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. 63 Item 8. Audited Financial Statements SHATTUCK LABS, INC. INDEX TO FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm 65 Balance Sheets as of December 31, 2023 and 2022 66 Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2023 and 2022 67 Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2023 and 2022 68 Statements of Cash Flows for the Years Ended December 31, 2023 and 2022 69 Notes to Financial Statements 70 64 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, 2023 and December 31, 2022, the related statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for the years then ended December 31, 2023, 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, 2023 and December 31, 2022, and the results of its operations and its cash flows for the years then ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on 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 We have served as the Company’s auditor since 2018. Austin, Texas February 29, 2024 65 SHATTUCK LABS, INC. BALANCE SHEETS (In thousands, except share and per share amounts) December 31, 2023 2022 Assets Current assets: Cash and cash equivalents $ 125,626 $ 47,379 Investments 4,999 113,901 Prepaid expenses and other current assets 12,595 23,304 Total current assets 143,220 184,584 Property and equipment, net 13,804 17,671 Other assets 2,540 3,069 Total assets $ 159,564 $ 205,324 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 1,587 $ 7,170 Accrued expenses and other current liabilities 9,866 17,795 Total current liabilities 11,453 24,965 Non-current operating lease liabilities 3,406 4,202 Total liabilities 14,859 29,167 Commitments and contingencies (Note 7) Stockholders’ equity: Common stock, $ 0.0001 par value: 300,000,000 shares authorized, 47,260,108 shares issued and outstanding at December 31, 2023 and 42,390,586 shares issued and outstanding at December 31, 2022 5 5 Additional paid-in capital 451,006 396,041 Accumulated other comprehensive income (loss) 4 ( 877 ) Accumulated deficit ( 306,310 ) ( 219,012 ) Total stockholders’ equity 144,705 176,157 Total liabilities and stockholders’ equity $ 159,564 $ 205,324 See accompanying notes to financial statements 66 SHATTUCK LABS, INC. STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands, except share and per share amounts) Year Ended December 31, 2023 2022 Collaboration revenue $ 1,657 $ 652 Operating expenses: Research and development 74,310 82,899 General and administrative 19,304 21,082 Expense from operations 93,614 103,981 Loss from operations ( 91,957 ) ( 103,329 ) Other income (expense): Interest income 4,669 1,592 Other ( 10 ) ( 208 ) Total other income 4,659 1,384 Net loss $ ( 87,298 ) $ ( 101,945 ) Unrealized gain (loss) on investments 881 ( 317 ) Comprehensive loss $ ( 86,417 ) $ ( 102,262 ) Net loss per share - basic and diluted $ ( 2.05 ) $ ( 2.41 ) Weighted-average shares outstanding - basic and diluted 42,600,190 42,378,895 See accompanying notes to financial statements 67 SHATTUCK LABS, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (In thousands, except share amounts) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Shares Amount 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 Proceeds from sale of common stock and pre-funded warrants, net of issuance cost 4,651,163 — — 47,580 — — — — — 47,580 Stock-based compensation expense — — — — 6,939 — — — — — 6,939 Proceeds from exercise of stock options and purchase of common stock pursuant to employee stock purchase plan 158,274 — — — 499 — — — — — 499 Issuance of common stock upon settlement of restricted stock units 77,312 — — — — — — — — Taxes paid related to net share settlement of equity awards ( 17,227 ) — ( 53 ) — — ( 53 ) Unrealized gain on investments — — — — — — 881 — — — 881 Net loss — — — — — — — — ( 87,298 ) — ( 87,298 ) Balance at December 31, 2023 47,260,108 $ 5 $ 451,006 $ 4 $ ( 306,310 ) $ 144,705 See accompanying notes to financial statements 68 SHATTUCK LABS, INC. STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2023 2022 Cash flows from operating activities: Net loss $ ( 87,298 ) $ ( 101,945 ) Adjustments to reconcile net loss to net cash used in operations: Stock-based compensation 6,939 6,462 Depreciation 4,042 3,073 Amortization of (discount) premium on debt securities ( 1,483 ) 1,370 Non-cash operating lease expense 364 302 Loss on sale of assets 303 704 Changes in operating assets and liabilities: Prepaid expenses and other current assets 10,458 ( 3,842 ) Other assets 165 ( 53 ) Accounts payable ( 5,629 ) ( 2,842 ) Accrued expenses and other current liabilities ( 8,636 ) 2,975 Non-current operating lease liabilities ( 796 ) ( 702 ) Deferred revenue 343 — Net cash used in operating activities ( 81,228 ) ( 94,498 ) Cash flows from investing activities: Sale and maturities of investments 190,999 193,325 Purchases of investments ( 79,733 ) ( 132,377 ) Purchases of property and equipment ( 407 ) ( 11,614 ) Sale of property and equipment — 104 Net cash provided by investing activities 110,859 49,438 Cash flows from financing activities: Proceeds from sale of common stock and pre-funded warrants, net of issuance cost 48,170 — Proceeds from the exercise of stock options and purchases of common stock pursuant to the employee stock purchase plan 499 171 Taxes paid related to net share settlement of equity awards ( 53 ) — Net cash provided by financing activities 48,616 171 Net increase (decrease) in cash and cash equivalents 78,247 ( 44,889 ) Cash and cash equivalents, beginning of period 47,379 92,268 Cash and cash equivalents, end of period $ 125,626 $ 47,379 Supplemental disclosures of non-cash investing and financing activities: Unpaid amounts for direct offering costs $ 339 $ — Deferred offering cost paid in prior period $ 251 $ — Unpaid amounts related to purchase of property and equipment $ 71 $ — Operating lease liabilities recognized for operating right-of-use assets $ — $ 5,447 Operating right-of-use assets exchanged for operating lease liabilities $ — $ 2,945 See accompanying notes to financial statements 69 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 biotechnology company pioneering the development of dual-sided fusion proteins, including its Agonist Redirected Checkpoint (“ARC®”) platform, as an entirely new class of biologic medicine capable of multifunctional activity with potential applications in oncology and autoimmune and inflammatory diseases, and other therapeutic areas. 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 $ 306.3 million as of December 31, 2023. 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 $ 130.6 million as of December 31, 2023 are sufficient to fund projected operations of the Company for at least the next twelve months. Global Economic Considerations 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, financial institution instability, instability in the geopolitical environment, 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 the Company’s 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. 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. 70 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. All of the Company’s revenue in 2023 and 2022 was derived from a collaboration agreement with ImmunoGen, Inc. (“ImmunoGen”) and a collaboration agreement with another third-party pharmaceutical company. In February 2024, ImmunoGen was acquired by AbbVie, Inc. The Company is highly dependent on a limited number of contract development and manufacturing organizations (“CDMOs”) 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 $ 4.8 million held in operating accounts, $ 81.1 million held in money market funds and $ 39.7 million in U.S. Government Securities as of December 31, 2023 and $ 3.5 million held in operating accounts and $ 43.9 million held in money market funds as of December 31, 2022. 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, 2023 and 2022, there were no impairments related to credit losses of investments. 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. 71 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 years ended December 31, 2023 and 2022, the Company recorded $ 0.3 million and $ 0.7 million, respectively, 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. 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 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. 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 72 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. 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. 73 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 CDMOs. The Company accrues for expenses resulting from obligations under agreements with CROs, CDMOs 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, CDMOs and other outside service providers. These estimates are typically based on contracted amounts applied to the proportion of work performed and determined through an evaluation of the progress or stage of completion of the services. In the event advance payments are made to a CRO, CDMO 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. Pre-Funded Warrants The Company’s pre-funded warrants are classified as a component of permanent stockholders’ equity within additional paid-in capital and were recorded at the issuance date using a relative fair value allocation method. The pre-funded warrants are 74 equity classified because they (i) are freestanding financial instruments, (ii) are immediately exercisable, (iii) do not embody an obligation for the Company to repurchase its shares, (iv) permit the holders to receive a fixed number of shares of common stock upon exercise, (v) are indexed to the Company’s common stock and (vi) meet the equity classification criteria. In addition, such pre-funded warrants do not provide any guarantee of value or return. The Company valued the pre-funded warrants at issuance, concluding that their sales price approximated their fair value. 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. Basic shares outstanding includes the weighted average effect of the Company’s outstanding pre-funded warrants, the exercise of which requires nominal consideration for the delivery of shares of common stock. 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, 2023 and 2022, as they would be anti-dilutive: As of December 31, 2023 2022 Stock options 4,942,164 4,209,255 Unvested restricted stock units 590,403 309,477 5,532,567 4,518,732 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. 75 Recently Adopted Accounting Pronouncements There were no recently issued accounting statements expected to have a material impact on the Company. 3. Investments The following table represents the Company’s available-for-sale investments by major security type (amounts in thousands): December 31, 2023 Amortized Cost Gross Unrealized Gain Total Fair Value Investments: U.S. government securities $ 4,998 $ 1 $ 4,999 Cash Equivalents: U.S. government securities 39,657 3 39,660 Total level 1 debt securities $ 44,655 $ 4 $ 44,659 December 31, 2022 Amortized Cost Gross Unrealized Loss Total Fair Value Investments: U.S. government securities $ 114,778 $ ( 877 ) $ 113,901 Cash Equivalents: U.S. government securities — — — Total level 1 debt securities $ 114,778 $ ( 877 ) $ 113,901 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 0.15 years as of December 31, 2023. 4. Property and Equipment Property and equipment consisted of the following (amounts in thousands): December 31, 2023 2022 Lab equipment $ 15,469 $ 15,547 Leasehold improvements 7,097 7,086 Furniture and fixtures 452 452 Office equipment 192 191 Construction in progress 100 104 Property and equipment, gross 23,310 23,380 Less: Accumulated depreciation and amortization ( 9,506 ) ( 5,709 ) Property and equipment, net $ 13,804 $ 17,671 Depreciation and amortization expense for the years ended December 31, 2023 and 2022 was $ 4.0 million and $ 3.1 million, respectively. 76 5. Accrued Expenses Accrued expenses consisted of the following (amounts in thousands): December 31, 2023 2022 Research and development contract costs $ 4,235 $ 11,256 Compensation and related benefits 3,794 3,967 Lease liabilities 796 701 Litigation settlement — 1,400 Other current liabilities 1,041 471 Total accrued expenses and other current liabilities $ 9,866 $ 17,795 6. Leases 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): December 31, Balance Sheet Classification 2023 2022 Other assets $ 2,271 $ 2,635 Accrued expenses and other current liabilities $ 796 $ 701 Non-current operating lease liabilities 3,406 4,202 Total liabilities $ 4,202 $ 4,903 The following table summarizes the weighted-average remaining lease term and discount rates for the Company’s operating leases: December 31, 2023 2022 Lease term (years) 4.5 5.5 Discount rate 8.6 % 8.6 % The Company incurred rent expense for its operating leases of $ 0.8 million for the years ended December 31, 2023 and 2022, respectively, which is included within operating expenses in the statements of operations and comprehensive loss. Cash paid for amounts included in the measurement of operating lease liabilities for the year ended December 31, 2023 and 2022 was $ 1.0 million and was included in net cash used in operating activities in the statement of cash flows. 77 The maturities of the Company’s operating lease liabilities as of December 31, 2023 were as follows (in thousands): 2024 $ 1,120 2025 1,152 2026 1,093 2027 848 2028 873 Thereafter — Total lease payments $ 5,086 Less: Imputed interest ( 884 ) Total $ 4,202 7. Commitments and Contingencies Kopfkino License Agreement The Company is party to an Exclusive License Agreement (“the Kopfkino License Agreement”), with Kopfkino IP, LLC (“Kopfkino”). Under terms of the Kopfkino License Agreement the Company is required to make payments of up to $ 20.5 million in aggregate for the achievement of specified development, regulatory and commercial sales milestones for certain licensed products. The Company is required to pay Kopfkino 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 Kopfkino 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. The Company originally entered into the Kopfkino License Agreement in June 2016 with Scorpius Holdings, Inc., (“Scorpius”) (f/k/a Nighthawk Biosciences, Inc., f/k/a Heat Biologics Inc.). In January 2024, Scorpius assigned the rights, title, and interest in and under the agreement, along with the underlying patents and patent applications, to Kopfkino. 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 the Company 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 cited the volatility in the Company’s common stock and alleged that the defendants made or were responsible for misleading omissions regarding the Company’s clinical trial results and the collaboration agreement with Millennium Pharmaceuticals, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company, Ltd. The court approved the parties’ settlement of the plaintiffs’ claims in the amount of $ 1.4 million and entered a final judgment dismissing the class action claims with prejudice on November 6, 2023. The Company paid the amount to the escrow agent for the settlement on June 19, 2023. 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 CDMOs 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 CDMO 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. 78 8. Collaboration Agreements The Company recognizes revenue for collaboration agreements 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, and any upfront payments are deferred accordingly. In 2022 the Company entered into a collaboration agreement with ImmunoGen. Pursuant to the collaboration agreement, ImmunoGen will reimburse the Company for $ 2.0 million of the costs we incur in the Phase 1B combination cohort evaluating SL-172154 in combination with mirvetuximab soravtansine in patients with platinum-resistant ovarian cancer. The Company dosed its first patient with mirvetuximab soravtansine in 2023 and recognized $ 1.7 million of revenue under the collaboration agreement in 2023. In February 2024, ImmunoGen was acquired by AbbVie, Inc. In 2022, the Company also executed and completed a collaboration agreement with a third party and recognized $ 0.7 million in revenue. On February 13, 2024, we entered into a collaboration and license agreement (the “Ono Agreement”) with Ono Pharmaceutical Co., Ltd (“Ono”) pursuant to which the parties will collaborate in the research and preclinical development of certain prespecified compounds directed toward a pair of targets selected by Ono from our pipeline of bifunctional fusion proteins. Pursuant to the Ono Agreement, the Company granted to Ono an exclusive option (the “Option”) to enter into an exclusive license to further develop, manufacture and sell products containing these bifunctional fusion proteins. Pursuant to the Ono Agreement, the Company and Ono developed a nonclinical research plan (the “Research Plan”). The Company is primarily responsible for carrying out the research activities in accordance with the Research Plan, subject to the oversight of a joint research committee consisting of representatives from each party. Ono is responsible for all research costs incurred under the Research Plan. Pursuant to the Ono Agreement, Ono will pay the Company $ 5.4 million to secure the Option and to cover the first six months of expected research costs under the Research Plan. In addition to further Research Plan funding, the Company is entitled to receive from Ono up to $ 224.5 million in aggregate consisting of license fees and milestone payments based on the achievement of specified development, regulatory, and sales milestones. The company may receive tiered royalties on product sales, ranging from mid-single digit to low-double digit percentages. Ono may terminate the Collaboration Agreement at any time upon 90 days’ written notice to us. If Ono exercises such termination right, Ono will pay all of our costs up through the date of termination. 9. Equity The Company is authorized to issue up to 300,000,000 shares of common stock and 10,000,000 shares of preferred stock, all with a par value of $ 0.0001 per share. The holders of the Company’s common stock are entitled to one vote per share on all matters submitted to a vote of stockholders. The Company’s common stock is not entitled to preemptive rights, and is not subject to conversion, redemption or sinking fund provisions. Subject to preferences that may apply to any shares of preferred stock outstanding at the time, the holders of the Company’s common stock will receive ratably any dividends declared by the Company’s board of directors (“Board”) out of funds legally available. In the event of the Company’s liquidation, dissolution or winding-up, the holders of the Company’s common stock will be entitled to share ratably in all assets remaining after payment of or provision for any liabilities. As of the periods presented, no common stock dividends had been declared by the Board. At December 31, 2023, none of the 10,000,000 shares of preferred stock were outstanding, and the Company has no present plans to issue any shares of preferred stock. On December 26, 2023, the Company sold 4,651,163 shares of common stock through an underwritten public offering, and concurrently completed a private placement of 3,100,823 pre-funded warrants for net proceeds of $ 47.6 million. The purchase price per share of common stock was $ 6.45 , and the purchase price per pre-funded warrant was $ 6.4499 which was the purchase price per share of common stock, minus the $ 0.0001 per share exercise price of such pre-funded warrant. Each pre-funded warrant may be exercised for one share of common stock, is immediately exercisable, does not expire, and is subject to a beneficial ownership limitation of 9.99 % post-exercise. As of December 31, 2023, no pre-funded warrants have been exercised, and 3,100,823 pre-funded warrants remain outstanding. In July 2022, the Company entered into a sales agreement (the “Sales Agreement”) with SVB Securities LLC (the “Sales Agent”), pursuant to which it may offer and sell up to $ 75.0 million of shares of its common stock from time to time (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, 2023, there were no sales pursuant to the ATM Facility . 79 10. Stock-Based Compensation and Employee Benefit Plans 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 stock on December 31st of the preceding calendar year. 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. As of December 31, 2023, there were 3,983,756 shares of common stock available for future grants. On January 1, 2024, the share reserve automatically increased by 1,890,404 shares. 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 2023, the Company granted 165,050 options that vest in equal tranches based on the Company achieving a closing share price of equal to or greater than $ 4.00 , $ 5.00 , and $ 6.00 for 30 consecutive trading days on or before the four th anniversary of the grant date. In 2022, the Company granted 178,150 options 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. 2020 Employee Stock Purchase Plan The 2020 Employee Stock Purchase Plan (the“2020 ESPP”) became effective in connection with the Company’s initial public offering (“IPO”) and as of December 31, 2023, a total of 1,204,874 shares of common stock are 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, 2024, the share reserve increased by 472,601 shares of common stock. During the years ended December 31, 2023 and 2022, the Company issued 23,020 and 13,088 shares of common stock for aggregate cash proceeds of $ 0.1 million and $ 0.1 million, respectively. 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, 2023 2022 Research and development $ 3,462 $ 3,574 General and administrative 3,477 2,888 Total stock-based compensation $ 6,939 $ 6,462 The following table summarizes option activity under the 2020 Plan: Options Weighted Average Exercise Price Weighted Average Remaining Life (Years) Balance at December 31, 2022 4,209,255 $ 8.29 8.07 Granted 1,462,535 3.41 Exercised ( 135,254 ) 3.26 Forfeited ( 594,372 ) 6.41 Balance at December 31, 2023 4,942,164 $ 7.21 7.62 Vested and expected to vest 4,787,518 $ 7.27 7.47 Exercisable at the end of the period 2,696,018 $ 8.34 6.47 Options granted during the years ended December 31, 2023 and 2022 had weighted-average grant-date fair values of $ 2.50 and $ 4.03 per share, respectively. As of December 31, 2023, the unrecognized compensation cost for options issued was $ 8.0 million and will be recognized over an estimated weighted-average amortization period of 1.94 years. The total intrinsic 80 value of options exercised during the years ended December 31, 2023 and 2022 was $ 0.40 million and $ 0.1 million, respectively. The aggregate intrinsic value of options outstanding and exercisable as of December 31, 2023 was $ 6.6 million. Restricted Stock Units The following table summarizes employee RSU activity for the year ended December 31, 2023: Awards Weighted Average Grant Date Fair Value Unvested RSUs at December 31, 2022 309,477 $ 7.22 Granted 460,925 3.54 Vested ( 77,312 ) 7.22 Forfeited ( 102,687 ) 4.62 Balance at December 31, 2023 590,403 $ 4.80 The Company recognized $ 0.8 million and $ 0.6 million of stock-based compensation related to RSUs as of December 31, 2023 and December 31, 2022. As of December 31, 2023, the unrecognized compensation cost for RSUs issued was $ 2.0 million and will be recognized over an estimated weighted-average amortization period of 2.70 years. The fair values of RSUs is 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. • 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. 81 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, 2023 2022 2020 Plan Expected term - years 6.08 6.08 Expected volatility 84.8 % 82.4 % Risk-free interest rate 3.6 % 2.4 % 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, 2023 2022 2020 Plan Expected term - years 4.00 4.00 Expected volatility 80.0 % 80.0 % Risk-free interest rate 3.6 % 1.4 % Expected dividends — — . 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, 2023 2022 2020 ESPP Expected term - years 0.5 0.5 Expected volatility 85.5 % 82.9 % Risk-free interest rate 4.0 % 2.5 % Expected dividends — — Employee Benefit Plans The Company sponsors a 401(k) retirement plan in which substantially all of its full-time employees are eligible to participate. Participants may contribute a percentage of their annual compensation to this plan, subject to statutory limitations. The Company made matching contributions of $ 0.7 million and $ 0.5 million to the plan for the years ended December 31, 2023 and 2022, respectively. 82 11. Income Taxes The Company recorded no federal provision for income taxes as of December 31, 2023 and 2022 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, 2023 and 2022 (amounts in thousands): Year Ended December 31, 2023 2022 Income tax benefit computed at federal statutory tax rate $ ( 18,332 ) $ ( 21,409 ) Change in valuation allowance 21,347 24,713 General business credits ( 4,392 ) ( 4,883 ) Stock compensation 486 602 Change in uncertain tax position 878 977 Other 13 — Income tax benefit $ — $ — Significant components of the Company’s deferred tax assets and liabilities are as follows (amounts in thousands): December 31, 2023 2022 Deferred tax asset: Net operating loss carryforwards $ 31,393 $ 24,867 Accrued expenses and other 1,827 3,578 Stock compensation 2,431 1,533 Credit carryforwards 13,614 10,101 Capital loss carryforwards 583 583 Capitalized R&D expense 27,210 15,017 Lease liabilities 882 1,030 Gross deferred tax asset 77,940 56,709 Less valuation allowance ( 76,386 ) ( 55,044 ) Net deferred tax asset 1,554 1,665 Deferred tax liability: Depreciation and amortization ( 744 ) ( 676 ) Prepaid expenses ( 334 ) ( 436 ) Lease assets ( 476 ) ( 553 ) Total deferred tax liability ( 1,554 ) ( 1,665 ) 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 $ 21.3 million and $ 24.7 million during the years ended December 31, 2023 and 2022, respectively, primarily due to continuing loss from operations, general business credit carryforwards, and accrued expenses. As of December 31, 2023 and 2022, the Company had gross U.S. net operating loss (“NOL”) carryforwards of $ 149.5 million and $ 118.4 million, respectively. Additionally, as of December 31, 2023 and 2022, the Company had capital loss carryforwards of $ 2.8 million. As of December 31, 2023 and 2022, the Company had gross state NOL carryforwards of $ 0.2 million. As of December 31, 2023 and 2022, the Company had gross U.S. tax credit carryforwards of $ 16.9 million and $ 12.5 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. 83 A reconciliation of the Company’s liability for unrecognized tax benefits is as follows (amounts in thousands): Year Ended December 31, 2023 2022 Balance, beginning of the year $ 2,380 $ 1,404 Increase for tax positions related to the current year 642 733 Increase for tax positions related to prior years 236 243 Balance, end of year $ 3,258 $ 2,380 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, 2023, 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 2020, 2021, and 2022 tax years. There are currently no federal or state income tax audits in progress. 12. Subsequent Events See Note 8 regarding the Ono Agreement entered into on February 13, 2024. 84 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.