REPARE THERAPEUTICS INC. You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and related notes appearing elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and related financing, 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, 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 leading clinical-stage precision oncology company enabled by our
proprietary synthetic lethality approach to the discovery and development of
novel therapeutics. Synthetic lethality, or SL, represents a clinically
validated approach to drug development. We use our proprietary, genome-wide,
CRISPR-enabled SNIPRx platform to systematically discover and develop highly
targeted cancer therapies focused on genomic instability, including DNA damage
repair. SL arises when a deficiency in either of two genes is tolerated in
cells, but simultaneous deficiencies in both genes cause cell death. Cancer
cells that contain a mutation in one gene of a SL pair are susceptible to
therapeutic intervention targeting the other gene pair. Using our SNIPRx
platform, we are developing our pipeline of SL product candidates, including our
initial product candidate, camonsertib (also known as
In
We continue to focus on the advancement of our preclinical programs into
clinical development. We expect to initiate IND-enabling studies in the first
half of 2023 for a small molecule against an undisclosed target with potential
to enter the clinic in late 2023 or early 2024, which represents an acceleration
from our prior expectations for this program. We are also pursuing development
of an inhibitor of polymerase theta (Pol?) in collaboration with Ono, as Pol? is
SL with multiple gene deficiencies found in tumors, including BRCA alterations.
In 2022, we selected a proposed inhibitor, which we designated as RP-2119. In
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Since our inception in
Since inception, we have incurred significant operating losses. Our net losses
were
We do not have any products approved for sale. 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 ever. In addition, if we obtain regulatory approval for our product candidates and do not enter into a third-party commercialization partnership, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing, manufacturing and distribution activities. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity offerings and debt financings or other sources, such as potential collaboration agreements, strategic alliances and licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on acceptable terms, or at all. Our failure to raise capital or enter into such agreements as, and when, needed, could have a negative effect on our business, results of operations and financial condition.
Macroeconomic Considerations
Unfavorable conditions in the economy in
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Recent and Anticipated Developments
•
Advancing camonsertib, a potent and selective oral small molecule inhibitor of ATR (Ataxia-Telangiectasia and Rad3-related protein kinase) for the treatment of tumors with specific synthetic lethal genomic alterations in partnership with Roche.
o
Initial data from the Phase 1/2 trials evaluating camonsertib in combination with three poly (ADP-ribose) polymerase (PARP) inhibitors is expected to be presented in the first half of 2023 at a major medical meeting.
o
We expect to report initial data from the Phase 1/2 TRESR trial evaluating camonsertib in combination with gemcitabine in the summer or fall of 2023.
•
Evaluating
o
We expect to report initial Phase 1 clinical data for
o
In the fourth quarter of 2022, the
o
Based on promising preclinical data released at the 34th EORTC-NCI-AACR
Symposium in
o
In the fourth quarter of 2022, we entered into an agreement with CCTG for a
planned, basket Phase 2 IST to evaluate
•
Advancing preclinical programs into clinical development.
o
We expect to initiate IND-enabling studies in the first half of 2023 for a small molecule against an undisclosed target with potential to enter the clinic in late 2023 or early 2024, which represents an acceleration from our prior expectations for this program.
o
We are pursuing development of an inhibitor of Pol? in collaboration with Ono in
o
In
o
Also, in
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Components of Results of Operations
Revenue
To date, we have not recognized any revenue from product sales, and we do not expect to generate any revenue from the sale of products in the foreseeable future. If our development efforts for our product candidates are successful and result in regulatory approval, or license agreements with third parties, we may generate revenue in the future from product sales. However, there can be no assurance as to when we will generate such revenue, if at all.
Collaboration and License Agreement with
On
Under the Roche Agreement, we granted Roche a worldwide, perpetual, exclusive,
sublicensable license to develop, manufacture, and commercialize the Licensed
Products. Roche assumes all subsequent development of camonsertib with the
potential to expand development into additional tumors and multiple combination
studies. We have agreed to complete specified ongoing clinical trials at our
expense. We also retained the right to conduct specified clinical trials of
camonsertib in combination with our PKMYT1 compound (also known as
The Roche Agreement was subsequently amended in
Under the terms of the Roche Agreement, we received an upfront payment of
We determined that the transaction price at the onset of the Roche Agreement was
Performance obligation Transaction price
(in thousands)
Combined licenses $ 105,327
Completion of Continuing Trials 26,585
Transfer of clinical trial materials 2,714
Total transaction price $ 134,626
We recognized
As of
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Collaboration and License Agreement with Bristol-Myers Squibb Company
In
The BMS Agreement was subsequently amended in July, September and
As part of the BMS Agreement, Bristol Myers Squibb paid us an initial upfront
fee of
The
Performance obligation Transaction price
(in thousands)
Research activities $ 6,405
Options to license druggable targets 31,148
Options to license undruggable targets 12,447
Total transaction price $ 50,000
For the years ended
In the fourth quarter of 2022, Bristol Myers Squibb waived its rights to
exercise options for druggable targets directed at two separate lesions. As a
result, we recognized, from our deferred revenue balance,
As of
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and nil (
Collaboration Agreement with Ono Pharmaceutical Company Ltd.
In
In
In
As of
Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts and the development of our product candidates, partially offset by fully refundable Canadian research and development tax credits. We expense research and development costs as incurred, which include:
•
external research and development expenses incurred under agreements with contract research organizations, or CROs, as well as investigative sites and consultants that conduct our clinical trials, preclinical studies and other scientific development services;
•
employee-related expenses, including salaries, bonuses, benefits, share-based compensation, and other related costs for those employees involved in research and development efforts;
•
costs related to manufacturing material for our preclinical studies and clinical trials, including fees paid to contract manufacturing organizations, or CMOs;
•
laboratory supplies and research materials;
•
upfront, milestone and maintenance fees incurred under license, acquisition and other third-party agreements;
•
costs related to compliance with regulatory requirements; and
•
facilities, depreciation, scientific advisory board and other allocated expenses, which include direct and allocated expenses for rent, maintenance of facilities and equipment, insurance, equipment and software.
Costs for certain activities are recognized based on an evaluation of the progress to completion of specific tasks using data such as information provided to us by our vendors and analyzing the progress of our studies or other services performed. Significant judgment and estimates are made in determining the accrued expense or prepaid balances at the end of any reporting period.
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We characterize research and development costs incurred prior to the identification of a product candidate as discovery costs. We characterize costs incurred once a product candidate has been identified as development costs.
Our direct external research and development expenses consist primarily of fees paid to outside consultants, CROs, CMOs and research laboratories in connection with our preclinical development, process development, manufacturing and clinical development activities. Our direct external research and development expenses also include fees incurred under license, acquisition, and option agreements. We track these external research and development costs on a program-by-program basis once we have identified a product candidate.
We do not allocate employee costs, costs associated with our discovery efforts, laboratory supplies, and facilities, including depreciation or other indirect costs, to specific programs because these costs are deployed across multiple programs and, as such, are not separately classified. We use internal resources primarily to conduct our research and discovery activities as well as for managing our preclinical development, process development, manufacturing, and clinical development activities.
The following table summarizes our research and development costs:
Year Ended
December 31,
2022 2021
(in thousands)
Discovery costs
Direct external costs $ 9,942 $ 11,308
Laboratory supplies and research materials 4,072 4,398
Personnel related costs* 10,965 8,912
Facilities related costs 1,536 1,460
Other costs* 4,032 3,665
30,547 29,743
Development
Direct external costs
Camonsertib program 25,434 25,350
RP-6306 program 25,241 15,962
RP-2119 program 5,152 -
Personnel related costs* 27,450 16,889
Facilities related costs 808 733
Other costs* 5,868 2,494
89,953 61,428
R&D tax credits (1,434 ) (1,124 )
Total research and development costs $ 119,066 $ 90,047
*Certain amounts have been reclassified for
presentation purposes.
The successful development of our product candidates is highly uncertain. We plan to substantially increase our research and development expenses for the foreseeable future as we continue the development of our product candidates and manufacturing processes and conduct discovery and research activities for our preclinical programs. We cannot determine with certainty the timing of initiation, the duration, or the completion costs of current or future preclinical studies and clinical trials of our product candidates due to the inherently unpredictable nature of preclinical and clinical development. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. We anticipate that we will make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to the results of ongoing and future preclinical studies and clinical trials, regulatory developments, and our ongoing assessments as to each product candidate's commercial potential. We will need to raise substantial additional capital in the future. Our clinical development costs are expected to increase significantly as we commence clinical trials. We
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anticipate that our expenses will increase substantially, particularly due to the numerous risks and uncertainties associated with developing product candidates, including the uncertainty of:
•
the scope, rate of progress, and expenses of our ongoing research activities as well as any preclinical studies, clinical trials and other research and development activities;
•
establishing an appropriate safety profile;
•
successful enrollment in and completion of clinical trials;
•
whether our product candidates show safety and efficacy in our clinical trials;
•
receipt of marketing approvals from applicable regulatory authorities;
•
establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;
•
obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates;
•
commercializing product candidates, if and when approved, whether alone or in collaboration with others; and
•
continued acceptable safety profile of products following any regulatory approval.
Any changes in the outcome of any of these variables with respect to the
development of our product candidates in preclinical and clinical development
could mean a significant change in the costs and timing associated with the
development of these product candidates. We may never succeed in achieving
regulatory approval for any of our product candidates. We may obtain unexpected
results from our clinical trials. We may elect to discontinue, delay or modify
clinical trials of some product candidates or focus on other product candidates.
For example, if the
General and Administrative Expenses
General and administrative expense consists primarily of employee related costs, including salaries, bonuses, benefits, share-based compensation and other related costs, as well as expenses for outside professional services, including legal, accounting and audit services and other consulting fees, rent expense, directors and officers insurance expenses, investor and public relations expenses and other general administrative expenses.
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 continue to incur significant accounting, audit, legal, regulatory, compliance and directors and officers insurance costs as well as investor and public relations expenses associated with operating as a public company.
Other Income (Expense), Net
Other income (expense), net consists primarily of realized and unrealized gains and losses on foreign exchange, interest income earned on cash and cash equivalents and marketable securities, and other expenses such as interest and bank charges.
Realized and unrealized gains and losses on foreign exchange consist of realized and unrealized gains and losses from holding cash and foreign currency denominated other receivables, accounts payable, accrued expenses and other current liabilities as well as operating lease liabilities.
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Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations for the years endedDecember 31, 2022 and 2021: YEAR ENDED DECEMBER 31, 2022 2021 CHANGE (in thousands) Revenue: Collaboration agreements$ 131,830 $ 7,600 $ 124,230
Operating expenses: Research and development, net of tax credits 119,066 90,047 29,019 General and administrative
32,560 26,213 6,347
Total operating expenses 151,626 116,260 35,366
Loss from operations (19,796 ) (108,660 ) 88,864
Other income (expense), net:
Realized and unrealized gain (loss) on
foreign exchange 308 (144 ) 452
Interest income 5,631 259 5,372
Other expense, net (43 ) (41 ) (2 )
Total other income, net 5,896 74 5,822
Loss before income taxes (13,900 ) (108,586 ) 94,686
Income tax benefit (expense) (15,147 ) 1,678 (16,825 )
Net loss $ (29,047 ) $ (106,908 ) $ 77,861
Revenue
Revenue was
We also recognized
Revenue was
Research and Development Expenses, Net of Tax Credits
Research and development expenses were
•
a
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•
a
•
a
•
a
General and Administrative Expenses
General and administrative expenses were
•
a
•
a
•
a
•
a
Other Income (Expense), Net
Other income, net was
Income Tax (Expense) Benefit
Income tax expense was
Income tax benefit was
The decrease of
Liquidity and Capital Resources
Since our inception, we have not recognized any revenue from product sales and
have incurred operating losses and negative cash flows from our operations. We
have not yet commercialized any product and we do not expect to generate revenue
from sales of any products for several years, if at all. On
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In
Prior to our IPO, we had funded our operations primarily through equity
financings, having raised an aggregate of approximately
We expect to incur significant expenses and operating losses for the foreseeable future as we advance our product candidates through preclinical and clinical development, seek regulatory approval and pursue commercialization of any approved product candidates and we will continue to incur additional costs associated with operating as a public company. We expect that our research and development and general and administrative costs will increase in connection with our planned research and development activities.
Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminates the option to
deduct
As of
Because of the numerous risks and uncertainties associated with research, development, and commercialization of our product candidates, we are unable to estimate the exact amount of our working capital requirements. Our future capital requirements will depend on many factors, including:
•
the initiation, timing, costs, progress and results of our product candidates,
including our ongoing Phase 1 clinical trials of
•
the progress of preclinical development and possible clinical trials of our current earlier-stage programs;
•
the scope, progress, results and costs of our research programs and preclinical development of any additional product candidates that we may pursue;
•
the development requirements of other product candidates that we may pursue;
•
our headcount growth and associated costs as we expand our research and development and establish a commercial infrastructure;
•
the timing and amount of milestone and royalty payments that we are required to make or eligible to receive under our current or future collaboration agreements, including the Roche Agreement;
•
the outcome, timing and cost of meeting regulatory requirements established by the FDA, EMA and other regulatory authorities;
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•
the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of our product candidates for which we or our collaborators receive marketing approval;
•
the cost of expanding, maintaining and enforcing our intellectual property portfolio, including filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights;
•
the cost of defending potential intellectual property disputes, including patent infringement actions brought by third parties against us or any of our product candidates;
•
the effect of competing technological and market developments;
•
the cost and timing of completion of commercial-scale manufacturing activities;
•
the extent to which we partner our programs, acquire or in-license other product candidates and technologies or enter into additional strategic collaborations;
•
the revenue, if any, received from commercial sales of camonsertib,
•
the costs of operating as a public company.
Until such time, if ever, as we can generate substantial product revenues to support our cost structure, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations and other similar arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our shareholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common shareholders. Debt financing and 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 capital expenditures or declaring dividends. If we raise funds through collaborations, or other similar 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 and/or may reduce the value of our common shares. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our product candidates even if we would otherwise prefer to develop and market such product candidates ourselves.
Cash Flows
Comparison of the Years Ended
The following table summarizes our cash flows for each of the years presented:
YEAR ENDED
DECEMBER 31,
2022 2021 CHANGE
(in thousands)
Net cash provided by (used in)
operating activities $ 322 $ (85,796 ) $ 86,118 Net cash used in investing activities (175,778 ) (1,676 ) (174,102 ) Net cash provided by financing activities
880 95,557 (94,677 )
Effect of exchange rate fluctuations on
cash held (330 ) (54 ) (276 )
Net (decrease) increase in cash and
cash equivalents $ (174,906 ) $ 8,031 $ (182,937 )
Operating Activities
Net cash provided by operating activities was
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expenses and other current liabilities, income taxes payable and deferred
revenue, offset by an increase of
Net cash used in operating activities was
The
Investing Activities
Net cash used in investing activities was
Net cash used in investing activities was
Financing Activities
Net cash provided by financing activities was
Net cash provided by financing activities was
Material Cash Requirements
As of
Collaboration and Research Agreements
Collaboration and research agreement obligations primarily relate to a strategic
collaboration agreement that we entered into with the
We also entered into an agreement with the
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Purchase and Other Obligations
In the normal course of business, we enter into contracts with CROs and other
third parties for preclinical studies and clinical trials, research and
development supplies and other testing and manufacturing services. These
contracts generally do not contain minimum purchase commitments and provide for
termination 30 to 90 days' prior written notice, and therefore are cancellable
contracts. The amount and timing of such payments are not known as of
We have further entered into license agreements under which we are obligated to
make milestone and royalty payments and incur annual maintenance fees. The
future milestone or royalty payment obligations under the agreement are
contingent upon future events, such as achieving certain clinical and commercial
milestones or generating product sales. As of
Indemnification agreements
In the ordinary course of business, we may provide indemnification of varying
scope and terms to vendors, lessors, business partners and other parties with
respect to certain matters including, but not limited to, losses arising out of
breach of such agreements or from intellectual property infringement claims made
by third parties. In addition, we have entered into indemnification agreements
with members of our board of directors and executive officers that will require
us, among other things, to indemnify them against certain liabilities that may
arise by reason of their status or service as directors or officers. The maximum
potential amount of future payments we could be required to make under these
indemnification agreements is, in many cases, unlimited. To date, we have not
incurred any material costs as a result of such indemnifications. We are not
aware of any indemnification arrangements could have a material effect on our
financial position, results of operations or cash flows, and we have not accrued
any liabilities related to such obligations in our consolidated financial
statements as of
Critical Accounting Estimates
This management's discussion and analysis is based on our consolidated financial
statements, which have been prepared in accordance with
While our accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report, we believe the following accounting policies used in the preparation of our consolidated financial statements require the most significant judgments and estimates. See Note 2 to our annual consolidated financial statements included elsewhere in this Annual Report for a description of our other significant accounting policies.
Revenue Recognition
In the year ended
We recognize revenue in accordance with
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commercialize product candidates. The terms of these agreements typically contain multiple promises or obligations, which may include: (i) licenses to compounds directed to specific targets (referred to as "exclusive licenses") and (ii) research and development activities to be performed on behalf of the collaboration partner related to the licensed targets. Payments to us under these agreements may include non-refundable license fees, customer option exercise fees, payments for research activities, reimbursement of certain costs, payments based upon the achievement of certain milestones and royalties on any resulting net product sales.
Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, we perform the following five steps: (i) we identify the contract(s) with a customer; (ii) we identify the performance obligations in the contract; (iii) we determine the transaction price; (iv) we allocate the transaction price to the performance obligations in the contract; and (v) we 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 and determine those that 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) the performance obligation is satisfied.
As part of the accounting for these arrangements, we must use significant judgment to determine: a) the number of performance obligations based on the determination under step (ii) above and whether those performance obligations are distinct from other performance obligations in the contract; b) the transaction price under step (iii) above; and c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above. We use judgment to determine whether milestones or other variable consideration, except for sales-based royalties, should be included in the transaction price as described further below. The transaction price is allocated to each performance obligation on a relative stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. In determining the stand-alone selling price of a license to our proprietary technology or a material right provided by a customer option, we consider market conditions as well as entity-specific factors, including those factors contemplated in negotiating the agreements as well as internally developed estimates that include assumptions related to the market opportunity, estimated development costs, probability of success and the time needed to commercialize a product candidate pursuant to the license. In validating estimated stand-alone selling price, we evaluate whether changes in the key assumptions used to determine estimated stand-alone selling price will have a significant effect on the allocation of arrangement consideration between performance obligations.
Amounts received prior to revenue recognition are recorded as deferred revenue. Amounts expected to be recognized as revenue within one year following the balance sheet date are classified as current portion of deferred revenue in the accompanying consolidated balance sheets. Amounts not expected to be recognized as revenue within one year following the balance sheet date are classified as deferred revenue, net of current portion. Amounts recognized as revenue, but not yet received or invoiced are generally recognized as contract assets.
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, which generally include research and development services, we recognize revenue from non-refundable, 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 license is distinct from the other promises, we consider relevant facts and circumstances of each arrangement, including the research and development 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 the license for its intended purpose without the receipt of the remaining promises, whether the value of the license 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 and whether the license is the predominant promise within 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. If the license is the predominant promise, and it is determined that the license represents
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functional intellectual property, revenue is recognized at the point in time when control of the license is transferred. If it is determined that the license does not represent functional intellectual property, revenue is recognized over time using an appropriate method of measuring progress. We have recognized revenue related to such licenses from our Roche collaboration and license agreement.
Research and Development Services - The obligations under our collaboration and license agreements generally include research and development services to be performed by us to benefit the collaboration partner. For performance obligations that include research and development services, we generally recognize revenue allocated to such performance obligations based on an appropriate measure of progress. We utilize judgment to determine the appropriate method of measuring progress for purposes of recognizing revenue, which is generally an input measure such as costs incurred. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. The measure of progress, and thereby periods of which revenue should be recognized, are subject to estimates by management and may change over the course of the contract. Reimbursements from the partner that are the result of a collaborative relationship with the partner, instead of a customer relationship, such as co-development activities, are recorded as a reduction to research and development expense. We have recognized revenue related to such research and development services from our Bristol Myers Squibb collaboration agreement and our Roche collaboration and license agreement.
Customer Options - Our arrangements may provide a collaborator with the right to acquire additional goods or services in the future. Under these agreements, fees may be due to us (i) at the inception of the arrangement as an upfront fee or payment or (ii) upon the exercise of the customer option. If an arrangement is determined to contain customer options that allow the customer to acquire additional goods or services, the goods and services underlying the customer options are not considered to be performance obligations at the outset of the arrangement, as they are contingent upon option exercise. We evaluate the customer options for material rights, or options to acquire additional goods or services for free or at a discount. If the customer options are determined to represent a material right, the material right is recognized as a separate performance obligation at the inception of the arrangement. We allocate the transaction price to material rights based on the relative stand-alone 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 or expires. We have recognized revenue related to such customer options from our Bristol Myers Squibb collaboration agreement.
Milestone Payments - At the inception of each arrangement that includes development milestone payments, we evaluate whether the milestones are considered probable of being achieved 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, the associated milestone value is included in the transaction price. Milestone payments that are not within our control or the control of the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. We evaluate factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal 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 our 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. If a milestone or other variable consideration relates specifically to our efforts to satisfy a single performance obligation or to a specific outcome from satisfying the performance obligation, we generally allocate the milestone amount entirely to that performance obligation once it is probable that a significant revenue reversal would not occur. To date, we have not recognized any revenue related to the achievement of such milestones.
Royalties - For arrangements that include sales-based royalties, including milestone payments based on a level of sales, and 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
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has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any royalty revenue resulting from any of our licensing arrangements.
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued and prepaid research and development expenses as of each balance sheet date. 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 and prepaid expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary.
We base our expenses related to research and development activities on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors that conduct research and development 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 research and development 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 our estimate, we adjust the accrual or prepaid balance accordingly. Non-refundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made.
Although we do not expect our estimates to be materially different from amounts incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period.
Share-Based Compensation
We measure share-based compensation based on the grant date fair value of the share-based awards and recognize share-based compensation expense on a straight-line basis over the requisite service period of the awards, which is generally the vesting period of the respective award. For non-employee awards, compensation expense is recognized as the services are provided, which is generally ratably over the vesting period.
Share-based compensation expense is classified in our consolidated statements of operations and comprehensive loss based on the function to which the related services are provided. We recognize share-based compensation expense for the portion of awards that have vested. Forfeitures are accounted for as they occur.
The fair value of each stock option grant is estimated on the date of grant
using the Black-Scholes option-pricing model, which requires inputs based on
certain subjective assumptions, including the expected share price volatility,
the expected term of the option, the risk-free interest rate for a period that
approximates the expected term of the option, and our expected dividend yield.
The fair value of each restricted share unit is estimated on the date of grant
based on the fair value of our common share on that same date. Prior to our IPO,
as there was no public market for our common shares, we determined the
volatility for awards granted based on an analysis of reported data for a group
of guideline companies that issued options with substantially similar terms. The
expected volatility has been determined using a weighted-average of the
historical volatility measures of this group of guideline companies blended with
the historical volatility of the Company's common shares. We expect to continue
using such methodology until we have adequate historical data regarding the
volatility of the trading price of our common shares on Nasdaq. The expected
term of our options granted to employees has been determined utilizing the
"simplified" method for awards that qualify as "plain-vanilla" options. With the
adoption of ASU 2018-07, we applied the nonpublic entity practical expedient for
calculating the expected term of non-employee awards, using the midpoint between
the vesting date and the contractual term, which is consistent with the method
used for employee awards. The risk-free interest rate is determined by reference
to the
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approximately equal to the expected term of the award. We have not paid, and do not anticipate paying, cash dividends on our common shares; therefore, the expected dividend yield is assumed to be zero.
Recently Adopted Accounting Pronouncements
See note 2 to our annual consolidated financial statements appearing elsewhere in this Annual Report for a description of recently adopted accounting pronouncements applicable to our financial statements.
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