SQZ Sqz Biotechnologies Co - 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing at the end of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a clinical-stage biotechnology company focused on unlocking the full potential of cell therapies to benefit patients with cancer, and other serious medical conditions. The company was founded on the therapeutic potential of Cell Squeeze ® , our proprietary technology which allows for rapid delivery of a variety of cargo into different cell types. We aim to create multiple cell therapies that drive the immune system to combat diseases.

On November 30, 2022, our Board of Directors approved a restructuring plan and strategic prioritization of our clinical portfolio (the Restructuring Plan) to concentrate on the development of our second-generation enhanced Antigen Presenting Cells (eAPC) cell therapy program, focused on HPV16 positive recurrent, locally advanced, or metastatic solid tumors and reduce our workforce by approximately 60%. In connection with the prioritization decision, we announced that Armon Sharei, PhD, stepped down from his role as Chief Executive Officer and as a member of the Board of Directors, as of November 30, 2022. The Board appointed Howard Bernstein, MD, PhD, our former Chief Scientific Officer and current director, as Interim Chief Executive Officer.

Additionally, on November 30, 2022, we announced a pause of our Antigen Presenting Cells (APC), Activating Antigen Carrier (AAC) and Tolerizing Antigen Carrier (TAC) programs. This portfolio prioritization allows us to deliver initial data readouts for the SQZ® eAPC program’s highest-dose monotherapy cohort, which we anticipate in mid-2023. We will continue to explore partnerships and collaborations for our earlier stage assets and programs, including TAC, as well as our point-of-care manufacturing capabilities.

In oncology, we are developing cell therapy platforms that are based on directing tumor antigen-specific immune activation via engineered antigen presentation. We believe that by engineering physiological antigen presentation signals in subsets of peripheral blood cells that act on immune priming pathways, we have the potential to develop cell therapies that are designed to be potent drivers of tumor-specific immunity, well-tolerated, administered without lymphodepleting preconditioning or hospitalization, and produced in under 24 hours.

We have continued to build upon the progress of our SQZ ® APC platform through the development of the novel SQZ ® eAPC platform. Our lead eAPC product candidate leverages the added capabilities and functionality of multiple antigen presentation and immunological signals achieved through multiplexed mRNA delivery to diverse immune cell types. In January 2022, we received allowance to proceed with clinical trials from the U.S. Food and Drug Administration, or FDA, under our Investigational New Drug, or IND, application for SQZ-eAPC-HPV, our lead eAPC candidate engineered with HPV16 antigens and costimulatory signals. We initiated the SQZ-eAPC-HPV trial, the COMMANDER-001 Phase 1/2 study, in patients with HPV16+ advanced solid tumors in the first half of 2022. We expect to announce initial data from highest-dose monotherapy cohort in this trial in mid-2023.

Recent Developments

At the time of the November 2022 strategic realignment announcement, the SQZ-AAC-HPV trial had one patient in the lowest- dose cohort on study. On December 21, 2022, after two treatment cycles, the patient’s CT scan showed reduction of the target lesion—a right hilar lymph node—from 16 millimeters (mm) at baseline to 10mm, or approximately 38% from baseline, which was consistent with a partial response by RECIST 1.1 criteria. A subsequent scan on February 2, 2023, after four treatment cycles, showed further reduction of the target lesion to 8mm, or 50% from baseline, which was consistent with a confirmed partial response / unconfirmed complete response by RECIST 1.1 criteria, as well as an unconfirmed complete response. In March 2023, after seven cycles of SQZ-AAC-HPV, a CT scan confirmed the complete response by RECIST 1.1 criteria. Biomarker analysis on this patient identified an inflamed tumor microenvironment that highly expressed MHC1 cells and an increase in CD8+ cell density was observed. In light of this response in the first patient dosed, we decided to continue to enroll patients in the SQZ-AAC-HPV clinical trial. The company has completed the dose-limiting toxicity period for the lowest-dose cohort. Following review and recommendation by the Study Safety Committee, the Company is advancing SQZ-AAC-HPV-101 trial to the highest-dose cohort. The company anticipates initial clinical data from the highest-dose cohort in the fourth quarter of 2023.

The ENVOY-001 trial is a Phase 1 open-label trial of our AAC HPV therapy candidate, or SQZ-AAC-HPV, as a monotherapy and in combination with immune checkpoint inhibitors in HLA-A*02+ patients with HPV16+ recurrent, locally advanced or metastatic solid

tumors.

NYSE Notification

On January 18, 2023, we received notice (the “NYSE Notification”) from the New York Stock Exchange (“NYSE”) indicating that we are not in compliance with Section 802.01C of the NYSE Listed Company Manual (“Section 802.01C”) because the average closing price of our common stock was less than $1.00 over a consecutive 30 trading-day period. The NYSE Notification does not result in the immediate delisting of our common stock from the NYSE.

We have notified the NYSE of our intent to cure the stock price deficiency and return to compliance with the NYSE continued listing standards. Under NYSE rules, we have a period of six months from receipt of the NYSE Notification to cure the stock price deficiency and regain compliance with the NYSE’s continued listing standards. Our common stock will continue to be listed and trade on the NYSE during this cure period, subject to our compliance with other NYSE continued listing standards. If our common stock is delisted, it may be difficult for our stockholders to sell their common stock without depressing the market price for our common stock, or at all. See Part I, Item 1A. “Risk Factors—An active, liquid trading market for our common stock may not be sustained” in this Annual Report on Form 10-K.

Financial Overview

Since our inception, we have focused substantially all of our resources on building our Cell Squeeze technology, establishing and protecting our intellectual property portfolio, conducting research and development activities, developing our manufacturing process and manufacturing product candidate materials, preparing for and initiating clinical trials of our product candidates, organizing and staffing our company, business planning, raising capital and providing general and administrative support for these operations. We do not have any products approved for sale and have not generated any revenue from product sales. To date, we have funded our operations primarily with proceeds from sales of common and preferred stock, payments received under our collaboration agreements with Hoffman-La Roche Inc. and F. Hoffman La Roche Ltd., or together, Roche, and with proceeds from our initial public offering, or IPO, and follow-on offering of common stock, or the Follow-On Offering. In November 2020, we completed our IPO pursuant to which we issued and sold 5,073,529 shares of common stock, inclusive of 661,764 shares sold by us pursuant to the full exercise of the underwriters’ option to purchase additional shares. We received aggregate net proceeds of approximately $75.5 million from the IPO, after deducting underwriting discounts and commissions, but before deducting offering costs payable by us, which were $2.6 million. In February 2021, we completed a public offering, or the Follow-On Offering, pursuant to which we issued and sold 3,000,000 shares of common stock. We received aggregate net proceeds of approximately $56.4 million, after deducting underwriting discounts and commissions, but before deducting offering costs payable by us, which were $0.8 million. On November 10, 2021,we entered into an Open Market Sales Agreement (the “Sales Agreement”) with Jefferies LLC (“Jefferies”) to issue and sell up to $75,000,000 in shares of our common stock from time to time during the term of the Sales Agreement through an “at-the-market” equity offering program under which Jefferies acts as our sales agent (the “ATM Facility”). During the year ended December 31, 2022, we sold 1,261,226 shares of common stock under the ATM Facility for net proceeds of approximately $4.1 million.

Since our inception, we have incurred significant operating losses. Our ability to generate any product revenue or product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more of our product candidates. We reported a net loss of $79.5 million for the year ended December 31, 2022. As of December 31, 2022, we had an accumulated deficit of $275.0 million. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect that our expenses and capital requirements will increase substantially in connection with our ongoing activities, particularly if and as we:

conduct clinical trials for our product candidates, including our ongoing clinical trials of SQZ-AAC-HPV and SQZ-eAPC-HPV, predominantly in the United States;

further develop our Cell Squeeze technology;

continue to develop additional product candidates;

maintain, expand and protect our intellectual property portfolio;

hire additional clinical, scientific, manufacturing and commercial personnel;

expand external and/or establish internal commercial manufacturing sources and secure supply chain capacity sufficient to provide commercial quantities of any product candidates for which we may obtain regulatory approval;

acquire or in-license other product candidates and technologies;

seek regulatory approvals for any product candidates that successfully complete clinical trials;

establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain regulatory approval; and

add operational, financial and management information systems and personnel to support our product development, clinical execution and planned future commercialization efforts, as well as to support our operation as a public company.

We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. If we obtain regulatory approval for any of our product candidates, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing and distribution.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. Currently, market conditions in the biotechnology sector are challenging due to ongoing global and economic uncertainties. Accordingly, we may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we would have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates.

Because of the numerous risks and uncertainties associated with cell therapy product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

As of March 22, 2023, the issuance date of the consolidated financial statements for the year ended December 31, 2022, included elsewhere in this Annual Report on Form 10-K, based on our recurring losses from operations incurred since inception, expectation of continuing operating losses for the foreseeable future and the need to raise additional capital to finance future operations, our management has concluded that there is substantial doubt about our ability to continue as a going concern for a period of one year from the date that the condensed consolidated financial statements are issued. See “—Liquidity and Capital Resources.”

Impact of the COVID-19 Pandemic

The COVID-19 pandemic has impacted and may continue to impact personnel at third-party manufacturing facilities or the availability or cost of materials, which would disrupt our supply chain. It also has affected and may continue to affect our ability to enroll patients in and timely complete our ongoing clinical trial of SQZ-eAPC-HPV and SQZ-AAC-HPV and delay the initiation of future clinical trials, disrupt regulatory activities or have other adverse effects on our business and operations. For example, we have experienced delays in receiving supplies of raw materials for our preclinical and clinical activities due to the impact of COVID-19 on our suppliers’ ability to timely manufacture these materials, and we have experienced an increase in the transportation cost of our product candidates. In addition, we have experienced delays in opening clinical trial sites and sites that are open may also have challenges enrolling patients. Further, staff shortages, including staff that are required to conduct certain testing, such as biopsies, at our clinical sites or at third-party vendors have resulted in delays in site initiations and in some tests not being properly or timely performed or being delayed.

The pandemic, general economic conditions and related uncertainties have caused significant disruptions in the financial markets, and may continue to cause disruptions, which could impact our ability to raise additional funds to support our operations. Moreover, the pandemic has significantly impacted inflation and economies worldwide and could result in adverse effects on our business and operations. We continue to monitor the potential impact of the COVID-19 pandemic on our business and financial statements. To date, we have not incurred impairment losses in the carrying values of our assets as a result of the pandemic and we are not aware of any specific related event or circumstance that would require us to revise our estimates reflected in our consolidated financial statements. We cannot be certain what the overall impact of the COVID-19 pandemic will be on our business and people. The extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations, financial condition, and liquidity, including planned and future clinical trials and research and development costs, will depend on future developments that are highly uncertain.

Other developments

We are monitoring ongoing events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions or other companies in the financial services industry or the financial services industry generally. This includes Silicon Valley Bank, or SVB, which was closed by the California Department of Financial Protection and Innovation, which then appointed the Federal Deposit Insurance Corporation, or the FDIC, as receiver on March 10, 2023. As of March 10, 2023, we had substantially all of our cash and cash equivalents on deposit with SVB or managed by SVB at a separate institution. Based upon the announcement on March 12, 2023, from the U.S. Department of the Treasury, the U.S. Federal Reserve and the FDIC, we expect to have access to all of our deposits at SVB and the separate institution. We are also monitoring the impacts that these events may have on our vendors. In addition, the United States Federal Reserve has raised, and may again raise, interest rates in response to concerns about inflation. Inflation, together with increased interest rates, may cause our customers to reduce or delay orders for our goods and services thereby causing a decrease in or change in timing of sales of our products and services. The impact of future inflation and interest rate fluctuations on the results of our operations cannot be accurately predicted.

Components of Our Results of Operations

Revenue

To date, we have not generated any revenue from product sales and do not expect to do so for the next several years. All of our revenue to date has been derived from three collaboration agreements with Roche, which we entered into in 2015, 2017 and 2018, and, to a lesser extent, from government grants.

If our development efforts for our product candidates are successful and result in regulatory approval or license or additional collaboration agreements with third parties, we may generate revenue in the future from product sales, payments from additional collaboration or license agreements that we may enter into with third parties, or any combination thereof. We expect that our revenue for the next several years will be derived primarily from our collaboration agreements with Roche as well as any additional collaborations that we may enter into in the future. We cannot provide assurance as to the timing of future milestone or royalty payments or that we will receive any of these payments at all.

Collaboration Revenue

2017 License and Collaboration Agreement with Roche

In April 2017, we entered into a second license and collaboration agreement with Roche, or the 2017 Roche Agreement, to allow Roche to use our Cell Squeeze technology to enable gene editing of immune cells to discover new targets in cancer immunotherapy. The 2017 Roche Agreement includes several licenses granted by Roche to us and by us to Roche in order to conduct a specified research program in accordance with a specified research plan.

Under the agreement, we received an upfront payment of $5.0 million as a technology access fee and are entitled to (i) payments of up to $1.0 million as reimbursement for our research costs; (ii) milestone payments of up to $7.0 million upon the achievement of specified development milestones; and (iii) annual maintenance fees ranging from $0.5 million to $0.9 million for each year following the fifth anniversary of the effective date, subject to specified prepayment discounts.

In early 2022, all active work streams under the 2017 Roche Agreement were concluded and the agreement was terminated. As of December 31, 2021, we determined that we expected to incur no additional costs to satisfy the remaining performance obligations under the 2017 Roche Agreement and we recognized revenue of $1.2 million under the 2017 Roche Agreement. There was no remaining deferred revenue under the 2017 Roche Agreement as of December 31, 2021.

2018 License and Collaboration Agreement with Roche

In October 2018, we entered into a third license and collaboration agreement with Roche, or the 2018 Roche Agreement, to jointly develop certain products based on mononuclear antigen presenting cells, or APCs, including human papilloma virus, or HPV, using our SQZ APC platform for the treatment of oncology indications. We granted Roche a non-exclusive license to our intellectual property, and Roche granted us a non-exclusive license to its and its affiliates’ intellectual property for the purpose of performing research activities. In connection with this agreement, the parties terminated the original Roche Agreement entered into in 2015.

Under the 2018 Roche Agreement, Roche was granted option rights to obtain an exclusive license to develop APC products or products derived from the collaboration programs on a product-by-product basis in oncology and to develop a Tumor Cell Lysate, or TCL, product. For each of the APC products and TCL product, once Roche exercises its option and pays a specified incremental amount, Roche will receive worldwide, exclusive commercialization rights for the licensed products, subject to our alternating option to retain U.S. APC commercialization rights. Through December 31, 2022, Roche had not exercised any of its options under the 2018 Roche Agreement.

Under the 2018 Roche Agreement, we received an upfront payment of $45.0 million and are eligible to receive (i) reimbursement of a mid double-digit percentage of our development costs; (ii) aggregate milestone payments on a product-by-product basis of up to $1.6 billion upon the achievement of specified milestones, consisting of up to $217.0 million of development milestone payments, up to $240.0 million of regulatory milestone payments and up to $1.2 billion of sales milestone payments; and (iii) tiered royalties on annual net sales of APC and TCL products licensed under the agreement at specified rates ranging from a mid single-digit percentage to a percentage in the mid twenties. We received the upfront payment of $45.0 million in October 2018 upon execution of the agreement. In addition, during the second quarter of 2019, we received a payment of $10.0 million following the achievement of the first development milestone under the 2018 Roche Agreement related to submission by us of preclinical data to the FDA and during the first quarter of 2020, we received a payment of $20.0 million following the achievement of the second development milestone under the 2018 Roche Agreement related to first-patient dosing in a Phase 1 clinical trial. In the fourth quarter of 2021, we became entitled to receive a milestone payment of $3.0 million upon (i) the recommendation by an independent panel that we could advance our SQZ-PBMC-HPV clinical trial to combination therapy with checkpoint initiators and (ii) the initiation of that therapy. For additional information on the 2018 Roche Agreement, see “Business—Collaboration, Research and License Agreements—Roche Collaboration.”

We assessed our accounting for the 2018 Roche Agreement in accordance with ASC 606 and identified the following promises under the agreement: (i) a non-exclusive license granted to Roche to use our intellectual property and collaboration compounds to conduct research activities related to the research plans under the 2018 Roche Agreement; (ii) specified research and development services related to HPV through Phase 1 clinical trials under a specified research plan; (iii) manufacturing of our SQZ APC platform and equipment in order to support the HPV research plan; (iv) specified research and development services on next-generation APCs under a research plan; (v) specified research and development services on TCL under a research plan; and (vi) participation on a joint steering committee, or JSC. We concluded at the outset of the 2018 Roche Agreement that there were three performance obligations under the agreement: (1) the license to our intellectual property, the research and development activities related to HPV through Phase 1 clinical trials under a specified research plan, and the manufacturing of our SQZ APC platform and equipment in order to support the HPV research plan, or the first performance obligation; (2) the license to our intellectual property and the research and development activities on next-generation APCs, or the second performance obligation; and (3) the license to our intellectual property and the research and development activities on TCL, or the third performance obligation. We also concluded that the JSC participation had an immaterial impact on the accounting model.

In addition, we determined that the upfront payment of $45.0 million as well as the reimbursable costs of $10.8 million estimated by us constituted the entirety of the consideration to be included in the transaction price. This transaction price of $55.8 million was initially allocated to the three performance obligations based on the relative standalone selling price of each obligation. The potential milestone payments that we may be eligible to receive were excluded from the transaction price at the outset of the arrangement. We reevaluate the transaction price at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur, and, if necessary, we will adjust our estimate of the transaction price.

We separately recognize revenue associated with each of the three performance obligations as the research, development and manufacturing services are provided using an input method, based on the cumulative costs incurred compared to the total estimated costs expected to be incurred to satisfy each performance obligation. The amounts received from Roche that have not yet been recognized as revenue are deferred as a contract liability in our consolidated balance sheet and will be recognized over the remaining research and development period until each performance obligation is satisfied.

In 2019, we evaluated our overall program priorities and determined that in 2020 we would continue to focus our resources on progressing the specified APC programs related to the 2018 Roche Agreement as well as our AAC and TAC platforms. As a result of our continuing focus on these specific programs, we reduced the level of priority of the TCL research activities under the 2018 Roche Agreement and expect to perform such TCL research activities over a longer time period than as originally expected under the research plan of the agreement. In the fourth quarter of 2022, we determined that based on our internal plans which have not included work on TCL since 2019, and which do not anticipate performing additional work on TCL prior to the expiration of the option right, as well as Roche's concurrence that no work was performed or expected to be performed in 2023, that we could recognize the deferred revenue of $9.2 million. Accordingly, as of December 31, 2022, there was no deferred revenue associated with the TCL performance obligation.

During the year ended December 31, 2022, there were no significant changes in the total estimated costs expected to be incurred to satisfy the performance obligations under the 2018 Roche Agreement. During the year ended December 31, 2021, the total estimated costs expected to be incurred to satisfy the performance obligations decreased by $7.3 million. We recognized revenue of $21.0 million and $25.8 million during the years ended December 31, 2022 and 2021, respectively, under the 2018 Roche Agreement. As of December 31, 2022 and 2021, we recorded as a contract liability deferred revenue related to the 2018 Roche Agreement of $0.2 million and $21.2 million, respectively, of which $0.2 million and $12.0 million, respectively, were current liabilities. As of December 31, 2022, the research and development services related to the remaining performance obligation was expected to be performed over a remaining period of three to six months.

For additional information regarding our accounting for the three collaboration agreements with Roche, see “—Critical Accounting Policies and Significant Judgments and Estimates—Revenue Recognition for License and Collaboration Arrangements” and “Business—Collaboration, Research and License Agreements—Roche Collaboration.”

Grant Revenue

We generate revenue from a government contract with the National Institutes of Health (NIH), which reimburses us for certain allowable costs for funded projects, plus an agreed upon fee. Revenue from government grants is recognized as the qualifying expenses related to the contracts are incurred, provided that there is reasonable assurance of recoverability. Revenue recognized upon incurring qualifying expenses in advance of receipt of funding is recorded as unbilled receivables, a component of prepaid expenses and other current assets, in our consolidated balance sheet

Operating Expenses

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including development of our product candidates and costs incurred under our collaboration arrangements with Roche, which include:

employee-related expenses, including salaries, related benefits and stock-based compensation expense for employees engaged in research and development functions;

expenses incurred in connection with the preclinical and clinical development of our product candidates and research programs, including under agreements with third parties, such as consultants, contractors and contract research organizations, or CROs;

the costs of developing and scaling our manufacturing process and of manufacturing our product candidates for use in our preclinical studies and clinical trials, including the costs under agreements with third parties, such as consultants, contractors and contract manufacturing organizations, or CMOs as well as developing our point-of-care manufacturing system;

laboratory and consumable materials and research materials;

facilities, depreciation and other expenses, which include direct and allocated expenses for rent and utilities; and

payments made under third-party licensing agreements.

We expense research and development costs as incurred. Nonrefundable advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed, or when it is no longer expected that the goods will be delivered or the services rendered. Upfront payments under license agreements are expensed upon receipt of the license, and annual maintenance fees under license agreements are expensed in the period in which they are incurred. Milestone payments under license agreements are accrued, with a corresponding expense being recognized, in the period in which the milestone is determined to be probable of achievement and the related amount is reasonably estimable.

Our direct research and development expenses are tracked on a program-by-program basis and consist of external costs and fees paid to consultants, contractors, CMOs and CROs in connection with our preclinical and clinical development and manufacturing activities. Such program costs also include the external costs of laboratory and consumable materials and costs of raw materials that are directly attributable to and incurred for any single program. We do not allocate employee costs, costs associated with our platform development and discovery efforts, payments made under third-party licensing agreements, costs of laboratory supplies and consumable materials that are not directly attributable to any single program, and facilities expenses, including rent, depreciation and other indirect costs, to specific product development programs because these costs are deployed across multiple programs and our platform technology and, as such, are not separately classified.

Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will increase substantially in connection with our planned preclinical and clinical development activities in the near term and in the future, particularly should Roche determine not to exercise its options and we decide to continue clinical development of a product candidate. At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our product candidates. The successful development of our product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development, including the following:

the timing and progress of preclinical and clinical development activities;

the number and scope of preclinical and clinical programs we decide to pursue;

our ability to raise the additional funds necessary to complete preclinical and clinical development of our product candidates;

the progress of the development efforts of parties with whom we have entered, or may enter, into collaboration arrangements;

our ability to maintain our current research and development programs and to establish new ones;

our ability to establish new licensing or collaboration arrangements;

the successful initiation and completion of clinical trials with safety, tolerability and efficacy profiles that are satisfactory to the FDA or any comparable foreign regulatory authority;

the receipt and related terms of regulatory approvals from applicable regulatory authorities;

the availability of specialty raw materials for use in production of our product candidates;

our ability to consistently manufacture our product candidates for use in clinical trials;

our ability to establish and operate a manufacturing facility, or secure manufacturing supply through relationships with third parties;

our ability to obtain and maintain patents, trade secret protection and regulatory exclusivity, both in the United States and internationally; and

our ability to protect our rights in our intellectual property portfolio.

A change in the outcome of any of these variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. In addition, we may never succeed in obtaining regulatory approval for any of our product candidates.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, for personnel in executive, finance and administrative functions. General and administrative expenses also include direct and allocated facility-related costs as well as professional fees for legal, patent, consulting, investor and public relations, accounting and audit services. We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our product candidates. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company.

Restructuring Charges‌

Restructuring charges consist primarily of salary continuance, severance, continued medical benefits, stock-based compensation expense, depreciation expense and other costs, as a result of the Restructuring Plan approved by our Board of Directors on November 30, 2022. The Restructuring Plan included a strategic prioritization of our clinical portfolio to concentrate on the development of our second-generation enhanced Antigen Presenting Cells (eAPC) cell therapy program and included a workforce reduction of approximately 60%. The workforce reduction affected both research and development and general and administrative functions. We may incur additional costs not currently contemplated due to events that may occur because of, or that are associated with, the Restructuring Plan.

Other Income (Expense)

Interest Income

Interest income consists of interest earned on our cash equivalents balances.

Other Income (Expense), Net

Other income (expense), net consists of miscellaneous income and expense unrelated to our core operations.

Income Taxes

Since our inception, we have not recorded any income tax benefits for the net losses we have incurred in each year or for our earned research and development tax credits, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss, or NOL, carryforwards and tax credit carryforwards will not be realized. As of December 31, 2022, we had U.S. federal NOL carryforwards of $185.2 million, which may be available to offset future taxable income, of which $11.3 million begin to expire in 2034 and of which $173.9 million do not expire but are generally limited in their usage to an annual deduction equal to 80% of annual taxable income. In addition, as of December 31, 2022, we had state NOL carryforwards of $174.1 million, which may be available to offset future taxable income, of which $171.8 million begin to expire in 2035 and $0.7 million may be carried forward indefinitely. As of December 31, 2022, we also had U.S. federal and state research and development tax credit carryforwards of $10.4 million and $6.2 million which will begin to expire in 2034 and 2030, respectively. We have recorded a full valuation allowance against our net deferred tax assets at each balance sheet date.

Results of Operations

Comparison 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:

YEAR ENDED

DECEMBER 31,

CHANGE

(in thousands)

Collaboration revenue

Grant revenue

Total revenue

Operating expenses:

Research and development

General and administrative

Restructuring charges

Total operating expenses

Loss from operations

Other income (expense):

Interest income

Other expense, net

Total other income, net

Net loss

Revenue

Collaboration revenue was $21.0 million for the year ended December 31, 2022, compared to $27.1 million for the year ended December 31, 2021. We recognize revenue under our collaboration arrangements using an input measure, comparing our cumulative costs incurred to our total estimated costs of the research, development and manufacturing activities, as applicable, on each program. The net decrease in collaboration revenue of $6.1 million was due to the following:

An increase in the expected remaining performance period of the 2018 Roche Agreement at the end of 2021, resulting in a longer period over which revenue was recognized in 2022 compared to 2021.

In the fourth quarter of 2021, we became entitled to receive a milestone payment of $3.0 million upon (i) the recommendation by an independent panel that we could advance our SQZ-PBMC-HPV clinical trial to combination therapy with checkpoint initiators and (ii) the initiation of that therapy. We achieved both requirements in the fourth quarter of 2021 and we therefore included the $3.0 million milestone payment in our estimate of the transaction price for the 2018 Roche Agreement. As a result, we recorded a cumulative catch-up adjustment to collaboration revenue of $2.5 million during the three months and year ended December 31, 2021.

A decrease in revenue recognized under the 2017 Roche Agreement. During the year ended December 31, 2022, we recognized no revenue compared to $1.2 million during the year ended December 31, 2021, respectively, under the 2017 Roche Agreement.

Offsetting the above decreases:

In the fourth quarter of 2022, we determined we could recognize the remaining deferred revenue of $9.2 million related to the TCL performance obligation. This determination was based on our internal plans which have not included work on TCL since 2019, and which do not anticipate performing work on TCL prior to the expiration of the option right, as well as Roche's concurrence that no work was performed or expected to be performed in 2023.

During the years ended December 31, 2022 and 2021, we recognized total revenue of $21.0 million and $25.8 million, respectively, under the 2018 Roche Agreement.

The decrease in collaboration revenue for the year ended December 31, 2022 was partially offset by a $0.4 million increase in grant revenue. We were awarded a government grant by the NIH at the end of the first quarter of 2022 and began performing services under this grant during the second quarter of 2022.

Research and Development Expenses

YEAR ENDED

DECEMBER 31,

CHANGE

(in thousands)

Direct research and development expenses by program:

SQZ-PBMC-HPV

SQZ-AAC-HPV

SQZ-eAPC-HPV

Other programs

Unallocated research and development expenses:

Personnel related (including stock-based compensation)

Facility related

Laboratory and consumable materials

Platform-related external services and other

Total research and development expenses

Research and development expenses were $71.0 million for the year ended December 31, 2022, compared to $70.1 million for the year ended December 31, 2021. The net increase was primarily due to the following:

Direct costs incurred for our SQZ-AAC-HPV program increased by $2.9 million primarily as a result of an increase in allocated manufacturing costs and clinical trial-related costs partially offset by reduced technology transfer costs.

Other program costs increased by $2.9 million primarily due to expenses incurred on developing a point-of-care system to manufacture our product candidates, as well as development of other platform related programs.

The increase in personnel-related costs of $3.7 million was primarily due to increased headcount and salary costs in our research and development function prior to the November 2022 Restructuring Plan. Personnel-related costs for the year ended December 31, 2022 and 2021 included stock-based compensation expense of $3.3 million and $3.2 million, respectively.

Facility-related costs increased by $0.1 million primarily due to an increase in operational costs.

Partially offsetting the above increases were:

The direct costs related to our SQZ-PBMC-HPV program decreased by $7.0 million primarily due to lower manufacturing costs as we increased our clinical trial activity on other product candidates.

SQZ-eAPC-HPV costs decreased by $1.5 million primarily due to a decrease in allocated and direct manufacturing costs, partially offset by an increase in clinical trial-related costs.

Laboratory and consumable materials expenses for general usage fluctuate from period to period based on the timing of our purchases made. We expense the costs of materials when purchased because they have no alternative future use. The laboratory and consumables materials expenses decreased by $0.3 million during the year ended December 31, 2022 compared to the year ended December 31, 2021.

General and Administrative Expenses

YEAR ENDED

DECEMBER 31,

CHANGE

(in thousands)

Personnel related (including stock-based compensation)

Professional and consultant fees

Facility related and other

Total general and administrative expenses

General and administrative expenses for the year ended December 31, 2022 were $26.3 million, compared to $25.7 million for the year ended December 31, 2021. The increase in general and administrative expenses was primarily due to the following:

Personnel-related costs increased by $0.2 million primarily due to an increase in salary costs due to an increase in headcount as well as an increase in stock-based compensation expense. Personnel-related costs for the years ended December 31, 2022 and 2021 included stock-based compensation expense of $4.7 million and $5.3 million, respectively.

Facility related and other costs increased by $0.7 million primarily due to an increase in operational costs.

Partially offsetting the increase was a decrease in professional and consultant fees of $0.3 million due to lower legal related costs incurred during 2022 in comparison to 2021.

Restructuring Charges

YEAR ENDED

DECEMBER 31,

CHANGE

(in thousands)

Personnel related (including salaries, severance and other benefits)

Stock-based compensation

Depreciation expense

Facility related and other

Total restructuring charges

Restructuring charges for the year ended December 31, 2022 were $4.9 million, compared to $0 for the year ended December 31, 2021. The increase in restructuring charges was primarily due to the following:‌

Personnel-related costs increased by $4.0 million primarily due to salary continuation, one-time severance payments, and other employee-related separation costs including stock-based compensation expense.

Stock-based compensation expense increased by $0.4 million due to modifications of stock options to extend the period for exercising vested options post-separation.

Depreciation expense increased by $0.4 million due to accelerated depreciation expense as a result of reducing the estimated useful lives and accelerating the depreciation expense for certain laboratory equipment that will no longer be required and will be disposed of.

Interest Income

Interest income for the years ended December 31, 2022 and 2021 was $1.2 million and less than $0.1 million, respectively. The increase in interest income was due to an increase in interest rates despite lower average cash balances during 2022 as compared to 2021.

Other Income (Expense), Net

Other income (expense) was not significant for both the years ended December 31, 2022 and 2021.

Liquidity and Capital Resources

Since our inception, we have incurred significant operating losses. 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 the next several years, if at all. Through December 31, 2022, we have funded our operations from the sales of our common and preferred stock, upfront and milestone payments under our collaboration agreements with Roche, and with proceeds from our IPO, Follow-On Offering and our ATM Facility. In November 2020, we completed our IPO pursuant to which we issued and sold 5,073,529 shares of common stock, inclusive of 661,764 shares sold by us pursuant to the full exercise of the underwriters’ option to purchase additional shares. We received aggregate net proceeds of approximately $75.5 million, after deducting underwriting discounts and commissions, but before deducting offering costs payable by us, which were $2.6 million. In February 2021, we completed the Follow-On Offering pursuant to which we issued and sold 3,000,000 shares of common stock. We received aggregate net proceeds of approximately $56.4 million, after deducting underwriting discounts and commissions, but before deducting offering costs payable by us, which were approximately $0.8 million. As of December 31, 2022, we had cash and cash equivalents of $63.7 million. During the year ended December 31, 2022, we raised approximately $4.1 million in net proceeds, under the ATM Facility, pursuant to which we sold 1,261,226 shares of our common stock. See Note 1 to our consolidated financial statements‌.

Going Concern

Since our inception, we have incurred significant operating losses and negative cash flows from our operations. We have not yet commercialized any products and we do not expect to generate revenue from sales of any products for several years, if at all. As of December 31, 2022, our cash and cash equivalents were $63.7 million and our restricted cash balance was $2.3 million. We expect

that our research and development and general and administrative expenses will continue to be significant as we focus on completing the necessary development, obtaining regulatory approval and preparing for potential commercialization of our product candidates. Based on our current operating plan, we believe that our existing cash and cash equivalents will be sufficient to fund our operating expenses and capital expenditure requirements into the first quarter of 2024.

These conditions and events raise substantial doubt about our ability to continue as a going concern for the one-year period following the issuance of our consolidated financial statements for the year ended December 31, 2022. To finance our operations, we will need to raise additional capital, which cannot be assured. Unless and until we reach profitability in the future, we will require additional capital to fund our operations, which could be raised through a combination of equity offerings, debt financings, other third-party funding, marketing and distribution arrangements and other collaborations and strategic alliances. If we are unable to obtain funding, we could be forced to delay, reduce, or eliminate some or all of our research and development programs, product portfolio expansion or commercialization efforts, which would adversely affect our business prospects, or we may be unable to continue operations.

Cash Flows

The following table summarizes our sources and uses of cash for each of the periods presented:

YEAR ENDED

DECEMBER 31,

(in thousands)

Net cash used in operating activities

Net cash used in investing activities

Net cash provided by financing activities

Net decrease in cash, cash equivalents and restricted cash

Operating Activities

During the year ended December 31, 2022, operating activities used $83.5 million of cash, primarily resulting from our net loss of $79.5 million and changes in our operating assets and liabilities of $24.2 million partially offset by net non-cash charges of $20.1 million. Net cash used by changes in our operating assets and liabilities for the year ended December 31, 2022 consisted of increases resulting from: a $3.0 million decrease in accounts receivable due to a milestone payment from Roche, a $2.1 million increase in accrued expenses, and a $3.2 million increase in accrued restructuring expenses offset by: a $0.4 million increase in prepaid expenses and other current assets, a $1.4 million decrease in accounts payable, a $20.9 million decrease in deferred revenue and a $9.9 million decrease in operating lease liabilities.

During the year ended December 31, 2021, operating activities used $82.1 million of cash, primarily resulting from our net loss of $68.7 million and changes in our operating assets and liabilities of $32.9 million partially offset by net non-cash charges of $19.5 million. Net cash used by changes in our operating assets and liabilities for the year ended December 31, 2021 consisted of a $1.1 million increase in accounts receivable, a $0.5 million decrease in prepaid expenses and other current assets, a $1.0 million increase in accounts payable, a $23.8 million decrease in deferred revenue and a $8.7 million decrease in operating lease liabilities.

In all periods presented, other changes in prepaid expenses and other current assets, accounts receivable, accounts payable, accrued expenses and other liabilities not described above were generally due to growth in our business, the advancement of our research programs and the timing of vendor invoicing and payments. In all periods presented, decreases in operating lease liabilities were primarily due to our recurring payments made under recorded operating lease liabilities, including those arising from embedded leases.

Investing Activities

During the year ended December 31, 2022, net cash used in investing activities was $0.5 million, consisting of purchases of property and equipment.

During the year ended December 31, 2021, net cash used in investing activities was $0.6 million, consisting of purchases of property and equipment.

The purchases of property and equipment in each period were primarily for equipment purchases related to the expansion of our research and development activities and the growth of our business.

Financing Activities

During the year ended December 31, 2022, net cash provided by financing activities was $4.2 million, consisting primarily of net proceeds from the ATM Facility, employee stock purchase plan issuances, and stock option exercises during the year.

During the year ended December 31, 2021, net cash provided by financing activities was $55.9 million, consisting primarily of net proceeds from our Follow-On Offering of $55.6 million and stock option exercises of $1.3 million, offset by the payment of issuance costs for prior period IPO common stock issuances of $1.1 million.

Funding Requirements

Even with the expected reduction in research and development and general and administrative expenses as a result of the Restructuring Plan announced on November 30, 2022, we expect that substantial expenses will be incurred 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 continue to incur additional costs associated with operating as a public company. The timing and amount of our operating and capital expenditures will depend largely on:

our ability to successfully execute upon and achieve the expected benefits of our Restructuring Plan

the timing and progress of preclinical and clinical development activities;

the commencement, enrollment or results of the current clinical trials of our product candidates or any future clinical trials we may conduct, or changes in the development status of our product candidates;

the timing and outcome of regulatory review of our product candidates;

our decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial as well as Roche’s decision whether to exercise its options;

changes in laws or regulations applicable to our product candidates, including but not limited to clinical trial requirements for approvals;

adverse developments concerning our manufacturers and other third-party providers;

our ability to obtain materials to produce adequate product supply for any approved product or inability to do so at acceptable prices;

the identification of additional restructuring charges not currently contemplated due to events that may occur because of, or that are associated with the Restructuring Plan.

our ability to establish collaborations if needed;

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;

the legal patent costs involved in prosecuting patent applications and enforcing patent claims and other intellectual property claims;

additions or departures of key scientific or management personnel;

unanticipated serious safety concerns related to the use of our product candidates;

the terms and timing of any collaboration, license or other arrangement, including the terms and timing of any milestone payments thereunder; and

the severity, duration and impact of the COVID-19 pandemic and general economic conditions, which may adversely impact our business.

As of December 31, 2022, we had cash, cash equivalents and marketable securities of $63.7 million. In accordance with Accounting Standards Update ("ASU, 2014-15"), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), we are required to evaluate whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern from the issuance date of our financial statements. Based on our current plans, which reflect the anticipated effect of the Restructuring Plan approved by our Board of Directors on November 30, 2022, including the 60% workforce reduction, certain cost reducing activities including pausing certain clinical trial activity and exploratory research programs, we believe that our existing cash, and cash equivalents will enable us to fund our operating expenses into the first quarter of 2024.

This timeline is subject to uncertainty as to the timing of future expenditures. We have developed plans to mitigate this risk, which primarily consist of raising additional capital through some combination of equity or debt financings, potential new collaborations, and/or reducing cash expenditures. If we are not able to secure adequate additional funding, we plan to make additional reductions in spending. In that event, we may have to delay, scale back, or eliminate some or all of our planned clinical trials. The actions necessary to reduce spending under this plan at a level that mitigates the factors described above are not considered probable, as defined in the accounting standards and therefore, the full extent to which management may extend our funds through these actions may not be considered in management’s assessment of our ability to continue as a going concern. As a result, management has concluded that substantial doubt exists about our ability to continue as a going concern.

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. To the extent that we raise additional capital through the sale of equity or convertible debt securities, existing stockholders' interests will be

diluted, and the terms of these securities may include liquidation or other preferences that adversely affect an investor's 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 product 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, including due to adverse macroeconomic conditions such as rising interest rates, we would be required to delay, scale back or discontinue our research, product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Contractual Obligations and Commitments

Under license agreements with MIT, we are obligated to pay annual license fees and to make contingent milestone and royalty payments. Under our license agreement with MIT, we are obligated to make aggregate milestone payments of up to $1.8 million upon the achievement of specified milestones, consisting of up to $0.8 million of development milestone payments and up to $1.0 million of regulatory milestone payments, as well as to pay royalties of low single-digit percentages of (i) our, and any of our affiliates’ and sublicensees’, net sales of licensed products in the research field and (ii) our, and any of our affiliates’, net sales of licensed products in the therapeutic field. In addition, we are obligated to pay annual license maintenance fees of less than $0.1 million per year. For additional information on our license with MIT, see “Business—Collaboration, Research and License Agreements—MIT License Agreement.”

Under our license agreement with Erytech, we are obligated to make aggregate milestone payments of up to $6.0 million upon the achievement of specified milestones, consisting of up to $1.0 million of development milestone payments and up to $5.0 million of regulatory milestone payments, for the first licensed product to achieve the specified milestones and payments of up to $50.0 million upon the achievement of specified sales milestones for all licensed products successfully developed under the agreement for each indication. In addition, we are obligated to pay tiered royalties ranging in the low single-digit percentages of annual net sales for each licensed product or licensed indication sold by us or our affiliates.

Under the 2018 Roche Agreement, if Roche exercises one of its options, then for each antigen product candidate for which Roche commercializes outside of the United States and we commercialize in the United States, we are obligated to pay Roche tiered royalties on net sales of such product candidate in the United States. The amount, timing and likelihood of such payments are not known. See “Business—Collaboration, Research and License Agreements—Roche Collaboration.”

We enter into contracts in the normal course of business with CMOs, CROs and other third parties for preclinical research studies, manufacturing, clinical trials, services and testing. These contracts do not contain minimum purchase commitments and are cancelable by us upon prior written notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including non-cancelable obligations of our service providers, up to the date of cancellation.

For additional information regarding our contractual commitments, see Notes 9 and 10 of our consolidated financial statements appearing at the end of this Annual Report on Form 10-K.

Critical Accounting Policies and Significant Judgments and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements appearing at the end of this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.

Revenue Recognition for License and Collaboration Arrangements

Under ASC 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform 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, we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract, determine which goods or services are performance obligations and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when, or as, that performance obligation is satisfied.

We enter into licensing arrangements that are within the scope of ASC 606, under which we may exclusively license to third parties rights to research, develop, manufacture and commercialize our product candidates. The terms of these arrangements typically include payment to us of one or more of the following: nonrefundable, upfront license fees; reimbursement of certain costs; customer option exercise fees; development, regulatory and sales milestone payments; and royalties on net sales of licensed products. The payment terms under our existing licensing arrangements are 60 days.

In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under our arrangements, we perform the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the assessment of the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when, or as, we satisfy each performance obligation. As part of the accounting for these arrangements, we must use significant judgment to determine: (a) the performance obligations based on the determination under step (ii) above; (b) the transaction price under step (iii) above; and (c) the standalone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above. We also use judgment to determine whether milestone payments or other variable consideration, except for royalties and sales-based milestones, should be included in the transaction price, as described below. The transaction price is allocated to each performance obligation based on the relative standalone selling prices of each performance obligation in the contract, and we recognize revenue based on those amounts when, or as, the performance obligations under the contract are satisfied.

The standalone selling price is the price at which an entity would sell a promised good or service separately to a customer. We estimate the standalone selling price of each of the identified performance obligations in our customer contracts, maximizing the use of observable inputs. Because we have not sold the same goods or services in our contracts separately to any customers on a standalone basis and there are no similar observable transactions in the marketplace, we estimate the standalone selling price of each performance obligation in our customer arrangements based on our estimate of costs to be incurred to fulfill our obligations associated with the performance, plus a reasonable margin.

We have determined that our only contract liability under ASC 606 is deferred revenue. Amounts received prior to revenue recognition are recorded as deferred revenue in the consolidated balance sheets. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current portion of deferred revenue in the consolidated balance sheets. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion, in the consolidated balance sheets.

Exclusive Licenses

If the license to our intellectual property is determined to be distinct from the other promises or performance obligations identified in the arrangement, we recognize revenue from nonrefundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. In assessing whether a promise or performance obligation is distinct from the other promises, we consider factors such as the research, development, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. In addition, we consider whether the collaboration partner can benefit from a promise for its intended purpose without the receipt of the remaining promises, whether the value of the promise is dependent on the unsatisfied promises, whether there are other vendors that could provide the remaining promises, and whether it is separately identifiable from the remaining promises. For licenses that are combined with other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of progress and related revenue recognition. The measure of progress, and the resulting periods over which revenue should be recognized, are subject to estimates by management and may change over the course of the research, development and licensing arrangement. Such a change could have a material impact on the amount of revenue we record in future periods. Under our existing license and collaboration agreements, we have concluded that the transfer of control to the customer occurs over the time period that the research and development services are to be provided by us, and this cost-to-cost method is, in management’s judgment, the best measure of progress towards satisfying the performance obligation.

Research and Development Services

The promises under our license and collaboration arrangements often include research and development services to be performed by us on behalf of the partner. Payments or reimbursements resulting from our research and development efforts are estimated at the outset of the arrangement and considered part of the transaction price that is subsequently recognized as revenue because we are the principal in the arrangement for such efforts.

Customer Options

If an arrangement is determined to contain customer options that allow the customer to acquire additional goods or services, we evaluate the customer options to determine if they are material rights at the outset of each arrangement. Options to acquire additional goods or services for free or at a discount are deemed to be material rights. If the goods and services underlying the customer options are not determined to be material rights, these customer options are not considered to be performance obligations in the arrangement because they are contingent upon exercise of the option. If the customer options are determined to be a material right, the material right is recognized as a separate performance obligation at the outset of the arrangement. We allocate the transaction price to material rights based on the relative standalone selling price, which is determined based on the identified discount and the probability that the customer will exercise the option. Amounts allocated to a material right are not recognized as revenue until, at the earliest, the option is exercised.

Milestone Payments

At the inception of each arrangement that includes potential research, development or regulatory milestone payments, we evaluate whether the milestones are considered likely to be met and estimate the amount to be considered for inclusion in the transaction price using the most-likely-amount method. If it is probable that a significant reversal in the amount of cumulative revenue recognized would not occur, the associated milestone payment value is included in the transaction price. For milestone payments due upon events that are not within the control of us or the licensee, such as regulatory approvals, we are not able to assert that it is likely that the regulatory approval will be granted and that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur until those approvals are received. In making this assessment, we evaluate factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the particular milestone. There is considerable judgment involved in determining whether it is probable that a significant reversal in the amount of cumulative revenue recognized would not occur. At the end of each subsequent reporting period, we reevaluate the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the overall transaction price of the arrangement. Any such adjustments are recorded on a cumulative catch-up basis, which would affect the amounts of revenue and earnings in the period of adjustment.

Royalties

For arrangements that include sales-based royalties, including milestone payments due upon first commercial sales or based on a level of sales, that are the result of a customer-vendor relationship and for which the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) the occurrence of the related sales or (ii) the date upon which the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, we have not recognized any royalty revenue from any of our licensing arrangements.

Information regarding management’s judgments and estimates applied in our accounting for our collaboration agreements with Roche in accordance with ASC 606 is summarized below. For additional information, see “—Components of Our Results of Operations—Revenue” and Note 11 to our consolidated financial statements appearing at the end of this Annual Report on Form 10-K.

2017 License and Collaboration Agreement with Roche

In April 2017, we entered into a second license and collaboration agreement with Roche, or the 2017 Roche Agreement, to allow Roche to use our Cell Squeeze technology to enable gene editing of immune cells to discover new targets in cancer immunotherapy. The 2017 Roche Agreement includes several licenses granted by Roche to us and by us to Roche in order to conduct a specified research program in accordance with a specified research plan.

Under the agreement, we received an upfront payment of $5.0 million as a technology access fee and are entitled to (i) payments of up to $1.0 million as reimbursement for our research costs; (ii) milestone payments of up to $7.0 million upon the achievement of specified development milestones; and (iii) annual maintenance fees ranging from $0.5 million to $0.9 million for each year following the fifth anniversary of the effective date, subject to specified prepayment discounts.

In early 2022, all active work streams under the 2017 Roche Agreement were concluded and the agreement was terminated. As of December 31, 2021, we determined that we expected to incur no additional costs to satisfy the remaining performance obligations under the 2017 Roche Agreement and we recognized revenue of $1.2 million under the 2017 Roche Agreement. There was no remaining deferred revenue under the 2017 Roche Agreement as of December 31, 2021.

2018 License and Collaboration Agreement with Roche

In October 2018, we entered into the 2018 Roche Agreement. Under the agreement, Roche was granted option rights to obtain an exclusive license to develop APC products or products derived from the collaboration programs on a product-by-product basis for oncologic indications. These option rights are exercisable upon the achievement of clinical Phase 1 proof of concept and expire, if unexercised, as of a date specified in the agreement. In addition, Roche was granted an option right to obtain an exclusive license to develop a TCL product. This option right is exercisable upon the achievement of clinical proof of concept and expires, if unexercised, as of a date specified in the agreement. For each of the APC products and TCL product, once Roche exercises its option and pays a specified incremental amount ranging from $15.0 million to $50.0 million for APC products and of $100.0 million for the TCL product, Roche will receive worldwide, exclusive commercialization rights for the licensed products, subject to our alternating option to retain U.S. APC commercialization rights. Through December 31, 2022, Roche had not exercised any of its options under the 2018 Roche Agreement.

Under the 2018 Roche Agreement, we received an upfront payment of $45.0 million and are eligible to receive (i) reimbursement of a mid double-digit percentage of our development costs; (ii) aggregate milestone payments on a product-by-product basis of up to $1.6 billion upon the achievement of specified milestones, consisting of up to $217.0 million of development milestone payments, up to $240.0 million of regulatory milestone payments and up to $1.2 billion of sales milestone payments; and (iii) tiered royalties on annual net sales of APC and TCL products licensed under the agreement at specified rates ranging from a mid single-digit percentage to percentage in the low twenties. We received the upfront payment of $45.0 million in October 2018 upon execution of the agreement. In addition, during the second quarter of 2019, we received a payment of $10.0 million following the achievement of the first development milestone under the 2018 Roche Agreement related to submission by us of preclinical data to the FDA, and during the first quarter of 2020, we received a payment of $20.0 million following the achievement of the second development milestone under the 2018 Roche Agreement related to first-patient dosing in a Phase 1 clinical trial.

We assessed our accounting for the 2018 Roche Agreement in accordance with ASC 606 and concluded that Roche is a customer prior to the exercise of any of its options under the agreement. We also identified the following promises under the 2018 Roche Agreement: (i) a non-exclusive license granted to Roche to use our intellectual property and collaboration compounds to conduct research activities related to the research plans under the 2018 Roche Agreement; (ii) specified research and development services related to HPV through Phase 1 clinical trials under a specified research plan; (iii) manufacturing of our SQZ APC platform and equipment in order to support the HPV research plan; (iv) specified research and development services on next-generation APCs under a research plan; (v) specified research and development services on TCL under a research plan; and (vi) participation on a JSC.

We concluded that, in the case of each performance obligation, the license to our intellectual property was not distinct as a result of Roche being unable to benefit from the license on its own or with other resources reasonably available in the marketplace because the license to our intellectual property requires significant specialized capabilities in order to be further developed. We concluded that the license to our intellectual property, research and development activities related to HPV, and manufacturing of our SQZ APC platform and equipment related to HPV were not distinct from each other because the research and manufacturing activities together customize and significantly modify the underlying technology. As such, we determined that each of these related promises under the agreement was not distinct from the others in this group and should be combined into a single performance obligation. We also concluded that the license to our intellectual property and the research and development activities on next-generation APCs were not distinct from each other because the research and development activities customize and significantly modify the underlying technology. As such, we determined that these related promises should be combined into a single performance obligation. Further, we concluded that the license to our intellectual property and the research and development activities on TCL were not distinct from each other because the research and development activities customize and significantly modify the underlying technology. As such, we determined that these related promises should be combined into a single performance obligation. We concluded that the three performance obligations were distinct from each other as they are separate programs and are unrelated. In addition, we determined that the impact of participation on the JSC was insignificant and had an immaterial impact on the accounting model.

Finally, we evaluated the option rights for licenses to develop, manufacture and commercialize the collaboration targets to determine whether these options provide Roche with any material rights for accounting purposes. We concluded that the option exercise prices were not below respective standalone selling prices, and, therefore, the options were marketing offers that do not provide material rights under ASC 606. Accordingly, the options were excluded as performance obligations at the outset of the 2018 Roche Agreement and will be accounted for as separate accounting contracts if and when each option exercise occurs.

Based on these assessments, we identified three performance obligations at the outset of the 2018 Roche Agreement: (1) the license to our intellectual property, the research and development activities related to HPV through Phase 1 clinical trials under a specified research plan, and the manufacturing of our SQZ APC platform and equipment in order to support the HPV research plan, or the first performance obligation; (2) the license to our intellectual property and the research and development activities on next-generation APCs, or the second performance obligation; and (3) the license to our intellectual property and the research and development activities on TCL, or the third performance obligation.

As of entering into the 2018 Roche Agreement, we assessed whether the 2018 Roche Agreement was, for accounting purposes, a modification of the two prior Roche agreements or a separate contract and concluded that it was a modification of the 2015 Roche Agreement. At the termination of the 2015 Roche Agreement, all deliverables were submitted to Roche for review, and as such, we completed all of our obligations under the 2015 Roche Agreement. Because the obligations under the 2015 Roche Agreement were completed at its termination and all arrangement consideration had been recognized as revenue, the accounting treatment as a modification determined by us would result in the same measurement and recognition patterns as would a separate contract. Further, we concluded that the 2018 Roche Agreement was a separate contract from the 2017 Roche Agreement because (i) we contracted to provide distinct goods and services associated with our gene editing platform to discover new targets in cancer immunotherapy, (ii) the 2018 Roche Agreement and 2017 Roche Agreement were not negotiated together as a package with a single commercial objective and (iii) the amount of consideration paid under the 2018 Roche Agreement and 2017 Roche Agreement are not dependent on the price or performance under the other agreement. In addition, we determined that the upfront payment of $45.0 million as well as the reimbursable costs of $10.8 million estimated by us constituted the entirety of the consideration to be included in the transaction price. This transaction price of $55.8 million was initially allocated to the three performance obligations based on the relative standalone

selling price of each obligation. The potential milestone payments that we may be eligible to receive were excluded from the transaction price at the outset of the arrangement because (i) all development and regulatory milestone payments did not meet the criteria for inclusion using the most-likely-amount method and (ii) we recognize as revenue sales-based royalties and milestone payments at the later of the occurrence of the related sales or the date upon which the performance obligation has been satisfied because we believe that the license is the predominant item to which the royalties relate and have applied the sales-based royalty exception. We reevaluate the transaction price at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur, and, if necessary, we will adjust our estimate of the transaction price.

We determined the standalone selling price of each performance obligation under the 2018 Roche Agreement based on our estimate of our costs to be incurred to fulfill the research, development and manufacturing obligations associated with each of the three performance obligations, plus a reasonable margin.

During the fourth quarter of 2019, we evaluated our overall program priorities and determined that in 2020 we would continue to focus our resources on progressing the specified APC programs related to the 2018 Roche Agreement as well as our AAC and TAC platforms. As a result of our continuing focus on these specific programs, we reduced the level of priority of the TCL research activities under the 2018 Roche Agreement and expect to perform such TCL research activities over a longer time period than as originally expected under the research plan of the agreement. Consequently, in the fourth quarter of 2019, we reclassified $5.3 million of our current deferred revenue to non-current deferred revenue in our consolidated balance sheet, and such non-current deferred revenue will remain unrecognized as revenue until TCL research activities resume or the 2018 Roche Agreement is modified by us and Roche. In the fourth quarter of 2022, we determined that based on our internal plans which did not include work on TCL since 2019, and which do not anticipate performing work on TCL in the future prior to the expiration of the option right, as well as Roche's concurrence that no work was performed or expected to be performed in 2023, that we could recognize the remaining deferred revenue of $9.2 million. Accordingly, as of December 31, 2022, there was no deferred revenue associated with the TCL performance obligation.

We separately recognize revenue associated with our performance obligations as the research, development and manufacturing services are provided using an input method, based on the cumulative costs incurred compared to the total estimated costs expected to be incurred to satisfy each performance obligation. The transfer of control to the customer occurs over the time period that the research and development services are to be provided by us, and this cost-to-cost method is, in management’s judgment, the best measure of progress towards satisfying each performance obligation. The amounts received that have not yet been recognized as revenue are deferred as a contract liability in our consolidated balance sheet and will be recognized over the remaining research and development period until each performance obligation is satisfied.

Accrued Research and Development Expenses

As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in the consolidated financial statements based on facts and circumstances known to us at that time. At each period end, we corroborate the accuracy of these estimates with the service providers and make adjustments, if necessary. Examples of estimated accrued research and development expenses include those related to fees paid to:

vendors in connection with preclinical and clinical development activities;

CMOs in connection with the process development and scale-up activities and the production of preclinical and clinical trial materials; and

CROs in connection with clinical trials.

We record the expense and accrual related to contract research and manufacturing based on our estimates of the services received and efforts expended considering a number of factors, including our knowledge of the progress towards completion of the research, development and manufacturing activities; invoicing to date under the contracts; communication from the CMOs, CROs and other companies of any actual costs incurred during the period that have not yet been invoiced; and the costs included in the contracts and purchase orders. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or prepaid expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.

Stock-Based Compensation

We measure stock-based awards granted to employees, non-employees and directors based on their fair value on the date of the grant using the Black-Scholes option-pricing model for options or the difference between the purchase price per share of the award, if any, and the fair value of our common stock for restricted common stock awards. Compensation expense for those awards is recognized over the requisite service period, which is generally the vesting period of the award for employees and directors and the period during which services are performed for non-employees. We use the straight-line method to record the expense of awards with service-based vesting conditions.

The Black-Scholes option-pricing model uses as inputs the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options, and our expected dividend yield.

Emerging Growth Company Status

The Jumpstart Our Business Startups Act of 2012 permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected not to “opt out” of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time private companies adopt the new or revised standard and will do so until such time that we either (i) irrevocably elect to “opt out” of such extended transition period or (ii) no longer qualify as an emerging growth company. We may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for private companies.

Item 7A. Quantitative and Qualitati ve Disclosures About Market Risk.

As of December 31, 2022, we had cash and cash equivalents of $63.7 million, which consisted of cash and money market funds. Interest income is sensitive to changes in the general level of interest rates; however, due to the nature of these balances, an immediate 10% change in interest rates would not have a material effect on the fair market value of our cash and cash equivalents.

We are not currently exposed to significant market risk related to changes in foreign currency exchange rates. Our operations may be subject to fluctuations in foreign currency exchange rates in the future.

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. Our operations may be subject to inflation in the future as a result of the COVID-19 pandemic and its impact on pricing and the supply chain.

Item 8. Financial Statement s and Supplementary Data.

The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K. An index of those financial statements is found in Item 15, Exhibits and Financial Statement Schedules, of this Annual Report on Form 10-K.