ALAUNOS THERAPEUTICS, INC. 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 cell therapy, designed to treat multiple solid tumor types in large cancer patient populations with unmet clinical needs. We are leveraging our cancer hotspot mutation 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 shared tumor-specific mutations in key oncogenic genes, including KRAS, TP53 and EGFR. In collaboration with MDAnderson , we are currently enrolling and treating patients for a Phase 1/2 clinical trial evaluating 12 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 cancers, which we refer to as our TCR-T Library Phase 1/2 Trial. As ofDecember 31, 2022 , we had approximately$53.0 million of cash, cash equivalents and restricted cash. Our restricted cash of$13.9 million relates to the Amended Loan and Security Agreement. Given our current development plans, we anticipate our cash resources will be sufficient to fund our operations into the fourth quarter of 2023, and we have no committed sources of additional capital at this time. See "Liquidity and Capital Resources." We have not generated any product revenue and have incurred significant net losses in each year since our inception. For the year endedDecember 31, 2022 , we had a net loss of$37.7 million , and throughDecember 31, 2022 , we have incurred approximately$880.6 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:
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continue to undertake clinical trials for product candidates;
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seek regulatory approvals for product candidates;
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work with regulatory authorities to identify and address program-related inquiries;
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implement additional internal systems and infrastructure;
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hire additional personnel; and
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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.
2022 Developments
In the fourth quarter of 2022, we submitted an IND amendment to the FDA to add two new TCRs to our clinical trial targeting frequent mutations and HLAs, with the potential to double the addressable market of our TCR-T Library Phase 1/2 Trial. The addition of these new TCRs highlights our strategy to add both more HLAs to existing mutations (KRAS-G12V and HLA-DRB1*07:01) and new mutations within our targeted gene families (TP53-R273C and HLA-DPB1*04:02). In 2023, we expect to further expand our library with exclusively owned TCRs targeting recurrent hotspot mutations in KRAS, TP53 and EGFR to include 15 TCRs. We continue to actively enroll patients in our TCR-T Library Phase 1/2 Trial targeting KRAS, TP53 and EGFR hotspot mutations across six solid tumor indications. InSeptember 2022 , we announced the first objective clinical response from a TCR-T cell therapy using non-viral Sleeping Beauty targeting solid tumors. We successfully dosed the third patient in the trial inDecember 2022 and expect to enroll multiple patients in the first half of 2023. The fourth quarter IND amendment also combined our treatment and screening protocols, streamlining enrollment and potentially making it easier for both patients and physicians. The amended IND also eliminated the requirement for retesting of the tumor mutation if six months had passed between screening and treatment. We anticipate providing an interim clinical data update in 2023 as we work toward advancing the TCR-T Library Phase 1/2 Trial into Phase 2 and we expect to be Phase 2 ready by the end of 2023. We continue to execute on our multi-pronged strategy to expand manufacturing capacity and efficiency. We doubled our manufacturing capacity in 2022 allowing for production of two products simultaneously. We also filed an IND amendment to move from fresh to cryopreserved product and expect to begin implementing this change in the first half of 2023. The use of cryopreserved cell products is 54
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expected to reduce manufacturing process time from 30 days to 26 days, a 13% decrease, while increasing flexibility for patient scheduling and treatment. We have ongoing initiatives to optimize the process and further reduce the manufacturing time. We are advancing our TCR-T cell therapy program towards an IND filing anticipated in the second half of 2023. We believe mbIL-15 has the potential to increase the survival of TCR-T cells in the harsh tumor microenvironment and deepen clinical responses. In addition, we continue to conduct translational assessments of treated patients to guide next generation TCR-T therapy approaches including potential combination and multiplexed TCR-T cell therapies. 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. 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:
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The number of clinical sites included in the trials;
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The length of time required to enroll suitable patients;
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The number of patients that ultimately participate in the trials;
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The length of time and cost to develop and optimize manufacturing processes;
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The cost to manufacture the clinical products for patients;
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The duration of patient follow-up to ensure the absence of long-term product-related adverse events; and
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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 Amended Loan and Security Agreement, as defined below, and sublease income, which started accruing onJuly 1, 2022 . 55
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Results of Operations for the Fiscal Years ended
Year Ended December 31,
2022 2021
Collaboration revenue $ 2,922 $ 398
Operating expenses:
Research and development 25,018 49,643
General and administrative 13,142 27,564
Gain on lease modification (133 ) -
Property and equipment and right-of-use assets impairment - 740
Total operating expenses 38,027 77,947
Loss from operations (35,105 ) (77,549 )
Other income (expense):
Interest expense (3,154 ) (1,189 )
Other income (expense), net 529 (13 )
Other income (expense), net (2,625 ) (1,202 )
Net loss $ (37,730 ) $ (78,751 )
Collaboration Revenue
Collaboration revenue during the years ended December 31, 2022 and 2021 were as
follows:
Year Ended December 31,
2022 2021 Change
($ in thousands)
Collaboration revenue $ 2,922 $ 398 $ 2,524 634 %
Collaboration revenue during the year ended December 31, 2022 was $2.9 million
compared to $0.4 during the year ended December 31, 2021 . The increase was
primarily due to $2.9 million we recognized under our license and collaboration
agreement with Solasia Pharma K.K upon achievement of a milestone.
Research and Development Expenses
Research and development expenses during the years endedDecember 31, 2022 and 2021 were as follows: Year Ended December 31, 2022 2021 Change
($ in thousands)
Research and development expenses
Research and development expenses for the year endedDecember 31, 2022 decreased by$24.6 million when compared to the year endedDecember 31, 2021 primarily due to a decrease in program-related costs of$9.7 million , mainly related to the winding down of our IL-12 and CAR-T programs, a$15.5 million decrease in employee-related expenses due to our reduced headcount, a$1.4 million decrease in consulting expenses due to our reduced use of outside service providers and a$0.5 million decrease in facilities and other expenses following the reduction of our real estate footprint in 2022. These decreases were partially offset by a one-time$2.5 million expense to MDAnderson under the terms of our License Agreement resulting from Solasia's achievement of a milestone. Our strategic restructuring event during the year endedDecember 31, 2021 resulted in the termination of approximately 60 full-time employees, which led to the decrease in employee-related expenses. We currently do not anticipate similar events in the future.
General and Administrative Expenses
General and administrative expenses during the years endedDecember 31, 2022 and 2021 were as follows: Year Ended December 31, 2022 2021 Change
($ in thousands)
General and administrative expenses
General and administrative expenses for the year ended
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million decrease in consulting expenses due to lower legal costs and reduced use
of consultants and a
Our strategic restructuring event during the year endedDecember 31, 2021 resulted in the termination of approximately 60 full-time employees, which led to the decrease in employee-related expenses. We currently do not anticipate similar events in the future. Gain on lease modification Gain on lease modifications during the years endedDecember 31, 2022 and 2021 was as follows: Year Ended December 31, 2022 2021 Change
($ in thousands)
Gain on lease modification $ (133 ) $ -
Gain on lease modification during the year endedDecember 31, 2022 was$0.1 million as compared to$0 during the year endedDecember 31, 2021 . As a result of a real estate lease modification during the second quarter of 2022, the associated lease liability and right-of-use asset were remeasured based on the revised lease payments, resulting in a gain of$0.1 million .
Impairments
Impairments during the years endedDecember 31, 2022 and 2021 were as follows: Year ended December 31, 2022 2021 Change ($ in thousands) Property and equipment and right-of-use assets impairment $ - $ 740$ (740 ) 100 % There were no impairments during the year endedDecember 31, 2022 , compared to$0.7 during the year endedDecember 31, 2021 . Due to a change in the intended use of ourBoston office, an impairment charge of$0.6 million to the right-of-use asset and$0.1 million to leasehold improvements and other assets associated with the office was recognized during the year endedDecember 31, 2021 . Other Income (Expense) Other income (expense) during the years endedDecember 31, 2022 and 2021 was as follows: Year Ended December 31, 2022 2021 Change ($ in thousands) Interest expense$ (3,154 ) $ (1,189 ) $ (1,965 ) 165 % Other income (expense), net 529 (13 ) 542 (4169 )% Total$ (2,625 ) $ (1,202 ) $ (1,423 ) 118 % Total other income (expense), net for the year endedDecember 31, 2022 increased by$1.4 million as compared to the year endedDecember 31, 2021 due to additional interest expense associated with our Amended Loan and Security Agreement, as defined below, of$2.0 million , partially offset by increased interest income of$0.5 million recognized during the year endedDecember 31, 2022 as a result of higher interest rates earned on our cash balances.
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. ThroughDecember 31, 2022 , we have received an aggregate of$729.1 million from issuances of equity and$25.0 million from our Amended Loan and Security Agreement. 57
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We follow the guidance of ASC Topic 205-40, Presentation of Financial Statements - Going Concern, in order to determine whether there is substantial doubt about our ability to continue as a going concern for one year after the date our financial statements are issued. Given our current development plans and cash management efforts, we anticipate that our cash resources will be sufficient to fund operations into the fourth quarter of 2023. Our ability to continue operations after our current cash resources are exhausted depends on our ability to obtain additional financing, as to which no assurances can be given. Cash requirements may vary materially from those now planned because of changes in our focus and direction of our research and development programs, competitive and technical advances, patent developments, regulatory changes or other developments. If adequate additional funds are not available when required, management may need to curtail its development efforts and planned operations to conserve cash. Based on the current cash forecast, management has determined that our present capital resources will not be sufficient to fund our planned operations for at least one year from the issuance date of the financial statements, which raises substantial doubt as to our ability to continue as a going concern. This forecast of cash resources and planned operations is forward-looking information that involves risks and uncertainties, and the actual amount of expenses could vary materially and adversely as a result of a number of factors.
2022 Public Offering
OnNovember 29, 2022 , we entered into an underwriting agreement, or the Underwriting Agreement, withCantor Fitzgerald & Co. , or the Underwriter, as the sole underwriter, relating to the issuance and sale in an underwritten offering, or the Offering, of 24,228,719 shares of our common stock, or the Firm Shares, to the Underwriter at a price of$0.6191 per share. Our net proceeds from the Offering were$14.7 million (before accounting for the partial exercise of the Underwriter's option as described below) after deducting underwriting discounts and commissions and offering expenses payable by us. Under the terms of the Underwriting Agreement, we granted the Underwriter an option, exercisable for 30 days, to purchase up to an additional 3,634,307 shares of common stock, or, together with the Firm Shares, the Shares, at the same price per share as the Firm Shares. OnJanuary 5, 2023 , the Underwriter partially exercised its option to purchase 216,294 shares of common stock.
All of the Shares sold in the Offering were sold by us.
2022 Equity Distribution Agreement
OnAugust 12, 2022 , we entered into an Equity Distribution Agreement, or the Equity Distribution Agreement, withPiper Sandler & Co. , or Piper Sandler, pursuant to which we can offer and sell, from time to time at our sole discretion, shares of our common stock having an aggregate offering price of up to$50 million through Piper Sandler as our sales agent in an "at the market offering." Piper Sandler will receive a commission of 3.0% of the gross proceeds of any common stock sold under the Equity Distribution Agreement. During the year endedDecember 31, 2022 , there were no sales of our common stock under the Equity Distribution Agreement. In connection with entering into the Equity Distribution Agreement, we concurrently terminated, effectiveAugust 12, 2022 , the Open Market Sale Agreement, datedJune 21, 2019 , governing our former "at the market offering" program.
2021 Loan and Security Agreement
OnAugust 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 byAugust 31, 2022 . EffectiveDecember 28, 2021 , we entered into the Amended Loan and Security Agreement, or the Amended Loan and Security Agreement. Under the terms of the Amended Loan and Security Agreement, the SVB Facility was modified to eliminate the additional 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 publishedU.S. prime rate, plus a margin of 4.5%. The Amended Loan and Security Agreement provided for an interest-only period throughAugust 31, 2022 . Commencing onSeptember 1, 2022 , aggregate outstanding borrowings became repayable in twelve consecutive, equal monthly installments of principal plus accrued interest. All outstanding obligations under the Amended Loan and Security Agreement are due and payable onAugust 1, 2023 . We will also owe SVB 5.75% of the original principal amounts borrowed as a final payment. We are permitted to make up to two prepayments, subject to a prepayment premium of the amount being prepaid, ranging from 1.00% to 2.00%, of the SVB Facility, each such prepayment to be at least$5.0 million plus all accrued and unpaid interest on the portion being prepaid. As a result of not achieving certain milestones specified in the Amended Loan and Security Agreement on or prior toAugust 31, 2022 , we were required to cash collateralize half of the sum of 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. As ofDecember 31, 2022 , we have collateralized$13.9 million , which is classified as restricted cash on our Balance Sheet. So long as no event of default has occurred and subject to certain other terms related to the remaining 58
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outstanding balance under the SVB Facility being satisfied,$2.5 million will be released from the collateral account following the eighth scheduled payment of principal and interest, and a further$4.0 million will be released following the tenth scheduled payment of principal and interest. 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, in the aggregate, and (ii) up to an additional 432,842 shares of Common Stock, in the aggregate, in the event we achieved certain clinical milestones, in each case at an exercise price per share of$2.22 . In connection with our entry into the Amended Loan and Security Agreement, 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$1.16 , or the SVB Warrants. The SVB Warrants expire onAugust 6, 2031 .
Cash Flows
The following table summarizes our net increase (decrease) in cash and cash
equivalents for the years ended
Year Ended December 31,
2022 2021
($ in thousands)
Net cash provided by (used in):
Operating activities $ (29,232 ) $ (61,468 )
Investing activities (193 ) (3,323 )
Financing activities 6,367 25,776
Net decrease in cash and cash equivalents
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:
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Non-cash operating items such as depreciation and stock-based compensation; and
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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 endedDecember 31, 2022 was$29.2 million , as compared to$61.5 million for the year endedDecember 31, 2021 . The decrease was primarily related to the reduction of our net loss by$41.1 million , partially offset by the extent of non-cash adjustments and working capital impacts. The net cash used in operating activities for the year endedDecember 31, 2022 was primarily a result of our net loss of$37.7 million , adjusted for$9.6 million of non-cash items such as depreciation, stock-based compensation and a decrease in the carrying amount of right-of-use assets, a decrease in accounts receivable of$1.1 million and a decrease in prepaid expenses and other assets of$1.0 million , offset by a decrease in accrued expenses of$0.7 million and a decrease in lease liabilities of$2.5 million . The net cash used in operating activities for the year endedDecember 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$9.4 million and an increase in accounts payable of$0.3 million . Net cash used in investing activities was$0.2 million for the year endedDecember 31, 2022 as compared to$3.3 million for the year endedDecember 31, 2021 . The decrease in net cash used in investing activities for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 was primarily a result of the decision to use available cash to expand our internal cell therapy capabilities in ourHouston, Texas facilities during the first half of 2021. Net cash provided by financing activities was$6.4 million for the year endedDecember 31, 2022 compared to$25.8 million for the year endedDecember 31, 2021 . The$6.4 million provided by financing activities during the year endedDecember 31, 2022 related primarily to$14.7 million in net proceeds from the issuance of common stock (before accounting for the partial exercise of the Underwriter's option), offset by$8.3 million of repayments of long-term debt. Net cash provided by financing activities was$25.8 million for the year endedDecember 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 .
Operating Capital and Capital Expenditure Requirements
We anticipate that losses will continue for the foreseeable future. As ofDecember 31, 2022 , our accumulated deficit was approximately$880.6 million . Our actual cash requirements may vary materially from those planned because of a number of factors, including: 59
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changes in the focus, direction and pace of our development programs;
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the effect of competing technologies and market developments;
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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;
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our headcount growth as we rebuild our workforce with a focus on our TCR program and scale our manufacturing capabilities;
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our ability to secure partnering arrangements; and
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costs of filing, prosecuting, defending and enforcing any patent claims and any other intellectual property rights, or other developments.
As ofDecember 31, 2022 , we had approximately$53.0 million of cash, cash equivalents and restricted cash. Our restricted cash of$13.9 million relates to the Amended Loan and Security Agreement. Given our current development plans, we anticipate our cash resources will be sufficient to fund our operations into the fourth 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, which excludes restricted cash, as ofDecember 31, 2022 was$15.7 million , consisting of$39.9 million in current assets and$24.2 million in current liabilities. Working capital as ofDecember 31, 2021 was$62.8 million , consisting of$78.8 million in current assets and$16.0 million in current liabilities.
Operating Leases
Our commitments for operating leases relate to laboratory and office space inHouston, Texas and office space inBoston, Massachusetts . OnDecember 21, 2015 andApril 15, 2016 , we renewed the sublease for our office space inBoston throughAugust 31, 2021 . OnApril 22, 2021 , we extended our sublease for a portion of office space at our office inBoston throughAugust 31, 2026 . OnMarch 12, 2019 , we entered into a lease agreement for office space inHouston at MDAnderson throughApril 2021 . OnOctober 15, 2019 , we entered into another lease agreement for additional office and laboratory space inHouston throughFebruary 2027 . OnApril 7, 2020 , we entered into amendments to our existing lease to lease additional office and laboratory space inHouston throughFebruary 2027 . In June andSeptember 2020 , we entered into short-term leases inHouston for additional office and laboratory space. OnDecember 15, 2020 , we entered into a second lease inHouston with MDAnderson which provided us additional office and laboratory space throughApril 2028 . InApril 2022 , we modified our real estate lease agreement executed onDecember 15, 2020 with MDAnderson . The modification reduced our leased space from 18,111 square feet to 3,228 square feet. As a result, the associated lease liability and right-of-use asset were remeasured to$0.4 million based on revised lease payments. InJune 2022 , we executed an agreement to sub-sublease 4,772 square feet of our subleased office space inBoston . The term of the sub-sublease is fromJuly 1, 2022 toJune 30, 2025 and provides the sub-subtenant with an option to extend through toJuly 31, 2026 . For the year endedDecember 31, 2022 , we recognized$0.1 million in lease income, which is classified within other income (expense), net in the Statement of Operations.
Royalty and License Fees
OnMay 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 . For the year endedDecember 31, 2022 , we recognized$0.3 million in royalty payments under the Patent License, and we recognized$0.3 million in royalty payments for the year endedDecember 31, 2021 . As ofDecember 31, 2022 , we have paid a total of$0.5 million in minimum annual royalty payments under the Patent License. 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 inthe United States or inEurope ,Japan ,Australia ,China orIndia . The first benchmark payment of$0.1 million was due upon the initiation of our TCR-T Library Phase 1/2 Trial. 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 . Payments of$0.1 million were made during the year endedDecember 31, 2022 , and no payments were made during the year endedDecember 31, 2021 . 60
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OnOctober 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 endedDecember 31, 2022 and 2021, 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 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 20% 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 . InJune 2022 , Solasia announced that darinaparsin had been approved from relapsed or refractory Peripheral T-Cell Lymphoma by theMinistry of Health, Labor and Welfare inJapan . During the year endedDecember 31, 2022 , the Company recorded$2.9 million of collaboration revenue under the Solasia License and Collaboration Agreement primarily related to Solasia's achievement of certain sales-based milestones inJapan , compared to$0.4 million during the year endedDecember 31, 2021 .
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 inthe 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:
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Clinical trial expenses and other research and development expenses;
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Collaboration agreements;
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Fair value measurements of stock-based compensation; and
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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:
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CROs in connection with performing research services on our behalf and clinical trials;
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investigative sites or other providers in connection with clinical trials;
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vendors in connection with preclinical and clinical development activities; and
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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
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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. CommencingJanuary 1, 2018 , we recognized revenue in accordance withFinancial Accounting Standards Board ("FASB") 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 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. 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). 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 62
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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 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:
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the fair market value of our common stock is considered the quoted market price on Nasdaq;
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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 option;
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the expected term represents the period that our stock options are expected to be outstanding;
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the risk-free interest rate is based on the yields of
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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 our 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.
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