AbCellera Biologics Inc. 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO) (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon our evaluation of the Company’s disclosure controls and procedures, as of December 31, 2020, the CEO and the CFO concluded that the disclosure controls were not effective, due to the material weaknesses in internal control over financial reporting described below, to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure and were not effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Internal Control Over Financial Reporting Management’s Report on Internal Control Over Financial Reporting This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our independent registered public accounting firm due to a transition period established by rules of the SEC for newly public companies. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d 15(f) under the Exchange Act) that occurred during the period covered by this annual report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Ongoing Remediation of Material Weakness in Internal Control over Financial Reporting As previously disclosed in our Registration Statement on Form S-1 (File No. 333-250838), which was declared effective by the SEC on December 10, 2020, and in connection with the preparation and audits of our financial statements as of and for the years ended December 31, 2018 and 2019, a material weakness (as defined under the Exchange Act and by the auditing standards of the U.S. Public Company Accounting Oversight Board, or “PCAOB”), was identified in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual financial statements will not be prevented or detected on a timely basis. Specifically, there was a material adjustment in our financial statements required due to an overstatement of lease liability upon adoption of ASU 2016-02, Leases (Topic 842), as well as certain other adjustments to our financial statements as of and for the years ended December 31, 2018 and 2019. In the aggregate, such adjustments amounted to a material weakness. The material weakness resulted from a lack of resources and experience within our finance function with respect to our transition to U.S. GAAP, and our change in measurement currency from Canadian dollars to U.S. dollars. The material weakness has not been remediated as of December 31, 2020. There were no material adjustments required in the 2020 annual consolidated financial statements due this material weakness. 99 We have begun taking significant measures, and plan to continue to take measures, to remediate this material weakness. These measures include hiring and engaging additional accounting personnel with familiarity with reporting under U.S. GAAP, and implementing and adopting additional controls and procedures. These remediation measures may be time consuming, costly, and might place significant demands on our financial and operational resources. Although we have made enhancements to our control procedures in this area, the material weaknesses will not be remediated until the necessary controls have been implemented and are operating effectively. See Item 1A. “Risk Factors. Item 9B. Other Information. None. 100 PART III Item 10. Directors, Executive Officers and Corporate Governance. The information required by this item will be included in our definitive proxy statement with respect to our 2021 Annual Meeting of Shareholders to be filed with the SEC, and is incorporated herein by reference. Item 11. Executive Compensation. The information required by this item will be included in our definitive proxy statement with respect to our 2021 Annual Meeting of Shareholders to be filed with the SEC, and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this item will be included in our definitive proxy statement with respect to our 2021 Annual Meeting of Shareholders to be filed with the SEC, and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this item will be included in our definitive proxy statement with respect to our 2021 Annual Meeting of Shareholders to be filed with the SEC, and is incorporated herein by reference. Item 14. Principal Accounting Fees and Services. The information required by this item will be included in our definitive proxy statement with respect to our 2021 Annual Meeting of Shareholders to be filed with the SEC, and is incorporated herein by reference. 101 PART IV Item 15. Exhibits, Financial Statement Schedules. (a) The following documents are filed as part of this Annual Report on Form 10-K: 1) The consolidated financial statements filed as part of this Annual Report on Form 10-K are listed in the “Index to Consolidated Financial Statements” under Part II, Item 8 of this Annual Report on Form 10-K. 2) No schedules are submitted because they are not applicable, not required or because information is included in the consolidated financial statements or the notes thereto. 3) The exhibits required by Item 601 of Regulation S-K and Item 15(b) of this Annual Report on Form 10‑K are listed in the Exhibit Index immediately preceding the signature page of this Annual Report on Form 10‑K. The exhibits listed in the Exhibit Index are incorporated by reference herein. Item 16. Form 10-K Summary None. Item 6. Exhibits. Exhibit Index. Exhibit No. Description 3.1* Articles of the Registrant, as currently in effect. 4.1 Amended and Restated Investors Rights Agreement among the Registrant and certain of its shareholders, dated March 23, 2020 (incorporated by reference to Exhibit 4.1 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-250838) filed on November 20, 2020). 4.2 Form of Specimen Common Share Certificate (incorporated by reference to Exhibit 4.2 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-250838) filed on December 7, 2020). 4.3* Description of Securities. 10.1 Lease between 0775021 BC Ltd. and the Registrant dated June 2, 2017, as amended (incorporated by reference to Exhibit 10.1 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-250838) filed on November 20, 2020). 10.2 † Research Collaboration and License Agreement between the Registrant and Eli Lilly and Company, dated March 11, 2020 (incorporated by reference to Exhibit 10.2 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-250838) filed on November 20, 2020). 10.3 † Patent License Agreement between the U.S. Department of Health and Human Services, as represented by National Institute of Allergy and Infectious Diseases and the Registrant, dated May 4, 2020 (incorporated by reference to Exhibit 10.3 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-250838) filed on November 20, 2020). 10.4 † License Agreement between the Board of Trustees of the Leland Stanford Junior University and Lineage Biosciences Inc., dated February 11, 2015 (incorporated by reference to Exhibit 10.4 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-250838) filed on November 20, 2020). 10.5 † Amendment No. 1 to License Agreement between the Board of Trustees of the Leland Stanford Junior University and Lineage Biosciences Inc., dated March 22, 2017 (incorporated by reference to Exhibit 10.5 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-250838) filed on November 20, 2020). 10.6 † License Agreement between the University of British Columbia and the Registrant dated December 16, 2013 (incorporated by reference to Exhibit 10.6 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-250838) filed on November 20, 2020). 10.7 † Strategic Innovation Fund Agreement between the Registrant and her Majesty the Queen in right of Canada as represented by the Minister of Industry, dated April 11, 2020 (incorporated by reference to Exhibit 10.7 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-250838) filed on November 20, 2020). 102 10.8 # Employment Agreement between the Registrant and Carl L. G. Hansen, Ph.D., dated August 1, 2019, as amended (incorporated by reference to Exhibit 10.8 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-250838) filed on December 7, 2020). 10.9 # Employment Agreement between the Registrant and Andrew Booth, dated April 12, 2019 (incorporated by reference to Exhibit 10.9 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-250838) filed on December 7, 2020). 10.10 # Employment Agreement between the Registrant and Tryn Stimart, dated July 10, 2019 (incorporated by reference to Exhibit 10.10 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-250838) filed on December 7, 2020). 10.11 # Employment Agreement between the Registrant and Véronique Lecault, Ph.D., dated December 20, 2016, as amended (incorporated by reference to Exhibit 10.11 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-250838) filed on December 7, 2020). 10.12 # Sixth Amended and Restated Stock Option Plan, and form of award agreement thereunder (incorporated by reference to Exhibit 10.12 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-250838) filed on December 7, 2020). 10.13 # 2020 Share Option and Incentive Plan and forms of award agreements thereunder (incorporated by reference to Exhibit 10.13 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-250838) filed on December 7, 2020). 10.14 # Senior Executive Cash Incentive Bonus Plan (incorporated by reference to Exhibit 10.14 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-250838) filed on December 7, 2020). 10.15 # 2020 Employee Share Purchase Plan (incorporated by reference to Exhibit 10.15 of the Registrant’s Registration Statement on Form S-1 (File No. 333-250838) filed on December 7, 2020). 10.16 # Executive Severance Plan (incorporated by reference to Exhibit 10.16 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-250838) filed on December 7, 2020). 10.17 # Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.17 of the Registrant’s Registration Statement on Form S-1 (File No. 333-250838) filed on December 7, 2020). 21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-250838) filed on December 7, 2020). 23.1* Consent of KPMG LLP, Independent Registered Public Accounting Firm 31.1* Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2* Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Filed herewith † Portions of this exhibit (indicated by asterisks) have been omitted in accordance with the rules of the Securities and Exchange Commission. # Indicates a management contract or any compensatory plan, contract or arrangement. 103 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized . ABCELLERA BIOLOGICS INC. Date: March 30, 2021 By: /s/ Carl L. G. Hansen Carl L.G. Hansen, Ph.D. Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Name Title Date /s/ Carl L. G. Hansen Chief Executive Officer and Director ( Principal Executive Officer ) March 30, 2021 Carl L. G. Hansen, Ph.D. /s/ Andrew Booth Chief Financial Officer ( Principal Financial Officer and Principal Accounting Officer ) March 30, 2021 Andrew Booth /s/ Véronique Lecault Director March 30, 2021 Véronique Lecault, Ph.D. /s/ John Edward Hamer Director March 30, 2021 John Edward Hamer, Ph.D. /s/ Michael Hayden Director March 30, 2021 Michael Hayden, Ph.D. /s/ John S. Montalbano Director March 30, 2021 John S. Montalbano /s/ Peter Thiel Director March 30, 2021 Peter Thiel 104 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2019 and 2020 F-3 Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the Years ended December 31, 2018, 2019, and 2020 F-4 Consolidated Statements of Stockholders’ Equity for the Years ended December 31, 2018, 2019 and 2020 F-5 Consolidated Statements of Cash Flows for the Years ended December 31, 2018, 2019, and 2020 F-6 Notes to Consolidated Financial Statements F-7 F-1 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors AbCellera Biologics Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of AbCellera Biologics Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income (loss) and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. Change in Accounting Principle As discussed in Note 4 to the consolidated financial statements, the Company has changed its accounting policy for leases as of January 1, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases . Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KPMG LLP Chartered Professional Accountants We have served as the Company’s auditor since 2017. Vancouver, Canada March 25, 2021 F-2 AbCellera Biologics Inc. Consolidated Balance Sheets (Expressed in thousands of U.S. dollars except share data) December 31, 2019 December 31, 2020 Assets Current assets: Cash and cash equivalents $ 7,553 $ 594,116 Accounts receivable 2,124 903 Accrued accounts receivable 1,152 212,336 Other current assets 1,811 5,970 Total current assets 12,640 813,325 Long term assets: Property and equipment, net 8,480 17,923 Intangible assets - 115,153 Goodwill - 31,500 Equity investee - 19,247 Other long-term assets 585 8,388 Loans to related parties 1,783 - Total long-term assets 10,848 192,211 Total assets $ 23,488 $ 1,005,536 Liabilities and shareholders' equity Current liabilities: Accounts payable and accrued liabilities $ 2,579 $ 20,005 Current portion of contingent consideration payable - 13,411 Income taxes payable - 36,152 Accrued royalties payable - 27,143 Deferred revenue 3,236 6,589 Current portion of long-term debt 2,080 190 Total current liabilities 7,895 103,490 Long-term liabilities: Operating lease liability 2,642 3,715 Long-term debt 1,363 2,198 Deferred revenue and grant funding 1,336 25,894 Contingent consideration payable - 9,148 Deferred tax liability - 26,161 Other long-term liabilities - 4,422 Total long-term liabilities 5,341 71,538 Total liabilities 13,236 175,028 Commitments and contingencies Shareholders' equity: Common shares: no par value, unlimited authorized shares at December 31, 2019 and 2020: 151,681,382 and 269,497,768 shares issued and outstanding at December 31, 2019 and 2020 respectively 5,122 710,387 Convertible preferred shares unlimited authorized shares at December 31, 2019 and 2020: 2,105,264 and nil issued and outstanding at December 31, 2019 and 2020 respectively 7,546 - Additional paid-in capital 2,300 5,919 Accumulated earnings (deficit) (4,716 ) 114,202 Total shareholders' equity 10,252 830,508 Total liabilities and shareholders' equity $ 23,488 $ 1,005,536 Subsequent events The accompanying notes are an integral part of these consolidated financial statements. F-3 AbCellera Biologics Inc. Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) (Expressed in thousands of U.S. dollars except share and per share data) 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) and comprehensive income (loss) for the period $ 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 The accompanying notes are an integral part of these consolidated financial statements. 1 Exclusive of depreciation and amortization F-4 AbCellera Biologics Inc. Consolidated Statements of Stockholders’ Equity (Expressed in thousands U.S. dollars except share data) Series A1 Preferred Shares Series A2 Preferred Shares Common Shares Additional Paid-in Accumulated Earnings Total Shareholders' Shares Amount Shares Amount Shares Amount Capital (Deficit) Equity Balances as at December 31, 2017 - $ - - $ - 141,885,067 $ 2,393 $ 901 $ (2,814 ) $ 480 Shares issued for cash - - - - 8,016,315 2,612 - - 2,612 Shares issued under stock option plan - - - - 1,040,000 69 (33 ) - 36 Preferred shares issued 2,105,264 7,557 - - - - - - 7,557 Stock-based compensation expense - - - - - - 615 - 615 Net earnings - - - - - - - 309 309 Balances as at December 31, 2018 2,105,264 7,557 - - 150,941,382 5,074 1,483 (2,505 ) 11,609 Shares issued under stock option plan - - - - 740,000 48 (23 ) - 25 Issuance costs - (11 ) - - - - - - (11 ) Stock-based compensation expense - - - - - - 840 - 840 Net loss - - - - - - - (2,211 ) (2,211 ) Balances as at December 31, 2019 2,105,264 7,546 - - 151,681,382 5,122 2,300 (4,716 ) 10,252 Issuance of Series A2 preferred shares - - 6,017,784 74,662 - - - - 74,662 Shares issued under stock option plan - - - - 2,719,882 1,450 (508 ) - 942 Share-based compensation expense - - - - - - 4,127 - 4,127 Issuance of common shares upon initial public offering, net of issuance costs of $32,609 (net of tax $8,462) - - - - 27,772,500 531,302 - - 531,302 Conversion of Series A1 and A2 preferred shares (2,105,264 ) (7,546 ) (6,017,784 ) (74,662 ) 81,230,480 82,208 - - - Conversion of convertible note - - - - 6,093,524 90,305 - - 90,305 Net earnings - - - - - - - 118,918 118,918 Balances as at December 31, 2020 - $ - - $ - 269,497,768 $ 710,387 $ 5,919 $ 114,202 $ 830,508 The accompanying notes are an integral part of these consolidated financial statements. F-5 AbCellera Biologics Inc. Consolidated Statements of Cash Flows (Expressed in thousands of U.S. dollars) December 31, 2018 December 31, 2019 December 31, 2020 Cash flows from operating activities: Net income (loss) $ 309 $ (2,211 ) $ 118,918 Cash flows from operating activities: Depreciation of property and equipment 918 1,604 2,317 Amortization of intangible assets - - 2,519 Amortization of operating lease right-of-use-assets - 243 435 Stock-based compensation 615 890 8,397 Extinguishment of long-term debt - - 3,700 Accretion and other (188 ) 194 830 Deferred tax expense - - 2,098 Unrealized foreign exchange gains and losses - - 177 Changes in operating assets and liabilities: Accounts and accrued research fees receivable (477 ) (1,803 ) (5,467 ) Accrued royalties receivable - - (197,553 ) Investment tax credit receivable (1,208 ) 1,593 - Income taxes payable - - 36,412 Accounts payable and accrued liabilities 180 150 6,601 Operating lease liabilities 310 2,784 (350 ) Deferred revenue 3,247 (6 ) 21,810 Accrued royalties payable - - 27,143 Other operating assets and liabilities (141 ) (744 ) (5,297 ) Net cash provided by operating activities 3,565 2,694 22,690 Cash flows from investing activities: Purchases of property and equipment (5,307 ) (3,997 ) (9,673 ) Purchase of intangible assets - - (5,000 ) Repayment (issuance) of related party loans - (1,783 ) 1,783 Acquisition of Trianni - - (87,643 ) Investment in equity investees - - (19,247 ) Net cash used in investing activities (5,307 ) (5,780 ) (119,780 ) Cash flows from financing activities: Repayment of long-term debt (899 ) (399 ) (19,942 ) Proceeds from long-term debt 2,911 193 15,490 Proceeds from convertible debentures - - 89,990 Short-term borrowings (32 ) 387 (387 ) Issuance of common shares pursuant to exercise of stock options 37 25 1,000 Net proceeds from issuance of common shares 2,612 - 522,840 Proceeds from issuance of preferred shares - series A1 financing 7,557 (11 ) - Proceeds from issuance of preferred shares - series A2 financing - - 74,662 Net cash provided by financing activities $ 12,186 $ 195 $ 683,653 Increase (decrease) in cash and cash equivalents 10,444 (2,891 ) 586,563 Cash and cash equivalents, beginning of year - 10,444 7,553 Cash and cash equivalents, end of year $ 10,444 $ 7,553 $ 594,116 Supplemental disclosure of non-cash investing and financing activities: Property and equipment purchases in accounts payable 548 35 656 Right-of-use assets obtained in exchange for operating lease obligation - 2,830 1,679 Purchase of intangible assets in exchange for in-licensing agreement payable 9,060 The accompanying notes are an integral part of these consolidated financial statements. F-6 AbCellera Biologics Inc. Notes to Consolidated Financial Statements (Expressed in thousands of U.S. dollars except share and per share data) 1. Nature of operations AbCellera Biologics Inc.’s (the “Company”) mission is to improve health with technologies that transform the way that antibody-based therapies are discovered. The Company aims to become the centralized operating system for next generation antibody discovery. The Company’s full-stack, AI-powered drug discovery platform searches and analyzes the database of natural immune systems to find antibodies that can be developed as drugs. The Company believes its technology increases the speed and the probaiblity of success of theraputic antibody discovery, including enabling discovery against targets that may otherwise be intractable. Rather than advancing its own clinical pipeline of drug candidates, the Company forges partnerships with drug developers of all sizes, from large cap pharmaceutical to small biotechnology companies. 2. Basis of presentation These consolidated financial statements are presented in U.S. dollars and have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated. All amounts expressed in the consolidated financial statements of the Company and the accompanying notes thereto are expressed in thousands of U.S. dollars, except for share and per share data and where otherwise indicated. References to “$” are to U.S. dollars and references to “C$” and “CAD” are to Canadian dollars. Stock split On December 4, 2020, the Board of Directors of the Company approved a 1-for-10 forward stock split of its issued and outstanding common shares and stock options, which was affected on December 4, 2020. All share and per share information in these consolidated financial statements has been retroactively restated to reflect the stock split. Initial public offering The Company’s registration statement on Form S-1 related to its initial public offering (“IPO”) was declared effective on December 10, 2020, by the SEC, and the Company’s common shares began trading on the Nasdaq on December 11, 2020. Upon close of the IPO, the Company sold 27,772,500 common shares at a price to the public of $20.00 per share. The Company received gross proceeds of $555.5 million, or aggregate net proceeds of $522.8 million, after deducting offering costs, underwriting discounts and commissions. Immediately prior to the completion of the IPO, all convertible preferred stock and notes then outstanding converted into an equivalent number of shares of common shares. 3. Significant accounting policies Use of estimates The preparation of the consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Areas of significant estimates include, but are not limited to, revenue recognition including estimated timing of completion of performance obligations and determining whether an option for additional goods or services represents a material right, recoverability of investment tax credits receivable, value of contingent consideration payable and the fair value of stock-based compensation awards. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates when there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could significantly differ from those estimates. F-7 COVID-19 Pandemic With the global spread of the ongoing COVID-19 pandemic, the Company has implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on its employees and its business. The Company has taken measures to secure its research and development activities, while work in its laboratories and facilities has been re-organized to reduce risk of COVID-19 transmission. Given the global economic impact, the overall disruption of global healthcare systems and the other risks and uncertainties associated with the pandemic, the Company’s business, financial condition, and results of operations could be materially adversely affected. The Company continues to closely monitor the COVID-19 pandemic as it evolves its business continuity plans and response strategy. As of the date of these financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update its estimates, assumptions and judgments or revise the carrying value of its assets or liabilities. Actual results could differ from these estimates, and any such differences may be material to the Company’s financial statements. Revenue recognition The Company accounts for revenue from contracts with customers, which includes the identification and assessment of the goods and/or services promised within a contract to evaluate which promises are distinct from each other. Promises that are not distinct at contract inception 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 it 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. The Company applied ASC 606 to all arrangements to date. The terms of our arrangements generally include the payment of one or more of the following: (i) non-refundable, up-front fixed fees, (ii) fixed fees for ‘discovery’ research support, (iii) fixed technology assignment fees, (iv) fixed payments based on the achievement of specified development and/or commercial milestones, (v) royalties on net sales by the customer of licensed products, and in some cases, (vi) early termination penalties, and (vii) reimbursements for costs incurred to fulfill the contract with the customer at cost or at cost plus an agreed upon mark-up. 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 support services performed. The Company utilizes 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. With respect to development and commercial milestone payments, at the inception of the arrangement, the Company evaluates 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 the Company constrains 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 Company allocates 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. The Company generally uses output methods to measure the progress toward satisfaction of performance obligations that are satisfied over time. Due to different types of end customers and 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 the Company’s performance. Royalty revenue is recognized in the period in which the obligation is satisfied and the corresponding sales by our corporate partners occur. Segmented and Enterprise-wide information The Company manages its operations as a single operating segment for the purposes of assessing performance and making operating decisions. The Company’s focus is on the discovery and development of antibodies. The Company’s revenues from external customers in which the services originated were in Canada in 2018, 2019 and 2020. The Company’s long-term assets excluding financial instruments were in Canada in 2018 and 2019, and at December 31, 2020, $133.7 million was in the U.S. and $58.5 million was in Canada. F-8 Government grants and credits Government grants are recognized when there is reasonable assurance that the grant will be received, and all associated conditions will be complied with. Reimbursements of eligible expenditures pursuant to government assistance programs are recorded when the related costs have been incurred and there is reasonable assurance regarding collection of the claim. The Company receives payments from the government of Canada as investment tax credits for scientific research and experimental development expenditures. The benefits of investment tax credits are recognized in the year the qualifying expenditure is made providing there is reasonable assurance of recoverability. The Company records the investment tax credits based on its estimates of amounts expected to be recovered. Government grants and credits received for expenditures on eligible research, development and capital expenditures are recognized ratably over the benefit period of the related expenditure for which the grants are intended to compensate in other income. Grant claims not settled by the balance sheet date are recorded as receivables provided their receipt is reasonably assured. The determination of the amount of the claim and the corresponding receivable amount requires management judgement and interpretation of eligible expenditures in accordance with the terms of the programs. The reimbursement claims submitted by the Company are subject to review by the relevant government agencies. The Company has used its best judgement and understanding of the related program agreements in determining the receivable amount. The benefit of below-market rate government loans is treated as a government grant. The government grant benefit is measured as the difference between the fair value of the government loan estimated by discounting future principal and interest amounts at interest rates expected to be available to the Company and the proceeds for the below-market government loan. The weighted-average interest rates estimated to be available to the Company for below-market loans received was 5.5% and 8.0% in the years ended December 31, 2019 and 2020, respectively. Deferred financing fees Deferred financing fees include amounts charged by attorneys, accountants and service providers that are directly attributable to future financing transactions. These costs are deferred and subsequently charged against the gross proceeds of the related financing transaction upon closing of such transaction. As of December 31, 2019 and 2020, the Company had no deferred financing fees. Functional currency The functional currency and reporting currency of the Company and its subsidiaries is the U.S. dollar. Transactions in foreign currencies are translated to the functional currency at exchange rates at the date of the transactions. Period end balances of monetary assets and liabilities in foreign currencies are translated to the functional currency using the period end foreign currency rates. Foreign currency gains and losses are recognized in the consolidated statements of income (loss) and comprehensive income (loss). Cash and cash equivalents Cash and cash equivalents are defined as cash on hand and deposits held with banks with maturity dates of less than three months. Accounts receivable The Company has trade receivables which are recorded at the invoiced amount and do not bear interest. The Company evaluates the collectability of accounts receivable on a regular basis based on economic assessment of market conditions and review of customer financial history. There was no allowance for doubtful accounts recorded as of December 31, 2019 and 2020. Property and equipment Property and equipment are recorded at cost less accumulated depreciation. Expenditures for major additions and improvements to property and equipment are capitalized and repairs and maintenance costs are expensed as incurred. F-9 Property and equipment are amortized using the straight-line method over the estimated useful lives of the property and equipment as follows: Asset Rate Computer equipment 3 years Laboratory equipment 5 years Office furniture and equipment 5 years Leasehold improvements Shorter of lease term or estimated useful life Estimated useful lives are periodically assessed to determine if changes are appropriate. When assets are retired or otherwise disposed of, the cost of these assets and related accumulated depreciation or amortization are removed from the accounts and any resulting gains or losses are included in loss from operations in the period of disposal. Costs for capital assets not yet placed into service are capitalized as construction-in-progress and depreciated once placed into service. Intangible assets Costs incurred to acquire patents and to prosecute and maintain intellectual property rights are expensed as incurred to general and administrative expense due to the uncertainty surrounding the drug development process and the uncertainty of future benefits. Patents, and intellectual property acquired from third parties are capitalized and amortized over the remaining life of the patent, if related to approved products or if there are alternative future uses for the underlying technology. No patent or intellectual property costs have been capitalized to date. In process research and development (IPR&D) will be amortized on completion of IPR&D activities. Intangible assets are amortized using the straight-line method over the estimated useful lives of the assets as follows: Asset Useful Life License 3-10 years Technology 20 years Impairment of long-lived assets The Company assesses the recoverability of its long-lived assets, including property and equipment and intangible assets subject to amortization, for indicators of impairment. 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. When quoted market prices are not available, the Company uses the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the asset as an estimate of fair value. No indicators of impairment were identified at the respective balance sheet dates. Indefinite-lived intangible assets are evaluated for impairment on an annual basis as of October 1 or more frequently if an indicator of impairment is present. Research and development costs Research and development costs are expensed in the period incurred. These costs related to spending for partner projects in addition to internal platform development programs and include required materials, salaries and benefits including stock-based compensation, and service contracts. These costs exclude depreciation and amortization. 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 recorded when the third-party sale occurs. Income taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”) for the expected future tax consequences of events that have been included in F-10 the financial statements. Under this method, DTAs and DTLs are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on DTAs and DTLs is recognized in income in the period that includes the enactment date. The Company recognizes DTAs to the extent that these assets are more likely than not to be realized. In making such a determination, all available positive and negative evidence are considered, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If it is determined that the DTAs in the future in excess of their net recorded amount can be realized, an adjustment to the DTA valuation allowance will be made, which would reduce the provision for income taxes. The Company records uncertain tax positions in accordance with Accounting Standards Codification (“ASC”) 740 on the basis of a two-step process in which (1) determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority is realized. Income tax credit (“ITC”) policy The Company earns income tax credits (ITCs) in jurisdictions in which it incurs eligible research and development expenditures. The Company uses the flow-through method to account for ITCs. Under this method, the ITCs subject to income tax accounting are recognized as a reduction to income tax expense in the year they are earned. Stock-based compensation The Company accounts for awards of stock options and shares to directors, employees, consultants, and non-employees using the fair value method. Under this method, stock-based compensation expense is measured at the fair value at the date of grant and is expensed over the award’s vesting period. The requisite service period generally equals the vesting period of the awards. Equity classified awards are measured using their grant date fair value. Liability classified awards are initially measured using their grant date fair value 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. For equity classified awards, a corresponding increase in additional paid-in capital is recorded when stock-based compensation is recognized. When stock options are exercised, share capital is credited by the sum of the consideration received and the related portion of the stock-based compensation previously recorded in additional paid-in capital. The effects of forfeitures of options and share awards are accounted for as they occur. Awards with an exercise price which is not denominated in: (a) the currency of a market in which a substantial portion of the Company’s equity securities traded, (b) the currency in which the individual’s pay is denominated, or (c) the Company’s functional currency, are classified as liabilities. Business combinations and goodwill Business combinations are accounted for using the acquisition method. The fair value of total purchase consideration is allocated to the fair values of identifiable tangible and intangible assets acquired and liabilities assumed, with the remaining amount being classified as goodwill. All assets, liabilities and contingent liabilities acquired or assumed in a business combination are recorded at their fair values at the date of acquisition. If the Company’s interest in the fair value of the acquiree’s net identifiable assets exceeds the cost of the acquisition, the excess is recognized in earnings or loss immediately. Transaction costs that are incurred in connection with a business combination, other than costs associated with the issuance of debt or equity securities, are expensed as incurred. Goodwill is evaluated for impairment on an annual basis as of October 1, or more frequently if an indicator of impairment is present. As part of the impairment evaluation, the Company may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of the reporting unit that includes the goodwill is less than its carrying value, then a quantitative impairment test would be prepared to compare this fair value to the carrying value and record an impairment charge if the carrying value exceeds the fair value. F-11 Equity method investments The Company accounts for its investments in equity-accounted joint ventures using the equity method. Under the equity method, the initial cost of the investment is adjusted for subsequent additional investments and the Company’s proportionate share of earnings or losses and distributions. The Company does not control the equity-accounted investments and as a result, the Company does not have the unilateral ability to determine whether cash generated by its equity-accounted investees is retained within the equity-investee or is distributed to the Company and other owners. In addition, equity-accounted investees do not control the timing of such distributions to the Company and other owners. The Company evaluates its investments in joint ventures for impairment when events or circumstances indicate that the carrying value of such investments may have experienced an other-than-temporary decline in value below carrying value. If the estimated fair value is less than the carrying value, the carrying value is written down to its estimated fair value and the resulting impairment is recorded in the Company’s consolidated statements of income (loss). During 2020, the Company entered into a joint venture related to the construction of our future office headquarters. To date, the equity investment balance represents the cash contribution made since inception. Net earnings (loss) per share The Company follows the two-class method when computing net earnings (loss) per share as the Company has issued shares that meet the definition of participating securities. The two-class method determines net earnings (loss) per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common shareholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. Basic net earnings (loss) per share attributable to common shareholders is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net earnings (loss) attributable to common shareholders is computed by adjusting net income (loss) attributable to common shareholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net earnings (loss) per share attributable to common shareholders is computed by dividing the diluted net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding for the period, including potential dilutive common shares. For purpose of this calculation, outstanding stock options and convertible preferred shares and notes are considered potential dilutive common shares. The Company’s convertible preferred shares contractually entitle the holders of such shares to participate in dividends but do not contractually require the holders of such shares to participate in losses of the Company. Accordingly, in periods in which the Company reports a net loss attributable to common shareholders, such losses are not allocated to such participating securities. In periods in which the Company reported a net loss attributable to common shareholders, diluted net loss per share attributable to common shareholders is the same as basic net loss per share attributable to common shareholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. Emerging Growth Company Status The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or JOBS Act, and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. The Company has elected to use the extended transition period for complying with new or revised accounting standards and as a result of this election, its consolidated financial statements may not be comparable to companies that comply with public company effective dates. The Company may take advantage of these exemptions up until December 31, 2025 or such earlier time that it is no longer an emerging growth company. 4. Changes in significant accounting policies Recent accounting pronouncements not yet adopted On January 1, 2020, the Company adopted the new ASU 2016-13, issued by the Financial Accounting Standards Board (“FASB”), and all related amendments under ASC Topic 326, Financial Instruments—Credit Losses . Adoption of this new accounting standard did not have a significant impact as on the Company’s consolidated financial statements. F-12 Recent accounting pronouncements not yet adopted The Company has reviewed recent accounting pronouncements and concluded that they are either not applicable to the Company or that no material impact is expected in the consolidated financial statements as a result of future adoption. 5. Net Earnings (Loss) per share Basic and diluted net earnings (loss) per share attributable to common shareholders was calculated as follows: Year Ended December 31, 2018 2019 2020 Basic earnings (loss) per share Net earnings (loss) $ 309 $ (2,211 ) $ 118,918 Less: earnings allocated to Preferred Shareholders (17 ) - (33,817 ) Net earnings (loss) attributable to common shareholders - basic $ 292 $ (2,211 ) $ 85,101 Weighted-average common shares outstanding - basic 149,436,370 151,327,560 159,195,023 Net earnings (loss) per share attributable to common shareholders - basic $ 0.00 $ (0.01 ) $ 0.53 Diluted earnings (loss) per share Net earnings (loss) attributable to common shareholders - diluted $ 309 $ (2,211 ) $ 118,918 Weighted-average common shares outstanding - basic 149,436,370 151,327,560 159,195,023 Convertible Preferred Shares 8,675,540 - 63,260,090 Stock options 13,224,200 - 40,674,652 Weighted-average common shares outstanding - diluted 171,336,110 151,327,560 263,129,765 Net earnings (loss) per share attributable to common shareholders - diluted $ 0.00 $ (0.01 ) $ 0.45 The Company’s potentially dilutive securities, which include convertible preferred shares and stock options have been excluded from the computation of diluted net loss per share for the year ended December 31, 2019 as the effect would be to reduce the net loss per share. Therefore, the weighted-average number of common shares outstanding for the year ended December 31, 2019 used to calculate both basic and diluted net loss per share attributable to common shareholders is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net earnings (loss) per share attributable to common shareholders for the periods indicated because including them would have had an anti-dilutive effect: Year Ended December 31, 2019 2020 Options to purchase common shares 37,359,000 - Convertible preferred shares 21,052,640 - Total potential common shares excluded 58,411,640 - 6. Other Current Assets Other current assets consisted of the following: December 31, 2019 2020 Tax and investment tax credit receivable $ 1,101 $ 489 Prepaid expenses 547 4,073 Materials and supplies 163 1,408 Total other current assets $ 1,811 $ 5,970 F-13 7. Property and equipment, net Property and equipment, net consisted of the following: December 31, 2019 2020 Computers $ 3,830 $ 6,324 Laboratory equipment 2,302 9,423 Furniture and fixtures 85 119 Leasehold improvements 2,729 3,708 Operating lease right-of-use assets 2,691 3,935 Property and equipment 11,637 23,509 Less accumulated depreciation (3,157 ) (5,586 ) Property and equipment, net $ 8,480 $ 17,923 Depreciation expense on property and equipment for the years ended December 31, 2018, 2019 and 2020 was $918, $1,604 and $2,317, respectively. 8. Intangible assets Intangible assets consisted of the following: December 31, 2020 Gross carrying amount Accumulated amortization Net book value License $ 35,873 $ 2,191 $ 33,682 Technology 41,400 329 41,071 IPR&D 40,400 - 40,400 $ 117,673 $ 2,520 $ 115,153 There was no balance of intangible assets, or related amortization expense, for the years ended December 31, 2018 and 2019. Amortization expense related to intangible assets was $2,520 for the year ended December 31, 2020 and is reflected within Depreciation and amortization expense on the consolidated statement of income (loss) and comprehensive income (loss). At December 31, 2020, amortization expense on intangible assets is estimated to be as follows for each of the next five years: Amortization Expense 2021 $ 9,860 2022 9,860 2023 9,860 2024 5,045 2025 3,476 $ 38,101 In March 2020, the Company entered into an agreement with Alloy Therapeutics (Alloy) to use the ATX-Gx™ humanized mice platform to enable in vivo human antibody discovery for its partner programs. Under the terms of the agreement, the Company will offer its biotech and pharma partners access to ATX-Gx™, Alloy’s proprietary suite of immunocompetent transgenic mice, for use in any antibody discovery program and against any therapeutic target. The agreement provides for future alternative use to the Company and as such the corresponding value has been recorded as an intangible asset. The asset will be amortized on a straight-line basis over the 10-year term of the license agreement with Alloy. The acquisition of $14,060 consists of an initial cash payment of $5,000, with two additional $5,000 installment payments paid in twelve and twenty-four months, respectively. The estimated fair value of the non-current portion of the financial obligation was determined by discounting future principal and interest amounts at estimated interest rates expected to be available to the Company with an interest rate of 10.98%. Amortization expense is reflected within Depreciation and amortization expense on the consolidated statement of income (loss). F-14 9. Accounts payable and other liabilities Accounts payable and other liabilities consisted of the following: December 31, 2019 2020 Accounts payable and accrued liabilities $ 1,644 $ 7,130 Liability for in-licensing agreement - 5,000 Bank indebtedness 387 - Operating lease liability 419 675 Liability classified options 51 4,270 Government remittances payable 46 1,988 Current portion of deferred grant funding 32 942 Total accounts payable and other liabilities $ 2,578 $ 20,005 10. Long-term debt Long-term debt consisted of the following: December 31, 2019 2020 Non-revolving BMO loan $ 2,009 $ - WD Canada - WINN Loan A 290 275 WD Canada - WINN Loan B 1,144 1,206 WD Canada - BSP loan - 907 Less: current portion of long-term debt (2,080 ) (190 ) Total long-term debt $ 1,363 $ 2,198 Non-revolving BMO loan The non-revolving loan from Bank of Montreal (BMO), along with interest accrued, was paid off in full in March 2020. OrbiMed Debt Facility In March 2020, the Company entered into a senior secured credit agreement (the “Credit Agreement”) with OrbiMed Royalty & Credit Opportunities III, LP (“OrbiMed”), which provided for term debt in an aggregate amount of $30,000, which matures on March 23, 2025 (a 5 year term). As of June 30, 2020, the Company had $15,000 of borrowings outstanding under the Credit Agreement. Borrowings under the Credit Agreement bear interest at a rate per annum equal to an applicable margin of 6.00% plus the higher of (a) the London Inter-bank Offered Rate (LIBOR) for the applicable interest period and (b) 1.75%. In July 2020, the outstanding loan was repaid in full, the Credit Agreement retired, and all associated security with the Credit Agreement was released. The Company incurred approximately $3,700 in combined cancellation fees and legal fees on early retirement of the Credit Agreement which has been classified in interest and other (income) expense on the consolidated statements of income (loss) and comprehensive income (loss). The Company was in compliance with all covenants under the Credit Agreement up to the date of retirement. WD Canada – WINN Loan A The Company secured contribution-based, shared cost, non-interest-bearing funding from the Ministry of Western Economic Diversification under the Western Innovation Initiative (WINN), towards capital equipment and expenses for a project based in Vancouver, BC. The funding commenced on April 1, 2015 and was completed on March 31, 2018. The maximum amount of funding under the agreement was $458. The contribution is repayable to the Ministry by 59 monthly installments of $8 starting from June 1, 2018, and one final instalment of $27. F-15 WD Canada – WINN Loan B The Company secured contribution-based, shared cost, non-interest-bearing funding from the Ministry of Western Economic Diversification under the WINN towards capital equipment and expenses for a project based in Vancouver, BC. The funding commenced on July 1, 2017 and was completed on August 1, 2019. The maximum amount of funding under the agreement is $1,347 subject to annual maximums of: 2017 - $549; 2018 - $565; 2019 - $223. The contribution is repayable to the Ministry by 59 monthly instalments of $22 starting January 1, 2021 and one final instalment of $21. WD Canada—Business Scale Up and Productivity (BSP) Loan The Company secured contribution-based, shared cost, non-interest-bearing funding from the Ministry of Western Economic Diversification under the BSP towards capital equipment and expenses for a project based in Vancouver, BC. This represents the third project for which we have received funding. The maximum amount of funding under the agreement is $3,846 subject to the following maximum annual amounts based on government funding years ending March 31: 2020—$750; 2021—$1,588; 2022—$1,508. The contribution is repayable to the Ministry by 59 monthly instalments of $64 starting April 1, 2023 and one final instalment of $64. At December 31, 2020 the Company has made draws amounting to $1,491 with respect to WD Canada loans. Principal repayments required on the Western Economic Diversification loans over the next five years and thereafter are as follows: Required principal repayments 2021 $ 379 2022 379 2023 616 2024 604 2025 573 Thereafter 687 Total $ 3,238 11. Shareholders’ Equity Common Shares As of December 31, 2019 and 2020, the Company’s articles of the corporation, as amended and restated, authorized the Company to issue unlimited voting common shares, each with no par value per share. The voting, dividend, and liquidation rights of the holders of the Company’s common shares are subject to and qualified by the rights, powers and preferences of the holders of the Series A preferred shares set forth below. As of each balance sheet date, common shares consisted of the following: December 31, 2019 December 31, 2020 Shares authorized Shares authorized Shares issued and outstanding Shares authorized Shares issued and outstanding Common shares Unlimited Unlimited 151,681,382 Unlimited 269,497,768 Each voting common share entitles the holder to one vote on all matters submitted to a vote of the Company’s shareholders. Common shareholders are entitled to receive dividends, if any, as may be declared by the board of directors, subject to the preferential dividend rights of the preferred shares. Through December 31, 2020, no cash dividends had been declared or paid by the Company. Series A1 Preferred shares On August 3, 2018, the Company entered into an investment agreement with DCVC Bio, L.P. for gross proceeds of CAD $10,000 ($7,702) in exchange for 2,105,264 shares. Total proceeds received net of financing costs were $7,557. F-16 The Series A1 preferred shares are voting and are convertible, at any time and from time to time at the option of its holder, into fully paid and non-assessable common shares at a 1:10 ratio, subject to appropriate adjustment for splits, dividends, other similar recapitalization and the like. Conversion of preferred shares to common shares is mandatory in the event of a Qualified Initial Public Offering with proceeds of at least $70 million. The holders of the Series A1 preferred shares are entitled to vote, together with the holders of common shares, as a single class, on all matters submitted to the shareholders for a vote and are entitled to the number of votes equal to the number of common shares into which the Series A1 preferred shares could convert on the record date for determination of shareholders entitled to vote. The holders of the Series A1 preferred shares are entitled to receive noncumulative dividends, as and if declared by the board of directors (the “Preferred Dividend”). The Company may not pay any dividends on common shares of the Company unless the holders of Preferred Shares then outstanding first receive, or simultaneously receive, the Preferred Dividend on each outstanding Series A1 preferred share and a dividend on each outstanding Series A1 preferred share in an amount at least equal to the product of the dividend payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted into common shares. Through December 31, 2020, no cash dividends had been declared or paid by the Company. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or Deemed Liquidation Event, the holders of Series A1 Preferred Shares then outstanding are entitled to a 1x non-participating liquidation preference. Due to the various rights and privileges within the existing Series A1 Preferred and Common shareholder agreements, the Company concluded triggering a deemed liquidation event is within the control of the Company, and therefore the Series A1 Preferred Shares are classified as permanent equity. Series A2 preferred shares On March 23, 2020, the Company entered into an investment agreement with certain shareholders for gross proceeds of $75,000 in exchange for 6,017,784 shares. Total proceeds received net of financing costs were $74,662. The Series A2 preferred shares are voting and are convertible, at any time and from time to time at the option of its holder, into fully paid and non-assessable common shares at a 1:10 ratio, subject to appropriate adjustment for splits, dividends, other similar recapitalization and the like. Conversion of preferred shares to common shares is mandatory in the event of a Qualified Initial Public Offering with proceeds of at least $70 million. The holders of the Series A2 preferred shares are entitled to vote, together with the holders of common shares, as a single class, on all matters submitted to the shareholders for a vote and are entitled to the number of votes equal to the number of common shares into which the Series A2 preferred shares could convert on the record date for determination of shareholders entitled to vote. The holders of the Series A2 preferred shares are entitled to receive noncumulative dividends, as and if declared by the board of directors (the “Preferred Dividend”). The Company may not pay any dividends on common shares of the Company unless the holders of Preferred Shares then outstanding first receive, or simultaneously receive, the Preferred Dividend on each outstanding Series A2 preferred share and a dividend on each outstanding Series A2 preferred share in an amount at least equal to the product of the dividend payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted into common shares. Through December 31, 2020, no cash dividends had been declared or paid by the Company. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or Deemed Liquidation Event, the holders of Series A2 Preferred Shares then outstanding are entitled to a 1x non-participating liquidation preference. In addition, holders of the Series A2 Preferred Shares are eligible to demand redemption of their shares in the event of certain deemed liquidation events, as defined the agreement. Due to the various rights and privileges within the existing Series A2 Preferred and Common shareholder agreements, the Company concluded triggering a deemed liquidation event is within the control of the Company, and therefore the Series A2 Preferred Shares are classified as permanent equity. Immediately prior to the completion of our IPO, all Series A1 and A2 Preferred shares converted to an equal amount of common shares. F-17 As of each balance sheet date, preferred shares consisted of the following: December 31, 2019 December 31, 2020 Shares authorized Shares authorized Shares issued and outstanding Shares authorized Shares issued and outstanding Series A1 preferred shares Unlimited Unlimited 21,052,640 Unlimited - Stock-based compensation Sixth Amended and Restated Stock Option Plan: We maintain the AbCellera Biologics Inc. Sixth Amended and Restated Stock Option Plan, our Pre-IPO Plan, which was most recently approved by our board of directors on November 18, 2020. The Pre-IPO Plan allows for the grant of options (and for U.S. participants, either incentive stock options and/or nonstatutory stock options) to employees, directors, and consultants, subject in each case to compliance with applicable tax laws. Our 2020 Plan became effective on the date immediately prior to the date on which our initial S-1 registration statement was declared effective by the SEC on December 10, 2020. As a result, we do not expect to grant any additional awards under the Pre-IPO Plan following that date. Any awards granted under the Pre-IPO Plan will remain subject to the terms of our Pre-IPO Plan and applicable award agreements. As of December 31, 2020, options to purchase 53,204,810 common shares were outstanding under the Pre-IPO Plan. Options granted under the Company’s Pre-IPO Plan are denominated in Canadian dollars and are translated into U.S dollars using the period end rate or the average foreign exchange rate for the period, as applicable, and have been noted for information purposes. 2020 Share Option and Incentive Plan: Our 2020 Share option and Incentive Plan, or 2020 Plan, was approved by our board of directors on November 18, 2020 and approved by our shareholders on December 1, 2020, and became effective on the date immediately prior to the date on which our initial S-1 registration statement was declared effective by the SEC on December 10, 2020. The 2020 Plan replaced our Pre-IPO Plan, as our board of directors will not make additional awards under the Pre-IPO Plan following our IPO. The shares we issue under the 2020 Plan will be authorized but unissued shares or shares that we reacquire. The common shares underlying any awards that are forfeited, cancelled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired by us prior to vesting, satisfied without any issuance of shares, expire or are otherwise terminated (other than by exercise) under the 2020 Plan and the Pre-IPO Plan will be added back to the common shares available for issuance under the 2020 Plan. The maximum aggregate number of common shares that may be issued as incentive share options may not exceed the Initial Limit cumulatively increased on January 1, 2022, and on each January 1 thereafter by the lesser of (i) the Annual Increase for such year or (ii) 21,280,000 common shares. F-18 The following table summarizes the Company’s stock options granted in Canadian dollars under the Pre-IPO Plan since December 31, 2018: Number of Shares Weighted- Average Exercise Price (CAD) Weighted- Average Exercise Price (USD) Weighted- Average Contractual Term (years) Outstanding as of December 31, 2018 23,744,000 $ 0.20 $ 0.15 Granted 14,905,000 0.43 0.33 Exercised (740,000 ) 0.05 0.04 Forfeited (550,000 ) 0.43 0.33 Outstanding as of December 31, 2019 37,359,000 0.29 0.22 7.66 Granted 19,539,680 2.16 1.61 Exercised (2,719,870 ) 0.49 0.37 Forfeited (974,000 ) 1.34 1.00 Outstanding as of December 31, 2020 53,204,810 0.95 0.71 7.67 Options exercisable as of December 31, 2020 23,511,125 $ 0.25 $ 0.18 6.14 The aggregate intrinsic value of options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common shares for those options that had exercise prices lower than the fair value of the Company’s common shares. The intrinsic value for stock options exercised during the years ended December 31, 2019 and 2020 was $Nil and $6,784, respectively. The following table summarizes the Company’s stock options granted under the 2020 Plan: Number of Shares Weighted- Average Exercise Price (USD) Weighted- Average Remaining Contractual Term (years) Outstanding, December 31, 2019 - $ - Granted 1,260,840 20.00 - Exercised - - - Forfeited - - - Outstanding as of December 31, 2020 1,260,840 20.00 9.95 Options exercisable as of December 31, 2020 - $ - - Stock-based compensation expense was classified in the consolidated statements of income (loss) and comprehensive income (loss) as follows: Year ended December 31, 2018 2019 2020 Research and development expenses $ 593 $ 606 $ 5,365 General and administrative expenses 6 199 1,341 Sales and marketing expenses 16 85 1,691 $ 615 $ 890 $ 8,397 Total stock-based compensation expense related to the new plan is nil during the year ended December 31, 2019 and $24 during the year ended December 31, 2020. As of December 31, 2019, and 2020, there was $5,915 and $48,440 of total unrecognized compensation cost related to nonvested stock-based compensation arrangements granted under the employee share option plan. That cost is expected to be recognized over a weighted average period of 1.9 years. F-19 The fair value of each option award is determined on the date of grant using the Black-Scholes option pricing model. The weighted-average valuation assumptions for stock options granted in the period are as follows: Year ended December 31, 2018 2019 2020 Average risk-free interest rate 1 3.50 % 1.60 % 0.64 % Expected volatility 2 100 % 100 % 79 % Average expected term (years) 3 6.25 6.25 6.11 Expected dividend yield 4 0.00 % 0.00 % 0.00 % Weighted average fair value of options granted 5 $ 0.34 $ 0.34 $ 5.60 The weighted-average valuation assumptions for liability classified stock options outstanding at December 31, 2020 are as follows: Year ended December 31, 2019 2020 Average risk-free interest rate 1 - 0.46 % Expected volatility 2 - 75 % Average expected term (years) 3 - 6.25 Expected dividend yield 4 - 0.00 % Weighted average fair value of options granted 5 - $ 37.44 (1) This rate is from federal government marketable bonds for each option grant during the year, having a term that most closely resembles the expected life of the option. (2) Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. As the Company does not yet have sufficient history of its own volatility, the Company has identified several public entities of similar complexity and stage of development and calculates historical volatility using the volatility of these companies. (3) This is the period of time that the options granted are expected to remain unexercised. Options granted have a maximum term of ten years. The Company uses the simplified method to calculate the average expected term, which represents the average of the vesting period and the contractual term. (4) No dividends have been paid by the Company yet. (5) The Company granted stock options at exercise prices not less than the fair value of its common shares as determined by the Board, with input from management. Management estimated the fair value of its common shares based on a number of objective and subjective factors, including internal valuations, external market considerations affecting the biotechnology industry and the historic prices at which the Company sold common shares. At December 31, 2019 there were no liability classified options outstanding. At December 31, 2020, there were 1,012,000 liability classified options outstanding, of which $4,270 was included in other liabilities. 12. Revenue The disaggregated revenue categories are presented on the face of the statement of income (loss) and comprehensive income (loss). Contract liabilities Contract liabilities represent payments received for performance obligations not yet satisfied and relate to deferred revenue, and are presented as current or long-term in the accompanying balance sheets based on the expected timing of satisfaction of the underlying goods and/or services. Deferred revenue outstanding at December 31, 2018, 2019 and 2020 were $4,518, $4,511 and $26,321, respectively. During the years ended December 31, 2018, 2019 and 2020, the Company recognized $1,271, $2,098 and $2,982, respectively, as revenue that had been included in deferred revenue in the previous year. F-20 In March of 2020, the Company entered into a research collaboration and license agreement with Eli Lilly pursuant to which the Company will perform discovery research for several targets for Eli Lilly to develop and commercialize . The agreement resulted in upfront payment s of $26,700, of which $ 2 1 , 94 0 was included in deferred revenue at December 3 1 , 2020. Un der the agreement, the Company is entitled to receive an aggregate of up to $29,000 of milestone payments as well as royalties in the low single digits based on net sales for non-COVID-19 targets and in the low- to mid-teens for aggregate sales below $125 ,000 and mid-teens to mid-twenties on aggregate sales above $125 ,000 . The Company expects to recognize approximately $ 5,801 in revenue in the next 12 months related to th is agreement. Of the remaining deferred revenue balance of $4,289, which amount is related to various other agreements, approximately $696 is expected to be recognized in revenue in the next 12 months. 13. Government Funding In 2020 the Company received a funding commitment from the Government of Canada under Innovation, Science and Economic Development’s (ISED) Strategic Innovation Fund (SIF) for a total of CAD $175,631 ($125,600) which is intended to support research and development efforts related to the discovery of antibodies for use drugs to treat COVID-19, and to build technology and manufacturing infrastructure for antibody therapies against future pandemic threats. To December 31, 2020 the Company incurred $12,420 in expenditures in respect of the SIF grant funding. This amount relates primarily to spending under phase 1 of the agreement and such amounts are not repayable. An immaterial amount was claimed in respect of phase 2 of the funding commitment which includes a non-probable repayable condition that is not estimable at this time. Of the total spend during the year ended December 31, 2020, $5,336 relates to research and development expenditures and is reflected in other income on the consolidated statement of income (loss) and comprehensive income (loss). The remaining $7,084 is attributable to capital asset expenditures and is amortized into other income over the average asset life of five years. Unamortized amounts are included in other liabilities and other long-term liabilities on the consolidated balance sheet. 14. Income taxes a. For financial reporting purposes, income before income taxes includes the following components: December 31, 2018 2019 2020 Canadian $ 341 $ (2,015 ) $ 163,077 Foreign (32 ) (196 ) (5,244 ) Total $ 309 $ (2,211 ) $ 157,833 The expense (benefit) for income taxes consists of: December 31, 2018 2019 2020 Canadian Current $ - $ - $ 36,931 Deferred - - 2,461 - - 39,392 Foreign Current - - (114 ) Deferred - - (363 ) - - (477 ) Income tax expense $ - $ - $ 38,915 December 31, 2018 2019 2020 Current tax expense (benefit) $ - $ - $ 36,817 Deferred tax expense (benefit) - - 2,098 Total tax expense $ - $ - $ 38,915 F-21 b. The consolidated effective income tax rate differs from the expected Canadian statutory tax rate of 27% (2019 and 2018: 27%). Reconciliation between the expected tax rate on income from operations and the statutory tax rate was as follows: December 31, 2018 2019 2020 Net earnings (loss) before income taxes $ 309 $ (2,211 ) $ 157,833 Combined statutory tax rate 27 % 27 % 27 % Expected income tax expense (recovery) at statutory rates 83 (597 ) 42,615 Stock-based compensation 166 254 1,934 Change in valuation allowance 237 854 (680 ) Change for (over) under accrual (142 ) 49 36 Change due to SR&ED (243 ) (510 ) (1,698 ) Foreign exchange (131 ) (9 ) (4,048 ) Other 30 (41 ) 756 Income tax expense $ - $ - $ 38,915 c. Deferred income tax assets and liabilities result from the temporary differences between assets and liabilities recognized for financial statement and income tax purposes. The significant components of the Company’s deferred income tax assets and liabilities were as follows: December 31, 2019 2020 Deferred tax assets: Long-term debt $ 450 $ 2,590 Financing fee 29 6,786 Operating lease liability 826 1,182 Net operating losses carried forward 433 408 Research and development deductions and credits 1,013 - Other 67 949 2,818 11,915 Deferred tax liabilities: Property and equipment $ (591 ) $ (707 ) Intangibles - (26,300 ) Operating lease right of use assets (746 ) (1,084 ) Government funding receivable - (3,279 ) Other (1 ) (41 ) (1,338 ) (31,411 ) 1,480 (19,496 ) Less: valuation allowance (1,480 ) (767 ) Net deferred tax asset (liability) - (20,263 ) Deferred tax asset 1,338 11,148 Deferred tax liability (1,338 ) (31,411 ) Net deferred tax assets (liability) $ - $ (20,263 ) Amounts recognized in the Company's consolidated balance sheet as of December 31, 2019 and 2020 comprise of $Nil and $5.9 million, respectively, included in Other long-term assets and $Nil and $26.2 million, respectively, as Deferred tax liability. Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing DTAs. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2020 in the United States. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. F-22 On the basis of this evaluation, valuation allowances of $555, $1,480 and $767 as of December 31, 2018, 2019 and 2020, respectively, have been recorded to recognize only the portion of the DTA that is more likely than not to be realized against DTL that reverses in carryforward period. The amount of the DTA considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is longer present and additional weight is given to subjective evidence such as our projections for growth. d. The Company does not have any Canadian non-capital loss carried forward and has utilized all investment tax credits from the prior taxation years in 2020. The Company had no unclaimed tax deductions for scientific research and experimental development. The Company had operating losses carried forward related to foreign operations of approximately $1,285, $1,547 and $1,456 as of December 31, 2018, 2019 and 2020 respectively. Certain operating losses available for the foreign subsidiary deferred tax assets can be carried forward indefinitely while the rest expire ranging from 2034 to 2037. Expiry date Net Operating Loss 2034 $ 325 2035 423 2036 333 2037 145 Indefinite 230 Total amount $ 1,456 e. As of December 31, 2020, the Company has immaterial accumulated undistributed earnings generated by foreign subsidiaries. The Company has not provided a deferred liability for the income taxes associated with its foreign investments because it is the Company’s intention to indefinitely reinvest in its foreign investments. f. A reconciliation of total unrecognized tax benefits for the years ended December 31, 2018, 2019 and 2020 were as follows: 2018 2019 2020 January 1 balance $ 357 $ 448 $ 387 Gross increase - tax position in prior period - - - Gross increase - tax position in current period 448 387 109 Gross decrease - tax position in current period (357 ) (448 ) (387 ) December 31 balance $ 448 $ 387 $ 109 Included in the balance of unrecognized tax benefits at December 31, 2018, 2019 and 2020 are potential benefits of $nil that, if recognized, would affect the effective tax rate on income from operations. Recognition of these potential benefits would result in a deferred tax asset in the form of undeducted SR&ED expenditures or tax credits available for carry-forward, which would be subject to a valuation allowance based on conditions existing at the reporting date. Net operating losses arising in tax years ending after December 31, 2017 can be carried over to each taxable year following the tax year of loss indefinitely. Under the Coronavirus Aid, Relief, and Economic Security Act, losses incurred effective 2021 can only be used to offset 80% of taxable income. The Company is subject to taxation primarily in Canada and the United States. Further, while the statute of limitations in each jurisdiction where an income tax return has been filed generally limits the examination period, as a result of loss carry-forwards, the limitation period for examination generally does not expire until several years after the loss carry-forwards are utilized. Tax years ranging from 2017 to 2020 remain subject to Canadian income tax examinations. Tax years ranging from 2017 to 2020 remain subject to U.S. income tax examinations. Other than routine audits done by tax authorities for tax credits and tax refunds that the Company has claimed, management is not aware of any other material income tax examination currently in progress by any taxing jurisdiction. F-23 15. Leases The Company leases office and laboratory facilities in Vancouver, Canada and Sydney, Australia, with terms expiring within two to seven years. The balance sheet classification of the Company's lease liabilities was as follows: December 31, 2019 December 31, 2020 Operating lease liabilities: Current portion $ 419 $ 675 Long-term portion 2,642 3,715 Total operating lease liabilities $ 3,061 $ 4,390 At December 31, 2020, the future minimum lease payments of the Company’s operating lease liabilities were as follows: Amount 2021 $ 1,045 2022 841 2023 807 2024 815 2025 856 Thereafter 1,330 The initial recognition of the lease obligation and right-of-use asset excludes leases acquired as part of a business combination that have a remaining lease term of 12 months or less on the date of acquisition . As of December 31, 2020, the weighted-average remaining lease term is 6.00 years and the discount rate used to determine the operating lease liabilities was approximately 6.5%. The Company incurred total operating lease expenses, including fixed lease payments and non-lease components, of $625, $638 and $1,086 during the years ended December 31, 2018, 2019 and 2020, respectively. 16. Financial Instruments The Company categorizes its financial assets and liabilities measured at fair value into a three-level hierarchy established by U.S. GAAP that prioritizes those inputs to valuation techniques used to measure fair value based on the degree to which they are observable. The three levels of the fair value hierarchy are as follows: Level 1 inputs are quoted prices in active markets for identical assets and liabilities; Level 2 inputs, other than quoted prices included within Level 1, are observable for the asset or liability either directly or indirectly; and Level 3 inputs are not observable in the market. The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, loans to related parties, accounts payable and accrued liabilities and royalties payable, bank indebtedness, operating lease obligations, long-term debt, and contingent consideration payable. The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and bank indebtedness approximate their fair values due to the immediate and short-term maturity of these financial instruments. The fair value of loans to related party approximate the carrying value as the interest rates approximate the rates applicable for non-related party loans. The estimated fair value of long-term debt of $3,400 and $2,338 at December 31, 2019 and December 31, 2020, respectively, are classified as Level 2. The estimated fair value has been determined by discounting future principal and interest amounts at estimated interest rates expected to be available to the Company at period end. Details of the fair value of the contingent consideration payable utilizing the Level 3 inputs is detailed in Note 19. 17. Commitments and contingencies From time to time, the Company may become involved in routine litigation arising in the ordinary course of business. At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company does not have contingency reserves established for any litigation liabilities and any the costs related to such legal proceedings are expensed as incurred. F-24 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. During 2020, the Company has expensed approximately $32,300 related to such obligations, of which $27,200 is included in current liabilities. There were no such payments prior to 2020. Excluding the lease arrangements as accounted for in Note 15 – Leases, the Company has the following additional commitments in respect of several leased facilities where the lease commencement dates are subsequent to December 31, 2020: Amount 2021 $ 368 2022 3,388 2023 7,802 2024 7,848 2025 7,983 Thereafter 86,332 18. Financial Risk Management Concentration of Credit Risk Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents are invested with the primary objective being the preservation of capital and maintenance of liquidity. The guidelines on the quality of financial instruments that the Company believes minimizes the exposure to concentration of credit risk. The Company limits its exposure to credit loss by placing its cash and cash equivalents with high credit quality financial institutions. The Company’s exposure to credit risk for accounts and accrued receivables is indicated by the carrying value of its accounts receivable and accrued receivables. We review our trade receivables, accrued revenue, and accrued royalties and reserve for amounts if collectability is no longer reasonably assured based on an assessment of various factors including historical loss rates and expectations of forward-looking loss estimates. Any adjustments made to our historical loss experience reflect current differences in asset-specific risk characteristics and current economic conditions. At December 31, 2019 and 2020, accounts and accrued royalty receivable amounts were due from five and seven customers, respectively. For the year ended December 31, 2020 we recognized our first milestone and royalty revenue streams, totaling $213,307, exclusively from our partnership with Lilly, of which $198,307 was a receivable at December 31, 2020 and collected subsequent to year end. Interest Rate Risk The Company’s interest rate risk is primarily attributable to its cash and cash equivalents, long term contingent consideration payable, long term operating lease liability and long-term debt. The Company believes that it does not have material exposure to changes in the fair value of cash and cash equivalents because of changes in interest rates due to the short-term nature of cash and cash equivalents. The Company does not enter into investments for trading or speculative purposes and has not used any derivative financial instruments to manage interest rate exposure. The Company is exposed to the risk that the fair value or future cash flows of the contingent consideration payable, operating lease liability and long-term debt will vary as a result of changes in market interest rates. In order to manage funding needs or capital structure goals, the Company enters into debt or lease agreements that are subject to either fixed market interest rates set at the time of issue or floating rates determined by ongoing market conditions. Debt subject to variable interest rates exposes the Company to variability in interest expense, while debt subject to fixed interest rates exposes the Company to variability in the fair value of debt. To manage interest rate exposure, the Company accesses various sources of financing and manages borrowings in line with debt ratings, liquidity needs, maturity schedule, and currency and interest rate profiles. F-25 Foreign Currency Risk The Company holds cash primarily in U.S. and Canadian dollars. The Company had Canadian denominated cash and cash equivalents of CAD $5,845 and CAD $905 at December 31, 2019 and 2020, respectively. The Company incurs certain operating expenses and accounts payable in currencies other than the U.S. dollar, primarily in Canadian dollars, and accordingly is subject to foreign exchange risk due to fluctuations in exchange rates. The Company does not use derivative instruments to hedge exposure to foreign exchange risk. The operating results and financial position of the Company are reported in U.S. dollars in the Company’s consolidated financial statements. The fluctuation of the U.S. dollar relative to the Canadian dollar will have an impact on the reported balances for net assets, net loss and shareholders’ equity in the Company’s consolidated financial statements. Liquidity Risk Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Company’s short-term cash requirements are primarily to settle its financial liabilities, which consist primarily of accounts payable and accrued liabilities falling due on average within 30 days and current portion of contingent consideration payable, lease obligations and long term debt falling due within the next 12 months, with medium term requirements to invest in property and equipment and research and development. The Company’s principal sources of liquidity to settle its financial liabilities are cash, cash equivalents and, collection of accounts and accrued receivables relating to research collaboration and license agreements, royalties and additional government grant funding as required. The Company believes that these principal sources of liquidity are sufficient to fund its operations for at least the next 12 months. Counterparty Risk In 2018, a significant portion of revenue was recognized from one customer representing 61%. In 2019, a significant portion of revenue was recognized from three customers representing 47%, 15% and 12%, respectively. For the year ended December 31, 2020, three of our partners accounted for 35%, 25% and 14% of our research fees revenue. Our partnership with Lilly constituted one of the partnerships that generated 10% or more of our consolidated revenues. 19. Related party transactions The Company utilizes its network of investors, directors, and advisors in executing business. As such, the Company had transactions with related parties including the following: a) The Chief Commercial Officer of StemCell Technologies Inc. (Stemcell) was a director for the Company until September 11, 2019. Stemcell provices reagents, tools and services for life science research. The Company incurred expenditures of $26 and $29 from transactions with Stemcell during the years ended December 31, 2019 and 2020, respectively. The amounts charged were subject to normal trade terms. As of December 31, 2020, StemCell was no longer a related party of the Company. b) Chief Executive Officer (“CEO”) of the Company was the recipient of a personal loan of CAD $2,000 ($1,540) from the, Company during the year ended December 31, 2019 for the purposes of financing the purchase of a residential property. The loan is interest bearing at an annual interest rate of 3.54%. The loan was repaid in full in 2020. c) The General Counsel of the Company was the recipient of a loan of $200 during the year ended December 31, 2019. The loan is interest bearing at an annual interest rate of 3.95% and has a term to maturity of 3.33 years. The loan was repaid in full in 2020. 20. Acquisitions OrthoMab In June 2020, the Company acquired rights to the OrthoMab bispecific platform from Dualogics, LLC for $4,000. The acquisition represents a group of similar assets sourced from the agreement. All the fair value associated with the agreement is concentrated in a group of similar assets and is not considered a business in accordance with ASC 805-10-55-5A. The Company does not reasonably expect the platform acquired will be used to receive economic benefit in an alternative manner, nor does the acquisition agreement provide for any future economic benefit to the Company from the rights retained by Dualogics, LLC. The Company F-26 therefore accounted for the right to the Dualogics, LLC platform acquired under the agreement as an acquisition of an asset and recognized $4,000 as research and development expenses under ASC 730. Trianni On November 3, 2020, the Company completed a business combination with Trianni, Inc. (“Trianni”), a biotechnology company with a humanized rodent platform, in which we were the acquirer. To fund the merger, on October 30, 2020 AbCellera entered into convertible note agreement wherein AbCellera issued convertible notes in consideration of $90,000. Issuance costs associated with the convertible notes was immaterial. The convertible notes mature five years from the date of issuance and bear no interest for the first twelve months and bear five percent (5%) interest per annum thereafter. Interest is payable annually starting twenty-four months from the date of issuance until maturity. Upon a liquidity event, such as an IPO, if occurred within 6 months of the issue date, then immediately prior to the liquidity event, noteholders may convert the principal amount of the note into common shares of the company at 85% of the IPO issue price of common shares. The convertible notes are also convertible at the option of the holders on the interest commencement date, which is 12 months after the issuance date. The number of common shares to be issued will be equal to 800,000 common shares (for certain specified investors) plus the number of common shares determined by dividing (i) the aggregate of the outstanding principal of the convertible note by (ii) AbCellera’s pre-money valuation of as defined in the agreement divided by the aggregate number of our common shares outstanding at the time of conversion. W e determined that no value should be assigned to the embedded derivatives and that there was no beneficial conversion feature. Immediately prior to the completion of our IPO, the convertible notes were converted into 6,093,524 common shares of the Company in accordance with the terms of the convertible note agreement. The convertible note was fully extinguished upon conversion and the carrying value of the convertible note was reclassified into common shares. The acquisition date fair value of the preliminary purchase price consideration transferred consisted of the following: Estimated Purchase Price Consideration Estimated Fair Value Closing Payment $ 95,925 (i) Earn-out payment 21,813 (ii) $ 117,738 (i) Pursuant to the merger agreement, the initial purchase price is $90 million adjusted for certain closing adjustments for working capital, indebtedness, transaction and other expenses as well as payments to Trianni option holders for the cancellation and extinguishment of Trianni options. (ii) Represents the estimated fair value of the earn-out payments related to the specific customer license ending on April 9, 2024. T he estimated fair value was categorized within Level 3 of the fair value hierarchy and determined by estimating the payout of 85% of the expected future net cash flows associated to the specific customer license during the earn-out period ending on April 9, 2024. The significant assumptions inherent in the development of the value include the amount and timing of projected future net revenues received by us from the specific customer license, and the discount rate selected to measure the risks inherent in the future cash flows, which was approximately 22%. In accordance with the acquisition method of accounting, the purchase price of Trianni has been allocated to the acquired assets and assumed liabilities based on their estimated acquisition date fair values. The fair value estimates were based on income, estimates and other analyses. The excess of the total consideration over the estimated fair value of the amounts initially assigned to the identifiable assets acquired and liabilities assumed has been recorded as goodwill, which is not deductible for income tax purposes. The goodwill balance represents the combined company’s expectations of the strategic opportunities available to it as a result of the merger, as well as other synergies that will be derived from the merger. Goodwill also reflects the requirement to record deferred tax balances for the difference between the assigned values and the tax bases of assets acquired and liabilities assumed in the business combination. As of December 31, 2020, the Company had not yet fully completed the analysis to assign fair values to all assets acquired and liabilities assumed, and therefore the purchase price allocation is preliminary. The remaining items include the finalization of working capital adjustments, income taxes, and resulting impact to goodwill. The preliminary purchase price allocation will be subject to F-27 further refinement as the Company continues to refine its estimates and assumptions based on information available at the acquisition date. These refinements may result in material changes to the estimated fair value of assets acquired and liabilities assumed. The purchase price allocation adjustments can be made throughout the end of the Company’s measurement period, which is not to exceed one year from the acquisition date. Total transaction costs expensed in the statement of income (loss) and comprehensive income (loss) was immaterial. The following table summarizes the preliminary purchase price allocation for the Trianni transaction as of November 3, 2020: Fair value of assets and liabilities acquired Purchase Price Allocation Cash and cash equivalents $ 8,282 Other current assets 710 Total current assets 8,992 Other assets 223 Intangibles 103,613 (i) Goodwill 31,527 (ii) Total assets 135,363 Current liabilities 92 Deferred income tax liability 26,525 (ii) Total liabilities 26,617 Estimated fair value of net identifiable assets acquired and liabilities assumed $ 117,738 (i) The estimated fair value of and useful lives of the intangible assets acquired is as follows: Estimated fair value (a) Estimated useful lives in years (b) License $ 21,813 3 Technology 41,400 20 IPR&D 40,400 (c) $ 103,613 (a) The estimated fair values were categorized within Level 3 of the fair value hierarchy and were determined using an income-based approach, which was based on the present value of the future estimated after-tax cash flows attributable to each intangible asset. The significant assumptions inherent in the development of the values, from the perspective of a market participant, include the amount and timing of projected future cash flows (including revenue, regulatory success and profitability), and the discount rate selected to measure the risks inherent in the future cash flows, which was between 19%-22%. These fair values are based on the most recent estimate of the fair value available and will be updated as we obtain more information. (b) The estimate of the useful life 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 (c) IPR&D assets are indefinite life intangible assets at the time of acquisition and will be amortized upon completion of IPR&D activities. (ii) Goodwill represents the excess of the estimated purchase price over the estimated fair value of Trianni’s identifiable assets acquired and liabilities assumed. Goodwill also reflects the requirement to record deferred tax balances for the difference between the assigned values and the tax bases of assets acquired and liabilities assumed in the business combination. Goodwill is not deductible for tax purposes. Net earnings (loss) for the period in the Consolidated Statement of Income and Comprehensive Income includes immaterial amount of Trianni revenue and net loss of approximately $1.8 million from the acquisition date to the year ended December 31, 2020. Unaudited Pro Forma Financial Information The following unaudited pro forma financial information presents consolidated results assuming the acquisition of Trianni occurred January 1, 2019. F-28 Years Ended December 31, 2019 2020 Sales $ 15,770 $ 239,410 Net income (loss) (10,878 ) 115,088 21. Subsequent events In January 2021, the Company entered into an agreement with a partner whereby we will invest $11,700 in equal shares of a Vancouver building development in Vancouver Canada to be leased by AbCellera for additional office and laboratory facilities. F-29