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, 2022 and 2021 63 Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2022 and 2021 64 Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2022 and 2021 65 Statements of Cash Flows for the Years Ended December 31, 2022 and 2021 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, 2022 and 2021, the related statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for each of the years in 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, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the years then ended, in conformity with U.S. generally accepted accounting principles. Change in Accounting Principle As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for leases as of January 1, 2022 due to the adoption of Accounting Standards Update (ASU) 2016-02, “Leases” (Topic 842). 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 February 23, 2023 62 SHATTUCK LABS, INC. BALANCE SHEETS (In thousands, except share and per share amounts) December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 47,379 $ 92,268 Investments 113,901 176,536 Prepaid expenses and other current assets 23,304 19,462 Total current assets 184,584 288,266 Property and equipment, net 17,671 9,938 Other assets 3,069 381 Total assets $ 205,324 $ 298,585 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 7,170 $ 10,012 Accrued expenses and other current liabilities 17,795 14,574 Total current liabilities 24,965 24,586 Non-current operating lease liabilities 4,202 — Deferred rent — 2,213 Total liabilities 29,167 26,799 Commitments and contingencies (Note 6) Stockholders’ equity: Common stock, $ 0.0001 par value: 300,000,000 shares authorized, 42,390,586 shares issued and outstanding at December 31, 2022 and 42,338,898 shares issued and outstanding at December 31, 2021 5 5 Additional paid-in capital 396,041 389,408 Accumulated other comprehensive loss ( 877 ) ( 560 ) Accumulated deficit ( 219,012 ) ( 117,067 ) Total stockholders’ equity 176,157 271,786 Total liabilities and stockholders’ equity $ 205,324 $ 298,585 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, 2022 2021 Collaboration revenue $ 652 $ 30,017 Operating expenses: Research and development 82,899 56,563 General and administrative 21,082 18,723 Expense from operations 103,981 75,286 Loss from operations ( 103,329 ) ( 45,269 ) Other income (expense): Interest income 1,592 625 Other ( 208 ) ( 330 ) Total other income 1,384 295 Net loss $ ( 101,945 ) $ ( 44,974 ) Unrealized loss on investments ( 317 ) ( 497 ) Comprehensive loss $ ( 102,262 ) $ ( 45,471 ) Net loss per share - basic and diluted $ ( 2.41 ) $ ( 1.07 ) Weighted-average shares outstanding - basic and diluted 42,378,895 42,032,384 See accompanying notes to financial statements 64 SHATTUCK LABS, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (In thousands, except share amounts) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance at December 31, 2020 41,767,431 $ 5 $ 382,012 $ ( 63 ) $ ( 72,093 ) $ 309,861 Exercise of stock options and purchases pursuant to employee stock purchase plan 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 Exercise of stock options and purchases pursuant to employee stock purchase plan 51,688 — 171 — — 171 Stock-based compensation expense — — 6,462 — — 6,462 Unrealized loss on investments — — — ( 317 ) — ( 317 ) Net loss — — — — ( 101,945 ) ( 101,945 ) Balance at December 31, 2022 42,390,586 $ 5 $ 396,041 $ ( 877 ) $ ( 219,012 ) $ 176,157 See accompanying notes to financial statements 65 SHATTUCK LABS, INC. STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2022 2021 Cash flows from operating activities: Net loss $ ( 101,945 ) $ ( 44,974 ) Adjustments to reconcile net loss to net cash used in operations: Stock-based compensation 6,462 5,467 Depreciation 3,073 1,380 Net amortization of premium on investments 1,370 3,035 Loss on sale of assets 704 — Non-cash operating lease expense 302 — Changes in operating assets and liabilities: Prepaid expenses and other current assets ( 3,842 ) ( 9,272 ) Other assets ( 53 ) ( 32 ) Accounts payable ( 2,842 ) 7,866 Accrued expenses and other current liabilities 2,975 6,924 Non-current operating lease liabilities ( 702 ) — Deferred revenue — ( 29,034 ) Deferred rent — 1,524 Net cash used in operating activities ( 94,498 ) ( 57,116 ) Cash flows from investing activities: Purchases of property and equipment ( 11,614 ) ( 7,926 ) Sale of property and equipment 104 — Sale and maturities of investments 193,325 201,575 Purchases of investments ( 132,377 ) ( 204,092 ) Net cash provided by (used in) investing activities 49,438 ( 10,443 ) Cash flows from financing activities: Proceeds from the exercises of stock options and purchases pursuant to employee stock purchase plan 171 1,929 Net cash provided by financing activities 171 1,929 Net decrease in cash and cash equivalents ( 44,889 ) ( 65,630 ) Cash and cash equivalents, beginning of period 92,268 157,898 Cash and cash equivalents, end of period $ 47,379 $ 92,268 Supplemental disclosures of non-cash financial activities: Operating lease liabilities recognized for operating right-of-use assets $ 5,447 $ — Operating right-of-use assets exchanged for operating lease liabilities $ 2,945 $ — Unpaid amounts related to purchase of property and equipment $ — $ 392 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 Agonist Redirected Checkpoint (“ARC ® ”) and gamma delta T cell engager (“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 one clinical-stage product candidate, SL-172154, 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 $ 219.0 million as of December 31, 2022. 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 investments of $ 161.3 million as of December 31, 2022 are sufficient to fund projected operations of the Company for at least the next twelve months. COVID-19 Pandemic The COVID-19 pandemic has had, and may 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 and its third-party vendors and consultants have experienced disruptions to their businesses as a result of the COVID-19 pandemic. Specifically, the outbreak has caused disruptions in the Company’s ability to manufacture clinical trial materials, including the acquisition of raw materials needed for such manufacturing, enrollment and treatment of patients in clinical trials, 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 uncertain and cannot be predicted. Accordingly, the COVID-19 pandemic could have a material and adverse effect on the Company’s business, results of operations and financial condition. 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. 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. 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 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 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. Substantially all of the Company’s revenue through 2021 was derived from its 2017 collaboration agreement (the “Collaboration Agreement”) with Millennium Pharmaceuticals, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company Limited (“Takeda”), which was mutually terminated in 2021. The Company is highly dependent on a limited number of contract manufacturing organizations (“CMOs”) 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 a limited number of contract research organizations (“CROs”) and 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 $ 3.5 million held in operating accounts and $ 43.9 million held in money market funds as of December 31, 2022 and $ 14.6 million held in operating accounts and $ 77.7 million held in money market funds as of December 31, 2021. Investments The Company's investments consist of highly-rated U.S. Treasury securities and have been classified as available-for-sale and are carried at estimated fair value as determined based upon quoted market prices. Management determines the appropriate classification of its investment securities at the time of purchase. The Company may hold securities with stated maturities greater than one year. All available-for-sale securities are considered available to support current operations and are classified as current assets. Credit impairments for available-for-sale 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 (loss), 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, 2022, there were no impairments related to credit losses of investments. 68 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. In the year ended December 31, 2022, the Company recorded $ 0.7 million of impairment losses related to lab equipment that was determined to no longer be needed, which is included in the Company's research and development costs. There were no impairments of long-lived assets for the year ended December 31, 2021. Leases The Company determines if an arrangement is a lease at inception. Right-of-use (“ROU”) assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. The classification of the Company's leases as operating or finance leases, along with the initial measurement and recognition of the associated ROU assets and lease liabilities, are performed at the lease commencement date. The measurement of lease liabilities is based on the present value of future lease payments over the lease term. As the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future lease payments. The ROU asset is based on the measurement of the lease liability and also includes any lease payments made prior to or on lease commencement and excludes lease incentives and initial direct costs incurred, as applicable. The lease terms may include options to extend or terminate the lease when it is reasonably certain the Company will exercise any such options. Rent expense for the Company's operating leases is recognized on a straight-line basis over the lease term. The Company has elected to not apply the recognition requirement of Accounting Standards Codification (“ASC”) 842, Leases (“ASC 842”) of the Financial Accounting Standards Board (“FASB”) to leases with a term of 12 months or less for all classes of assets. Commitments and Contingencies The Company follows ASC 450-20, Contingencies of the FASB to report accounting for contingencies. Certain conditions may exist as of the date the condensed financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s condensed financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed. 69 Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. 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. Upon the amendment of an existing agreement, the Company evaluates 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, 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. 70 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 that 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. 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 Arrangements 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 71 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 judgments 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. Stock-Based Compensation The Company recognizes the cost of stock-based awards issued to employees and nonemployees as compensation expense on a straight-line basis over the vesting period of the award, net of estimated forfeitures. Forfeiture estimates are based on historical cancellation data. The Company uses the Black-Scholes option pricing model to determine the grant-date fair value of stock options. The fair values of restricted stock units (“RSUs”) are based on the fair value of the Company’s common stock on the date of the grant. The Company also grants stock options that vest upon achievement of certain market-based conditions. The Company uses the Monte Carlo pricing model to estimate the fair value of options that have market-based conditions. 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, or convertible notes (if any), 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 of December 31, 2022 and 2021, as they would be anti-dilutive: As of December 31, 2022 2021 Stock options 4,209,255 2,448,676 Unvested restricted stock 309,477 — 4,518,732 2,448,676 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 investments. 72 Recently Adopted Accounting Pronouncements In February 2016, the FASB issued ASC 842, which requires a lessee to record a ROU asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. A modified retrospective 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 Accounting Standards Update until the annual periods beginning after December 15, 2021. The Company adopted this pronouncement effective January 1, 2022. See Note 6 for the impact on the financial statements. No prior period amounts were adjusted and such prior period amounts continue to be reported in accordance with previous lease guidance, ASC 840, Leases (“ASC 840”). The Company elected to use all of the available practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed the Company to carry forward the historical lease classification of those leases in place as of January 1, 2022. The following table summarizes the impact of the adoption of ASC 842 on the accompanying balance sheet as of January 1, 2022 (in thousands): December 31, 2021 Effect of the Adoption of ASC 842 January 1, 2022 Other assets (1) $ 381 $ 2,945 $ 3,326 Lease liabilities: Accrued expenses and other current liabilities (2) $ 14,574 $ 255 $ 14,829 Non-current operating lease liabilities $ — $ 4,903 $ 4,903 Deferred rent (3) $ 2,213 $ ( 2,213 ) $ — 1 Operating lease right-of-use assets are classified within other assets. 2 Current operating lease liabilities are classified within accrued expenses and other current liabilities. Current deferred rent was classified within accrued expenses as of December 31, 2021. 3 Non-current deferred rent was classified within deferred rent as of December 31, 2021. 3. Investments The following table represents the Company’s available for sale investments by major security type (amounts in thousands): December 31, 2022 Amortized Cost Gross Unrealized Loss Total Fair Value Investments: U.S. government securities $ 114,778 $ ( 877 ) $ 113,901 Total investments $ 114,778 $ ( 877 ) $ 113,901 December 31, 2021 Amortized Cost Gross Unrealized Loss Total Fair Value Investments: U.S. government securities $ 177,096 $ ( 560 ) $ 176,536 Total investments $ 177,096 $ ( 560 ) $ 176,536 The Company’s 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 0.37 years as of December 31, 2022. 73 4. Property and Equipment Property and equipment consisted of the following (amounts in thousands): December 31, 2022 2021 Lab equipment $ 15,547 $ 5,823 Leasehold improvements 7,086 3,709 Furniture and fixtures 452 459 Office equipment 191 206 Construction in progress 104 2,521 23,380 12,718 Accumulated depreciation and amortization ( 5,709 ) ( 2,780 ) Property and equipment, net $ 17,671 $ 9,938 Depreciation and amortization expense for the years ended December 31, 2022 and 2021 was $ 3.1 million and $ 1.4 million, respectively. 5. Accrued Expenses Accrued expenses consisted of the following (amounts in thousands): December 31, 2022 2021 Research and development contract costs $ 11,256 $ 10,253 Compensation and related benefits 3,967 3,320 Litigation settlement 1,400 — Other current liabilities 1,172 1,001 Total accrued expenses and other current liabilities $ 17,795 $ 14,574 6. Commitments and Contingencies Operating Leases The Company leases certain office space, laboratory facilities, and equipment. These leases require monthly lease payments that may be subject to annual increases throughout the lease term. Certain of these leases also include renewal options at the election of the Company to renew or extend the lease. These optional periods have not been considered in the determination of the ROU assets or lease liabilities associated with these leases as the Company did not consider it reasonably certain it would exercise the options. The Company performed evaluations of its contracts and determined it has operating leases. The following table summarizes the Company’s recognition of its operating leases (in thousands): Balance Sheet Classification December 31, 2022 Other assets $ 2,635 Accrued expenses and other current liabilities $ 701 Non-current operating lease liabilities 4,202 Total liabilities $ 4,903 The following table summarizes the weighted-average remaining lease term and discount rates for the Company’s operating leases: December 31, 2022 Lease term (years) 5.5 Discount rate 8.64 % The Company incurred rent expense for its operating leases of $ 0.8 million and $ 0.7 million during the years ended December 31, 2022 and 2021, respectively, included within operating expenses in the statements of operations and 74 comprehensive loss. Cash paid for amounts included in the measurement of operating lease liabilities for the year ended December 31, 2022 was $ 1.0 million and was included in net cash used in operating activities in the statement of cash flows. The maturities of the Company’s operating lease liabilities as of December 31, 2022 were as follows (in thousands): 2023 $ 1,089 2024 1,120 2025 1,152 2026 1,093 2027 848 Thereafter 873 Total lease payments $ 6,175 Less: Imputed interest ( 1,272 ) Total $ 4,903 As of December 31, 2021, future annual minimum lease payments, as defined under the previous lease accounting guidance of ASC 840, due under non-cancelable operating leases at December 31 of each year are as follows (in thousands): 2022 $ 986 2023 1,089 2024 1,120 2025 1,152 2026 1,093 Thereafter 1,722 Total minimum lease payments $ 7,162 Nighthawk Biosciences, Inc. License Agreement In connection with a license agreement with Nighthawk Biosciences, Inc. (“Nighthawk”), 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 Nighthawk 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 Nighthawk 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 no t recorded a liability for the aforementioned payments 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. The cases were consolidated on June 2, 2022, and the plaintiffs filed an amended complaint on July 1, 2022. The amended complaint cites the volatility in the Company’s common stock and alleges that the defendants made or are responsible for misleading omissions regarding the Company’s clinical trial results and the Collaboration Agreement with Takeda. The parties reached a settlement in principle of the plaintiffs’ claims in the amount of $ 1.4 million on November 2, 2022. The settlement is subject to a definitive settlement agreement, notice to stockholders and court approval. The parties filed their motion for preliminary approval of the settlement agreement with the court on December 14, 2022, and, as of February 22, 2023, that motion is pending. The Company has accrued the settlement amount in accrued expenses and other current liabilities as of December 31, 2022. 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 75 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. Collaboration Agreements The Company recognizes 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 uses actual costs incurred relative to budgeted costs expected to be incurred. In the second quarter of 2022, the Company executed a collaboration agreement with a third party and completed the work in the fourth quarter of 2022. The company recognized $ 0.7 million, which represents all of the revenue associated with this agreement, in the year ended December 31, 2022. Collaboration Agreement - Takeda 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 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. 8. 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 (the “Board”) 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. On January 1, 2023, the share reserve automatically increased by 1,695,623 shares. As of December 31, 2022, there were 3,497,307 shares available for future grants. The 2020 Plan permits the granting of options, stock appreciation rights, RSUs, performance stock, and performance cash awards. The terms of the agreements under the 2020 Plan are determined by the Board. The Company’s awards generally vest over four years and have a term of 10 years. In 2022, the Company granted 178,150 awards that vest based on the Company achieving a closing share price of equal to or greater than $ 18.00 for 30 consecutive trading days on or before the four th anniversary of the grant date, and 226,543 awards that vest over two years . 2020 Employee Stock Purchase Plan The 2020 Employee Stock Purchase Plan (“2020 ESPP”) became effective in connection with the Company’s initial public offering (“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. On January 1, 2023, the share reserve increased by 423,905 shares. During the years ended December 31, 2022 and 2021, the Company issued 13,088 and 2,106 shares of common stock for aggregate cash proceeds of $ 0.1 million and $ 0.1 million, respectively. 76 The Company recorded stock-based compensation expense in the following expense categories of its accompanying audited statements of operations and comprehensive loss (in thousands): Year Ended December 31, 2022 2021 Research and development $ 3,574 $ 2,200 General and administrative 2,888 3,267 Total stock-based compensation $ 6,462 $ 5,467 The following table summarizes option activity under the 2020 Plan: Options Weighted Average Exercise Price Weighted Average Remaining Life (Years) Balance at December 31, 2021 2,448,676 $ 10.96 8.08 Granted 1,938,675 5.68 Exercised ( 38,600 ) 3.23 Forfeited ( 139,496 ) 16.88 Balance at December 31, 2022 4,209,255 $ 8.29 8.07 Vested and expected to vest 4,153,436 $ 8.29 8.06 Exercisable at the end of the period 1,717,933 $ 8.24 6.87 Options granted during the years ended December 31, 2022 and 2021 had weighted-average grant-date fair values of $ 4.03 and $ 16.38 per share, respectively. As of December 31, 2022, the unrecognized compensation cost for options issued was $ 12.9 million and will be recognized over an estimated weighted-average amortization period of 2.29 years. The total intrinsic value of options exercised during the years ended December 31, 2022 and 2021 was $ 0.1 million and $ 11.8 million, respectively. The aggregate intrinsic value of options outstanding and exercisable as of December 31, 2022 was $ 0.2 million. Restricted Stock Units The following table summarizes employee RSU activity for the year ended December 31, 2022: Awards Weighted Average Grant Date Fair Value Unvested RSUs as of December 31, 2021 — $ — Granted 331,653 7.24 Vested — — Forfeited ( 22,176 ) 7.43 Balance at December 31, 2022 309,477 $ 7.22 The Company recognized $ 0.6 million of stock-based compensation related to RSUs as of December 31, 2022. As of December 31, 2022, the unrecognized compensation cost for RSUs issued was $ 1.7 million and will be recognized over an estimated weighted-average amortization period of 3.06 years. The fair values of RSUs are based on the fair value of the Company's common stock on the date of the grant. Fair Value of Stock Options and Shares Issued The Company accounts for stock-based compensation by measuring and recognizing as compensation expense the fair value of all share-based payment awards made to employees, including employee stock options and restricted stock awards. The Company uses the Black-Scholes option pricing model to estimate the fair value of employee stock options that only have service or performance conditions. The Company uses the Monte Carlo pricing model to estimate the fair value of options that have market-based conditions. The inputs to both pricing models require a number of management estimates such as the expected term, volatility, risk-free interest rate and dividend yield. The fair value of stock options was determined using the methods and assumptions discussed below. 77 • 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 assumption is based on the historical volatilities of the common stock of a peer group of publicly traded companies as well as the historical volatility of the Company's common stock since the Company began trading subsequent to the IPO in October 2020 over the period corresponding to the expected life as of the grant date. The historical volatility data was computed using the daily closing prices during the equivalent period of the calculated expected term of the stock-based awards. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of the Company's stock price becomes available, or until circumstances change, such that the identified entities are no longer comparable companies. In the latter case, other suitable, similar entities whose share prices are publicly available would be utilized in the calculation. • 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 dividends on its common stock. • Prior to the Company’s IPO, the 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 calculated using the Black-Scholes option pricing model granted under the Company’s 2020 Plan were estimated using the following weighted-average assumptions: Year Ended December 31, 2022 2021 2020 Plan Expected term - years 6.08 6.08 Expected volatility 82.4 % 81.4 % Risk-free interest rate 2.4 % 1.1 % Expected dividends — — The grant-date fair value of options calculated using the Monte Carlo option pricing model granted under the Company’s 2020 Plan were estimated using the following assumptions: Year Ended December 31, 2022 2020 Plan Expected term - years 4.00 Expected volatility 80.0 % Risk-free interest rate 1.4 % Expected dividends — There were no options granted that have market-based conditions during the year ended December 31, 2021. 78 The grant-date fair value of shares issued calculated using the Black-Scholes option pricing model under the Company’s 2020 ESPP were estimated using the following weighted-average assumptions: Year Ended December 31, 2022 2021 2020 ESPP Expected term - years 0.50 0.50 Expected volatility 82.9 % 81.3 % Risk-free interest rate 2.5 % 0.9 % Expected dividends — — 9. Income Taxes The Company recorded no federal provision for income taxes as of December 31, 2022 and 2021 due to reported net losses since inception. A reconciliation of the expected income tax expense (benefit) computed using the federal statutory income tax rate to the Company’s effective income tax rate is as follows for the years ended December 31, 2022 and 2021 (amounts in thousands): Year Ended December 31, 2022 2021 Income tax benefit computed at federal statutory tax rate $ ( 21,409 ) $ ( 9,445 ) Change in valuation allowance 24,713 13,045 General business credits ( 4,883 ) ( 3,108 ) Stock compensation 602 ( 1,923 ) Section 162(m) limitation — 809 Change in uncertain tax position 977 622 Income tax benefit $ — $ — Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2022 and 2021 are as follows (amounts in thousands): December 31, 2022 2021 Deferred tax asset: Net operating loss carryforwards $ 24,867 $ 20,460 Accrued expenses and other 3,578 3,520 Stock compensation 1,533 779 Credit carryforwards 10,101 6,194 Capital loss carryforwards 583 484 Capitalized R&D expense 15,017 — Lease liabilities 1,030 — Gross deferred tax asset 56,709 31,437 Less valuation allowance ( 55,044 ) ( 30,331 ) Net deferred tax asset 1,665 1,106 Deferred tax liability: Depreciation and amortization ( 676 ) ( 578 ) Prepaid expenses ( 436 ) ( 528 ) Lease assets ( 553 ) — Total deferred tax liability ( 1,665 ) ( 1,106 ) 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 79 $ 24.7 million and $ 13.0 million during the years ended December 31, 2022 and 2021, respectively, primarily due to continuing loss from operations, general business credit carryforwards, and accrued expenses. As of December 31, 2022 and 2021, the Company had gross U.S. net operating loss (“NOL”) carryforwards of $ 118.4 million and $ 97.4 million, respectively. Additionally, as of December 31, 2022 and 2021, the Company had capital loss carryforwards of $ 2.8 million and $ 2.3 million, respectively. As of December 31, 2022 and 2021, the Company had gross state NOL carryforwards of $ 0.2 million and $ 0.2 million, respectively. As of December 31, 2022 and 2021, the Company had gross U.S. tax credit carryforwards of $ 12.5 million and $ 7.6 million, respectively. The NOL, capital loss, and tax credit carryforwards will begin to expire in 2024, 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 NOL 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, 2022 2021 Balance, beginning of the year $ 1,404 $ 783 Increase for tax positions related to the current year 733 449 Increase for tax positions related to prior years 243 172 Balance, end of year $ 2,380 $ 1,404 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, 2022, 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 2019, 2020, and 2021 tax years. There are currently no federal or state income tax audits in progress. 10. Subsequent Events None. 80 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.