Alaunos Therapeutics, Inc. 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those under “Risk Factors” included in Part I, Item 1A and under “Special Note Regarding Forward-Looking Statements” or in other parts of this Annual Report on Form 10-K. Overview We are a clinical-stage oncology-focused cell therapy company developing adoptive TCR-T, designed to treat multiple solid tumor types in large cancer patient populations with unmet clinical needs. We are leveraging our novel cancer mutation hotspot TCR library and our proprietary, non-viral Sleeping Beauty gene transfer platform to design and manufacture patient-specific cell therapies that target neoantigens arising from common tumor-related mutations in key oncogenic genes, including KRAS , TP53 , and EGFR . In collaboration with MD Anderson, we are currently enrolling patients for a Phase 1/2 clinical trial evaluating ten TCRs reactive to mutated KRAS, TP53 , and EGFR from our TCR library for the investigational treatment of non-small cell lung, colorectal, endometrial, pancreatic, ovarian, and bile duct, which we refer to as our TCR-T Library Phase 1/2 Trial. We anticipate treating our first patient in this trial in the second quarter of 2022 and reporting interim data in the second half of 2022. As of December 31, 2021, we have approximately $76.1 million of cash and cash equivalents. Given our current development plans, we anticipate our cash resources will be sufficient to fund our operations into the second quarter of 2023, and we have no committed sources of additional capital at this time. See "Liquidity and Capital Resources." Our amended and restated certificate of incorporation authorizes us to issue 350,000,000 shares of common stock. As of December 31, 2021, there were 216,127,443 shares of common stock outstanding and an additional 33,620,711 shares of common stock reserved for issuance pursuant to outstanding stock options and warrants. We may need additional shares for business and financial purposes in the future. We have not generated any product revenue and have incurred significant net losses in each year since our inception. For the year ended December 31, 2021, we had a net loss of $78.8 million, and through December 31, 2021, we have incurred approximately $842.9 million of accumulated deficit since our inception in 2003. We expect to continue to incur significant operating expenditures and net losses. Further development of our product candidates will likely require substantial increases in our expenses as we: • continue to undertake clinical trials for product candidates; • seek regulatory approvals for product candidates; • work with regulatory authorities to identify and address program-related inquiries; • implement additional internal systems and infrastructure; • hire additional personnel; and • scale-up and scale-out the manufacturing of our product candidates. We continue to seek additional financial resources to fund the further development of our product candidates. If we are unable to obtain sufficient additional capital, one or more of these programs could be delayed, and we may be unable to continue our operations at planned levels and be forced to reduce our operations. Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Recent Developments On September 27, 2021, we announced a restructuring designed to enable us to focus on and advance our TCR program. As a result of the restructuring, approximately 60 positions were eliminated, and we anticipate that the cost savings associated with the restructuring will extend our cash runway. Given our current development plans and cash management efforts, we anticipate cash resources will be sufficient to fund operations into the second quarter of 2023. The ongoing COVID-19 global pandemic has presented a significant health and economic challenge around the world and may affect our employees, partners and business operations. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted. Supply chain disruptions caused by the pandemic may negatively impact productivity, disrupt our business and delay our clinical programs and timelines. The severity of negative impacts will depend, in part, on the length and magnitude of the disruptions. These and perhaps more severe 53 Table of Contents disruptions in our operations could negatively impact our business, operating results and financial condition. We continue to work with our partners to mitigate the impact the COVID-19 pandemic is having on our business. Financial Overview Collaboration Revenue We recognize research and development funding revenue over the estimated period of performance. To date we have not generated product revenue. Unless and until we receive approval from the FDA and/or other regulatory authorities for our product candidates, we cannot sell our products and will not have product revenue. Research and Development Expenses Our research and development expenses consist primarily of salaries and related expenses for personnel, costs of contract manufacturing services, costs of facilities, reagents, and equipment, fees paid to professional service providers in conjunction with our clinical trials, fees paid to contract research organizations in conjunction with clinical trials, fees paid to contract research organizations in conjunction with costs of materials used in research and development, consulting, license and milestone payments and sponsored research fees paid to third parties. We have not accumulated and tracked our internal historical research and development costs or our personnel and personnel-related costs on a program-by-program basis. Our employee and infrastructure resources are allocated across several projects, and many of our costs are directed to broadly applicable research endeavors. As a result, we cannot state the costs incurred for each of our oncology programs on a program-by-program basis. We do track our accumulated costs by program for costs incurred by outside vendors conducting research for our named clinical candidates. For the year ended December 31, 2021, our clinical stage projects included our TCR-T Library Phase 1/2 Trial evaluating TCRs from our library for the investigational treatment of non-small cell lung, colorectal, endometrial, pancreatic, ovarian, and bile duct cancers; a Phase 2 clinical trial of Ad-RTS-hIL-12 with veledimex in combination with cemiplimab-rwlc in progressive glioblastoma; a Phase 1/2 clinical trial of Ad-RTS-hIL-12 with veledimex for the treatment of pediatric brain tumors; a Phase 1 clinical trial with Ad-RTS-IL-12 plus veledimex in progressive glioblastoma; and a Phase 1 clinical trial infusing our second generation CD19-specific CAR-T cells in patients with advanced lymphoid malignancies. Since December 31, 2021, we have significantly reduced spending on all programs other than our TCR-T Library Phase 1/2 Trial. Costs incurred by outside vendors conducting research for our named clinical candidates during the year ended December 31, 2021 and through inception are as follows: Year ended Since Inception, Through (in millions) December 31, 2021 December 31, 2021 Direct external expenses by program: TCR-T Library Phase 1/2 Trial $ 15.4 $ 15.4 Ad-RTS-hIL-12 with veledimex in combination with cemiplimab-rwlc $ 1.5 $ 7.9 Ad-RTS-hIL-12 with veledimex for the treatment of pediatric brain tumors $ 0.2 $ 2.7 Ad-RTS-IL-12 plus veledimex in progressive glioblastoma $ 0.3 $ 14.9 CD19-specific CAR+ T cells in patients with advanced lymphoid malignancies $ 0.1 $ 6.2 Our future research and development expenses in support of our current and future programs will be subject to numerous uncertainties in timing and cost to completion. We test potential products in numerous preclinical studies for safety, toxicology and efficacy. We may conduct multiple clinical trials for each product. As we obtain results from trials, we may elect to discontinue or delay clinical trials for certain products in order to focus our resources on more promising products or indications. Completion of clinical trials may take several years or more, and the length of time generally varies substantially according to the type, complexity, novelty and intended use of a product. It is not unusual for preclinical and clinical development of each of these types of products to require the expenditure of substantial resources. The duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others, the following: • The number of clinical sites included in the trials; • The length of time required to enroll suitable patients; • The number of patients that ultimately participate in the trials; • The length of time and cost to develop and optimize manufacturing processes; • The cost to manufacture the clinical products for patients; • The duration of patient follow-up to ensure the absence of long-term product-related adverse events; and 54 Table of Contents • The efficacy and safety profile of the product. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our programs or when and to what extent we will receive cash inflows from the commercialization and sale of a product. Our inability to complete our programs in a timely manner or our failure to enter into appropriate collaborative agreements could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time-to-time in order to continue with our product development strategy. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business. General and Administrative Expenses General and administrative expenses consist primarily of salaries, benefits and stock-based compensation, consulting and professional fees, including patent related costs, general corporate costs and facility costs not otherwise included in research and development expenses or cost of product revenue. Other Income (Expense) Other income (expense) consists primarily of interest expense associated with our Loan and Security Agreement. Results of Operations for the Fiscal Years ended December 31, 2021 and 2020 For the Year Ended December 31, 2021 2020 Collaboration revenue $ 398 $ — Operating expenses: Research and development 49,643 52,696 General and administrative 27,564 27,665 Property and equipment and right-of-use assets impairment 740 - Total operating expenses 77,947 80,361 Loss from operations (77,549 ) (80,361 ) Other income (expense), net (1,202 ) 385 Net loss $ (78,751 ) $ (79,976 ) Net loss applicable to common stockholders $ (78,751 ) $ (79,976 ) Collaboration Revenue Collaboration revenue during the years ended December 31, 2021 and 2020 were as follows: Year ended December 31, 2021 2020 Change ($ in thousands) Collaboration revenue $ 398 $ — $ 398 100 % Collaboration revenue during the year ended December 31, 2021 was $0.4 million compared to $0 during the year ended December 31, 2020. The increase was due to $0.4 million we recognized in the current year from a collaboration agreement. Research and Development Expenses Research and development expenses during the years ended December 31, 2021 and 2020 were as follows: Year ended December 31, 2021 2020 Change ($ in thousands) Research and development $ 49,643 $ 52,696 $ (3,053 ) (6 )% Research and development expenses for the year ended December 31, 2021 decreased by $3.1 million, or 6%, when compared to the year ended December 31, 2020 primarily due to a decrease in program-related costs of $9.2 million as a result of the winding down of our IL-12 and CAR-T programs. The decrease was partially offset by an increase of $4.3 million in employee related expenses, including a $2.2 million 55 Table of Contents severance charge related to our strategic restructuring event in the third quarter of 2021, and a $1.8 million increase in facilities and other related expenses primarily related to our expanded facilities in Houston. General and Administrative Expenses General and administrative expenses during the years ended December 31, 2021 and 2020 were as follows: Year ended December 31, 2021 2020 Change ($ in thousands) General and administrative $ 27,564 $ 27,665 $ (101 ) (0 )% General and administrative expenses for the year ended December 31, 2021 decreased by $0.1 million as compared to the year ended December 31, 2020, primarily due to a decrease in professional services of $4.4 million, partially offset by a $4.3 million increase in employee related expenses, including a $1.3 million severance charge related to our strategic restructuring event in the third quarter of 2021 and other severance-related charges incurred during 2021. Impairments Impairments during the years ended December 31, 2021 and 2020 were as follows: Year ended December 31, 2021 2020 Change ($ in thousands) Property and equipment and right-of-use assets impairment $ 740 $ — $ 740 100 % Impairments during the year ended December 31, 2021 were $0.7 million compared to $0 during the year ended December 31, 2020. The increase was due to a change in the intended use of our Boston office, resulting in an impairment charge of $0.6 million to the right-of-use asset and $0.1 million to leasehold improvements and other assets associated with the office. Other Income (Expense) Other income (expense) during the years ended December 31, 2021 and 2020 was as follows: Year ended December 31, 2021 2020 Change ($ in thousands) Interest expense, net $ (1,182 ) $ - $ (1,182 ) (100 )% Other income (expense), net (20 ) 385 (405 ) (105 )% Total $ (1,202 ) $ 385 $ (1,587 ) (412 )% Total other income (expense), net for the year ended December 31, 2021 increased by $1.6 million as compared to the year ended December 31, 2020 due to $1.2 million of interest expense associated with our Loan and Security Agreement, as defined below, and a reduction in other income of $0.4 million. Liquidity and Capital Resources Sources of Liquidity We have not generated any revenue from product sales. Since inception, we have incurred net losses and negative cash flows from our operations. To date, we have financed our operations primarily through public offerings of our common stock, private placements of our convertible equity securities, term debt and collaborations. Through December 31, 2021, we have received an aggregate of $714.1 million from issuances of equity and $25.0 million from our Loan and Security Agreement, as defined below. Loan and Security Agreement On August 6, 2021, we entered into the Loan and Security Agreement. The Loan and Security Agreement provided for an initial term loan of $25.0 million funded at the closing, with an additional tranche of $25.0 million available if certain funding and clinical milestones were met by August 31, 2022. On December 28, 2021, we entered into a First Amendment, or the Amendment, to the Loan and Security Agreement, or the Amended Loan and Security Agreement. 56 Table of Contents Under the terms of the Amended Loan and Security Agreement, the SVB Facility was modified to eliminate the additional $25.0 million tranche, which remained unfunded, leaving only the initial $25.0 million as the full amount available under the SVB Facility. The SVB Facility bears interest at a floating rate per annum on the outstanding loans, payable monthly, at the greater of (a) 7.75% and (b) the current published U.S. prime rate, plus a margin of 4.5%. The Amended Loan and Security Agreement provides for an interest-only period which extends through August 31, 2022, as compared to March 31, 2022 in the Loan and Security Agreement, and may be automatically extended through August 31, 2023, if, on or prior to August 31, 2022, SVB receives evidence, satisfactory to it, confirming that we have (i) received at least $50.0 million in net cash proceeds from the sale of our equity securities after the date of the Amended Loan and Security Agreement, on terms and conditions acceptable to SVB, and (ii) achieved positive data in the first cohort of the TCR-T Library Phase 1/2 Trial endorsed by an independent safety monitoring committee as a safe dose to proceed (together, the “Amended Milestones”). After the interest-only payment period, aggregate outstanding borrowings are repayable in twelve consecutive, equal monthly installments of principal plus accrued interest. All outstanding principal and accrued and unpaid interest under the SVB Facility and all other outstanding obligations under the Amended Loan and Security Agreement are due and payable on August 1, 2023; however, if we achieve the Amended Milestones on or prior to August 31, 2022, then the maturity will be automatically extended to August 1, 2024. In addition to the payment of the outstanding principal plus accrued interest due, we will also owe SVB a final payment fee equal to 5.75% of the original principal amounts borrowed. We are permitted to make up to two prepayments, each payment of at least $5.0 million, subject to the prepayment premium of the SVB Facility. Such prepayment premium would be 3.00% of the principal amount of the SVB Facility if prepaid prior to the first anniversary of the effective date, 2.00% of the principal amount of the SVB Facility if prepaid on or after the first anniversary of the effective date but prior to the second anniversary of the effective date and 1.00% of the principal amount of the SVB Facility if prepaid on or after the second anniversary of the effective date but prior to maturity date. No amount that has been repaid may be reborrowed. The Loan and Security Agreement required us to cash collateralize half of the sum of the outstanding principal amount of the term loans, plus an amount equal to 5.75% of the original principal amount of any portion of the SVB Facility actually extended, if we failed to achieve to a certain fundraising milestone on or prior to December 31, 2021. The Amended Loan and Security Agreement revised our cash collateralization obligation to require us to cash collateralize half of the sum of only the then-outstanding principal amount of the SVB Facility, plus an amount equal to 5.75% of the original principal amount of the SVB Facility if we do not achieve the Amended Milestones on or prior to August 31, 2022. In the event a cash collateralization were to occur, so long as no event of default has occurred and, after subtracting the eighth scheduled payment of principal and interest on the SVB Facility, the sum of the aggregate of outstanding principal and accrued and unpaid interest, plus the final payment, is equal to or less than $9,770,933, then, within ten business days of the date of receipt of the eighth scheduled payment of principal and interest on the SVB Facility, SVB will release $2.5 million from the collateral account, so long as the balance in the collateral account after the release would equal or exceed $10.0 million. If no event of default has occurred and, after subtracting the tenth scheduled payment of principal and interest on the SVB Facility, the sum of the aggregate of outstanding principal and accrued and unpaid interest, plus the final payment, is equal to or less than $5,604,167, then, within ten business days of the date of receipt of the tenth scheduled payment of principal and interest on the SVB Facility, SVB will release a further $4.0 million from the collateral account, so long as the balance in the collateral account after the release would equal or exceed $6.0 million. The SVB Facility and related obligations under the Amended Loan and Security Agreement are secured by substantially all of our properties, rights and assets, except for its intellectual property (which is subject to a negative pledge under the Amended Loan and Security Agreement). In addition, the Amended Loan and Security Agreement contains customary representations, warranties, events of default and covenants. In connection with our entry into the Loan and Security Agreement, we issued to SVB warrants to purchase (i) up to 432,844 shares of our common stock, par value $0.001 per share, in the aggregate, and (ii) up to an additional 432,842 shares of Common Stock, in the aggregate, in the event we achieve certain clinical milestones, in each case at an exercise price per share of $2.22. In connection with the entry into the Amendment, we amended and restated the warrants issued to SVB. As amended and restated, the warrants are for up to 649,615 shares of our common stock, in the aggregate, at an exercise price per share of $1.16, or the SVB Warrants. The SVB Warrants expire on August 6, 2031. February 2020 Public Offering On February 5, 2020, we issued and sold 27,826,086 shares of our common stock at an offering price to the public of $3.25 per share, for aggregate net proceeds of approximately $84.8 million after deducting underwriting discounts and offering expenses paid by us. The offering was made pursuant to our effective registration statement on Form S-3ASR (File No. 333-232283) previously filed with the SEC, and a prospectus supplement thereunder. On March 10, 2020, the underwriters exercised their option to purchase an additional 1,284,025 shares. The net proceeds were approximately $3.9 million after deducting underwriting discounts and offering expenses paid by us. 57 Table of Contents At-the-Market Facility In June 2019, we entered into an Open Market Sale Agreement, or Sales Agreement, with Jefferies LLC as a sale agent pursuant to which we may offer and sell, from time to time through Jefferies, shares of our common stock having an aggregate offering value of up to $100.0 million. Shares will be sold pursuant to our effective registration statement on Form S-3ASR (File No. 333-232283), as previously filed with the SEC. Subject to the terms of the Sales Agreement, we are able to determine, at our sole discretion, the timing and number of shares to be sold under this at-the-market, or ATM, facility. The compensation to Jefferies for sales of our common stock pursuant to the Sales Agreement will be an amount equal to 3% of the gross proceeds of any shares of common stock sold under the sales agreement. During the year ended December 31, 2020, we issued and sold an aggregate of 2,814,673 shares for aggregate net proceeds of approximately $13.0 million after deducting underwriting discounts and offering expenses payable by us. We did not sell any shares of our common stock under the ATM facility during the year ended December 31, 2021. Cash Flows The following table summarizes our net increase (decrease) in cash and cash equivalents for the years ended December 31, 2021 and 2020: Year ended December 31, 2021 2020 ($ in thousands) Net cash provided by (used in): Operating activities $ (61,468 ) $ (57,013 ) Investing activities (3,323 ) (9,778 ) Financing activities 25,776 102,119 Net increase (decrease) in cash and cash equivalents $ (39,015 ) $ 35,328 Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. Operating cash flow is derived by adjusting our net loss for: • Non-cash operating items such as depreciation and amortization, stock-based compensation, inducement warrant expense, and warrants for common stock issued; and • Changes in operating assets and liabilities which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in results of operations. Net cash used in operating activities for the year ended December 31, 2021 was $61.5 million, as compared to $57.0 million for the year ended December 31, 2020. The net cash used in operating activities for the year ended December 31, 2021 was primarily a result of our net loss of $78.8 million, adjusted for $14.5 million of non-cash items such as depreciation and stock-based compensation, and a decrease in accrued expenses of $10.5 million, offset by a decrease in receivables of $3.6 million, a decrease in prepaid expenses and other assets of $9.2 million, and an increase in accounts payable of $0.3 million. The net cash used in operating activities for the year ended December 31, 2020 was primarily a result of our net loss of $80.0 million, an increase in receivables of $1.3 million, an increase in other noncurrent assets of $0.6 million, partially offset by a decrease in prepaid expenses and other current assets of $11.6 million primarily related to the use of funds at MD Anderson and an increase in accounts payable and accrued expenses of $5.3 million. Net cash used in investing activities was $3.3 million for the year ended December 31, 2021 as compared to $9.8 million for the year ended December 31, 2020. The $6.5 million decrease in net cash used in investing activities for the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily a result of the decision to use available cash to expand our internal cell therapy capabilities in our Houston, Texas facilities during 2020. Net cash provided by financing activities was $25.8 million for the year ended December 31, 2021 compared to $102.1 million for the year ended December 31, 2020. The $25.8 million provided by financing activities during the year ended December 31, 2021 related primarily to proceeds from our $25.0 million SVB Facility and the proceeds from the exercise of stock options equal to $1.0 million. Net cash provided by financing activities was $102.1 million for the year ended December 31, 2020, was primarily a result of net proceeds of $88.7 million from the issuance of common stock in our follow-on public offering and $13.0 million from the issuance of common stock under our ATM facility. Operating Capital and Capital Expenditure Requirements We anticipate that losses will continue for the foreseeable future. As of December 31, 2021, our accumulated deficit was approximately $842.9 million. Our actual cash requirements may vary materially from those planned because of a number of factors, including: • changes in the focus, direction and pace of our development programs; • the effect of competing technologies and market developments; 58 Table of Contents • the scope, progress, timing, costs and results of our TCR-T Library Phase 1/2 Trial for the treatment of certain solid tumors and costs associated with the development of our product candidates; • our headcount growth as we rebuild our workforce with a focus on our TCR program and scale our manufacturing capabilities; • our ability to secure partnering arrangements; and • costs of filing, prosecuting, defending and enforcing any patent claims and any other intellectual property rights, or other developments. As of December 31, 2021, we had approximately $76.1 million of cash and cash equivalents. Given our current development plans, we anticipate our cash resources will be sufficient to fund our operations into the second quarter of 2023. In order to continue our operations beyond our forecasted runway we will need to raise additional capital, and we have no committed sources of additional capital at this time. The forecast of cash resources is forward-looking information that involves risks and uncertainties, and the actual amount of our expenses could vary materially and adversely as a result of a number of factors. We have based our estimates on assumptions that may prove to be wrong, and our expenses could prove to be significantly higher than we currently anticipate. Management does not know whether additional financing will be on terms favorable or acceptable to us when needed, if at all. If adequate additional funds are not available when required, or if we are unsuccessful in entering into partnership agreements for further development of our product candidates, management may need to curtail its development efforts and planned operations. Working capital as of December 31, 2021 was $62.8 million, consisting of $78.8 million in current assets and $16.0 million in current liabilities. Working capital as of December 31, 2020 was $112.2 million, consisting of $130.6 million in current assets and $18.4 million in current liabilities. Operating Leases Our commitments for operating leases relate to laboratory and office space in Houston, Texas and office space in Boston, Massachusetts. On December 21, 2015 and April 15, 2016, we renewed the sublease for our office space in Boston through August 31, 2021. On April 22, 2021, we extended our lease for a portion of office space currently held at our office in Boston. The renewal of the portion of our office space was originally set to expire on August 31, 2021 but was extended through August 31, 2026. On March 12, 2019, we entered into a lease agreement for office space in Houston at MD Anderson through April 2021. On October 15, 2019, we entered into another lease agreement for additional office and laboratory space in Houston through February 2027. On April 7, 2020, we entered into amendments to our existing lease to lease additional office and laboratory space in Houston through February 2027. In June and September 2020, we entered into short-term leases in Houston for additional office and laboratory space. On December 15, 2020, we entered into a second lease in Houston with MD Anderson which provided us additional office and laboratory space through April 2028. Refer to Note 8, Leases , for details on the future funding requirements related to our leases. Royalty and License Fees On May 28, 2019, we entered into the Patent License with the NCI. The terms of the Patent License require us to pay the NCI minimum annual royalties in the amount of $0.3 million, which will be reduced to $0.1 million once the aggregate minimum annual royalties paid by us equals $1.5 million. We have made royalty payments to the NCI in accordance with the patent license agreement. Refer to Note 9, Commitments and Contingencies , for further details. Pursuant to the Patent License, we are also required to make performance-based payments contingent upon the successful completion of clinical and regulatory benchmarks relating to the licensed products. Of such payments, the aggregate potential benchmark payments are $4.3 million, of which aggregate payments of $3.0 million are due only after marketing approval in the United States or in Europe, Japan, Australia, China or India. The first benchmark payment of $0.1 million will be due upon the initiation of our first sponsored Phase 1 clinical trial of a licensed product or licensed process in the field of use licensed under the Patent License. In addition, we are required to pay the NCI one-time benchmark payments following aggregate net sales of licensed products at certain aggregate net sales ranging from $250.0 million to $1.0 billion. The aggregate potential amount of these benchmark payments is $12.0 million. No payments were made during the years ended December 31, 2021 and 2020. On October 5, 2018, we entered into the License Agreement with PGEN. Under the License Agreement, we are obligated to pay PGEN an annual licensing fee of $0.1 million expected to be paid through the term of the agreement and we have also agreed to reimburse certain historical costs of PGEN up to $1.0 million. For the years ended December 31, 2021 and 2020, we have made licensing fee payments in accordance with the terms of the agreement. Pursuant to the terms of the License Agreement, we are responsible for contingent milestone payments totaling up to an additional $52.5 million for each exclusively licensed program upon the initiation of later stage clinical trials and upon the approval of exclusively licensed 59 Table of Contents products in various jurisdictions. In addition, we will pay PGEN tiered royalties ranging from low-single digit to high-single digit on the net sales derived from the sales of any approved IL-12 products and CAR products. We will also pay PGEN royalties ranging from low-single digit to mid-single digit on the net sales derived from the sales of any approved TCR products, up to a maximum royalty amount of $100.0 million in the aggregate. We will also pay PGEN twenty percent of any sublicensing income received by us relating to the licensed products. We are responsible for all development costs associated with each of the licensed products. PGEN will pay us royalties ranging from low-single digits to mid-single digits on the net sales derived from the sale of PGEN’s CAR products, up to a maximum royalty amount of $100.0 million. Critical Accounting Policies and Significant Estimates Our Management’s Discussion and Analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. Actual results may differ materially from these estimates under different assumptions or conditions. We believe the following are our more significant estimates and judgments used in the preparation of our financial statements: • Clinical trial expenses and other research and development expenses; • Collaboration agreements; • Fair value measurements of stock-based compensation; and • Income taxes. Research and Development Costs / Clinical Trial Expenses As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears for services performed, on a predetermined schedule or when contractual milestones are met; however, a few require advanced payments. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. Examples of estimated accrued research and development expenses include fees paid to: • CROs in connection with performing research services on our behalf and clinical trials; • investigative sites or other providers in connection with clinical trials; • vendors in connection with preclinical and clinical development activities; and • vendors related to product manufacturing, development, and distribution of preclinical and clinical supplies. We base our expenses related to preclinical studies and clinical trials on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed, enrollment of patients, number of sites activated and the level of effort to be expended in each period. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in changes to our previous estimates, which we considered reasonably reliable at the time. To date, we have not made any material adjustments to our prior estimates of accrued research and development expenses. Revenue Recognition from Collaboration Agreements We primarily generate revenue through collaboration arrangements with strategic partners for the development and commercialization of product candidates. Commencing January 1, 2018, we recognized revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”) , which replaced ASC 605, Multiple Element Arrangements , as used in historical years. The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods and/or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and/or services. To determine the appropriate amount of revenue to be recognized for arrangements that 60 Table of Contents we determine are within the scope of ASC 606, we perform the following steps: (i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) each performance obligation is satisfied. We recognize collaboration revenue under certain of our license or collaboration agreements that are within the scope of ASC 606. Our contracts with customers typically include promises related to licenses to intellectual property, research and development services and options to purchase additional goods and/or services. If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenue from non-refundable, 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, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. Contracts that include an option to acquire additional goods and/or services are evaluated to determine if such option provides a material right to the customer that it would not have received without entering into the contract. If so, the option is accounted for as a separate performance obligation. If not, the option is considered a marketing offer which would be accounted for as a separate contract upon the customer’s election. The terms of our arrangements with customers typically include the payment of one or more of the following:(i) non-refundable, up-front payment, (ii) development, regulatory and commercial milestone payments, (iii) future options and (iv) royalties on net sales of licensed products. Accordingly, the transaction price is generally comprised of a fixed fee due at contract inception and variable consideration in the form of milestone payments due upon the achievement of specified events and tiered royalties earned when customers recognize net sales of licensed products. We measure the transaction price based on the amount of consideration to which we expect to be entitled in exchange for transferring the promised goods and/or services to the customer. We utilize the most likely amount method to estimate the amount of variable consideration, to predict the amount of consideration to which we will be entitled for our one open contract. Amounts of variable consideration are included in the transaction price to the extent that it is 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. At the inception of each arrangement that includes development and regulatory milestone payments, we evaluate whether the associated event is considered probable of achievement and estimate the amount to be included in the transaction price using the most likely amount method. Milestone payments that are not within the control of us or the licensee, such as those dependent upon receipt of regulatory approval, are not considered to be probable of achievement until the triggering event occurs. At the end of each reporting period, we reevaluate the probability of achievement of each milestone and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenue and net loss in the period of adjustment. For arrangements that include sales-based royalties, including milestone payments based upon the achievement of a certain level of product sales, we recognize revenue upon the later of: (i) when the related sales occur or (ii) when the performance obligation to which some or all of the payment has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any development, regulatory or commercial milestones or royalty revenue resulting from any of our collaboration arrangements. Consideration that would be received for optional goods and/or services is excluded from the transaction price at contract inception. We allocate the transaction price to each performance obligation identified in the contract on a relative standalone selling price basis. However, certain components of variable consideration are allocated specifically to one or more particular performance obligations in a contract to the extent both of the following criteria are met: (i) the terms of the payment relate specifically to the efforts to satisfy the performance obligation or transfer the distinct good or service and (ii) allocating the variable amount of consideration entirely to the performance obligation or the distinct good or service is consistent with the allocation objective of the standard whereby the amount allocated depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services. We develop assumptions that require the use of judgment to determine the standalone selling price for each performance obligation identified in each contract. The key assumptions utilized in determining the standalone selling price for each performance obligation may include forecasted revenue, development timelines, estimated research and development costs, discount rates, likelihood of exercise and probabilities of technical and regulatory success. Revenue is recognized based on the amount of the transaction price that is allocated to each respective performance obligation when or as the performance obligation is satisfied by transferring a promised good and/or service to the customer. For performance obligations that are satisfied over time, we recognize revenue by measuring the progress toward complete satisfaction of the performance obligation using a single method of measuring progress which depicts the performance in transferring control of the associated goods and/or services to the customer. We use input methods to measure the progress toward the complete satisfaction of performance obligations satisfied over time. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenue and net loss in the period of adjustment. Accounting for Stock-Based Compensation Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite service period. Stock-based compensation expense is based on the number of awards ultimately expected to vest and is 61 Table of Contents reduced for forfeitures as they occur. Consistent with prior years, the Company uses the Black-Scholes option pricing model which requires estimates of the expected term option holders will retain their options before exercising them and the estimated volatility of the Company’s common stock price over the expected term. We review our valuation assumptions periodically and, as a result, we may change our valuation assumptions used to value share-based awards granted in future periods. Such changes may lead to a significant change in the expense we recognize in connection with share-based payments. Our assumptions are estimated as follows: • The fair market value of our common stock is considered the quoted market price on NASDAQ. • The expected volatility is based on the historical stock volatility of our common stock over a sufficient period of time equal to the expected term of the options. • The expected term represents the period that our stock options are expected to be outstanding. • The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities commensurate with the expected term of the award. • We have not paid dividends on our common stock nor do we expect to pay dividends in the foreseeable future. Income Taxes In preparing our financial statements, we estimate our income tax liability in each of the jurisdictions in which we operate by estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which, prior to the consideration for the need for a valuation allowance, are included on the balance sheet. Significant management judgment is required in assessing the realizability of our deferred tax assets. In performing this assessment, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making this determination, under the applicable financial accounting standards, we are allowed to consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and the effects of tax planning strategies. Our estimates of future taxable income include, among other items, our estimates of future income tax deductions related to the exercise of stock options. In the event that actual results differ from our estimates, we adjust our estimates in future periods and we may need to establish a valuation allowance, which could materially impact our financial position and results of operations. We account for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. We evaluate uncertain tax positions on an annual basis and adjust the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. Our liabilities for uncertain tax positions can be relieved only if the contingency becomes legally extinguished through either payment to the taxing authority or the expiration of the statute of limitations, the recognition of the benefits associated with the position meet the “more-likely-than-not” threshold or the liability becomes effectively settled through the examination process. We consider matters to be effectively settled once the taxing authority has completed all of its required or expected examination procedures, including all appeals and administrative reviews; we have no plans to appeal or litigate any aspect of the tax position; and we believe that it is highly unlikely that the taxing authority would examine or re-examine the related tax position. We also accrue for potential interest and penalties, related to unrecognized tax benefits in income tax expense. Recent Accounting Pronouncements For a discussion of new accounting standards, please read Note 3 to the accompanying financial statements, Summary of Significant Accounting Principles included in this report. Item 7A. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, we are not required to provide the information under this item. Item 8. Financial Statements and Supplementary Data The information required by this Item 8 is contained on pages F-1 through F-28 of this Annual Report and is incorporated herein by reference. 62 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None.