Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion of our financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis generally addresses 2022 and 2021 items and year-over-year comparisons between 2022 and 2021. Discussions of 2020 items and year-over-year comparisons between 2021 and 2020 that are not included in this Annual Report on Form 10-K can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 28, 2022. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, include forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.
Overview
We are a clinical-stage immuno-oncology company focused on helping patients fight cancer by developing a pipeline of product candidates based on expertise in protein engineering and oncology led by the CD47 blocker, evorpacept, currently in multiple Phase 1 and 2 clinical trials. Cancer cells leverage CD47, a cell surface protein, as a “don’t eat me” signal to evade detection by the immune system. Our company is developing a next-generation checkpoint inhibitor designed to have a high affinity for CD47 and to avoid the limitations caused by hematologic toxicities inherent in other CD47 blocking approaches. We believe our lead product candidate, evorpacept, will have a wide therapeutic window to block the “don’t eat me” signal on cancer cells, and will enhance the immune activation of broadly used anti-cancer agents through combination treatment strategies. As of December 31, 2022, we had dosed over 300 subjects with evorpacept across a range of hematologic and solid malignancies in combination with a number of leading anti-cancer agents. We continue to initiate additional studies in combination with leading anti-cancer agents.
Evorpacept
Solid Tumors
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ASPEN-03 - Head and Neck Squamous Cell Carcinoma (HNSCC)
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In May 2021, we enrolled the first subject in the ASPEN-03 trial, a randomized Phase 2 trial of evorpacept in combination with pembrolizumab for the treatment of first-line advanced PD-L1 positive HNSCC.
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In July 2022, the Food and Drug Administration, or the FDA, granted Fast Track designation for evorpacept in combination with pembrolizumab for first-line treatment of adult patients with metastatic or unresectable, recurrent HNSCC whose tumors express PD-L1.
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ASPEN-04 - Head and Neck Squamous Cell Carcinoma (HNSCC)
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In February 2020, the FDA granted Fast Track designation for evorpacept in combination with pembrolizumab, platinum, and fluorouracil for the first-line treatment of adult patients with metastatic or unresectable, recurrent HNSCC.
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In July 2021, we enrolled the first subject in the ASPEN-04 trial, a randomized Phase 2 trial of evorpacept in combination with pembrolizumab, platinum, and fluorouracil for the treatment of first-line advanced HNSCC.
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ASPEN-06 - Gastric/Gastroesophageal Junction (GEJ) Cancer
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In January 2020, the FDA granted Fast Track designation for evorpacept in combination with trastuzumab, ramucirumab and paclitaxel for the treatment of patients with HER2-overexpressing advanced gastric or GEJ adenocarcinoma with disease progression on or after prior trastuzumab and fluoropyrimidine or platinum containing chemotherapy.
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In January 2022, the FDA’s Office of Orphan Products Development granted Orphan Drug Designation (ODD) to evorpacept for the treatment of patients with gastric/GEJ cancer.
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In March 2022, we dosed the first patient in the ASPEN-06 trial, a randomized Phase 2/3 trial of evorpacept in combination with trastuzumab, ramucirumab and paclitaxel for the treatment of second and third line advanced HER2-overexpressing gastric/GEJ cancer.
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ASPEN-07 - Urothelial Cancer (UC)
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In February 2023, we announced the dosing of the first patient in the ASPEN-07 trial, a Phase 1 study evaluating evorpacept in combination with an antibody-drug conjugate (ADC), enfortumab vedotin-ejfv, for the second-line treatment of locally advanced or metastatic UC.
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Hematologic Malignancies
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ASPEN-02 - Myelodysplastic Syndromes (MDS)
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In October 2020, we dosed the first patient in the ASPEN-02 trial, a Phase 1 trial of evorpacept in combination with azacitidine for the treatment of MDS.
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In December 2021, we presented initial clinical data from the Phase 1a dose escalation portion of the clinical trial evaluating evorpacept in combination with azacitidine for the treatment of patients at the 63rd American Society of Hematology (ASH) Annual Meeting.
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ASPEN-05 - Acute Myeloid Leukemia (AML)
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In October 2021, we dosed the first patient in the ASPEN-05 trial, a Phase 1 trial of evorpacept in combination with azacitidine and venetoclax for the treatment of AML.
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In June 2022, we paused enrollment in the ASPEN-05 AML trial based on the desire to leverage upcoming dose optimization data from the ASPEN-02 MDS study to inform dose optimization in ASPEN-05.
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In June 2022, the FDA’s Office of Orphan Drug Products Development granted ODD to evorpacept for the treatment of patients with AML.
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In December 2022, we presented initial clinical data from the Phase 1a dose escalation portion of the clinical trial evaluating evorpacept in combination with azacitidine and venetoclax for the treatment of patients at the 64th ASH Annual Meeting.
Investigator-Sponsored Trials (ISTs)
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Non-Hodgkin Lymphoma (NHL)
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In 2021, an IST of evorpacept was initiated in combination with rituximab and lenalidomide for the treatment of patients with indolent and aggressive NHL sponsored by MD Anderson Cancer Center in Texas.
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Colorectal Cancer
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In 2022, a Phase 2 IST of evorpacept was initiated in combination with pembrolizumab and cetuximab in patients with refractory microsatellite stable metastatic colorectal cancer sponsored by the Academic Gastrointestinal Cancer Consortium (AGICC) in New York. The first patient was dosed in August 2022.
Collaborations
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Zymeworks - Breast Cancer
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Our collaborator, Zymeworks, is sponsoring and managing an ongoing Phase 1 trial of zanidatamab for the treatment of advanced HER2-expressing breast cancer and other solid tumors in combination with evorpacept and enrolled the first subject in October 2021.
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Zymeworks recently entered into a license agreement with Jazz Pharmaceuticals plc (Jazz). In December 2022, Jazz exercised its option to continue with its exclusive license to develop and commercialize zanidatamab in the United States, Europe, Japan and other certain territories. Under the terms of the license agreement, Jazz will be responsible for managing future zanidatamab-related clinical trials.
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Quantum Leap Healthcare Collaborative - Breast Cancer
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In August 2022, we announced a collaboration with the Quantum Leap Healthcare Collaborative who will sponsor and manage a Phase 1 trial (I-SPY) to evaluate evorpacept in combination with fam-trastuzumab deruxtecan-nxki for the treatment of patients with unresectable or metastatic HER2-positive and HER2-low breast cancer.
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Tallac Therapeutics - ALTA-002
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Our second program, ALTA-002, is a collaboration between us and Tallac Therapeutics, Inc. (Tallac) that combines our company’s SIRPα antibody with Tallac’s toll-like receptor 9 (TLR9) agonist, resulting in a potent immune activator targeted to myeloid cells in the tumor to promote innate and adaptive anti-cancer immune responses. This novel Toll-like receptor agonist antibody conjugation platform (TRAAC) enables systemic delivery of targeted TLR9 activation.
o
An investigational new drug (IND) filing for ALTA-002 is planned for the first half of 2023.
Based on our preliminary clinical results to date in multiple oncology indications showing encouraging anti-tumor activity and tolerability and our clinical development plans, our strategy is to pursue evorpacept (evorpacept is the International Nonproprietary Name (INN) and the recommended United States Adopted Name (USAN); this product is also known as ALX148) as a potentially critical component of future oncology combination treatments.
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Additionally, with our acquisition of ScalmiBio, Inc. (ScalmiBio), we are planning to expand our pipeline of drug candidates to antibody-drug conjugates (ADCs) based on expertise in protein engineering and oncology.
Our predecessor company, ALX Oncology Limited, an Irish private company limited by shares, was initially incorporated in Ireland on March 13, 2015 under the name Alexo Therapeutics Limited and changed its name to ALX Oncology Limited on October 11, 2018. We were then incorporated in Delaware on April 1, 2020 under the name ALX Oncology Holdings Inc.
Since our founding, we have devoted substantially all of our resources to identifying and developing evorpacept, advancing preclinical programs, scaling up manufacturing, conducting clinical trials and providing general and administrative support for these operations. We have no products approved for marketing and we have never received any revenue from drug product sales.
In July 2020, we completed our initial public offering, raising net proceeds of $169.5 million, after deducting underwriting discounts and commissions of $13.0 million and offering-related expenses of $3.2 million. In December 2020, we completed a follow-on offering, raising net proceeds of $194.9 million, after deducting underwriting discounts and commissions of $12.5 million and offering-related expenses of $0.7 million.
In March 2022, we filed a universal shelf registration statement (Shelf Registration Statement), which provides for aggregate offerings of up to $450.0 million of the Company’s securities. In May 2022, we filed an amendment to the Shelf Registration Statement, which was declared effective by the Securities and Exchange Commission (SEC) on May 31, 2022. We believe that our Shelf Registration Statement will provide us with the flexibility to raise additional capital to finance our operations as needed. In December 2021, we entered into a sales agreement (Sales Agreement) with Cantor Fitzgerald & Co. and Credit Suisse Securities (USA) LLC, under which we may, subject to the effectiveness of the Shelf Registration Statement, offer and sell our common stock, having aggregate gross proceeds of up to $150.0 million, from time to time through them as our sales agents in an at-the-market offering. No securities have been sold pursuant to the Shelf Registration Statement or Sales Agreement.
In October 2022, we entered into a loan and security agreement (Loan Agreement) with Oxford Finance LLC, Oxford Finance Credit Fund II LP, and Silicon Valley Bank (Lenders). Upon closing of the Loan Agreement, we drew $10.0 million and have access to draw an additional $40.0 million through the end of 2023. A further $50.0 million may become available to us, $25.0 million upon the achievement of pre-determined development milestones and $25.0 million at the Lenders’ sole discretion. The Company received net proceeds from issuance of the term loan of $9.3 million after deducting debt issuance costs of approximately $0.7 million.
From inception through December 31, 2022, we have raised an aggregate of $554.6 million to fund our operations, of which $175.1 million were net proceeds from sales of our convertible preferred stock, $5.8 million were net proceeds from borrowings under a term loan, $169.5 million were net proceeds from our initial public offering, $194.9 million were net proceeds from our follow-on offering and $9.3 million were net proceeds from borrowings under the Loan Agreement.
We have incurred net losses in each year since inception. Our net losses were $123.5 million, $83.5 million and $45.7 million for the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, we had an accumulated deficit of $325.5 million. Substantially all of our operating losses are a result of expenses incurred in connection with our research and development programs, primarily evorpacept, and from general and administrative expenses associated with our operations.
We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We expect our expenses will increase substantially in connection with our ongoing activities, as we:
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advance evorpacept through multiple clinical trials in multiple indications;
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pursue regulatory approval of evorpacept in hematological malignancies and solid tumors;
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continue our discovery and preclinical and clinical development efforts, including our collaborations with Tallac Therapeutics, Zymeworks/Jazz, and Quantum Leap Healthcare Collaborative and our acquisition of ScalmiBio;
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obtain and maintain patent, trade secret and other intellectual property protection and regulatory exclusivity for our product candidates;
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manufacture supplies for our preclinical studies and clinical trials; and
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continue to add operational, financial and management information systems to support ongoing operations as a public company.
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Components of Results of Operations
Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for the development of our lead product candidate, evorpacept, which include:
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expenses incurred in connection with preclinical and clinical development, including expenses incurred under collaboration agreements and under agreements with contract research organizations, or CROs;
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employee-related expenses, including salaries, related benefits, travel and stock-based compensation expenses for employees engaged in research and development functions;
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expenses related to production of clinical materials, including fees paid to contract manufacturing organizations, or CMOs;
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laboratory, vendor expenses and third-party drugs related to the execution of preclinical studies and clinical trials;
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facilities and other expenses, which include expenses for rent and maintenance of facilities, depreciation and amortization expense and other supplies; and
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acquired in-process research and development (IPR&D) and milestone payments related to our ScalmiBio acquisition.
We expense research and development costs as incurred. Nonrefundable advance payments for goods or services to be received in future periods for use in research and development activities are deferred and capitalized. The capitalized amounts are then expensed as the related goods are delivered or as services are performed. We record accruals for estimated costs of research, preclinical studies, clinical trials and manufacturing development, which are a significant component of research and development expenses. We determine the estimated costs through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fees to be paid for such services.
Our research and development expenses consist primarily of costs associated with the development of our lead product candidate, evorpacept, and include external costs, such as fees paid to consultants, central laboratories, contractors, collaborators, CMOs and CROs in connection with our preclinical and clinical development activities.
Almost all of our research and development expenses to date have been related to the clinical development of our lead product candidate, evorpacept. We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to progress on our existing product candidates and developing new product candidates. As our product candidates advance into later stages of development, we begin to conduct larger clinical trials. The process of conducting the necessary clinical trials to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates. In addition, we will incur expenses related to the preclinical research conducted internally and through the contract with Tallac Therapeutics, as further described in Note 11 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
The successful development of our current and future product candidates is highly uncertain. This is due to the numerous risks and uncertainties, including the following:
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successful completion of preclinical studies and clinical trials;
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delays in regulators or institutional review boards authorizing us or our investigators to commence our clinical trials or in our ability to negotiate agreements with clinical trial sites or CROs;
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the number and location of clinical sites included in the trials;
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raising additional funds necessary to complete clinical development of our product candidates;
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obtaining and maintaining patent, trade secret and other intellectual property protection and regulatory exclusivity for our product candidates;
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contracting with third-party manufacturers for clinical supplies of our product candidates;
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protecting and enforcing our rights in our intellectual property portfolio, including, if necessary, litigation; and
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maintaining a continued acceptable safety profile of the products following approval.
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A change in the outcome of any of these variables with respect to the development of our product candidates may significantly impact the costs and timing associated with the development of our product candidates. We may never succeed in obtaining regulatory approval for any of our product candidates.
Research and development activities are essential to our business model. There are numerous factors associated with the successful commercialization of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. In addition, future regulatory factors beyond our control may impact the success, cost or timing of our clinical development programs.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related expenses, business development expenses, facilities expenses, depreciation and amortization expenses and professional services expenses, including legal, human resources, audit, accounting and tax-related services, and directors and officers liability insurance premiums. Personnel and related costs consist of salaries, benefits and stock-based compensation expenses. Facilities costs consist of rent and maintenance of facilities.
We anticipate that our general and administrative expenses will continue to increase as a result of increased headcount, inflationary pressures, expanded infrastructure and higher consulting, legal, tax and regulatory-related services associated with maintaining compliance with stock exchange listing and SEC requirements, audit and investor relations costs, director and officer insurance premiums and other costs associated with being a public company.
Interest Income
Our interest income consists primarily of interest income on cash, cash equivalents and short-term and long-term investments.
Other Expense, Net
Our other expense, net, consists primarily of interest expense on the term loan, amortization of deferred debt issuance costs, and interest related to finance leases.
Results of Operations and Net Loss
Comparisons of the Years Ended December 31, 2022 and 2021
The following table summarizes our results of operations for the years ended December 31, 2022 and 2021 (in thousands):
Year Ended
December 31, Change
Operating expenses:
Income tax (provision) benefit (64 ) 21 (85 ) -405 %
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Research and Development Expenses
The following table summarizes our research and development expenses incurred for the years ended December 31, 2022 and 2021 (in thousands):
Year Ended
December 31, Change
Research and development expenses increased by $38.2 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily attributable to (i) an increase of $26.1 million in clinical and development costs primarily due to increase of $23.3 million in costs to support a higher number of active clinical trials and future expected patient enrollment for the advancement of our lead product candidate, evorpacept, including costs to manufacture clinical trial materials, and an increase of $4.1 million related to the Tallac Collaboration for costs related to the IND filing planned for 2023 offset by a $1.3 million decrease in regulatory consulting costs due to hiring of regulatory headcount, (ii) an increase of $1.4 million in preclinical costs primarily due to development of new targets and costs related to the Tallac Collaboration for costs related to the IND filing planned for 2023, (iii) an increase of $6.0 million in personnel and related costs due primarily to a $4.3 million increase driven by headcount growth, a $1.0 million increase in retention bonus paid to ScalmiBio stockholders, and $0.7 million in personnel costs related to the Tallac Collaboration, (iv) an increase of $5.5 million in stock-based compensation expense primarily due to a full year of expense for awards granted during the year ended December 31, 2021 as well as additional awards granted since December 31, 2021 and (v) a decrease of $0.8 million in other research costs due primarily to a decrease of $4.7 million in acquired in-process research and development costs related to the ScalmiBio acquisition which was expensed in 2021 offset by an increase of $2.0 million in facility costs related to the expansion of our new laboratory space and an increase of $1.7 million in VAT fees related to companion drug purchased for use in our clinical trials.
General and Administrative Expenses
The following table summarizes our general and administrative expenses incurred for the years ended December 31, 2022 and 2021 (in thousands):
Year Ended
December 31, Change
General and administrative expenses increased by $5.7 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily attributable to (i) an increase of $4.4 million in stock-based compensation expense due to a full year of expense for awards granted during the year ended December 31, 2021 as well as additional stock option awards granted since December 31, 2021, (ii) an increase of $0.8 million in other costs primarily driven by an increase of $1.1 million in various expenses such as legal patent fees, legal corporate fees and facility and information technology costs offset by a decrease of $0.5 million in accounting and SOX consulting fees which were higher in 2021 due to SOX 404(b) implementation, and (iii) an increase of $0.4 million in personnel and related costs primarily driven by headcount growth.
Interest Income
Interest income increased by $4.2 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily attributable to the Company investing its cash into short-term and long-term investments starting in January 2022, resulting in increased interest income.
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Other Expense, Net
Other expense, net increased by $0.2 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily attributable to interest expense associated with the Loan Agreement, which the Company entered into in October 2022. There was no comparable interest expense on debt obligation in 2021.
Liquidity and Capital Resources; Plan of Operations
Sources of Liquidity
Since our inception, we have incurred significant operating losses and have not generated any product revenue. We have not yet commercialized any of our product candidates and we do not expect to generate revenue from sales of any product candidates for several years, if at all, subject to regulatory and marketing approval of any of our product candidates. To date, we have funded our operations with proceeds from the sales of shares of our common stock and convertible preferred stock and borrowings under our term loan. As of December 31, 2022, we had cash, cash equivalents and short-term and long-term investments of $282.9 million.
Funding Requirements
We have incurred losses and negative cash flows from operations since inception and anticipate that we will continue to incur net losses for the foreseeable future. As of December 31, 2022, we had an accumulated deficit of $325.5 million. We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities and clinical trials for our product candidates in development. In addition, we expect to incur additional costs associated with operating as a public company. Management recognizes the need to raise additional capital to fully implement its business plan. The timing and amount of such future capital requirements are difficult to forecast and will depend on many factors, including:
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the timing and progress of preclinical and clinical development activities;
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successful enrollment in and completion of clinical trials;
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the timing and outcome of regulatory review of our product candidates;
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our ability to establish agreements with third-party manufacturers for clinical supply for our clinical trials and, if any of our product candidates are approved, commercial manufacturing;
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addition and retention of key research and development personnel;
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our efforts to enhance operational, financial and information management systems, and hire additional personnel, including personnel to support development of our product candidates;
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the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of our product candidates for which we obtain marketing approval;
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the legal patent costs involved in prosecuting patent applications and enforcing patent claims and other intellectual property claims;
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the terms and timing of any collaboration, license or other arrangement, including the terms and timing of any milestone and royalty payments thereunder;
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macroeconomic conditions, such as inflation, economic downturns, disasters, and medical or public health crises; and
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the impact of the ongoing COVID-19 pandemic or geopolitical risks, which may exacerbate the magnitude of the factors discussed above.
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Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. Other than the Loan Agreement, we do not have any committed external source of funds. Our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or drug candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our research, product development or future commercialization efforts or grant rights to develop and market drug candidates that we would otherwise prefer to develop and market ourselves.
In July 2020, we completed our initial public offering pursuant to a registration statement on Form S-1. In the initial public offering, we issued and sold an aggregate of 9,775,000 shares of common stock, including the underwriters’ exercise in full of their overallotment option, under the registration statement at a public offering price of $19.00 per share. Net proceeds were approximately $169.5 million, after deducting underwriting discounts and commissions of $13.0 million and offering-related expenses of $3.2 million.
In December 2020, we completed our follow-on public offering pursuant to a registration statement on Form S-1. In the follow-on public offering, we issued and sold an aggregate of 2,737,000 shares of common stock, including the underwriters’ exercise in full of their overallotment option, under the registration statement at a public offering price of $76.00 per share. Net proceeds were approximately $194.9 million, after deducting underwriting discounts and commissions of $12.5 million and offering-related expenses of $0.7 million.
In December 2021, we entered into a sales agreement with Cantor Fitzgerald & Co. and Credit Suisse Securities (USA) LLC, under which we may offer and sell our common stock, having aggregate gross proceeds of up to $150.0 million, from time to time through them as our sales agents in our at-the-market equity offering program, or the ATM Offering Program. On March 25, 2022, we filed a Shelf Registration Statement with the SEC. In May 2022, we filed an amendment to the Shelf Registration Statement, which was declared effective by the SEC on May 31, 2022. No sales have been made under the ATM Offering Program as of the date of this report.
In October 2022, we entered into the Loan Agreement with the Lenders. Upon closing of the Loan Agreement, we drew $10.0 million and have access to draw an additional $40.0 million through the end of 2023. A further $50.0 million may become available to us, $25.0 million upon the achievement of pre-determined development milestones and $25.0 million at the Lenders’ sole discretion. For a description of the terms of the Loan Agreement, see “Note 7. Term Loan” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
We believe our existing cash, cash equivalents, short-term and long-term investments and funds available from our term loan will enable us to fund our operating expenses and capital expenditure requirements through the middle of 2025. We have based these estimates on assumptions in which actuals may materially differ, and we could utilize our available capital resources sooner than we expect.
Cash Flows
The following table presents a summary of the net cash flow activity for the years ended December 31, 2022 and 2021 (in thousands):
Year Ended
December 31,
Net cash provided by (used in):
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Operating Activities
In the year ended December 31, 2022, net cash used in operating activities of $89.2 million was attributable to a net loss of $123.5 million, offset by non-cash charges of $24.4 million and an increase in net operating assets and liabilities of $9.9 million. Non-cash charges consisted primarily of stock-based compensation expense of $23.8 million and non-cash lease costs of $1.1 million. The change in operating assets and liabilities was primarily due to an increase in accounts payable and accrued expenses and other current liabilities of $11.6 million primarily due to timing of invoices and payments and a decrease in other assets of $0.8 million offset by an increase in prepaid and other current assets of $1.5 million and a decrease in other non-current liabilities of $1.0 million.
In the year ended December 31, 2021, net cash used in operating activities of $68.1 million was attributable to a net loss of $83.5 million and a net decrease of $4.0 million in our operating assets and liabilities, partially offset by $19.4 million in non-cash charges. The change in operating assets and liabilities was due to $9.7 million increase in other assets primarily related to long-term prepaid clinical costs and $1.7 million increases in prepaid expenses and other current assets, offset by $7.3 million increase in accounts payable and other accrued liabilities primarily due to timing of invoice and payments. The non-cash charges consisted of stock-based compensation of $13.9 million, acquired in-process research and development of $4.7 million, and non-cash lease costs of $0.7 million.
Investing Activities
In the year ended December 31, 2022, net cash used in investing activities of $235.4 million was attributable to purchases of short-term and long-term investments of $376.8 million and purchases of property and equipment of $1.4 million, offset by cash received for maturities of investments of $142.8 million.
In the year ended December 31, 2021, cash used in investing activities was $4.9 million due to the acquisition of in-process research and development of $4.3 million and purchase of property and equipment of $0.7 million.
Financing Activities
In the year ended December 31, 2022, net cash provided by financing activities of $9.9 million was attributable to proceeds from issuance of the term loan of $10.0 million offset by payments for debt issuance costs of $0.7 million, proceeds from the exercise of stock options under equity incentive plans of $0.6 million, and proceeds from issuance of common stock pursuant to employee stock purchase plan of $0.3 million, offset by principal payments on finance leases of $0.4 million.
In the year ended December 31, 2021, cash provided by financing activities was $2.5 million, which were driven by $2.6 million proceeds from exercise of common stock under equity incentive plans and $0.2 million proceeds from issuance of common stock pursuant to employee stock purchase plan, offset by $0.3 million of principal payments on finance leases.
Off-Balance Sheet Arrangements
During the period presented, we did not have, nor do we currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Critical Accounting Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. 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. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ significantly from these estimates under different assumptions or conditions.
Our significant accounting policies are more fully described in the notes to our audited consolidated financial statements elsewhere in this Annual Report on Form 10-K. We believe that the following accounting policy reflects the most critical judgments and estimation uncertainty used in the preparation of our Consolidated Financial Results.
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Clinical and Contract Manufacturing Accruals
We record accruals for estimated costs of research, preclinical studies and clinical trials, and manufacturing development, which are a significant component of research and development expenses. A substantial portion of our ongoing research and development activities are conducted by third-party service providers, including CROs and contract manufacturing organizations, or CMOs. Our contracts with CROs generally include pass-through fees such as regulatory expenses, investigator fees, travel costs and other miscellaneous costs, including shipping and printing fees. Similarly, our contracts with CMOs generally include pass-through fees such as raw materials and other miscellaneous costs, including shipping. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided to us under such contracts. We accrue the costs incurred under agreements with these third parties based on estimates of actual work completed but not yet invoiced in accordance with the respective agreements. We determine the estimated costs through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fees to be paid for such services. To assist in our estimates, we rely upon the receipt of timely and accurate reporting from our clinical and non-clinical studies and other third-party vendors.
We make significant judgments and estimates in determining the accrual balance related to our CMOs at the end of each reporting period based on discussion with internal personnel who work directly and meet regularly with the CMOs. As actual costs become known, we adjust our accruals. 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 could result in our reporting amounts that are too high or too low in any particular period. Through December 31, 2022, there have been no material differences from our accrued estimated expenses to the actual clinical trial and manufacturing development expenses. However, variations in the assumptions used to estimate accruals, including, but not limited to, the number of patients enrolled, the rate of patient enrollment, the actual services performed, and related costs may vary from our estimates, resulting in adjustments to clinical trial expense and manufacturing costs in future periods. Changes in these estimates that result in material changes to our accruals could materially affect its financial position and results of operations.
Recent Accounting Pronouncements
See “Note 2. Significant Accounting Policies” of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for a full description of recent accounting pronouncements, including the respective expected dates of adoption and estimated effects, if any, on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities.
As of December 31, 2022, we had cash, cash equivalents and short-term and long-term investments of $282.9 million. We generally hold our cash and cash equivalents in interest-bearing bank accounts and money market funds. We have invested primarily in U.S. Treasury securities, U.S. government agency securities, corporate debt securities, commercial paper and asset-backed securities and all our investments are classified as available-for-sale. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. An immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our cash, cash equivalents and investments.
As of December 31, 2022, we had borrowings of $10.0 million outstanding under the Loan Agreement. Borrowings under the Loan Agreement bear interest at a floating rate per annum equal to the greater of (i) 1-month term SOFR, and (ii) 2.33%, plus 6.25%. An immediate 10% change in the 1-month term SOFR would not have a material impact on our debt-related obligations, financial position or results of operations.
Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist of cash, cash equivalents and investments. The Company’s investments consist of debt securities issued by highly rated corporate entities, the U.S. federal government or state and local governments. The Company’s exposure to any individual corporate entity is limited by policy. Deposits may exceed federally insured limits. The Company invests its cash equivalents in highly rated money market funds. During the periods presented, the Company has not experienced any realized losses on its deposits of cash, cash equivalents or investments.
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Foreign Currency Risk
Our expenses are generally denominated in U.S. dollars. However, we have entered into a limited number of contracts with vendors for services with payments denominated in foreign currencies, primarily the euro. We are subject to foreign currency transaction gains or losses on our contracts denominated in foreign currencies. To date, foreign currency transaction gains and losses have not been material to our consolidated financial statements, and we have not had a formal hedging program with respect to foreign currency. A 10.0% increase or decrease in current exchange rates would not have a material effect on our financial results.
Item 8. Financial Statements and Supplementary Data.
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INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm 106
Consolidated Balance Sheets 108
Consolidated Statements of Operations 109
Consolidated Statements of Comprehensive Loss 110
Consolidated Statements of Cash Flows 112
Notes to Consolidated Financial Statements 113
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
ALX Oncology Holdings Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of ALX Oncology Holdings Inc. and subsidiaries (the Company) as of December 31, 2022 and December 31, 2021, the related consolidated statements of operations, comprehensive loss, convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and December 31, 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2021 due to the adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842).
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of contract manufacturing accruals
As discussed in Notes 2 and 5 to the consolidated financial statements, the Company has contract manufacturing accruals of $5,249 thousand. The Company accrues the costs incurred under agreements with contract manufacturing organizations (CMOs) based on estimates of actual work completed but not yet invoiced in accordance with the respective agreements. The Company determines the estimated costs incurred through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fees to be paid for such services.
We identified the assessment of contract manufacturing accruals as a critical audit matter. Specifically, assessing the estimate of contract manufacturing activities completed but not yet invoiced required a higher degree of auditor judgment. Changes to the estimate of contract manufacturing activities completed but not yet invoiced could have had a significant impact on the contract manufacturing accrual recorded by the Company.
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The following are the primary procedures we performed to address this critical audit matter. We assessed the Company’s estimate of the related contract manufacturing activities completed but not yet invoiced for a selection of the Company’s contract manufacturing accruals by: (1) inquiring of Company personnel responsible for overseeing the respective manufacturing activities to understand their progress; (2) inspecting correspondence received by the Company from CMOs, if any, and comparing the reported information to the Company’s estimate; and (3) inspecting the terms of the contract and any executed change orders and comparing them to the Company’s contract manufacturing accruals.
/s/ KPMG LLP
We have served as the Company’s auditor since 2016.
San Francisco, California
March 9, 2023
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ALX ONCOLOGY HOLDINGS INC.
Consolidated Balance Sheets
(in thousands, except share and per share data)
December 31, December 31,
Assets
Current assets:
Short-term investments 217,385 —
Prepaid expenses and other current assets 4,762 3,352
Property and equipment, net 3,889 897
Long-term investments 16,699 —
Liabilities and stockholders’ equity
Current liabilities:
Payable and accrued liabilities due to related party 1,650 1,630
Accrued expenses and other current liabilities 18,602 9,901
Term loan, non-current 9,389 —
Other non-current liabilities 5,311 1,839
Commitments and contingencies (Note 13)
Stockholders’ equity
Accumulated other comprehensive loss (845 ) —
Total liabilities and stockholders’ equity $ 306,489 $ 380,183
The accompanying notes are an integral part of these consolidated financial statements.
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ALX ONCOLOGY HOLDINGS INC.
Consolidated Statements of Operations
(in thousands, except share and per share amounts)
Year Ended
December 31,
Related-party revenue $ — $ — $ 1,182
Operating expenses:
Cost of services for related-party revenue — — 1,075
Loss on early debt extinguishment — — (621 )
Income tax (provision) benefit (64 ) 21 (241 )
Cumulative dividends allocated to preferred stockholders — — (5,202 )
The accompanying notes are an integral part of these consolidated financial statements.
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ALX ONCOLOGY HOLDINGS INC.
Consolidated Statements of Comprehensive Loss
(in thousands)
Year Ended
December 31,
Cumulative preferred dividends allocated to preferred stockholders — — (5,202 )
Other comprehensive loss, net of tax:
Unrealized loss on available-for-sale investments (845 ) — —
The accompanying notes are an integral part of these consolidated financial statements.
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ALX ONCOLOGY HOLDINGS INC.
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(in thousands, except share amounts)
Convertible Preferred Stock Stockholders’ Equity (Deficit)
Shares Amount Shares Amount Capital Loss Deficit Equity (Deficit)
Reclassification of warrants from liability to equity — — — — 1,019 — — 1,019
Cumulative dividends — — 2,564,759 3 (3 ) — — —
Issuance of common stock under net exercise of warrants — — 48,932 — — — — —
Issuance of common stock under equity incentive plans — — 182,111 — 299 — — 299
Vesting of early exercised stock options — — — — 27 — — 27
Stock-based compensation — — — — 5,436 — — 5,436
Issuance of common stock under equity incentive plans — — 225,612 — 567 — — 567
Unrealized loss on available-for-sale investments — — — — — (845 ) — (845 )
The accompanying notes are an integral part of these consolidated financial statements.
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ALX ONCOLOGY HOLDINGS INC.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended
December 31,
Operating activities
Adjustments to reconcile net loss to net cash used in operating activities:
Acquired in-process research and development — 4,739 —
Accretion of term loan discount and issuance costs 44 — 421
Changes in fair value of compound derivative liability and warrants — — 650
Gain on assignment of lease — — (126 )
Loss on early debt extinguishment — — 621
Changes in operating assets and liabilities
Receivables due from related-party — — 536
Prepaid expenses and other current assets (1,476 ) (1,662 ) (1,514 )
Payable and accrued liabilities due to related party 20 1,419 —
Accrued expenses and other current liabilities 7,027 3,306 4,983
Other non-current liabilities (977 ) (698 ) (4 )
Investing activities
Purchase of investments (376,789 ) — —
Maturities of investments 142,800 — —
Purchase of property and equipment (1,427 ) (666 ) (31 )
Acquisition of in-process research and development — (4,257 ) —
Proceeds from assets held for sale — — 641
Net cash provided by (used in) investing activities (235,416 ) (4,923 ) 610
Financing activities
Proceeds from common stock offerings, net — — 368,256
Payments of offering costs — — (3,848 )
Proceeds from issuance of convertible preferred stock, net — — 104,680
Principal payments on finance leases (388 ) (281 ) —
Proceeds from issuance of term loan, net 10,000 — —
Payments of debt issuance costs (655 ) — —
Cash paid for early debt extinguishment — — (6,506 )
Supplemental disclosure
Cash paid for taxes $ — $ 274 $ 47
Supplemental disclosure of non-cash investing and financing activities
Vesting of early exercised stock options $ — $ — $ 27
Accumulated dividend on convertible preferred stock $ — $ — $ 3
Right-of-use asset acquired under operating leases $ 4,613 $ 1,780 $ —
Right-of-use asset acquired under finance leases $ — $ 776 $ —
Reconciliation of cash and cash equivalents and restricted cash:
Restricted cash (included in other assets) 66 — —
The accompanying notes are an integral part of these consolidated financial statements.
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ALX ONCOLOGY HOLDINGS INC.
Notes to Consolidated Financial Statements
(1) ORGANIZATION
Organization
ALX Oncology Holdings Inc., or the Company, was formed as a Delaware corporation on April 1, 2020, or Inception. The Company was formed for the purpose of completing the Company’s initial public offering of its common stock and related transactions in order to carry on the business of ALX Oncology Limited. The Company is a clinical-stage immuno-oncology company focused on helping patients fight cancer by developing therapies that block the CD47 checkpoint pathway and bridge the innate and adaptive immune system.
ALX Oncology Holdings Inc. is incorporated in Delaware. ALX Oncology Limited, incorporated in Ireland, is a wholly-owned subsidiary of ALX Oncology Holdings Inc. ALX Oncology Inc., incorporated in Delaware, is a wholly-owned subsidiary of ALX Oncology Limited. Alexo International Holdings Limited, incorporated in Malta, is a wholly-owned subsidiary of ALX Oncology Inc. All the companies are collectively known as the Subsidiaries.
As of December 31, 2022, the Company has devoted substantially all of its efforts to the formation and financing of the Company, as well as product development, and has not realized product revenues from its planned principal operations. The Company does not have manufacturing facilities and all manufacturing related activities are contracted out to third-party service providers.
Management expects to incur additional losses in the future to conduct product candidate research and development and to conduct pre-commercialization activities and recognizes that the Company will likely raise additional capital to fully implement its business plan. The Company intends to raise such capital through the sale of additional equity, debt financings and/or strategic alliances with third parties. However, there can be no assurance that the Company will be successful in acquiring additional funding at levels sufficient to fund its operations or on terms acceptable to the Company. If the Company is unsuccessful in its efforts to raise additional financing, the Company could be required to significantly reduce operating expenses and delay, reduce the scope of or eliminate some of its development programs or its future commercialization efforts, out-license intellectual property rights to its product candidates and sell unsecured assets, or a combination of the above, any of which may have a material adverse effect on the Company’s business, results of operations, financial condition and/or its ability to fund its scheduled obligations on a timely basis or at all. The Company believes that the existing capital resources will be sufficient to fund the projected operating requirements for at least the next twelve months.
(2) SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, and the applicable rules and regulations of the U.S. Securities and Exchange Commission, or SEC.
Reclassifications
Certain reclassifications have also been made within the consolidated statements of operations for the years ended December 31, 2021 and 2020 to conform to the current year presentation. For the year ended December 31, 2021, the Company reclassified approximately $0.1 million out of other income (expense), net into a separate interest income financial statement line item as well as combined a nominal amount of interest expense into other income (expense), net, which is now renamed other expense, net. For the year ended December 31, 2020, the Company reclassified approximately $0.1 million out of other income (expense), net into a separate interest income financial statement line item as well as combined approximately $0.8 million amount of interest expense into other income (expense), net, which is now renamed other expense, net. Total loss before income taxes as of December 31, 2021 and 2020 did not change as a result of these reclassifications.
Principles of Consolidation
All intercompany balances and transactions have been eliminated in consolidation.
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Reverse Stock Split
On July 8, 2020, the Company’s board of directors approved an amendment to the Company’s certificate of incorporation to effect a 1-for-6.5806 reverse split of its common stock and convertible preferred stock. The par values of the common and convertible preferred stock were not adjusted as a result of the reverse stock split. All authorized, issued and outstanding common stock, convertible preferred stock, stock options, warrants, and related per share amounts contained in the consolidated financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented. The reverse stock split was effected on July 9, 2020.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates, including, but not limited to, those related to the estimated useful lives of long-lived assets, clinical trial accruals, fair value of assets and liabilities, fair value of investments, valuation of the Company’s common stock in periods prior to its initial public offering and stock-based compensation. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company holds its cash and cash equivalents in checking and money market accounts. The Company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents. Cash equivalents consist primarily of amounts invested in money market funds and U.S. government agency securities that are stated at cost, which approximate fair value.
Investments
Investments consist of money market funds, U.S. Treasury securities, U.S. government agency securities, corporate debt securities, commercial paper and asset-backed securities. The Company’s investments are classified as available-for-sale and carried at estimated fair values and reported in cash equivalents, short-term investments and long-term investments. Management determines the appropriate classification of the investments at the time they are purchased and evaluates the appropriateness of such classifications at each balance sheet date. Investments with contractual maturities greater than 12 months are considered long-term investments.
The Company regularly reviews its investments for declines in estimated fair value below amortized cost. The factors considered in determining whether a credit loss exists include the creditworthiness of the security issuers, the number of investments in an unrealized loss position, the severity and duration of the unrealized losses, and whether it is more likely than not that the Company will be required to sell the investments before the recovery of their amortized cost basis. The cost of investments sold is based on the specific identification method. In circumstances when an unrealized loss is determined to be credit-related, or when the Company intends to sell or is more likely than not required to sell a security before it recovers its amortized cost basis, the difference between the fair value and the amortized cost of the security is recognized within other expense, net in the consolidated statements of operations, and an allowance for credit loss is recorded on the consolidated balance sheets. In circumstances when the decline in fair value is non-credit related, the difference is reported in accumulated other comprehensive loss, net of tax as a separate component of consolidated stockholders’ equity.
Concentration of Credit Risk, Credit Losses and Other Risks and Uncertainties
Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash, cash equivalents, and investments. The primary objectives for the Company’s investment portfolio are the preservation of capital and the maintenance of liquidity. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company is exposed to credit risk in the event of default by the financial institutions holding its cash, cash equivalents and investments and issuers of investments. The Company manages its credit risk by holding its cash, cash equivalents and investments in large financial institutions within the U.S. In addition, the Company’s investment policy limits investments to certain types of instruments such as money market funds, debt securities issued by the U.S. government and its agencies, corporate debt securities, commercial paper as well as asset-backed securities, and places restrictions on the credit ratings, maturities and concentration by type and issuer. The Company has not experienced any losses on its deposits of cash, cash equivalents and investments.
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The Company’s future results of operations involve a number of other risks and uncertainties. Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, uncertainty of results of clinical trials and reaching milestones, uncertainty of regulatory approval of the Company’s potential product candidates, uncertainty of market acceptance of the Company’s product candidates, competition from substitute products and larger companies, securing and protecting proprietary technology, strategic relationships and dependence on key individuals or sole-source suppliers.
The Company’s product candidates require approvals from the U.S. Food and Drug Administration, or FDA, and comparable foreign regulatory agencies prior to commercial sales in their respective jurisdictions. There can be no assurance that any product candidates will receive the necessary approvals. If the Company was denied approval, approval was delayed or the Company was unable to maintain approval for any product candidate, it could have a materially adverse impact on the Company.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation of property and equipment is provided using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the term of the lease, or the useful life of the assets. Upon sale or retirement of assets, the cost and related accumulated depreciation or amortization are removed from the consolidated balance sheet and the resulting gain or loss is reflected in the consolidated statement of operations. Maintenance and repairs are charged to the consolidated statement of operations as incurred.
Leases
On January 1, 2021, the Company adopted Accounting Standards Update No. 2016-02, Leases, Topic 842, or Accounting Standards Codification (ASC) 842, using the alternative modified transition method, which applies the standard as of the adoption date. Results and disclosure requirements for reporting periods beginning after January 1, 2021 are presented under ASC 842.
The Company determines if an arrangement contains a lease at inception. For arrangements where the Company is the lessee, leases are included in operating or finance lease right-of-use, or ROU, assets; current operating or finance lease liabilities; and non-current operating or finance lease liabilities.
Lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. ROU assets also include any initial direct costs incurred and any lease payments made on or before the lease commencement date, less lease incentives received. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the lease liabilities as the Company’s leases generally do not provide an implicit rate. The incremental borrowing rate is reevaluated upon a lease modification. The Company considered information available at the adoption date of ASC 842 to determine the incremental borrowing rate for leases in existence as of this date. Lease terms may include options to extend or terminate the lease when the Company is reasonably certain that the option will be exercised. Lease expense for operating leases is recognized on a straight-line basis over the lease term. For finance leases, ROU assets are amortized on a straight-line basis over the shorter of the expected useful life or the lease term, and the carrying amount of the lease liability is adjusted to reflect interest, which is recorded in interest expense.
The Company elected to apply each of the practical expedients described in ASC 842 which allow companies (i) not to reassess prior conclusions on whether any expired or existing contracts are or contain a lease, lease classification, and initial direct costs, (ii) combine lease and non-lease components for all underlying assets groups, and (iii) not recognize ROU assets or lease liabilities for short term leases. A short-term lease is a lease that, at the commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability is measured by comparison of the carrying amount to the future undiscounted net cash flows which the asset or asset group are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds its fair value. Fair value is determined using various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. The Company has not recorded impairment of any long-lived assets.
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Fair Value of Financial Instruments
The fair value of the Company’s financial assets and liabilities are determined in accordance with the fair value hierarchy established in ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy of ASC 820 requires an entity to maximize the use of observable inputs when measuring fair value and classifies those inputs into three levels:
Level 1—Observable inputs, such as quoted prices in active markets;
Level 2—Inputs, other than the quoted prices in active markets, which are observable either directly or indirectly such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the instrument’s anticipated life; and
Level 3—Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The Company classifies money market funds and U.S. treasury securities as Level 1 within the fair value hierarchy as the fair value is based on quoted prices. The Company classifies its investments in U.S. government agency securities, corporate debt securities, commercial paper, and asset-backed securities as Level 2 within the fair value hierarchy as the fair value is estimated by third-party pricing sources using quoted prices for identical or similar instruments in markets that are not active and industry-standard model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs obtained from various third-party data providers, including but not limited to benchmark yields, reported trades and broker/dealer quotes. Where applicable the market approach utilizes prices and information from market transactions for similar or identical assets.
Debt Issuance Costs
Debt issuance costs consist of payments made to secure commitments under certain debt financing arrangements. These amounts are recognized as interest expense over the period of the financing arrangement using the effective interest method. If the financing arrangement is canceled or forfeited, or if the utility of the arrangement to the Company is otherwise compromised, these costs are recognized as interest expense immediately. The Company’s consolidated financial statements present debt issuance costs related to a recognized debt liability as a direct reduction from the carrying amount of that debt liability.
Convertible Preferred Stock
The Company records convertible preferred stock net of issuance costs on the dates of issuance, which represents the carrying value. In the event of a change of control of the Company, proceeds will be distributed in accordance with the liquidation preferences set forth in its organization documents unless the holders of convertible preferred stock have converted their convertible preferred stock into common stock. Convertible preferred stock is classified outside of stockholders’ equity (deficit) on the accompanying consolidated balance sheets as events triggering the liquidation preferences are not solely within the Company’s control. The Company has elected not to adjust the carrying values of the convertible preferred stock to the liquidation preferences of such shares because of the uncertainty of whether or when such an event would occur. Upon the consummation of the Company’s initial public offering in July 2020, all shares of convertible preferred stock outstanding and accrued cumulative dividends automatically converted into 23,934,533 shares of common stock.
Series B Convertible Preferred Stock Warrant Liability
The Company has issued freestanding warrants to purchase its Series B convertible preferred stock. Freestanding warrants for the Company’s convertible preferred stock that are classified outside of permanent equity are recorded at fair value, and are subject to re-measurement at the end of every period until the earlier of the exercise of the warrants or the completion of a liquidation event, including the completion of an initial public offering. Upon exercise, the Series B convertible preferred stock warrant liability would be reclassified to additional paid-in capital, with any change in fair value recognized as a component of other expense, net. Following the Company’s initial public offering, the warrants were automatically converted to warrants to purchase shares of common stock. The Company revalued the Series B convertible preferred stock warrants as of the completion of the initial public offering and reclassified the outstanding preferred stock warrant liability balance to additional paid-in capital with no further re-measurement required as common stock warrants are considered permanent equity.
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Revenue Recognition
To date, the Company has derived revenue from providing research and development services on a time and materials basis to a related-party. No such revenue was earned in either 2021 or 2022.
The Company recognizes such revenues over time as services are delivered, and invoices the customer as the work is incurred in arrears.
The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services.
To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, Revenue from Contracts with Customers, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation.
As part of the Company’s consideration as to whether the Company has entered into a contract with a customer, it considers whether it is probable that it will collect the consideration it is entitled to in exchange for the goods and services it transfers to the customer. At contract inception, the Company assesses the goods or services promised within each contract that falls under the scope of ASC 606, determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Cost of Services for Related-Party Revenue
The Company incurs costs associated with related-party services including direct labor and associated employee benefits, laboratory supplies, and other expenses. These costs are recorded in cost of services for related-party revenue as a component of total operating expenses in the accompanying consolidated statements of operations.
Research and Development Costs
Research and development costs are expensed as incurred and consist primarily of salaries and benefits, stock-based compensation expense, lab supplies and facility costs, as well as fees paid to nonemployees and entities that conduct certain research and development activities on behalf of the Company and expenses incurred in connection with license agreements. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are capitalized and recorded in prepaid expenses and other current assets, and then expensed as the related goods are delivered or the services are performed.
Asset Acquisition including Acquired In-Process Research and Development Expenses
When determining whether a transaction gives rise to an acquisition of a business or asset group, the Company applies a screening test to determine whether substantially all of the fair value of the gross assets acquired in the transaction is concentrated in a single identifiable asset or group of similar identifiable assets. If so, then the assets are not considered a business and the transaction is accounted for as an asset acquisition.
The Company measures and recognizes asset acquisitions that are not deemed to be business combinations based on the cost to acquire the asset or group of assets, which includes transaction costs. Goodwill is not recognized in asset acquisitions or transactions to license intellectual property. In an asset acquisition, the cost allocated to acquired in-process research and development (IPR&D) with no alternative future use is recognized as an expense on the acquisition date.
When a transaction is accounted for as an asset acquisition, an in-process research and development, or IPR&D asset is only capitalized if it has an alternative future use other than in a particular research and development project. Otherwise, amounts allocated to IPR&D that have no alternative use are expensed.
Upfront and milestone payments made related to an asset acquisition are accrued for and expensed when the achievement of the milestone is considered probable.
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Clinical and Contract Manufacturing Accruals
The Company records accruals for estimated costs of research, preclinical studies and clinical trials, and manufacturing development, which are a significant component of research and development expenses. A substantial portion of the Company’s ongoing research and development activities are conducted by third-party service providers, including contract research organizations, or CROs, and contract manufacturing organizations, or CMOs. The Company’s contracts with CROs generally include pass-through fees such as regulatory expenses, investigator fees, travel costs and other miscellaneous costs, including shipping and printing fees. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided to the Company under such contracts. The Company accrues the costs incurred under agreements with these third parties based on estimates of actual work completed in accordance with the respective agreements. The Company determines the estimated costs through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fees to be paid for such services. To assist in its estimates the Company relies upon the receipt of timely and accurate reporting from its clinical and non-clinical studies and other third-party vendors.
The Company makes significant judgments and estimates in determining the accrual balance at the end of each reporting period. As actual costs become known, the Company adjusts its accruals. Although the Company does not expect its estimates to be materially different from amounts actually incurred, the Company’s understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and could result in the Company reporting amounts that are too high or too low in any particular period. Through December 31, 2022, there have been no material differences from the Company’s accrued estimated expenses to the actual clinical trial expenses. However, variations in the assumptions used to estimate accruals, including, but not limited to, the number of patients enrolled, the rate of patient enrollment, the actual services performed, and related costs may vary from the Company’s estimates, resulting in adjustments to clinical trial expense in future periods. Changes in these estimates that result in material changes to the Company’s accruals could materially affect its financial position and results of operations.
Stock-based Compensation Expense
The Company incurs stock-based compensation expense primarily from stock options, restricted stock units, and ESPP purchase rights.
The Company estimates the fair value of stock options granted to employees, directors and non-employees and ESPP purchase rights using the Black-Scholes option-pricing model. The Black-Scholes model requires the input of subjective assumptions, including expected volatility, expected dividend yield, expected term, risk-free rate of return and the estimated fair value of the underlying common stock on the date of grant. Prior to the Company’s initial public offering, the fair value of the common stock underlying the stock-based awards was determined on each grant date by the board of directors, with input from management, considering the most recently available third-party valuation of common shares. The grant-date fair value of restricted stock units is the fair value of the underlying stock on the award’s grant date. The Company uses the straight-line method to allocate compensation expense to reporting periods over the requisite service period, which is generally the vesting period. The Company accounts for the effect of forfeitures as they occur.
Segment Reporting
The Company manages its operations as a single operating segment for the purposes of assessing performance and making operating decisions. All of the Company’s long-lived assets are located in the United States.
Foreign Currency Transactions
The functional currency of the Company’s operation and each of its subsidiaries is U.S. dollars. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate prevailing on the balance sheet date. Expenses are translated at the average exchange rates prevailing during the applicable period. Foreign currency transaction gains and losses are included in the consolidated statement of operations and recorded in other expense, net, and were immaterial for the years December 31, 2022, 2021 and 2020.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the consolidated financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect for the period in which the temporary differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the consolidated statements of operations in the period that includes the enactment date.
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Deferred income taxes comprise the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax reporting purposes, net operating loss carryforwards, and other tax credits measured by applying currently enacted tax laws. A valuation allowance is provided when necessary to reduce deferred tax assets to an amount that is more likely than not to be realized. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The Company recognizes benefits of uncertain tax positions if it is more likely than not that such positions will be sustained upon examination based solely on their technical merits, as the largest amount of benefit that is more likely than not to be realized upon the ultimate settlement. The Company’s policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit.
Comprehensive Loss
Comprehensive loss consists of net loss and changes in unrealized gains and losses on investments for all periods presented.
Net Loss Per Share Attributable to Common Stockholders
Basic net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is the same as basic net loss per share, since the effects of potentially dilutive securities are antidilutive given the net loss for each period presented.
Recent Accounting Pronouncements
None.
(3) ACQUISITION OF ASSETS AND OWNERSHIP
On October 4, 2021, the Company entered into a stock purchase agreement with ScalmiBio, Inc., or ScalmiBio, as the Company expands its pipeline with plans to develop new anti-cancer drug candidates based on ScalmiBio’s platform. Under the terms of the stock purchase agreement, the Company made an initial payment to the stockholders of ScalmiBio at closing on October 4, 2021 of approximately $4.5 million in cash, net of certain expenses and adjustments, and made an additional payment of $2.0 million at the one-year anniversary of the transaction on October 4, 2022 to the stockholders of ScalmiBio. This additional payment was recorded as research and development costs within the consolidated statements of operations and consolidated statements of comprehensive loss over the one-year period given the payment was contingent on the majority stockholder remaining employed with the Company through the one-year anniversary of the closing. In addition, the Company has agreed to pay up to $35.0 million, in aggregate, in certain milestones based on the clinical development of the acquired ScalmiBio technology and has also agreed to pay a low single digit royalty on net sales of any products developed from the ScalmiBio acquired technology for a defined term. The Company has the option to buy-out the royalty payment, prior to the first marketing approval of the developed product.
The Company’s CEO and President, who is also a director, was also a director of ScalmiBio prior to the acquisition, and owned 31.7% of ScalmiBio stock. As a result, he received or will receive a proportional share of the consideration to ScalmiBio stockholders as described above. He also received approximately $87,000 out of the closing proceeds for the repayment of a note and accrued interest for a loan to ScalmiBio. Given his interest in the ScalmiBio acquisition, the Company’s audit committee approved the acquisition under its related-party transaction policy and the Company’s CEO recused himself from the negotiation and approval of the transaction.
To determine the accounting for this transaction, an assessment was made as to whether an integrated set of assets and activities should be accounted for as a business combination or an asset acquisition. The guidance requires an initial screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets. If that screen is met, the set is not considered a business. The Company concluded that substantially all of the fair value is concentrated in a group of similar identifiable assets. Pursuant to asset acquisition accounting, acquired IPR&D with no alternative future use is expensed at acquisition. Accordingly, $4.7 million including $0.2 million of legal and other professional fees related to the acquisition, was recognized in “Research and development” expenses in the consolidated statements of operations and consolidated statements of comprehensive loss for the year ended December 31, 2021.
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(4) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the Company’s financial assets that are measured at fair value on a recurring basis by level within the fair value hierarchy as of December 31, 2022 and 2021 (in thousands):
Cash equivalents
U.S. government agency securities Level 2 3,484 — — 3,484
Short-term investments
Long-term investments
U.S. government agency securities Level 2 9,760 — (15 ) 9,745
The Company did not have any outstanding financial liabilities to be re-measured on a recurring basis as of December 31, 2022 and 2021.
The fair value of cash equivalents and available-for-sale investments by classification included in the consolidated balance sheets was as follows as of December 31, 2022 and 2021 (in thousands):
December 31, December 31,
Short-term investments 217,385 —
Long-term investments 16,699 —
Cash and cash equivalents in the above table excludes bank account cash of $8.6 million and $6.5 million as of December 31, 2022 and 2021, respectively.
The fair value of cash equivalents and available-for-sale investments by contractual maturity was as follows as of December 31, 2022 and 2021 (in thousands):
December 31, December 31,
Maturing after one year through five years 16,699 —
The primary objective of the Company’s investment portfolio is to maintain safety of principal, prudent levels of liquidity and acceptable levels of risk. The Company’s investment policy limits investments to certain types of instruments issued by institutions with investment-grade credit ratings, and it places restrictions on maturities and concentration by asset class and issuer.
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There were no transfers of assets or liabilities between the fair value measurement levels during the years ended December 31, 2022 and 2021 and there were no financial instruments classified as Level 3 as of December 31, 2022 and 2021.
As of December 31, 2022 and 2021, accrued interest receivable related to the Company’s investments of $1.0 million and zero, respectively, was included in prepaid expenses and other current assets as well as other assets on the consolidated balance sheet.
As of December 31, 2022, the unrealized losses for available-for-sale investments were non-credit related and the Company does not intend to sell the investments that were in an unrealized loss position, nor will it be required to sell those investments before recovery of their amortized costs basis, which may be maturity. As of December 31, 2022 and 2021, no allowance for credit losses for the Company’s investments was recorded. As of December 31, 2022 and 2021, there were no securities in a continuous net unrealized loss position for more than 12 months. As of December 31, 2022 and 2021, the Company has not recognized any impairment losses on available-for-sale investments.
(5) BALANCE SHEET COMPONENTS
Property and Equipment, Net
The following table presents the components of property and equipment, net as of December 31, 2022 and 2021 (in thousands):
December 31, December 31,
Leasehold improvements $ 2,360 $ 229
Computer hardware and software 344 241
Property and equipment, gross 4,292 960
Less: accumulated depreciation (403 ) (63 )
Property and equipment, net $ 3,889 $ 897
Depreciation was $0.3 million, nominal, and $0.2 million for years ended December 31, 2022, 2021 and 2020, respectively.
Other Assets
The following table presents the components of other assets, net as of December 31, 2022 and 2021 (in thousands):
December 31, December 31,
Long-term prepaid clinical expenses $ 7,264 $ 6,694
Operating lease right-of-use assets 5,626 1,829
Long-term prepaid contract manufacturing costs 1,456 2,854
Finance lease right-of-use assets 298 746
Accrued interest receivable 78 —
Restricted cash 66 —
Accrued Expenses and Other Current Liabilities
The following table presents the components of accrued expenses and other current liabilities as of December 31, 2022 and 2021 (in thousands):
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December 31, December 31,
Accrued clinical and nonclinical study costs $ 5,485 $ 4,119
Accrued contract manufacturing 5,249 693
Accrued compensation and related expenses 3,708 3,294
Accrued property and equipment 2,110 27
Accrued professional fees 835 790
Operating lease liabilities, current 755 313
Finance lease liabilities, current 286 429
Total accrued expenses and other current liabilities $ 18,602 $ 9,901
(6) LEASES
In conjunction with the adoption of ASC 842 on January 1, 2021, the Company evaluated its vendor contracts to identify embedded leases, if any, and noted that a pharmaceutical support services agreement entered into in May 2016 included leases under ASC 842 because the Company has the right to direct the use of certain equipment. The embedded leases commenced in September 2020 and expire in August 2023 with no stated option to extend the term. The Company classified the leases as finance leases.
In May 2021, the Company entered into a lease agreement for approximately 10,000 square feet of office space located in South San Francisco, California. The lease commenced on June 6, 2021 and expires on August 31, 2026. The lease does not provide an option to extend after it expires. The total lease payments for the life of the lease are approximately $2.0 million. The Company classified the lease as an operating lease.
In February 2022, the Company entered into a lease agreement totaling approximately 11,074 square feet of office and laboratory space located in Palo Alto, California. The lease consists of two premises and expires in February 2030. The lease provides for an option to extend for two years after expiration. The lease for one of the premises commenced in February 2022 and the lease for the second premises commenced in April 2022. The lease provides for an annual base rent of approximately $0.8 million, which increases on an annual basis by 3%. The total lease payments for the life of the lease are approximately $6.9 million. The Company is also responsible for leasehold improvement costs related to the second premises, which are expected to be approximately $2.1 million, of which $1.5 million is to be paid with interest at a rate of 7% per annum as additional payments over the life of the lease. The Company classified the lease as an operating lease. Under the terms of the lease agreement, the Company issued a letter of credit to the landlord in the amount of $0.1 million, which is collateralized by a restricted cash deposit of $0.1 million (see Note 5 “Other Assets”).
As of December 31, 2022, the ROU assets recorded for operating leases and finance leases were $5.6 million and $0.3 million, respectively. As of December 31, 2021, the ROU assets recorded for operating leases and finance leases were $1.8 million and $0.7 million, respectively. The amounts were included in the other assets on the consolidated balance sheet.
The following table presents the maturities and balance sheet information of the Company’s operating and finance lease liabilities as of December 31, 2022 (in thousands, except lease term and discount rate):
Operating Leases Finance Leases
Less: imputed interest (1,957 ) (2 )
Total lease liabilities $ 6,023 $ 286
Lease liabilities: current (i) $ 765 $ 286
Lease liabilities: non-current (ii) 5,258 —
Total lease liabilities $ 6,023 $ 286
Weighted average remaining lease term (in years) 6.3 0.7
Weighted average discount rate 8.4 % 1.7 %
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(i)
Current lease liabilities are presented within accrued expenses and other current liabilities and payable and accrued liabilities due to related party on the consolidated balance sheets and includes a nominal amount due to Tallac Therapeutics, Inc. for an operating lease. Refer to Note 11 “Related-Party Transactions” for additional discussion.
(ii)
Non-current lease liabilities are presented within other non-current liabilities on the consolidated balance sheet.
The following table presents the components of lease costs for the years ended December 31, 2022 and 2021 (in thousands):
Year Ended
December 31,
Variable lease cost and other, net (i) 262 84
Short-term lease cost 88 —
Finance lease cost:
Amortization of right-of-use assets 447 369
(i)
The variable lease cost and other, net is comprised primarily of common area maintenance charges for the operating lease, which are dependent on usage. These costs are classified as operating lease expense due to the election to not separate lease and non-lease components. These costs were not included within the measurement of the Company’s operating lease ROU assets and operating lease liabilities.
The following table presents the supplemental cash flow disclosures for cash paid for the years ended December 31, 2022 and 2021 (in thousands):
Year Ended
December 31,
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 933 $ 243
Operating cash flows from finance leases $ 8 $ 11
Financing cash flows from finance leases $ 388 $ 281
Right-of-use asset acquired under leases
Finance leases $ — $ 776
(7) TERM LOAN
Silicon Valley Bank and WestRiver Loan
The Company’s wholly-owned subsidiaries Alexo Therapeutics International and Sirpant Therapeutics, as borrowers, entered into a Loan and Security Agreement, or the SVB-WestRiver Loan Agreement, dated as of December 20, 2019, with Silicon Valley Bank, or SVB, and WestRiver, collectively as lenders, and SVB, as administrative agent and collateral agent. On the closing date of the Loan Agreement in December 2019, $6.0 million was funded to the Company. In December 2020, the Company fully repaid the loan balance.
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In conjunction with the SVB-WestRiver Loan Agreement, the Company issued warrants to purchase Series B convertible preferred stock to SVB and WestRiver, and recorded a warrant liability of approximately $0.4 million at the date of issuance. The Company also determined that certain loan features were embedded derivatives requiring bifurcation and separate accounting, and recorded a term loan compound derivative liability of approximately $51,000. The Company measured its Series B convertible preferred stock warrant liability and term loan compound derivative liability at fair value on a recurring basis, which were classified as Level 3 liabilities. During the year ended December 31, 2020, the increase in fair value in warrant liability was approximately $658,000. During the year ended December 31, 2020, the decreases in fair value in compound derivative liability was approximately $8,000. Those amounts were recognized as a component of other expense, net in the consolidated statement of operations. The Company reclassified the preferred stock warrant liability balance into additional paid-in capital in July 2020 with no further re-measurement required, as the common stock warrants are considered permanent equity effective with the completion of the initial public offering. The compound derivative liability was extinguished upon the extinguishment of the host instrument in December 2020.
Oxford Finance and Silicon Valley Bank Loan
In October 2022, the Company entered into a loan and security agreement, or the Loan Agreement, with Oxford Finance LLC, Oxford Finance Credit Fund II LP, and Silicon Valley Bank, or Lenders, for a secured term loan facility of up to $100.0 million. Pursuant to the Loan Agreement, the Company drew an initial loan of $10.0 million and has access to draw an additional $40.0 million through the end of 2023. The Loan Agreement provides for an additional $50.0 million over three tranches, with $12.5 million available in each of two tranches based upon the achievement of milestones related to the development of evorpacept and one preclinical product candidate, and $25.0 million at the Lenders’ sole discretion. The proceeds of the loans may be used by the Company for working capital and to fund its general business requirements.
Borrowings under the Loan Agreement bear interest at a floating rate per annum equal to the greater of (i) 1-month term Secured Overnight Financing Rate, or SOFR, and (ii) 2.33%, plus 6.25%. The minimum per annum interest rate is 8.58%. Interest on the term loans is payable monthly in arrears. The Company will begin to make principal payments in equal monthly installments beginning on December 1, 2025. However, if either of the milestone related tranche term loans are funded, then the Company will begin to make principal payments in equal monthly installments beginning on December 1, 2026. The term loans mature on October 1, 2027.
The term loans may be prepaid in full or in part, in increments of $10.0 million, with various prepayment premiums. Upon the earlier prepayment or maturity of any term loan, the Company is required to pay a final payment fee of 6.0% of the original principal amount of such funded term loan. The final payment will be accreted to the final payment amount as interest expense using the effective interest method over the term of the loan through maturity date. The term loans once repaid or prepaid may not be reborrowed. The Company is also obligated to pay other customary fees for a loan facility of this size and type.
The term loans under the Loan Agreement are secured by substantially all of the Company’s assets, except the Company’s intellectual property, which is the subject of a negative pledge, and will be guaranteed by the Company’s future subsidiaries, subject to certain limitations. Upon the outstanding balance of the term loans reaching $75.0 million or greater, the Company’s intellectual property will become collateral. The Company and its subsidiary, ALX Oncology Limited, have guaranteed the obligations under the Loan Agreement. The Loan Agreement contains customary affirmative and negative covenants, including covenants limiting the ability of the Company to, among other things, dispose of assets, effect certain mergers, incur debt, grant liens, pay dividends and distributions on its capital stock, make investments and acquisitions, and enter into transactions with affiliates, in each case subject to customary exceptions for a loan facility of this size and type.
The Loan Agreement contains customary events of default, which include, but are not limited to payment defaults, material misrepresentations, breaches of covenants, cross defaults with certain other material indebtedness, bankruptcy and insolvency events, and judgment defaults. The occurrence of an event of default could result in the acceleration of our obligations under the Loan Agreement, the termination of the Lenders’ commitments, a 5.0% increase in the applicable rate of interest and the exercise by the Lender of other rights and remedies provided for under the Loan Agreement.
The Company received net proceeds from issuance of the term loan of $9.3 million after deducting debt issuance costs of approximately $0.7 million. Debt issuance costs were recorded as debt discount on the term loan, offsetting term loan, non-current on the consolidated balance sheet. The debt discount will be amortized over the term of the loan as interest expense using the effective interest method. During the year ended December 31, 2022, interest expense incurred in connection with the Loan Agreement was $0.2 million. We had no outstanding debt and did not incur interest expense in 2021.
The Company determined that certain loan features were embedded derivatives requiring bifurcation and separate accounting. Those embedded derivatives were bundled together as a single, compound embedded derivative and then bifurcated and accounted for separately from the host contract. As of December 31, 2022, the value of the embedded derivative is not material, but could become material in future periods if an event of default became more probable than is currently estimated. As of December 31, 2022, we were in compliance with all financial reporting covenants under the Loan Agreement.
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As of December 31, 2022, the future maturities under the Loan Agreement are as follows (in thousands):
Total future maturities 10,600
Less: current portion of term loan —
Total term loan, net of current portion 10,600
Less: unamortized debt issuance costs (993 )
Less: unaccreted final payment costs (218 )
Term loan, non-current, net $ 9,389
(8) STOCKHOLDERS’ EQUITY
On July 21, 2020, the Company’s amended and restated certificate of incorporation became effective, authorizing 1,000,000,000 shares of common stock, $0.001 par value per share, and 100,000,000 shares of undesignated preferred stock, $0.001 par value per share. As of December 31, 2022 and 2021, the Company had 40,861,386 and 40,587,067 shares of common stock outstanding, respectively.
Common Stock
In July 2020, the Company consummated its initial public offering and issued 9,775,000 shares of common stock for net proceeds of approximately $169.5 million, after deducting underwriting discounts and commissions of $13.0 million and offering-related expenses of $3.2 million. Upon the closing of the initial public offering, all shares of convertible preferred stock outstanding and accrued cumulative dividends were automatically converted into 23,934,533 shares of common stock.
In December 2020, the Company consummated its follow-on public offering and issued 2,737,000 shares of common stock for net proceeds of approximately $194.9 million, after deducting underwriting discounts and commissions of $12.5 million and offering-related expenses of $0.7 million.
Common stock reserved for future issuance as of December 31, 2022 consists of the following:
December 31,
Stock options issued and outstanding 6,196,848
Stock options authorized for future issuance 2,932,309
Employee Stock Purchase Plan shares authorized for future issuance 1,147,986
Restricted stock issued and outstanding 820,326
Dividends
Prior to the Company’s initial public offering, cumulative dividends of 6.0% per annum of the original issue price for each convertible preferred stock series were payable when and as declared by the Company’s Board of Directors, or Board of Directors, upon the occurrence of a liquidation event or upon a contingent mandatory conversion of the convertible preferred stock in connection with a qualified initial public offering as described below. The Series A original issue price was $6.58, and the Series B and Series C original issue price was $9.4972. The original issue price was subject to adjustment in the event of any share dividend, share split, combination, consolidation or other recapitalization. The dividends accrued from day to day from the issue date of such preferred stock whether or not declared and were cumulative. In addition, the preferred stockholders participated on an as-converted basis in any dividends payable to common stockholders. As of July 20, 2020, there were approximately $18.0 million of accrued cumulative dividends on the Series A, Series B and Series C convertible preferred stock, which became payable upon the consummation of the Company’s initial public offering and automatically converted into 2,564,759 shares of the Company’s common stock.
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(9) STOCK-BASED COMPENSATION
Equity Incentive Plans
2015 Share Award Scheme
During 2015, the Company adopted an equity compensation plan, the 2015 Share Award Scheme, or the 2015 Share Award Scheme, for eligible employees, officers, directors, advisors, and consultants. The 2015 Share Award Scheme provided for the grant of incentive and non-statutory stock options. The 2015 Share Award Scheme permitted the Company to grant up to 2,143,117 shares of common stock pursuant to awards granted thereunder, including incentive stock options, non-statutory stock options, conditional share awards and restricted share awards.
2020 Equity Incentive Plan
On April 1, 2020, the Board of Directors approved a new equity incentive plan, or the 2020 Equity Incentive Plan, that replaced the 2015 Share Award Scheme. The 2020 Equity Incentive Plan permitted the issuance of up to 4,379,139 shares of the Company’s common stock pursuant to awards granted under it, and authorized the award of stock options, restricted stock awards, stock appreciation rights and restricted stock units to employees, directors, and consultants.
Amended and Restated 2020 Equity Incentive Plan