BEAM THERAPEUTICS INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Some of the numbers included herein have been rounded for the convenience of presentation. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under Item 1A, Risk factors, in this Annual Report on Form 10-K.
Overview
We are a biotechnology company committed to establishing the leading, fully integrated platform for precision genetic medicines. Our vision is to provide life-long cures to patients suffering from serious diseases. To achieve this vision, we have assembled a platform that includes a suite of gene editing and delivery technologies and are establishing internal manufacturing capabilities. Our suite of gene editing technologies is anchored by our proprietary base editing technology, which potentially enables a differentiated class of precision genetic medicines that target a single base in the genome without making a double-stranded break in the DNA. This approach uses a chemical reaction designed to create precise, predictable and efficient genetic outcomes at the targeted sequence. Our proprietary base editors have two principal components: (i) a clustered regularly interspaced short palindromic repeats, or CRISPR, protein, bound to a guide RNA, that leverages the established DNA-targeting ability of CRISPR, but is modified to not cause a double-stranded break, and (ii) a base editing enzyme, such as a deaminase, which carries out the desired chemical modification of the target DNA base. We believe this design contributes to a more precise and efficient edit compared to traditional gene editing methods, which operate by creating targeted double-stranded breaks in the DNA that can result in unwanted DNA modifications. We believe that the precision of our editors will dramatically increase the impact of gene editing for a broad range of therapeutic applications.
To unlock the full potential of our base editing technology across a wide range of therapeutic applications, we are pursuing a broad suite of both clinically validated and novel delivery modalities, depending on tissue type, including both ex vivo approaches in our hematology and immunology-oncology portfolios as well as in vivo approaches across our programs.
The elegance of the base editing approach combined with a tissue specific delivery modality provides the basis for a targeted efficient, precise, and highly versatile gene editing system, capable of gene correction, gene modification, gene silencing or gene activation, and/or multiplex editing of several genes simultaneously. We are currently advancing a broad, diversified portfolio of base editing programs against distinct editing targets, utilizing the full range of our development capabilities. We believe the flexibility and versatility of our base editors and delivery technologies may have broad therapeutic applicability and have the potential to transform the field of precision genetic medicines.
We believe that building an integrated platform combining our gene editing capabilities with advanced delivery and manufacturing capabilities will give us the flexibility to develop our own sustainable portfolio and to create a hub for partnering with other companies to unlock the full potential of precision genetic medicine across a broad array of possible applications.
Manufacturing
To realize the full potential of base editors as a differentiated class of medicines and to enable our parallel investment strategy in multiple delivery modalities, we are building customized and integrated capabilities across discovery, manufacturing, and preclinical and clinical development. Due to the critical importance of high-quality manufacturing and control of production timing and know-how, we are establishing our own manufacturing facility, which will provide us the flexibility to manufacture a variety of different product modalities. We believe this investment will maximize the value of our portfolio and capabilities, the probability of technical success of our programs, and the speed at which we can provide potentially life-long cures to patients.
We have a 100,000 square foot manufacturing facility in
For our initial waves of clinical trials, we expect to use CMOs with relevant manufacturing experience in genetic medicines alongside our internal manufacturing capabilities.
Acquisitions
In
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COVID-19
While the COVID-19 pandemic did not significantly impact our business or results
of operations during the year ended
For a more detailed discussion of risks related to COVID-19 and other health emergencies, please see Part II, Item 1A, Risk factors-General risk factors, in this Annual Report on Form 10-K.
Financial operations overview
General
We were founded in
We are an early-stage company, and the majority of our programs are at a
preclinical or early clinical stage of development. To date, we have not
generated any revenue from product sales and do not expect to generate revenue
from the sale of products for the foreseeable future. Our revenue to date has
been primarily derived from license and collaboration agreements with partners.
Since inception we have incurred significant operating losses. Our net losses
for the years ended
As a result of these anticipated expenditures, we will need to raise additional capital 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 licensing arrangements. We may be unable to raise additional funds or enter into such other agreements when needed on favorable terms or at all. Our inability to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We can give no assurance that we will be able to secure such additional sources of capital to support our operations, or, if such capital is available to us, that such additional capital will be sufficient to meet our needs for the short or long term.
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Revenue Recognition
In
We have not generated any revenue to date from product sales and do not expect
to do so in the near future. During the years ended
For additional information about our revenue recognition policy, see Note 2 and Note 11 of the notes to our audited consolidated financial statements included in this Annual Report on Form 10-K.
Research and development expenses
Research and development expenses consist of costs incurred in performing research and development activities, which include:
•
Expenses incurred in connection with investments in delivery technology for our base editors, including the LNP technology we acquired through our acquisition of Guide;
•
the cost to obtain licenses to intellectual property, such as those with
•
personnel-related expenses, including salaries, bonuses, benefits and stock-based compensation for employees engaged in research and development functions;
•
expenses incurred in connection with the discovery and preclinical development of our research programs, including under agreements with third parties, such as consultants, contractors and contract research organizations;
•
expenses incurred in connection with our clinical trials, including CRO costs and costs related to study preparation;
•
expenses incurred in connection with regulatory filings;
•
expenses incurred in connection with the building of our base editing platform;
•
the cost of manufacturing for use in our preclinical studies, IND-enabling studies and clinical trials;
•
laboratory supplies and research materials; and
•
facilities, depreciation and other expenses which include direct and allocated expenses.
Our external research and development expenses support our various preclinical and clinical programs. Our internal research and development expenses consist of employee-related expenses, facility-related expenses, and other indirect research and development expenses incurred in support of overall research and development. We expense research and development costs as incurred. 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 benefits are consumed.
In the early phases of development, our research and development costs are often devoted to product platform and proof-of-concept preclinical studies that are not necessarily allocable to a specific target.
We expect that our research and development expenses will increase substantially as we advance our programs through their planned preclinical and clinical development.
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General and administrative expenses
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, intellectual property, business development and administrative functions. General and administrative expenses also include legal fees relating to intellectual property and corporate matters, professional fees for accounting, auditing, tax and consulting services, insurance costs, travel, and direct and allocated facility related expenses and other operating costs.
We anticipate that our general and administrative expenses will increase in the
future to support our increased research and development activities. We also
expect to continue to incur costs associated with being a public company and
maintaining controls over financial reporting, including costs of accounting,
audit, legal, regulatory and tax-related services associated with maintaining
compliance with Nasdaq and
Other income and expenses
Other income and expenses consist of the following items:
•
Change in fair value of derivative liabilities consists primarily of
remeasurement gains or losses associated with changes in success payment
liabilities associated with our license agreement with Harvard, dated as of
•
Change in fair value of non-controlling equity investments consists of mark-to-market adjustments related to our investments in equity securities.
•
Change in fair value of contingent consideration liabilities consists of remeasurement of the fair market value of the technology and product contingent consideration liabilities related to the acquisition of Guide.
•
Interest and other income (expense), net consists primarily of interest income as well as interest expense related to our equipment financings.
Results of operations
Comparison of the years ended
The following table summarizes our results of operations (in thousands):
Years Ended December 31,
2022 2021 Change
License and collaboration revenue $ 60,920 $ 51,844 $ 9,076
Operating expenses:
Research and development 311,594 387,087 (75,493 )
General and administrative 87,805 57,222 30,583
Total operating expenses 399,399 444,309 (44,910 )
Loss from operations (338,479 ) (392,465 ) 53,986
Other income (expense):
Change in fair value of derivative liabilities 23,900 (1,000 ) 24,900
Change in fair value of non-controlling equity
investments 20,200 17,690 2,510
Change in fair value of contingent
consideration liabilities 18,904 5,146 13,758
Interest and other income (expense), net 15,297 (9 ) 15,306
Total other income (expense) 78,301 21,827 56,474
Net loss before income taxes (260,178 ) (370,638 ) 110,460
Provision for income taxes (3,410 ) - (3,410 )
Loss from equity method investment (25,500 ) - (25,500 )
Net loss $ (289,088 ) $ (370,638 ) $ 81,550 License and collaboration revenue
License and collaboration revenue was approximately
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Research and development expenses
Research and development expenses were
Years Ended December 31,
2022 2021 Change
External research and development expenses
- 154,953 (154,953 )
Employee related expenses 89,547 47,823 41,724
Facility and IT related expenses 54,048 36,744 17,304
Stock-based compensation expense 52,004 26,644 25,360
Other expenses 4,164 42,691 (38,527 )
Total research and development expenses
The decrease of
•
A decrease of
•
A decrease of
The decrease was partially offset by the following:
•
An increase of
•
A
•
An increase of
Research and development expenses are expected to continue to increase as we advance clinical trials for BEAM-101 and BEAM-201, advance preclinical studies for BEAM-301 and BEAM-302, continue our current research programs, initiate new research programs, continue the preclinical and clinical development of our product candidates and conduct any future preclinical studies and begin to enroll patients in and conduct clinical trials for any of our product candidates.
General and administrative expenses
General and administrative expenses were
•
An increase of
•
An increase of
•
An increase of
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Change in fair value of derivative liabilities
During the year ended
Change in fair value of non-controlling equity investments
During the years ended
Change in contingent consideration liabilities
During the years ended
Interest and other income (expense), net
Interest and other income (expense), net was
Provision for income taxes
We recorded an income tax provision of
Loss from equity method investment
We record our share of gains or losses from Orbital on a quarterly basis. For
the year ended
Comparison of the years ended
The following table summarizes our results of operations (in thousands):
Years Ended December 31,
2021 2020 Change
License and collaboration revenue $ 51,844 $ 24 $ 51,820
Operating expenses:
Research and development 387,087 103,179 283,908
General and administrative 57,222 29,605 27,617
Total operating expenses 444,309 132,784 311,525
Loss from operations (392,465 ) (132,760 ) (259,705 )
Other income (expense):
Change in fair value of derivative liabilities (1,000 ) (63,400 ) 62,400
Change in fair value of non-controlling equity
investments 17,690 517 17,173
Change in fair value of contingent
consideration liabilities 5,146 - 5,146
Interest and other income (expense), net (9 ) 1,051 (1,060 )
Total other income (expense) 21,827 (61,832 ) 83,659
Net loss $ (370,638 ) $ (194,592 ) $ (176,046 )
License revenue
License and collaboration revenue was approximately
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Research and development expenses
Research and development expenses were
Years Ended December 31,
2021 2020 Change
External research and development expenses
154,953 - 154,953
Employee related expenses 47,823 25,423 22,400
Facility and IT related expenses 36,744 15,753 20,991
Stock-based compensation expense 26,644 11,199 15,445
Other expenses 42,691 9,464 33,227
Total research and development expenses
The increase of
•
A
•
A
•
An increase of
•
Increases of
•
An increase of
General and administrative expenses
General and administrative expenses were
•
An increase of
•
Increases of
•
An increase of
•
An increase of
Change in fair value of derivative liabilities
During the year ended
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Change in fair value of non-controlling equity investments
During the years ended
Change in contingent consideration liabilities
During the year ended
Interest and other income (expense), net
Interest and other income (expense), net was
Liquidity and capital resources
Since our inception in
To date, we have funded our operations primarily through equity offerings. In
In
In
In
In
In
In
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As of
We are required to make success payments to
We have not yet commercialized any of our product candidates, and we do not expect to generate revenue from the sale of our product candidates for the foreseeable future. We anticipate that we may need to raise additional capital in order to continue to fund our research and development, including our planned preclinical studies and clinical trials, building, maintaining and operating a commercial-scale cGMP manufacturing facility, and new product development, as well as to fund our general operations. As necessary, we will seek to raise additional capital through various potential sources, such as equity and debt financings or through corporate collaboration and license agreements. We can give no assurances that we will be able to secure such additional sources of capital to support our operations, or, if such funds are available to us, that such additional financing will be sufficient to meet our needs.
Cash flows
The following table summarizes our sources and uses of cash (in thousands):
Years Ended December 31,
2022 2021 2020
Net cash provided by (used in) operating
activities $ 22,527 $ (66,268 ) $ (95,741 )
Net cash used in investing activities (461,336 ) (294,144 ) (100,123 )
Net cash provided by financing activities 111,590 756,141 322,322
Net change in cash, cash equivalents and
restricted cash $ (327,219 ) $ 395,729 $ 126,458
Operating activities
Net cash provided by operating activities for the year ended
These sources of cash were offset in part by our net loss of
Net cash used in operating activities for the year ended
Net cash used in operating activities for the year ended
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Investing activities
For the year ended
For the year ended
For the year ended
Financing activities
Net cash provided by financing activities for the year ended
Net cash provided by financing activities for the year ended
Net cash provided by financing activities for the year ended
Funding requirements
Our operating expenses have increased and are expected to continue to increase substantially as we continue to advance our portfolio of programs.
Specifically, our expenses will increase if and as we:
•
advance clinical trials of our product candidates, including our BEACON trial and our trial of BEAM-201;
•
continue our research programs and our preclinical development of product candidates from our research programs;
•
seek to identify additional research programs and additional product candidates;
•
initiate preclinical studies and clinical trials for additional product candidates we identify and develop;
•
maintain, expand, enforce, defend, and protect our intellectual property portfolio and provide reimbursement of third-party expenses related to our patent portfolio;
•
seek marketing approvals for any of our product candidates that successfully complete clinical trials;
•
establish a sales, marketing, and distribution infrastructure to commercialize any medicines for which we may obtain marketing approval;
•
further develop our base editing platform;
•
further develop delivery technology for our base editors, including the LNP technology we acquired through our acquisition of Guide;
•
continue to hire additional personnel including research and development, clinical and commercial personnel;
•
add operational, financial, and management information systems and personnel, including personnel to support our product development;
•
acquire or in-license products, intellectual property, medicines and technologies; and
•
maintain and operate a commercial-scale cGMP manufacturing facility.
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We expect that our cash, cash equivalents at
Our future funding requirements will depend on many factors including:
•
the cost of continuing to build our base editing platform;
•
the costs of acquiring licenses for the delivery modalities that will be used with our product candidates;
•
the scope, progress, results, and costs of discovery, preclinical development, laboratory testing, manufacturing and clinical trials for the product candidates we may develop;
•
the costs of preparing, filing, and prosecuting patent applications, maintaining and enforcing our intellectual property and proprietary rights, and defending intellectual property-related claims;
•
the costs, timing, and outcome of regulatory review of the product candidates we develop;
•
the costs of future activities, including product sales, medical affairs, marketing, manufacturing, distribution, coverage and reimbursement for any product candidates for which we receive regulatory approval;
•
the success of our license agreements and our collaborations;
•
our ability to establish and maintain additional collaborations on favorable terms, if at all;
•
the achievement of milestones or occurrence of other developments that trigger payments under any collaboration agreements we are a party to or may become a party to, including our agreement with Guide;
•
the payment of success liabilities to
•
the extent to which we acquire or in-license products, intellectual property, and technologies;
•
the costs of obtaining, building, operating and expanding our manufacturing capacity; and
•
the impact on our business of macro-economic conditions, as well as the prevailing level of macro-economic, business, and operational uncertainty, including as a result of geopolitical events or other global or regional events such as the COVID-19 pandemic.
A change in the outcome of any of these or other 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. Further, our operating plans may change in the future, and we may need additional funds to meet operational needs and capital requirements associated with such operating plans.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, and licensing arrangements. We do not have any committed external source of capital. We have historically relied on equity issuances to fund our capital needs and will likely rely on equity issuances in the future. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends.
If we raise capital through additional collaborations, strategic alliances, 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 we may have to grant licenses on terms that may not be favorable to us. If we are unable to raise additional capital through equity or debt financings when needed, we may be required to delay, limit, reduce, or terminate our product development or, if approved, future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. We can give no assurance that we will be able to secure such additional sources of funds to support our operations, or, if such funds are available to us, that such additional funding will be sufficient to meet our needs.
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Contractual obligations
We lease certain assets under noncancelable operating and finance leases, which
expire through 2037. The leases relate primarily to office space, laboratory and
manufacturing space in addition to equipment. Aggregate future minimum
commitments under these office and laboratory leases and equipment leases are
In
We are potentially obligated to pay certain milestone and success fees, non-royalty sublicense income fees, royalty fees, licensing maintenance fees, and reimbursement of patent maintenance costs that we may be required to pay under agreements we have entered into with certain institutions to license intellectual property. Our agreements to license intellectual property include potential milestone payments that are dependent upon the development of products using the intellectual property licensed under the agreements and contingent upon the achievement of development or regulatory approval milestones, as well as commercial and success payment milestones. These amounts are contingent upon the occurrence of future events and the timing and likelihood of such potential obligations are not known with certainty.
In addition, we agreed to pay Guide's former stockholders and optionholders up
to an additional
Additionally, we enter into contracts in the normal course of business with CROs, CMOs and other vendors to assist in the performance of our research and development activities and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore are cancelable contracts.
Critical accounting policies and significant judgments and estimates
Our management's discussion and analysis of our financial condition and results
of operations is based on our consolidated financial statements, which we have
prepared in accordance with
While our significant accounting policies are described in more detail in Note 2, Summary of significant accounting policies, to our consolidated financial statements in 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
We recognize revenue in accordance with ASC 606.
At inception, we determine whether contracts are within the scope of ASC 606 or other topics. For contracts that are determined to be within the scope of ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which we expect to be entitled to receive in exchange for these goods and services. To achieve this core principle, we apply the following five steps (i) identify the contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when the performance obligation is satisfied. We only apply the five-step model to contracts when we determine that collection of substantially all consideration for goods and services that are transferred is probable based on the customer's intent and ability to pay the promised consideration.
Performance obligations promised in a contract are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct and are distinct in the context of the contract. To the extent a contract includes multiple promised goods and services, we apply judgment to determine whether promised goods and services are both capable of being distinct and are distinct in the context of the contract. If these criteria are not met, the promised goods and services are accounted for as a combined performance obligation.
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The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods and services to the customer. To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method, depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in management's judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Any estimates, including the effect of the constraint on variable consideration, are evaluated at each reporting period for any changes. Determining the transaction price requires significant judgment and is discussed in further detail for each of our license and collaboration agreements in Note 11 to our consolidated financial statements in this Annual Report on Form 10-K.
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The consideration to be received is allocated among the separate performance obligations based on relative standalone selling prices. Determining the standalone selling price requires significant judgment and is discussed in further detail for each of our license and collaboration agreements in Note 11.
We satisfy performance obligations either over time or at a point in time. Revenue is recognized over time if either (i) the customer simultaneously receives and consumes the benefits provided by the entity's performance, (ii) the entity's performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or (iii) the entity's performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. If the entity does not satisfy a performance obligation over time, the related performance obligation is satisfied at a point in time by transferring the control of a promised good or service to a customer.
The timing of when services are performed and the occurrence of external costs associated with the programs under the collaboration agreements could impact how revenue is recognized in a certain period.
Licenses of intellectual property, or IP: If the license to our IP is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from consideration allocated to the license when the license is transferred to the customer and the customer can use and benefit from the licenses. 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 performance and related revenue recognition. Determining the revenue recognition of IP licenses requires significant judgment and is discussed in further detail for each of our license and collaboration agreements in Note 10 and 11.
Milestone payments: At the inception of each arrangement that includes development or regulatory milestone payments, we evaluate the probability of reaching the milestones and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur in the future, the associated milestone value is included in the transaction price. Milestone payments that are not within our control or the licensee's, such as regulatory approvals, are not considered probable of being achieved until those approvals are received and therefore revenue recognized is constrained as management is unable to assert that a reversal of revenue would not be possible. The transaction price is then allocated to each performance obligation on a relative standalone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment. To date, we have not recognized any milestone revenue resulting from any of our agreements.
Commercial Milestone Payments and Royalties: For arrangements that include sales-based royalties, including milestone payments based on levels of sales, if the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any royalty revenue resulting from any of our agreements.
When no performance obligations are required of us, or following the completion of the performance obligation period, such amounts are recognized as revenue upon transfer of control of the goods or services to the customer. Generally, all amounts received or due other than sales-based milestones and royalties are classified as license and collaboration revenue. Sales-based milestones and royalties will be recognized as royalty revenue at the later of when the related sales occur or when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
Deferred revenue expected to be recognized within the next twelve months is classified as a current liability.
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Asset acquisitions
In 2018, we adopted ASU 2017-01, Business Combinations, or ASU 2017-01, which
clarified the definition of a business. We measure and recognize asset
acquisitions that are not deemed to be business combinations based on the cost
to acquire the assets, which includes transaction costs, and the consideration
is allocated to the items acquired based on a relative fair value methodology.
At the time of acquisition, we determine if a transaction should be accounted for as a business combination or acquisition of assets.
Equity method of accounting
In circumstances where we have the ability to exercise significant influence, but not control, over the operating and financial policies of an entity in which we have an investment in common stock or in-substance common stock, we utilize the equity method of accounting for recording related investment activity. In assessing whether we exercise significant influence, we consider the nature and magnitude of the investment, participating rights we hold, and relevant factors such as the presence of a collaborative or other business relationship.
Under the equity method of accounting, our investments are initially recorded at cost on the consolidated balance sheets. Upon recording an equity method investment, we evaluate whether there are basis differences between the carrying value and fair value of our proportionate share of the investee's underlying net assets. Typically, we amortize basis differences identified on a straight-line basis over the underlying asset's or liability's estimated useful lives when calculating the attributable earnings or losses, excluding the basis differences attributable to in-process research and development, or IPR&D, that has no alternative future use. To the extent a basis difference relates to IPR&D and the investee is not a business as defined in ASC 805, Business Combinations, we immediately expense such basis difference related to IPR&D. If we are unable to attribute all of the basis difference to specific assets or liabilities of the investee, the residual excess of the cost of the investment over the proportional fair value of the investee's assets and liabilities is considered to be Equity Method Goodwill and is recognized within the equity investment balance, which is tracked separately within our memo accounts. We subsequently record in the consolidated statements of operations and comprehensive loss our share of income or loss of the other entity within the loss from equity method investment line item. If the share of losses exceeds the carrying value of our investment, we will suspend recognizing additional losses and will continue to do so unless we commit to providing additional funding or commit to guarantee investee liabilities.
We evaluate our equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may be impaired and consider qualitative and quantitative factors including the investee's financial metrics, product and commercial outlook and cash usage. If a decline in the value of an equity method investment is determined to be other than temporary, a loss is recorded in earnings in the current period and the investment is written down to fair value.
At
Contingent consideration liabilities
We may be required to make milestone payments to the former stockholders and optionholders of Guide in the form of our common stock based on the achievement of certain product and technology milestones. The payments are accounted for under ASC 480, Distinguishing Liabilities from Equity. These contingent consideration liabilities are carried at fair value which was estimated by applying a probability-based model, which utilized inputs primarily based upon the achievement and related timing of certain product and technology milestones that were unobservable in the market. The estimated fair value of contingent consideration liabilities, initially measured and recorded on the acquisition date, are considered to be a Level 3 measurement and are reviewed quarterly, or whenever events or circumstances occur that indicate a change in fair value. The contingent consideration liabilities are recorded at fair value at the end of each reporting period with changes in estimated fair values recorded in other income (expense) in the consolidated statements of operations and other comprehensive loss.
The estimated fair value is determined based on probability adjusted discounted cash flow models that include significant estimates and assumptions pertaining to technology and product development. Significant changes in any of the probabilities of success would result in a significantly higher or lower fair value measurement. Significant changes in the probabilities as to the periods in which milestones will be achieved would result in a significantly lower or higher fair value measurement.
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Fair value measurements - Success payments
We are required to make success payments to
Accrued research and development costs
As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. Examples of estimated accrued research and development expenses include fees paid to vendors in connection with preclinical development activities and vendors related to development, manufacturing and distribution of product candidate materials.
We base our expenses related to preclinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple vendors that conduct and manage preclinical studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the 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 and adjust accordingly.
Stock-based compensation
We measure stock options and other stock-based awards granted to our employees, directors, consultants or founders based upon their fair value on the date of the grant and recognize stock-based compensation expense over the requisite service period, which is generally the vesting period of the respective award. We recognize forfeitures as they occur.
The majority of our stock-based compensation awards are subject to service-based vesting conditions. We apply the straight-line method of expense recognition to all awards with service-based vesting. We also have performance-based awards, where stock-based compensation expense is recognized over the service period using the accelerated attribution method to the extent achievement of the of performance condition is probable.
We estimate the fair value of each stock option grant on the date of grant using the Black-Scholes option-pricing model, which uses inputs such as the fair value of our common stock, 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. The fair value of our common stock is used to determine the fair value of restricted stock awards.
Prior to our IPO in
Leases
On
For contracts entered into on or after the effective date, at the inception of a contract, we assess whether the contract is, or contains, a lease. The assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether we have the right to direct the use of the asset. At inception of a lease, we allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments.
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Leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any of these criteria.
For all leases at the lease commencement date, a right-of-use asset and a lease liability are recognized. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease.
The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred if any, less any lease incentives received. All right-of-use assets are reviewed for impairment. The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, our secured incremental borrowing rate for the same term as the underlying lease. For real estate leases and other operating leases, we use our secured incremental borrowing rate. For finance leases, we use the rate implicit in the lease or our secured incremental borrowing rate if the implicit lease rate cannot be determined.
Lease payments included in the measurement of the lease liability comprise the following: the fixed noncancelable lease payments, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early.
Lease cost for operating leases consists of the lease payments plus any initial direct costs, primarily brokerage commissions, and is recognized on a straight-line basis over the lease term. Included in lease cost are any variable lease payments incurred in the period that are not included in the initial lease liability and lease payments incurred in the period for any leases with an initial term of 12 months or less. Lease cost for finance leases consists of the amortization of the right-of-use asset on a straight-line basis over the lease term and interest expense determined on an amortized cost basis. The lease payments are allocated between a reduction of the lease liability and interest expense.
Leasehold improvements are not unique and are retained by the lessor at the end of the lease. However, in the case of a space designed to be suitable for our specific real estate needs and if we are responsible for cost overruns, we are the accounting owner of the leasehold improvements.
We made an accounting policy election to not recognize leases with an initial term of 12 months or less within our consolidated balance sheets and to recognize those lease payments on a straight-line basis in our consolidated statements of income over the lease term.
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