Shattuck Labs, Inc. 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are a smaller reporting company, as defined by Rule 12b-2 under the Securities and Exchange Act of 1934 and in Item 10(f)(1) of Regulation S-K, and are not required to provide the information under this item. 60 Item 8. Audited Financial Statements SHATTUCK LABS, INC. INDEX TO FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm 62 Balance Sheets as of December 31, 2021 and 2020 63 Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2021 and 2020 64 Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Years Ended December 31, 2021 and 2020 65 Statements of Cash Flows for the Years Ended December 31, 2021 and 2020 66 Notes to Financial Statements 67 61 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Shattuck Labs, Inc.: Opinion on the Financial Statements We have audited the accompanying balance sheets of Shattuck Labs, Inc. (the Company) as of December 31, 2021 and 2020, the related statements of operations and comprehensive loss, changes in redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively, 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, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, 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 these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KPMG LLP We have served as the Company’s auditor since 2018. Austin, Texas March 15, 2022 62 SHATTUCK LABS, INC. BALANCE SHEETS (In thousands, except share and per share amounts) December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 92,268 $ 157,898 Short-term investments 176,536 177,551 Prepaid expenses and other current assets 19,462 10,190 Total current assets 288,266 345,639 Property and equipment, net 9,938 3,000 Other assets 381 349 Total assets $ 298,585 $ 348,988 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 10,012 $ 1,754 Accrued expenses 14,574 7,352 Deferred revenue - related party — 7,728 Total current liabilities 24,586 16,834 Deferred rent 2,213 987 Deferred revenue - related party, net of current portion — 21,306 Total liabilities 26,799 39,127 Commitments and contingencies (Note 6) Stockholders’ equity: Common stock; $ 0.0001 par value: 300,000,000 shares authorized, 42,338,898 shares issued and outstanding at December 31, 2021 and 41,779,183 shares issued and 41,767,431 shares outstanding at December 31, 2020 5 5 Additional paid-in capital 389,408 382,012 Accumulated other comprehensive loss ( 560 ) ( 63 ) Accumulated deficit ( 117,067 ) ( 72,093 ) Total stockholders’ equity 271,786 309,861 Total liabilities and stockholders’ equity $ 298,585 $ 348,988 See accompanying notes to financial statements 63 SHATTUCK LABS, INC. STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands, except share and per share amounts) Year Ended December 31, 2021 2020 Collaboration revenue - related party $ 30,017 $ 9,934 Operating expenses: Research and development 56,563 37,483 General and administrative 18,723 9,382 Expense from operations 75,286 46,865 Loss from operations ( 45,269 ) ( 36,931 ) Other income (expense): Interest income 625 549 Other ( 330 ) ( 221 ) Total other income (expense) 295 328 Net loss $ ( 44,974 ) $ ( 36,603 ) Unrealized loss on investments ( 497 ) ( 117 ) Comprehensive loss $ ( 45,471 ) $ ( 36,720 ) Net loss per share - basic and diluted $ ( 1.07 ) $ ( 2.36 ) Weighted-average shares outstanding - basic and diluted 42,032,384 15,506,067 See accompanying notes to financial statements 64 SHATTUCK LABS, INC. STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (In thousands, except share amounts) Series A Redeemable Convertible Preferred Stock Series B Redeemable Convertible Preferred Stock Series B-1 Redeemable Convertible Preferred Stock Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity (Deficit) Shares Amount Shares Amount Shares Amount Shares Amount Balance at December 31, 2019 1,093,019 $ 49,064 — $ — — $ — 7,600,877 $ 1 $ 887 $ 54 $ ( 35,490 ) $ ( 34,548 ) Sales of Series B Redeemable convertible preferred stock, net of issuance costs — — 550,571 34,427 — — — — — — — — Sales of Series B-1 Redeemable convertible preferred stock, net of issuance costs — — — — 1,319,964 82,613 — — — — — — Conversion of Series A redeemable convertible preferred stock ( 1,093,019 ) ( 49,064 ) — — — — 7,487,151 1 49,063 — — 49,064 Conversion of Series B redeemable convertible preferred stock — — ( 550,571 ) ( 34,427 ) — — 3,771,363 1 34,426 — — 34,427 Conversion of Series B-1 redeemable convertible preferred stock — — — — ( 1,319,964 ) ( 82,613 ) 9,041,739 1 82,612 — — 82,613 Issuance of common stock upon initial public offering, net of issuance cost — — — — — — 13,664,704 1 213,529 — — 213,530 Exercise of stock options — — — — — — 181,449 — 229 — — 229 Vesting of common stock previously subject to vesting requirements — — — — — — 20,148 — — — — — Stock-based compensation expense — — — — — — — — 1,266 — — 1,266 Unrealized loss on investments — — — — — — — — — ( 117 ) — ( 117 ) Net loss — — — — — — — — — — ( 36,603 ) ( 36,603 ) Balance at December 31, 2020 — $ — — $ — — $ — 41,767,431 $ 5 $ 382,012 $ ( 63 ) $ ( 72,093 ) $ 309,861 Exercise of stock options and ESPP purchases — — — — — — 559,715 — 1,929 — — 1,929 Vesting of common stock previously subject to vesting requirements — — — — — — 11,752 — — — — — Stock-based compensation expense — — — — — — — — 5,467 — — 5,467 Unrealized loss on investments — — — — — — — — — ( 497 ) — ( 497 ) Net loss — — — — — — — — — — ( 44,974 ) ( 44,974 ) Balance at December 31, 2021 — $ — — $ — — $ — 42,338,898 $ 5 $ 389,408 $ ( 560 ) $ ( 117,067 ) $ 271,786 See accompanying notes to financial statements 65 SHATTUCK LABS, INC. STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2021 2020 Cash flows from operating activities: Net loss $ ( 44,974 ) $ ( 36,603 ) Adjustments to reconcile net loss to net cash used in operations: Stock-based compensation 5,467 1,266 Depreciation 1,380 618 Net amortization of premium on short-term investments 3,035 1 Changes in operating assets and liabilities: Prepaid expenses and other current assets ( 9,272 ) ( 6,835 ) Other assets ( 32 ) ( 326 ) Accounts payable 7,866 ( 1,751 ) Accrued expenses 6,924 3,313 Deferred revenue - related party ( 29,034 ) 6,569 Deferred rent 1,524 89 Net cash used in operating activities ( 57,116 ) ( 33,659 ) Cash flows from investing activities: Purchase of property and equipment ( 7,926 ) ( 727 ) Sale and maturities of short-term investments 201,575 37,595 Purchases of short-term investments ( 204,092 ) ( 183,190 ) Net cash used in investing activities ( 10,443 ) ( 146,322 ) Cash flows from financing activities: Proceeds from the exercises of stock options and ESPP purchases 1,929 229 Proceeds from the initial public offering — 232,301 Issuance costs of the initial public offering — ( 18,738 ) Proceeds from sale of Series B-1 redeemable convertible preferred stock — 83,000 Issuance costs of Series B-1 redeemable convertible preferred stock — ( 387 ) Proceeds from sale of Series B redeemable convertible preferred stock — 34,620 Issuance costs of Series B redeemable convertible preferred stock — ( 159 ) Net cash provided by financing activities 1,929 330,866 Net increase (decrease) in cash and cash equivalents ( 65,630 ) 150,885 Cash and cash equivalents, beginning of period 157,898 7,013 Cash and cash equivalents, end of period $ 92,268 $ 157,898 Supplemental disclosures of non-cash financial activities: Unrealized loss on short-term investments $ ( 497 ) $ ( 117 ) Unpaid amounts related to purchase of property and equipment $ 392 $ 454 See accompanying notes to financial statements 66 SHATTUCK LABS, INC. NOTES TO FINANCIAL STATEMENTS 1. Organization and Description of Business Shattuck Labs, Inc. (the “Company”) was incorporated in 2016 in the State of Delaware and is a clinical-stage biopharmaceutical company developing dual-sided fusion proteins, including its ARC ® and GADLEN ™ platforms, as novel classes of biologic medicines capable of multifunctional activity with potential applications in oncology and inflammatory diseases. Using its proprietary technology, the Company is building a pipeline of therapeutics, initially focused on the treatment of solid tumors and hematologic malignancies. The Company has two clinical-stage product candidates, SL-172154 and SL-279252, and has several compounds in preclinical development. Liquidity The Company has incurred losses and negative cash flows from operations since inception and has an accumulated deficit of $ 117.1 million as of December 31, 2021. The Company anticipates incurring additional losses and negative cash flows from operations until such time, if ever, that it can generate significant sales of its product candidates currently in development, and is highly dependent on its ability to find additional sources of funding in the form of licensing of its technology, collaboration agreements, and/or public and private debt and equity financings. Adequate additional funding may not be available to the Company on acceptable terms, or at all. The failure to raise funds as and when needed could have a negative impact on the Company’s financial condition and ability to pursue its clinical operations, research and development and commercialization of its product candidates. Management believes that the Company’s cash and cash equivalents and short-term investments of $ 268.8 million as of December 31, 2021, are sufficient to fund projected operations of the Company for at least the next twelve months. COVID-19 Pandemic On March 10, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The virus and actions taken to mitigate its spread have had, and are expected to continue to have, a broad adverse impact on the economies and financial markets of many countries, including the geographical areas in which the Company operates and conducts its business and in which the Company’s partners operate and conduct their business. The Company is currently following the recommendations of local health authorities to minimize exposure risk for its team members and visitors. However, the scale and scope of this pandemic is unknown and the duration of the business disruption and related financial impact cannot be reasonably estimated at this time. While the Company has implemented specific business continuity plans to reduce the potential impact of COVID-19, there is no guarantee that the Company’s continuity plans will be successful. The Company has already experienced disruptions to its business such as work-from-home orders for offices and similar disruptions have occurred for its partners. Specifically, the outbreak has caused disruptions in its ability to manufacture clinical trial materials, including the acquisition of raw materials needed for such manufacturing, enrollment and treatment of patients in clinical trials in process, and slowdowns and shutdowns of the laboratories and other service providers that are being relied upon in the development of the Company’s product candidates. The extent to which the COVID-19 pandemic or any other health epidemic may impact the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and the actions to mitigate its impact, among others. Accordingly, the COVID-19 pandemic could have a material adverse effect on the Company’s business, results of operations and financial condition. 2. Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation The accompanying audited financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, revenue recognition, the accrual of research and development expenses, and the valuation of stock-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates, if any, are recorded in the period in which they become known and actual results could differ from management’s estimates. A change in the Company’s estimates occurred in the second quarter of 2021, which impacted the Company’s revenue recognition and related balance sheet accounts. 67 Fair Value of Financial Instruments Fair value is defined as the price that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. Fair value measurements are classified and disclosed in one of the following categories: • Level 1: Observable inputs such as quoted prices in active markets for identical assets the reporting entity has the ability to access as of the measurement date; • Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and • Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. Fair value measurements are classified based on the lowest level of input that is significant to the measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values stated below takes into account the market for its financial assets and liabilities, the associated credit risk and other factors as required. The Company considers active markets as those in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Management believes that the carrying amounts of the Company’s financial instruments, including short-term investments and accounts payable, approximate fair value due to the short-term nature of those instruments. Concentration of Risk Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash, cash equivalents and short-term investments. The Company maintains its cash and cash equivalents at two accredited financial institutions in amounts that exceed federally-insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships. The Company invests in only highly rated debt securities that management believes protects the Company from risk of default and impairment of value. All of the Company’s revenue is derived from its collaboration agreement with Millennium Pharmaceuticals, Inc., a wholly owned subsidiary of Takeda Pharmaceutical Company Limited (“Takeda”), which was mutually terminated pursuant to the termination agreement, dated November 8, 2021. The Company is highly dependent on one third-party contract manufacturing organization (“CMO”) to supply drug products for its research and development activities of its programs, including clinical trials and non-clinical studies. These programs could be adversely affected by a significant interruption in the supply of such drug products. The Company is highly dependent on three contract research organizations (“CROs”) and a limited number of third-party service providers to manage and support its clinical trials. These programs could be adversely affected by a significant disruption in services provided by these CROs and third parties. Cash and Cash Equivalents The Company considers all demand deposits with financial institutions and all highly liquid investments with original maturities of 90 days or less at the date of purchase to be cash and cash equivalents. Cash and cash equivalents consisted of $ 14.6 million held in operating accounts and $ 77.7 million held in money market funds as of December 31, 2021 and $ 2.7 million held in operating accounts, $ 80.2 million held in money market funds and $ 75.0 million held in government obligations as of December 31, 2020. Short-Term Investments Short-term investments consist of highly-rated U.S. Treasury securities with maturities of more than three months but less than one year at the date of purchase. The Company classifies its short-term investments at the time of purchase as available-for-sale securities. Available-for-sale securities are carried at fair value. Credit impairments for available-for-sale debt securities are recorded through an allowance rather than a direct write-down of the security and are recorded through a charge to the statements of operations. Unrealized gains or losses not related to credit impairments are recorded in accumulated other comprehensive income, a component of stockholders’ equity, until realized. The Company reviews available-for-sale debt securities for impairments related to credit losses and other factors each quarter. As of December 31, 2021, there were no impairments related to credit losses of short-term investments. 68 Deferred Offering Costs The Company capitalizes certain legal, accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs will be recorded against gross proceeds. Series A, Series B and Series B-1 Redeemable Convertible Preferred Stock The Company records shares of redeemable convertible preferred stock at their respective fair values on the date of issuance, net of issuance costs. The redeemable convertible preferred stock is recorded outside of stockholders’ equity on the balance sheet because the shares contain liquidation features that are not solely within the Company’s control. Upon the completion of the Company’s initial public offering (“IPO”) in the fourth quarter of 2020, all outstanding shares of the Company’s redeemable convertible preferred stock were converted into common stock. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets include prepaid expenses for general business purposes and services used in research projects, which are stated at cost and amortized on a straight-line basis over the related period of benefit. Supplies and materials that have multiple applications for alternative future use are expensed as they are consumed. Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation. Depreciation expense is recognized using the straight-line method over the estimated useful life of the asset. Expenditures for repairs and maintenance that do not extend the estimated useful life or improve an asset are expensed as incurred. Upon retirement or sale, the cost and related accumulated depreciation and amortization of assets disposed of are removed from the accounts, and any resulting gain or loss is included in the statement of operations and comprehensive loss. Depreciation periods are as follows: Office equipment 3 years Furniture and fixtures 5 to 10 years Lab equipment 5 years Leasehold improvements Shorter of lease term or 15 years Impairment of Long-Lived Assets Long-lived assets are reviewed for indications of possible impairment whenever events or changes in circumstance indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amounts to the future undiscounted cash flows attributable to these assets. An impairment loss is recognized to the extent an asset group is not recoverable and the carrying amount exceeds the projected discounted future cash flows arising from these assets. There were no impairments of long-lived assets for the years ended December 31, 2021 and 2020. Deferred Rent The Company records rent expense on a straight-line basis over the term of the leases and, accordingly records the difference between cash payments and the recognition of rent expense as a deferred rent asset or liability. Incentives granted under the Company’s leases, including allowances to fund leasehold improvements, are deferred and recognized as adjustments to rent expense on a straight-line basis over the term of the leases. Revenue Recognition Collaboration revenue is recognized in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). 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 committees. The Company evaluates 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, the Company considers 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, the Company must 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. 69 Upon the amendment of an existing agreement, the Company evaluates whether the amendment represents a modification to an existing contract which would be recorded through a cumulative catch-up to revenue, or a separate contract. If it is determined that it is a separate contract, the Company will evaluate the necessary revenue recognition through the five-step process described below. When the Company concludes that a contract should be accounted for as a combined performance obligation and recognized over time, the Company must then determine the period over which revenue should be recognized and the method by which to measure revenue. The Company generally recognizes revenue using a cost-based input method. The Company recognizes collaboration revenue in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services when its customer or collaborator obtains control of promised goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the following five steps are performed: 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 within the contract; and v. recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it determines that it is probable it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses 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 Company’s arrangements may consist of a license of, or options to license, the Company’s intellectual property and research, development and manufacturing services. The Company 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. The Company determines transaction price based on the amount of consideration the Company expects 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, the Company estimates the probability and extent of consideration it expects 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. The Company then considers any constraints on the variable consideration and includes variable consideration in the transaction price 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. The Company then allocates the transaction price to each performance obligation based on the relative standalone selling price and recognizes as revenue 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 which consist of licenses and other promises, the Company utilizes 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. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. The Company records 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 the Company’s accompanying 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 non-current liabilities. 70 The Company’s collaboration revenue arrangements may include the following: Up-front License Fees: If a license is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from nonrefundable, up-front fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes 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 for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. Milestone Payments: At the inception of an agreement that includes research and development milestone payments, the Company evaluates each milestone to determine when and how much of the milestone to include in the transaction price. The Company first estimates the amount of the milestone payment that the Company could receive using either the expected value or the most-likely amount approach. The Company primarily uses the most-likely amount approach as that approach is generally most predictive for milestone payments with a binary outcome. The Company then considers whether any portion of that estimated amount is subject to the variable consideration constraint (that is, whether it is probable that a significant reversal of cumulative revenue would not occur upon resolution of the uncertainty). The Company updates the estimate of variable consideration included in the transaction price at each reporting date which includes updating the assessment of the likely amount of consideration and the application of the constraint to reflect current facts and circumstances. Royalties: For arrangements that include sales-based royalties, including milestone payments based on a level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company will recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not granted a development and commercialization license nor recognized any revenue related to sales-based royalties or milestone payments based on the level of sales. Research and Development Services: The Company will record costs associated with development and process optimization activities as research and development expenses in the statements of operations and comprehensive loss consistent with ASC 730, Research and Development. The Company considered the guidance in ASC 808, Collaborative Agreements and will recognize the payments received from these agreements as revenue when the related costs are incurred. Research and Development Costs Research and development costs are expensed as incurred, and include salaries, stock-based compensation and other personnel-related costs, equipment and supplies, depreciation, nonclinical studies, clinical trials and manufacturing development activities. A substantial portion of the Company’s ongoing research and development activities are conducted by third-party service providers, including CROs and CMOs. The Company accrues for expenses resulting from obligations under agreements with CROs, CMOs and other outside service providers for which payment flows do not match the periods over which materials or services are provided to the Company. Accruals are recorded based on estimates of services received and efforts expended pursuant to agreements established with CROs, CMOs and other outside service providers. These estimates are typically based on contracted amounts applied to the proportion of work performed and determined through an evaluation of the progress or stage of completion of the services. In the event advance payments are made to a CRO, CMO or outside service provider, the payments will be recorded as a prepaid asset which will be amortized as the contracted services are performed. As actual costs become known, the Company adjusts its accruals and prepaid assets accordingly. Inputs, such as the services performed, the number of patients enrolled or the study duration, may vary from the Company’s estimates, resulting in adjustments to research and development expense in future periods. The Company makes significant judgements and estimates in determining the accrual and/or prepaid balance in each reporting period and changes in these estimates may result in material changes to the Company’s accruals that could materially affect the Company’s results of operations. 71 Stock-Based Compensation The Company recognizes the grant-date fair value of stock-based awards issued to employees and nonemployee Board members as compensation expense on a straight-line basis over the vesting period of the award. The Company uses the Black-Scholes option pricing model to determine the grant-date fair value of stock options. The Company adjusts expense for forfeitures in the periods they occur. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statements and the tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities will be recognized in the period that includes the enactment date. Additionally, any changes in income tax laws are immediately recognized in the year of enactment. A valuation allowance is established against the deferred tax assets to reduce their carrying value to an amount that is more likely than not to be realized. The deferred tax assets and liabilities are classified as noncurrent along with the related valuation allowance. Due to a lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance. The Company recognizes benefits of uncertain tax positions if it is more likely than not that such positions will be sustained upon examination based solely on the technical merits, as the largest amount of benefits that is more likely than not to be realized upon the ultimate settlement. The Company’s policy is to recognize interest and penalties related to the unrecognized tax benefits as a component of income tax expense. Net Loss Per Share Basic loss per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during each period. Diluted loss per share of common stock includes the effect, if any, from the potential exercise or conversion of securities, such as redeemable convertible preferred stock, convertible notes, stock options and unvested shares of restricted stock, which would result in the issuance of incremental shares of common stock. For diluted net loss per share, the weighted-average number of shares of common stock is the same for basic net loss per share due to the fact that when a net loss exists, dilutive securities are not included in the calculation as the impact is anti-dilutive. The following potentially dilutive securities have been excluded from the computation of diluted weighted-average shares of common stock outstanding, as they would be anti-dilutive: December 31, 2021 2020 Stock options 2,448,676 2,742,022 Unvested restricted stock — 11,752 2,448,676 2,753,774 Other Comprehensive Income (Loss) Other comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Other comprehensive income (loss) is comprised of the net loss and unrealized gains and losses on short-term investments. Recently Adopted Accounting Pronouncements In December 2019, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes . The ASU removes certain exceptions to the general principles in ASC 740, Income Taxes and also clarifies and amends existing guidance to improve consistent application. This ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year, with early adoption permitted. The Company adopted this pronouncement effective January 1, 2021 and it did not have a material impact on the financial statements or related disclosures. Recently Issued Accounting Pronouncements (not yet adopted) In February 2016, the FASB issued ASU No. 2016-02, Leases which requires a lessee to record a right-of-use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. A modified retrospective 72 transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The FASB deferred the effective date of this ASU until the annual periods beginning after December 15, 2021. The Company expects that the most significant effects of adopting this standard will primarily relate to (a) the recognition of right of use assets and lease liabilities on the balance sheet in relation to its existing operating lease agreements in Austin, Texas and Durham, North Carolina; and (b) providing significant new disclosures about leasing activities. The Company is currently evaluating the expected impact that the standard could have on its financial statements and related disclosures. 3. Short-Term Investments The following table represents the Company’s available for sale short-term investments by major security type (amounts in thousands): December 31, 2021 Amortized Cost Gross Unrealized Loss Total Fair Value Short-term investments: U.S. government securities $ 177,096 $ ( 560 ) $ 176,536 Total short-term investments $ 177,096 $ ( 560 ) $ 176,536 December 31, 2020 Amortized Cost Gross Unrealized Loss Total Fair Value Short-term investments: U.S. government securities $ 177,614 $ ( 63 ) $ 177,551 Total short-term investments $ 177,614 $ ( 63 ) $ 177,551 The Company’s short-term investment instruments and cash and cash equivalents are classified using Level 1 inputs within the fair value hierarchy and are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Debt securities have an average maturity of 0.43 years as of December 31, 2021. 4. Property and Equipment Property and equipment consisted of the following (amounts in thousands): December 31, 2021 2020 Lab equipment $ 5,823 $ 2,790 Leasehold improvements 3,709 1,073 Construction in progress 2,521 355 Furniture and fixtures 459 157 Office equipment 206 105 12,718 4,480 Accumulated depreciation and amortization ( 2,780 ) ( 1,480 ) Property and equipment, net $ 9,938 $ 3,000 Depreciation and amortization expense for the years ended December 31, 2021 and 2020 was $ 1.4 million and $ 0.6 million, respectively. 5. Accrued Expenses Accrued expenses consisted of the following (amounts in thousands): 73 December 31, 2021 2020 Research and development contract costs $ 10,253 $ 5,382 Compensation and related benefits 3,320 1,551 Other 1,001 419 Total accrued expenses $ 14,574 $ 7,352 6. Commitments and Contingencies Operating Leases As of December 31, 2021, future minimum payments, by year and in aggregate, under non-cancelable operating leases consist of the following (amounts in thousands): 2022 $ 1,058 2023 1,089 2024 1,120 2025 1,152 2026 1,093 Thereafter 1,721 Total minimum lease payments $ 7,233 The Company recognized rent expense of $ 0.7 million and $ 0.4 million for the years ended December 31, 2021 and 2020, respectively. Heat License Agreement In connection with a license agreement with Heat Biologics Inc. (“Heat”), the Company is required to make payments of up to $ 20.6 million in aggregate for the achievement of specified development, regulatory and commercial sales milestones for certain licensed products. The Company is required to pay Heat a percentage of upfront fees or other non-royalty payments not tied to milestone events that it receives in connection with certain sublicenses of the licensed patents. The Company is also required to pay Heat a royalty on all of its worldwide net sales, those of its affiliates and sublicenses of certain licensed patents in the low single digits. The Company has not recorded a liability for the payments aforementioned given the achievement of specified development, regulatory and commercial sales milestones for certain licensed products is not probable as of the balance sheet date. Litigation From time to time, the Company may become involved in various legal actions arising in the ordinary course of business. On January 31, 2022 and February 11, 2022, putative class action lawsuits were filed in the U.S. District Court for the Eastern District of New York against us and certain of the Company’s officers and directors. In each complaint, the plaintiff cites the volatility in the Company’s common stock and alleges that the defendants made or are responsible for false or misleading statements regarding the Company’s collaboration agreement with Takeda. The plaintiffs in both lawsuits seek a ruling that the case may proceed as a class action, and seeks unspecified damages and attorneys’ fees, expert fees and costs. The Company and the individual defendants deny any allegations of wrongdoing and intend to vigorously defend against these lawsuits. Contractual Obligations Contractual obligations represent future cash commitments and liabilities under agreements with third parties, and exclude contingent liabilities for which the Company cannot reasonably predict future payment. The Company’s contractual obligations result primarily from obligations for various CMOs and CROs, which include potential payments that may be required under its agreements. The contracts also contain variable costs and milestones that are hard to predict as they are based on such things as patients enrolled and clinical trial sites. 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. Such agreements are cancellable upon written notice by the Company and, therefore, are not long-term liabilities. 7. Preferred Stock During the year ended December 31, 2020, the Company entered into various stock purchase agreements with new and existing investors pursuant to which the Company sold an aggregate 550,571 shares of Series B redeemable convertible 74 preferred stock and 1,319,964 shares of Series B-1 redeemable convertible preferred stock at $ 62.88051 per share for net proceeds of $ 117.0 million. The Company’s Series A, Series B and Series B-1 redeemable convertible preferred stock converted into common stock upon the completion of the Company’s IPO in 2020 and the rights, preferences, and terms are no longer applicable . 8. Collaboration Agreement - Related Party The Company recognized revenue for the allocated up-front payments using a cost-based input measure. In applying the cost-based input method of revenue recognition, the Company used actual costs incurred relative to budgeted costs expected to be incurred for the combined performance obligation. In August 2017, the Company entered into a Collaboration Agreement with Takeda related to the development of certain ARC molecules, as amended in April 2018, October 2018 and March 2020 (the “Collaboration Agreement”). The Collaboration Agreement was mutually terminated pursuant to a termination agreement dated November 8, 2021 (the “Termination Agreement”). Under the terms of the Termination Agreement, the Company is not required to satisfy any remaining performance obligations, the Company 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. The Company received cash of $ 3.6 million and $ 14.0 million in the years ended December 31, 2021 and 2020, respectively, and recognized total revenue of $ 82.0 million through December 31, 2021 under the Collaboration Agreement. 9. Stock-Based Compensation 2020 Equity Incentive Plan In September 2020, the Company adopted the 2020 Stock Incentive Plan (the “2020 Plan”) which, as of the adoption date, replaced the 2016 Stock Incentive Plan. Under the 2020 Plan, the share reserve automatically increases on January 1st of each year beginning in 2021 and ending with a final increase on January 1, 2030 in an amount equal to 4 % of the Company’s outstanding common shares on December 31st of the preceding calendar year. The Board of Directors may provide that there will be no increase in the share reserve for any such year or that the increase in the share reserve may be smaller than would otherwise occur. As of December 31, 2021, there were 3,912,408 shares available for future grants under the 2020 Plan and on January 1, 2022, the share reserve automatically increased by 1,693,555 shares. The 2020 Plan permits the granting of options and restricted stock. The terms of the agreements under the 2020 Plan are determined by the Company’s Board of Directors. The Company’s awards vest based on the terms in the agreements and generally vest over four years and have a term of 10 years. 2020 Employee Stock Purchase Plan The 2020 Employee Stock Purchase Plan (“2020 ESPP”) became effective in connection with the Company’s IPO. A total of 395,795 shares of common stock were reserved for issuance under the 2020 ESPP. Eligible employees may purchase shares of common stock under the 2020 ESPP at 85 % of the lower of the fair market value of the Company’s common stock as of the first or the last day of each offering period. Employees are limited to contributing 15 % of the employee’s eligible compensation and may not purchase more than $ 25,000 of stock during any calendar year or more than 600 shares during any one purchase period. The 2020 ESPP share reserve automatically increases on January 1st of each calendar year, for ten years , commencing on January 1, 2021, in an amount equal to 1 % of the total number of shares of common stock outstanding on December 31st of the preceding calendar year. The Board may act prior to January 1st of a given year to provide that there will be no January 1st increase of the share reserve for such year or that the increase in the share reserve for such year will be a smaller number of shares of common stock than would otherwise occur pursuant to the preceding sentence. As of December 31, 2021 there were 393,689 shares available for future purchases and on January 1, 2022, the share reserve automatically increased by 423,388 shares. Under the 2020 ESPP, the Company issued 2,106 shares of common stock for aggregate cash proceeds of $ 0.1 million during the year ended December 31, 2021. There were no shares of common stock issued during the year ended December 31, 2020. The Company recorded stock-based compensation expense in the following expense categories of its accompanying audited statements of operations and comprehensive loss (amounts in thousands): Year Ended December 31, 2021 2020 Research and development $ 2,200 $ 531 General and administrative 3,267 735 Total stock-based compensation $ 5,467 $ 1,266 75 The following table summarizes option activity under the 2020 Plan and the 2016 Stock Incentive Plan: Options Weighted Average Exercise Price Weighted Average Remaining Life (Years) Balance at January 1, 2021 2,742,022 $ 7.95 8.82 Granted 325,671 23.60 Exercised ( 557,609 ) 3.40 Forfeited ( 61,408 ) 12.13 Balance at December 31, 2021 2,448,676 $ 10.96 8.08 Vested and expected to vest 2,418,923 $ 10.88 8.07 Exercisable at the end of the period 1,259,440 $ 6.44 7.55 Options granted during the years ended December 31, 2021 and 2020 had weighted-average grant-date fair values of $ 16.38 and $ 8.93 per share, respectively. As of December 31, 2021, the unrecognized compensation cost was $ 11.4 million and will be recognized over an estimated weighted-average amortization period of 2.48 years. The aggregate intrinsic value of options exercised as of December 31, 2021 and 2020 was $ 10.8 million and $ 49.7 million, respectively. The aggregate intrinsic value of options outstanding and exercisable as of December 31, 2021 was $ 5.9 million. The fair value of each option is estimated on the date of grant using a Black-Scholes option pricing model which takes into account inputs such as the exercise price, the estimated fair value of the underlying common stock at grant date, expected term, expected stock price volatility, risk-free interest rate and dividend yield. The fair value of stock options was determined using the methods and assumptions discussed below. • The expected term of employee stock options with service-based vesting is determined using the “simplified” method, whereby the expected life equals the arithmetic average of the vesting term and the original contractual term of the option due to the Company’s lack of sufficient historical data. • The expected stock price volatility is based on historical volatilities of comparable public entities within the Company’s industry. • The risk-free interest rate is based on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the expected term. • The expected dividend yield is 0 % because the Company has not historically paid, and does not expect, for the foreseeable future, to pay a dividend on its common stock. • Prior to the Company’s IPO, its Board periodically estimated the fair value of the Company’s common stock considering, among other things, contemporaneous valuations of its common stock prepared by an unrelated third-party valuation firm. Subsequent to the Company’s IPO, options are issued with a strike price no less than the market price on date of grant. The grant-date fair value of options granted under the Company’s 2020 Plan were estimated throughout the year using the Black-Scholes option-pricing model using the following weighted-average assumptions: Year Ended December 31, 2021 2020 Expected term - years 6.08 5.94 Expected volatility 81.4 % 75.3 % Risk-free interest rate 1.1 % 0.5 % Expected dividends — — The restricted shares are considered the issuance of share-based payments as opposed to the sale of stock and as such, the Company has recognized compensation expense for these awards based on the fair value of the award on the date of grant. 76 The following table summarizes the activity relating to these shares: Awards Outstanding at December 31, 2020 11,752 Vested ( 11,752 ) Outstanding at December 31, 2021 — The grant-date fair value of shares issued under the Company’s 2020 ESPP were estimated throughout the year using the Black-Scholes option-pricing model using the following weighted-average assumptions: Year Ended December 31, 2021 2020 Expected term - years 0.50 0.00 Expected volatility 81.3 % — % Risk-free interest rate 0.9 % — % Expected dividends — — 10. Income Taxes The Company recorded no federal provision for income taxes as of December 31, 2021 and 2020 due to reported net losses since inception. The difference between the Company’s provision for income taxes and the amounts computed by applying the statutory federal income tax rate to income before income taxes is as follows for the years ended December 31, 2021 and 2020 (amounts in thousands): Year Ended December 31, 2021 2020 Income tax benefit computed at federal statutory tax rate $ ( 9,445 ) $ ( 7,687 ) Change in valuation allowance 13,045 8,717 Return to provision adjustments — ( 745 ) General business credits ( 3,108 ) ( 1,114 ) Other permanent differences — 119 Stock compensation ( 1,923 ) — Section 162(m) limitation 809 — Change in uncertain tax position 622 223 Other — 487 Income tax benefit $ — $ — 77 Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2021 and 2020 are as follows (amounts in thousands): December 31, 2021 2020 Deferred tax asset: Net operating loss carryforwards $ 20,460 $ 9,891 Accrued expenses and other 3,520 1,345 Stock compensation 779 182 Credit carryforwards 6,194 3,708 Deferred revenue — 2,631 Capital loss carryforwards 484 27 Gross deferred tax asset 31,437 17,784 Less valuation allowance ( 30,331 ) ( 17,285 ) Net deferred tax asset 1,106 499 Deferred tax liability: Depreciation and amortization ( 578 ) ( 121 ) Prepaid expenses ( 528 ) ( 378 ) Total deferred tax liability ( 1,106 ) ( 499 ) Total net deferred tax asset $ — $ — The Company has established a valuation allowance equal to the net deferred tax asset due to uncertainties regarding the realization of the deferred tax asset based on the Company’s lack of earnings history. The valuation allowance increased by $ 13.0 million and $ 8.7 million during the years ended December 31, 2021 and 2020, respectively, primarily due to continuing loss from operations, general business credit carryforwards, and accrued expenses. As of December 31, 2021 and 2020, the Company had gross U.S. net operating loss (“NOL”) carryforwards of $ 97.4 million and $ 47.1 million, respectively. Additionally, as of December 31, 2021 and 2020, the Company had capital loss carryforwards of $ 2.3 million and $ 0.1 million, respectively. As of December 31, 2021 and 2020, the Company had gross state NOL carryforwards of $ 0.2 million and $ 0.2 million, respectively. As of December 31, 2021 and 2020, the Company had gross U.S. tax credit carryforwards of $ 7.6 million and $ 4.5 million, respectively. The NOL, capital loss, and tax credit carryforwards will begin to expire in 2036, if not utilized. The NOL, capital loss, and credit carryforwards are subject to Internal Revenue Service adjustments until the statute closes on the year the net operating loss or credit carryforwards are utilized. Section 382 of the Internal Revenue Code limits the utilization of U.S. NOLs following a change of control. After the 2019 financial statements were filed, the Company completed a Section 382 study from formation through October 14, 2020. Although an ownership change occurred during 2020, no deferred tax assets were impacted by the limitation. A reconciliation of our liability for unrecognized tax benefits is as follows: Year Ended December 31, 2021 2020 Balance, beginning of the year $ 783 $ 560 Increase for tax positions related to the current year 449 223 Increase for tax positions related to prior years 172 — Balance, end of year $ 1,404 $ 783 All of the Company’s gross unrecognized tax benefits, if recognized, would affect its effective tax rate. The Company does not expect unrecognized tax benefits to decrease within the next twelve months due to the lapse of statute limitations. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of December 31, 2021, the Company has not accrued any interest or penalties related to unrecognized tax benefits. The Company files income tax returns in the U.S. and state jurisdictions. The Company is subject to examination by taxing authorities in its significant jurisdictions for the 2018, 2019, and 2020 tax years. There are currently no federal or state income tax audits in progress. 78 11. Related Party As of December 31, 2020, Takeda held an approximate 5.0 % ownership interest in the Company’s outstanding shares. Considering the resignation of the Takeda director and percent ownership of the Company’s common stock as of December 31, 2020, the Company no longer considers Takeda a related party. 12. Subsequent Events None. 79 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.