AbCellera Biologics Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes thereto included elsewhere in this annual report. Some of the information contained in this discussion and analysis or set forth in other parts of this annual report contain forward-looking statements that involve risks, uncertainties and assumptions. As a result of many factors, including those factors set forth in Part I, Item 1A, Risk Factors, our actual results could differ materially from those discussed in or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part I, Item 1A, Risk Factors. Please also see the section titled “Cautionary Note Regarding Forward-Looking Statements.” Overview We are a team of scientists, engineers, creatives, and business professionals addressing the barriers of conventional antibody drug development. We believe investments in technology will improve the quality, speed, and success of drug development and that long-term value creation begins with building a great company that can create multiple products, repeatedly and successfully. We focus on the development of antibody-based drugs and are committed to improving discovery and development. We aim to be the best in the world in bringing antibody therapeutics from target to target to the start of clinical testing by combining expertise, technologies, and infrastructure to build an integrated engine for antibody drug discovery and development . W e think deeply about capital allocation and strive to maximize long-term value while mitigating the risks that are inherent in drug development and in scaling a company. We look for opportunities where we believe low-risk investments in building technology and operational efficiency can create a sustained competitive advantage and drive long-term value by making biologics drug development faster and more efficient. We structure our agreements in a way that is designed to align our partners’ economic interests with our own. We partner with companies of all sizes and government organizations to propel programs to the clinic, together. We enable discovery against targets that have traditionally been intractable, and we accelerate programs against less difficult targets. Our deals emphasize participation in the success and upside of future antibody therapeutic candidates. Our partnership agreements include near-term payments for technology access, research and intellectual property rights, and downstream payments in the form of clinical and commercial milestones, and royalties on net sales. We also participate in alternative investment opportunities including equity in our business partners and various rights for deeper involvement in moving molecules forward. Longer-term we are eligible to receive additional payments upon satisfaction of clinical and commercial milestones, which we refer to as milestone payments, as well as royalties on sales of approved products derived from antibodies that we discover for our partners. Our discovery partnerships generally include royalty payments on net sales in the single-digit to low-double digit range. We focus a substantial portion of our resources on research and development efforts towards strengthening our discovery and development engine and we expect to continue to make significant investments in this area for the foreseeable future. We expect to continue to incur significant expenses, and we expect such expenses to increase substantially in connection with our ongoing activities, including as we: • invest in research and development activities to improve our antibody discovery and development engine including investments in building our new headquarters through our joint ventures and building a new small-scale manufacturing facility; • market and sell our solutions to existing and new partners; • expand and enhance operations to deliver programs, including investments in manufacturing; • acquire businesses or technologies to support the growth of our business; • attract, hire and retain qualified personnel; and • continue to establish, protect and defend our intellectual property and patent portfolio, including our ongoing litigation 2022 Highlights $485 million $159 million $0.56 & $0.50 $886 million Total Revenue Net Income Basic & Diluted EPS Cash, cash equivalents, and marketable securities 73 To date, we have financed our operations primarily from revenue from our antibody discovery partnerships in the form of royalty revenue, government funding from grants, and from the issuance and sale of convertible preferred shares and notes, and common shares. We have grown the number of programs that we have under contract with our partners, as illustrated by the following chart. In 2022, we added 18 new programs under contract, started 23 programs, and advanced three molecules in the clinic. As of December 31, 2022, we had 174 discovery programs that are either completed, in progress or under contract with 40 partners. 74 Results of Operations The following table summarizes our key operating results for the years ended December 31, 2020, 2021, and 2022. All figures are in U.S. dollars and amounts are expressed in thousands, except share data: Year Ended December 31, 2020 2021 2022 Revenue: Research fees $ 19,848 $ 19,076 $ 40,802 Licensing revenue - 20,778 696 Milestone payments 15,000 8,000 900 Royalty revenue 198,307 327,349 443,026 Total Revenue 233,155 375,203 485,424 Operating expenses: Royalty fees 27,143 45,516 66,436 Research and development expense ( 1) 29,393 62,062 107,879 Other operating expenses 20,588 63,212 94,598 Total operating expenses 77,124 170,790 268,913 Income from operations 156,031 204,413 216,511 Total other (income) (1,802 ) (14,736 ) (22,588 ) Net earnings before income tax 157,833 219,149 239,099 Net earnings $ 118,918 $ 153,464 $ 158,519 ( 1) Exclusive of depreciation, amortization, and impairment. Operating expenses include stock-based compensation as follows: Year Ended December 31, 2020 2021 2022 Research and development expenses $ 5,365 $ 15,663 $ 24,327 Other operating expenses 3,032 14,983 25,154 Total stock-based compensation $ 8,397 $ 30,646 $ 49,481 Recent Developments In February 2022, we announced that bebtelovimab (LY-CoV1404), the second antibody developed through our collaboration with Lilly, received an EUA from the FDA for the treatment of mild-to-moderate COVID-19. Lilly announced in February 2022 that it entered into a purchase agreement with the U.S. government to supply up to 600,000 doses of bebtelovimab no later than March 31, 2022, with an option of 500,000 additional doses no later than July 31, 2022, for at least $720 million. In June 2022, we announced that Lilly modified its purchase agreement with the U.S. government to supply an additional 150,000 doses of bebtelovimab for consideration of approximately $275 million. Lilly shipped and we recognized royalty revenue on approximately half of these doses in the quarter ended June 30, 2022. In collaboration with the U.S. government, the requirement that bebtelovimab distribution be controlled by the U.S. government was removed in August 2022, making bebtelovimab commercially available for purchase by U.S. states/territories, hospitals, and a broad set of other providers. In November 2022, the FDA announced bebtelovimab is no longer authorized for emergency use in any U.S. region. Lilly and its authorized distributors have paused commercial distribution until further notice by the FDA. Key Factors Affecting Our Results of Operations and Future Performance We believe that our financial performance has been, and in the foreseeable future will continue to be, primarily driven by multiple factors as described below, each of which presents growth opportunities for our business. These factors also pose important 75 challenges that we must successfully address to sustain our growth and improve our results of operations. Our ability to successfully address these challenges is subject to various risks and uncertainties, including those described in Part I, Item 1A, Risk Factors. • Securing additional programs under contract. Our potential to grow revenue, in both the near and long term, is dependent on our ability to secure additional programs under contract from new and existing partners. For existing partners, we seek to expand our relationships with them to cover multi-year, multi-target programs. Since our first commercial partnership in 2015, as of December 31, 2022, we had 174 discovery programs that are either completed, in progress or under contract with 40 partners. We are building our business development team across the major biotechnology geographic hubs to bring in new partners and new programs under contract, and we believe that we have a significant opportunity to continue to increase the number of partners who have programs based on our discovery and development engine. Our ability to continue to grow our number of programs under contract is dependent upon our ability to educate the market and support the business through investment in our sales and marketing efforts and through further research and development to enhance our discovery differentiation. • Our partners successfully developing and commercializing the antibodies that we discover. We estimate that, based on the terms of our existing contracts and estimates of historical rates of success of antibody drug development, the vast majority of the potential value for each program under contract is represented by potential future milestone payments and royalties rather than research fees. As a result, we believe our business and our future results of operations will be highly reliant on the degree to which our partners successfully develop and commercialize the antibodies that we discover based on contracts with our partners. As our partners continue to advance development of the antibodies that we have discovered, we expect to start receiving additional milestone payments and royalties if any partners commence commercial sales of such antibodies. • Rate and timing of selecting and initiating discovery projects by our partners. Once programs are secured under contract, partners must select targets and agree on a detailed statement of work before we commence discovery research on any antibodies. The rate and timing of such selection and initiation differs from partner to partner. Research fees that we recognize under our partnerships depend on our delivery of antibodies for development by our partners and delays by our partners in selecting targets and agreeing on statements of work will impact revenue recognition. • Investing in enhancements to our discovery and development engine. Our ability to maintain and expand our partnerships is dependent on the advantages our discovery and development engine delivers to our partners. We intend to maintain our leading position through investments in research and development to refine and add capabilities in areas such as computation, protein engineering, immunization technologies, genetically engineered rodents and cell line selection. We have successfully executed and will continue to look for strategic technology acquisitions to improve, broaden and deepen our capabilities and expertise in antibody discovery and development, or those that offer opportunities to expand our partnership business into adjacent therapeutic modalities. We intend to devote substantial resources to continue to improve our discovery differentiation which will impact our financial performance. • Scaling our operations to execute on discovery programs . As we secure additional programs under contract and as our partners initiate discovery programs, our operational capacity to execute such research activities may become strained. We are making significant investments in capital and time to increase our ability to address future growth, including building new headquarters through our Dayhu and Beedie joint ventures, building a new small-scale manufacturing facility, investing in research and development, and continuing to hire talented personnel across functions. We have new facilities under development scheduled to take occupancy in 2024 that are intended to materially expand capacity. As we expand our workforce, we expect a significant increase in our operating expenses, including stock-based compensation. Key Business Metrics We regularly review the following key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We believe that the following metrics are important to understand our current business. These metrics may change or may be substituted for additional or different metrics as our business develops. Year Ended December 31, Change Cumulative Metrics 2021 2022 % Number of discovery partners 36 40 11 % Programs under contract 156 174 12 % Partnered program starts 78 101 29 % Molecules in the clinic 5 8 60 % 76 The table below outlines the details of molecules in the clinic as of December 31, 2022: Molecule Most advanced stage Partner Therapy areas Program type Bamlanivimab (LY-CoV555) Marketed, EUA Eli Lilly and Company Infectious disease – COVID-19 AbCellera Pre-partnered Program - Partnered Bebtelovimab (LY-CoV1404) Marketed, EUA Eli Lilly and Company Infectious disease – COVID-19 AbCellera Pre-partnered Program - Partnered TAK-920/DNL919 Phase 1 Denali Therapeutics Inc. Neurology - Alzheimer's Disease AbCellera Partner-initiated Discovery NBL-012 Phase 1 NovaRock Biotherapeutics Inc. Dermatology, gastrointestinal, immunology Trianni license NBL-015/FL-301 Phase 1 NovaRock Biotherapeutics Inc. Oncology Trianni license NBL-020 IND/CTA authorized NovaRock Biotherapeutics Inc. Oncology Trianni license Undisclosed Phase 1 Undisclosed Undisclosed Trianni license IVX-01 Clinical field study Invetx Inc. Animal health AbCellera Partner-initiated Discovery Number of discovery partners represents the unique number of partners with whom we have executed partnership contracts. We view this metric as an indication of the competitiveness of our engine and our level of market penetration. The metric also relates to our opportunities to secure programs under contract . Programs under contract represent the number of antibody development programs that are under contract for delivery of discovery research activities. A program under contract is counted when a contract is executed with a partner under which we commit to discover or deliver antibodies against one selected target. A target is any relevant antigen for which a partner seeks our support in developing binding antibodies. We view this metric as an indication of commercial success and technological competitiveness. It further relates to revenue from access fees. The cumulative number of programs under contract with downstream participation is related to our ability to generate future revenue from milestone payments and royalties. Partnered program starts represent the number of unique programs under contract for which we have commenced the discovery effort. The discovery effort commences on the later of (i) the day on which we receive sufficient reagents to start discovery of antibodies against a target and (ii) the day on which the kick-off meeting for the program is held. We view this metric as an indication of our operational capacity to execute on programs under contract. It is also an indication of the selection and initiation of discovery projects by our partners and the resulting potential for near-term payments. Cumulatively, partnered program starts with downstream participation indicate our total opportunities to earn downstream revenue from milestone fees and royalties in the mid- to long-term . Molecules in the clinic represent the count of unique molecules for which an Investigational New Drug, or IND, New Animal Drug, or equivalent under other regulatory regimes, application has been approved based on an antibody that was discovered either by us or by a partner using licensed AbCellera technology. Where the date of such application approval is not known to us, the date of the first public announcement of a clinical trial will be used for the purpose of this metric. We view this metric as an indication of our near- and mid-term potential revenue from milestone fees and potential royalty payments in the long term . 77 Summary partnership agreements with pharmaceutical and biotechnology companies that include downstream participation from 2016 to Dec ember 3 1 , 202 2 : Partner # of Targets & Duration Therapeutic Indication or Modality Date Announced AbbVie Inc. Up to 5 targets, multi-year Undisclosed December 15, 2022 Rallybio Corporation Up to 5 targets, multi-year Rare metabolic disorder and undisclosed December 1, 2022 Atlas Ventures - stealth stage company Up to 3 targets, multi-year Undisclosed August 3, 2022 Undisclosed biotechnology company Up to 3 targets, multi-year Undisclosed June 29, 2022 * Empirico Inc. 2 additional targets Undisclosed May 3, 2022 Everest Medicines Ltd. Up to 10 targets, multi-year Oncology and undisclosed September 22, 2021 Moderna, Inc. Up to 6 targets, multi-year RNA-encoded antibodies September 15, 2021 EQRx, Inc. Multi-target, multi-year Oncology and immunology (initially) August 4, 2021 Tachyon Inc. Single target Oncology August 3, 2021 Undisclosed biotechnology company Up to 4 targets, multi-year Undisclosed June 30, 2021 * Angios GmbH Multi-target, multi-year Ophthalmology May 6, 2021 Undisclosed biotechnology company Multi-target, multi-year Oncology May 6, 2021 * Empirico Inc. 5 targets, multi-year Undisclosed April 14, 2021 Gilead Sciences, Inc. 8 targets, multi-year Undisclosed April 1, 2021 Abdera Therapeutics Inc. 9 targets, multi-year Oncology January 14, 2021 Invetx, Inc. Multi-target, multi-year Animal Health November 19, 2020 Kodiak Sciences Inc. Multi-target, multi-year Ophthalmology October 29, 2020 IGM Biosciences, Inc. Multi-target, multi-year Oncology and immunology September 24, 2020 Undisclosed Single target Bispecific June 3, 2020 * Eli Lilly and Company Up to 9 targets, multi-year COVID-19 program and additional indications May 22, 2020 * Regeneron Pharmaceuticals, Inc. Multi-target, multi-year Multiple undisclosed March 16, 2020 * Invetx, Inc. Multi-target, multi-year Animal health February 23, 2020 Undisclosed Multi-target, multi-year Cell therapy September 25, 2019 * Gilead Sciences, Inc. Single target Infectious disease June 13, 2019 Denali Therapeutics, Inc. 8 targets, multi-year Neurological diseases February 28, 2019 Novartis AG Up to 10 targets, multi-year Undisclosed February 14, 2019 Autolus Therapeutics plc Single target Cell therapy (CAR-T) November 29, 2018 Denali Therapeutics, Inc. Single target Neurological diseases June 12, 2018 Undisclosed mid-cap biopharmaceutical company Undisclosed Undisclosed January 25, 2018 Teva Pharmaceuticals Industries Ltd. Single target Membrane protein June 13, 2017 Pfizer Inc. Multi-target, multi-year Membrane protein January 5, 2017 Undisclosed global biotechnology company Multi-target, multi-year Undisclosed November 4, 2016 Kodiak Sciences Inc. Single target Ophthalmology August 24, 2016 Teva Pharmaceuticals Industries Ltd. Undisclosed Undisclosed February 2, 2016 * Effective date of agreement Components of Results of Operations Revenue Our revenue is comprised of partnership research fees, licensing revenue, development milestones, and royalty payments from commercial products. Research fees consist primarily of technology access fees, which are generally generated upon execution of our 78 partnership agreements, and discovery research fees, which are generated through our performance of antibody discovery research for our partners. Licensing revenue is primarily from our licensing of our humanized rodent platform, Trianni ™. Our partnership agreements also entitle us to receive payments upon the satisfaction of clinical, approval, and commercial milestones as well as royalties on our partners’ commercial sales of the molecules that we discover. We expect that our revenue, particularly revenue arising from royalties of antibodies sold by our partners, will fluctuate from period to period due to variances in demand for such antibodies and the status of regulatory approvals or emergency use authorizations for such antibodies. For example, in November 2022, the FDA announced bebtelovimab is no longer authorized for emergency use in the U.S. Lilly and its authorized distributors have paused commercial distribution until further notice by the FDA. We expect that our overall revenue will fluctuate from period to period due to the timing of securing additional programs under contract, the inherently uncertain nature of the timing of milestone achievement, our dependence on the program decisions of our partners and uncertainty in sales of our antibodies by our partners that generate royalty revenue. Operating Expenses Royalty fees. Royalty fees consist of certain contractual royalty payments to our strategic partners upon receipt of royalty revenue based on our customers third-party net sales. Royalty fees are not included in every program. For royalties received from Lilly for commercial sales of bamlanivimab and bebtelovimab, royalty fees were due to collaboration partners in AbCellera’s DARPA P3 (Pandemic Preparedness Program) project focused on rapid pandemic response. Royalty fees are recorded when the third-party sale occurs. Research and development expenses. Research and development expenses primarily consist of salaries, benefits, incentive compensation, stock-based compensation, laboratory supplies and materials expenses for employees and contractors engaged in research and product development. These expenses are exclusive of depreciation, amortization, and impairment. Research and development activities consist of discovery research for partners as well as internal development of our discovery and development engine. We derive improvements to our discovery and development engine from both types of activities. We have not historically tracked our research and development expenses on a partner-by-partner basis or on a product candidate-by-product candidate basis. We expect to continue to incur substantial research and development expenses as we conduct discovery research for our partners and our internal programs. In addition, we plan to continue to invest in research and development to enhance our solutions and offerings to our partners, including continuing to hire additional employees and continuing research and development projects obtained through strategic technology acquisitions. As a result, we expect that our research and development expenses will continue to increase in absolute dollars in future periods and vary from period to period as a percentage of revenue. Sales and marketing expenses. Our sales and marketing expenses consist primarily of salaries, benefits, incentive compensation and stock-based compensation costs for employees within our commercial sales functions, as well as marketing, travel expenses, and information technology costs that are directly associated with sales and marketing efforts, such as client relationship management tools and other information technology data tools to provide insight into market segments and trends. We expect our sales and marketing expenses to increase in absolute dollars as we expand our commercial sales, marketing and business development teams; increase our presence globally; and increase marketing activities to drive awareness and adoption of our discovery and development engine. While these expenses may vary from period to period as a percentage of revenue, we expect these expenses to increase as a percentage of sales in the short term as we continue to grow our commercial organization to drive anticipated growth in the business. General and administrative expenses. General and administrative expenses primarily consist of salaries, benefits, incentive compensation and stock-based compensation costs for employees in our executive, accounting and finance, office administration, legal and human resources functions as well as professional services fees, such as consulting, audit, tax and legal fees, general corporate costs and allocated overhead expenses. General and administrative expenses also include all rent and facilities expenses for all employees, regardless of department or function. We expect that our general and administrative expenses will continue to increase in absolute dollars in future periods, primarily due to increased headcount to support continued growth in the business. We expect these expenses to vary from period to period as a percentage of revenue. Depreciation, amortization, and impairment. Depreciation expense consists of the depreciation of property and equipment used actively in the business. Amortization expense and impairment includes the amortization of intangible assets over their respective useful lives and impairment of certain IPR&D as further described in our notes to the consolidated financial statements. Other (Income) Expense Interest income. Interest income consists primarily of interest earned on cash, cash equivalent, and marketable securities balances. 79 Interest and o ther. Interest and other consists primarily of financing fees , fair value adjustments of contingent consideration and marketable securities , and includes foreign exchange gains or losses due to fluctuations in exchange rates from the jurisdictions that we operate in against the U.S. dollar . Grants and incentives. Grants and incentives include cost recovery on activities that qualified for approved projects supported by grant funding or tax credits. Grants primarily include the benefit from programs administered by the Canadian government’s Ministry of Innovation, Science and Economic Development, and Strategic Innovation Fund. To the extent that grant funding covers capital expenditures, a deferred credit is recorded on the balance sheet and recognized ratably over the benefit period of the related expenditure for which the grant was intended to compensate. Tax credits include benefits from the Canadian Scientific Research and Experimental Development, or SR&ED, program, the Australian R&D Tax Incentive program and U.S. federal and state research and experimentation tax credits. Where we qualify for refundable tax credits, these are included in grants and incentives in the year the qualifying expenditure is made. Non-refundable tax credits are recognized as a reduction to income tax expense in the year they are earned and are included in a note in the consolidated financial statements. We expect to continue to benefit from these tax programs in the future. Results of Operations Comparison of the Years Ended December 31, 2021 and 2022 Revenue Year Ended December 31, Change 2021 2022 Amount % Revenue Research fees $ 19,076 $ 40,802 $ 21,726 114 % Licensing revenue 20,778 696 (20,082 ) (97 )% Milestone payments 8,000 900 (7,100 ) (89 )% Royalty revenue 327,349 443,026 115,677 35 % Total revenue $ 375,203 $ 485,424 $ 110,221 29 % Revenue increased by $110.2 million from the year ended December 31, 2021, compared to the year ended December 31, 2022. The increase was driven primarily by a $115.7 million increase in royalty revenue that is directly associated with the specified percentage of proceeds that Lilly received from the sales of bebtelovimab to the U.S. Government and commercially. Further, significant growth in partnered program starts and a continued increase in programs under contract contributed to an increase of $21.7 million in non-COVID discovery programs. The increase in revenue was partially offset by a decrease of $20.1 million in licensing revenue related to the Trianni platform and reduced milestone achievements within the year. Operating Expenses Royalty fees Year Ended December 31, Change 2021 2022 Amount % Royalty fees $ 45,516 $ 66,436 $ 20,920 46 % Royalty fees were $45.5 million and $66.4 million for the years ended December 31, 2021, and December 31, 2022, respectively. Royalty fees were attributable to the royalty revenues received by the Company from sales of bamlanivimab and bebtelovimab by Lilly due to AbCellera’s collaborations in pandemic response. Research and Development Year Ended December 31, Change 2021 2022 Amount % Research and development $ 62,062 $ 107,879 $ 45,817 74 % Research and development expenses increased by $45.8 million, or 74%, from the year ended December 31, 2021, compared to the year ended December 31, 2022, reflecting continuing strong investments in the capacity and capabilities of AbCellera’s discovery and development engine. $17.0 million of the increase is due to the increase in compensation expense consistent with increased 80 headcount and $ 8.8 million of the increase relates to stock-based compensation expense . $ 2 0.0 million of the increase is attributed to an increase in research materials, supplies , software, facilities, and services used to execute on our research and development activities and strengthen our discovery and development engine . Sales and Marketing Year Ended December 31, Change 2021 2022 Amount % Sales and marketing $ 6,913 $ 11,270 $ 4,357 63 % Sales and marketing expenses increased by $4.4 million, or 63%, from the year ended December 31, 2021, compared to the year ended December 31, 2022. The increase was primarily driven by $4.0 million in total compensation expenses related to an increased headcount in business development and marketing teams and $1.4 million in increased travel, advertising, and consulting costs. The increase was partially offset by $0.8 million for a donation made in 2021 to Surrey Hospital to fund a study related to bamlanivimab in Canada. General and Administrative Year Ended December 31, Change 2021 2022 Amount % General and administrative $ 41,848 $ 55,485 $ 13,637 33 % General and administrative expenses increased by $13.6 million, or 33%, from the year ended December 31, 2021, compared to the year ended December 31, 2022. $9.1 million of the increase in general and administrative expense is related exclusively to the increase in stock-based compensation expense and a further $5.3 million is related to increased compensation expense which was driven by increased headcount within the general and administrative function. $2.6 million of the increase in general and administrative expense is due to increased expenditures related to rent and facilities expense, software, insurance premiums, and increased general office and expenses to support the growth of the Company. The increase was partially offset by a decrease of $3.4 million in legal and accounting fees. Depreciation, Amortization, and Impairment Year Ended December 31, Change 2021 2022 Amount % Depreciation, amortization, and impairment $ 14,451 $ 27,843 $ 13,392 93 % Depreciation, amortization, and impairment expense increased by $13.4 million, or 93%, from the year ended December 31, 2021, compared to the year ended December 31, 2022. An increase of $8.4 million (or $6.3 million, net of deferred income tax) relates to a full impairment charge of the carrying value of one distinct program from our suite of next-generation mice acquired through our 2020 Trianni acquisition. The discontinuance of this specific mouse program does not have an impact on the validity and continued development of our remaining suite of next-generation transgenic humanized mice and does not impact our business model and ability to deliver on our antibody discovery and development engine. The remaining $5.0 million increase relates to additions of $14.3 million of property and equipment and intangible assets purchased in the year, depreciating and amortizing over their respective useful lives. Other (Income) Expense Interest (Income) Year Ended December 31, Change 2021 2022 Amount % Interest (income) $ (3,330 ) $ (16,079 ) $ (12,749 ) 383 % Interest income increased by $12.7 million, or 383%, from the year ended December 31, 2021, compared to the year ended December 31, 2022. The increase was primarily driven by an increase in interest rates, a larger average cash and cash equivalents and marketable securities balances maintained in the year ended December 31, 2022, compared to the prior period. 81 Interest and Other Year Ended December 31, Change 2021 2022 Amount % Interest and other $ 6,080 $ 4,045 $ (2,035 ) (33 )% Interest and other decreased by $2.0 million, or 33% from the year ended December 31, 2021, compared to the year ended December 31, 2022. The $1.9 million decrease was attributed to a decrease in other expenses and an increase in other income. F oreign exchange gains due to fluctuations in the Canadian and U.S. dollar exchange rate was offset by fair value adjustments related to contingent consideration and held-for-trading marketable securities due to an increase in interest rates in the period. Grants and Incentives Year Ended December 31, Change 2021 2022 Amount % Grants and incentives $ (17,486 ) $ (10,554 ) $ 6,932 (40 )% Grants and incentives decreased by $6.9 million, or 40%, from the year ended December 31, 2021, compared to the year ended December 31, 2022. The decrease was primarily driven by a decrease in activity relating to research and development expenditures that are eligible for the SIF project. Income Tax Expense Year Ended December 31, Change 2021 2022 Amount % Income tax expense $ 65,685 $ 80,580 $ 14,895 23 % Income taxes increased by $14.9 million, or 23%, from the year ended December 31, 2021, compared to the year ended December 31, 2022. For the year ended December 31, 2022, our provision for income taxes is $80.6 million primarily relating to current net earnings and partly offset by deferred income taxes due to timing of differences between accounting net income and taxable income. Comparison of the Years Ended December 31, 2020 and 2021 Revenue Year Ended December 31, Change 2020 2021 Amount % Revenue Research fees $ 19,848 $ 19,076 $ (772 ) (4 )% Licensing revenue - 20,778 20,778 N/A Milestone payments 15,000 8,000 (7,000 ) (47 )% Royalty revenue 198,307 327,349 129,042 65 % Total revenue $ 233,155 $ 375,203 $ 142,048 61 % Revenue increased by $142.0 million from the year ended December 31, 2020 to the year ended December 31, 2021. In 2021, we received milestone revenue upon the first commercial sale in Europe by Lilly relating to molecule bamlanivimab for treatment of COVID-19 in the amount of $7.0 million and $1.0 million in milestone payments from Trianni licenses. Royalty revenue of $327.3 million for the year ended December 31, 2021 are directly associated with the specified percentage of proceeds that Lilly received from the sales of bamlanivimab. We earned $20.8 million in licensing revenue related to the Trianni humanized rodent platform business. The significant growth we delivered in partnered program starts drove higher research fees in the year on non-COVID-19 discovery programs, offset by fees earned last year against our COVID-19 discovery program leading to a net decrease in research fees of $0.8 million. 82 Operating Expenses Royalty fees Year Ended December 31, Change 2020 2021 Amount % Royalty fees $ 27,143 $ 45,516 $ 18,373 68 % Royalty fees increased by $18.4 million from the year ended December 31, 2020 to the year ended December 31, 2021. Royalty fees are directly attributable to the royalty revenues received by the Company from sales of bamlanivimab by Lilly due to AbCellera’s collaborators in pandemic response. Research and Development, Exclusive of Depreciation, Amortization, and Impairment Year Ended December 31, Change 2020 2021 Amount % Research and development $ 29,393 $ 62,062 $ 32,669 111 % Research and development expenses increased by $32.7 million, or 111%, from the year ended December 31, 2020 to the year ended December 31, 2021 reflecting continuing strong investments in the capacity and capabilities of AbCellera’s antibody discovery and development engine. $13.2 million of the increase is due to the increase in compensation expense consistent with increased headcount. $10.2 million of the increase relates to stock-based compensation expense. $13.6 million of the increase is attributed to an increase in facilities, research materials, supplies and services consistent with the overall increase in research and development activities. The overall increase was partly offset by the decrease in IPR&D expense of $4.2 million attributable to the 2020 purchase of the OrthoMab bispecific platform, and licensing fees incurred during the prior period. Sales and Marketing Year Ended December 31, Change 2020 2021 Amount % Sales and marketing $ 3,842 $ 6,913 $ 3,071 80 % Sales and marketing expenses increased by $3.1 million, or 80%, from the year ended December 31, 2020 to the year ended December 31, 2021. The increase was primarily driven by increased headcount in business development and marketing staff which resulted in an increase of $1.5 million in compensation expenses. $0.8 million of the increase is attributable to a donation made to Surrey Hospital to fund a study related to bamlanivimab in Canada. The remaining increase of $0.5 million is attributable to increased recruiting and consulting fees. General and Administrative Year Ended December 31, Change 2020 2021 Amount % General and administrative $ 11,910 $ 41,848 $ 29,938 251 % General and administrative expenses increased by $29.9 million, or 251%, from the year ended December 31, 2020 to the year ended December 31, 2021. $11.7 million of the increase in general and administrative expense is related to the increased impact of non-cash stock-based compensation expense. $4.1 million of the increase is related to increased compensation expense, excluding stock-based compensation, which was driven by increased headcount within the general and administrative function. $7.3 million is attributable to legal fees and other corporate matters relating to being a public company and protecting our intellectual property. $6.7 million of the increase in general and administrative expense is due to increased expenditures related to rent and facilities expense, software, insurance premiums, and increased general office and expenses to support the growth of the Company. Depreciation and Amortization Year Ended December 31, Change 2020 2021 Amount % Depreciation and amortization $ 4,836 $ 14,451 $ 9,615 199 % 83 Depreciation and amortization expense increased by $9.6 million, or 199%, from the year ended December 31, 2020 to the year ended December 31, 2021. Depreciation expense increased by $2.1 million due to the depreciation of equipment and facilities related to capital equipment purchases of $8.4 million in the year. Amortization expense increased by $7.5 million due to the amortization of acquired intangible assets over their respective useful lives. Other (Income) Expense Interest (Income) Year Ended December 31, Change 2020 2021 Amount % Interest income $ (293 ) $ (3,330 ) $ (3,037 ) 1037 % Interest income increased by $3.0 million, or 1037%, from the year ended December 31, 2020 to the year ended December 31, 2021. The increase was primarily driven by a larger average cash and cash equivalents balances maintained in the year ended December 31, 2021 compared to the prior period. Interest and Other Expense Year Ended December 31, Change 2020 2021 Amount % Interest and other $ 6,811 $ 6,080 $ (731 ) (11 )% Interest and other expense decreased by $0.7 million, or 11% from the year ended December 31, 2020, to the year ended December 31, 2021. $4.9 million of the decrease relates to combined interest, and cancellation fees and legal fees on early retirement of the OrbiMed credit agreement in July 2020, in addition to interest expense on the credit facility for the period before retirement. This was offset by a $3.4 million increase in fair value adjustments of contingent consideration and investments and $0.6 million foreign exchange (gain) loss driven primarily by foreign denominated cash balances that we maintain and the relative exchange rates against the U.S. dollar. Grants and Incentives Year Ended December 31, Change 2020 2021 Amount % Grants and incentives $ (8,320 ) $ (17,486 ) $ (9,166 ) 110 % Grants and incentives increased by $9.2 million, or 110%, from the year ended December 31, 2020 to the year ended December 31, 2021. The increase was primarily driven by an increase in activity relating to research and development expenditures that are eligible for the SIF project. Income Tax Expense Year Ended December 31, Change 2020 2021 Amount % Income taxes $ 38,915 $ 65,685 $ 26,770 69 % Income taxes increased by $26.8 million, or 69%, from the year ended December 31, 2020, to the year ended December 31, 2021. For the year ended December 31, 2021, our provision for income taxes is $65.7 million primarily relating to current net earnings and partly offset by deferred income taxes due to timing of differences between accounting net income and taxable income. Liquidity and Capital Resources As of December 31, 2022, we had $886.5 million of cash, cash equivalents, and marketable securities, comprised of $386.5 million in cash and cash equivalents and $500.0 million in marketable securities. The increase of $163.5 million since December 30, 2021, was primarily from cash flow from operations and driven by the receipt of accounts receivable relating to royalties from bamlanivimab and bebtelovimab in the year ended December 31, 2022. 84 We have generated positive operating cash flow cumulatively since our inception in 2012 and in every year since 2018. We intend to significantly invest in our business, and as a result may incur operating losses in future periods. We will continue to invest in research and development efforts towards expanding our capabilities and expertise along our discovery and development engine , the building of our business development team and marketing our solutions to new and existing partners, and the expansion of our future office headquarters, and related infrastructure, including execution of long-term office-lease arrangements. Based on our current business plan, we believe that our existing cash, cash equivalents, marketable securities, and anticipated cash flows from operations, will be sufficient to meet our working capital and capital expenditure needs and do not anticipate the need of external funding over at least the next 36 months following the date of this report. Sources of Liquidity Since our inception, we have financed our operations primarily from revenue in the form of research fees, milestone payments, and royalty payments from partners, government grants, and debt and equity financings. Government of Canada’s Strategic Innovation Fund In 2020, we entered into a multi-year agreement with the Canadian government’s Strategic Innovation Fund, or SIF. Under this agreement, up to CAD $175.6 million ($129.7 million as of December 31, 2022) was committed by the Government of Canada to be directed towards two key stages of a project. The first stage will provide financial support to our operations during the work that we perform for the discovery of antibodies against COVID-19. The funding supports investment into equipment, teams and physical space to advance our discovery and development engine for future pandemic preparedness. The Canadian government has committed up to CAD $63.9 million ($47.2 million as of December 31, 2022) towards this stage of the project, based on costs incurred and paid and such funding is non-repayable. As of December 31, 2022, we have claimed a total of $46.1 million under this first stage of the project. The second stage of the project is intended to fund the expansion of research and development; building out process development and chemistry, manufacturing and control, or CMC, capabilities; constructing a facility for GMP manufacturing; and all related supporting laboratory and office requirements. The project related budget includes project costs for the land and building, the fit out for offices, labs, GMP cleanrooms as well as the equipment required to develop fully functional CMC and GMP capabilities as required to support clinical trials. The Canadian government has committed up to CAD $111.7 million ($82.5 million as of December 31, 2022) for this project, contingent upon costs incurred and paid, with the rest to be co-funded by us through partnering with a developer and taking a co-ownership position in the resulting facilities. SIF funding for this project started in 2021 and is expected to continue through to 2025. Repayment is conditional on achieving certain revenue threshold over a seven year period from the time of completion of the funded project and is calculated as a percentage rate of the Company’s revenue, with payment made to the Government of Canada on an annual basis during the repayment period of fifteen years. If the revenue threshold is not met, the SIF funding contribution will be non-repayable. This funding and its associated conditional repayment is not secured by any of our assets or that of the project, and includes certain non-financial covenants and restrictive covenants on dividend payments or other shareholder distributions that would prevent the Company in satisfying its obligations under the arrangement. As of December 31, 2022, we have claimed a total of $33.2 million under this second stage of the project. No amounts have been accrued related to the repayment terms as the conditions are estimated to be non-probable as of December 31, 2022. We conduct work, incur expenses, and fund all costs from our own cash resources. On a quarterly basis, we submit claims to the SIF for eligible reimbursable expenses. For the year ended December 31, 2022, we claimed a total of $18.9 million under SIF. Cash Flows The following table summarizes our cash flows for the periods presented: Year Ended December 31, 2020 2021 2022 Net cash provided by (used in): Operating activities $ 22,690 $ 244,584 $ 277,360 Investing activities (119,780 ) (332,247 ) (352,625 ) Financing activities 683,653 (3,886 ) (1,628 ) Effect of exchange rate changes on cash and cash equivalents — (1,425 ) (9,599 ) Net increase (decrease) in cash and cash equivalents, and restricted cash $ 586,563 $ (92,974 ) $ (86,492 ) 85 Operating Activities Net cash provided by operating activities increased from $244.6 million in the year ended December 31, 2021, to $277.4 million in the year ended December 31, 2022. The increase resulted primarily from increased royalty revenues and receipt of accrued royalties receivable in the period, partially offset by an increase in expenditures that reflect AbCellera’s investment in research and development and growth of the Company, in addition to payment for the Company’s income taxes liability. Net cash provided by operating activities increased from $22.7 million in the year ended December 31, 2020, to $244.6 million in the year ended December 31, 2021. The increase resulted primarily from increased revenue from royalty and licensing streams, satisfaction of clinical milestones under our partnership with Lilly, and continued discovery research activities, as well as upfront payments from securing new multi-year, multi-target contracts with partners. Investing Activities Net cash used in investing activities increased from $332.2 million in the year ended December 31, 2021, to $352.6 million in the year ended December 31, 2022. The increase in investing activities in 2022 was attributed to the purchase of property and equipment to facilitate the growth of the Company, including the purchase of land related to our future GMP facility, in addition to the purchase of intangible assets and marketable securities. There were no acquisitions in the period and a decrease in the total receipt of grant funding in the 2022 from the prior year due to a decrease in SIF-eligible research and development activities performed in the period. Net cash used in investing activities increased from $119.8 million in the year ended December 31, 2020, to $332.2 million in the year ended December 31, 2021. The increase in investing activities during 2021 were directly attributed to our investment in marketable securities in addition to real estate, particularly our land purchase related to our future GMP facility. Additional investing activities during the period were related to facilities and equipment expenditures in our Vancouver offices, the acquisition of TetraGenetics, and investment in equity accounted investees, offset by grant funding received in the period. Financing Activities Net cash used in financing activities decreased from $3.9 million for the year ended December 31, 2021, to net cash used in financing activities of $1.6 million for the year ended December 31, 2022. This was primarily due to no contingent consideration payments made or long-term debt repaid in 2022. Net cash provided by financing activities decreased from $683.7 million for the year ended December 31, 2020, to net cash used by financing activities of $3.9 million for the year ended December 31, 2021. This was primarily due to proceeds from Series A2 financing, convertible debentures, and common stock from the IPO in 2020. Contractual Obligations and Commitments The following table summarizes our commitments to settle contractual obligations as of December 31, 2022, other than leases which are recognized as operating lease liabilities in our consolidated balance sheets: Payments Due by Period Total Less than 1 year 1 to 3 Years 3 to 5 Years More than 5 years Commitments ( 1) 163,225 - 6,761 13,522 142,942 Royalty fees payable 19,347 19,347 - - - Contingent consideration payable ( 2) 60,265 44,211 10,832 2,240 2,982 Total $ 242,837 $ 63,558 $ 17,593 $ 15,762 $ 145,924 (1) Includes leased facility where the lease commencement date is subsequent to December 31, 2022. (2) As of December 31, 2022, the contingent consideration payable had an estimated fair value of approximately $60.3 million, which has been included as a liability on our consolidated balance sheets. (3) Excludes financial arrangements disclosed in Note 9 and Note 13 to our audited consolidated financial statements. 86 The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. Purchase and Other Obligations In the normal course of business, we enter into contracts with third parties for research and development supplies and other services. These contracts generally do not contain minimum purchase commitments and are cancellable contracts. These payments are not included in the table above as the amount and timing of such payments are not known as of December 31, 2022. The Company may enter into certain agreements with strategic partners in the ordinary course of operations that may include contractual milestone payments related to the achievement of pre-specified research, development, regulatory and commercialization events and indemnification provisions, which are common in such agreements. Pursuant to the agreements, the Company may be obligated to make research and development and regulatory milestone payments upon the occurrence of certain events and upon receipt of royalty payments in the low single-digits to mid-twenties based on certain net sales targets. Other than the amounts included in the above table, these contingent future payments are not included in the table above as they entail uncertainties in relation to the amount and timing of such payments as they are contingent upon future events, such as achieving certain commercial milestones or generating future product sales. Berkeley Lights Litigation See Item 3 “Legal Proceedings” for detailed information. The timing of the incurrence of legal expenses relating to pending litigation is difficult to predict and the outcome of litigation is inherently uncertain. Related costs and outcomes could materially affect our financial condition and operating results in future periods. Critical Accounting Policies and Estimates We have prepared our consolidated financial statements in accordance with U.S. GAAP. Our preparation of these consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 3 to our audited consolidated financial statements, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements. Revenue Recognition Our revenue primarily consists of research fees, licensing revenue, milestone payments and royalty revenue, which are generated through our performance of antibody discovery research for our partners, and licensing revenue, which we generated from our Trianni humanized rodent platform. Promised deliverables to our global partners include research and development and licenses. The Company applied ASC 606 to all arrangements to date. We recognize revenue when we satisfy the performance obligations under the terms of a contract and control of our services is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those services. When applying the revenue recognition criteria of ASC 606 to research fees and milestone payments, management may apply significant judgment when evaluating whether contractual obligations represent distinct performance obligations, including whether options for additional goods or services represent a material right; allocating the transaction price to performance obligations within a contract; and assessing the recognition and possible future reversal of variable consideration. Research Fees. The transaction price generally includes fixed fees due at contract inception as well as fixed fees payable at the beginning and end of different phases of the discovery research services performed. Revenue is recognized based on the amount of the transaction price that is allocated to each respective performance obligation when or as the performance obligation is satisfied by transferring a promised good and/or service to the customer. We allocate the transaction price to each distinct performance obligation identified in the contract based on relative observable standalone selling prices. 87 Licensing Revenue. For the licenses of our intellectual property the Company recognizes revenue from non-refundable, upfront fees when the license is transferred to the customer and the customer is able to use and benefit from the license. Milestone Payments. At the inception of the arrangement and at each reporting date thereafter, we evaluate whether the associated event is considered probable of achievement and estimate the amount to be included in the transaction price using the most likely amount method. Whether the criteria for achieving the milestone payments will be met in the future is highly uncertain. Consequently, there is a significant risk that we may not earn all of the milestone payments from each of our arrangements. This uncertainty is considered resolved when the associated event giving rise to the milestone payment occurs. Royalty Revenue. Royalty revenue is recognized in the period in which the obligation is satisfied and the corresponding sales by our corporate partners occur. The sales are based on sales data reported by our partners. Differences between actual and estimated royalty revenue will be adjusted for in the period in which they become known, which is generally expected to be the following quarter. Business Combination, Goodwill and Intangible Assets Acquisitions of businesses are accounted for using the acquisition method. The consideration of a business combination is measured, at the date of the exchange, as the aggregate of the fair value of assets given, liabilities incurred or assumed and equity instruments issued by us to the former owners of the acquiree in exchange for control of the acquiree. Acquisition related costs incurred for the business combination are expensed. The acquiree’s identifiable assets, liabilities and contingent liabilities are recognized at their fair value at the acquisition date. Goodwill arising on acquisition is recognized as an asset and initially measured at cost, being the excess of the consideration of the acquisition over our interest in the fair value of the net identifiable assets, liabilities and contingent liabilities recognized. If our interest in the fair value of the acquiree’s net identifiable assets, liabilities and contingent liabilities exceeds the cost of the acquisition, the excess is recognized in earnings or loss immediately. Goodwill, which is not amortized, will be evaluated for impairment on an annual basis on October 1 or more frequently if an indicator of impairment is present. As part of our acquisitions of Trianni in 2020, and TetraGenetics in 2021, Goodwill, License, Technology and In-Process Research and Development Intangible (“IPR&D”) intangible assets were recognized. IPR&D is classified as indefinite-lived, is not amortized, and is evaluated for impairment on an annual basis on October 1 or more frequently if an indicator of impairment is present. IPR&D becomes definite-lived upon the completion or abandonment of the associated research and development efforts. To test our IPR&D for impairment we first perform a qualitative assessment to determine if it is more likely than not that the carrying amount of our indefinite-lived intangible assets exceeds its fair value. If it is, a quantitative assessment is required. Based on our qualitative assessment, other than for an impairment associated to one of our IPR&D assets as described in the notes to the consolidated financial statements, we determined there were no potential indicators of impairment of our remaining indefinite-lived intangible assets as of October 1, 2022 and during the remainder of 2022. For our annual goodwill impairment test, we begin with a qualitative assessment to determine whether a quantitative impairment test is necessary. If we determine, after performing an assessment based on the qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, or that a fair value of the reporting unit substantially in excess of the carrying amount cannot be assured, then a quantitative impairment test would be performed. The quantitative test for impairment requires us to make judgments relating to future cash flows, growth rates and economic and market conditions. These evaluations are based on determining the fair value of the reporting unit using a valuation method such as discounted cash flow or a relative, market-based approach. At October 1, 2022, we performed a qualitative assessment for our annual impairment test of goodwill after concluding that it was not more likely than not that the fair value of the reporting unit was less than its carrying value. Consequently, the quantitative impairment test was not required. The Company concluded that there were no impairment indicators related to goodwill during the remainder of 2022. As part of our ongoing planned research and development and execution of our programs under contract, changes to our plans due to internal and external factors out of our control could impact the amount and timing of projected future cash flows. As a result, these unplanned changes could result in us performing a quantitative impairment test in the future, which could result in a potential non-cash impairment charge associated with our goodwill or intangible assets, which would reduce our future earnings. In connection with our acquisition of Trianni, we may be required to make future payments to former shareholders of Trianni upon the achievement of certain earn-out provisions related to a specific customer license ending on April 9, 2024. As of December 31, 2022, the contingent consideration payable had an estimated fair value of approximately $23.5 million, of which $12.9 million is a short-term liability and 10.6 million is a long-term liability on our consolidated balance sheets. In connection with our acquisition of TetraGenetics, contingent consideration payable at December 31, 2022, is $36.8 million, of which $31.3 million is a short-term liability and $5.5 million is a long-term liability on our consolidated balance sheets. Contingent consideration payable is a 88 financial liability and measured at its fair value at each reporting period, with any changes in fair value from the previous reporting period recorded in the statement s of income and comprehensive incom e . In estimating the fair value of the intangible assets and contingent consideration, we applied an income approach based on the present value of the relevant future estimated after-tax cash flows. The key assumptions include the amount and timing of revenues, success probability, and discount rates. A 10% change in these key assumptions associated with the recognition of intangible assets and contingent consideration would not have a material impact on the amounts recognized. See Note 20 to our consolidated financial statements for further information related to the accounting for the above acquisitions. Stock-Based Compensation We measure stock-based compensation based on the grant date fair value of the stock-based awards and recognize stock-based compensation expense on a straight-line basis over the requisite service period of the awards, which is generally the vesting period of the respective award. For non-employee awards, compensation expense is recognized as the services are provided, which is generally ratably over the vesting period. Awards with an exercise price which is not denominated in: (a) the currency of a market in which a substantial portion of our equity securities are traded, (b) the currency in which the individual’s pay is denominated, or (c) our functional currency, are classified as liabilities, and are subsequently re-measured to fair value at each balance sheet date until exercised or cancelled, with changes in fair value recognized as compensation cost for the period. As of December 31, 2021, and 2022, there were no liability classified options outstanding. Stock-based compensation expense is classified in our consolidated statements of income and comprehensive income based on the function to which the related services are provided. We recognize stock-based compensation expense for the portion of awards that have vested. Forfeitures are accounted for as they occur. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model, which requires inputs based on certain subjective assumptions, including the expected share price volatility, the expected term of the option, the risk-free interest rate for a period that approximates the expected term of the option, and our expected dividend yield. Prior to our IPO, as there was no public market for our common shares, we determined the volatility for awards granted with reference to an analysis of reported data for a group of guideline companies that issued options with substantially similar terms. We expect to continue to do so until we have adequate historical data regarding the volatility of the trading price of our common shares on the Nasdaq Stock Market. The risk-free interest rate is determined by reference to government treasury yield curves in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The expected term represents the period that the stock-based awards are expected to be outstanding. We use the simplified method to determine the expected term, which is based on the average of the time-to-vesting and the contractual life of the options. We have not paid, and do not anticipate paying, dividends on our common shares; therefore, the expected dividend yield is assumed to be zero. As there had been no public market for our common shares prior to our IPO, the historical estimated fair value of our common shares has been approved by our board of directors. Our board of directors determined the per-share fair value of our common shares in connection with option grants as equal to the per-share issuance price of our common shares in the then-most recent arms’ length financing transaction, and when appropriate, considered our most recently available independent third-party valuations of common shares and our operating results and financial performance. In accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation , third-party valuation firms prepared valuations of our common shares. From November 2019 until March 2020, such valuations used a discounted cash flow, or DCF, analysis, which is based on management’s projection of future revenues and costs. The future cash flows are adjusted to arrive at a risk-adjusted present-day value of the future cash flows and fair value of equity. From March 2020 to July 2020, such valuations used a methodology that calculated the implied total value of an enterprise by accounting for all share class rights and preferences, as of the date of the latest financing. The total equity value implied by this transaction was then applied in the context of an option pricing model to determine the value of each class of our shares. The analysis used an option pricing method, or OPM, which treats common shares and preferred shares as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. The OPM considers the preferred shareholders’ liquidation preferences, participation rights, dividend policy and conversion rights to determine how proceeds from a liquidity event will be distributed among various ownership classes at a future date. A discount for lack of marketability of the common shares is then applied to arrive at an indication of value for the common shares. After July 2020, but prior to our IPO, such valuations estimated the enterprise value of our business using a hybrid approach in determining the fair value of our common shares that includes a probability-weighted expected return method, or PWERM and the OPM. Under a PWERM, the fair market value of our common shares is estimated based upon an analysis of future values for the enterprise assuming various future outcomes. Based on the timing 89 and nature of an assumed liquidity event in each scenario, a discount for lack of marketability would be applied to each scenario, as appropriate. The probability-weighted the value of each expected outcome would then be used to arrive at an estimate of fair value per common share. Our third-party valuation reports estimated a valuation of our common shares of $1.24 per share as of June 30, 2020, $2.37 per share as of September 30, 2020, and $2.71 per share as of October 31, 2020. No third-party valuation report was prepared for any period after October 31, 2020. In addition to considering the results of the third-party valuations, our board of directors considered various objective and subjective factors to determine the fair value of our common shares as of each grant date, which may be a date other than the most recent third-party valuation date, including: • the prices at which we most-recently sold preferred shares and the superior rights and preferences of the preferred shares relative to our common shares at the time of each grant; • the lack of liquidity of our equity as a private company; • our stage of development and business strategy and the material risks related to our business and industry; • our financial condition and operating results, including our levels of available capital resources and forecasted results; • developments in our business, including the achievement of milestones such as entering into partnering agreements; • the valuation of publicly traded companies in the life sciences, biopharmaceutical and healthcare technology sectors, as well as recently completed mergers and acquisitions of peer companies; • any external market conditions affecting our industry, and trends within our industry; • the likelihood of achieving a liquidity event for the holders of our preferred shares and holders of our common shares, such as an initial public offering, or IPO, or a sale of our company, given prevailing market conditions; and • the analysis of IPOs and the market performance of similar companies in our industry. For purposes of determining the fair value of our common shares for the awards granted in October 2020, we also considered the applicability of the following factors and determined not to assign probability weightings to the potential occurrence of such events for the reasons discussed below: • The application by Lilly on October 7, 2020, of the EUA for the bamlanivimab single agent therapy to the FDA was not assigned a probability weighting due to the significant general risks and uncertainties in drug therapy applications with the FDA, in addition to the binary nature and outcome of the EUA application assessment. While we were aware that an EUA application was submitted to the FDA, we were not a party to the application, nor did we have control over its contents. In addition, we were not involved in any interactions with the FDA in relation to this application and therefore had little insight into the status of the application, the nature of any questions or comments raised by the agency in its review or any likelihood of the grant of the EUA. • The October 28, 2020 announcement by Lilly of an agreement with the U.S. government to supply 300,000 vials of bamlanivimab for $375.0 million for which we are eligible to receive royalties in the low- to mid-twenties was not assigned a probability weighting due to the substantial uncertainty as to the likelihood of receipt of the EUA that is a precondition for any sales of the antibody to occur and upon which our eligibility to receive royalties depends. • The process of acquiring Trianni, Inc. was not assigned a probability weighting because the proposed acquisition was to be made at fair value of the net assets acquired, the acquisition was not completed until November 3, 2020, and not publicly announced until November 18, 2020. Until such announcement, we had no insight into market reaction to this acquisition and its perceived impact on our valuation. The assumptions underlying these valuations represented management’s best estimates, which involved inherent uncertainties and the application of management’s judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, the fair value of our common shares and our stock-based compensation expense could be materially different. • Stock options granted after October 2020 and prior to our IPO, had a per-share exercise price based on the factors described above. The EUA application for the bamlanivimab single agent therapy was granted by the FDA on November 9, 2020, and on December 2, 2020, the U.S. government announced the purchase of an additional 650,000 doses of bamlanivimab for $812.5 million. 90 Following the completion of our IPO, the fair value of our common shares is determined based on the quoted market price of our common shares. See Note 11 to our consolidated financial statements concerning additional stock-based compensation expense and certain specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options granted in the years ended December 31, 2020, 2021 and 2022. Recent Accounting Pronouncements See Note 4 to our annual consolidated financial statements appearing elsewhere in this Annual Report for a description of recent accounting pronouncements applicable to our consolidated financial statements. Impact of COVID-19 Since the start of the COVID-19 pandemic, we have taken steps to protect our employees, business partners, vendors, and contractors. To address the multiple dimensions of the pandemic, we have been continuously monitoring the global situation, executing mitigation activities whenever and wherever required, and following guidance from provincial and federal health authorities. The full extent to which the ongoing COVID-19 pandemic and related developments may affect the Company’s future financial results and operations will depend on future developments which are difficult to predict . As of the date of these consolidated 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 consolidated financial statements . 91