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Item 7. Management’s Discussion and Analysis

2023-02-23 compared with 2022-03-15 · 104 added, 131 removed, 158 unchanged (60% of the section changed)

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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.

We have created a novel approach to immune modulation by designing biologics with structural characteristics that may not be 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 with 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.

We are pursuing a broad clinical development strategy in both solid and hematologic 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.

W e 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 may provide both first-in-class and best-in-class development opportunities for SL-172154.

We believe that data shared to date 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, demonstrated by unique pharmacodynamic findings, as compared to monoclonal or bispecific antibodies.

In addition to our clinical-stage ARC product candidate, we possess a deep pipeline of potential product candidates in preclinical development.

As an example, SL-9258, an ARC compound 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.

We plan to nominate a third clinical product candidate from our preclinical pipeline in 2022.

The most advanced compounds from this platform are a CD20-directed GADLEN and a B7-H3-directed GADLEN.

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.

Since our inception in 2016, we have devoted substantially all of our resources to 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, developing and perfecting our intellectual property rights, 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.

We have funded our operations as of the filing date of this Annual Report on Form 10-K through the net proceeds from our IPO 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 agreements for approximately $82.7 million.

For the years ended December 31, 2022 and 2021, our net loss was $101.9 million and $45.0 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;

We have not been profitable since inception, and as of December 31, 2022, we had an accumulated deficit of $219.0 million and $161.3 million in cash and cash equivalents and investments.

We expect to continue to incur significant expenses and operating losses in the near term in connection with our ongoing activities, as we:

• continue to advance the nonclinical and clinical development of our clinical-stage product candidate, SL-172154;

• initiate nonclinical studies and clinical trials for additional product candidates that we may identify in the future;

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• 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;

• maintain our operational, financial, and management systems;

• retain key personnel and infrastructure to support our clinical development, research and manufacturing efforts;

• utilize our in-house process development and manufacturing capabilities;

• continue to develop, perfect, and defend our intellectual property portfolio;

• 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.

• incur additional legal, accounting, or other expenses in operating our business, including the additional costs associated with operating as a public company and expenses incurred in connection with ongoing and future litigation, if any.

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.

We may obtain unexpected results from our nonclinical studies and clinical trials.

We may elect to discontinue, delay, or modify nonclinical studies and clinical trials of our product candidates.

We may be adversely affected by inflationary pressures and the macroeconomic environment, which are beyond our control.

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.

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, and/or additional collaborations with third-parties, 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.

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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.

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;

As a result of the COVID-19 pandemic, we have experienced, and expect to continue to experience, delays in our clinical trials.

Our manufacturing operations have also been impacted, including delays with certain third-party manufacturers 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 our clinical trials, although the significance of any future delays is difficult to predict.

Certain of our research and development activities, including the conduct of nonclinical studies, have been delayed and may be further delayed due to the impact of the COVID-19 pandemic.

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, 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.

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 and 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.

Global Economic Considerations

In addition, the global macroeconomic environment is uncertain, and could be negatively affected by, among other things, increased U.S.

trade tariffs and trade disputes with other countries, instability in the global capital and credit markets, supply chain weaknesses, and instability in the geopolitical environment, including as a result of the Russian invasion of Ukraine and other political tensions, and lingering effects of the COVID-19 pandemic.

Such challenges have caused, and may continue to cause, recession fears, rising interest rates, foreign exchange volatility and inflationary pressures.

At this time, we are unable to quantify the potential effects of this economic instability on our future operations.

Collaboration Agreement - Takeda

On August 8, 2017, we entered into the Collaboration Agreement with Takeda.

The Collaboration Agreement was mutually terminated pursuant to the Termination Agreement.

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

Collaboration Revenue

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.

Our total revenue to date has been generated from our Collaboration Agreement with Takeda, and a research agreement with another third-party pharmaceutical company that was initiated and completed in 2022.

Additionally, we have entered into the Clinical Trial Collaboration Agreement with ImmunoGen, under which we expect to recognize up to $2.0 million of revenue, beginning in 2023 and continuing into or through 2024.

We continue to explore other potential collaborations and expect that collaboration revenue we may generate, if any, will fluctuate from period to period.

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.

Our research and development expenses consist primarily of costs incurred in connection with the discovery and development of our current and potential future 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;

• expenses incurred to conduct our nonclinical studies and clinical trials;

• costs of manufacturing nonclinical study and clinical trial 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;

• laboratory materials and supplies used to support our research activities;

• 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;

• allocated expenses for facility-related costs.

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SL-172154 $ 38,609 $ 15,708

SL-279252 10,804 16,362

Other pipeline candidates 14,031 6,210

Other pipeline compounds 17,373 24,835

Internal costs, including personnel related benefits, facilities, and depreciation 26,917 16,020

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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.

We expect to incur significant research and development expenses throughout 2023.

While it is difficult for us to predict with certainty, we expect increasing year-over-year operating expense over the next several years in the event that we conduct additional nonclinical studies and clinical trials (beyond our currently planned clinical trials), including later-stage clinical trials, for our current and future product candidates, pursue regulatory approval of our product candidates, or advance our preclinical pipeline.

The process of conducting the necessary nonclinical and clinical research to obtain regulatory approval is costly and time consuming.

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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.

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

more likely than not that all of our NOLs and tax credits will not be realized.

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, corporate, and litigation matters and fees for accounting and tax services.

We expect that our general and administrative expense may increase in the future to support our ongoing research and development activities and as a result of the costs of operating as a public company.

These increases may include increased costs related to the retention of personnel and fees paid to outside consultants, lawyers, and accountants, among other expenses.

Additionally, we anticipate that we will continue to incur significant 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 advances to later-stage clinical development or obtains regulatory approval, we expect that we would incur significantly increased expenses associated with building the appropriate general and administrative support for our increased research and development activities, or building a sales and marketing team, respectively.

Other income consists of interest earned on our cash, cash equivalents and investments, which consists of amounts held in a money market fund and at various times in government and corporate obligations as well as investment fees and realized gain or losses on investments (if any).

Our NOLs and tax credit carryforwards will begin to expire in 2024.

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(in thousands) 2022 2021 Dollar Percentage

Collaboration revenue - related party $ 30,017 $ 9,934 $ 20,083 202.2 %

Collaboration revenue $ 652 $ 30,017 $ (29,365) (97.8) %

Operating expenses:

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Loss from operations (103,329) (45,269) (58,060) 128.3 %

Other income (expense):

Interest income 625 549 76 13.8 %

Other (330) (221) (109) 49.3 %

Other income 1,384 295 1,089 369.2 %

Net loss $ (101,945) $ (44,974) $ (56,971) 126.7 %

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.

Collaboration Revenue

Collaboration revenue decreased by $29.4 million, or (97.8)%, to $0.7 million for the year ended December 31, 2022 from $30.0 million for the year ended December 31, 2021.

This decrease is primarily attributable to the cessation of work with Takeda under the Collaboration Agreement, which was mutually terminated in the fourth quarter of 2021 and all remaining revenue was recognized at that time.

In the second quarter of 2022, we executed a collaboration agreement with another third party.

We completed the work in the fourth quarter of 2022 and have recognized all of the revenue associated with that agreement.

Research and Development Expense

Research and development expenses increased by $26.3 million, or 46.6%, to $82.9 million for the year ended December 31, 2022 from $56.6 million for the year ended December 31, 2021.

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.

The increase was primarily due to an increase of $8.4 million in manufacturing costs related to the manufacture of clinical trial material for our ongoing clinical trials, an increase of $7.5 million as a result of an increase in headcount to expand our in-house research, manufacturing and clinical development capabilities, an increase of $4.3 million for facility and equipment expenses related to our increased lab space and related research activities, an increase of $3.2 million in clinical trial costs and an increase of $3.2 million in other operating expenses primarily related to fixed asset depreciation and impairment losses, offset by a decrease of $1.2 million in pharmacology costs.

General and Administrative Expense

General and administrative expenses increased by $2.4 million, or 12.6%, to $21.1 million for the year ended December 31, 2022 from $18.7 million for the year ended December 31, 2021.

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.

The increase was primarily driven by a litigation settlement of $1.4 million and an increase of $0.6 million of costs associated with being a public company.

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.

Since our inception, our primary sources of liquidity have been generated by sales of our preferred stock and common stock, including our IPO, and collaboration agreements.

As of December 31, 2022, we had an accumulated deficit of $219.0 million and $161.3 million of cash and cash equivalents and investments.

In July 2022, we entered into a sales agreement, or the Sales Agreement, with SVB Securities LLC, or the Sales Agent, pursuant to which we may offer and sell up to $75.0 million of shares of our common stock from time to time in the ATM Facility.

The Sales Agent is generally entitled to compensation at a commission equal to 3.0% of the aggregate gross sales price per share sold under the Sales Agreement.

As of December 31, 2022, there were no sales pursuant to the ATM Facility.

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

capabilities and working capital requirements.

Our primary uses of cash and cash equivalents and 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 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.

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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.

We believe that our cash and cash equivalents and investments as of December 31, 2022 are sufficient to fund projected operations into the second half of 2024.

The following table shows a summary of our cash flows for the periods indicated:

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Net cash used in operating activities $ (94,498) $ (57,116)

Net cash used in investing activities (10,443) (146,322)

Net cash provided by (used in) investing activities 49,438 (10,443)

Net cash provided by financing activities 171 1,929

Net (decrease) increase in cash and cash equivalents $ (65,630) $ 150,885

Net decrease in cash and cash equivalents $ (44,889) $ (65,630)

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.

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.

During the year ended December 31, 2022, net cash used in operating activities was $94.5 million and primarily reflected by our net loss of $101.9 million and a $4.5 million net change in our operating assets and liabilities, offset by noncash charges of $6.5 million in stock-based compensation, $4.7 million in depreciation expense, amortization of investments and non-cash operating lease expense and $0.7 million in losses on sale of assets.

We expect to continue to use cash in our operating activities

as we 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.

During the year ended December 31, 2021, net cash used in operating activities was $57.1 million and primarily reflected by our net loss of $45.0 million and a $22.0 million net change in our operating assets and liabilities, offset by noncash charges of $5.5 million in stock-based compensation and $4.4 million in depreciation expense and amortization of investments.

Net Cash Provided by (Used in) Investing Activities

During the year ended December 31, 2022, net cash provided by investing activities was $49.4 million of which $60.9 million represents the net change in investments and $11.5 million represents purchases of property and equipment, net of sales, primarily attributable to our continued efforts to bring certain process development, manufacturing and laboratory capabilities in-house.

During the year ended December 31, 2021, net cash used in investing activities was $10.4 million of which $7.9 million was used to purchase property and equipment, primarily attributable to our continued efforts to bring certain process development, manufacturing and laboratory capabilities in-house and $2.5 million represents the net change in investments.

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.

During the year ended December 31, 2022, net cash provided by financing activities was $0.2 million and was from the exercise of stock options and purchases pursuant to our employee stock purchase plan.

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 purchases pursuant to our employee stock purchase plan.

Contractual Obligations and Other Commitments

The following table summarizes our contractual obligations and commitments at December 31, 2021:

(in thousands) Less than

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

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.

See Note 6 and Note 7 to our financial statements found elsewhere in this Annual Report on Form 10-K for additional disclosures.

Critical Accounting Policies

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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.

Our critical accounting policies are those policies which require the most significant judgments and estimates in the preparation of our financial statements.

We believe that the assumptions and estimates associated with our most critical accounting policies are those relating to revenue, accrued research and development costs and stock-based compensation.

Revenue Recognition

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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.

Upon the amendment of an existing agreement, we evaluate whether the amendment represents a modification to an existing contract that would be recorded through a cumulative catch-up to revenue, or a separate contract.

If it is determined that it is a separate contract, we will evaluate the necessary revenue recognition through the five-step process described below.

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.

We recognize collaboration revenue in an amount that reflects the consideration that we expect to receive in exchange for those goods or services when our customer or collaborator obtains control of promised goods or services.

To determine revenue recognition for such arrangements, we perform the following five steps:

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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.

The promised goods or services in the arrangement may consist of a license of, or options to license, 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.

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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.

We then consider 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.

We then allocate the transaction price to each performance obligation based on the relative standalone selling price and recognize 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 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.

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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.

Deferred revenues not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as non-current liabilities.

Research and Development Expense

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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.

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.

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We use the Black-Scholes option pricing model to value our stock option awards.

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.

The fair values of restricted stock units, or RSUs, are based on the fair value of the Company’s common stock on the date of the grant.

We recognize compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period of the award.

We also grant stock options that vest upon achievement of certain market-based conditions.

We use the Monte Carlo pricing model to estimate the fair value of options that have market-based conditions.

The Black-Scholes and Monte Carlo option-pricing models require 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 8 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 and Monte Carlo option pricing models to determine the estimated fair value of our stock options granted during the year ended December 31, 2022.

Recent Accounting Pronouncements

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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 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 IPO, (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 Securities Exchange Act of 1934, as amended, or 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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis