SUTRO BIOPHARMA, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the attached financial statements and notes thereto. This Annual Report on Form 10-K, including the following sections, contains forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements. For a detailed discussion of these risks and uncertainties, see the “Risk Factors” section in Item 1A of this Annual Report on Form 10-K. We caution the reader not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this Form 10-K. We undertake no obligation to update forward-looking statements, which reflect events or circumstances occurring after the date of this Form 10-K. Overview We are a clinical-stage oncology company developing site-specific and novel-format antibody drug conjugates, or ADCs, enabled by our proprietary integrated cell-free protein synthesis platform, XpressCF ® , and our site-specific conjugation platform, XpressCF+ ® . We aim to design and develop therapeutics using the most relevant and potent modalities, including ADCs, bispecific ADCs, immunostimulatory ADCs, or iADCs, dual conjugate ADCs, or ADC 2 s, and cytokine derivatives. Our molecules are directed primarily against clinically validated targets where the current standard of care is suboptimal. We believe that our platform allows us to accelerate the discovery and development of potential first-in-class and/or best-in-class molecules by enabling the rapid and systematic evaluation of protein structure-activity relationships to create optimized homogeneous product candidates. Our mission is to transform the lives of patients by creating medicines with improved therapeutic profiles for areas of unmet need. Once identified, production of protein drug candidates can be rapidly and predictably scaled in our current Good Manufacturing Practices, or cGMP, compliant manufacturing facility. We have the ability to manufacture our proprietary cell-free extract that supports our production of proteins on a large scale using a semi-continuous fermentation process. Our most advanced product candidate is STRO-002, or luveltamab tazevibulin, or luvelta, an ADC directed against folate receptor-alpha, or FolRα, for patients with FolRα-expressing cancers, including ovarian cancer. Luvelta was designed and optimized for an improved therapeutic index by placing a precise number of linker-warheads at four specific locations within the antibody using our proprietary XpressCF+ ® platform. Our first Phase 1 trial for luvelta is an open-label study evaluating luvelta as a monotherapy for patients with ovarian and endometrial cancers. This trial is being conducted in two-parts, dose escalation and dose expansion. The primary objectives of the clinical trial are to determine the safety and tolerability profile, to define the recommended Phase 2 dose level and interval and to evaluate preliminary anti-tumor activity. Our secondary objectives are to characterize the human pharmacokinetics and additional safety, tolerability and efficacy measures. In 2019, we began enrolling patients in a Phase 1 trial of luvelta that focused on ovarian and endometrial cancers. The Phase 1 trial assessing safety, tolerability and preliminary efficacy of luvelta to treat platinum resistant ovarian cancer has been completed. In January 2024, we reported near-final results from this Phase 1 trial, in which luvelta exhibited a manageable safety profile together with promising preliminary efficacy data in the tested patient population. We also presented data from Phase 1b trials assessing safety, tolerability and preliminary efficacy for the treatment of ovarian cancer with luvelta in combination with bevacizumab and for treatment of endometrial cancer. In August 2021, luvelta was granted Fast Track designation by the U.S. Food and Drug Administration, or FDA, for the treatment of patients with platinum-resistant epithelial ovarian, fallopian tube, or primary peritoneal cancer who have received one to three prior lines of systemic therapy. We began enrolling patients in a Phase 2/3 trial of luvelta for the treatment of platinum-resistant ovarian cancer, the REFRαME-O1 study, in June 2023. 104 In January 2024, we presented an aggregated data set from of our Phase I trials of luvelta. This data set included data from all ovarian cancer patients treated with luvelta as a monotherapy in Phase 1 studies, regardless of FolRα expression levels, dose level of luvelta, or platinum sensitivity or resistance, corresponding to a total of 99 patients, of which 92 were RECIST-evaluable, with 21% platinum sensitive patients and 78% platinum refractory patients. Patients received a median of three prior lines of therapy. There were 72% of the patients that had experienced prior bevacizumab therapy and 70% had been treated with a PARP inhibitor. These patients were not selected for FolRα expression levels and were treated at starting dose levels ≤2.9 mg/kg, 4.3 mg/kg, 5.2 mg/kg or ≥5.6 mg/kg. The safety profile of luvelta from these aggregated data was shown to be manageable, with a low rate of discontinuation of treatment resulting from neutropenia. The predominant TEAE was neutropenia, encompassing neutropenia, febrile neutropenia, and decreased neutrophil count, with 69.7% patients reporting any grade neutropenia and 64.6% patients reporting Grade 3 or higher neutropenia. Neuropathy and arthralgia were the other most commonly reported significant TEAEs, with 57.6% and 16% of patients reporting any grade and Grade 3 or higher arthralgia, respectively, and 44% and 7% patients reporting any grade and Grade 3 or higher neuropathy, respectively. The observed neutropenia was primarily uncomplicated, with less than 5% incidence of febrile neutropenia. Neutropenia and arthralgia each led to discontinuation of treatment in 1.5% of patients. Neuropathy led to discontinuation of treatment in 2.9% of patients. There were six patients that experienced grade 5 safety events on study, with one such event assessed as probably luvelta related and the remainder assessed as unrelated to luvelta. We also presented a subset of the aggregated data from our Phase 1 trials of luvelta for which 43 patients with platinum resistant ovarian cancer selected for FolRα TPS ≥25%, or tumors with ≥25% of the tumor cells expressing FolRα at any level of staining intensity, were treated with 4.3 mg/kg or 5.2 mg/kg doses of luvelta, corresponding to all patients treated in phase 1 studies that would be eligible for enrollment in the REFRαME-O1 registrational study. The ORR observed for this subset population was 28%, with a DOR of 5.7 months and PFS of 5.8 months. Based on the data from our Phase 1 program, we selected FolRα expression TPS ≥25% as the target eligibility cutoff or threshold for further study in clinical development of luvelta. We estimate that approximately 80% of the platinum resistant ovarian cancer patients would be eligible for luvelta treatment based on this TPS ≥25% threshold for FolRα expression . We also opened for enrollment a Phase 1 trial to assess the combination of luvelta and bevacizumab for treatment of ovarian cancer in December 2021 and presented initial preliminary results of this study in January 2024. Safety signals from this study were generally consistent with those previously reported and the combination treatment with luvelta and bevacizumab demonstrated clinical activity in treated patients regardless of their FolRα expression status. We also began enrolling patients in an expansion cohort for FolRα-selected endometrial cancer in the fourth quarter of 2021 and presented initial preliminary results from the study at the 2023 ESMO Congress in October 2023. In this trial, luvelta showed encouraging preliminary anti-tumor activity in FolRα-selected patients, defined by a TPS of >25% FolRα expression, and the safety profile was consistent with prior data in patients with platinum-resistant ovarian cancer. We expect to present updated results from the bevacizumab combination study in 2024. Further, we plan to submit an IND for the treatment of NSCLC with luvelta in the first half of 2024. In addition to the Phase 1 studies discussed above, we initiated a Phase 2/3 study, the REFRαME-O1 study, of luvelta for the treatment of platinum-resistant ovarian cancer in June 2023. This study comprises two parts; in Part 1, we anticipate enrolling 50 patients randomized 1:1 to two different doses of luvelta, either 4.3 mg/kg or 5.2 mg/kg plus prophylactic pegfilgrastim for two cycles, followed by reduction to 4.3 mg/kg. After proceeding to Part 2 of the study, the non-optimized dose of luvelta will be dropped and approximately 516 patients will be randomized 1:1 to the selected luvelta dose or investigators choice of chemotherapy. The protocol will include an optional interim analysis for ORR and DOR to support a potential application for accelerated approval and the endpoints that will be assessed for a potential full approval are PFS and OS. The REFRαME-O1 study patient population includes those with platinum-resistant ovarian cancer, 1-3 lines of prior treatment and tumors that express FolRα at TPS≥25% and excludes primary platinum refractory patients and those with ECOG PS of 0-1. We announced the initiation of Part 1 of the REFRαME-O1 study in June 2023 and the study is ongoing. We anticipate that Part 1 will be fully enrolled by the end of the first half of 2024. 105 In 2022 we initiated an exploratory cohort, or cohort C, of 15 patients to assess the safety of treatment with luvelta at 5.2 mg/kg in combination with prophylactic pegfilgrastim and presented preliminary data from ten patients from this cohort in January 2023. In January 2024 we announced updated data from this cohort based on 16 patients. In particular: • Grade 3+ neutropenia was reduced from 66.7% to 6.3%, resulting in a 90.6% decrease in Grade 3+ neutropenia rates at the first cycle of luvelta (p=0.0002); Grade 3 neutropenia was reduced from 71.4% to 18.8%, resulting in a 73.7% decrease in Grade 3+ neutropenia rates at the first and second cycle (p=0015) • Overall Grade 3+ neutropenia was reduced from 76.2% to 37.5% In addition, we have been offering compassionate use of luvelta to treat pediatric patients with relapsed/refractory CBFA2T3-GLIS2, or CBF/GLIS, acute myeloid leukemia, or AML, commonly known as RAM phenotype AML. Updated compassionate use data continued to show anti-leukemic activity of luvelta in pediatric patients with relapsed/refractory CBF/GLIS AML and was presented at the ASH 2023 in December 2023. The data showed that luvelta was well tolerated as a monotherapy agent and in combination with standard cancer therapies. Luvelta was granted Orphan Drug Designation by the FDA in December 2022 in this pediatric patient population. We expect to begin enrollment of a registration-directed trial of luvelta for treatment of pediatric RAM phenotype AML in the second half of 2024. Our most advanced assets in preclinical development are STRO-003 and STRO-004. We believe STRO-003 has the potential to be a first-in-class and best-in-class ADC targeting ROR1 and that STRO-004 has the potential to be a best-in-class ADC targeting TF. Preclinical data suggest that both STRO-003 and STRO-004 have potent antitumor activity and potential for a differentiated safety profile. We anticipate being ready to file an IND for each of STRO-003 and STRO-004 in 2024 and 2025, respectively. Enabled through our proprietary XpressCF ® and XpressCF+ ® platforms, we have entered into multi-target, product-focused collaborations with leading pharmaceutical and biotechnology companies in the field of oncology, with our ongoing relationships that include an immunostimulatory antibody-drug conjugates collaboration with Astellas, a cytokine derivatives collaboration with Merck, and a licensing agreement for luvelta in Greater China with Tasly. In August 2023, Tasly received its first IND clearance by NMPA in Greater China for luvelta. Our XpressCF ® and XpressCF+ ® platforms have also supported Vaxcyte, focused on discovery and development of vaccines for the treatment and prophylaxis of infectious disease. The lead programs for Vaxcyte are VAX-31 and VAX-24, its 31-valent and 24-valent, respectively, pneumococcal conjugate vaccine candidates. Vaxcyte is responsible for performing all research and development activities, and we provide technical support and supply XtractCF ® and other materials to Vaxcyte. In June 2023, we entered into a purchase and sale agreement (the “Purchase Agreement”) with Blackstone, in which Blackstone acquired the right to receive our 4% revenue interest in Vaxcyte’s future products, including Vaxcyte’s pneumococcal conjugate vaccine, or PCV, products such as VAX-24 and its second-generation PCV product, VAX-31. As described further below, following agreement with Vaxcyte on the Form Definitive Agreement and upon effectiveness of an amendment to the licensing agreement, the revenue interest in the 4% royalty on potential future sales of Vaxcyte products other than Vaxcyte’s PCV products reverted to us. In November 2023, Vaxcyte exercised its option to access expanded rights to develop and manufacture cell-free extract for use in development and manufacture of its vaccine products, among certain other rights. Since the commencement of our operations, we have devoted substantially all of our resources to performing research and development and manufacturing activities in support of our own product development efforts and those of our collaborators, raising capital to support and expand such activities and providing general and administrative support for these operations. We have funded our operations to date primarily from upfront, milestone and other payments under our collaboration agreements with BMS, Merck, Astellas, EMD Serono, Vaxcyte, BioNova, and Tasly, the issuance and sale of redeemable convertible preferred stock, our initial public offering, or IPO, follow-on public offerings of common stock, sales of our common stock through our ATM Facility, debt financing, and the royalty monetization agreement with Blackstone. 106 We do not have any products approved for commercial sale and have not generated any revenue from commercial product sales. We had a loss from operations of $89.3 million and a net loss of $106.8 million for the year ended December 31, 2023, which net loss included the non-operating, unrealized gain of $9.9 million related to our holdings of Vaxcyte common stock. We had a loss from operations of $128.9 million and net loss of $119.2 million, which net loss included the non-operating, unrealized gain of $12.1 million related to our holdings of Vaxcyte common stock, for the year ended December 31, 2022. Substantially all of our losses have resulted from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We cannot assure you that we will have net income or that we will generate positive cash flow from operating activities in the future. As of December 31, 2023, we had an accumulated deficit of $559.4 million. We do not expect to generate any revenue from commercial product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, access, marketing, manufacturing and distribution. Our operating expenses would significantly increase due to continued activities to develop, and seek regulatory approvals for, our product candidates, engage in other research and development activities, expand our pipeline of product candidates, continue to develop our manufacturing facility and capabilities, maintain and expand our intellectual property portfolio, seek regulatory and marketing approval for any product candidates that we may develop, acquire or in-license other assets or technologies, ultimately establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval, and operate as a public company. Current capital market conditions provide a challenging financing environment. In this context, we are continuing our process of evaluating our programs and spending. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials, our expenditures on other research and development activities and the timing of achievement and receipt of upfront, milestones and other collaboration agreement payments. A discussion and analysis of our financial condition, results of operations, and cash flows for the year ended December 31, 2021 is included in Item 7 of Part II “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 30, 2023. Financial Operations Overview Revenue We do not have any products approved for commercial sale and have not generated any revenue from commercial product sales. Our total revenue to date has been generated principally from our collaboration and license agreements with BMS, Merck, Astellas, EMD Serono, Vaxcyte, BioNova and Tasly, and to a lesser extent, from manufacturing, supply and services and materials we provide to the above collaborators. We derive revenue from collaboration arrangements, under which we may grant licenses to our collaboration partners to further develop and commercialize our proprietary product candidates. We may also perform research and development activities under the collaboration agreements. Consideration under these contracts generally includes a nonrefundable upfront payment, development, regulatory and commercial milestones and other contingent payments, and royalties based on net sales of approved products. Additionally, the collaborations may provide options for the customer to acquire from us materials and reagents, clinical product supply or additional research and development services under separate agreements. We assess which activities in the collaboration agreements are considered distinct performance obligations that should be accounted for separately. We develop assumptions that require judgement to determine whether the license to our intellectual property is distinct from the research and development services or participation in activities under the collaboration agreements. At the inception of each agreement, we determine the arrangement transaction price, which includes variable consideration, based on the assessment of the probability of achievement of future milestones and contingent payments and other potential consideration. We recognize revenue over time by measuring our progress towards the complete satisfaction of the relevant performance obligation using an appropriate input or output method based on the nature of the service promised to the customer. For arrangements that include multiple performance obligations, we allocate the transaction price to the identified performance obligations based on the standalone selling price, or SSP, of each distinct performance obligation. In instances where SSP is not directly observable, we develop assumptions that require judgment to 107 determine the SSP for each performance obligation identified in the contract. These key assumptions may include full-time equivalent, or FTE, personnel effort, estimated costs, discount rates and probabilities of clinical development and regulatory success. Please see further discussion on the revenue recognition treatment of performance obligations under Critical Accounting Policies and Estimates. Operating Expenses Research and Development Research and development expenses represent costs incurred in performing research, development and manufacturing activities in support of our own product development efforts and those of our collaborators, and include salaries, employee benefits, stock-based compensation, laboratory supplies, outsourced research and development expenses, professional services and allocated facilities-related costs. We expense both internal and external research and development costs as they are incurred. Nonrefundable advance payments for services that will be used or rendered for future research and development activities are recorded as prepaid expenses and recognized as expenses as the related services are performed. Our research and development expenses would increase in the future due to continued activities to advance our product candidates into and through preclinical studies and clinical trials, pursue regulatory approval of our product candidates, expand our pipeline of product candidates, and continue to develop our manufacturing facility and capabilities. The process of conducting the necessary preclinical and clinical research to obtain regulatory approval is costly and time consuming. The actual probability of success for our product candidates may be affected by a variety of factors including: the safety and efficacy of our product candidates, early clinical data, investment in our clinical programs, the ability of collaborators to successfully develop our licensed product candidates, competition, manufacturing capability and commercial viability. We may never succeed in achieving regulatory approval for any of our product candidates. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of our product candidates. The following table summarizes our research and development expenses incurred during the indicated periods. The internal costs include personnel, facility costs and research and scientific related activities associated with our pipeline. The external program costs reflect external costs attributable to our clinical development candidates and preclinical candidates selected for further development. Such expenses include third-party costs for preclinical and clinical studies and research, development and manufacturing services, and other consulting costs. Year ended December 31, 2023 2022 (in thousands) Internal costs: Research and drug discovery $ 34,822 $ 34,571 Process and product development 20,810 15,708 Manufacturing 44,176 39,613 Clinical development 12,601 9,159 Total internal costs 112,409 99,051 External Program Costs: Research and drug discovery 3,955 3,621 Process and product development 3,052 642 Manufacturing 36,085 20,758 Clinical development 24,924 13,099 Total external program costs 68,016 38,120 Total research and development expenses $ 180,425 $ 137,171 108 General and Administrative Our general and administrative expenses consist primarily of personnel costs, expenses for outside professional services, including legal, human resources, audit, accounting and tax services and allocated facilities-related costs. Personnel costs include salaries, employee benefits and stock-based compensation. We expect to incur expenses operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and listing standards applicable to companies listed on the Nasdaq Global Market, additional insurance expenses, investor relations activities and other administrative and professional services. The size of our administrative function and our general and administrative expenses to support the anticipated growth of our business would increase as we continue to advance our product candidates into and through the clinic. Interest Income Interest income consists primarily of interest earned on our invested funds. Unrealized Gain (Loss) on Equity Securities Unrealized gain (loss) on equity securities consists of the remeasurement of our investment in Vaxcyte common stock. Non-cash interest expense related to the sale of future royalties Non-cash interest expense related to the sale of future Vaxcyte royalties represents the imputed interest expense on our deferred royalty obligation related to the sale of future Vaxcyte royalties pursuant to the Purchase Agreement, using the effective interest method. As further described in the financial statements in Note 10. Deferred Royalty Obligation Related to the Sale of Future Royalties, in June 2023, we entered into the Purchase Agreement with Blackstone, pursuant to which we sold to Blackstone our 4% royalty, or revenue interest, in the potential future net sales of Vaxcyte products, including Vaxcyte’s PCV products, such as VAX-24 and VAX-31. As described further below, following agreement with Vaxcyte on the Form Definitive Agreement and upon effectiveness of an amendment to the licensing agreement, the revenue interest in the 4% royalty on potential future sales of Vaxcyte products other than Vaxcyte’s PCV products reverted to us. Non-cash interest expense will be recognized over the estimated life of the royalty term arrangement using the effective interest method based on the imputed interest rate derived from estimated amounts and timing of potential future royalty payments to be earned and received by Blackstone from Vaxcyte under the 2015 License Agreement. Interest and Other Income (Expense), Net Interest expense includes interest incurred on our debt and amortization of debt issuance costs, including accretion of the final payment. Additionally, we identified a financing component under the Astellas Agreement and recorded interest expense associated with the upfront payment. Other income (expense) includes realized gain (loss) on the equity securities. Income Taxes We recorded an income tax charge of $18.2 million during the year ended December 31, 2023. The income tax charge was primarily due to unfavorable book-tax differences related to capitalizing and amortizing research and development expenditures under Internal Revenue Code, or IRC, Section 174, the upfront payment from the sale of future royalties, deferred revenue, foreign income tax, and IRC Section 382 limitations imposed on the utilization of our historical tax attributes as a result of cumulative ownership changes that we experienced in prior years. We recorded a foreign income tax charge of $2.5 million during the year ended December 31, 2022, due to a withholding tax in China on an upfront license fee payment received from Tasly. 109 All other income tax charges and benefits for the years ended December 31, 2023 and 2022 have been immaterial, primarily due to the net loss in each year. Our deferred assets continue to be subject to full valuation allowance for the tax years ended December 31, 2023 and 2022. A valuation allowance is recorded when it is more likely than not that all or some portion of the deferred income tax assets will not be realized. We regularly assess the need for a valuation allowance against our deferred income tax assets by considering both positive and negative evidence related to whether it is more likely than not that our deferred income tax assets will be realized. In evaluating our ability to recover our deferred income tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred income tax liabilities, future tax rates, projected future taxable income, tax-planning strategies, and results of recent operations. Comparison of the Years Ended December 31, 2023 and 2022 Year ended December 31, Change 2023 2022 $ % (in thousands) Revenue $ 153,731 $ 67,772 $ 85,959 127 % Operating expenses: Research and development 180,425 137,171 43,254 32 % General and administrative 62,584 59,544 3,040 5 % Total operating expenses 243,009 196,715 46,294 24 % Loss from operations (89,278 ) (128,943 ) 39,665 (31 )% Interest income 14,510 3,455 11,055 320 % Unrealized gain on equity securities 9,917 12,130 (2,213 ) (18 )% Non-cash interest expense related to the sale of future royalties (12,570 ) - (12,570 ) * Interest and other income (expense), net (11,180 ) (3,346 ) (7,834 ) 234 % Loss before provision for income taxes (88,601 ) (116,704 ) 28,103 (24 )% Provision for income taxes 18,192 2,500 15,692 628 % Net loss $ (106,793 ) $ (119,204 ) $ 12,411 (10 )% *Percentage not meaningful Revenue We have recognized revenue as follows during the indicated periods: Year Ended December 31, Change 2023 2022 $ % (in thousands) Bristol-Myers Squibb Company ("BMS") $ 5,590 $ 9,752 $ (4,162 ) (43 )% Merck Sharp & Dohme Corporation ("Merck") 5,869 11,600 (5,731 ) (49 )% Merck KGaA, Darmstadt, Germany (operating in the United States and Canada under the name "EMD Serono") 8 2,695 (2,687 ) (100 )% Astellas Pharma Inc. (“Astellas”) 33,992 10,897 23,095 212 % Tasly Biopharmaceuticals Co., Ltd. (“Tasly”) 6,970 25,000 (18,030 ) (72 )% Vaxcyte 101,302 3,828 97,474 2,546 % BioNova Pharmaceuticals, Ltd. (“BioNova”) - 4,000 (4,000 ) (100 )% Total revenue $ 153,731 $ 67,772 $ 85,959 127 % 110 Total revenue increased by $86.0 million, or 127%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022. This was primarily due to a $97.5 million increase in Vaxcyte revenue from an earned $97.5 million in upfront and option exercise payments related to the Option exercised by Vaxcyte under the Vaxcyte Agreement, and a $23.1 million increase from Astellas, of which $13.1 million was from the ongoing performance related to partially unsatisfied performance obligations, $5.3 million was from research and development services, and $4.7 million was from the financing component related to the Astellas Agreement,. These increases were partially offset by an $18.0 million decrease in Tasly revenue from an earned $25.0 million upfront payment in 2022 under the Tasly License Agreement, partially offset by a contingent payment of $5.0 million earned in 2023, and a $2.0 million in clinical product supply under the 2023 Tasly Supply Agreement, a $5.7 million decrease in Merck revenue primarily due to an earned $10.0 million contingent payment from Merck in 2022, a $0.8 million decrease from the 2022 completion of the performance obligation associated with the extension of the research term for the first target program under the 2018 Merck Agreement, partially offset by a $5.1 million increase in manufacturing activities supporting clinical trial supply, a $4.0 million decrease in BioNova revenue due to an earned licensing option payment in 2022, and a $4.2 million and $2.7 million decrease in BMS and EMD Serono revenue, respectively, due to their decisions to end clinical development of CC-99712 and M1231, respectively, in 2023. Research and Development Expense Research and development expense increased by $43.2 million, or 32%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022. The overall increase was primarily due to increases of $18.1 million in consulting and outside services mainly due to increased CMO-related activities, $13.4 million in personnel-related expenses due to higher headcount, $11.4 million in clinical development expenses, $3.9 million in facilities-related expenses, and $1.3 million in equipment and office-related expenses, partially offset by a decrease of $3.0 million in preclinical research expenses, and $1.9 million in laboratory supplies. General and Administrative Expense General and administrative expense increased by $3.0 million, or 5%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022. The overall increase was primarily due to increases of $2.6 million in consulting and outside services, $1.1 million in equipment and office-related expenses, and $0.7 million in facilities-related expenses, partially offset by a $1.4 million decrease in personnel-related expenses. Interest Income Interest income increased by $11.0 million during the year ended December 31, 2023 as compared to the year ended December 31, 2022, due primarily to higher average investment balances and higher average rates of return in 2023. Unrealized Gain on Equity Securities Unrealized gain on equity securities was $9.9 million during the year ended December 31, 2023 as compared to an unrealized gain of $12.1 million during the year ended December 31, 2022. The unrealized gain on equity securities in each period was entirely due to the remeasurement of the estimated fair value of our investment in Vaxcyte common stock. Non-cash Interest Expense related to the Sale of Future Royalties Non-cash interest expense increased by $12.6 million during the year ended December 31, 2023, as compared to the year ended December 31, 2022. Non-cash interest expense was recognized on our deferred royalty obligation related to the June 2023 sale of future Vaxcyte royalties pursuant to the Purchase Agreement using the effective interest method based on the imputed interest rate derived from estimated amounts and timing of potential future royalty payments to be earned and received by Blackstone from Vaxcyte under the 2015 License Agreement. No non-cash interest expense was recorded during the year ended December 31, 2022. 111 Interest and Other Income (Expense), Net Interest and other income (expense), net, increased by $7.8 million during the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to the increase of $4.7 million from the financing component related to the Astellas Agreement, a $4.1 million decrease in recognized gain on sale of equity securities sold during the year ended December 31, 2022, partially offset by a decrease of $1.1 million in interest incurred on our outstanding loan. Liquidity and Capital Resources Sources of Liquidity To date, we have incurred significant net losses, and negative cash flows from operations. Our operations have been funded primarily by payments received from our collaborators, and net proceeds from equity sales, debt, and a royalty monetization. As of December 31, 2023, we had $333.7 million in cash, cash equivalents and marketable securities, equity securities of $41.9 million, outstanding debt of $4.1 million and an accumulated deficit of $559.4 million. Upfront Payment from Blackstone In June 2023, we entered into a Purchase Agreement with Blackstone, pursuant to which we sold to Blackstone our 4% royalty, or revenue interest, in potential future net sales of Vaxcyte products, including Vaxcyte’s PCV products, such as VAX-24 and VAX-31. As described further below, following agreement with Vaxcyte on the Form Definitive Agreement and upon effectiveness of an amendment to the licensing agreement, the revenue interest in the 4% royalty on potential future sales of Vaxcyte products other than Vaxcyte’s PCV products reverted to us. We retain the right to discover and develop vaccines for the treatment or prophylaxis of any disease that is not caused by an infectious pathogen, including cancer. Blackstone made an upfront payment of $140.0 million to us and is also obligated to pay up to an additional $250.0 million upon the achievement of various return thresholds, as set forth in the Purchase Agreement. Upfront Payments from Vaxcyte and Vaxcyte Equity Ownership In December 2022, we entered into a letter agreement (the “Vaxcyte Agreement”) with Vaxcyte under which the Company granted to Vaxcyte (i) authorization to enter into an agreement with an independent alternate contract manufacturing organization, or CMO, to source cell-free extract solely for the products it licensed from the us, allowing Vaxcyte to have direct oversight over financial and operational aspects of the relationship with the CMO, and (ii) a right, but not an obligation, to obtain certain exclusive rights to internally manufacture and/or source extract from certain CMOs and the right to independently develop and make improvements to extract for use in connection with the exploitation of certain vaccine compositions (the “Option”). Pursuant to the Vaxcyte Agreement, we received from Vaxcyte a one-time, nonrefundable, non-creditable, upfront payment of $10.0 million in cash, and 167,780 shares of Vaxcyte’s common stock with a fair value of $7.5 million at the date of the transaction in December 2022. Additionally, pursuant to the Vaxcyte Agreement, we agreed with Vaxcyte to negotiate the terms and conditions of the Form Definitive Agreement to be entered into in the event Vaxcyte exercises the Option. In September 2023, we mutually agreed in writing with Vaxcyte upon the Form Definitive Agreement, and in October 2023, we received a $5.0 million payment from Vaxcyte. In November 2023 (the "Exercise Date"), Vaxcyte exercised the Option by submitting written notice thereof to us and concurrently paid us $50.0 million in cash as the first of two installment payments for the Option exercise price. Under the Vaxcyte Agreement, Vaxcyte is obligated to pay us an additional $25.0 million in cash within six months of the Exercise Date as the second of two installment payments for the Option exercise price. Upon the occurrence of certain regulatory milestones, Vaxcyte would be obligated to pay us up to $60.0 million in cash. In the event that Vaxcyte undergoes a change of control, certain rights and payments may be accelerated. 112 As of December 31, 2023, we held 667,780 shares of Vaxcyte common stock, which include the 167,780 shares received from Vaxcyte under the Vaxcyte Agreement. The estimated fair value of Vaxcyte common stock was $41.9 million as of December 31, 2023. At-The-Market Sales During the year ended December 31, 2023, we sold an aggregate of 1,857,410 shares of our common stock through our ATM Facility pursuant to the Sales Agreement with Jefferies. The gross proceeds from these sales were approximately $12.4 million, before deducting fees of approximately $0.4 million, resulting in net proceeds of approximately $12.0 million. Contingent and Upfront Payments from Tasly In August 2023, Tasly received the first IND clearance by the NMPA in Greater China. As a result of this achievement, we earned a $5.0 million contingent payment from Tasly under the Tasly License Agreement. The contingent payment, net of withholding tax of $0.5 million, resulted in a net payment to us of $4.5 million received in October 2023. In September 2023, we received a $5.0 million contingent payment from Tasly related to the first patient dosed in our REFRaME-O1 trial for luvelta, net of withholding tax of $0.5 million. The REFRaME-O1 study consists of two parts, Part I being the dose-finding portion and Part II being the portion of the study that will focus on the selected dose from Part I, and is intended to generate data to enable the potential registration of luvelta. Although we currently intend to conduct the REFRaME-O1 study to completion, we have the sole discretion to terminate the REFRaME-O1 study at any time. As such, we have agreed with Tasly, that in the event we terminate the REFRaME-O1 study prior to dosing the first patient in Part II, we will refund Tasly the contingent payment received by us within 30 days of such study termination. During the year ended December 31, 2022, we earned a $25.0 million nonrefundable upfront payment from Tasly under the Tasly License Agreement to grant Tasly an exclusive license to develop and commercialize luvelta in Greater China. The upfront payment, net of a withholding tax of $2.5 million, resulted in a net payment to us of $22.5 million received during the year ended December 31, 2022. Upfront Payment from Astellas In June 2022, we entered into a License and Collaboration Agreement with Astellas, for the development of immunostimulatory antibody-drug conjugates for up to three biological targets, to be identified by Astellas. Pursuant to the agreement with Astellas, we received from Astellas a one-time, nonrefundable, non-creditable, upfront payment of $90.0 million during the year ended December 31, 2022. Contingent Payment from Merck In July 2022, the first patient was dosed in a Phase 1 study of MK-1484, an investigational candidate resulting from the 2018 Merck Agreement for the first program in our collaboration to develop novel cytokine derivative therapeutics for the treatment of cancer. As a result of this achievement, we earned and received a $10.0 million contingent payment from Merck during the year ended December 31, 2022. Term Loan On February 28, 2020, or the Effective Date, we entered into a loan and security agreement, (the "LSA"), with Oxford Finance LLC, or Oxford, as the collateral agent and a lender, and Silicon Valley Bank, as a lender, together with Oxford, the Lenders, pursuant to which the Lenders have agreed to lend us up to an aggregate of $25.0 million (the "Term A Loan"). Upon entering into the Loan and Security Agreement, we borrowed $25.0 million from the Lenders, with approximately $9.6 million of such amount applied to the repayment of the outstanding principal, interest and final payment fees owed pursuant to the prior loan and security agreement dated August 4, 2017. In June 2022, we entered into an amendment to the LSA with Oxford and SVB (the “LSA Amendment”). The LSA Amendment added a financial covenant that requires us to maintain a minimum unrestricted cash balance of 113 $10.0 million. We were in compliance with the financial covenant under the LSA Amendment as of December 31, 2023. In June 2023, we entered into an amendment to the LSA with Oxford and SVB (the “5th LSA Amendment”). Under the 5th LSA Amendment, effective July 1, 2023, the loan bears interest at the floating per annum rate of interest equal to the greater of (i) 8.07% and (ii) the sum of (a) a specific published 1-month secured overnight financing rate (SOFR) reported on the last business day of the month that immediately precedes the month in which the interest will accrue, plus (b) 0.10%, plus (c) 6.40%. There was an immaterial impact of the 5th LSA Amendment on our financial statements. The Term A Loan matured on March 1, 2024 (the “Maturity Date”) and the Company made a final payment of 3.83% of the original principal amount of the Term A Loan on the Maturity Date under the LSA. In connection with entering into the LSA, we issued to the Lenders warrants exercisable for 81,257 shares of our common stock, or the Debt Warrants. The Debt Warrants are exercisable in whole or in part, immediately, and have a per share exercise price of $9.23, which was the closing price of our common stock reported on the Nasdaq Global Market on the day prior to the Effective Date. The Debt Warrants will terminate on the earlier of February 28, 2030 or the closing of certain merger or consolidation transactions. Leases In June 2021, we entered into a third amendment, or Third Amendment, to our manufacturing facility lease, dated May 18, 2011, as amended, by and between Alemany Plaza LLC, located at San Carlos, California, or San Carlos Lease, as an extension to the term of the San Carlos Lease for a period of five years, or the Lease Extension Period. Pursuant to the Third Amendment, the San Carlos Lease will expire on July 31, 2026, and it includes an option to renew the San Carlos Lease for an additional five years. The aggregate estimated base rent payments due over the Lease Extension Period is approximately $4.2 million, subject to certain terms contained in the San Carlos Lease. In June 2021, we entered into a first amendment, or First Amendment, to our manufacturing facility lease, dated March 4, 2015, as amended, by and between 870 Industrial Road LLC, located at San Carlos, California, or the Industrial Lease, as an extension to the term of the Industrial Lease for a period of five years, or the Industrial Lease Extension Period. Pursuant to the first Amendment, the Industrial Lease will expire on June 30, 2026, and it includes an option to renew the Industrial Lease for an additional five years. The aggregate estimated base rent payments due over the Industrial Lease Extension Period is approximately $4.3 million, subject to certain terms contained in the Industrial Lease. 114 In September 2020, we entered into a sublease agreement, or the Sublease with Five Prime Therapeutics, Inc., or the Sublessor, for approximately 115,466 square feet, in a building located in South San Francisco, California, or the Premises. We use the Premises as our corporate headquarters and to conduct (or expand) research and development activities. We commenced making monthly payments for the first 85,755 square feet of the Premises, or Initial Premises, in July 2021, with occupancy of such space commencing in August 2021. We were provided early access to the Initial Premises in the fourth quarter of 2020 to conduct certain planning and tenant improvement work. The Sublease is subordinate to the lease agreement, effective December 12, 2016, between the Sublessor and HCP Oyster Point III LLC, or the Landlord. We commenced using the remaining 29,711 square feet of the Premises, or the Expansion Premises, on July 1, 2023 under the sublease agreement. The Sublease for both the Initial Premises and Expansion Premises will expire on December 31, 2027. With a commencement date on the Initial Premises of July 1, 2021, and Expansion Premises of July 1, 2023, the aggregate estimated base rent payments due over the term of the Sublease are approximately $39.1 million, including the approximately $5.2 million in potential financial benefit to us of base rent abatement to be provided by the Sublessor, subject to certain terms contained in the Sublease. The Sublease contains customary provisions requiring us to pay our pro rata share of utilities and a portion of the operating expenses and certain taxes, assessments and fees of the Premises and provisions allowing the Sublessor to terminate the Sublease upon the termination of the lease with the Landlord or if we fail to remedy a breach of certain of its obligations within specified time periods. Additionally, we posted a security deposit of $0.9 million, which is reflected as restricted cash in non-current assets on our Balance Sheets as of December 31, 2023 and 2022. Funding Requirements Based upon our current operating plan, we believe that our existing capital resources will enable us to fund our operating expenses and capital expenditure requirements through at least the next twelve months after the date of this filing. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. We will continue to require additional financing to advance our current product candidates into and through clinical development, to develop, acquire or in-license other potential product candidates, pay our obligations and to fund operations for the foreseeable future. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements, marketing and distribution arrangements, royalty monetizations, or other sources of financing. Adequate additional funding may not be available to us on acceptable terms, or at all. Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies, and may cause us to delay, reduce the scope of or suspend one or more of our pre-clinical and clinical studies, research and development programs or commercialization efforts, and may necessitate us to delay, reduce or terminate planned activities in order to reduce costs. Due to the numerous risks and uncertainties associated with the development and commercialization of our product candidates and the extent to which we may enter into additional collaborations with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical studies. To the extent we raise additional capital through new collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we do raise additional capital through public or private equity or convertible debt offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. 115 Cash Flows The following table summarizes our cash flows during the periods indicated: Year Ended December 31, 2023 2022 (in thousands) Cash (used in) provided by operating activities $ (111,616 ) $ 3,549 Cash used in investing activities (3,924 ) (35,022 ) Cash provided by financing activities 137,554 48,313 Net increase in cash, cash equivalents and restricted cash $ 22,014 $ 16,840 Cash Flows from Operating Activities Cash used in operating activities for the year ended December 31, 2023 was $111.6 million. Our net loss of $106.8 million included non-cash charges of $24.9 million for stock-based compensation, $12.6 million for non-cash interest expense on our deferred royalty obligation, $9.9 million for the unrealized gain on equity securities as a result of the remeasurement of the estimated fair value of our investment in Vaxcyte common stock, $9.1 million for the accretion of discount on our marketable securities, $6.8 million for depreciation and amortization, $3.6 million for noncash lease expenses and $0.6 million in other non-cash charges. Cash used in operating activities also reflected a net change in operating assets and liabilities of $34.4 million, due to a decrease of $32.6 million in our deferred revenue from revenue recognized under our collaboration agreements, an increase of $28.9 million in accounts receivable primarily due to a receivable from Vaxcyte under the Vaxcyte Agreement, and a decrease of $4.6 million in our operating lease liability, which were partially offset by an increase of $30.1 million in accounts payable, accrued expenses and other liabilities mainly due to the tax liability and timing of payments, an increase of $1.5 million in accrued compensation due to increased headcount, and a decrease of $0.1 million in prepaid expenses and other assets. Cash provided by operating activities for the year ended December 31, 2022 was $3.5 million. Our net loss of $119.2 million included non-cash charges of $26.3 million for stock-based compensation, $12.1 million for the unrealized gain on equity securities as a result of the remeasurement of the estimated fair value of our investment in Vaxcyte common stock, $5.7 million for depreciation and amortization, $4.1 million for the realized gain on equity securities, $2.6 million for noncash lease expenses, $0.4 million for the accretion of discount on our marketable securities and $0.3 million in other non-cash charges. Cash provided by operating activities also reflected a net change in operating assets and liabilities of $104.4 million, due to an increase of $93.6 million in our deferred revenue balance primarily due to the upfront payment from Astellas, a decrease of $5.3 million in accounts receivable from our collaborators, an increase of $5.3 million in accounts payable, accrued expenses and other liabilities due to timing of payments, an increase of $1.7 million in accrued compensation due to increased headcount, and an increase of $1.9 million in our operating lease liability, which were partially offset by an increase of $3.5 million in prepaid expenses and other assets. Cash Flows from Investing Activities Cash used in investing activities of $3.9 million for the year ended December 31, 2023 was primarily related to purchases of marketable securities of $460.3 million and purchases of property and equipment of $4.3 million, principally for laboratory equipment, partially offset by maturities and sales of marketable securities of $460.7 million. Cash used in investing activities of $35.0 million for the year ended December 31, 2022 was primarily related to purchases of marketable securities of $216.7 million and purchases of property and equipment of $7.9 million, principally for laboratory equipment, partially offset by maturities and sales of marketable securities of $160.8 million and proceeds from sale of Vaxcyte equity securities of $28.7 million. 116 Cash Flows from Financing Activities Cash provided by financing activities of $137.5 million for the year ended December 31, 2023 was primarily related to $136.2 million of net proceeds from the sale of future royalties, $12.0 million of net proceeds from our ATM Facility sales of common stock, $2.0 million of net proceeds received from participants in our employee equity plans and $0.3 million of proceeds received from the exercise of common stock options, partially offset by debt repayment of $12.5 million and a $0.5 million tax payment related to the net share settlement of certain vested restricted stock units. Cash provided by financing activities of $48.3 million for the year ended December 31, 2022 was primarily related to $56.3 million of net proceeds from our ATM Facility sales of common stock, $1.6 million of net proceeds received from participants in our employee equity plans and $0.3 million of proceeds received from the exercise of common stock options, partially offset by debt repayment of $9.4 million and a $0.5 million tax payment related to the net share settlement of certain vested restricted stock units. Contractual Obligations and Other Commitments In addition to the contractual obligations and commitments as noted above and elsewhere in this Annual Report with regards to the leases and term loans, we enter into agreements in the normal course of business, including with contract research organizations for clinical trials, contract manufacturing organizations for certain manufacturing services, and vendors for preclinical studies and other services and products for operating purposes, which are generally cancelable upon written notice. Critical Accounting Policies and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in the notes to our financial statements included elsewhere in this report, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results. Revenue Recognition We do not have any products approved for commercial sale and have not generated any revenue from commercial product sales. Our total revenue to date has been generated principally from our collaboration and license agreements with BMS, Merck, Astellas, EMD Serono, Vaxcyte, BioNova, Tasly, and to a lesser extent, from manufacturing, supply and services and materials we provide to our collaborators. When we enter into collaboration agreements, we assess whether the arrangements fall within the scope of ASC 808, Collaborative Arrangements (ASC 808) based on whether the arrangements involve joint operating activities and whether both parties have active participation in the arrangement and are exposed to significant risks and rewards. To the extent that the arrangement falls within the scope of ASC 808, we assess whether the payments between us and our collaboration partner fall within the scope of other accounting literature. If we conclude that payments from the collaboration partner to us represent consideration from a customer, such as license fees and contract research and development activities, we account for those payments within the scope of ASC 606, Revenue from Contracts with Customers. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) 117 identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. However, if we conclude that our collaboration partner is not a customer for certain activities and associated payments, such as for certain collaborative research, development, manufacturing and commercial activities, we present such payments as a reduction of research and development expense or general and administrative expense, based on where we present the underlying expense. Collaboration revenue: We derive revenue from collaboration arrangements, under which we may grant licenses to our collaboration partners to further develop and commercialize our proprietary product candidates. We may also perform research and development activities under the collaboration agreements. Consideration under these contracts generally includes a nonrefundable upfront payment, development, regulatory and commercial milestones and other contingent payments, and royalties based on net sales of approved products. Additionally, the collaborations may provide options for the customer to acquire from us materials and reagents, clinical product supply or additional research and development services under separate agreements. We assess which activities in the collaboration agreements are considered distinct performance obligations that should be accounted for separately. We develop assumptions that require judgement to determine whether the license to our intellectual property is distinct from the research and development services or participation in activities under the collaboration agreements. At the inception of each agreement, we determine the arrangement transaction price, which includes variable consideration, based on the assessment of the probability of achievement of future milestones and contingent payments and other potential consideration. We recognize revenue over time by measuring the progress towards the complete satisfaction of the relevant performance obligation using an appropriate input or output method based on the nature of the service promised to the customer. For arrangements that include multiple performance obligations, we allocate the transaction price to the identified performance obligations based on the standalone selling price, or SSP, of each distinct performance obligation. In instances where SSP is not directly observable, we develop assumptions that require judgment to determine the SSP for each performance obligation identified in the contract. These key assumptions may include full-time equivalent, or FTE, personnel effort, estimated costs, discount rates and probabilities of clinical development and regulatory success. Upfront Payments : For collaboration arrangements that include a nonrefundable upfront payment, if the license fee and research and development services cannot be accounted for as separate performance obligations, the transaction price is deferred and recognized as revenue over the expected period of performance using a cost-based input methodology. We use judgement to assess the pattern of delivery of the performance obligation. In addition, amounts paid in advance of services being rendered may result in an associated financing component to the upfront payment. Accordingly, the interest on such borrowing cost component will be recorded as interest expense and revenue, based on an appropriate borrowing rate applied to the value of services to be performed by us over the estimated service performance period. License Grants: For collaboration arrangements that include a grant of a license to our intellectual property, we consider whether the license grant is distinct from the other performance obligations included in the arrangement. For licenses that are distinct, we recognize revenues from nonrefundable, upfront payments and other consideration allocated to the license when the license term has begun and we have provided all necessary information regarding the underlying intellectual property to the customer, which generally occurs at or near the inception of the arrangement. Milestone and Contingent Payments : At the inception of the arrangement and at each reporting date thereafter, we assess whether we should include any milestone and contingent payments or other forms of variable consideration in the transaction price using the most likely amount method. If it is probable that a significant reversal of cumulative revenue would not occur upon resolution of the uncertainty, the associated milestone value is included in the transaction price. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of each such milestone and any related constraint and, if necessary, adjust our estimate of the overall transaction price. Since milestone and contingent payments may become payable to us upon the initiation of a clinical study or filing for or receipt of regulatory approval, we review the relevant facts and circumstances to determine when we should update the transaction price, which may occur 118 before the triggering event. When we update the transaction price for milestone and contingent payments, we allocate the changes in the total transaction price to each performance obligation in the agreement on the same basis as the initial allocation. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment, which may result in recognizing revenue for previously satisfied performance obligations in such period. Our collaborators generally pay milestones and contingent payments subsequent to achievement of the triggering event. Research and Development Services : For amounts allocated to our research and development obligations in a collaboration arrangement, we recognize revenue over time using a cost-based input methodology, representing the transfer of goods or services as activities are performed over the term of the agreement. Materials Supply: We provide materials and reagents, clinical materials and services to certain of our collaborators under separate agreements. The consideration for such services is generally based on FTE personnel effort used to manufacture those materials, reimbursed at an agreed upon rate in addition to agreed-upon pricing for the provided materials. The amounts billed are recognized as revenue as the performance obligations are met by us. Revenue subject to governmental withholding taxes is recognized on a gross basis with the withholding taxes recorded as a component of income tax expense. Research and Development We record accrued expenses for estimated costs of our research and development activities conducted by third party service providers, which include outsourced research and development expenses, professional services and contract manufacturing activities. We record the estimated costs of research and development activities based upon the estimated amount of services provided but not yet invoiced, and include these costs in current liabilities in the Balance Sheets and within research and development expense in the Statements of Operations. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed. For outsourced research and development expenses, such as professional fees payable to third parties for preclinical studies, clinical trials and research services and other consulting costs, we estimate the expenses based on the services performed, pursuant to contracts with research institutions that conduct and manage preclinical studies, clinical trials and research services on our behalf. We estimate these expenses based on discussions with internal management personnel and external service providers as to the progress or stage of completion of services and the contracted fees to be paid for such services. If the actual timing of the performance of services or the level of effort varies from the original estimates, we will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the performance of the related services by the third parties are recorded as prepaid expenses until the services are rendered. Stock-Based Compensation We measure and recognize compensation expense for all stock-based awards, including restricted stock units, stock options, and the ESPP, to employees, consultants and nonemployee directors based on the estimated fair value of the awards on the grant date. The fair value of stock options and purchase rights under the ESPP are estimated using the Black-Scholes option-pricing model. The Black-Scholes model requires use of assumptions and judgments about the variables used in the calculations, including the expected term, the expected volatility of the underlying stock, the related risk-free interest rate for the expected term of the award and the expected dividends. Stock-based compensation expense for restricted stock units and stock options is generally recognized on a straight line basis over the requisite service period. Stock-based compensation expense for the ESPP is recognized on a straight-line basis over the offering period. We account for forfeitures of stock-based awards as they occur. 119 The closing sale price per share of our common stock as reported on the Nasdaq Global Market on the date of grant is used to determine the exercise price per share of our stock-based awards to purchase common stock. Deferred Royalty Obligation related to the Sale of Future Royalties and Non-cash Interest Expense We treated the sale of Vaxcyte future royalties to Blackstone as a deferred royalty obligation, as we had ongoing manufacturing obligations under the 2015 License Agreement in the generation of the cash flows. Due to our then ongoing manufacturing obligations, we will account for any royalties earned as non-cash revenue. As royalties are remitted to Blackstone from Vaxcyte, the balance of the deferred royalty obligation will be effectively amortized over the estimated life of the royalty term arrangement. We recorded the proceeds from this transaction as a liability on our Balance Sheets related to the sale of future royalties to be amortized to interest expense using the effective interest rate method over the estimated life of the royalty term arrangement. The liability related to the sale of future royalties and the related interest expense are based on our current estimates of future royalties expected to be earned by Blackstone from Vaxcyte over the estimated life of the royalty term arrangement. We periodically assess the estimated royalties to be earned using forecasts from external sources. To the extent our future estimates of earned royalties are greater or less than previous estimates or the estimated timing of such payments is materially different than our previous estimates, we will prospectively recognize related non-cash interest expense. Income Taxes As of December 31, 2023, we had federal net operating loss, or NOL, carryforwards of $140.2 million and federal general business credits from research and development expenses totaling $20.0 million, as well as state NOL carryforwards of $100.5 million and state research and development credits of $26.0 million. If not utilized, the federal NOL carryforwards will expire at various dates beginning in 2027, and the federal credits will expire at various dates beginning in 2032. The state NOL carryforwards will expire at various dates beginning in 2031, if not utilized. The state research and development tax credits can be carried forward indefinitely. Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Tax Reform Act of 1986, or the Tax Reform Act, as amended, and similar state provisions. The annual limitation may result in the expiration of NOLs and credits before utilization. We have performed Section 382 study through December 31, 2022, and concluded that we experienced an ownership change on November 20, 2019, and December 31, 2022. This change does not limit our ability to use our existing NOLs within the carryforward period provided by the Internal Revenue Code, subject to availability of taxable income. We may experience ownership changes in the future as a result of equity offerings or other shifts in our stock ownership, some of which are outside our control. If there is a subsequent event or further change in ownership, these losses may be subject to limitations, resulting in their expiration before they can be utilized. We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available. Recent Accounting Pronouncements See Note 2 to our audited financial statements included elsewhere in this report for more information. 120 Item 7A. Quantitative and Qualita tive Disclosures about Market Risk We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities. The primary objective of our investment activities is to preserve our capital to fund our operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of cash equivalents and investments in a variety of securities of high credit quality. We had cash, cash equivalents and marketable securities of $333.7 million and $302.3 million as of December 31, 2023 and 2022, respectively, which consisted of money market funds, commercial paper, corporate debt securities, asset-backed securities, U.S. government securities, U.S. agency securities and supranational debt securities. Such interest earning instruments carry a degree of interest rate risk; however, historical fluctuations in interest income have not been significant. Additionally, we had equity securities of $41.9 million as of December 31, 2023, consisting solely of common stock of Vaxcyte. Equity risk is the risk we will incur economic losses due to adverse changes in equity prices. Our potential exposure to changes in equity prices results from our Vaxcyte common stock holdings. Therefore, we are subject to market risk if such holdings materially decrease in value. A hypothetical 10 percent decrease in the market price for our equity investments as of December 31, 2023 would decrease the fair value by $4.2 million. We intend to manage equity price risk going forward by continuously evaluating market conditions. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. We have not been exposed nor do we anticipate being exposed to material risks due to changes in interest rates. A hypothetical 10% change in market interest rates would not have a material impact on our financial statements. We do not believe that our cash, cash equivalents or marketable securities have significant risk of default or illiquidity. As of December 31, 2023 and 2022, we had $4.1 million and $16.3 million, respectively, in debt outstanding, net of debt discount and accretion of final payment. Until June 30, 2023, our existing debt with Oxford and SVB bore interest at a floating per annum rate equal to the greater of (i) 8.07% or (ii) the sum of (a) the greater of (1) the thirty (30) day U.S. LIBOR rate reported in the Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue or (2) 1.67%, plus (b) 6.40%. In June 2023, we entered into an amendment to the LSA with Oxford and SVB (the “5th LSA Amendment”). Under the 5th LSA Amendment, effective July 1, 2023, the loan bears interest at the floating per annum rate of interest equal to the greater of (i) 8.07% and (ii) the sum of (a) a specific published 1-month secured overnight financing rate (SOFR) reported on the last business day of the month that immediately precedes the month in which the interest will accrue, plus (b) 0.10%, plus (c) 6.40%. There was an immaterial impact of the 5th LSA Amendment on our financial statements. This debt matured on March 1, 2024 and was interest-only through March 1, 2022. Such interest-bearing debt carried a limited degree of interest rate risk. If overall interest rates had increased or decreased by 100 basis points during the periods presented our interest expense would not have been materially affected. 121 Item 8. Financial Statemen ts and Supplementary Data SUTRO BIOPHARMA, INC. ANNUAL REPORT ON FORM 10-K INDEX TO AUDITED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID 42 ) 123 Financial Statements Balance Sheets 125 Statements of Operations 126 Statements of Comprehensive Loss 127 Statements of Stockholders’ Equity 128 Statements of Cash Flows 129 Notes to Financial Statements 130 122 Report of Independent Regis tered Public Accounting Firm To the Stockholders and the Board of Directors of Sutro Biopharma, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of Sutro Biopharma, Inc. (the Company) as of December 31, 2023, and 2022, the related statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, 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. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Royalty agreement with Blackstone Life Sciences Description of the Matter As discussed in Note 2 and Note 10 to the financial statements, on June 21, 2023, the Company closed a purchase and sale agreement (the “Agreement”) with Blackstone Life Sciences (“Blackstone”), pursuant to which the Company sold to Blackstone its 4% royalty in potential net sales of Vaxcyte Inc.’s products and received an upfront payment of $140 million. The Company concluded the Agreement represented a sale of future royalties and accounted for the transaction under Accounting Standards Codification (ASC) 470 as debt. The Company estimated the amount of future royalty payments and expected interest expense using the effective interest rate method over the life of the agreement. The carrying 123 value of the liability related to the sale of future royalties at December 31, 2023 was $149.1 million and the interest expense for the year ended December 31, 2023 was $12.6 million. The auditing of the Agreement was complex due to the significant judgment and estimation used by management related to the sale of future royalties and due to the nature and extent of audit effort required to address these matters. The accounting involves significant judgment and inherent uncertainties as it relates to the Company's estimate of future sales for which royalties will be paid, which in turn significantly impacts the calculation of interest expense recognized. How We Addressed the Matter in Our Audit To test the carrying value of the liability related to the sale of future royalties and the amount of interest expense recognized, our audit procedures included, among others, assessing the methodology used, evaluating the reasonableness of the significant estimates discussed above, and testing the completeness and accuracy of the underlying data used by the Company. Specifically, we tested the calculation of the liability balance including the classification of the balance as non-current. In addition, we evaluated the Company’s estimate of future sales, by comparing the estimates to available peer data and market research. We also recalculated the current year interest expense using the effective interest method based on the Company’s estimate of future royalties to be paid. We involved professionals outside of the core audit team to assist in the assessment of the estimation methodology and significant assumptions used in determining the future sales for which royalties will be paid. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2007. San Mateo, California March 25, 2024 124 SUTRO BIOPHARMA, INC. BAL ANCE SHEETS (in thousands, except share and per share data) December 31, 2023 2022 Assets Current assets: Cash and cash equivalents $ 69,268 $ 47,254 Marketable securities 264,413 255,090 Investment in equity securities 41,937 32,020 Accounts receivable 36,078 7,122 Prepaid expenses and other current assets 9,846 11,667 Total current assets 421,542 353,153 Property and equipment, net 21,940 24,621 Operating lease right-of-use assets 22,815 26,443 Other non-current assets 3,567 1,855 Restricted cash 872 872 Total assets $ 470,736 $ 406,944 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 9,440 $ 4,797 Accrued compensation 14,686 13,142 Deferred revenue-current 20,666 16,759 Operating lease liability-current 6,420 4,585 Debt-current 4,061 12,500 Accrued expenses and other current liabilities 38,473 14,764 Total current liabilities 93,746 66,547 Deferred revenue, non-current 53,379 89,885 Operating lease liability-non-current 23,154 29,574 Debt-non-current - 3,771 Deferred royalty obligation related to the sale of future royalties 149,114 - Other non-current liabilities 1,694 119 Total liabilities 321,087 189,896 Commitments and contingencies (Note 8) Stockholders’ equity: Preferred stock, $ 0.001 par value — 10,000,000 shares authorized as of December 31, 2023 and 2022; 0 shares issued and outstanding as of December 31, 2023 and 2022 - - Common stock, $ 0.001 par value — 300,000,000 shares authorized as of December 31, 2023 and 2022; 61,009,829 and 57,499,541 shares issued and outstanding as of December 31, 2023 and 2022, respectively 61 58 Additional paid-in-capital 708,975 670,223 Accumulated other comprehensive income (loss) 21 ( 618 ) Accumulated deficit ( 559,408 ) ( 452,615 ) Total stockholders’ equity 149,649 217,048 Total Liabilities and Stockholders’ Equity $ 470,736 $ 406,944 See accompanying notes to financial statements. 125 SUTRO BIOPHARMA, INC. STATEMEN TS OF OPERATIONS (in thousands, except share and per share data) Year Ended December 31, 2023 2022 2021 Revenue $ 153,731 $ 67,772 $ 61,880 Operating expenses Research and development 180,425 137,171 104,400 General and administrative 62,584 59,544 56,004 Total operating expenses 243,009 196,715 160,404 Loss from operations ( 89,278 ) ( 128,943 ) ( 98,524 ) Interest income 14,510 3,455 577 Unrealized gain (loss) on equity securities 9,917 12,130 ( 4,454 ) Non-cash interest expense related to the sale of future royalties ( 12,570 ) - - Interest and other income (expense), net ( 11,180 ) ( 3,346 ) ( 3,137 ) Loss before provision for income taxes ( 88,601 ) ( 116,704 ) ( 105,538 ) Provision for income taxes 18,192 2,500 - Net loss $ ( 106,793 ) $ ( 119,204 ) $ ( 105,538 ) Net loss per share, basic and diluted $ ( 1.78 ) $ ( 2.35 ) $ ( 2.29 ) Weighted-average shares used in computing basic and diluted net loss per share 60,163,542 50,739,185 46,119,089 See accompanying notes to financial statements. 126 SUTRO BIOPHARMA, INC. STATEMENTS O F COMPREHENSIVE LOSS (in thousands) Year Ended December 31, 2023 2022 2021 Net loss $ ( 106,793 ) $ ( 119,204 ) $ ( 105,538 ) Other comprehensive income (loss): Net unrealized income (loss) on available-for-sale securities 639 ( 304 ) ( 443 ) Comprehensive loss $ ( 106,154 ) $ ( 119,508 ) $ ( 105,981 ) See accompanying notes to financial statements. 127 SUTRO BIOPHARMA, INC. Statements of Stockholders’ Equity (in thousands, except share amounts) Accumulated Additional Other Total Common Stock Paid-In- Comprehensive Accumulated Stockholders’ Shares Amount Capital Income (Loss) Deficit Equity Balances at December 31, 2020 45,752,116 46 559,746 129 ( 227,873 ) 332,048 Exercise of common stock options and common stock warrants 246,678 - 2,485 - - 2,485 Return and retirement of common stock ( 7,687 ) - ( 7 ) - - ( 7 ) Issuance of common stock under Employee Stock Purchase Plan 145,809 - 1,765 - - 1,765 Vesting of restricted stock units 238,724 - - - - - Stock transaction associated with taxes withheld on restricted stock units ( 48,509 ) - ( 987 ) - - ( 987 ) Stock-based compensation expense - - 23,241 - - 23,241 Net unrealized loss on available-for-sale securities - - - ( 443 ) - ( 443 ) Net Loss - - - - ( 105,538 ) ( 105,538 ) Balances at December 31, 2021 46,327,131 46 586,243 ( 314 ) ( 333,411 ) 252,564 Exercise of common stock options 49,654 - 268 - - 268 Issuance of common stock under Employee Stock Purchase Plan 270,516 - 1,613 - - 1,613 Vesting of restricted stock units 620,647 1 ( 1 ) - - - Stock transaction associated with taxes withheld on restricted stock units ( 53,567 ) - ( 463 ) - - ( 463 ) Stock-based compensation expense - - 26,304 - - 26,304 Issuance of common stock in connection with At-The-Market sale, net of issuance costs of $ 2,026 10,285,160 11 56,259 - - 56,270 Net unrealized loss on available-for-sale securities - - - ( 304 ) - ( 304 ) Net Loss - - - - ( 119,204 ) ( 119,204 ) Balances at December 31, 2022 57,499,541 $ 58 $ 670,223 $ ( 618 ) $ ( 452,615 ) $ 217,048 Exercise of common stock options 53,060 - 314 - - 314 Issuance of common stock under Employee Stock Purchase Plan 526,079 - 2,051 - - 2,051 Vesting of restricted stock units 1,155,644 1 - - - 1 Stock transaction associated with taxes withheld on restricted stock units ( 81,905 ) - ( 490 ) - - ( 490 ) Stock-based compensation expense - - 24,908 - - 24,908 Issuance of common stock in connection with At-The-Market sale, net of issuance costs of $ 459 1,857,410 2 11,969 - - 11,971 Net unrealized income on available-for-sale securities - - - 639 - 639 Net Loss - - - - ( 106,793 ) ( 106,793 ) Balances at December 31, 2023 61,009,829 $ 61 $ 708,975 $ 21 $ ( 559,408 ) $ 149,649 See accompanying notes to financial statements. 128 SUTRO BIOPHARMA, INC. STATEMENTS O F CASH FLOWS (in thousands) Year Ended December 31, 2023 2022 2021 Operating activities Net loss $ ( 106,793 ) $ ( 119,204 ) $ ( 105,538 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 6,816 5,690 4,844 (Accretion of discount) amortization of premium on marketable securities ( 9,075 ) ( 364 ) 2,781 Stock-based compensation 24,908 26,304 23,241 Non-cash lease expenses 3,628 2,598 4,929 Realized gain on equity securities - ( 4,074 ) - Unrealized (gain) loss on equity securities ( 9,917 ) ( 12,130 ) 4,454 Non-cash interest expense on deferred royalty obligation 12,570 - - Other 622 324 1,230 Changes in operating assets and liabilities: Accounts receivable ( 28,956 ) 5,341 ( 6,895 ) Prepaid expenses and other assets 109 ( 3,544 ) ( 3,959 ) Accounts payable 4,812 ( 1,225 ) 2,708 Accrued compensation 1,544 1,725 2,594 Accrued expenses and other liabilities 25,300 6,562 5,866 Deferred revenue ( 32,599 ) 93,648 ( 15,207 ) Change in operating lease liability ( 4,585 ) 1,898 ( 2,727 ) Net cash provided by (used in) operating activities ( 111,616 ) 3,549 ( 81,679 ) Investing activities Purchases of marketable securities ( 460,301 ) ( 216,671 ) ( 248,727 ) Maturities of marketable securities 434,966 127,960 148,250 Sales of marketable securities 25,726 32,799 18,476 Proceeds from sale of equity securities, net - 28,739 - Purchases of equipment and leasehold improvements ( 4,315 ) ( 7,858 ) ( 15,323 ) Proceeds from exercise of options for Vaxcyte shares - 9 9 Net cash (used in) provided by investing activities ( 3,924 ) ( 35,022 ) ( 97,315 ) Financing activities Proceeds from sales of common stock, net of issuance costs 11,971 56,270 - Payments of debt ( 12,500 ) ( 9,375 ) - Proceeds from the sale of future royalties, net of issuance costs 136,208 - - Proceeds from exercise of common stock options 314 268 2,485 Taxes paid related to net share settlement of restricted stock units ( 490 ) ( 463 ) ( 987 ) Return and retirement of common stock - - ( 7 ) Proceeds from employee stock purchase plan 2,051 1,613 1,765 Net cash provided by financing activities 137,554 48,313 3,256 Net increase (decrease) in cash, cash equivalents and restricted cash 22,014 16,840 ( 175,738 ) Cash, cash equivalents and restricted cash at beginning of year 48,126 31,286 207,024 Cash, cash equivalents and restricted cash at end of year $ 70,140 $ 48,126 $ 31,286 Supplemental disclosure of cash flow information Cash paid for interest $ 1,126 $ 1,869 $ 2,046 Income tax paid $ 379 $ - $ 103 Supplemental Disclosures of Non-cash Investing and Financing Information Purchase of property and equipment included in accounts payable $ 214 $ 280 $ 370 Remeasurement of operating lease right-of-use assets for lease modification $ - $ - $ 4,227 Financing component associated with program fees $ 9,836 $ 5,079 $ 610 Value of 167,780 shares of Vaxcyte common stock received under the Vaxcyte Agreement $ - $ 7,500 $ - See accompanying notes to financial statements. 129 SUTRO BIOPHARMA, Inc. Notes to Financ ial Statements 1. Organization and Principal Activities Description of Business Sutro Biopharma, Inc. (the “Company”), is a clinical-stage oncology company developing site-specific and novel-format antibody drug conjugates, or ADCs. The Company was incorporated on April 21, 2003 and is headquartered in South San Francisco , California . The Company operates in one business segment, the development of biopharmaceutical products. Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the Chief Executive Officer, the Company’s chief operating decision maker, in deciding how to allocate resources and assessing performance. The Company operates and manages its business as one operating segment. The Company’s Chief Executive Officer reviews financial information on an aggregate basis for the purposes of allocating and evaluating financial performance. All of the Company’s long-lived assets are maintained in the United States. At-The-Market Sales During the year ended December 31, 2023, the Company sold an aggregate of 1,857,410 shares of its common stock through its At-the-Market Facility (“ATM Facility”) pursuant to its Open Market Sales Agreement SM dated April 2, 2021 with Jefferies LLC (“Jefferies”), as sales agent (the “Sales Agreement”). During the year ended December 31, 2023, the gross proceeds from these sales were approximately $ 12.4 million, before deducting fees of approximately $ 0.4 million, resulting in net proceeds of approximately $ 12.0 million, to the Company. Liquidity The Company has incurred significant losses and has negative cash flows from operations. As of December 31, 2023, there was an accumulated deficit of $ 559.4 million. Management expects to continue to incur additional substantial losses in the foreseeable future as a result of the Company’s research and development and other operational activities. As of December 31, 2023, the Company had unrestricted cash, cash equivalents and marketable securities of $ 333.7 million and equity securities of $ 41.9 million, consisting solely of common stock of Vaxcyte, which are available to fund future operations. The Company will need to raise additional capital to support the completion of its research and development activities and to support its operations. The Company believes that its unrestricted cash, cash equivalents, marketable securities and investments in equity securities as of December 31, 2023 will enable the Company to maintain its operations for a period of at least 12 months following the filing date of these financial statements. 130 2. Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation and Use of Estimates The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company bases its estimates on historical experience and market-specific or other relevant assumptions that it believes are reasonable under the circumstances. The amounts of assets and liabilities reported in the Company’s Balance Sheets and the amounts of expenses and income reported for each of the periods presented are affected by estimates and assumptions, which are used for, but are not limited to, determining research and development periods under collaboration arrangements, stock-based compensation expense, valuation of marketable securities, impairment of long-lived assets, income taxes, deferred royalty obligation related to the sale of future royalties and related non-cash interest expense, and certain accrued liabilities. Actual results could differ from such estimates or assumptions. Recent Accounting Pronouncements Not Yet Adopted In November 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which enhances the disclosures required for operating segments in the Company's annual and interim financial statements. ASU 2023-07 is effective for the Company in the Company's annual reporting for fiscal 2024 and for interim period reporting beginning in fiscal 2025 on a retrospective basis. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2023-07 on the Company's financial statements. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which enhances the disclosures required for income taxes in the Company's annual financial statements. ASU 2023-09 is effective for the Company in the Company's annual reporting for fiscal 2025 on a prospective basis. Early adoption and retrospective reporting are permitted. The Company is currently evaluating the impact of ASU 2023-09 on the Company's financial statements. Cash, Cash Equivalents, Marketable Securities and Restricted Cash The Company considers all highly liquid investments with original maturities of 90 days or less from the date of purchase to be cash equivalents. Investments with original maturities of greater than 90 days from the date of purchase but less than one year from the balance sheet date, or where the Company's intent is to use the investments to fund current operations or to make them available for current operations are classified as current, while investments with maturities in one year or beyond one year from the balance sheet date are classified as long-term investments. Available-for-sale marketable securities are carried at fair value, with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss). Realized gains and losses are included in interest income in the Company’s Statements of Operations. There were no material realized gains or losses in the periods presented. The cost of securities sold is based on the specific-identification method. The Company evaluates, on a quarterly basis, its marketable securities for potential impairment. For marketable securities in an unrealized loss position, the Company assesses whether such declines are due to credit loss based on factors such as changes to the rating of the security by a ratings agency, market conditions and supportable forecasts of economic and market conditions, among others. If a credit loss exists, 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 marketable security before recovery of its amortized cost basis. If either condition is met, the security’s amortized cost basis is written down to fair value and is recognized through interest and other income (expense), net. 131 If neither condition is met, declines as a result of credit losses, if any, are recognized as an allowance for credit loss, limited to the amount of unrealized loss, through interest and other income (expense), net. Any portion of unrealized loss that is not a result of a credit loss, is recognized in other comprehensive income (loss). The Company invests in money market funds, commercial paper, corporate debt securities, asset-based securities, U.S. government securities, U.S. agency securities and supranational debt securities with high credit ratings. The Company has established guidelines regarding diversification of its investments and their maturities, with the objectives of maintaining safety and liquidity while maximizing yield. Under certain agreements, the Company has pledged cash and cash equivalents as collateral. As of both December 31, 2023 and 2022, restricted cash related to such agreements was $ 0.9 million. A reconciliation of cash, cash equivalents, and restricted cash reported within the Company’s Balance Sheets to the amount reported within the accompanying Statements of Cash Flows was as follows: December 31, 2023 2022 2021 (in thousands) Cash and cash equivalents $ 69,268 $ 47,254 $ 30,414 Restricted cash 872 872 872 Total cash, cash equivalents and restricted cash shown in the Statements of Cash Flows $ 70,140 $ 48,126 $ 31,286 Concentrations of Credit Risk Cash and cash equivalents and marketable securities consist of financial instruments that potentially subject the Company to a concentration of credit risk, to the extent of the amounts recorded on the Balance Sheets. The Company minimizes the amount of credit exposure by investing cash that is not required for immediate operating needs in money market funds, government obligations and/or commercial paper with short maturities. The Company performs a regular review of its collaborators’ credit risk and payment histories when circumstances warrant, including payments made subsequent to year-end. When appropriate, the Company provides for an allowance for credit risks by reserving for specifically identified doubtful accounts, although historically the Company has not experienced credit losses from its accounts receivable . Investments in Equity Securities Vaxcyte common stock held by the Company is measured at fair value at each reporting period based on the closing price of Vaxcyte’s common stock on the last trading day of each reporting period, with any realized or unrealized gains and losses recorded in the Company’s Statements of Operations. Property and Equipment, Net Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is determined using the straight-line method over the estimated useful lives of the respective assets, generally three to five years . Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the term of the lease. Maintenance and repairs are charged to expense as incurred and costs of improvement are capitalized. 132 Impairment of Long-Lived Assets The Company reviews long-lived assets, including property and equipment, leasehold improvements and right-of-use assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when the estimated, undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Impairment, if any, is measured at the amount by which the carrying amount of a long-lived asset exceeds its fair value. The Company did no t recognize any impairment charges during the years ended December 31, 2023, 2022 and 2021. As of December 31, 2023 and 2022, management believes that no revision to the remaining useful lives or write down of the remaining long-lived assets is required. Leases The Company adopted ASU 2016-02 (Topic 842), Leases (Accounting Standards Codification, or “ASC”, 842) on July 1, 2021 , effective as of January 1, 2021. The Company determines if an arrangement is or contains a lease at contract inception by assessing whether the arrangement contains an identified asset and whether the lessee has the right to control such asset. The Company is required to classify leases as either finance or operating leases and to record a Right-of-Use (ROU) asset and a lease liability for all leases with a term greater than 12 months regardless of the lease classification. The lease classification will determine whether the lease expense is recognized based on an effective interest rate method or on a straight-line basis over the term of the lease. The Company determines the initial classification and measurement of its ROU assets and lease liabilities at the lease commencement date and thereafter, if modified. The Company does not have material finance leases. For leases with a term greater than 12 months, the Company records the related ROU asset and lease liability at the present value of lease payments over the term of the lease. The term of the Company’s leases equals the non-cancellable period of the lease, including any rent-free periods provided by the lessor, and also includes options to extend or terminate the lease that the Company is reasonably certain to exercise. The ROU asset equals the carrying amount of the related lease liability, adjusted for any lease payments made prior to lease commencement and lease incentives provided by the lessor. Variable lease payments are expensed as incurred and do not factor into the measurement of the applicable ROU asset or lease liability. The Company has elected, for all classes of underlying assets, not to recognize ROU assets and lease liabilities for leases with a term of 12 months or less. Lease cost for short-term leases is recognized on a straight-line basis over the lease term. The Company has also elected to not separate lease and non-lease components for its leases and, as a result, accounts for lease and non-lease components as one component. The Company’s leases do not provide a readily determinable implicit rate. Therefore, the Company estimates its incremental borrowing rate to discount the lease payments based on information available at lease commencement. The Company determines its incremental borrowing rate based on the rate of interest that the Company would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Lease payments may be fixed or variable; however, only fixed payments are included in the Company’s lease liability calculation. Lease costs for the Company’s operating leases are recognized on a straight-line basis within operating expenses over the lease term. The Company’s lease agreements may contain variable non-lease components such as common area maintenance, operating expenses or other costs, which are expensed as incurred. Deferred Royalty Obligation related to the Sale of Future Royalties and Non-cash Interest Expense In June 2023, the Company entered into a purchase and sale agreement (the “Purchase Agreement”) with Blackstone, pursuant to which the Company sold to Blackstone its 4 % royalty, or revenue interest, in the potential future net sales of Vaxcyte products, including Vaxcyte’s pneumococcal conjugate vaccine, or PCV, products such as VAX-24 and its second-generation PCV product, VAX-31, (the “Purchased Interest”) under that certain Amended and Restated SutroVax Agreement, dated October 12, 2015, by and between the Company and Vaxcyte, as amended (the “2015 License Agreement”). In June 2023, Blackstone made an upfront payment of 133 $ 140.0 million to the Company and will also pay up to an additional $ 250.0 million upon the achievement of various return thresholds as set forth in the Purchase Agreement. The net proceeds from the upfront payment received by the Company from the sale of future royalties from Vaxcyte are recorded as deferred royalty obligation related to the sale of future royalties on the Company's Balance Sheets. As royalties are earned and remitted pursuant to the 2015 License Agreement, the balance of the deferred royalty obligation will be amortized over the estimated life of the royalty term arrangement, and non-cash interest expense related to the sale of future royalties is recorded using the effective interest method. To determine the amortization of the deferred royalty obligation, the Company is required to estimate the total amount of future royalties to be earned under the 2015 License Agreement. There are a number of factors that could materially affect the amount and timing of royalty payments earned, most of which are not within the Company's control. The Company periodically assesses the amount of royalty payments expected to be earned which are subject to the Purchase Agreement and, to the extent that the amount or timing of such earned royalties is materially different than the Company's original estimates, the Company will prospectively adjust the imputed interest rate and the related amortization of the deferred royalty obligation. As described in Note 5. Collaboration and License Agreements and Supply Agreements, Vaxcyte Agreement, following agreement with Vaxcyte on the Form Definitive Agreement and upon effectiveness of the amendment No. 3 to the 2015 License Agreement, the revenue interest in the 4 % royalty on potential future net sales of Vaxcyte products other than Vaxcyte’s PCV products reverted to the Company. Issuance fees and costs directly related to the Purchase Agreement were offset against the initial carrying value of the deferred royalty obligation and were amortized using the effective interest method over the estimated life of the royalty term arrangement. Revenue Recognition When the Company enters into collaboration agreements, it assesses whether the arrangements fall within the scope of ASC 808, Collaborative Arrangements ("ASC 808") based on whether the arrangements involve joint operating activities and whether both parties have active participation in the arrangement and are exposed to significant risks and rewards. To the extent that the arrangement falls within the scope of ASC 808, the Company assesses whether the payments between the Company and its collaboration partner fall within the scope of other accounting literature. If it concludes that payments from the collaboration partner to the Company represent consideration from a customer, such as license fees and contract research and development activities, the Company accounts for those payments within the scope of Accounting Standards Update (ASU) No. 2014-09 (Topic 606), Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. However, if the Company concludes that its collaboration partner is not a customer for certain activities and associated payments, such as for certain collaborative research, development, manufacturing and commercial activities, the Company presents such payments as a reduction of research and development expense or general and administrative expense, based on where the Company presents the underlying expense. The Company has no products approved for commercial sale and has not generated any revenue from commercial product sales. The total revenue to date has been generated principally from collaboration and license agreements and to a lesser extent, from manufacturing, supply and services and materials the Company provides to its collaboration partners. Collaboration Revenue: The Company derives revenue from collaboration arrangements, under which the Company may grant licenses to its collaboration partners to further develop and commercialize its proprietary product candidates. The Company may also perform research and development activities under the collaboration agreements. Consideration under these contracts generally includes a nonrefundable upfront payment, development, regulatory and commercial milestones and other contingent payments, and royalties based on net sales of approved products. Additionally, the collaborations may provide options for the customer to acquire from the Company materials and reagents, clinical product supply or additional research and development services under separate agreements. 134 The Company assesses which activities in the collaboration agreements are considered distinct performance obligations that should be accounted for separately. The Company develops assumptions that require judgement to determine whether the license to the Company’s intellectual property is distinct from the research and development services or participation in activities under the collaboration agreements. At the inception of each agreement, the Company determines the arrangement transaction price, which includes variable consideration, based on the assessment of the probability of achievement of future milestones and contingent payments and other potential consideration. The Company recognizes revenue over time by measuring its progress towards the complete satisfaction of the relevant performance obligation using an appropriate input or output method based on the nature of the service promised to the customer. For arrangements that include multiple performance obligations, the Company allocates the transaction price to the identified performance obligations based on the standalone selling price, or SSP, of each distinct performance obligation. In instances where SSP is not directly observable, the Company develops assumptions that require judgment to determine the SSP for each performance obligation identified in the contract. These key assumptions may include full-time equivalent, or FTE, personnel effort, estimated costs, discount rates and probabilities of clinical development and regulatory success. Upfront Payments : For collaboration arrangements that include a nonrefundable upfront payment, if the license fee and research and development services cannot be accounted for as separate performance obligations, the transaction price is deferred and recognized as revenue over the expected period of performance using a cost-based input methodology. The Company uses judgement to assess the pattern of delivery of the performance obligation. In addition, amounts paid in advance of services being rendered may result in an associated financing component to the upfront payment. Accordingly, the interest on such borrowing cost component will be recorded as interest expense and revenue, based on an appropriate borrowing rate applied to the value of services to be performed by the Company over the estimated service performance period. License Grants: For collaboration arrangements that include a grant of a license to the Company’s intellectual property, the Company considers whether the license grant is distinct from the other performance obligations included in the arrangement. For licenses that are distinct, the Company recognizes revenues from nonrefundable, upfront payments and other consideration allocated to the license when the license term has begun and the Company has provided all necessary information regarding the underlying intellectual property to the customer, which generally occurs at or near the inception of the arrangement. Milestone and Contingent Payments : At the inception of the arrangement and at each reporting date thereafter, the Company assesses whether it should include any milestone and contingent payments or other forms of variable consideration in the transaction price using the most likely amount method. If it is probable that a significant reversal of cumulative revenue would not occur upon resolution of the uncertainty, the associated milestone value is included in the transaction price. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of each milestone and any related constraint and, if necessary, adjusts its estimate of the overall transaction price. Since milestone and contingent payments may become payable to the Company upon the initiation of a clinical study or filing for or receipt of regulatory approval, the Company reviews the relevant facts and circumstances to determine when the Company should update the transaction price, which may occur before the triggering event. When the Company updates the transaction price for milestone and contingent payments, the Company allocates the changes in the total transaction price to each performance obligation in the agreement on the same basis as the initial allocation. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment, which may result in recognizing revenue for previously satisfied performance obligations in such period. The Company’s collaborators generally pay milestones and contingent payments subsequent to achievement of the triggering event. Research and Development Services : For amounts allocated to the Company’s research and development obligations in a collaboration arrangement, the Company recognizes revenue over time using a cost-based input methodology, representing the transfer of goods or services as activities are performed over the term of the agreement. 135 Materials Supply: The Company provides materials and reagents, clinical materials and services to certain of its collaborators under separate agreements. The consideration for such services is generally based on FTE personnel effort used to manufacture those materials reimbursed at an agreed upon rate in addition to agreed-upon pricing for the provided materials. The amounts billed are recognized as revenue as the performance obligations are met by the Company. Revenue subject to governmental withholding taxes is recognized on a gross basis with the withholding taxes recorded as a component of income tax expense. Research and Development The Company records accrued expenses for estimated costs of the research and development activities conducted by third party service providers, which include outsourced research and development expenses, professional services and contract manufacturing activities. The Company records the estimated costs of research and development activities based upon the estimated amount of services provided but not yet invoiced, and includes these costs in current liabilities in the Balance Sheets and within research and development expense in the Statements of Operations. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed. For outsourced research and development expenses, such as professional fees payable to third parties for preclinical studies, clinical trials and research services and other consulting costs, the Company estimates the expenses based on the services performed, pursuant to contracts with research institutions that conduct and manage preclinical studies, clinical trials and research services on the Company’s behalf. The Company estimates these expenses based on discussions with internal management personnel and external service providers as to the progress or stage of completion of services and the contracted fees to be paid for such services. If the actual timing of the performance of services or the level of effort varies from the original estimates, the Company will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the performance of the related services by the third parties are recorded as prepaid expenses until the services are rendered. Stock-Based Compensation The Company maintains a stock-based compensation plan as a long-term incentive for employees, consultants, and members of the Company’s Board of Directors. The plan allows for the issuance of restricted stock units, non-statutory and incentive stock options to employees and non-statutory stock options to nonemployees. The Company also maintains an employee stock purchase plan. The Company measures and recognizes compensation expense for all stock-based awards, including restricted stock units, stock options, and the ESPP, to employees, consultants and nonemployee directors based on the estimated fair value of the awards on the grant date. The fair value of stock options and purchase rights under the ESPP are estimated using the Black-Scholes option-pricing model. The Black-Scholes model requires the Company to make assumptions and judgments about the variables used in the calculations, including the expected term, the expected volatility of the underlying stock over the expected term of the award, the related risk-free interest rate for the expected term of the award and the expected dividends. Stock-based compensation expense for restricted stock units and stock options is generally recognized on a straight line basis over the requisite service period. Stock-based compensation expense for the ESPP is recognized on a straight-line basis over the offering period. The Company accounts for forfeitures of stock-based awards as they occur. The closing sale price per share of our common stock as reported on the Nasdaq Global Market on the date of grant is used to determine the exercise price per share of our stock-based awards to purchase common stock. 136 Income Taxes The Company provides for income taxes under the asset and liability method. Current income tax expense or benefit represents the amount of income taxes expected to be payable or refundable for the current year. Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards, and are measured using the enacted tax rates and laws that will be in effect when such items are expected to reverse. Deferred income tax assets are reduced, as necessary, by a valuation allowance when management determines it is more likely than not that some or all of the tax benefits will not be realized. The Company accounts for uncertain tax positions in accordance with Accounting Standards Codification (“ASC”) 740-10, Accounting for Uncertainty in Income Taxes . The Company assesses all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available. The Company includes any penalties and interest expense related to income taxes as a component of interest and other income (expense), net, as necessary. Fair Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, or an exit price, in the principal or most advantageous market for that asset or liability in an orderly transaction between market participants on the measurement date, and establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. The Company determined the fair value of financial assets and liabilities using the fair value hierarchy that describes three levels of inputs that may be used to measure fair value, as follows: Level 1—Quoted prices in active markets for identical assets and liabilities; Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The carrying amounts of accounts receivable, prepaid expenses, accounts payable, accrued liabilities and accrued compensation and benefits approximate fair value due to the short-term nature of these items. The fair value of the Company’s outstanding loan (See Note 7) is estimated using the net present value of the payments, discounted at an interest rate that is consistent with market interest rate, which is a Level 2 input. The estimated fair value of the Company’s outstanding loan approximates the carrying amount, as the loan bears a floating rate that approximates the market interest rate. The carrying value of the deferred royalty obligation related to the sale of future royalties under the 2015 License Agreement with Vaxcyte approximates its fair value as of December 31, 2023, and is based on the Company's current estimates of future royalties expected to be earned over the estimated life of the royalty term arrangement. See Note 10. Deferred Royalty Obligation Related to the Sale of Future Royalties for a description of the Level 3 inputs used to estimate the fair value of the liability. 137 Net Loss Per Share Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding for the period, without consideration for potential dilutive common shares. Basic net loss per share is the same as diluted net loss per share as the inclusion of all potentially dilutive securities would have been anti-dilutive given the net loss of the Company. 3. Fair Value Measurements The following table sets forth the fair value of the Company’s financial assets and liabilities measured on a recurring basis by level within the fair value hierarchy: December 31, 2023 Total Level 1 Level 2 Level 3 (in thousands) Assets: Money market funds $ 56,397 $ 56,397 $ - $ - Commercial paper 82,152 - 82,152 - Corporate debt securities 61,894 - 61,894 - Equity securities 41,937 41,937 - - Asset-backed securities 10,505 - 10,505 - U.S. government securities 113,652 113,652 - - U.S. agency securities 4,961 - 4,961 - Total $ 371,498 $ 211,986 $ 159,512 $ - December 31, 2022 Total Level 1 Level 2 Level 3 (in thousands) Assets: Money market funds $ 36,486 $ 36,486 $ - $ - Commercial paper 87,140 - 87,140 - Corporate debt securities 36,429 - 36,429 - Equity securities 32,020 32,020 - - Asset-backed securities 14,016 - 14,016 - U.S. government securities 91,251 91,251 - - U.S. agency securities 16,607 - 16,607 - Supranational debt securities 16,481 - 16,481 - Total $ 330,430 $ 159,757 $ 170,673 $ - Where applicable, the Company uses quoted market prices in active markets for identical assets to determine fair value. This pricing methodology applies to Level 1 investments, which are comprised of money market funds, U.S. government securities and the shares of Vaxcyte common stock held by the Company. If quoted prices in active markets for identical assets are not available, then the Company uses quoted prices for similar assets or inputs other than quoted prices that are observable, either directly or indirectly. These investments are included in Level 2 and consist of commercial paper, corporate debt securities, asset-backed securities, U.S. agency securities and supranational debt securities. These assets are valued using market prices when available, adjusting for accretion of the purchase price to face value at maturity. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. In certain cases where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3 within the valuation hierarchy. As of December 31, 2023, the deferred royalty obligation 138 related to the sale of future Vaxcyte royalties was classified as Level 3 within the valuation hierarchy. Refer to Note 10 below for information relating to the Purchase Agreement between the Company and Blackstone, pursuant to which the Company sold to Blackstone its 4 % royalty, or revenue interest, in potential future net sales of Vaxcyte products, including VAX-24 and VAX-31. As of December 31, 2022, the Company did not hold any securities that were classified as Level 3 within the valuation hierarchy. Investments in Equity Securities As of December 31, 2023 and 2022 , the Company held 667,780 shares of Vaxcyte common stock with an estimated fair value of $ 41.9 million and $ 32.0 million, respectively. The Company recognized an unrealized gain (loss) of $ 9.9 million, $ 12.1 million and $( 4.5 ) million for the years ended December 31, 2023, 2022 and 2021, respectively. The Company sold zero and 1,058,434 shares of Vaxcyte common stock at their fair market value during the years ended December 31, 2023 and 2022, respectively. The Company recognized a gain of $ 4.1 million on equity securities during the year ended December 31, 2022 which is recorded under interest and other income (expense), net, in the Statements of Operations. 4. Cash Equivalents and Marketable Securities Cash equivalents and marketable securities consisted of the following: December 31, 2023 Amortized Cost Basis Unrealized Gains Unrealized Losses Fair Value (in thousands) Money market funds $ 56,397 $ - $ - $ 56,397 Commercial paper 82,179 1 ( 28 ) 82,152 Corporate debt securities 61,887 12 ( 5 ) 61,894 Asset-based securities 10,505 - - 10,505 U.S. government securities 113,612 40 - 113,652 U.S. agency securities 4,960 1 - 4,961 Total 329,540 54 ( 33 ) 329,561 Less: amounts classified as cash equivalents ( 65,144 ) ( 4 ) - ( 65,148 ) Total marketable securities $ 264,396 $ 50 $ ( 33 ) $ 264,413 December 31, 2022 Amortized Cost Basis Unrealized Gains Unrealized Losses Fair Value (in thousands) Money market funds $ 36,486 $ - $ - $ 36,486 Commercial paper 87,140 - - 87,140 Corporate debt securities 36,554 2 ( 127 ) 36,429 Asset-based securities 14,026 - ( 10 ) 14,016 U.S. government securities 91,619 8 ( 376 ) 91,251 U.S. agency securities 16,646 - ( 39 ) 16,607 Supranational debt securities 16,555 - ( 74 ) 16,481 Total 299,026 10 ( 626 ) 298,410 Less: amounts classified as cash equivalents ( 43,318 ) ( 2 ) - ( 43,320 ) Total marketable securities $ 255,708 $ 8 $ ( 626 ) $ 255,090 No marketable securities had maturities of more than one year as of December 31, 2023 and 2022. There were $ 110.9 million and $ 139.5 million of investments in an unrealized loss position of $ 33,000 and $ 0.6 million as of December 31, 2023 and 2022, respectively . During the years ended December 31, 2023, 2022 and 2021, the Company did no t record any other-than-temporary impairment charges on its available-for-sale 139 securities. Based on the Company’s procedures under the expected credit loss model, including an assessment of unrealized gains and losses on the portfolio after December 31, 2023, the Company concluded that the unrealized losses for its marketable securities were not attributable to credit and therefore an allowance for credit losses for these securities has not been recorded as of December 31, 2023. Also, based on the scheduled maturities of the investments, the Company was more likely than not to hold these investments for a period of time sufficient for a recovery of the Company’s cost basis. The Company recognized no material gains or losses on its cash equivalents and current marketable securities as of December 31, 2023 and as a result, the Company did not reclassify any amounts out of accumulated other comprehensive income (loss) for the year then ended. 5. Collaboration and License Agreements and Supply Agreements The Company has entered into collaboration and license agreements and supply agreements with various pharmaceutical and biotechnology companies. The Company analyzes its agreements to determine whether it should account for the agreements within the scope of ASC 808, and, if so, it analyzes whether it should account for any elements under ASC 606. The Company’s accounts receivable balances may contain billed and unbilled amounts from upfront payments, milestones and other contingent payments, as well as reimbursable costs from collaboration and license agreements and supply agreements. The Company has not experienced credit losses from its accounts receivable and, therefore, has no t recorded a reserve for estimated credit losses as of December 31, 2023 and 2022. In accordance with the collaborati on, license, and supply agreements, the Company recognized revenue as follows: Year Ended December 31, 2023 2022 2021 (in thousands) Bristol-Myers Squibb Company ("BMS") $ 5,590 $ 9,752 $ 11,483 Merck Sharp & Dohme Corporation ("Merck") 5,869 11,600 42,780 Merck KGaA, Darmstadt, Germany (operating in the United States and Canada under the name "EMD Serono") 8 2,695 4,576 Astellas Pharma Inc. (“Astellas”) 33,992 10,897 - Tasly Biopharmaceuticals Co., Ltd. (“Tasly”) 6,970 25,000 - Vaxcyte, Inc. ('Vaxcyte") 101,302 3,828 3,041 BioNova Pharmaceuticals, Ltd. (“BioNova”) - 4,000 - Total revenue $ 153,731 $ 67,772 $ 61,880 The following table presents the changes in the Company’s deferred revenue balance from the agreements during the year ended December 31, 2023: Year ended December 31, 2023 (in thousands) Deferred revenue—December 31, 2022 $ 106,644 Additions to deferred revenue 11,018 Recognition of revenue in current period ( 43,617 ) Deferred revenue—December 31, 2023 $ 74,045 The Company’s balance of deferred revenue contains upfront and contingent payments for obligations from our agreements which remain partially unsatisfied. The Company expects to recognize approximately $ 20.7 million of the deferred revenue over the next twelve months . 140 Collaboration with BMS BMS Agreement and 2018 BMS Master Services Agreement In September 2014, the Company signed a Collaboration and License Agreement (the “BMS Agreement”) with BMS to discover and develop bispecific antibodies and/or antibody-drug conjugates (“ADCs”), focused primarily on the field of immuno-oncology, using the Company’s proprietary integrated cell-free protein synthesis platform, XpressCF ® . In August 2017, the Company entered into an amended and restated collaboration and license agreement with BMS to refocus the collaboration on four programs that were advancing through preclinical development, including an ADC program targeting B cell maturation antigen (“BCMA ADC” or “CC-99712”). In May 2019, the U.S. Food and Drug Administration cleared the investigational new drug (“IND”) application for the BCMA ADC, which was discovered and manufactured by the Company and is the first collaboration program IND. In March 2018, the Company entered into a Master Development and Clinical Manufacturing Services Agreement (the “2018 BMS Master Services Agreement”) with BMS, wherein BMS requested the Company to provide development, manufacturing and supply chain management services, including clinical product supply. In June 2023, the Company received a notice of termination from BMS indicating that it was stopping development of CC-99712 due to a portfolio prioritization decision. The termination of the BMS Agreement was effective as of October 7, 2023 (the "Termination Date"). Following the Termination Date, the Company has sole worldwide rights to CC-99712. As of December 31, 2023 and 2022, there was no deferred revenue under the BMS Agreement. As of December 31, 2023 and 2022, there was zero and $ 3.1 million, respectively, of deferred revenue under the 2018 BMS Master Services Agreement. Revenues under the BMS Agreement and the 2018 BMS Master Services Agreement were as follows: Year ended December 31, 2023 2022 2021 (in thousands) Research and development services $ 412 $ 700 $ 940 Materials supply 5,178 9,052 10,543 Total revenue $ 5,590 $ 9,752 $ 11,483 Collaboration with Merck 2018 Merck Agreement In July 2018, the Company entered into an agreement (the “2018 Merck Agreement”) with Me rck for access to the Company’s technology and the identification and preclinical research and development of two target programs, with an option for Merck to engage the Company to continue these activities for a third program, upon the payment of an additional amount, focusing on cytokine derivatives for cancer and autoi mmune disorders, with an initial transaction price of $ 60.0 million. The option to expand activities to a third program expired in January 2021. In March 2020, Merck exercised its option to extend the research term of the collaboration’s first cytokine-derivative program by one year , which, pursuant to the terms of the 2018 Merck Agreement, triggered a payment of $ 5.0 million. In April 2021, the Company earned a $ 15.0 million contingent payment for the initiation by Merck of the first IND-enabling toxicology study under the first cytokine-derivative program in the collaboration. 141 In September 2021, the Company entered into an amendment to the 2018 Merck Agreement (the “2021 Amendment”) to extend the research term for the first program in the 2018 Merck Agreement. Under the terms of the 2021 Amendment, the Company received a payment of $ 2.5 million with an additional $ 7.5 million to be received upon the achievement of certain developmental milestones by Merck on a second molecule under the first cytokine-derivative program of the collaboration. Merck decided not to pursue further development of a second molecule under the first cytokine-derivative program of the collaboration and, therefore, allowed the option to extend the period for nomination of additional clinical candidates under the 2021 Amendment to expire in June 2022. In December 2021, Merck did not extend the research term for the second research program of the collaboration, which research program reverted to the Company. The first research program of the collaboration is focused on MK-1484, a d istinct cytokine derivative molecule for the treatment of cancer. The Company is eligible to receive aggregate contingent payments of up to approximately $ 500 million for the target program selected by Merck, assuming the develo pment and sale of the therapeutic candidate and all possible indications identified under the collaboration. If one or more products from the target program is developed for non-oncology or a single indication, the Company will be eligible for reduced aggregate contingent payments. In addition, the Company is eligible to receive tiered royalties ranging from mid-single digit to low teen percentages on the worldwide sales of any commercial products that may result from the collaboration . In July 2022, the first patient was dosed with MK-1484 in a Phase 1 study. As a result of this achievement, the Company earned and received a $ 10.0 million contingent payment from Merck during the year ended December 31, 2022. As of December 31, 2023 and 2022, there was no deferred revenue under the 2018 Merck Agreement and 2021 Amendment. 2020 Merck Master Services Agreement In August 2020, the Company entered into a Pre-Clinical and Clinical Supply Agreement (the “2020 Merck Master Services Agreement”) with Merck, wherein Merck requested the Company to provide development, manufacturing and supply chain management services, including clinical product supply, upon completion of the research programs under the 2018 Merck Agreement. As of both December 31, 2023 and 2022, there was no deferred revenue under the 2020 Merck Master Services Agreement. Revenues under the 2018 Merck Agreement and the 2020 Merck Master Services Agreement were as follows: Year ended December 31, 2023 2022 2021 (in thousands) Ongoing performance related to unsatisfied performance obligations $ - $ 862 $ 35,098 Contingent payment - 10,000 - Research and development services 245 577 2,666 Financing component on unearned revenue - - 610 Materials supply 5,624 161 4,406 Total revenue $ 5,869 $ 11,600 $ 42,780 Collaboration with EMD Serono MDA Agreement and 2019 EMD Serono Supply Agreement The Company signed a Collaboration Agreement and a License Agreement with EMD Serono in May 2014 and September 2014, respectively, which were entered into in contemplation of each other and therefore treated as a single agreement for accounting purposes. The Collaboration Agreement was subsumed into the License Agreement (the “MDA Agreement”), which agreement is to develop ADCs for multiple cancer targets. 142 In April 2019, the Company entered into an ADC Product Preclinical and Phase I Clinical Supply Agreement (the “2019 EMD Serono Supply Agreement”) with EMD Serono, wherein EMD Serono requested the Company to provide development, manufacturing and supply chain management services, including clinical product supply. In March 2023, EMD Serono disclosed its decision to close the Phase 1a trial of M1231 in patients with solid tumors and not initiate a previously planned expansion study. EMD Serono stated that the decision was based on strategic portfolio considerations. As of December 31, 2023 and 2022, there was no deferred revenue related to payments received by the Company under the EMD Serono agreements. R evenues under the EMD Serono agreements were as follows: Year ended December 31, 2023 2022 2021 (in thousands) Contingent payment $ - $ - $ 2,000 Research and development services 6 510 851 Materials supply 2 2,185 1,725 Total revenue $ 8 $ 2,695 $ 4,576 Astellas License and Collaboration Agreement In June 2022, the Company entered into a License and Collaboration Agreement (the “Astellas Agreement”) with Astellas for the development of immunostimulatory antibody-drug conjugates for up to three biological targets, to be identified by Astellas. The Company will conduct research and pre-clinical development of any compound (as designated by Astellas) in each of the three programs in accordance with the terms of a research plan between the Company and Astellas. Astellas will have an exclusive worldwide license to develop and commercialize any such designated compound, subject to the Company’s rights to participate in cost and profit sharing in the United States, as described below. Pursuant to the Astellas Agreement, the Company received from Astellas a one-time, nonrefundable, non-creditable, upfront payment of $ 90.0 million during the year ended December 31, 2022. Under ASC 808 and ASC 606, the Company determined that both parties are active participants in the activities and are exposed to significant risks and rewards dependent on the success of the development program, and identified four performance obligations under the Astellas Agreement as: (1) performance of services related to the first target program; (2) performance of services related to the second target program; (3) performance of services related to the third target program; and (4) the Company’s estimated future services on the collaboration JSC. The transaction price of $ 90.0 million was allocated among the performance obligations using the Company’s best estimate of the standalone selling price, or SSP, for each of the associated performance obligations. Revenue allocated to the three target programs, which totaled $ 89.1 million, is being recognized on a proportion of performance basis, using FTE cost as the basis of measurement, with such performance expected to occur over an estimated service period of four years for each target program. As it pertains to the JSC performance obligation, the revenue allocated to such performance obligation was $ 0.9 million, and is being recognized on a proportion of performance basis using FTE cost as the basis of measurement, and such effort is expected to be incurred on a relatively consistent basis throughout the term of the Astellas Agreement. Additionally, under ASC 606, the Company determined a financing component associated with the $ 90.0 million upfront payment and has calculated $ 32.8 million as of December 31, 2023 on the unearned revenue portion beyond one year from the effective date of the agreement, which amount is being recognized as interest expense and revenue over the estimated service period for the three target programs. The Company is also eligible to receive up to $ 422.5 million in development, regulatory and commercial milestones for each product candidate, and tiered royalties ranging from low double-digit to mid-teen percentages on worldwide sales of any commercial products that may result from the collaboration, subject to customary deductions under certain circumstances. The Company can also elect to convert any product candidate into a cost and profit-sharing arrangement, for the United States only. In the event the Company makes such election, it will share commercialization costs and profits relating to such product candidate equally with Astellas in the United States, and no royalties will be due from Astellas for net sales of such product candidates in the United States. 143 Revenues under the Astellas Agreement were as follows: Year ended December 31, 2023 2022 2021 (in thousands) Ongoing performance related to unsatisfied performance obligations $ 17,015 $ 3,940 $ - Research and development services 6,584 1,878 - Financing component on unearned revenue 9,836 5,079 - Materials supply 557 - - Total revenue $ 33,992 $ 10,897 $ - As of December 31, 2023 and 2022, there was $ 69.0 million and $ 86.1 million of deferred revenue, respectively, related to the upfront payment received by the Company under the Astellas Agreement. Collaboration with Tasly Tasly License Agreement In December 2021, the Company entered into a license agreement with Tasly to grant Tasly an exclusive license to develop and commercialize STRO-002, or luveltamab tazevibulin, or luvelta, in Greater China (the “Tasly License Agreement”). Tasly will pursue the clinical development, regulatory approval, and commercialization of luvelta in multiple indications, including ovarian cancer, non-small cell lung cancer, triple-negative breast cancer, and other indications in Greater China. The Company will retain development and commercial rights of luvelta globally outside of Greater China, including the United States. Under the Tasly License Agreement, Tasly was obligated to make to the Company an initial nonrefundable upfront payment of $ 40.0 million, with additional potential payments totaling up to $ 345 million related to development, regulatory and commercialization contingent payments and milestones. The Company will provide luvelta to Tasly under appropriate clinical and commercial supply service agreements. Upon commercialization, the Company will receive tiered royalties, ranging from low- to mid-teen percentages based on annual net sales of luvelta in Greater China for at least ten years following the first commercial sale of luvelta in Greater China. The Company determined that the Tasly License Agreement falls within the scope of ASC 808, as both parties are active participants in the activities and are exposed to significant risks and rewards dependent on the success of the commercialization of indications for luvelta in Greater China. The Company concluded that the Tasly License Agreement contained the following units of account: i) licensed know-how and Sutro patents, license to trademark rights, and initial regulatory data and information necessary to prepare an IND; and ii) collaboration governance and information sharing activities, such as JSC participation and ongoing regulatory and pharmacovigilance support. The promises related to the licensed know-how and Sutro patents, license to trademark rights, and initial regulatory data and information necessary to prepare an IND are considered to be interdependent and not distinct from each other, representing a combined output. The Company determined that these promises are capable of being distinct from the collaboration governance and information sharing activities discussed below and further determined that this unit of account is a vendor-customer relationship and accounted for it in accordance with ASC 606. All potential future milestones and other payments were considered constrained at the inception of the Tasly License Agreement since the Company could not conclude it was probable that a significant reversal in the amount of revenue recognized would not occur. Since there is only one performance obligation accounted for under ASC 606, no allocation of the transaction price was necessary. 144 The Company determined that the unit of account consisting of collaboration governance and information sharing activities, such as JSC participation and ongoing regulatory and pharmacovigilance support, do not represent a customer-vendor relationship between the Company and Tasly. These promises are considered to be interdependent and not distinct from each other, representing a combined output. However, the Company determined that these promises are capable of being distinct from the intellectual property and data license promises discussed above. As such, based on the nature of the agreement and collaborative activities, the Company determined that the costs associated with these governance and information sharing activities performed under the agreement will be included in research and development expenses in the Statements of Operations, with any reimbursement of costs by Tasly reflected as a reduction of such expenses. During the year ended December 31, 2023 and 2022, the Company did no t recognize any material reduction of research and development expenses under the Tasly License Agreement. In April 2022, the Company entered into amendment No. 1 (the “Tasly Amendment”) to the Tasly License Agreement with Tasly. Pursuant to the Tasly Amendment, the initial nonrefundable upfront payment due by Tasly was amended to $ 25.0 million, and a $ 15.0 million payment will become payable to the Company upon the achievement of certain regulatory milestones. The Tasly Amendment also added an additional regulatory milestone payment to the Tasly License Agreement, providing additional potential payments totaling up to $ 350.0 million related to development, regulatory and commercialization milestones, beyond the payments described above, and made certain other ministerial edits. During the year ended December 31, 2022, the Company recognized the $ 25.0 million upfront payment as revenue after the payment, net of a withholding tax, was received by the Company from Tasly. The withholding tax of $ 2.5 million was recorded as an income tax charge related to the upfront payment. During the year ended December 31, 2023, the Company recognized a $ 5.0 million contingent payment as revenue, net of withholding tax, after Tasly received its first IND clearance by National Medical Products Administration, or NMPA, in Greater China. The withholding tax of $ 0.5 million was recorded as an income tax charge related to the contingent payment. During the year ended December 31, 2023, the Company also recorded a $ 5.0 million contingent payment, received by the Company from Tasly related to the first patient dosed in the Company’s REFRaME-O1 trial for luvelta, as deferred revenue, net of withholding tax of $ 0.5 million. The REFRaME-O1 study consists of two parts, Part I being the dose-finding portion and Part II being the portion of the study that will focus on the selected dose from Part I, and is intended to generate data to enable the potential registration of luvelta. Although it currently intends to conduct the REFRaME-O1 study to completion, the Company has the sole discretion to terminate the REFRaME-O1 study at any time. As such, the Company has agreed with Tasly that, in the event the Company terminates the REFRaME-O1 study prior to dosing the first patient in Part II, the Company will refund Tasly the contingent payment received by the Company within 30 days of such study termination. Given the above, the contingent payment received by the Company was considered constrained for accounting purposes during the year ended December 31, 2023, since the Company could not conclude it was probable that a significant reversal in the amount of revenue recognized would not occur. The withholding tax was recorded by the Company as a tax charge related to the received contingent payment. 2023 Tasly Supply Agreement In June 2023, the Company entered into a Master Development and Clinical Supply Agreement (the “2023 Tasly Supply Agreement”) with Tasly, wherein Tasly requested the Company to provide development, manufacturing and supply chain management services, including clinical product supply. 145 Revenues under the Tasly agreements were as follows: Year ended December 31, 2023 2022 2021 (in thousands) Upfront payment $ - $ 25,000 $ - Contingent payment 5,000 - - Research and development services 92 - - Materials supply 1,878 - - Total revenue $ 6,970 $ 25,000 $ - Agreements with Vaxcyte Vaxcyte Supply Agreement In May 2018, the Company entered into a Supply Agreement (the “Supply Agreement”) with Vaxcyte, wherein Vaxcyte engaged the Company to provide research and development services and to supply extracts and custom reagents, as requested by Vaxcyte. The pricing is based on an agreed upon cost-plus arrangement. During 2020, upon Vaxcyte’s request and their agreement to reimburse the related costs, the Company entered into agreements with third-party contract manufacturing organizations, or CMOs, to conduct process transfers to allow for such CMOs to manufacture and supply extract and custom reagents for Vaxcyte. As part of the agreement with Vaxcyte, should the Company decide to purchase extract from the extract CMO, the Company would be required to reimburse Vaxcyte for a portion of all incurred process transfer costs. As of December 31, 2023 and 2022, there was $ 6.9 million and $ 4.8 million in such accruals related to the Vaxcyte Supply Agreement. For the years ended December 31, 2023, 2022 and 2021, the agreed-upon reimbursements by Vaxcyte of the costs associated with such arrangements, principally for pass-through costs from the CMOs, were $ 8.6 million, $ 12.4 million and $ 8.9 million, respectively, and were accounted for by the Company as a reduction to research and development expense based on the Company’s conclusion that Vaxcyte was not a customer for such activities and associated payments. Vaxcyte Agreement In December 2022, the Company entered into a letter agreement (the “Vaxcyte Agreement”) with Vaxcyte under which the Company granted to Vaxcyte (i) authorization to enter into an agreement with an independent alternate CMO to source cell-free extract solely for the products it licensed from the Company, allowing Vaxcyte to have direct oversight over financial and operational aspects of the relationship with the CMO (“CMO Relationship Rights”), and (ii) a right, but not an obligation, to obtain certain exclusive rights to internally manufacture and/or source extract from certain CMOs and the right to independently develop and make improvements to extract for use in connection with the exploitation of certain vaccine compositions (the “Option”). The Option was exercisable for five years following the effective date of the Vaxcyte Agreement (the “Option Period”), subject to potential acceleration in the event of a change of control of Vaxcyte. Pursuant to the Vaxcyte Agreement, the Company received a one-time, nonrefundable, non-creditable, upfront payment of $ 10.0 million in cash, and 167,780 shares of Vaxcyte common stock with a fair value of $ 7.5 million in December 2022. Additionally, pursuant to the Vaxcyte Agreement, th e Company and Vaxcyte agreed to negotiate the terms and conditions of a form definitive agreement to be entered into in the event Vaxcyte exercises the Option (the “Form Definitive Agreement”). In September 2023, the Company and Vaxcyte mutually agreed upon the Form Definitive Agreement, and in October 2023, the Company received a $ 5.0 million payment from Vaxcyte. Effective immediately upon agreement to the Form Definitive Agreement, the Company and Vaxcyte entered into amendment No 3. (the “Amendment”) to that certain license agreement between the Company and Vaxcyte, dated August 1, 2014, and amended and restated on October 12, 2015, and amended again on May 9, 2018 and May 29, 2018 (the “License Agreement”). The Amendment amended certain terms of the License Agreement including with respect to (i) royalty reduction provisions applicable in the event of expiration of relevant patent 146 claims, which would result in lower royalties payable by Vaxcyte under certain circumstances, (ii) the ownership, prosecution, maintenance and enforcement of certain intellectual property rights licensed or arising under the License Agreement, and (iii) the timing and form for financial reporting of royalty payment calculations. In November 2023 (the "Exercise Date"), Vaxcyte exercised the Option by submitting written notice thereof to the Company and concurrently paid the Company $ 50.0 million in cash as the first of two installment payments for the Option exercise price. Under the Vaxcyte Agreement, Vaxcyte is obligated to pay the Company an additional $ 25.0 million in cash within six months of the Exercise Date as the second of two installment payments for the Option exercise price. Upon the occurrence of certain regulatory milestones, Vaxcyte would be obligated to pay the Company certain additional payments totaling up to $ 60.0 million in cash. In the event that Vaxcyte undergoes a change of control, certain rights and payments may be accelerated. These contingent payments were considered constrained variable consideration or otherwise not eligible for revenue recognition at inception and as of December 31, 2023. The Company evaluated the terms of the Vaxcyte Agreement and concluded that the Vaxcyte Agreement is considered a new standalone contract and distinct from the previously existing agreements with Vaxcyte. Under ASC 606, the Company determined that Vaxcyte is a customer for this arrangement and identified the promised goods and services under the Vaxcyte Agreement as: (1) the Option; (2) the Form Definitive Agreement; (3) CMO Relationship Rights; and (4) Joint steering committee participation. The Company concluded that the promises within the contract are interrelated and interdependent of one another. As such, these are not considered distinct but are combined as a single performance obligation. This single performance obligation is considered a material right as it provides Vaxcyte with the right to acquire additional goods at a price it would not have received without having entered into the Vaxcyte Agreement. Revenue from the single performance obligation amounting to $ 97.5 million was recognized during the year ended December 31, 2023, as the Option was exercised by Vaxcyte on the Exercise Date and the single performance obligation was satisfied under the Vaxcyte Agreement. As of December 31, 2023 and 2022, there was zero and $ 17.5 million, respectively, of deferred revenue related to the payments received by the Company under the Vaxcyte Agreement. Revenues under the Vaxcyte agreements were as follows: Year ended December 31, 2023 2022 2021 (in thousands) Upfront payments $ 97,500 $ - $ - Research and development services 2,435 2,356 1,131 Materials supply 1,367 1,472 1,910 Total revenue $ 101,302 $ 3,828 $ 3,041 Refer to Note 10 below for information relating to the Purchase Agreement between the Company and Blackstone, pursuant to which the Company sold to Blackstone its 4 % royalty, or revenue interest, in potential future net sales of Vaxcyte products, including VAX-24 and VAX-31. BioNova Option Agreement In October 2021, the Company entered into an agreement with BioNova granting BioNova the option to obtain exclusive rights to develop and commercialize STRO-001 in China, Hong Kong, Macau and Taiwan (“Greater China”) and amended the BioNova Option Agreement with BioNova in the first quarter of 2023. In March 2024, BioNova notified the Company that it had decided to terminate both the BioNova Option Agreement and clinical development of STRO-001 in Greater China. Following receipt of this notice, the Company decided to suspend development of STRO-001. 147 6. Property and Equipment, Net Property and equipment, net, consists of the following: December 31, 2023 2022 (in thousands) Computer equipment and software $ 1,750 $ 1,536 Furniture and office equipment 244 247 Laboratory equipment 38,006 35,843 Leasehold improvements 23,606 23,215 Construction in progress 497 1,685 Total 64,103 62,526 Less accumulated depreciation and amortization ( 42,163 ) ( 37,905 ) Total property and equipment, net $ 21,940 $ 24,621 Depreciation and amortization expense amounted to $ 6.8 million, $ 5.7 million and $ 4.8 million for the years ended December 31, 2023, 2022 and 2021, respectively. 7. Loan and Security Agreement In August 2017, the Company entered into a loan and security agreement with Oxford Finance LLC (“Oxford”) and Silicon Valley Bank (“SVB”) under which it borrowed $ 15.0 million (the “August 2017 Loan”). In connection with the August 2017 Loan, the Company issued to Oxford and SVB warrants to purchase 46,359 shares of Company's common stock. On February 28, 2020, (the “Effective Date”), the Company entered into a loan and security agreement (the “Loan and Security Agreement”) with Oxford as the collateral agent and a lender, and SVB as a lender (together with Oxford, the “Lenders”), pursuant to which the Lenders agreed to lend the Company up to an aggregate of $ 25.0 million (the “Term A Loan”). Upon entering into the Loan and Security Agreement, the Company borrowed $ 25.0 million from the Lenders, with approximately $ 9.6 million of such amount applied to the repayment of the outstanding principal, interest and final payment fees owed pursuant to the August 2017 Loan. As such, the August 2017 Loan has been paid in full. The Company accounted for the issuance of the Loan and Security Agreement and repayment of the August 2017 Loan as a debt modification. The associated unamortized debt discount on the August 2017 Loan and new lender fees from the debt issuance was amortized as interest expense using the effective interest method until the maturity date of the Term A Loan. In June 2022, the Company entered into an amendment to the Loan and Security Agreement with Oxford and SVB (the “LSA Amendment”). The LSA Amendment added a financial covenant that requires the Company to maintain a minimum unrestricted cash balance of $ 10.0 million. The Company was in compliance with the financial covenant under the LSA Amendment as of December 31, 2023. In June 2023, the Company entered into an amendment to the Loan and Security Agreement with Oxford and SVB (the “5th LSA Amendment”). Under the 5th LSA Amendment, effective July 1, 2023, the loan bore interest at the floating per annum rate of interest equal to the greater of (i) 8.07 % and (ii) the sum of (a) a specific published 1-month secured overnight financing rate (SOFR) reported on the last business day of the month that immediately precedes the month in which the interest will accrue plus (b) 0.10 %, plus (c) 6.40 % . There was an immaterial impact of the 5th LSA Amendment on the financial statements of the Company. The Term A Loan matured on March 1, 2024 (the “Maturity Date”) and the Company made a final payment of 3.83 % of the original principal amount of the Term A Loan on the Maturity Date. 148 In connection with entering into the Loan and Security Agreement, the Company issued to the Lenders warrants exercisable for 81,257 shares of the Company’s common stock (the “2020 Warrants”). The 2020 Warrants are exercisable in whole or in part, immediately, and have a per share exercise price of $ 9.23 , which was the closing price of the Company’s common stock reported on the Nasdaq Global Market on the day prior to the Effective Date. The 2020 Warrants will terminate on the earlier of February 28, 2030 or the closing of certain merger or consolidation transactions. The estimated fair value upon issuance of the Warrants of $ 0.6 million is recorded as a debt discount on the associated borrowings on the Company’s Balance Sheet. The debt discount was amortized to interest expense over the repayment period of the loan using the effective-interest method. During the years ended December 31, 2023, 2022 and 2021, the Company recorded interest expense related to loans outstanding of $ 1.3 million, $ 2.4 million and $ 2.6 million, respectively, with average interest rates of 11.49 %, 8.72 % and 8.07 %, respectively, which includes interest related to the accretion of debt discount of $ 0.3 million, $ 0.5 million and $ 0.6 million, respectively. Long-term debt and net premium balances are as follows: December 31, 2023 2022 (in thousands) Principal amount of debt outstanding $ 3,125 $ 15,625 Net premium associated with accretion of final payment and other debt issuance costs 936 646 Debt, current and non-current 4,061 16,271 Less: Debt, current portion ( 4,061 ) ( 12,500 ) Debt, non-current portion $ - $ 3,771 Future minimum payments of principal and estimated payments of interest on the Company’s Loan and Security Agreement as of December 31, 2023 are as follows: Year Ending December 31: Amount (in thousands) Total future maturities - 2024 $ 4,126 Less: amount representing interest ( 43 ) Less: final payment ( 958 ) Total principal amount of debt outstanding $ 3,125 8. Commitments and Contingencies Leases In June 2021, the Company entered into a third amendment (the “Third Amendment”) to its manufacturing facility lease, dated May 18, 2011, as amended, by and between Alemany Plaza LLC, located in San Carlos, California (the “San Carlos Lease”), as an extension to the term of the San Carlos Lease for a period of five years (the “Lease Extension Period”). Pursuant to the Third Amendment, the San Carlos Lease will expire on July 31, 2026 , and it includes an option to renew the San Carlos Lease for an additional five years . The aggregate estimated base rent payments due over the Lease Extension Period is approximately $ 4.2 million, subject to certain terms contained in the San Carlos Lease. In June 2021, the Company entered into a first amendment (the “First Amendment”) to its manufacturing support facility lease, dated March 4, 2015, as amended, by and between 870 Industrial Road LLC, located in San Carlos, California (the “Industrial Lease”), as an extension to the term of the Industrial Lease for a period of five years (the “Industrial Lease Extension Period”). Pursuant to the first Amendment, the Industrial Lease will expire on June 30, 2026 , and it includes an option to renew the Industrial Lease for an additional five years . The aggregate estimated base rent payments due over the Industrial Lease Extension Period is approximately $ 4.3 million, subject to certain terms contained in the Industrial Lease. 149 In September 2020, the Company entered into a sublease agreement (the “Sublease”) with Five Prime Therapeutics, Inc. (the “Sublessor”), for approximately 115,466 square feet, in a building located in South San Francisco, California (the “Premises”). The Company uses the Premises as its corporate headquarters and to conduct (or expand) research and development activities. The Company commenced making monthly payments for the first 85,755 square feet of the Premises (“Initial Premises”) in July 2021, with occupancy of such space commencing in August 2021. The Company was provided early access to the Initial Premises commencing in the fourth quarter of 2020 to conduct certain planning and tenant improvement work. The Sublease is subordinate to the lease agreement, effective December 12, 2016, between the Sublessor and HCP Oyster Point III LLC (the “Landlord”). The Company commenced using the remaining 29,711 square feet of the Premises, or the Expansion Premises on July 1, 2023 under the sublease agreement. The Sublease for both the Initial Premises and Expansion Premises will expire on December 31, 2027 . With a commencement date on the Initial Premises of July 1, 2021, and Expansion Premises of July 1, 2023, the aggregate estimated base rent payments due over the term of the Sublease are approximately $ 39.1 million, including the approximately $ 5.2 million in potential financial benefit to the Company of base rent abatement to be provided by the Sublessor, subject to certain terms contained in the Sublease. The Sublease contains customary provisions requiring the Company to pay its pro rata share of utilities and a portion of the operating expenses and certain taxes, assessments and fees of the Premises and provisions allowing the Sublessor to terminate the Sublease upon the termination of the lease with the Landlord or if the Company fails to remedy a breach of certain of its obligations within specified time periods. Additionally, the Company posted a security deposit of $ 0.9 million, which is reflected as restricted cash in non-current assets on the Company’s Balance Sheets as of December 31, 2023 and 2022. The Company recognizes rent expense for these operating leases on a straight-line basis over the lease period. The components of lease costs, which the Company includes in operating expenses in the Statements of Operations, were as follows: Year ended December 31, 2023 2022 2021 (in thousands) Operating lease cost $ 7,039 $ 6,154 $ 8,355 Short-term lease cost 274 82 117 Variable lease cost 2,047 1,610 2,089 Total lease cost $ 9,360 $ 7,846 $ 10,561 During the years ended December 31, 2023, 2022 and 2021, the Company recorded operating lease expense of $ 7.0 million, $ 6.2 million and $ 8.4 million, respectively, and paid $ 8.0 million, $ 1.7 million, and $ 6.2 million, respectively, of operating lease payments related to the lease liabilities, which the Company includes in net cash used in operating activities in the Statements of Cash Flows. As of December 31, 2023 and 2022, the weighted-average remaining lease term was 3.8 years and 4.8 years, respectively, and the weighted-average discount rate used to determine the operating lease liability was 10.8 % for both years. As of December 31, 2023, the maturities of the Company’s operating lease liabilities were as follows: Year Ending December 31, Amount (in thousands) 2024 $ 9,219 2025 9,533 2026 8,994 2027 8,289 Total lease payments 36,035 Less: imputed interest ( 6,461 ) Operating lease liabilities 29,574 Less: current portion ( 6,420 ) Total lease liabilities, non-current $ 23,154 150 Indemnification & Other In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to vendors, lessors, business partners, board members, officers, and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by the Company, negligence or willful misconduct of the Company, violations of law by the Company, or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with directors and certain officers and employees that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No demands have been made upon the Company to provide indemnification under such agreements, and thus, there are no claims that the Company is aware of that could have a material effect on the Company’s Balance Sheets, Statements of Operations, or Statements of Cash Flows. The Company currently has directors’ and officers’ liability insurance. In addition, the Company enters into agreements in the normal course of business, including with contract research organizations for clinical trials, contract manufacturing organizations for certain manufacturing services, and vendors for preclinical studies and other services and products for operating purposes, which are generally cancelable upon written notice. 9. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following: December 31, 2023 2022 (in thousands) Vaxcyte-related accrual under Vaxcyte Supply Agreement $ 6,933 $ 4,830 CMO-related accrual 8,195 3,900 Clinical trials-related accrual 4,283 2,954 Tax and related expenses 15,165 - Other 3,897 3,080 Total accrued expenses and other current liabilities $ 38,473 $ 14,764 10. Deferred Royalty Obligation related to the Sale of Future Royalties In June 2023, the Company entered into the Purchase Agreement with Blackstone, pursuant to which the Company sold to Blackstone its 4 % royalty, or revenue interest, in the potential future net sales of Vaxcyte products, including the Purchased Interest under the 2015 License Agreement. As described in Note 5. Collaboration and License Agreements and Supply Agreements, Vaxcyte Agreement, following agreement with Vaxcyte on the Form Definitive Agreement and upon effectiveness of the amendment No. 3 to the 2015 License Agreement, the revenue interest in the 4 % royalty on potential future net sales of Vaxcyte products other than Vaxcyte’s PCV products reverted to the Company. The Company retains the right to discover and develop vaccines for the treatment or prophylaxis of any disease that is not caused by an infectious pathogen, including cancer. In June 2023, Blackstone made an upfront payment of $ 140.0 million to the Company and will also pay up to an additional $ 250.0 million upon the achievement of various return thresholds as set forth in the Purchase Agreement. Under the Purchase Agreement, and in connection with its sale of the Purchased Interest, the Company has agreed to certain covenants with respect to the exercise of its rights under the 2015 License Agreement, including with respect to the Company’s right to amend, assign and terminate the 2015 License Agreement. The Purchase Agreement contains other customary terms and conditions, including representations and warranties, covenants, and indemnification obligations in favor of each party. The Company recorded the $ 140.0 million upfront payment from Blackstone as a deferred royalty obligation related to the sale of future royalties on the Company's Balance Sheets. Due to the Company's then ongoing manufacturing obligations under the 2015 License Agreement, the Company accounted for the proceeds as imputed debt and, therefore, will recognize future non-cash royalty revenues. Non-cash interest expense will be 151 recognized over the estimated life of the royalty term arrangement using the effective interest method based on the imputed interest rate derived from estimated amounts and timing of potential future royalty payments to be received from Vaxcyte. As part of the sale, the Company incurred approximately $ 3.8 million in transaction costs, which are being amortized over the estimated life of the royalty term arrangement using the effective interest method. As future royalties are earned from Vaxcyte by Blackstone, the balance of the deferred royalty obligation will be amortized over the estimated life of the royalty term arrangement. There are a number of factors that could materially affect the fair value of the deferred royalty obligation. Such factors include, but are not limited to, the amount and timing of potential future royalty payments to be earned and received by Blackstone from Vaxcyte under the 2015 License Agreement, changing standards of care, the introduction of competing products, manufacturing or other delays, intellectual property matters, adverse events that result in governmental health authority imposed restrictions on the use of the vaccine products, and other events or circumstances that could result in reduced royalty payments from Vaxcyte to Blackstone, which are not within the Company's control, and all of which would result in a reduction of non-cash royalty revenues and the non-cash interest expense over the estimated life of the royalty term arrangement. The Company periodically assesses the estimated royalty payments to be earned by Blackstone from Vaxcyte and, to the extent that the amount or timing of such payments is materially different than our original estimates, the Company will prospectively adjust the imputed interest rate and the related amortization of the deferred royalty obligation. As of December 31, 2023, our effective interest rate used to amortize the liability is 17.0 %. During the year ended December 31, 2023, the Company recognized approximately $ 12.6 million of non-cash interest expense on the deferred royalty obligation, which amount will increase such balance. As of December 31, 2023, Blackstone has not received any royalty payment from Vaxcyte and, therefore, the deferred royalty obligation has not begun to be amortized. The following table shows the activity of the deferred royalty obligation since transaction inception through December 31, 2023: December 31, 2023 (in thousands) Proceeds from the sale of future Vaxcyte royalties $ 140,000 Issuance costs ( 3,792 ) Non-cash interest expense associated with the sale of future Vaxcyte royalties 12,570 Amortization of issuance costs 336 Deferred royalty obligation related to the sale of future Vaxcyte royalties, net $ 149,114 11. Stockholders’ Equity Common Stock Holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders of the Company. The Company has reserved common stock, on an if-converted basis, for issuance as follows: December 31, 2023 2022 Common stock options issued and outstanding 7,905,032 7,310,611 Common stock awards issued and outstanding 5,244,873 3,958,478 Remaining shares reserved for issuance under 2018 Equity Incentive Plan and 2021 Equity Inducement Plan 1,777,919 1,541,706 Shares reserved for issuance under 2018 Employee Stock Purchase Plan 914,911 865,995 Warrants to purchase common stock 127,616 127,616 Total 15,970,351 13,804,406 152 Preferred Stock As of December 31, 2023 and 2022, the Company had 10,000,000 shares of preferred stock authorized with a par value of $ 0.001 per share. No shares of preferred stock were outstanding as of December 31, 2023 and 2022. 12. Equity Incentive Plans, Equity Inducement Plans, Employee Stock Purchase Plan and Stock-Based Compensation 2004 Equity Incentive Plan, 2018 Equity Incentive Plan, 2021 Equity Inducement Plan, and Amended and Restated 2021 Equity Inducement Plan In September 2018, the Company adopted the 2018 Equity Incentive Plan (“2018 Plan”), which became effective on September 25, 2018. As a result, the Company will not grant any additional awards under the 2004 Equity Incentive Plan (“2004 Plan”). The terms of the 2004 Plan and applicable award agreements will continue to govern any outstanding awards thereunder. In addition to the shares of common stock reserved for future issuance under the 2004 Plan that were added to the 2018 Plan upon its effective date, the Company initially reserved 2,300,000 shares of common stock for issuance under the 2018 Plan. In addition, the number of shares of common stock reserved for issuance under the 2018 Plan will automatically increase on the first day of January for a period of up to ten years , commencing on January 1, 2019, in an amount equal to 5 % of the total number of shares of the Company’s capital stock outstanding on the last day of the preceding year (rounded to the nearest whole share), or a lesser number of shares determined by the Company’s board of directors. As a result, common stock reserved for issuance under the 2018 Plan was increased by 2,874,977 shares on January 1, 2023. In August 2021, the Company adopted the 2021 Equity Inducement Plan (“2021 Plan”), which became effective on August 4, 2021. Upon its effective date, the Company initially reserved 750,000 shares of common stock for issuance pursuant to non-qualified stock options and restricted stock units (“RSUs”) under the 2021 Plan. In accordance with Rule 5635(c)(4) of the Nasdaq listing rules, equity awards under the 2021 Plan may only be made to an employee if he or she is granted such equity awards in connection with his or her commencement of employment with the Company and such grant is an inducement material to his or her entering into employment with the Company or such subsidiary. In addition, awards under the 2021 Plan may only be made to employees who have not previously been an employee or member of the Board (or any parent or subsidiary of the Company) or following a bona fide period of non-employment of the employee by the Company (or a parent or subsidiary of the Company). At all times the Company will reserve and keep available a sufficient number of shares as will be required to satisfy the requirements of all outstanding awards granted under the 2021 Plan. In August 2022, the Company amended and restated the 2021 Plan (the “Amended and Restated 2021 Plan”) and reserved an additional 750,000 shares of common stock available for issuance under the Amended and Restated 2021 Plan to be granted by the Company to certain employees as a material inducement to their acceptance of employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4). Additionally, in February 2023, the Company amended and restated the Amended and Restated 2021 Plan and reserved an additional 500,000 shares of common stock available for issuance under the Amended and Restated 2021 Plan to be granted by the Company to certain employees as a material inducement to their acceptance of employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4). The total number of shares reserved for issuance pursuant to the Amended and Restated 2021 Plan is 2,000,000 shares. As of December 31, 2023, the Company had 1,777,919 shares available for grant under the 2018 Plan and the 2021 Plan. 153 The following table summarizes option activity under the Company’s 2004 Plan, 2018 Plan and 2021 Plan: Shares Weighted- Average Exercise Price Weighted- Average Remaining Contract Term (Years) Aggregate Intrinsic Value (in thousands) Stock options outstanding at December 31, 2022 7,310,611 $ 12.68 6.66 $ 2,187 Granted 1,611,500 5.35 Exercised ( 53,060 ) 5.92 Canceled and forfeited ( 964,019 ) 12.63 Stock options outstanding at December 31, 2023 7,905,032 $ 11.24 6.02 $ 180 Stock options exercisable at December 31, 2023 5,717,050 $ 12.42 5.14 $ 14 The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between our closing stock price on the last trading day of fiscal 2023 and the exercise prices, multiplied by the number of in-the-money stock options) that would have been received by the stock option holders had all stock option holders exercised their stock options on December 31, 2023. For the years ended December 31, 2023, 2022 and 2021, the aggregate intrinsic value of stock options exercised was $ 30,000 , $ 0.1 million and $ 2.8 million, respectively, determined at the date of the option exercise. Employee Stock Options Valuation For determining stock-based compensation expense, the fair-value-based measurement of each employee stock option was estimated as of the date of grant using the Black-Scholes option pricing model with assumptions as follows: Year Ended December 31, 2023 2022 2021 Expected term (in years) 5.3 - 6.1 5.3 - 6.1 5.3 - 6.1 Expected volatility 80.7 %- 84.1 % 81.8 %- 83.5 % 80.9 %- 84.9 % Risk-free interest rate 3.6 %- 4.7 % 1.7 %- 4.2 % 0.6 %- 1.3 % Expected dividend - - - Expected Term —The expected term represents the period that the stock-based awards are expected to be outstanding. The Company used the “simplified” method to determine the expected term of options granted, which calculates the expected term as the average of the weighted-average vesting term and the contractual term of the option. Expected Volatility —Since the Company has limited information available on the volatility of its common stock due to its short trading history, the expected volatility was estimated based on the average historical volatilities of common stock of comparable publicly traded entities over a period equal to the expected term of the stock option grants. 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 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 options. Expected Dividend — The Company has never paid dividends on its common stock. Therefore, the Company used an expected dividend of zero . Using the Black-Scholes option-valuation model, the weighted-average estimated grant-date fair value of employee stock options granted during the years ended December 31, 2023, 2022 and 2021 was $ 3.84 , $ 5.03 and $ 14.24 per share, respectively. 154 Restricted Stock Units Restricted stock units (“RSUs”) are share awards that entitle the holder to receive freely tradable shares of the Company’s common stock upon vesting. The RSUs cannot be transferred and the awards are subject to forfeiture if the holder’s employment terminates prior to the release of the vesting restrictions. The RSUs generally vest over a four-year period provided the employee remains continuously employed with the Company. The fair value of the RSUs is equal to the closing price of the Company’s common stock on the grant date. A summary of the status and activity of non-vested RSUs for the year ended December 31, 2023 is as follows: Number of Shares Weighted Average Grant-Date Fair Value Non-vested December 31, 2022 3,958,478 $ 11.70 Granted 2,823,725 5.41 Released ( 1,155,644 ) 12.31 Canceled ( 381,686 ) 9.92 Non-vested December 31, 2023 5,244,873 $ 8.31 2018 Employee Stock Purchase Plan In September 2018, the Company adopted the 2018 Employee Stock Purchase Plan (“ESPP”), which became effective on September 26, 2018, in order to enable eligible employees to purchase shares of the Company’s common stock. The Company initially reserved 230,000 shares of common stock for sale under the ESPP. The aggregate number of shares reserved for sale under the ESPP will automatically increase on the first day of January for a period of up to ten years, commencing on January 1, 2019, in an amount equal to 1 % of the total number of shares of the Company’s capital stock outstanding on the last day of the preceding year (rounded to the nearest whole share), or a lesser number of shares determined by the Company’s board of directors. As a result, common stock reserved for issuance under the ESPP was increased by 574,995 shares on January 1, 2023. The aggregate number of shares issued over the term of the Company’s ESPP, subject to stock-splits, recapitalizations or similar events, may not exceed 2,300,000 shares of the Company’s common stock. The fair value of the ESPP shares is estimated using the Black-Scholes option pricing model. For the years ended December 31, 2023, 2022 and 2021, the fair value of ESPP shares was estimated using the following assumptions: Year Ended December 31, 2023 2022 2021 Expected term (in years) 0.5 0.5 0.5 Expected volatility 79.6 - 89.9 % 65.9 - 88.1 % 65.9 - 111.4 % Risk-free interest rate 3.8 %- 5.5 % 0.1 %- 3.8 % 0.1 % Expected dividend - - - During the years ended December 31, 2023, 2022 and 2021, 526,079 , 270,516 , and 145,809 shares, respectively, had been purchased. As of December 31, 2023, 914,911 shares were available for future issuance under the ESPP. Stock-Based Compensation Expense The Company believes that the fair value of the stock options, RSUs and ESPP shares is more reliably measurable than the fair value of services received. 155 Total stock-based compensation expense recognized was as follows: Year Ended December 31, 2023 2022 2021 (in thousands) Research and development expense: Stock options $ 2,183 $ 2,287 $ 2,208 Restricted stock units 8,885 7,227 4,280 ESPP 764 592 638 Subtotal 11,832 10,106 7,126 General and administrative expense: Stock options 6,066 10,261 11,045 Restricted stock units 6,796 5,781 4,920 ESPP 214 156 150 Subtotal 13,076 16,198 16,115 Total $ 24,908 $ 26,304 $ 23,241 As of December 31, 2023, unrecognized stock-based compensation expense related to the unvested stock options and RSUs granted was $ 11.0 million and $ 30.9 million, respectively. The remaining unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.0 years and 2.3 years, respectively. As of December 31, 2023, there is $ 0.3 million of unrecognized stock-based compensation expense related to the ESPP. 13. Income Taxes Current provision for income taxes consists of the following: Year Ended December 31, 2023 2022 2021 (in thousands) Federal $ 16,646 $ - $ - State 603 - - Foreign 943 2,500 - Total current provision for income taxes $ 18,192 $ 2,500 $ - For the year ended December 31, 2023, the Company recognized an income tax expense of $ 18.2 million. The income tax charge for the year ended December 31, 2023, was primarily due to unfavorable book-tax differences related to capitalizing and amortizing research and development expenditures under Internal Revenue Code, or IRC, Section 174, the upfront payment from the sale of future royalties, deferred revenue, foreign income tax, and IRC Section 382 limitations imposed on the utilization of the Company's historical tax attributes as a result of cumulative ownership changes that the Company experienced in prior years. The effective tax rates for the year ended December 31, 2023 vary from the U.S. federal statutory tax rate of 21 % primarily due to the Company’s inability to recognize the benefit from its net deferred tax assets, which are offset by a valuation allowance. The Company has established a full valuation allowance against its net deferred tax assets due to the uncertainty surrounding the realization of such assets. All losses to date have been incurred domestically. The Company recorded a foreign income tax charge of $ 2.5 million during the year ended December 31, 2022, due to a withholding tax in China on its license revenue from Tasly. 156 The effective tax rate of the Company’s provision (benefit) for income taxes differs from the federal statutory rate as follows: Year Ended December 31, 2023 2022 2021 Federal statutory rate 21.0 % 21.0 % 21.0 % State tax ( 0.6 ) - - Change in valuation allowance ( 41.2 ) ( 26.2 ) ( 24.7 ) Tax credits ( 0.7 ) 5.1 3.7 Stock compensation ( 3.2 ) ( 3.2 ) ( 0.2 ) Foreign-Derived Intangible Income deduction 1.5 - - Foreign withholding ( 1.1 ) ( 2.1 ) - Other 3.7 3.3 0.2 Total ( 20.6 )% ( 2.1 )% 0 % The components of the Company’s deferred tax assets consist of the following: December 31 2023 2022 (in thousands) Deferred tax assets: Net operating loss carryforwards $ 37,231 $ 60,952 Research and development credits 32,800 40,396 Capitalized research and development expenditure 46,260 24,481 Deferred royalty obligation 31,944 - Deferred revenue 15,274 - Accruals and other 5,309 3,849 Operating lease liability 6,335 7,471 Stock based compensation 5,613 4,562 Fixed asset basis - 663 Total deferred tax assets 180,766 142,374 Less: valuation allowance ( 167,693 ) ( 131,228 ) Gross deferred tax assets 13,073 11,146 Deferred tax liabilities: Operating lease right-of-use asset ( 4,887 ) ( 5,783 ) Fixed asset basis ( 809 ) - Vaxcyte investment ( 7,377 ) ( 5,363 ) Total deferred tax liabilities ( 13,073 ) ( 11,146 ) Total net deferred tax assets $ - $ - Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. Due to the Company’s history of operating losses and future sources of taxable income, the Company believes that the realization of the deferred tax assets is currently not more likely than not to be realized and, accordingly, have provided a full valuation allowance against net deferred tax assets. For the years ended December 31, 2023, 2022 and 2021, the net increase in the valuation allowance was $ 36.5 million, $ 30.6 million and $ 26.2 million, respectively. As of December 31, 2023, the Company had federal net operating loss carryforwards of $ 140.2 million and federal general business credits from research and development expenses totaling $ 20.0 million, as well as state net operating loss carryforwards of $ 100.5 million and state research and development credits of $ 26.0 million. The federal net operating loss carryforwards will expire at various dates beginning in 2027 , and the federal credits will expire at various dates beginning in 2032 , if not utilized. The state net operating loss carryforwards will expire at various dates beginning in 2031 , if not utilized. The state research and development tax credits can be carried forward indefinitely. 157 Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50 %, as defined, over a three-year testing period. Under the Internal Revenue Code and similar state provisions, certain substantial changes in the Company's ownership could result in an annual limitation on the amount of net operating loss and credit carryforwards that can be utilized in future years to offset future taxable income. The annual limitation may result in the expiration of net operating losses and credit carryforwards before utilization. The Company completed Section 382 analysis through December 31, 2022, and concluded that the Company experienced an ownership change on November 20, 2019, and December 31, 2022. If there is subsequent event or further change in ownership, these losses may be subject to limitations, resulting in their expiration before they can be utilized. The Company files U.S. federal and state tax returns with varying statutes of limitations. Due to net operating loss and credit carryforwards, all of the tax years since inception through the 2022 tax year remain subject to examination by the U.S. federal and some state authorities. The actual amount of any taxes due could vary significantly depending on the ultimate timing and nature of any settlement. The amount of unrecognized tax benefits, if recognized, that would affect the effective tax rate is $ 8.7 million, $ 8.6 million and $ 6.4 million as of December 31, 2023, 2022 and 2021, respectively. One or more of these unrecognized tax benefits could be subject to a valuation allowance if and when recognized in a future period, which could impact the timing of any related effective tax rate benefit. The Company believes that the amount by which the unrecognized tax benefits may increase or decrease within the next 12 months is not estimable. The Company has elected to recognize, if incurred, interest and penalties related to liabilities for uncertain tax positions as a part of income tax expense. Interest and penalties were immaterial during the year ended December 31, 2023. The Company determines its uncertain tax positions based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings is more likely than not to be sustained upon examination by the relevant income tax authorities. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows: December 31 2023 2022 2021 (in thousands) Gross unrecognized tax benefit at January 1 $ 8,649 $ 6,409 $ 4,902 Additions for tax positions taken in the current year 2,631 2,255 1,492 Additions / (Reductions) for tax positions of prior years ( 2,550 ) ( 15 ) 15 Gross unrecognized tax benefit at December 31 $ 8,730 $ 8,649 $ 6,409 14. Net Loss Per Share The following table sets forth the computation of the Company’s basic and diluted net loss per share. Year Ended December 31, 2023 2022 2021 (in thousands, except share and per share amounts) Numerator: Net loss $ ( 106,793 ) $ ( 119,204 ) $ ( 105,538 ) Denominator: Shares used in computing net loss per share 60,163,542 50,739,185 46,119,089 Net loss per share, basic and diluted $ ( 1.78 ) $ ( 2.35 ) $ ( 2.29 ) 158 The following common stock equivalents were excluded from the computation of diluted net loss per share for the years ended December 31, 2023, 2022 and 2021 because including them would have been antidilutive: Year Ended December 31, 2023 2022 2021 Common stock options issued and outstanding 7,905,032 7,310,611 6,512,086 Restricted stock units issued and outstanding 5,244,873 3,958,478 2,403,826 Warrants to purchase common stock 127,616 127,616 127,616 Shares to be issued under ESPP 226,490 150,532 54,759 Total 13,504,011 11,547,237 9,098,287 159 Item 9. Changes in and Disagreements with Acco untants on Accounting and Financial Disclosure None.