expense and related cash flows were as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Lease expense Operating lease expense $ 362 $ 347 $ 718 $ 694 Variable lease expense 119 106 254 212 Total lease expense $ 481 $ 453 $ 972 $ 906 Operating cash outflows from operating leases $ 503 $ 413 $ 1,021 $ 834 The weighted-average remaining term on the Company’s leases was 4.3 years as of June 30, 2022. To compute the present value of the lease liabilities, the Company used a weighted average discount rate of 7.4 % as of June 30, 2022. Future minimum commitments due under the operating lease agreements as of June 30, 2022 are as follows (in thousands): Years Ending December 31, Amount 2022 (remaining 6 months) $ 561 2023 1,310 2024 1,348 2025 1,388 Thereafter 1,186 Total undiscounted lease payments 5,793 Present value adjustment ( 847 ) Total present value of lease payments $ 4,946 On July 1, 2021, the Company entered into a sublease agreement for additional office space in Seattle, Washington. The commencement date of the sublease was August 1, 2021. The contractual term of the sublease is two years with an option to extend for one additional year and an option to terminate after one year subject to a termination fe e. On May 2, 2022, the Company sent a notice of termination of the sublease agreement to be effective on August 1, 2022 . Due to the change in lease term, the Company remeasured the ROU asset and lease liability as of May 2, 2022 and, as a result, reduced the ROU asset and lease liability by $ 0.3 million. 6. Term Loan Payable In November 2016, the Company entered into a loan and security agreement with Silicon Valley Bank (“SVB”) and borrowed $ 3.5 million as a term loan. The outstanding principal amount of the term loan accrued interest at an annual rate of 1.75 % per annum. At closing, the Company incurred de minimis debt issuance costs and owed a final payment fee of $ 0.3 million, both of which are amortized to interest expense over the remaining term of the debt under the effective interest method. The effective interest rate of the Company’s term loan was 5.14 %. The term loan’s original maturity date was November 1, 2020 . However, in April 2020, the Company amended the loan and security agreement to defer principal payments for six months and extend the maturity date to May 1, 2021 . There were no costs or additional warrant issuances in connection with this amendment. The Company accounted for the amendment as a debt modification and amortized the remaining debt discount over the remaining term. On May 1, 2021, the Company made its final scheduled payment to SVB under the loan and security agreement including the final payment fee. 14 7. Stockholders’ Equity (Deficit) Common Stock The Company has reserved shares of common stock for the following potential future issuances: June 30, December 31, 2022 2021 Shares underlying outstanding equity awards 9,394,930 6,370,873 Shares available for future equity award grants 1,649,193 2,931,012 Shares underlying early exercised equity awards 17,619 26,283 Total 11,061,742 9,328,168 8. Stock-Based Compensation Stock-based compensation expense recognized for all equity awards has been reported in the statements of operations and comprehensive loss as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Research and development expense $ 2,171 $ 2,079 $ 4,212 $ 4,004 General and administrative expense 2,969 2,651 5,877 5,011 Total stock-based compensation expense $ 5,140 $ 4,730 $ 10,089 $ 9,015 As of June 30, 2022 , the total unrecognized stock-based compensation expense was $ 44.2 million, which is expected to be recognized over a remaining weighted-average period of approximately 2.05 years. Stock Option Awards As of June 30, 2022 , the Company’s equity incentive plans authorized a total of 11,321,495 shares, of which 1,649,193 shares are available for future grant, and 9,394,930 shares are outstanding. Not included in the outstanding option balance are 17,619 shares pursuant to stock options that were early exercised and subject to repurchase under the Company’s 2016 Equity Incentive Plan that remain unvested as of June 30, 2022. A summary of the Company’s stock option activity for the six months ended June 30, 2022 is as follows (in thousands, except share and per share data and years): Stock Options Outstanding Shares Subject to Options Outstanding Weighted- Average Exercise Price Weighted- Average Remaining Contractual Life (Years) Aggregate Intrinsic Value Balance at December 31, 2021 6,370,873 $ 12.82 Granted 3,088,001 4.20 Exercised ( 14,459 ) 1.24 $ 43.00 Cancelled ( 795,160 ) 12.82 Balance at June 30, 2022 8,649,255 9.76 8.45 $ 7,191.00 Vested at June 30, 2022 2,817,696 $ 11.05 7.69 $ 3,284.00 The total fair value of shares vested during the six months ended June 30, 2022 and 2021 was $ 11.4 million and $ 7.4 million, respectively. The aggregate intrinsic value in the table above is calculated as the difference between the exercise price of the underlying options and the estimated fair value of the Company’s common stock for all options that were in-the-money at June 30, 2022. The weighted-average grant date fair value per share of option grants for the six months ended June 30, 2022 and 2021 was $ 2.82 and $ 26.69 , respectively. 15 The grant date fair value of stock options was estimated using a Black-Scholes option pricing model with the following weighted-average assumptions: Six Months Ended June 30, Six Months Ended June 30, 2022 2021 Expected term (in years) 5.8 5.9 Expected volatility 77 % 81 % Risk-free interest rate 2.24 % 0.97 % Expected dividend yield — — The fair value of stock options was determined using the Black-Scholes option-pricing model and the assumptions below. Each of these inputs is subjective and generally requires significant judgement. Fair Value of Common Stock. The grant date fair market value of the shares of common stock underlying stock options is determined by the Company’s board of directors. Following the closing of the Company’s IPO, the fair market value of the Company’s common stock is based on its closing price as reported on the date of grant on the primary stock exchange on which the Company’s common stock is traded. Prior to the Company’s IPO, because there was no public market for the Company’s common stock, the board of directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair market value, which included contemporaneous valuations performed by an independent third-party, the Company’s results of operations and financial position, including its levels of available capital resources, its stage of development and material risks related to the Company’s business, progress of the Company’s research and development activities, the Company’s business conditions and projections, the lack of marketability of the Company’s common stock and preferred stock as a private company, the prices at which the Company sold shares of its redeemable convertible preferred stock to outside investors in arms-length transactions, the rights, preferences and privileges of the Company’s redeemable convertible preferred stock relative to those of its common stock, the analysis of IPOs and the market performance of similar companies in the biopharmaceutical industry, the likelihood of achieving a liquidity event for the Company’s securityholders, such as an IPO or a sale of the company, given prevailing market conditions, the hiring of key personnel and the experience of management, trends and developments in the Company’s industry and external market conditions affecting the life sciences and biotechnology industry sectors. Expected Term. The expected term represents the period that the options granted are expected to be outstanding. The expected term of stock options issued is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term) as the Company has concluded that its stock option exercise history does not provide a reasonable basis upon which to estimate expected term. Expected Volatility. Given the Company’s limited historical stock price volatility data, the Company derived the expected volatility from the average historical volatilities over a period approximately equal to the expected term of comparable publicly traded companies within its peer group that were deemed to be representative of future stock price trends as the Company has limited trading history for its common stock. The Company will continue to apply this process until a sufficient amount of 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 rate, with maturities similar to the expected term of the stock options. Expected Dividend Yield. The Company has never paid dividends on its common stock and does not anticipate paying any dividends in the foreseeable future. Therefore, the Company uses an expected dividend yield of zero . 16 Restricted Stock Unit Awards During the six months ended June 30, 2022 the Company issued restricted stock unit (“RSU”) awards to employees under the Company’s 2020 Equity Incentive Plan. There was no RSU activity during the six months ended June 30, 2021. A summary of the Company’s RSU activity for the six months ended June 30, 2022 is as follows: Restricted Stock Unit Awards Share Equivalents Weighted- Average Grant Date Fair Value Balance at December 31, 2021 — $ — Granted 817,376 3.70 Cancelled ( 71,701 ) 4.50 Balance at June 30, 2022 745,675 3.63 Vested at June 30, 2022 — $ — 9. Licensing Agreement Cell Line License Agreement with WuXi Biologics (Hong Kong) Limited In October 2019, the Company entered into a cell line license agreement with WuXi Biologics (Hong Kong) Limited (“WuXi Bio”). Under the license agreement, WuXi Bio granted the Company a non-exclusive, worldwide, sublicensable, under certain of WuXi Bio’s intellectual property rights, know-how and biological materials (“WuXi Bio Licensed Technology”), to make, use, sell, offer for sale and import a product developed through the use of the WuXi Bio Licensed Technology (“WuXi Bio Licensed Product”). The WuXi Bio Licensed Technology is used to manufacture a component of the Company’s legacy programs. The Company has paid an aggregate of $ 150,000 in license fees that were recorded in research and development expense when incurred. In the event the Company manufactures its commercial supplies of a product produced by the Licensed Cell Line using a manufacturer other than WuXi Bio or its affiliates, the Company will become obligated to pay WuXi Bio aggregate milestone payments, upon achievement of certain sales milestones, of up to $ 10.8 million. The Company has the right to terminate the license by giving at least six months prior written notice to WuXi Bio and paying all amounts due to them through the termination date. In the event the Company fails to pay all amounts due to WuXi Bio under the license agreement, and fails to pay the amounts within 30 days after receiving written notice of such failure, WuXi Bio may terminate the license with 45 days written notice to the Company. In the event either party commits a material breach under the license and fails to cure the breach within 30 days after receiving written notice from the other party of such breach, either party may terminate the license immediately upon written notice to the other party. 10. Commitments and Contingencies Legal Proceedings From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made and can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. On November 5, 2021, a securities class action complaint was filed against the Company and certain of the Company's officers and directors in the U.S. District for the Western District of Washington, captioned Dresner v. Silverback Therapeutics, Inc., et al., Case No. 2:21-cv-01499 (the “Dresner Case”). The court has appointed lead plaintiff and lead plaintiff's counsel, and plaintiff's counsel then filed the amended complaint on April 11, 2022. The amended complaint alleges that between December 3, 2020 and March 31, 2022, the Company and certain of the Company's officers and directors violated (1) Sections 11 and 15 of the Securities Act of 1933, as amended; and (2) Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Securities and Exchange Commission (“SEC”) Rule 10b-5 promulgated thereunder, by making allegedly false and misleading statements in various SEC filings and press releases regarding the clinical and commercial prospects of the Company’s product candidate, SBT6050, which is now discontinued. The complaint seeks unspecified damages and interest, as well as attorneys’ fees and other costs. The Company and the other defendants filed a motion to dismiss on May 26, 2022 and lead plaintiff filed an opposition brief on July 11, 2022. On August 10, 2022, the Company and the other defendants filed a reply brief. The court is expected to issue a ruling on the motion to dismiss by the end of 2022 or in the first half of 2023. 17 The Company cannot predict the outcome of this suit, and failure by the Company to obtain a favorable resolution could have a material adverse effect on its business, results of operations and financial condition. The Company’s chances of success on the merits are still uncertain and any possible loss or range of loss cannot be reasonably estimated and as such the Company has not recorded a liability as of June 30, 2022. Indemnifications In the ordinary course of business, the Company enters into agreements that may include indemnification provisions. Pursuant to such agreements, the Company may indemnify, hold harmless, and defend an indemnified party for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. The Company has never incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. The Company has entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by Delaware corporate law. The Company currently has directors’ and officers’ insurance coverage that reduces its exposure and enables the Company to recover a portion of any future amounts paid. The Company believes the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal. COVID-19 The global COVID-19 pandemic continues to evolve, and management continue to monitor the situation closely. The extent of the impact of COVID-19 on the Company’s business, operations, planned preclinical studies and clinical trials, and manufacturing timelines and plans remains uncertain, and will depend on certain developments, including the duration and spread of the outbreak and its impact on the Company’s CROs, third-party manufacturers, supply chains necessary for research and development and manufacturing, and other third parties with whom the Company does business, as well as its impact on regulatory authorities and the Company’s key scientific and management personnel. For example, the COVID-19 pandemic has caused the cost of obtaining animals for our preclinical studies to increase dramatically and, if the shortage continues, could also result in delays to our development timelines. To the extent possible, management is conducting business as usual, with necessary or advisable modifications to employee travel and some of the Company’s non-lab based employees working remotely. Management will continue to actively monitor the evolving situation related to COVID-19 and may take further actions that alter Company operations, including those that may be required by federal, state or local authorities, or that management determines are in the best interests of the Company’s employees and other third parties with whom the Company does business. At this point, the extent to which the COVID-19 pandemic may affect the Company’s business, operations and clinical development timelines and plans, including the resulting impact on Company expenditures and capital needs, remains uncertain and is subject to change. 11. Employee Benefit Plans The Company maintains a retirement plan, which is qualified under section 401(k) of the Internal Revenue Code of 1986, as amended, for the Company’s U.S. employees. The plan allows eligible employees to defer, at the employee’s discretion, pretax compensation up to the IRS annual limits. In 2022, the Company began matching contributions to each employee participant’s account equal to 100% of the participant’s contributions up to 4 % of the participant’s eligible compensation, subject to applicable plan and IRS limits. 12. Net Loss Per Share Attributable to Common Stockholders The following outstanding shares of potentially dilutive securities were excluded from the computation of the diluted net loss per share attributable to common stockholders for the periods presented because their effect would have been anti-dilutive: Six Months Ended June 30, 2022 2021 Common stock options 8,649,255 6,467,507 RSU awards 745,675 — Unvested common stock 17,619 35,287 Total potentially dilutive shares 9,412,549 6,502,794 18 13. March Restructuring Plan The Company currently estimates that it will incur costs of approximately $ 2.0 million for termination benefits related to the March Restructuring Plan, all of which will be cash expenditures paid in 2022. During the six months ended June 30, 2022, the Company incurred $ 1.6 million in costs associated with the termination benefits resulting from the March Restructuring Plan. $ 1.2 million and $ 0.4 million of the termination benefits are included in research and development expense and general and administrative expense, respectively. A summary of the restructuring charges for the six months ended June 30, 2022 is as follows (in thousands): Accrued Severance 2022 Accrued severance as of December 31, 2021 $ — Severance expense incurred during the three months ended March 31, 2022 404 Accrued severance as of March 31, 2022 404 Severance expense incurred during the three months ended June 30, 2022 1,180 Severance paid during the period ( 987 ) Accrued severance as of June 30, 2022 $ 597 14. Subsequent Events Merger Agreement On July 21, 2022, as amended on August 11, 2022, the Company entered into an Agreement and Plan of Merger and Reorganization ( the “Merger Agreement” ), with Sabre Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of the Company (the “Merger Sub”, and ARS Pharmaceuticals, Inc., a Delaware corporation (“ARS Pharma”), pursuant to which, among other matters, and subject to the satisfaction or waiver of the conditions described in the Merger Agreement, Merger Sub will merge with and into ARS Pharma (the “Merger” ) , with ARS Pharma continuing as a wholly-owned subsidiary of the Company and the surviving corporation of the Merger . July Restructuring Plan In connection with the Merger Agreement with ARS Pharma and in order to preserve cash resources, the Company committed to reducing its workforce by approximately 75 % by September 2, 2022 and the remaining 25 % as of the close of the Merger. All employees affected by the workforce reduction will be eligible to receive, among other things, severance payments based on the applicable employee’s level and years of service with the Company and the continuation of group health insurance coverage for a specified time period post-termination. As a result of the Merger Agreement workforce reduction, the Company estimates that it will incur severance-related charges of approximately $ 13.0 million in the third and fourth quarter of 2022, all of which will be cash expenditures. The Company also estimates it will incur non-cash charges of approximately $ 2.0 million in the third and fourth quarter of 2022 relating to outstanding equity awards with accelerated vesting as a result of the workforce reduction. The severance-related and non-cash charges that the Company expects to incur in connection with, or as a result of, the workforce reduction, are subject to a number of assumptions, and actual results may differ materially. The Company may also incur other charges or cash expenditures not currently contemplated due to events that may occur as a result of, or associated with, the workforce reduction. 19 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis together with our unaudited financial statements and related notes thereto included in “Item 1. Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q and the audited financial statements and related notes thereto as of and for the year ended December 31, 2021 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (SEC), on March 31, 2022. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should carefully read the “Risk Factors” section of this Quarterly Report to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Overview We are a biopharmaceutical company focused on leveraging our proprietary ImmunoTAC technology platform to develop systemically delivered, tissue targeted therapeutics for the treatment of chronic viral infections, cancer, and other serious diseases. Our platform enables us to strategically pair proprietary linker-payloads that modulate key disease-modifying pathways with monoclonal antibodies directed to specific disease sites. In July 2020, we initiated clinical development of our first ImmunoTAC product candidate, a TLR8 agonist conjugated to a HER2 antibody, SBT6050. Preclinical data suggested that we would be able to demonstrate a therapeutic window and advance SBT6050 through clinical development as a monotherapy and in combination with standard-of-care agents that had a complementary mechanism-of-action. Our Phase 1/1b program was designed to measure safety and tolerability, pharmacokinetic (PK), pharmacodynamic (PD) and anti-tumor activity as monotherapy and in combination with pembrolizumab. On March 28, 2022, we made the decision to discontinue our clinical development program for SBT6050 due to limited monotherapy activity and dose-limiting adverse events when used in combination with pembrolizumab. SBT6290, comprised of the same linker payload conjugated to a Nectin4 antibody, was expected to show a similar clinical profile and, therefore, we also terminated this program prior to dosing patients. Following the decision on March 28, 2022, we prioritized our resources to focus on the development of SBT8230 and early-stage discovery programs. Our understanding of TLR8 conjugates in preclinical species and in the clinic guides our interpretation of the preclinical characteristics of SBT8230, an ASGR1 antibody conjugated to a TLR8 agonist linker payload for the treatment of chronic hepatitis B virus (cHBV). ASGR1 is highly expressed in liver and is restricted in its expression to this organ. Other ASGR1-directed agents, such as those used in RNAi therapies, have shown robust liver localization. SBT8230 shows biodistribution profiles in non-human primates (NHP) consistent with these agents, which is distinct from SBT6050 and SBT6290. The anti-viral immune response is achieved through activation of myeloid cells and subsequent activation of immune cells that drive an IFNγ signal, which has been observed in the clinic with SBT6050. This has been shown by others to drive seroconversion, an important determinant of a functional cure. We presented a preclinical update on SBT8230 in the fourth quarter of 2021. In the third quarter of 2022, we completed Phase 1-enabling good laboratory practices toxicology studies and Phase 1-enabling chemistry, manufacturing, and control activities. In addition, up until recently, we had internal discovery programs focused on evaluating and developing new antigen binding domains specific for targets of interest (including antibodies), next-generation linker technologies, and both agonist and antagonist small molecule payloads, that may be combined to create novel tissue-targeted antibody conjugates. Our most advanced discovery program is a proprietary glucocorticoid receptor agonist linker-payload (GC) conjugated to an antagonist monoclonal antibody against CD40 for the treatment of autoimmune and inflammatory diseases. By specifically delivering a glucocorticoid to CD40-expressing immune cells, our approach is designed to mitigate the off-target toxicities commonly observed with systemically administered glucocorticoids. In addition, the conjugate offers the potential for CD40 blockade together with targeted glucocorticoid delivery to enhance anti-inflammatory and immunosuppressive effects. Our CD40-GC conjugate leverages next-generation linker technology developed internally, which is designed to improve the pharmacokinetic properties of antibody drug conjugates. Our CD40-GC program is currently estimated to be 6-12 months away from development candidate selection. 20 Following our decision to discontinue our clinical development programs for SBT6050 and SBT6290, in April of 2022, we initiated a process to evaluate alternatives for the Company, including strategic mergers and acquisitions, asset acquisitions and sales, remaining a standalone company pursuing a limited pipeline focusing on SBT8230 and preclinical programs, and liquidation to distribute available cash. The goal of this evaluation was to identify the opportunity that would, in the opinion of our board of directors, create the most value for our stockholders. On July 21, 2022, as amended on August 11, 2022, we entered into an Agreement and Plan of Merger and Reorganization (the Merger Agreement) with Sabre Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of the Company (the Merger Sub ), and ARS Pharmaceuticals, Inc., a Delaware corporation (ARS Pharma ) , pursuant to which, among other matters, and subject to the satisfaction or waiver of the conditions described in the Merger Agreement, Merger Sub will merge with and into ARS Pharma (the Merger) with ARS Pharma continuing as a wholly-owned subsidiary of our Company and the surviving corporation of the Merger . At the effective time of the proposed Merger, all of ARS Pharma’s outstanding shares of common stock (after giving effect to the automatic conversion of all outstanding shares of ARS Pharma’s preferred stock into shares of ARS Pharma’s common stock) will be converted into the right to receive the right to receive a number of shares common stock of the Company equal to an exchange ratio calculated in accordance with the Merger Agreement and the Company will assume each outstanding and unexercised option and warrant to purchase ARS capital stock, which will be converted into options and warrants to purchase shares of common stock of the Company based on the exchange ratio. Immediately after the Merger, based upon an assumed exchange ratio of 1.2441 and assuming we have $240 million of net cash at the closing of the Merger, the pre-Merger ARS Pharma equity holders are expected to hold approximately 63% of the outstanding shares of our common stock and the pre-Merger equity holders of Silverback are expected to hold approximately 37% of the outstanding shares of our common stock, in each case, on a fully diluted basis using the treasury stock method. The Merger, which has been approved by our board of directors and the board of directors and stockholders of ARS Pharma, is expected to close in the fourth quarter of 2022, subject to the satisfaction or waiver of certain closing conditions, including the approval of our stockholders. Certain officers, directors and stockholders of Silverback who in the aggregate own approximately 31% of the outstanding shares of our common stock immediately prior to the date of the Merger Agreement are parties to support agreements whereby such stockholders have agreed, among other things, to vote in favor of the Merger, subject to the terms of the support agreements. Although we have entered into the Merger Agreement and intend to consummate the proposed Merger, there is no assurance that we will be able to successfully consummate the proposed Merger on a timely basis, or at all. If, for any reason, the proposed Merger is not completed, we will reconsider our strategic alternatives and could pursue another strategic transaction similar to the proposed Merger, potential collaborative, partnering or other strategic arrangements for our programs, including a sale or divestiture of our legacy programs, or liquidate and distribute available cash. In connection with the announcement of the Merger, we have started to winddown our research and development activities and focus on exploring opportunities to divest our legacy programs, including SBT8230 for cHBV, next-generation linker technologies, and our preclinical GC conjugate program. In connection with the Merger Agreement and in order to preserve cash resources, we committed to reducing our workforce by approximately 75% by September 2, 2022 and the remaining 25% as of transaction close. All employees affected by the workforce reduction will be eligible to receive, among other things, severance payments based on the applicable employee’s level and years of service with us and the continuation of group health insurance coverage for a specified time period post-termination. On August 10, 2022, our board of directors approved the termination of employment of Laura Shawver, Ph.D., our Chief Executive Officer, effective as of September 2, 2022 (the “Transition Date”), to extend our cash runway and to allow Dr. Shawver to pursue other employment opportunities. Dr. Shawver has entered into a consulting agreement with us effective as of the Transition Date pursuant to which she has agreed to provide, on an as-needed basis, not to exceed 20 hours per week unless mutually agreed, transition services and to advise, consult and support our management team in connection with the closing of the Merger, winddown activities related thereto, the sale of our legacy assets and other services from the Transition Date until the earlier of (a) the closing of the Merger and (b) December 31, 2022. As consideration for her consulting services, Dr. Shawver will be paid an hourly rate of $300 and all outstanding equity awards held by Dr. Shawver as of the Transition Date will continue to vest and will remain exercisable during the consulting period. Dr. Shawver will also continue to serve as a member of our Board of Directors. Effective as of the Transition Date, Jeffrey C. Pepe, Ph.D., J.D., has been appointed to serve as our Interim Chief Executive Officer and principal executive officer. 21 Components of Our Results of Operations Operating Expenses Our operating expenses consist of (i) research and development expenses and (ii) general and administrative expenses. Research and Development Our research and development expenses consist primarily of direct and indirect costs incurred in connection with the development, and winding down, of our ImmunoTAC technology platform, product candidates, discovery efforts and preclinical studies and clinical trial activities related to our program pipeline, including our SBT6050, SBT6290, andSBT8230 programs. 22 Our direct costs include: • expenses incurred under agreements with CROs and other vendors that conduct our preclinical and clinical activities; • expenses associated with manufacturing our product candidates including under agreements with contract development and manufacturing organizations and other vendors; and • consulting fees. Our indirect costs include: • personnel-related expenses, consisting of employee salaries, bonuses, benefits, severance, stock-based compensation expense and recruiting costs for personnel engaged in research and development activities; • facility and equipment related expenses, consisting of indirect and allocated expenses for rent, depreciation, and equipment maintenance; and • other unallocated research and development expenses incurred in connection with our research and development programs, including laboratory materials and supplies and license fees. We expense research and development costs as incurred. Advance payments for goods and services that will be used over time for research and development are capitalized and recognized as goods are delivered or as the related services are performed. In-licensing fees and other costs to acquire technologies used in research and development that have not yet received regulatory approval and that are not expected to have an alternative future use are expensed when incurred. We track direct costs by stage of program, clinical or preclinical. However, we do not track indirect costs on a program specific or stage of program basis because these costs are deployed across multiple programs and, as such, are not separately classified. We expect that our research and development expenses will decrease for the remainder of 2022 due to the winding down of all preclinical development and other research and development activities in order to preserve cash resources in anticipation of the proposed Merger with ARS Pharma. General and Administrative General and administrative expenses consist primarily of personnel-related expenses, including employee salaries, bonuses, benefits, severance, stock-based compensation, and recruiting costs for personnel in executive, finance, and other administrative functions. Other significant general and administrative expenses include legal fees relating to intellectual property, corporate matters, and the proposed Merger, professional fees for accounting, tax and consulting services, insurance costs, travel expenses, and the proposed Merger, and facility related expenses. We expect that our general and administrative expenses will remain flat or increase for the remainder of 2022 due to the administrative effort required to close the proposed Merger with ARS Pharma and to explore opportunities to divest our legacy programs. Interest Income, net Interest income, net includes interest earned on our cash, cash equivalents, and investments carried at fair value, and interest expense on our borrowings. 23 Results of Operations Comparison of the Three Months Ended June 30, 2022 and 2021 The following table summarizes our results of operations for the three months ended June 30, 2022 and 2021: Three Months Ended June 30, Dollar % 2022 2021 Change Change (in thousands, except percentages) Operating expenses: Research and development $ 12,245 $ 17,749 $ (5,504 ) -31 % General and administrative 7,553 6,762 791 12 Total operating expenses 19,798 24,511 (4,713 ) (19 ) Loss from operations (19,798 ) (24,511 ) 4,713 (19 ) Interest income (expense), net 369 15 354 * Net loss and comprehensive loss $ (19,429 ) $ (24,496 ) $ 5,067 -21 % * Not meaningful Research and Development Expenses The following table summarizes our research and development expenses for the three months ended June 30, 2022 and 2021: Three Months Ended June 30, Dollar % 2022 2021 Change Change (in thousands, except percentages) Direct costs: SBT6050 $ 1,718 $ 4,174 $ (2,456 ) -59 % SBT6290 209 4,451 (4,242 ) (95 ) Preclinical programs 2,978 1,668 1,310 79 Total direct costs 4,905 10,293 (5,388 ) (52 ) Indirect costs: Personnel-related expenses, including stock-based compensation 5,713 5,768 (55 ) (1 ) Facility and equipment related expenses 661 745 (84 ) (11 ) Other unallocated research and development expenses 966 943 23 2 Total research and development expenses $ 12,245 $ 17,749 $ (5,504 ) -31 % Research and development expenses were $12.2 million and $17.7 million for the three months ended June 30, 2022 and 2021, respectively. The decrease of $5.5 million was due primarily to a decrease in clinical programs of $6.7 million as we continued to wind down SBT6050 and SBT6290. This decrease was partially offset by an increase of $1.3 million in our preclinical programs, as we prioritized our resources to focus on the development of SBT8230 and early-stage discovery programs. General and Administrative Expenses General and administrative expenses were $7.5 million and $6.8 million for the three months ended June 30, 2022 and 2021, respectively. The increase of $0.7 million was due primarily to an increase of $0.6 million in personnel-related expenses due to increases in salaries, bonuses, and stock-based compensation. To a lesser extent, the increase in general and administrative expenses was due to an increase in professional services and other various general administrative expenses of $0.1 million. Interest Income, net Interest income, net was $369,000 and $15,000 for the three months ended June 30, 2022 and 2021, respectively. The change of $354,000 was primarily due to investing our cash in intermediate-term U.S. Treasury Securities in the second half of 2021. 24 Comparison of the Six Months Ended June 30, 2022 and 2021 The following table summarizes our results of operations for the six months ended June 30, 2022 and 2021: Six Months Ended June 30, Dollar % 2022 2021 Change Change (in thousands, except percentages) Operating expenses: Research and development $ 29,142 $ 29,988 $ (846 ) -3 % General and administrative 15,354 13,408 1,946 15 Total operating expenses 44,496 43,396 1,100 3 Loss from operations (44,496 ) (43,396 ) (1,100 ) 3 Interest income (expense), net 436 33 403 * Net loss and comprehensive loss $ (44,060 ) $ (43,363 ) $ (697 ) 2 % * Not meaningful Research and Development Expenses The following table summarizes our research and development expenses for the six months ended June 30, 2022 and 2021: Six Months Ended June 30, Dollar % 2022 2021 Change Change (in thousands, except percentages) Direct costs: SBT6050 $ 4,100 $ 6,400 $ (2,300 ) -36 % SBT6290 930 6,670 (5,740 ) (86 ) Preclinical programs 8,014 3,153 4,861 154 Total direct costs 13,044 16,223 (3,179 ) (20 ) Indirect costs: Personnel-related expenses, including stock-based compensation 12,824 10,463 2,361 23 Facility and equipment related expenses 1,328 1,627 (299 ) (18 ) Other unallocated research and development expenses 1,946 1,675 271 16 Total research and development expenses $ 29,142 $ 29,988 $ (846 ) -3 % Research and development expenses were $29.1 million and $30.0 million for the six months ended June 30, 2022 and 2021, respectively. The decrease of $0.9 million was due primarily to a decrease of $8.0 million in our clinical programs as we began to wind down SBT6050 and SBT6290 in March 2022 and a decrease in facilities and equipment related expenses of $0.3 million. This decrease was partially offset by an increase of $4.9 million in our preclinical programs as we prioritized our resources to focus on the development of SBT8230 and early-stage discovery programs, an increase in personnel-related expenses of $2.4 million due to increases in salaries, bonuses, and stock-based compensation, and an increase in other unallocated research and development expenses of $0.3 million. General and Administrative Expenses General and administrative expenses were $15.4 million and $13.4 million for the six months ended June 30, 2022 and 2021, respectively. The increase of $2.0 million was due primarily to an increase of $1.6 million in personnel-related expenses due to increases in salaries, bonuses, and stock-based compensation. To a lesser extent, the increase in general and administrative expenses was due to an increase in professional services and other administrative expenses of $0.4 million. Interest Income, net Interest income, net was $436,000 and $33,000 for the six months ended June 30, 2022 and 2021, respectively. The change of $403,000 was primarily due to investing our cash in intermediate-term U.S. Treasury Securities in the second half of 2021. 25 Liquidity and Capital Resources We have incurred net losses and negative cash flows from operations since our inception and anticipate we will continue to incur net losses for the foreseeable future. Since our inception, we have funded our operations almost exclusively with proceeds from the sale and issuance of shares of our redeemable convertible preferred stock and common stock, and debt financings. We will need to raise substantial additional capital in the future. As of June 30, 2022, we had $282.4 million in cash, cash equivalents, restricted cash, and investments. The following table sets forth a summary of the net cash flow activity for the six months ended June 30, 2022 and 2021: Six Months Ended June 30, 2022 2021 (in thousands) Net cash provided by (used in): Operating activities $ (34,895 ) $ (26,336 ) Investing activities (618 ) (735 ) Financing activities 158 191 Net increase (decrease) in cash, cash equivalents, and restricted cash $ (35,355 ) $ (26,880 ) Operating Activities During the six months ended June 30, 2022, net cash used in operating activities was $34.9 million. This consisted primarily of a net loss of $44.1 million and an increase in our operating assets and liabilities of $1.9 million, partially offset by non-cash charges of $11.0 million. The non-cash charges primarily consisted of stock-based compensation expense of $10.1 million, non-cash lease expense of $0.5 million, and depreciation expense of $0.4 million. The increase in our operating assets and liabilities was primarily due to a decrease in accounts payable and accrued expenses of $3.6 million, and a decrease in lease liability of $0.6 million. These increases were partially offset by a decrease in our prepaid and other assets of $2.3 million. During the six months ended June 30, 2021, net cash used in operating activities was $26.3 million. This consisted primarily of a net loss of $43.4 million, partially offset by non-cash charges of $10.0 million and a decrease in our operating assets and liabilities of $7.1 million. The non-cash charges primarily consisted of stock-based compensation expense of $9.0 million, non-cash lease expense of $0.6 million, and depreciation expense of $0.4 million. The decrease in our operating assets and liabilities was primarily due to an increase in accounts payable and accrued expenses of $6.8 million, and a decrease in prepaid expenses and other assets of $0.7 million after adjusting for non-cash items. This decrease was partially offset by a decrease in our lease liability of $0.5 million. Investing Activities During the six months ended June 30, 2022, cash used in investing activities was $0.6 million due to purchases of property and equipment. During the six months ended June 30, 2021, cash used in investing activities was $0.7 million due to purchases of property and equipment. Financing Activities During the six months ended June 30, 2022, cash provided by financing activities was $0.2 million. This was primarily driven by proceeds from the exercise of common stock options and purchases of common stock under our employee stock purchase program of $0.2 million. During the six months ended June 30, 2021, cash provided by financing activities was $0.2 million. This was primarily driven by proceeds from the exercise of common stock options and purchases of common stock under our employee stock purchase program of $1.0 million, which was partially offset by $0.8 million of principal payments on the term loan payable. 26 Future Funding Requirements We believe that our cash, cash equivalents, restricted cash, and investments of $282.4 million at June 30, 2022 will be sufficient to fund our operating expenses and capital expenditure requirements into the second half of 2026. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect. Our future funding requirements, both near and long-term, will depend on many factors, including: • our ability to identify and consummate the proposed Merger or a similar strategic transaction for the Company; • the timing and nature of any strategic transactions that we undertake; • whether we enter into a partnership or business combination; • the terms and timing of any future collaborations, licensing, consulting or other arrangements that we may establish; and • the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property related claims. If, for any reason, the proposed Merger is not completed, we will reconsider our strategic alternatives and could pursue another strategic transaction similar to the proposed Merger, potential collaborative, partnering or other strategic arrangements for our programs, including a sale or divestiture of our legacy programs, or liquidate and distribute available cash. If we liquidate, we would be required to pay all of our debts and contractual obligations, and to set aside certain reserves for potential future claims, and there can be no assurances as to the amount or timing of available cash left to distribute to our stockholders after paying our debts and other obligations and setting aside funds for reserves. Material Cash Requirements Other than transaction costs related to the Merger and severance payments related to our planned reduction in force, d uring the six months ended June 30, 2022, there have been no material changes outside the ordinary course of business to our material cash requirements from those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K filed with the SEC on March 31, 2022. Critical Accounting Policies and Significant Judgments and Estimates Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses, stock-based compensation, and valuation allowances for deferred tax assets. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. During the six months ended June 30, 2022, there were no material changes to our critical accounting policies. Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Significant Judgments and Estimates” in our Annual Report on Form 10-K filed with the SEC on March 31, 2022 and Note 2 to our unaudited condensed financial statements appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q. We believe that of our critical accounting policies, the following accounting policies involve the most judgment and complexity: • Research and Development Costs; • Stock-based Compensation; • Income Taxes. 27 Recent Accounting Pronouncements See Note 2 to our unaudited condensed financial statements appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information. Emerging Growth Company Status We are an emerging growth company, as defined in the JOBS Act. For so long as we remain an emerging growth company, we are permitted and intend to rely on certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with certain new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. We will remain an emerging growth company until the earliest to occur of: (i) the last day of the fiscal year in which we have at least $1.07 billion in annual revenue; (ii) the date upon which we are deemed to be a “large accelerated filer,” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the Exchange Act); (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt securities during the prior three-year period; and (iv) December 31, 2025. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable to a “smaller reporting company” as defined under Item 10(f)(1) of Regulation S-K of the Securities Act of 1933, as amended (the Securities Act).