AbCellera Biologics Inc. 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 the section titled “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes thereto included elsewhere in this annual report. Some of the information contained in this discussion and analysis or set forth in other parts of this annual report contain forward-looking statements that involve risks, uncertainties and assumptions. As a result of many factors, including those factors set forth in the section titled “Risk Factors,” our actual results could differ materially from those discussed in or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors.” Please also see the section titled “Cautionary Note Regarding Forward Looking Statements.” Overview We believe that the surest path to a better future is through technological advancement and that the new frontier of technology lies at the interface of computation, engineering and biology. Our mission is to improve health with technologies that transform the way that antibody-based therapies are discovered. We aim to become the centralized operating system for next generation antibody discovery. Our full-stack, artificial intelligence-, or AI, powered drug discovery platform searches and analyzes the database of natural immune systems to find antibodies that can be developed as drugs. We believe our technology increases the speed and the probability of success of therapeutic antibody discovery, including enabling discovery against targets that may otherwise be intractable. Rather than advancing our own clinical pipeline of drug candidates, we forge partnerships with drug developers of all sizes, from large cap pharmaceutical to small biotechnology companies. We empower them to move quickly, reduce cost and tackle the toughest problems in drug development. As of December 31, 2020, we had 103 discovery programs that are either completed, in progress or under contract with 27 partners. As a recent example, in a collaboration with Eli Lilly and Company, or Lilly, we applied our technology stack to co-develop bamlanivimab, a potential antibody therapy to treat and prevent COVID-19. Starting from a single blood sample obtained from a convalescent patient, we and our partners identified a viable antibody drug candidate within three weeks that advanced into clinical testing 90 days after initiation of the program. Lilly progressed into these clinical trials at a greatly accelerated pace as a result of the Coronavirus Treatment Acceleration Program, which is a special emergency program for possible coronavirus therapies created by the FDA in 2020 to expedite the development of potentially safe and effective life-saving treatments to combat the COVID-19 pandemic. With respect to other or future product candidates, there is no assurance that any of our partners or collaborators will be able to advance a product candidate into clinical development on this timeframe again in the future, or at all. We initiated our partnering program in 2015 and have only had this one program result in clinical milestone payments to us to date and we have not yet had a program receive marketing approval. We structure our agreements in a way that is designed to align our partners’ economic interests with our own. We forge partnerships with large cap pharmaceutical companies, biotechnology companies of all sizes and non-profit and government organizations. Our partners select a target and define the antibody properties needed for therapeutic development. We provide discovery solutions to partners that have a range of discovery capabilities, from the highly enabled to the less enabled. We enable discovery against targets that have traditionally been intractable, and we accelerate programs against less difficult targets. Our deals emphasize participation in the success and upside of future antibody therapeutics. Our partnership agreements include near-term payments for technology access, research and intellectual property rights, and downstream payments in the form of clinical and commercial milestones, and royalties on net sales. Longer-term we are eligible to receive additional payments upon satisfaction of clinical and commercial milestones, which we refer to as milestone payments, as well as royalties on sales of products derived from antibodies that we discover for our partners. Our discovery partnerships generally include royalty payments on net sales in the single digit to low-double digit range. We generated revenue of $11.6 million and $233.2 million for the years ended December 31, 2019 and 2020, respectively. As of December 31, 2020, we had a total of 27 partners for whom we were conducting drug discovery activities. For the year ended December 31, 2019, two of our partners accounted for 47% and 15% of revenue, and eleven partners accounted for the remaining 38% of revenue. For the year ended December 31, 2020, three of our partners accounted for 35%, 25% and 14% of our research fees revenue and eight partners accounted for the remaining 26% of research fees revenue. For the year ended December 31, 2020 we recognized our first clinical milestone payments and royalty revenue streams, totaling $213.3 million, exclusively from our partnership with Lilly. Our partnership with Lilly constituted one of the partnerships that generated 10% or more of our consolidated revenues during the one or more periods described above. With respect to the other partners, we do not believe the loss of any one or 76 more of such partners would have a material adverse effect on us and our subsidiaries taken as a whole. We have also grown the number of programs that we have under contract with our partners, as illustrated by the following charts. We have achieved such growth in our business with a modest sales and marketing infrastructure, consisting of a limited number of business development personnel supported by marketing staff that have historically been primarily focused on scientific writing. We incurred sales and marketing expenses of $1.3 million and $3.8 million for the years ended December 31, 2019 and 2020, respectively. We are significantly increasing investment into our business development team and into marketing our solutions to new and existing partners. We focus a substantial portion of our resources on research and development efforts towards deepening our technology and expertise along our technology stack, and we expect to continue to make significant investments in this area for the foreseeable future. We incurred research and development expenses of $10.1 million and $29.4 million for the years ended December 31, 2019 and 2020, respectively. We incurred general and administrative expenses of $2.7 million and $11.9 million for the years ended December 31, 2019 and 2020, respectively. We have also experienced significant growth in our workforce in recent periods, increasing from 107 employees as of December 31, 2019 to 206 employees as of December 31, 2020. We expect to continue to incur significant expenses, and we expect such expenses to increase substantially in connection with our ongoing activities, including as we: • invest in research and development activities to improve our technology stack and platform; • market and sell our solutions to existing and new partners; • expand and enhance operations to deliver programs, including investments in manufacturing; • acquire businesses or technologies to support the growth of our business; • attract, hire and retain qualified personnel; • continue to establish, protect and defend our intellectual property and patent portfolio, including our ongoing litigation; and • operate as a public company. To date, we have financed our operations primarily from revenue from our drug discovery partnerships in the form of research fees, government funding from grants, external borrowings, and from the issuance and sale of convertible preferred shares and notes, and common shares. Our net loss for the year ended December 31, 2019 was $2.2 million and our net earnings for the year ended December 31, 2020 was $118.9 million. As of December 31, 2020, we had accumulated earnings of $114.2 million and we had cash and cash equivalents totaling $594.1 million. 77 The following chart illustrates key milestones achieved since our inception. Recent Developments In March 2020, we entered into a discovery partnership agreement with Eli Lilly and Company, or Lilly, pursuant to which we will perform discovery research for a number of targets for Lilly that will result in antibodies for Lilly to develop and potentially commercialize. This partnership includes the licensing of bamlanivimab, a monoclonal antibody designed to block viral attachment of the COVID-19 virus and its entry into human cells as well as other candidate antibodies against COVID-19 discovered by AbCellera. On June 1, 2020, 90 days after program initiation, bamlanivimab moved to first-in-human testing and progressed to Phase 3 clinical trials by July 2020. For the year ended December 31, 2020, we received an aggregate of $15.0 million upon the satisfaction of clinical and approval milestones by Lilly and recognized $198.3 million in royalty revenue related to bamlanivimab. Royalty revenues of $198.3 are reduced by the associated royalty fees payable to the National Institutes of Health of $27.1, resulting in a final amount received of $171.2 after royalty fee payments. This royalty impact, incorporating the related royalty fees payable, is based on our royalty arrangements of low- to mid-teens for aggregate sales for COVID-19 therapeutics below $125.0 million and mid-teens to mid-twenties on aggregate sales above $125.0 million. In March 2020, we completed an equity financing, raising an aggregate of $75.0 million in gross proceeds through the sale and issuance of Series A2 convertible preferred shares. In connection with this financing, we also entered into a senior secured credit agreement with OrbiMed Royalty & Credit Opportunities III, LP, or OrbiMed, which provided for term debt in an aggregate amount of $30.0 million. In July 2020, we repaid funds borrowed under the credit agreement facility in full and retired the credit facility with OrbiMed . Immediately prior to the completion of our IPO, our convertible preferred shares and notes were converted to common shares. 78 In April 2020, we entered into a multi-year agreement with the Canadian government’s Strategic Innovation Fund, or SIF. Under this agreement, CAD $175.6 million ($125.6 million) was committed by the Government of Canada. To date, our business has required only minimal expenditures for manufacturing activities. As part of our strategy to expand our market by delivering a full solution through forward integration, we plan to add capabilities and infrastructure to support GMP manufacturing, and we intend to apply such SIF funding towards this goal. In November 2020, we acquired Trianni. In connection with the acquisition, our U.S. subsidiary entered into an agreement and plan of merger for an initial purchase price of $90.0 million, subject to certain adjustments for working capital, indebtedness and expenses. Upon consummation of the merger, Trianni became our wholly-owned subsidiary. We paid the purchase price for the acquisition using the proceeds from the issuance of the Convertible Notes in an aggregate amount of $90.0 million. The Convertible Notes will mature on October 30, 2025, unless prepaid or converted earlier, and will bear interest from October 30, 2021 at an annual rate of 5%, payable annually in arrears on October 30 of each year, beginning on October 30, 2022. Interest on the Convertible Notes is payable in cash or in the form of additional nonconvertible notes. The Convertible Notes are convertible at the option of the noteholders into our common shares under certain circumstances, including upon the closing of this offering. Convertible Notes converted upon the closing of this offering will convert at a price of 85% of the IPO price. In December 2020, we completed Abcellera’s IPO on the Nasdaq. The Company completed the sale of 27,772,500 shares of its common shares in the IPO at a price to the public of $20.00 per share. The Company raised gross proceeds of $555.5 million, or aggregate net proceeds of $522.8 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. Immediately prior to the completion of our IPO, our convertible preferred shares and notes were converted to common shares. Key Factors Affecting Our Results of Operations and Future Performance We believe that our financial performance has been, and in the foreseeable future will continue to be, primarily driven by multiple factors as described below, each of which presents growth opportunities for our business. These factors also pose important challenges that we must successfully address in order to sustain our growth and improve our results of operations. Our ability to successfully address these challenges is subject to various risks and uncertainties, including those described in the section of this prospectus titled “Risk Factors.” • Securing additional programs under contract. Our potential to grow revenue, in both the near and long term, is dependent on our ability to secure additional programs under contract from new and existing partners. For existing partners, we seek to expand our relationships with them to cover multi-year, multi-target programs. Since our first commercial partnership in 2015, as of December 31, 2020, we had 103 discovery programs that are either completed, in progress or under contract with 27 partners. We are building our business development team across the major biotechnology geographic hubs in order to bring in new partners and new programs under contract, and we believe that we have a significant opportunity to continue to increase the number of partners who have programs based on our platform. Our ability to continue to grow our number of programs under contract is dependent upon our ability to educate the market and support the business through investment in our sales and marketing efforts and through further research and development to enhance our technological differentiation. • Our partners successfully developing and commercializing the antibodies that we discover. We have historically generated nearly all of our revenue from research fees. We estimate that, based on the terms of our existing contracts and estimates of historical rates of success of antibody drug development, the vast majority of the potential value for each program under contract is represented by potential future milestone payments and royalties rather than research fees. As a result, we believe our business and our future results of operations will be highly reliant on the degree to which our partners successfully develop and commercialize the antibodies that we discover based on contracts with our partners. As our partners continue to advance development of the antibodies that we have discovered, we expect to start receiving additional milestone payments and royalties if any partners commence commercial sales of such antibodies. For example, recent public announcements by our partner Lilly have indicated that the bamlanivimab antibody is advancing through late stage clinical trials. We received development milestone payments of $15.0 million from this partnership during year ended December 31, 2020. If this product candidate receives marketing approval and is successfully commercialized by Lilly, we are entitled to receive approval milestones payments and royalties on such sales. The total aggregate amount of clinical and approval milestones related to this partnership is up to $29.0 million. On October 7, 2020, Lilly submitted a request for an EUA for the bamlanivimab single agent therapy to the FDA, which was granted on November 9, 2020. On October 28, 2020, Lilly announced an agreement with the U.S. government to supply 300,000 vials of bamlanivimab for $375.0 million and on December 2, 2020, Lilly announced the purchase by the U.S. government of an additional 650,000 doses of bamlanivimab for $812.5 million. On October 29, 2020, Lilly also announced a fixed price contract for procurement of bamlanivimab in the amount of $312.5 million with the U.S. Army Contracting Command. On November 22, 2020, Lilly was granted authorization for the bamlanivimab single agent therapy by Health Canada under the Interim Order Respecting the Importation, Sale and Advertising of Drugs for Use in Relation to COVID-19. On November 24, 2020, Lilly announced an 79 agreement with the Canadian government to supply 26,000 doses of bamlanivimab for the three month period between December 2020 and February 2021, for $32.5 million. Under our partnership with Lilly, we are entitled to receive a specified percentage of proceeds that Lilly receives from these sales. • Rate and timing of selecting and initiating discovery projects by our partners. Once programs are secured under contract, partners must select targets and agree on a detailed statement of work before we commence discovery research on any antibodies. The rate and timing of such selection and initiation differs from partner to partner. Because the vast majority of research fees that we are entitled to recognize under our partnerships depend on our delivery of antibodies for development by our partners, any delays by our partners in selecting targets and agreeing on statements of work will impact revenue recognition. • Investing in enhancements to our technology stack. Our ability to maintain and expand our partnerships is dependent on the advantages our technology stack delivers to our partners. We intend to maintain our leading position through research and development investments to refine and add capabilities in areas such as computation, protein engineering, immunization technologies, genetically engineered rodents and cell line selection. We have successfully closed and will continue to look for strategic technology acquisitions to improve, broaden and deepen our capabilities and expertise in antibody drug discovery and development, or those that offer opportunities to expand our partnership business into adjacent therapeutic modalities. We intend to devote substantial resources to continue to improve our technological differentiation which will impact our financial performance. • Scaling our operations to execute on discovery programs. As we secure additional programs under contract and as our partners initiate discovery programs, our operational capacity to execute such research activities may become strained. We are making significant investments in capital and time to increase our ability to address future growth, including building new headquarters, building a new small-scale manufacturing plant, investing in research and development and hiring more talented personnel across functions. We have new facilities under development scheduled to take occupancy in 2021 that are intended to materially expand capacity. Over the past twelve months, we have grown our workforce by 93%, moving from 107 to 206 full time employees as of December 31, 2020. As we expand our workforce, we expect a significant increase in our operating expenses, including stock-based compensation. Key Business Metrics We regularly review the following key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We believe that the following metrics are important to understand our current business. These metrics may change or may be substituted for additional or different metrics as our business develops. For example, as our business matures and to the extent programs are discontinued, we anticipate updating these metrics to reflect such changes. Year Ended December 31, Change Metric 2019 2020 % Number of discovery partners 22 27 23 % Programs under contract, cumulative 60 103 72 % Program starts, cumulative 43 52 21 % Programs in the clinic - 1 N/M Number of discovery partners represents the unique number of partners with whom we have executed partnership contracts. We view this metric as an indication of the competitiveness of our technology stack and our current level of market penetration. The metric also relates to our opportunities to secure programs under contract from existing customers through repeat business opportunities. Programs under contract represent the number of antibody development programs that are under contract for delivery of discovery research activities. A program under contract is counted when a contract is executed with a partner under which we commit to discover antibodies against one selected target. A target is any relevant antigen for which a partner seeks our support in developing binding antibodies. We view this metric as an indication of commercial success and technological competitiveness. It further relates to revenue from technology access fees. The cumulative number of programs under contract with downstream participation is related to our ability to generate future revenue from milestone payments and royalties. Program starts represent the number of unique programs under contract for which we have commenced the discovery effort. The discovery effort commences on the later of (i) the day on which we receive sufficient reagents to start discovery of antibodies against a target and (ii) the day on which the kick-off meeting for the program is held. We view this metric as an indication of our operational capacity to execute on programs under contract. It is also an indication of the selection and initiation of discovery projects 80 by our partners and the resulting near-term potential to earn research fees. Cumulatively, program starts with downstream participation indicate our total opportunities to earn downstream revenue from milestone fees and royalties in the mid- to long-term. Programs in the clinic represent the count of unique programs for which an Investigational New Drug, or IND, New Animal Drug or Pre-Market Approval, or PMA, application, or equivalents under other regulatory regimes, has been filed based on an antibody that was discovered by us. Where the date of such application is not known to us, the date of the first public announcement of clinical trials will be used instead for the purpose of this metric. We view this metric as an indication of our near- and mid-term potential revenue from milestone fees and potential royalty payments in the long term. Components of Results of Operations Revenue Our revenue is comprised of partnership research fees, development milestones and royalty payments from commercial products. Research fees consist primarily of technology access fees, which are generally generated upon execution of our partnership agreements, and discovery research fees, which are generated through our performance of antibody discovery research for our partners. Our partnership agreements also entitle us to receive payments upon the satisfaction of clinical, approval, and commercial milestones as well as royalties on our partners’ commercial sales of the molecules that we discover. We expect revenue to increase over time as we secure additional programs under contract and conduct discovery efforts for our partners, and as our partners continue the development of the antibodies that we deliver. We expect that our revenue will fluctuate from period to period due to the timing of securing additional programs under contract, the inherently uncertain nature of the timing of milestone achievement and our dependence on the program decisions of our partners. Operating Expenses Royalty fees. Royalty fees consist of certain contractual royalty payments to our strategic partners upon receipt of royalty revenue based on our customers third-party net sales. Royalty fees are not included in every program. For royalties received from Lilly for commercial sales of bamlanivimab, royalty fees were due to collaboration partners in AbCellera’s DARPA P3 (Pandemic Preparedness Program) project focused on rapid pandemic response. Royalty fees are recorded when the third-party sale occurs. Research and Development expenses. Research and development expenses primarily consist of salaries, benefits, incentive compensation, stock-based compensation, laboratory supplies and materials expenses for employees and contractors engaged in research and product development. These expenses are exclusive of depreciation and amortization. Research and development activities consist of discovery research for partners as well as our internal platform development. We derive improvements to our technology stack from both types of activities. We have not historically tracked our research and development expenses on a partner-by-partner basis or on a product candidate-by-product candidate basis. We expect to continue to incur substantial research and development expenses as we conduct discovery research for our partners. In addition, we plan to continue to invest in research and development to enhance our solutions and offerings to our partners, including hiring additional employees and continuing research and development projects obtained through strategic technology acquisitions. As a result, we expect that our research and development expenses will continue to increase in absolute dollars in future periods and vary from period to period as a percentage of revenue. Sales and Marketing Expenses. Our sales and marketing expenses consist primarily of salaries, benefits, and stock-based compensation costs for employees within our commercial sales functions, as well as marketing, travel expenses and information technology costs that are directly associated with sales and marketing efforts, such as client relationship management tools and other information technology data tools to provide insight into market segments and trends. This activity has been complemented with research and development staff attending a variety of scientific conferences, which has helped increase the business development pipeline. The associated expenses are included in research and development expenses as scientific conference attendance is primarily related to our research and development efforts. We expect our sales and marketing expenses to increase in absolute dollars as we expand our commercial sales, marketing and business development teams; increase our presence globally; and increase marketing activities to drive awareness and adoption of our platform. While these expenses may vary from period to period as a percentage of revenue, we expect these expenses to increase as a percentage of sales in the short term as we continue to grow our commercial organization to drive anticipated growth in the business. General and administrative expenses. General and administrative expenses primarily consist of salaries, benefits and stock-based compensation costs for employees in our executive, accounting and finance, project management, corporate development, office administration, legal and human resources functions as well as professional services fees, such as consulting, audit, tax and legal fees, 81 general corporate costs and allocated overhead expenses. General and administrative expenses also include all rent and facilities expenses for all employees, regardless of department or function. We expect that our general and administrative expenses will continue to increase in absolute dollars in future periods, primarily due to increased headcount to support anticipated growth in the business and due to incremental costs associated with operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a securities exchange and costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC and stock exchange listing standards, public relations, insurance and professional services. We expect these expenses to vary from period to period as a percentage of revenue. Depreciation and amortization. Depreciation expense consists of the depreciation of property and equipment used actively in the business, primarily by research and development activities. Amortization expense includes the amortization of intangible assets over their respective useful lives. Other (Income) Expense Interest Income. Interest income consists of interest earned on cash balances in our Bank of Montreal cash accounts. In 2020, following the closing of our preferred share financing, interest income also included interest earned on money market funds administered by Bank of Montreal. Interest and Other (Income) Expense. Interest expense consists primarily of interest related to borrowings under our credit agreements. For the years ended December 31, 2018 and 2019, we had credit and overdraft agreements with Bank of Montreal. In 2020, prior to the closing of our preferred share financing, we repaid and terminated all material Bank of Montreal credit agreements. In connection with our preferred share financing, we entered into a new credit agreement with OrbiMed. In the third quarter of 2020, we repaid this credit agreement with OrbiMed and retired all of the credit facility. Foreign Exchange (Gain) Loss, Net. Foreign exchange (gain) loss, net, consists primarily of income or loss due to fluctuation in exchange rates between the Canadian dollar and the U.S. dollar. All of our historical revenue has been generated in U.S. dollars. Grants and Incentives. Grants and incentives include cost recovery on activities that qualified for approved projects supported by grant funding or tax credits. Grants primarily include the benefit from programs administered by the Canadian government’s Ministry of Innovation, Science and Economic Development, such as their Industrial Research Assistance Program, which impacts 2018 and 2019, and the Strategic Innovation Fund, which impacts the twelve months ended December 31, 2020. To the extent that grant funding covers capital expenditures, a deferred credit is recorded on the balance sheet and recognized ratably over the benefit period of the related expenditure for which the grant was intended to compensate. Tax credits include benefits from the Canadian Scientific Research and Experimental Development, or SR&ED, program, the Australian R&D Tax Incentive program, and U.S. federal and state research and experimentation tax credits. Depending on our Canadian tax status, either a refundable cash or tax credit is accrued for every dollar spent in eligible research and development activities. In Australia, government investment tax credits are in the form of a tax credit for our Australian entity Channel Biologics Pty Ltd. U.S. federal and state tax credits are a general business credit based on eligible research and development expenditures for our U.S. subsidiaries. Refundable tax credits are included in grants and incentives. Tax credits are included in a note in the financial statements. We expect to continue to benefit from these tax programs in the future. 82 Results of Operations The results of operations presented below should be reviewed in conjunction with the consolidated financial statements and notes included elsewhere in this annual report. The following tables set forth our results of operations for the periods presented: Year Ended December 31, 2018 2019 2020 Revenue: Research fees $ 8,831 $ 11,612 $ 19,848 Milestone payments - - 15,000 Royalty revenue - - 198,307 Total revenue 8,831 11,612 233,155 Operating expenses: Royalty fees - - 27,143 Research and development ( 1 ) 5,803 10,113 29,393 Sales and marketing (1) 712 1,263 3,842 General and administrative (1) 2,151 2,749 11,910 Depreciation and amortization 918 1,604 4,836 Total operating expenses 9,584 15,729 77,124 Income (loss) from operations (753 ) (4,117 ) 156,031 Other (income) expense: Interest income (42 ) $ (155 ) (293 ) Interest and other expense 212 209 6,511 Foreign exchange (gain) loss 362 (186 ) 300 Grants and incentives (1,594 ) (1,774 ) (8,320 ) Total other income (1,062 ) (1,906 ) (1,802 ) Net earnings (loss) before income tax 309 (2,211 ) 157,833 Provision for income tax - - 38,915 Net earnings (loss) for the year $ 309 $ (2,211 ) $ 118,918 Net earnings (loss) per share attributable to common shareholders Basic $ 0.00 $ (0.01 ) $ 0.53 Diluted $ 0.00 $ (0.01 ) $ 0.45 Weighted-average common shares outstanding Basic 149,436,370 151,327,560 159,195,023 Diluted 171,336,110 151,327,560 263,129,765 ( 1 ) Amounts are exclusive of depreciation and amortization. Amounts include stock-based compensation as follows: Year Ended December 31, 2018 2019 2020 (in thousands) Research and development $ 593 $ 606 $ 5,365 Sales and marketing 6 85 1,341 General and administrative 16 199 1,691 Total stock-based compensation $ 615 $ 890 $ 8,397 83 Comparison of the Years Ended December 31, 2018 and 2019 Revenue Year Ended December 31, Change 2018 2019 Amount % (in thousands, except percentages) Revenue Research fees $ 8,831 $ 11,612 $ 2,781 31 % Total revenue $ 8,831 $ 11,612 $ 2,781 31 % Revenue increased by $2.8 million, or 31%, from the year ended December 31, 2018 to the year ended December 31, 2019. The increase was primarily driven by a higher number of programs under contract executed in 2019 for which we received research fees associated with discovery work conducted for our partners. There was no clinical milestone payment revenue in the years ended December 31, 2018 and 2019. Operating Expenses Research and Development Year Ended December 31, Change 2018 2019 Amount % (in thousands, except percentages) Research and development $ 5,803 $ 10,113 $ 4,310 74 % Research and development expenses increased by $4.3 million, or 74%, from the year ended December 31, 2018 to the year ended December 31, 2019. The increase was primarily driven by increased headcount in the research and development function and associated expenses consisting primarily of personnel compensation in the amount of $2.5 million. In addition, expenses related to materials supporting research and development activities increased $0.9 million. Sales and Marketing Year Ended December 31, Change 2018 2019 Amount % (in thousands, except percentages) Sales and marketing $ 712 $ 1,263 $ 551 77 % Sales and marketing expenses increased by $0.6 million, or 77%, from the year ended December 31, 2018 to the year ended December 31, 2019. The increase was primarily driven by increased compensation expense in the amount of $0.3 million and the engagement of a public relations consulting firm of $0.2 million. General and Administrative Year Ended December 31, Change 2018 2019 Amount % (in thousands, except percentages) General and administrative $ 2,151 $ 2,749 $ 598 28 % General and administrative expenses increased by $0.6 million, or 28%, from the year ended December 31, 2018 to the year ended December 31, 2019. The increase was primarily driven by increased headcount within the general and administrative function and associated expenses consisting primarily of personnel compensation in the amount of $0.7 million. 84 Depreciation Year Ended December 31, Change 2018 2019 Amount % (in thousands, except percentages) Depreciation $ 918 $ 1,604 $ 686 75 % Depreciation expense increased by $0.7 million, or 75%, from the year ended December 31, 2018 to the year ended December 31, 2019. The increase was primarily driven by a significant investment in capital assets made in 2018 and 2019 for laboratory space at our Vancouver Yukon Street facility and associated equipment in that facility in the amount of $5.3 million and $4.0 million, respectively. Other (Income) Expense Interest Income Year Ended December 31, Change 2018 2019 Amount % (in thousands, except percentages) Interest income $ (42 ) $ (155 ) $ (113 ) 269 % Interest income increased by $0.1 million, or 269%, from the year ended December 31, 2018 to the year ended December 31, 2019. The increase was primarily driven by a larger average cash balance maintained in the year ended December 31, 2019 compared to the prior period. Interest and Other Expense Year Ended December 31, Change 2018 2019 Amount % (in thousands, except percentages) Interest and other expense $ 212 $ 209 $ (4 ) (2 )% There was no material change in interest and other expenses for the year ended December 31, 2018 compared to the year ended December 31, 2019. Some interest was charged on the Bank of Montreal loan carried during these two periods. Foreign Exchange (Gain) Loss Year Ended December 31, Change 2018 2019 Amount % (in thousands, except percentages) Foreign exchange (gain) loss $ 362 $ (186 ) $ (548 ) NM Foreign exchange (gain) loss decreased by $0.5 million from the year ended December 31, 2018 to the year ended December 31, 2019. Foreign exchange gains and losses are driven primarily by the Canadian dollar cash balances that we maintain and the relative exchange rates between Canadian dollars and U.S. dollars. Grants and Incentives Year Ended December 31, Change 2018 2019 Amount % (in thousands, except percentages) Grants and incentives $ (1,594 ) $ (1,774 ) $ (180 ) 11 % Grants and incentives increased by $0.2 million, or 11%, from the year ended December 31, 2018 to the year ended December 31, 2019. This amount is associated with the Canadian SR&ED refundable tax credit program. With this program, we are able to claim eligible research and development expenses and earn a refundable tax credit after applying the applicable rate. The 2018 refundable tax credit was $1.4 million and the 2019 refundable tax credit was $1.1 million. This change in the effective claim amount 85 is largely due to our growth. As a larger enterprise we no longer qualify for the enhanced claim rate extended to smaller businesses in Canada. Comparison of the Years Ended December 31, 2019 and 2020 Revenue Year Ended December 31, Change 2019 2020 Amount % (in thousands, except percentages) Revenue Research fees $ 11,612 $ 19,848 $ 8,236 71 % Milestone payments - 15,000 15,000 N/A Royalty revenue - 198,307 198,307 N/A Total revenue $ 11,612 $ 233,155 $ 221,543 1908 % Revenue increased by $221.5 million from the year ended December 31, 2019 to the year ended December 31, 2020. We received milestone payments upon achieving Phase 1, Phase 2, and Phase 3 clinical milestones and for the first commercial sale in the United States by Lilly relating to molecule bamlanivimab for treatment of COVID-19 in the amount of $15.0 million. Royalty payments of $198.3 million are directly associated with the specified percentage of proceeds that Lilly received from the sales of bamlanivimab. Research fees recognized increased by $8.2 million, or 71%. $5.3 million of the increase is associated with research fees from new partnerships agreements entered into in 2020. The remaining increase is attributable to additional targets and project activities from ongoing projects or new projects with existing partners. Operating Expenses Royalty fees Year Ended December 31, Change 2019 2020 Amount % (in thousands, except percentages) Royalty fees - $ 27,143 $ 27,143 N/A Royalty fees for the year ended December 31, 2020 were $27.1 million. These were directly attributable to the royalty revenues received by the Company from sales of bamlanivimab by Lilly due to AbCellera’s collaborators in pandemic response. Research and Development, Exclusive of Depreciation and Amortization Year Ended December 31, Change 2019 2020 Amount % (in thousands, except percentages) Research and development $ 10,113 $ 29,393 $ 19,280 191 % Research and development expenses increased by $19.3 million, or 191%, from the year ended December 31, 2019 to the year ended December 31, 2020. $5.1 million of the increase relates to licensing fees due in relation to research activity. $5.1 million of the increase is due to the increase in compensation expense consistent with increased headcount. $4.3 million of the increase relates to stock-based compensation expense related to Liability Classified Options (LCOs). This $4.3 million in LCOs will be settled with equity when the employees exercise the associated options. In June 2020, the Company acquired the OrthoMab bispecific platform from Dualogics in the amount of $4.0 million. This transaction is accounted for as an acquisition of an asset and was expensed upon completion of the transaction, as the platform acquired is intended to be further utilized and expanded in our research and development efforts. The remaining increase is attributed to research materials and supplies consistent with increased research and development activities. 86 Sales and Marketing Year Ended December 31, Change 2019 2020 Amount % (in thousands, except percentages) Sales and marketing $ 1,263 $ 3,842 $ 2,579 204 % Sales and marketing expenses increased by $2.6 million, or 204%, from the year ended December 31, 2019 to the year ended December 31, 2020. The increase was primarily driven by increased headcount in business development and marketing staff which resulted in an increase of $2.4 million in compensation expenses, including increased expenditures on new hires, external consultants for public relations and graphic design activities. Sales and marketing expenses related to travel were significantly lower for the year ended December 31, 2020 due to COVID-19 related travel restrictions. General and Administrative Year Ended December 31, Change 2019 2020 Amount % (in thousands, except percentages) General and administrative $ 2,749 $ 11,910 $ 9,161 333 % General and administrative expenses increased by $9.2 million, or 333%, from the year ended December 31, 2019 to the year ended December 31, 2020. $1.9 million of the increase is related to the closing of our 2020 preferred share financing and IPO including legal, accounting and other professional services which are not expected to recur in future periods. $2.9 million of the increase was driven by increased headcount within the general and administrative function and the associated compensation expenses. This investment in the general and administrative function was necessary to support both the overall growth of the company as well as to prepare for being a listed company. $2.1 million is attributable to legal fees incurred with respect to Berkley litigation and legal IP matters. Depreciation and Amortization Year Ended December 31, Change 2019 2020 Amount % (in thousands, except percentages) Depreciation and amortization $ 1,604 $ 4,836 $ 3,232 201 % Depreciation and amortization expense increased by $3.2 million, or 201%, from the year ended December 31, 2019 to the year ended December 31, 2020. Depreciation expense increased by $0.7 million due to the depreciation of equipment and facilities related to capital equipment purchases of $9.7 million in the year. Amortization expense increased by $2.5 million due to the amortization of acquired intangible assets over their respective useful lives. Other (Income) Expense Interest Income Year Ended December 31, Change 2019 2020 Amount % (in thousands, except percentages) Interest income $ (155 ) $ (293 ) $ (138 ) 89 % Interest income increased by $0.1 million, or 89%, from the year ended December 31, 2019 to the year ended December 31, 2020. The increase was primarily driven by a larger average cash balance maintained in the year ended December 31, 2020 compared to the prior period. 87 Interest and Other Expense Year Ended December 31, Change 2019 2020 Amount % (in thousands, except percentages) Interest and other expense $ 209 $ 6,511 $ 6,302 3015 % Interest and other expense increased by $6.3 million, or 3015% from the year ended December 31, 2019 to the year ended December 31, 2020. $4.2 million of the increase relates to combined interest, and cancellation fees and legal fees on early retirement of the OrbiMed credit agreement in July 2020, in addition to interest expense on the credit facility for the period before retirement. Given the nature of these cancellation costs and the Company not having any material debt due to its strong liquidity position at the end of 2020, these expenses are not expected to recur in future periods. Foreign Exchange (Gain) Loss Year Ended December 31, Change 2019 2020 Amount % (in thousands, except percentages) Foreign exchange (gain) loss $ (186 ) $ 300 $ 486 -261 % Foreign exchange (gain) loss increased by $0.5 million from the year ended December 31, 2019 to the year ended December 31, 2020. Foreign exchange gains and losses are driven primarily by the Canadian dollar cash balances that we maintain and the relative exchange rates between Canadian dollars and U.S. dollars. Grants and Incentives Year Ended December 31, Change 2019 2020 Amount % (in thousands, except percentages) Grants and incentives $ (1,774 ) $ (8,320 ) $ (6,546 ) 369 % Grants and incentives increased by $6.5 million, or 369%, from the year ended December 31, 2019 to the year ended December 31, 2020. The increase was primarily driven by expenses for which there was cost recovery related to the SIF project entered into between us and the Government of Canada in April 2020, in the amount of $6.8 million. Any additional cash from the SIF project that we receive for eligible capital expenditure activities will result in recognition of a deferred credit on the balance sheet. Subsequent to the third quarter, a number of expenditures incurred were identified as not being eligible under the SIF project which directly impacted the grant and incentives recovery amounts recognized in the year. These expenditures did not impact the commitment under the SIF project for $125 million of funding from the Government of Canada to AbCellera. Future eligible expenditures for the project and associated reimbursement will be recognized in a subsequent reporting period. Liquidity and Capital Resources As of December 31, 2020, we had $594.1 million of cash and cash equivalents. During 2020, we raised gross proceeds of $75.0 million through the sale and issuance of Series A2 convertible preferred shares in March 2020, a convertible note of $90.0 million to fund the acquisition of Trianni, and gross proceeds of $555.5 million, or $522.8 million net, from our IPO in December 2020. We also secured an additional CAD$175.6 million ($125.6 million) in SIF funding from the Government of Canada for future infrastructure investment to grow the business. In addition to our financings, we also have amounts receivable of $198.3 million at December 31, 2020 that were received subsequent to year end. Immediately prior to the completion of our IPO, our convertible preferred shares and notes were converted to common shares. We have generated positive operating cash flow cumulatively since our inception in 2012 and in every year since 2018. We intend to significantly invest in our business, and as a result may incur operating losses in future periods. We will continue to invest in research and development efforts towards expanding our capabilities and expertise along our technology stack, as well as building our business development team and marketing our solutions to new and existing partners. Based on our current business plan, we believe the net proceeds from this offering, together with our existing cash and cash equivalents and anticipated cash flows from operations, will be sufficient to meet our working capital and capital expenditure needs over at least the next 24 months following the date of this report. 88 Our future capital requirements will depend on many factors, including, but not limited to our ability to successfully secure additional programs under contract with new and existing partners, the successful identification and discovery of antibodies for our partners and the successful development and commercialization by our partners of the antibodies that we deliver. If we are unable to execute on our business plan and adequately fund operations, or if the business plan requires a level of spending in excess of cash resources, we may be required to negotiate partnerships in which we receive greater near-term payments at the expense of potential downstream revenue. Alternatively, we may need to seek additional equity or debt financing, which may not be available on terms acceptable to us or at all. 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 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 preferred equity financing, if available, may involve agreements that include covenants restricting our ability to take specific actions, such as incurring additional debt, selling or licensing our assets, making product acquisitions, making capital expenditures, or declaring dividends. If we are unable to generate sufficient revenue or raise additional capital when desired, our business, financial condition, results of operations and prospects would be adversely affected. Sources of Liquidity Since our inception, we have financed our operations primarily from revenue in the form of research fees and milestone payments from partners, government grants, debt and equity financings. Revenue from Research Fees We receive payments from our partnerships in the form of technology access and discovery research fees as we conduct discovery activities for our partners. Such fees are recognized as revenue in the period when the discovery work is performed. Revenue from Milestone and Royalty Payments We are entitled to additional payments with respect to discovery programs with our partners upon the satisfaction of development and approval milestones, as well as royalties upon sales, if any, by our partners of the antibodies that we discover. In 2020, we received the first milestone and royalty payments related to bamlanivimab, a molecule discovered by us in connection with our partnership with Lilly. Bamlanivimab received Emergency Use Authorization by from the U.S. Food and Drug Administration, or FDA, on November 9, 2020. On November 22, 2020, Lilly was granted authorization for bamlanivimab by Health Canada under the Interim Order Respecting the Importation, Sale and Advertising of Drugs for Use in Relation to COVID-19. Similar authorizations for bamlanivimab have been granted in Europe, the Middle East and Africa. Bamlanivimab together with etesevimab received EUA from the FDA for the treatment of mild-to-moderate COVID-19 in high-risk patients on February 9, 2021. Through its COVID-19 Treatment Guidelines, the National Institutes of Health recommended the use of bamlanivimab together with etesevimab to treat early COVID-19 in high-risk patients on February 23, 2021. Bamlanivimab alone and together with etesevimab received a positive opinion from the European Medicines Agency’s Committee for Medicinal Products for Human Use, on March 5, 2021: the harmonized, European Union, or EU, -level opinion on the efficacy, quality, and safety of the antibodies can be used by EU member states when making decisions on the possible use of the therapies at a national level prior to market authorization. Under our partnership with Lilly, we are entitled to receive a specified percentage of proceeds that Lilly receives from these sales. In 2020, we recognized a total of $198.3 million in royalty revenue related to sales of bamlanivimab. Financings and Option Exercises As of December 31, 2020, we have raised a total of $688.4 million from the issuance of common shares in our IPO, the issuance and sale of convertible preferred shares and notes, common shares, net of costs associated with such financings, and exercises of employee share options. Prior Credit Agreements In 2018, we entered into a credit agreement with Bank of Montreal that provided for a term loan, a revolving credit facility and a facility for travel expenses. Interest on this facility accrued at a prime floating rate plus 1.5% per annum. In March 2020, we retired our term loan and revolving credit facility with Bank of Montreal. We continue to maintain a credit facility for travel expenses. As part of our $105.0 million Series A2 financing in March 2020, we entered into a senior secured credit agreement with OrbiMed, which provided for a term loan in an aggregate amount of $30.0 million for a five-year term. Borrowings under this facility bore interest at a rate per annum equal to an applicable margin of 6% plus the higher of LIBOR for the applicable interest period and 89 1.75%. In July 2020, we repaid funds borrowed under this facility in full and retired the credit facility with OrbiMed. All associated security interests with this credit facility were released. Ministry of Western Economic Diversification under the Western Innovation Initiative Starting in April 2015, we have obtained funding from the Canadian Ministry of Western Economic Diversification, or WD Canada, under the Western Innovation Initiative, or WINN, and the Business Scale-up and Productivity, or BSP, programs. WINN and BSP are Canadian federal government initiatives which provide financing to projects that meet certain program criteria. The funding covers project expenditures for the purchase of capital equipment and the payment of project-related expenses. The terms of these WD Canada loans include a draw of the loan over the three years of a project, one year of no repayments for the loan followed by repayment over five years in equal installments of the principal amount of the loan. These loans are provided at zero interest and are unsecured. As of December 31, 2020, we have three loans with WD Canada for projects started in 2015, 2016, and 2019, representing total available funding of $5.7 million. As of December 31, 2020, approximately $2.4 million remained outstanding that was borrowed under this initiative, and these loans are repayable in installments through to 2028. Government of Canada’s Strategic Innovation Fund In April 2020, we entered into a multi-year agreement with the Canadian government’s Strategic Innovation Fund, or SIF. Under this agreement, up to CAD $175.6 million ($125.6 million) was committed by the Government of Canada to be directed towards two key stages of a project. The first stage will provide financial support to our operations during the work that we perform for the discovery of antibodies against COVID-19. The funding supports investment into equipment, teams and physical space to advance our platform for future pandemic preparedness. The Canadian government has committed up to CAD $63.9 million ($45.7 million) towards this stage of the project, based on costs incurred and paid and such funding is non-repayable. As of December 31, 2020, we have claimed a total of $12.3 million under this first stage of the project. The second stage of the project is intended to fund the expansion of research and development; building out process development and chemistry, manufacturing and control, or CMC, capabilities; constructing a facility for GMP manufacturing; and all related supporting laboratory and office requirements. The project related budget includes project costs for the land and building, the fit out for offices, labs, GMP cleanrooms as well as the equipment required to develop fully functional CMC and GMP capabilities as required to support clinical trials. The Canadian government has committed up to CAD $111.7 million ($79.9 million) for this project, contingent upon costs incurred and paid, with the rest to be co-funded by us through partnering with a developer and taking a co-ownership position in the resulting facilities. Completion and approval of a feasibility study is required to further advance this project and prior to any SIF reimbursement for this stage. SIF funding for this project is expected to occur between 2021 and 2025. Repayment of SIF assistance received for this stage of the project will be calculated as a percentage rate of AbCellera’s revenue, with payment made to the Government of Canada on an annual basis during the repayment period starting in 2027. Repayment on this stage of the project is conditional on revenue thresholds being achieved in seven years, a year following the completion of the project and over the subsequent ten-year period. If the revenue threshold is not met, the SIF funding contribution will be non-repayable. This funding and its associated conditional repayment is not secured by any of our assets or that of the project. As of December 31, 2020, we have claimed a total of $0.1 million under this second stage of the project. We conduct work, incur expenses and fund all costs from our own cash resources. On a quarterly basis, we submit claims to the SIF for eligible reimbursable expenses. As of December 31, 2020, we have claimed a total of $12.4 million under SIF. Cash Flows The following table summarizes our cash flows for the periods presented: Year Ended December 31, 2018 2019 2020 Net cash provided by (used in): Operating activities $ 3,565 $ 2,694 $ 22,691 Investing activities (5,307 ) (5,780 ) (119,780 ) Financing activities 12,186 195 683,653 Net increase (decrease) in cash and cash equivalents, and restricted cash $ 10,444 $ (2,891 ) $ 586,564 90 Operating Activities Net cash provided by operating activities increased by $20.0 million from $2.7 million in the year ended December 31, 2019 to $22.7 million in the year ended December 31, 2020. The increase resulted primarily from increased revenue from discovery research activities, securing new multi-year, multi-target contracts with partners that involved up front technology access fees upon execution of the contract, and payments resulting from the satisfaction of clinical milestones under our partnership with Lilly. Net cash provided by operating activities decreased by $0.9 million from $3.6 million in the year ended December 31, 2018 to $2.7 million in the year ended December 31, 2019. The decrease resulted primarily from fewer large contracts with technology access fees entered into in 2019 as compared to 2018. Investing Activities Net cash used in investing activities was $5.8 million in the year ended December 31, 2019 compared to $119.8 million in the year ended December 31, 2020. The increase in cash used was primarily driven by the acquisition of Trianni, an investment in equity investees related to future facility expansion and investment in a fully paid up license for access to a humanized rodent platform for discovery projects with Alloy Therapeutics. By contrast, in the year ended December 31, 2019, investments were limited to equipment used primarily in our research and development activities. Net cash used in investing activities was $5.3 million during the year ended December 31, 2018 compared to $5.8 million in the year ended December 31, 2019. The increase in cash used was primarily driven by issuance of related party loans. Financing Activities Net cash provided by financing activities was $0.2 million for the year ended December 31, 2019 compared to net cash provided by financing activities of $683.7 million for the year ended December 31, 2020. Net cash provided by financing activities for the year ended December 31, 2020 related primarily to the IPO, SIF funding, convertible note, and the Series A2 financing round closed in March 2020. By contrast, no major equity financing was completed in 2019. Net cash provided by financing activities was $12.2 million for the year ended December 31, 2018 compared to $0.2 million for the year ended December 31, 2019. Net cash provided by financing activities for the year ended December 31, 2018 resulted primarily from the Series A preferred share financing, common share equity issuances, and drawdowns from the Bank of Montreal credit agreement to fund facilities expansion in 2018. Net cash provided by financing activities during the year ended December 31, 2019 resulted primarily from the proceeds from debt at Bank of Montreal used to help finance equipment at our Vancouver Yukon Street facility. Contractual Obligations and Commitments The following table summarizes our commitments to settle contractual obligations at December 31, 2020, other than leases which are recognized as operating lease liabilities in our consolidated balance sheet: Payments Due by Period Total Less than 1 year 1 to 3 Years 3 to 5 Years More than 5 years Long-term debt obligations, including interest (1) $ 3,334 $ 389 $ 1,025 $ 1,212 $ 708 Commitments (2) 113,721 368 11,190 15,831 86,332 Royalty fees payable 27,143 27,143 - - - Contingent consideration payable (3) 22,559 13,411 9,148 - - Total $ 166,757 $ 41,311 $ 21,363 $ 17,043 $ 87,040 (1) Includes obligations outstanding as of December 31, 2020 related to funding obtained from WD Canada under the WINN and BSP programs. The funding covers project expenditures for the purchase of capital equipment and the payment of project-related expenses. The terms of these WD Canada loans include a draw of the loan over the three years of a project, one year of no repayments for the loan followed by repayment over five years in equal installments of the principal amount of the loan. These loans are provided at zero interest and are unsecured. (2) Includes several leased facilities where the lease commencement dates are subsequent to December 31, 2020. (3) As of December 31, 2020, the contingent consideration payable had an estimated fair value of approximately $22.6 million, which has been included as a liability on our consolidated balance sheet. 91 The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. Purchase and Other Obligations In the normal course of business, we enter into contracts with third parties for research and development supplies and other services. These contracts generally do not contain minimum purchase commitments and are cancellable contracts. These payments are not included in the table above as the amount and timing of such payments are not known as of December 31, 2020. The Company may enter into certain agreements with strategic partners in the ordinary course of operations that may include contractual milestone payments related to the achievement of pre-specified research, development, regulatory and commercialization events and indemnification provisions, which are common in such agreements. Pursuant to the agreements, the Company may be obligated to make research and development and regulatory milestone payments upon the occurrence of certain events and upon receipt of royalty payments in the low single-digits to mid-twenties based on certain net sales targets. Other than the amounts included in the above table, these contingent future payments are not included in the table above as they entail uncertainties in relation to the amount and timing of such payments as they are contingent upon future events, such as achieving certain commercial milestones or generating future product sales. Berkeley Lights Litigation In July, August and September 2020, we filed suits against Berkeley Lights, in the U.S. District Court for the District of Delaware alleging that Berkeley Lights directly infringes and indirectly causes infringement of one or more of our patents. On December 3, 2020, the judge assigned to these three lawsuits ordered that they be transferred to the U.S. District Court for the Northern District of California. In August 2020, Berkeley Lights filed suit against us and our subsidiary Lineage Biosciences Inc. in the U.S. District Court for the Northern District of California seeking (i) declaratory judgment of non-infringement of U.S. Patent No. 10,058,839, or the 839 patent; (ii) a finding of unfair competition and false advertising under the Lanham Act; and (iii) a finding of unfair business practices under the California Business and Professions Code. We believe the action filed by Berkeley Lights is without merit and have moved to dismiss the above action for lack of jurisdiction and failure to state a claim upon which relief can be granted pursuant to Federal Rules of Civil Procedure 12(b) 1, 2, and 6. See Item 3 “Legal Proceedings” for additional information. The timing of the incurrence of legal expenses relating to pending litigation is difficult to predict and the outcome of litigation is inherently uncertain. Related costs and outcomes could materially affect our financial condition and operating results in future periods. Off-Balance Sheet Arrangements We have no undisclosed off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our results of operations or financial condition. Critical Accounting Policies and Estimates We have prepared our consolidated financial statements in accordance with U.S. GAAP. Our preparation of these consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 3 to our audited consolidated financial statements, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements. Revenue Recognition Our revenue currently primarily consists of research fees, milestone payments and royalty revenue, which are generated through our performance of antibody discovery research for our partners. Promised deliverables to our global partners include research and development. The Company applied ASC 606 to all arrangements to date. 92 In accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers , or ASC 606, we account for revenue from contracts with partners, whom we view as customers under ASC 606, which includes 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. For instances where promises are not distinct at contract inception , they are combined into a single performance obligation. An option to acquire additional goods and/or services is evaluated on both quantitative and qualitative aspects to determine if such an option provides a material right to the customer that the customer would not have received without entering into the contract. If so, the option is accounted for as a separate performance obligation. If not, the option is considered a marketing offer and is accounted for as a separate contract upon the customer’s election. When applying the revenue recognition criteria of ASC 606 to research fees and milestone payments, management applies significant judgment when evaluating whether contractual obligations represent distinct performance obligations; allocating transaction price to performance obligations within a contract; determining when performance obligations have been met; assessing the recognition and future reversal of variable consideration; and when determining and applying appropriate methods of measuring progress for performance obligations satisfied over time. We allocate the transaction price to each performance obligation identified in the contract on a relative standalone selling price basis. Revenue is recognized based on the amount of the transaction price that is allocated to each respective performance obligation when or as the performance obligation is satisfied by transferring a promised good and/or service to the customer. We generally use output methods to measure the progress toward satisfaction of performance obligations that are satisfied over time. Due to different types of end customers and differences in the nature of work involved, revenue contracts require formal inspection and approval of experiments and research plans at each stage of work. Therefore, the output method is the most faithful depiction of our performance. Research Fees. We negotiate technology access fees and discovery research fees in our partnership contracts that are recognized as revenue in the period when the discovery work is performed. The transaction price generally includes fixed fees due at contract inception as well as fixed fees payable at the beginning and end of different phases of the discovery research services performed. We utilize either the expected value method or the most likely amount method to estimate the amount of variable consideration to include in the transaction price, as most appropriate in the circumstances. Milestone Payments. At the inception of the arrangement, we evaluate whether the associated event is considered probable of achievement and estimate the amount to be included in the transaction price using the most likely amount method. In determining the transaction price, we constrain the transaction price for variable consideration to limit its inclusion so that it only includes the amount that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The process of successfully achieving the criteria for the milestone payments is highly uncertain. Consequently, there is a significant risk that we may not earn all of the milestone payments from each of our arrangements. Management applies significant judgment when assessing the likelihood of milestones being achieved and when allocating the transaction price to each performance obligation for revenue recognition purposes. Royalty Revenue. Royalty revenue is recognized in the period in which the obligation is satisfied and the corresponding sales by our corporate partners occur. Business Combination, Goodwill and Intangible Assets Acquisitions of businesses are accounted for using the acquisition method. The consideration of a business combination is measured, at the date of the exchange, as the aggregate of the fair value of assets given, liabilities incurred or assumed and equity instruments issued by us to the former owners of the acquiree in exchange for control of the acquiree. Acquisition related costs incurred for the business combination are expensed. The acquiree’s identifiable assets, liabilities and contingent liabilities are recognized at their fair value at the acquisition date. Goodwill arising on acquisition is recognized as an asset and initially measured at cost, being the excess of the consideration of the acquisition over our interest in the fair value of the net identifiable assets, liabilities and contingent liabilities recognized. If our interest in the fair value of the acquiree’s net identifiable assets, liabilities and contingent liabilities exceeds the cost of the acquisition, the excess is recognized in earnings or loss immediately. Goodwill, which is not amortized, will be evaluated for impairment on an annual basis on October 1 or more frequently if an indicator of impairment is present. Goodwill is subject to a two-step impairment test on an annual basis. The first step compares the fair value of the reporting unit to its carrying amount, which includes the goodwill. When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired, and the second step of the impairment test is unnecessary. If the carrying amount exceeds the implied fair value of the reporting unit, the second step measures the amount of the impairment loss. If the carrying amount exceeds the fair value of the reporting unit, an impairment loss is recognized equal to that excess. 93 As part of our acquisition of Trianni on November 3, 2020, Goodwill, License, Technology and In-Process Research and Development Intangible (“IPR&D”) intangible assets were recognized. The fair value of the aggregate intangible assets was determined to be $103.6 million and goodwill was $31.5 million at the acquisition date. IPR&D is classified as indefinite-lived and is not amortized. IPR&D becomes definite-lived upon the completion or abandonment of the associated research and development efforts. License and Technology intangible assets with finite useful lives are amortized on a straight-line basis over their estimated useful lives, which was based on an analysis of the expected use of the asset by us, any legal, regulatory or contractual provisions that may limit the useful life, the effects of obsolescence, competition and other relevant economic factors, and consideration of the expected cash flows used to measure the fair value of the intangible asset. Amortization begins when intangible assets with finite lives are put into use. If events or changes in circumstances indicate impairment, the Company measures recoverability by a comparison of the asset’s carrying amount to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. The costs incurred in establishing and maintaining patents for intellectual property developed internally are expensed in the period incurred . In connection with our acquisition of Trianni, we may be required to make future payments to former shareholders of Trianni upon the achievement of certain earn-out provisions related to a specific customer license ending on April 9, 2024. As of December 31, 2020, the contingent consideration payable had an estimated fair value of approximately $22.6 million, which has been included as a long-term liability on our consolidated balance sheet. Contingent consideration payable is a financial liability and measured at its fair value at each reporting period, with any changes in fair value from the previous reporting period recorded in the statement of income (loss) and comprehensive income (loss). See Note 19 to our consolidated financial statements detailing the accounting for the Trianni acquisition, including the valuation methodology and key assumptions we used in estimating the fair value of the assets acquired, liabilities assumed, and contingent consideration payable. Stock-Based Compensation We measure stock-based compensation based on the grant date fair value of the stock-based awards and recognize stock-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. Awards with an exercise price which is not denominated in: (a) the currency of a market in which a substantial portion of our equity securities are traded, (b) the currency in which the individual’s pay is denominated, or (c) our functional currency, are classified as liabilities, and are subsequently re-measured to fair value at each balance sheet date until exercised or cancelled, with changes in fair value recognized as compensation cost for the period. Stock-based compensation expense is classified in our consolidated statements of income (loss) and comprehensive income (loss) based on the function to which the related services are provided. We recognize stock-based compensation expense for the portion of awards that have vested. Forfeitures are accounted for as they occur. The fair value of each 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. Prior to our IPO, as there was no public market for our common shares, we determined the volatility for awards granted with reference to an analysis of reported data for a group of guideline companies that issued options with substantially similar terms. We expect to continue to do so until we have adequate historical data regarding the volatility of the trading price of our common shares on the Nasdaq Stock Market. The risk-free interest rate is determined by reference to the Bank of Canada Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The expected term represents the period that the stock-based awards are expected to be outstanding. We use the simplified method to determine the expected term, which is based on the average of the time-to-vesting and the contractual life of the options. We have not paid, and do not anticipate paying, dividends on our common shares; therefore, the expected dividend yield is assumed to be zero. As there has been no public market for our common shares prior to our IPO, the historical estimated fair value of our common shares has been approved by our board of directors. Our board of directors determined the per-share fair value of our common shares in connection with option grants as equal to the per-share issuance price of our common shares in the then-most recent arms’ length financing transaction, and when appropriate, considered our most recently available independent third-party valuations of common shares and our operating results and financial performance. 94 In accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation , third-party valuation firms prepared valuations of our common shares. From November 2019 until March 2020, such valuations used a discounted cash flow, or DCF, analysis, which is based on management’s projection of future revenues and costs. The future cash flows are adjusted to arrive at a risk-adjusted present-day value of the future cash flows and fair value of equity. From March 2020 to July 2020, such valuations used a methodology that calculated the implied total value of an enterprise by accounting for all share class rights and preferences, as of the date of the latest financing. The total equity value implied by this transaction was then applied in the context of an option pricing model to determine the value of each class of our shares. The analysis used an option pricing method, or OPM, which treats common shares and preferred shares as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. The OPM takes into account the preferred shareholders’ liquidation preferences, participation rights, dividend policy and conversion rights to determine how proceeds from a liquidity event will be distributed among various ownership classes at a future date. A discount for lack of marketability of the common shares is then applied to arrive at an indication of value for the common shares. After July 2020, in contemplation of this offering, such valuations estimated the enterprise value of our business using a hybrid approach in determining the fair value of our common shares that includes a probability-weighted expected return method, or PWERM and the OPM. Under a PWERM, the fair market value of our common shares is estimated based upon an analysis of future values for the enterprise assuming various future outcomes. Based on the timing and nature of an assumed liquidity event in each scenario, a discount for lack of marketability would be applied to each scenario, as appropriate. The probability-weighted the value of each expected outcome would then be used to arrive at an estimate of fair value per common share. Our third-party valuation reports estimated a valuation of our common shares of $1.24 per share as of June 30, 2020, $2.37 per share as of September 30, 2020 and $2.71 per share as of October 31, 2020. No third-party valuation report was prepared for any period after October 31, 2020. In addition to considering the results of the third-party valuations, our board of directors considered various objective and subjective factors to determine the fair value of our common shares as of each grant date, which may be a date other than the most recent third-party valuation date, including: • the prices at which we most-recently sold preferred shares and the superior rights and preferences of the preferred shares relative to our common shares at the time of each grant; • the lack of liquidity of our equity as a private company; • our stage of development and business strategy and the material risks related to our business and industry; • our financial condition and operating results, including our levels of available capital resources and forecasted results; • developments in our business, including the achievement of milestones such as entering into partnering agreements; • the valuation of publicly traded companies in the life sciences, biopharmaceutical and healthcare technology sectors, as well as recently completed mergers and acquisitions of peer companies; • any external market conditions affecting our industry, and trends within our industry; • the likelihood of achieving a liquidity event for the holders of our preferred shares and holders of our common shares, such as an initial public offering, or IPO, or a sale of our company, given prevailing market conditions; and • the analysis of IPOs and the market performance of similar companies in our industry. For purposes of determining the fair value of our common shares for the awards granted in October, 2020, we also considered the applicability of the following factors and determined not to assign probability weightings to the potential occurrence of such events for the reasons discussed below: • The application by Eli Lilly on October 7, 2020 for EUA for the bamlanivimab single agent therapy to the FDA was not assigned a probability weighting due to the significant general risks and uncertainties in drug therapy applications with the FDA, in addition to the binary nature and outcome of the EUA application assessment. While we were aware that an EUA application was submitted to the FDA, we were not a party to the application, nor did we have control over its contents. In addition, we were not involved in any interactions with the FDA in relation to this application and therefore had little insight into the status of the application, the nature of any questions or comments raised by the agency in its review or any likelihood of the grant of the EUA. • The October 28, 2020 announcement by Eli Lilly of an agreement with the U.S. government to supply 300,000 vials of bamlanivimab for $375.0 million for which we are eligible to receive royalties in the low- to mid-twenties was not assigned a 95 probability weighting due to the substantial uncertainty as to the likelihood of receipt of the EUA that is a precondition for any sales of the antibody to occur and upon which our eligibility to receive royalties depends. • The process of acquiring Trianni, Inc. was not assigned a probability weighting because the proposed acquisition was to be made at fair value of the net assets acquired, the acquisition was not completed until November 3, 2020 and not publicly announced until November 18, 2020. Until such announcement, we had no insight into market reaction to this acquisition and its perceived impact on our valuation. The assumptions underlying these valuations represented management’s best estimates, which involved inherent uncertainties and the application of management’s judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, the fair value of our common shares and our stock-based compensation expense could be materially different. Stock options granted after October 2020 and prior to our IPO, the awards had a per-share exercise price based on the factors described above. The EUA application for the bamlanivimab single agent therapy was granted by the FDA on November 9, 2020. Following the completion of our IPO, the fair value of our common shares are determined based on the quoted market price of our common shares. See Note 11 to our consolidated financial statements concerning additional stock-based compensation expense and certain specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options granted in the years ended December 31, 2018, 2019 and 2020. Recent Accounting Pronouncements See Note 3 to our annual consolidated financial statements appearing elsewhere in this Annual Report for a description of recent accounting pronouncements applicable to our consolidated financial statements. Impact of the COVID-19 Pandemic In March 2020, the World Health Organization declared the outbreak of a novel coronavirus, or COVID-19, as a pandemic, which continues to spread throughout the United States and worldwide. As with many companies around the world, our day to day operations were disrupted with the imposition of work from home policies and requirements for physical distancing for any personnel present in our offices and laboratories. The pandemic has also disrupted our sales and marketing activities as shelter-in-place orders, quarantines, travel restrictions and other public health safety measures have impacted our ability to interact with our existing and potential partners for our solutions. There is significant uncertainty as to the trajectory of the pandemic and its impacts on our business in the future. We could be materially and adversely affected by the risks, or the public perception of the risks, related to the COVID-19 pandemic or similar public health crises. Such crises could adversely impact our ability to conduct on-site laboratory activities, expand our laboratory facilities, secure critical supplies such as reagents, laboratory tools or immunized animals required for discovery research activities, and hire and retain key personnel. The ultimate extent of the impact of any epidemic, pandemic, outbreak, or other public health crisis on our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of such epidemic, pandemic, outbreak, or other public health crisis and actions taken to contain or prevent the further spread, among others. Accordingly, we cannot predict the extent to which our business, financial condition and results of operations will be affected. We remain focused on maintaining our operations, liquidity and financial flexibility and continue to monitor developments as we deal with the disruptions and uncertainties from the COVID-19 pandemic. JOBS Act Accounting Election We qualify as an “emerging growth company” as defined in the JOBS Act. An emerging growth company may take advantage of reduced reporting requirements that are not otherwise applicable to public companies. These provisions include, but are not limited to: • not being required to comply with the auditor attestation requirements on the effectiveness of our internal controls over financial reporting; • not being required to comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis); 96 • reduced disclosure obligations regarding executive compensation arrangements; and • exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may use these provisions until the last day of our fiscal year in which the fifth anniversary of the completion of this offering occurs. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenue exceeds $1.07 billion, or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period. The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards, until those standards apply to private companies. We have elected to take advantage of the benefits of this extended transition period and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards. Until the date that we are no longer an emerging growth company or affirmatively and irrevocably opt out of the exemption provided by Section 7(a)(2)(B) of the Securities Act upon issuance of a new or revised accounting standard that applies to our financial statements and that has a different effective date for public and private companies, we will disclose the date on which we will adopt the recently issued accounting standard. 97