Shattuck Labs, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our audited financial statements and related notes appearing in this Annual Report on Form 10-K. This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this report entitled “Risk Factors.” You should carefully read the “Cautionary Note About Forward-Looking Statements” and “Risk Factors” sections of this Annual Report on Form 10-K to gain an understanding of the important factors that could cause actual results to differ materially from the results described below. Overview We are an innovative clinical-stage biotechnology company pioneering the development of dual-sided fusion proteins as an entirely new class of biologic medicine. We have created a novel approach to immune modulation by designing biologics with structural characteristics that are not achievable by existing therapeutic modalities, including monoclonal or bispecific antibodies. Compounds derived from our proprietary Agonist Redirected Checkpoint, or ARC, platform simultaneously inhibit checkpoint molecules and activate costimulatory molecules within a single therapeutic. Our lead product candidate, SL-172154, is designed to simultaneously inhibit the CD47/SIRPα macrophage checkpoint interaction and activate the CD40 costimulatory receptor to induce an antitumor immune response. Coupling CD40 activation with CD47 inhibition differentiates SL-172154 from all other clinical-stage CD47/SIRPα inhibitors in development, and in our published preclinical studies, SL-172154 resulted in superior antitumor immunity as compared to certain CD47/SIRPα inhibitors. We are pursuing a broad clinical development strategy in both hematologic and solid tumors, with multiple ongoing clinical trials. SL-172154 is in an ongoing Phase 1 clinical trial for the treatment of patients with ovarian cancer. In addition to our clin ical trials in solid tumors, we are also evaluating SL-172154 in an ongoing Phase 1 clinical trial for the treatment of patients with certa in hematologic malignancies, including acute myeloid leukemia, or AML, and higher-risk myelodysplastic syndromes, or HR-MDS. We believe our clinical development plan will provide both first-in-class and best-in-class development opportunities for SL-172154. Our second product candidate, SL-279252, is designed to simultaneously inhibit the PD-1/PD-L1 interaction and activate the OX40 costimulatory receptor and is in an ongoing Phase 1 clinical trial in patients with advanced solid tumors. In November 2021, at the 36 th annual meeting of the Society for Immunotherapy of Cancer, or the SITC Meeting, we announced initial clinical data from our ongoing Phase 1 clinical trials for SL-172154 in ovarian cancer and for SL-279252 in advanced solid tumors and lymphoma. We believe that these data generated in human cancer patients have demonstrated that the unique protein engineering and physical properties of the ARC platform have led to a differentiated profile in terms of safety and on-target immune activation as compared to monoclonal or bispecific antibodies. In addition to our clinical-stage ARC product candidates, we possess a deep pipeline of preclinical immuno-oncology candidates. As an example, SL-9258, an ARC in preclinical development, is designed to inhibit the TIGIT/PVR checkpoint interaction while simultaneously activating HVEM and LTβ costimulatory receptors. Furthermore, our expertise in dual-sided fusion proteins has led to the development of a second novel platform technology. We call this our gamma delta T cell engager, or GADLEN, platform. 51 We plan to nominate a third clinical product candidate from our preclinical pipeline in 2022. Longer-term, we are pursuing additional disease areas, including autoimmune diseases, where our dual-sided fusion protein platforms may provide advantages over current treatment modalities. Overview of Operations Since our inception in 2016, we have devoted substantially all of our resources to developing and perfecting our intellectual property rights, conducting research and development activities, including undertaking nonclinical studies of our product candidates, conducting clinical trials of our most advanced product candidates, manufacturing our product candidates, organizing and staffing our company, business planning, and raising capital. We do not have any products approved for sale, and we have not generated any revenue from product sales. We have funded our operations as of the filing date of this Annual Report on Form 10-K through the net proceeds from our initial public offering of approximately $213.5 million, the sale of redeemable convertible preferred stock for approximately $152.9 million, the issuance of convertible notes for approximately $10.5 million and payments received pursuant to our collaboration agreement with Takeda for approximately $82.0 million. For the years ended December 31, 2021 and 2020, our net loss was $45.0 million and $36.6 million, respectively. We have not been profitable since inception, and as of December 31, 2021, we had an accumulated deficit of $117.1 million and $268.8 million in cash and cash equivalents and short-term investments. We expect to continue to incur significant expenses and increasing operating losses in the near term. We expect our expenses will increase substantially in connection with our ongoing activities, as we: • continue to advance the nonclinical and clinical development of our clinical-stage product candidates, SL-172154 and SL-279252; • initiate nonclinical studies and clinical trials for additional product candidates that we may identify in the future; • manufacture sufficient quantities of bulk drug substance and drug product to support our ongoing and planned nonclinical studies and clinical trials; • continue our process development efforts for our current and future product candidates; • expand our operational, financial, and management systems; • increase personnel and infrastructure to support our clinical development, research and manufacturing efforts; • build out and expand our in-house process development and manufacturing capabilities; • continue to develop, perfect, and defend our intellectual property portfolio; and • incur additional legal, accounting, or other expenses in operating our business, including the additional costs associated with operating as a public company. We do not expect to generate significant product revenue unless and until we successfully complete development and obtain regulatory and marketing approval of, and begin to sell, one or more of our product candidates, which we expect will take several years. We expect to spend a significant amount in development and marketing costs prior to such time. We may never succeed in achieving regulatory and marketing approval for our product candidates. We may obtain unexpected results from our nonclinical and clinical trials. We may elect to discontinue, delay, or modify nonclinical and clinical trials of our product candidates. A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. Accordingly, until such time as we can generate significant product revenue, if ever, we expect to continue to seek private or public equity and debt financing to meet our capital requirements. There can be no assurance that such funding may be available to us on acceptable terms, or at all, or that we will be able to commercialize our product candidates. In addition, we may not be profitable even if we commercialize any of our product candidates. COVID-19 Pandemic There is significant uncertainty as to the future effects of the ongoing COVID-19 pandemic, which may, among other things, materially impact our business, including our ongoing and planned clinical trials. We have experienced, and expect to continue to experience, delays in our SL-172154 and SL-279252 clinical trials as a result of the ongoing pandemic. Our manufacturing operations have been impacted by the ongoing pandemic, including delays with our third-party manufacturer and difficulties in obtaining raw materials needed to manufacture material for our clinical trials. Additionally, we have experienced, and expect to continue to experience, delays in enrolling patients, missed treatments for enrolled patients, and performance delays from certain third-party vendors supporting the SL-172154 and SL-279252 clinical trials, although the significance of any future delays is difficult to predict. 52 Further, due to public health guidance measures, we have in the past implemented, and may in the future implement, a work-from-home policy for our employees, excluding those necessary to maintain minimum basic operations, which may negatively impact productivity, or disrupt, delay, or otherwise adversely impact our business. For example, some of our research activities that require our personnel to be in our laboratories may be delayed. We may also experience delays or disruptions to our operations if and when our employees need to take time off work due to illness or other COVID-19-related impacts to our workforce. Due to the impact of the COVID-19 pandemic and work-from-home policies and other operational limitations mandated by federal, state and local governments as a result of the pandemic, certain of our research and development activities, including the conduct of nonclinical studies, have been delayed and may be further delayed and other aspects of our business, such as the conduct of various corporate functions and the ability of our Board and management to provide oversight and guidance may be adversely impacted until such operational limitations are lifted. The COVID-19 pandemic or local outbreaks associated with the COVID-19 pandemic could result in difficulty manufacturing our product candidates, securing clinical trial site locations, contract research organizations, or CROs; and/or trial monitors and other critical vendors and consultants supporting our clinical trials. In addition, outbreaks or the perception of an outbreak near a clinical trial site location could impact our ability to enroll patients or to complete all scheduled physician visits for currently enrolled patients. These situations, or others associated with COVID-19 pandemic, could cause delays in our clinical trial plans and could increase expected costs, all of which could have a material adverse effect on our business and its financial condition. At the current time, we are unable to quantify the potential effects of the COVID-19 pandemic on our future operations. Collaboration Agreement On August 8, 2017, we entered into a Collaboration Agreement with Millennium Pharmaceuticals, Inc., or Takeda, a wholly owned subsidiary of Takeda Pharmaceutical Company, Ltd., or the Collaboration Agreement. The Collaboration Agreement was mutually terminated pursuant to the termination agreement, or the Termination Agreement, dated November 8, 2021. Under the terms of the Termination Agreement, we are not required to satisfy any remaining performance obligations, we will not make any payments to or receive any future milestone or royalty payments from Takeda, and all options to license and rights of first negotiation held by Takeda under the Collaboration Agreement were terminated. The remaining deferred revenue was recognized as revenue in the fourth quarter of 2021. Components of our Results of Operation Collaboration Revenue - Related Party We have no products approved for commercial sale, and we have not generated any revenue from commercial product sales. Our total revenue to date has been generated solely from our Collaboration Agreement with Takeda, which was terminated in November 2021. We expect that any collaboration revenue we may generate from any future collaboration partners will fluctuate from period to period. We have received cash of $3.6 million and $14.0 million for the years ended December 31, 2021 and 2020, respectively, from Takeda under the Collaboration Agreement. We have recognized total aggregate revenue of $82.0 million through December 31, 2021 under the Collaboration Agreement. Operating Expense Research and Development Expense Our research and development expenses consist primarily of costs incurred in connection with the discovery and development of our product candidates. These expenses include: • expenses incurred to conduct our clinical trials and nonclinical studies; • costs of manufacturing clinical trial and nonclinical study materials, including the costs of raw materials required for manufacturing; • process development activities to optimize manufacturing processes; • employee-related expenses, including salaries, benefits, and stock-based compensation; • fees paid to third parties who assist with research and development activities; • expenses relating to regulatory activities, including filing fees paid to regulatory agencies; • laboratory materials and supplies used to support our research activities; and • allocated expenses for facility-related costs. 53 The following table summarizes our research and development expenses by product candidate: Year ended December 31, (in thousands) 2021 2020 SL-172154 $ 15,708 $ 6,478 SL-279252 10,804 16,362 Other pipeline candidates 14,031 6,210 Internal costs, including personnel related benefits, facilities, and depreciation 16,020 8,433 $ 56,563 $ 37,483 Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials, including increased demand for clinical trial material. We expect our research and development expenses to increase significantly over the next several years as we conduct additional nonclinical studies and clinical trials, including later-stage clinical trials, for our current and future product candidates and pursue regulatory approval of our product candidates. The process of conducting the necessary nonclinical 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 for our product candidates; • investment in our clinical programs; • competition; • manufacturing capability; and • commercial viability. We may never succeed in achieving regulatory approval for any of our product candidates due to 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, if ever. General and Administrative Expense General and administrative expense consists primarily of personnel expenses, including salaries, benefits, and stock-based compensation expense, for employees and consultants in executive, finance, accounting, legal, information technology and human resource functions. General and administrative expense also includes corporate facility costs, including rent, utilities, depreciation, and maintenance, not otherwise included in research and development expense, as well as legal fees related to intellectual property and corporate matters and fees for accounting and tax services. We expect that our general and administrative expense will increase in the future to support our growing research and development activities and as a result of the increased costs of operating as a public company. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers, and accountants, among other expenses. Additionally, we anticipate increased costs associated with being a public company, including expenses related to services associated with maintaining compliance with the requirements of Nasdaq and the Securities and Exchange Commission, or SEC, insurance, and investor relations costs. If any of our current or future product candidates obtains regulatory approval, we expect that we would incur significantly increased expenses associated with building a sales and marketing team. Interest Income Interest income consists of interest earned on our cash, cash equivalents and short-term investments, which consists of amounts held in a money market fund and at various times in short-term government and corporate obligations. Income Taxes Since our inception, we have not recorded any income tax benefits for the net operating losses, or NOLs, we have incurred or for our research and development tax credits, as we believe, based upon the weight of available evidence, that it is 54 more likely than not that all of our NOLs and tax credits will not be realized. Our NOLs and tax credit carryforwards will begin to expire in 2036. We have recorded a full valuation allowance against our deferred tax assets at each balance sheet date. Results of Operations Comparison of the Years Ended December 31, 2021 and 2020 The following table sets forth our results of operations for the years ended December 31, 2021 and 2020. Year Ended December 31, Change (in thousands) 2021 2020 Dollar Percentage Collaboration revenue - related party $ 30,017 $ 9,934 $ 20,083 202.2 % Operating expenses: Research and development 56,563 37,483 19,080 50.9 % General and administrative 18,723 9,382 9,341 99.6 % Loss from operations (45,269) (36,931) (8,338) 22.6 % Other income (expense): Interest income 625 549 76 13.8 % Other (330) (221) (109) 49.3 % Net loss $ (44,974) $ (36,603) $ (8,371) 22.9 % Collaboration Revenue - Related Party Collaboration revenue increased by $20.1 million, or 202.2%, to $30.0 million for the year ended December 31, 2021 from $9.9 million for the year ended December 31, 2020. The Collaboration Agreement with Takeda was mutually terminated pursuant to the Termination Agreement and all remaining deferred revenue under the Collaboration Agreement was recognized in the fourth quarter of 2021. The increase was primarily attributable to the recognition of the remainder of the deferred revenue associated with the Collaboration Agreement. Research and Development Expense Research and development expenses increased by $19.1 million, or 50.9%, to $56.6 million for the year ended December 31, 2021 from $37.5 million for the year ended December 31, 2020. The increase was primarily attributable to an increase of $6.4 million in personnel costs as a result of an increase in headcount to expand our manufacturing and clinical development capabilities, an increase of $5.8 million in manufacturing and clinical costs, an increase of $3.1 million in assay development and nonclinical pipeline costs and an increase of $2.0 million in laboratory and facilities related costs. The remaining $1.8 million increase primarily resulted from an increase in depreciation and outside service fees. General and Administrative Expense General and administrative expenses increased by $9.3 million, or 99.6%, to $18.7 million for the year ended December 31, 2021 from $9.4 million for the year ended December 31, 2020. The increase was primarily due to a $5.0 million increase in personnel-related costs driven by higher employee headcount needed to support our growing research and development activities, and a $3.3 million increase for costs associated with being a public company. Interest Income Interest income increased by $0.1 million to $0.6 million for the year ended December 31, 2021 from $0.5 million for the year ended December 31, 2020. Liquidity and Capital Resources Since our inception, our primary sources of liquidity have been generated by sales of our preferred stock and common stock, including our initial public offering, or IPO, and through our Collaboration Agreement with Takeda. As of December 31, 2021, we had an accumulated deficit of $117.1 million and $268.8 million of cash and cash equivalents and short-term investments. Capital Resources and Funding Requirements Our primary uses of cash and cash equivalents and short-term investments are to fund our operations, which consist primarily of research and development expenditures related to our programs, product development costs, research expenses, administrative support, capital expenditures related to bringing in-house certain process development and manufacturing 55 capabilities and working capital requirements. We anticipate incurring additional net losses and negative cash flows from operations in the near future until such time, if ever, that we can generate significant sales of our product candidates currently in development. Our future funding requirements will depend on many factors, including: • the scope, timing, progress, and results of discovery, nonclinical development, laboratory testing, and clinical trials for our product candidates; • the costs of process development and scale-up of a commercially ready manufacturing process to support registrational clinical trials; • the costs of manufacturing our product candidates for clinical trials and in preparation for marketing approval and commercialization; • the extent to which we enter into collaborations or other arrangements with additional third parties in order to further develop our product candidates; • the costs of preparing, filing and prosecuting patent applications, maintaining, and enforcing our intellectual property rights and defending other intellectual property-related claims; • the costs and fees associated with the discovery, acquisition, or in-license of additional product candidates or technologies; • the costs of future commercialization activities, if any, including establishing sales, marketing, manufacturing, distribution, and storage capabilities, for any of our product candidates for which we receive marketing approval; and • revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval. Until we obtain regulatory approval to market our product candidates, if ever, we cannot generate revenues from sales of our products. Even if we are able to sell our products, we may not generate a sufficient amount of product revenues to finance our cash requirements. Accordingly, it will be necessary for us to seek to raise additional capital through equity offerings and/or debt financings or from other potential sources of liquidity, which may include new collaborations, licensing or other commercial agreements for one or more of our development programs or patent portfolios. There can be no assurance that such funding may be available to us on acceptable terms, or at all. The issuance of equity securities may result in dilution to stockholders and the issuance of debt securities may have rights, preferences and privileges senior to those of our common stock and the terms of any such debt securities could impose significant restrictions on our operations. The failure to raise funds as and when needed could have a negative impact on our financial condition and ability to pursue our business strategies. Additionally, if additional funding is not secured when required, we may need to delay or curtail our operations until such funding is received, which would have a material and adverse impact on our business prospects and results of operations. We believe that our cash and cash equivalents and short-term investments as of December 31, 2021 are sufficient to fund projected operations into the second half of 2024. Cash Flows The following table shows a summary of our cash flows for the periods indicated: Year ended December 31, (in thousands) 2021 2020 Net cash used in operating activities $ (57,116) $ (33,659) Net cash used in investing activities (10,443) (146,322) Net cash provided by financing activities 1,929 330,866 Net (decrease) increase in cash and cash equivalents $ (65,630) $ 150,885 Net Cash Used in Operating Activities During the year ended December 31, 2021, net cash used in operating activities was $57.1 million and primarily reflected our net loss of $45.0 million, offset primarily by noncash charges of $6.8 million in stock-based compensation and depreciation, $3.0 million in net amortization of premium on short-term investments and a $22.0 million net change in our operating assets and liabilities. We expect our operating activities expenses to increase as we continue to conduct our clinical trials and nonclinical studies, incur costs of manufacturing clinical trial and nonclinical study materials and continue process development activities to optimize our manufacturing processes. 56 During the year ended December 31, 2020, net cash used in operating activities was $33.7 million and primarily reflected our net loss of $36.6 million, offset primarily by noncash charges of $1.9 million in stock-based compensation and depreciation and a $1.1 million net change in our operating assets and liabilities. Net Cash Used in Investing Activities During the year ended December 31, 2021, net cash used in investing activities was $10.4 million of which $204.1 million was used to purchase short-term investments, $201.6 million was received from the sale of short-term investments and $7.9 million was used to purchase property and equipment. During the year ended December 31, 2020, net cash used in investing activities was $146.3 million of which $183.2 million was used to purchase short-term investments, $37.6 million was received from the sale of short-term investments and $0.7 million was used to purchase property and equipment. Net Cash Provided by Financing Activities During the year ended December 31, 2021, net cash provided by financing activities was $1.9 million and was from the exercise of stock options and ESPP purchases. During the year ended December 31, 2020, net cash provided by financing activities was $330.9 million and was primarily from the sale of our Series B and B-1 redeemable convertible preferred stock and proceeds from our initial public offering. Contractual Obligations and Other Commitments The following table summarizes our contractual obligations and commitments at December 31, 2021: (in thousands) Less than 1 year 1 to 3 years 3 to 5 years More than 5 years Total Operating lease obligations $ 1,058 $ 2,209 $ 2,245 $ 1,721 $ 7,233 Total $ 1,058 $ 2,209 $ 2,245 $ 1,721 $ 7,233 The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum, or variable price provisions, and the approximate timing of the actions under the contracts. Payments due upon cancellation consisting only of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to the date of cancellation are not included in the preceding tables as the amount and timing of such payments are not known. We have not included any potential contingent payments upon the achievement by us of specified regulatory and commercial events, as applicable, or patent prosecution or royalty payments we may be required to make under the Heat License Agreement (as defined below). We have excluded these potential payments in the preceding tables because the timing and likelihood of these contingent payments are not currently known and would be difficult to predict or estimate. Contractual obligations represent future cash commitments and liabilities under agreements with third parties, and exclude contingent liabilities for which we cannot reasonably predict future payment. Our contractual obligations result primarily from obligations for various contract manufacturing organizations, or CMO, and clinical research organizations, or CROs, which include potential payments we may be required to make under its agreements. The contracts also contain variable costs and milestones that are hard to predict. The timing of payments and actual amounts paid under CMO and CRO agreements may be different depending on the timing of receipt of goods or services or changes to agreed-upon terms or amounts for some obligations. Also, those agreements are cancellable upon written notice by us and, therefore, not long-term liabilities. Heat License Agreement In June 2016, we entered into an Exclusive License Agreement, or the Heat License Agreement, with Heat Biologics Inc., or Heat. The Heat License Agreement was subsequently amended in November 2016, December 2016, and March 2017. Pursuant to the Heat License Agreement, Heat granted to us a worldwide, sublicensable exclusive license to research, develop, manufacture, and commercialize products under three provisional patent applications, including all patents issuing from such applications, or the Fusion Protein Patent Rights and a worldwide, sublicensable nonexclusive license to research, develop, manufacture, and commercialize certain know-how owned and controlled by Heat related to the Fusion Protein Patent Rights. Under the Heat License Agreement, Heat was required to conduct certain research and development services under a mutually-agreed upon research and development plan and Heat was eligible to receive financial support from us for these efforts. Effective March 2017, Heat completed all research and development services under the Heat License Agreement and assigned to us three patent applications and all data derived from the research and development activities, referred to collectively as the Research Services Inventions. Pursuant to the terms of the Heat License Agreement, we are obligated to use 57 commercially reasonable efforts to diligently research and develop at least one product covered by the Fusion Protein Patent Rights, including the obligation to file an IND application for such product. Our development efforts, including the development of SL-279252 and certain other ARC compounds, to date satisfy these obligations. Unless sooner terminated or extended, the term of the Heat License Agreement continues until the later of 20 years following the effective date and the expiration of the last-to-expire royalty term. Either party may terminate the agreement due to a material breach by the other party (subject to a 90-day cure period) or if the other party files for bankruptcy. In the event we terminate the Heat License Agreement due to a material breach by Heat, Heat must assign to us all right, title, and interest in the patent rights licensed under the Heat License Agreement. In addition to an upfront payment of $50,000, which we made in 2016, the Heat License Agreement requires us to make further payments to Heat in the future of up to $20.6 million in the aggregate, for the achievement of specified development, regulatory, and commercial sale milestones for certain licensed products. We are also required to pay Heat a percentage of certain upfront fees or other non-royalty payments not tied to milestone events that we receive in connection with certain sublicenses of the Fusion Protein Patent Rights. We will be required to pay Heat a royalty on all worldwide net sales by us, our affiliates, and sublicenses of certain licensed products in the low single digits. Royalties are payable, on a product-by-product and country-by-country basis, commencing on the first commercial sale of such product and continuing until the last-to-expire valid patent claim to the licensed patent rights that cover such product in that country. Critical Accounting Policies Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, the accrual for research and development expenses, and the valuation of stock-based awards. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 2 to our financial statements included elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies are the most critical to the judgments and estimates used in the preparation of our financial statements. Revenue Recognition We have and may continue to enter into collaboration agreements with other companies. Arrangements with collaborators may include licenses to intellectual property, research and development services, manufacturing services for clinical and commercial supply, and participation on joint steering and patent committees. We evaluate the promised goods or services in the contract to determine which promises, or group of promises, represent performance obligations. In contemplation of whether a promised good or service meets the criteria required of a performance obligation, we consider the stage of development of the underlying intellectual property, the capabilities and expertise of the customer relative to the underlying intellectual property, and whether the promised goods or services are integral to or dependent on other promises in the contract. When accounting for an arrangement that contains multiple performance obligations, we develop judgmental assumptions, which may include market conditions, reimbursement rates for personnel costs, development timelines, and probabilities of regulatory success to determine the stand-alone selling price for each performance obligation identified in the contract. When we conclude that a contract should be accounted for as a combined performance obligation and recognized over time, we then determine the period over which revenue should be recognized and the method by which to measure revenue. We generally recognize revenue using a cost-based input method. We recognize collaboration revenue when our customer or collaborator obtains control of promised goods or services, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. To determine revenue recognition for such arrangements, we perform 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; 58 iv. allocate the transaction price to the performance obligations within the contract; and v. recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts when we determine that it is probable we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, we assess the goods or services promised within the contract to determine whether each promised good or service is a performance obligation. The promised goods or services in the arrangement consist of a license to our intellectual property and research, development and manufacturing services. We may provide options to additional items in such arrangements, which are accounted for as separate contracts when the customer elects to exercise such options, unless the option provides a material right to the customer. Performance obligations are promises in a contract to transfer a distinct good or service to the customer that (i) the customer can benefit from on its own or together with other readily available resources, and (ii) are separately identifiable from other promises in the contract. Goods or services that are not individually distinct performance obligations are combined with other promised goods or services until such combined group of promises meet the requirements of a performance obligation. We determine transaction price based on the amount of consideration we expect to receive for transferring the promised goods or services in the contract. Consideration may be fixed, variable, or a combination of both. At contract inception for arrangements that include variable consideration, we estimate the probability and extent of consideration we expect to receive under the contract utilizing either the most-likely amount method or expected amount method, whichever best estimates the amount expected to be received. We then consider any constraints on the variable consideration and include in the transaction price variable consideration to the extent it is deemed probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We then allocate the transaction price to each performance obligation based on the relative standalone selling price and recognize revenue as the amount of the transaction price that is allocated to the respective performance obligation when (or as) control is transferred to the customer and the performance obligation is satisfied. For performance obligations that consist of licenses and other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. We record amounts as accounts receivable when the right to consideration is deemed unconditional. When consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract, a contract liability is recorded as deferred revenue. Amounts received prior to satisfying the revenue recognition criteria are recognized as deferred revenue in our balance sheet. Deferred revenues expected to be recognized as revenue within the 12 months following the balance sheet date are classified as a current liability. Deferred revenues not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as noncurrent liabilities. Research and Development Expense Research and development expenses consist primarily of costs incurred in connection with the development of our product candidates. We expense research and development costs as incurred. We accrue expenses for manufacturing, process development, nonclinical studies and clinical trial activities performed by vendors based upon estimates of the proportion of work completed. We determine the estimates by reviewing contracts, vendor agreements and purchase orders, and through discussions with our internal personnel and external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services. However, actual costs and timing of clinical trials are highly uncertain, subject to risks and may change depending upon a number of factors, including our clinical development plan. We make estimates of our prepaid and accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known at that time. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the accrual accordingly. Nonrefundable advance payments for goods and services, including fees for process development or manufacturing and distribution of clinical supplies that will be used in future research and development activities, are deferred and recognized as expense in the period that the related goods are consumed or services are performed. Stock-Based Compensation We measure compensation expense for all share-based awards based on the estimated fair value of the share-based awards on the grant date. We use the Black-Scholes option pricing model to value our stock option awards. We recognize 59 compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period of the award. The Black-Scholes option-pricing model requires the use of subjective assumptions that include the expected stock price volatility and, for options granted prior to our IPO, the fair value of the underlying common stock on the date of grant. See Note 9 to our audited financial statements included elsewhere in this Annual Report on Form 10-K for information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options granted during the year ended December 31, 2021. Recent Accounting Pronouncements See Note 2 to our financial statements found elsewhere in this Annual Report on Form 10-K for a description of recent accounting pronouncements applicable to our financial statements. Emerging Growth Company and Smaller Reporting Company Status We are an emerging growth company as defined in the JOBS Act. Under the JOBS Act, an emerging growth company can take advantage of the extended transition period for complying with new or revised accounting standards and delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption from complying with new or revised accounting standards and, therefore, will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. We have evaluated the benefits of relying on other exemptions and reduced reporting requirements under the JOBS Act. Subject to certain conditions, as an emerging growth company, we may rely on certain of these exemptions, including without limitation exemptions to the requirements for (1) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (2) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an emerging growth company until the earlier of (a) the last day of the fiscal year (i) following the fifth anniversary of the completion of our initial public offering, (ii) in which we have total annual gross revenues of at least $1.07 billion or (iii) in which we are deemed to be a “large accelerated filer” under the rules of the SEC, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th, or (b) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. We are also a “smaller reporting company” as defined under the Exchange Act. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than $250.0 million or (ii) our annual revenue is less than $100.0 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700.0 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.