Item 7. Management’s Discussion and Analysis
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. To maximize the value and impact of our work, we are advancing a pipeline of programs and strategically partnering with groups with novel science or innovative technology.
We focus on the development of antibody-based drugs and are committed to improving discovery and development. We aim to build a competitive advantage in bringing antibody therapeutics from target into 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 deliberately partner with companies of all sizes to propel programs pursuing the best ideas for new antibody-based drugs to the clinic, together. We enable discovery against targets that have traditionally been intractable, and we accelerate programs against less difficult targets.
As our capabilities have grown, we are also strategically leveraging our engine to develop internal programs to address areas of high unmet medical need and to advance our pipeline of first-in-class and best-in-class medicines.
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 partnerships generally include royalty payments (or equivalents) on net sales. For discovery agreements, these are typically in the single-digit to low-double digit range. We believe that our internal programs, if successfully out-licensed, may generate substantial upfront payments and royalty positions on net sales in the high single-digits to high teens range, in addition to clinical and commercial milestones.
We focus a substantial portion of our resources on research and development efforts towards strengthening our discovery and development engine and developing a pipeline of internal and co-development programs. We expect to continue to make significant investments in this area for the foreseeable future, over time shifting effort from engine development towards engine application. We expect to continue to incur significant expenses 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 completing the construction of our small-scale manufacturing facility and our new headquarters through our joint ventures;
• pursue internal and co-development programs in preclinical and eventually clinical development;
• market and sell our solutions to existing and new strategic partners;
• expand and enhance operations to deliver programs, including investments in manufacturing;
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• 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 .
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. Additionally, we have twice secured significant government co-investments in the form of non-dilutive capital to help fund research and development, including internal programs, and facility construction.
The Company has advanced two AbCellera-led programs into IND-enabling studies. The programs align with the Company's strategy of building value, both through strategic partnerships, and through internal discovery and development of potential first-in-class and best-in-class antibody therapies. We have started a cumulative total 87 partner-initiated programs with downstream participation and have seen a cumulative total 13 molecules advanced into the clinic, as illustrated by the following chart. In 2023, we added 29 new programs under contract, started 12 partner-initiated programs with downstream participation, and saw partners advance five molecules into the clinic.
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Financial Highlights
The following table summarizes our key operating results for the years ended December 31, 2021, 2022, and 2023. All figures are in U.S. dollars and amounts are expressed in thousands, except earnings (loss) per share data:
Twelve Months Ended December 31,
Financial Performance 2021 2022 2023
Revenues:
Research fees $ 19,076 $ 40,802 $ 35,556
Licensing revenue 20,778 696 969
Milestone payments 8,000 900 1,500
Royalty revenue 327,349 443,026 —
Total revenue 375,203 485,424 38,025
Operating expenses:
Royalty fees 45,516 66,436 —
Research and development (1)
62,062 107,879 175,658
Other operating expenses 63,212 94,598 99,574
Total operating expenses 170,790 268,913 275,232
Income (loss) from operations 204,413 216,511 (237,207)
Total other (income) (14,736) (22,588) (63,178)
Net earnings (loss) before income tax 219,149 239,099 (174,029)
Net earnings (loss) 153,464 158,519 (146,398)
Net earnings (loss) per share attributable to common shareholders
Basic $ 0.56 $ 0.56 $ (0.51)
Diluted $ 0.48 $ 0.50 $ (0.51)
Operating expenses include stock-based compensation:
Research and development expenses 15,663 24,327 31,781
Sales and marketing expenses 2,120 3,134 5,129
General and administrative expenses 12,863 22,020 27,274
Financial Position and Liquidity December 31, 2022 December 31, 2023
Cash and cash equivalents $ 386,535 $ 133,320
Marketable securities 499,950 627,265
Total cash, cash equivalents, and marketable securities 886,485 760,585
Total assets 1,540,907 1,488,094
Total shareholders' equity 1,233,277 1,152,318
(1) Exclusive of depreciation, amortization, and impairment.
Key Factors Affecting Our Results of Operations and Future Performance
We believe that our financial performance has been, and in the foreseeable future will continue to be, primarily driven by multiple factors as described below, each of which presents growth opportunities for our business. These factors also pose important challenges that we must successfully address 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.
• Engaging with strategic partners. Our potential to grow revenue, in both the near and long term, is dependent on successfully engaging with strategic partners. For existing strategic partners, we seek to expand
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our relationships with them to collaborate on additional programs initiated by them as well as to create a basis for potentially out-licensing some of our internal programs. Our teams are selective in determining which partners we choose to engage with, focusing on the opportunities with the strong potential to generate significant value in the long term.
• 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 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 propose 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.
• Successfully out-licensing drug candidates from our internal programs. We believe that our internal programs may result in drug candidates of interest to other drug developers with capabilities complimentary to our own. Where these capabilities can be expected to enhance the value of our drug candidate, we may seek to out-license. Successful out-licensing agreements could generate substantial up-front payments in addition to later milestone payments and royalties. Our financial performance may therefore be impacted by our ability to produce and out-license such drug candidates from our internal programs.
• 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 and our internal programs. 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. Specifically, we are currently completing our investments in integrated preclinical development and antibody manufacturing. We have also 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 business into adjacent therapeutic modalities. We intend to continue to devote resources to continue to improve our discovery differentiation which will impact our financial performance.
• Pursuing drug discovery and development opportunities internally . As the capabilities of our discovery and development engine have matured we are increasingly in a position to pursue attractive, well-validated targets ourselves, e.g. in the GPCR, ion channel, and TCE spaces. Such programs have the potential to yield first-in-class drug candidates in indications with substantial unmet medical need which we would wholly own. We plan on investing significant resources in the preclinical and, eventually, clinical development of internal programs which will impact our financial results. The investments in each program are undertaken at risk and may ultimately not yield a return.
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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 as further described below with respect to changes in this and upcoming reports.
Cumulative Metrics December 31, 2022 December 31, 2023 Change %
Number of discovery partners 40 46 15 %
Programs under contract 174 203 17 %
Partner-initiated program starts with downstreams* 75 87 16 %
Molecules in the clinic 8 13 63 %
* Metric adjusted from prior reporting
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.
Partner-initiated program starts with downstreams represent the number of unique partner-initiated programs where we stand to participate financially in downstream success 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 the selection and initiation of projects by our partners and the resulting potential for near-term payments. Cumulatively, partner-initiated program starts with downstream participation indicate our total opportunities to earn downstream revenue from milestone fees and royalties (or royalty equivalents) in the mid- to long-term. This is the first time we disclose this metric. See discussion below for additional explanation.
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 reached "open" status or has otherwise 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.
Discussion of Current and Future Changes . For the year ended December 31, 2023 we have made a change to our Key Business Metric relating to program starts, which we describe below. In addition, we are changing the set of metrics we will include within our 2024 disclosures which is also outlined below.
Number of Discovery Partners and Programs Under Contract
As our business has matured, we no longer consider the Number of Discovery Partners or Programs Under Contract meaningful metrics to evaluate our business.
We continue to focus on strategic partnerships rather than on deal volume in partnering, and we expect to increasingly drive value from our pipeline of internal and co-development programs. Both of these activities are best reported and viewed on an individual basis and not well represented by these two business metrics. As such, going forward, we will no longer be reporting on the Number of Discovery Partners and Programs Under Contract as continued discussion of the metrics provides no significant additional insight.
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Program Starts
We have also adjusted the business metric definition for program starts by (a) removing AbCellera-initiated programs that have been out-licensed or partnered and (b) excluding programs without downstream participation.
a. Removal of AbCellera-initiated programs . In future, we expect to strike deals on more of our own programs, e.g. on the basis of our T-cell-engager platform, and will report on these separately, which is why we have made this modification. Historically, that has happened once, when we partnered our COVID-19 program to Lilly. Under the previous definition of Partnered Program Starts, this program was included, and the total cumulative number of Partnered Program Starts at the end of December 2023 correspondingly would have been one higher: 113 cumulative total partnered program starts compared to 112 partner-initiated program starts.
b. Exclusion of programs without downstream participation . Of the cumulative total 112 partner-initiated program starts, 87 programs included a position for downstream participation. When we first chose Program Starts as a business metric, we wanted to reflect both the near-term aspects of our antibody-discovery partnerships – such as operational capacity and potential for near-term payments – as well as the opportunities to earn downstream revenue from the resulting portfolio of downstream stakes in the mid-to-long term. As our strategy is unfolding, our main focus for partner-initiated programs is on adding value to the portfolio. Consequently, we are now including only programs with downstream participation.
If we had reported on our original metric of cumulative partnered program starts, the number would have been 101 for December 31, 2022.
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The table below outlines the details of molecules in the clinic as of December 31, 2023:
Molecule Most advanced stage Partner Therapy areas Program type
Bamlanivimab (LY-CoV555) Marketed, EUA* Eli Lilly and Company Infectious disease – COVID-19 AbCellera-initiated; partner-led
Bebtelovimab (LY-CoV1404) Marketed, EUA* Eli Lilly and Company Infectious disease – COVID-19 AbCellera-initiated; partner-led
TAK-920/DNL919 Phase 1* Denali Therapeutics Inc. Neurology - Alzheimer's Disease AbCellera partner-initiated discovery
Undisclosed Phase 1 Teva Pharmaceutical Industries Ltd. Neuroscience AbCellera partner-initiated discovery
IVX-01 Clinical field study Invetx Animal Health AbCellera partner-initiated discovery
Undisclosed Clinical field study Undisclosed Animal Health AbCellera partner-initiated discovery
Undisclosed Clinical field study Undisclosed Animal Health 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 Phase 1 NovaRock Biotherapeutics Inc. Oncology Trianni license
NBL-028 Phase 1 NovaRock Biotherapeutics Inc. Oncology Trianni license
Undisclosed Phase 1* Undisclosed Undisclosed Trianni license
AB-2100 IND open Arsenal Bio Oncology Trianni license
*Expect no further progress
Summary of partnership agreements with pharmaceutical and biotechnology companies that include downstream participation from 2016 to December 31, 2023:
Partner # of Targets & Duration Therapeutic Indication or Modality Date Announced
Undisclosed Multi-target, multi-year Undisclosed December 28, 2023 *
Undisclosed biotechnology company Multi-target, multi-year Undisclosed December 20, 2023 *
Undisclosed biotechnology company Multi-target, multi-year Undisclosed December 4, 2023 *
Prelude Up to 5 targets, multi-year Oncology November 1, 2023
Regeneron Pharmaceuticals, Inc. Up to 4 targets, multi-year Undisclosed September 20, 2023
Incyte Corporation Undisclosed Oncology September 13, 2023
RQ Biotechnology Ltd. Up to 3 targets, multi-year Infectious disease March 22, 2023
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' 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
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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 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. Up to 4 targets, 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 Pharmaceutical 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 Pharmaceutical 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 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. We expect that our overall revenue will fluctuate from period to period due to the timing of securing additional programs under contract and the progress of our internal programs, the inherently
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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, investments made in co-development and internal programs, and internal development of our discovery and development engine. 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, stock-based compensation costs for employees within our commercial sales functions, and marketing and travel expenses. We expect our sales and marketing expenses to increase in absolute dollars as we expand our commercial sales, 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, 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. 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.
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 federal and provincial governments. 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.
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Tax credits primarily include benefits from the Canadian and Australian federal and local research and development programs and are non-refundable. Non-refundable tax credits are recognized as a reduction to income tax expense in the year they are earned. We expect to continue to benefit from these tax programs in the future.
Other. Other consists primarily of 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.
Results of Operations
Comparison of the Years Ended December 31, 2022 and 2023
Revenue
December 31, Change
2022 2023 Amount %
Revenue:
Research fees $ 40,802 $ 35,556 $ (5,246) (13) %
Licensing revenue 696 969 273 39 %
Milestone payments 900 1,500 600 67 %
Royalty revenue 443,026 — (443,026) (100) %
Total revenue $ 485,424 $ 38,025 $ (447,399) (92) %
Revenue decreased by $447.4 million from the year ended December 31, 2022, compared to the year ended December 31, 2023 . The decrease was driven primarily by the absence of royalty revenue recognized in the period since the FDA announced that bebtelovimab is no longer authorized for emergency use in any U.S. region in the fourth quarter of 2022. Research fees decreased by $5.2 million due to the timing and mix of programs executed for our partners.
Operating Expenses
Royalty Fees
December 31, Change
2022 2023 Amount %
Royalty fees $ 66,436 $ — $ (66,436) (100) %
Royalty fees for the year ended December 31, 2022 and December 31, 2023 were $66.4 million and nil, respectively. Royalty fees in 2022 were attributable to the royalty revenues received by the Company from sales of bamlanivimab and bebtelovimab by Lilly.
Research and Development
December 31, Change
2022 2023 Amount %
Research and development $ 107,879 $ 175,658 $ 67,779 63 %
Research and development expenses increased by $67.8 million, or 63%, from the year ended December 31, 2022, compared to the year ended December 31, 2023. Research and development expenses reflect the continued growth in program execution, platform development, forward integration, and investment in partnered and internal programs. Approximately $31.6 million of the increase is related to a specific one time payment in our investment in internal programs in 2023. The remaining increase includes a $19.9 million increase in compensation-related expenses consistent
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with the increase in headcount, of which $7.5 million relates to stock-based compensation. In addition, there is a $16.3 million increase in facilities, supplies and services expenditure consistent with the overall growth of the Company.
Sales and Marketing
December 31, Change
2022 2023 Amount %
Sales and marketing $ 11,270 $ 14,180 $ 2,910 26 %
Sales and marketing expenses increased by $2.9 million, or 26%, from the year ended December 31, 2022, compared to the year ended December 31, 2023. The increase was attributable to compensation costs and other expenses related to our business development activity.
General and Administrative
December 31, Change
2022 2023 Amount %
General and administrative $ 55,485 $ 60,999 $ 5,514 10 %
General and administrative expenses increased by $5.5 million, or 10%, from the year ended December 31, 2022, compared to the year ended December 31, 2023. $4.8 million of the increase in general and administrative expense is compensation-related and driven by the increase in headcount. The remaining expenses incurred to support the growth of the Company was offset by a decrease in legal and consulting fees.
Depreciation, Amortization, and Impairment
December 31, Change
2022 2023 Amount %
Depreciation, amortization, and impairment $ 27,843 $ 24,395 $ (3,448) (12) %
Depreciation, amortization, and impairment expenses decreased by $3.4 million in 2023, or (12)% compared to the year ended December 31, 2022. An increase in depreciation expense of $4.9 million from an increase in equipment in use, facilities, and capital equipment purchases was offset by an impairment charge of $8.4 million (or $6.3 million, net of deferred income tax) recognized in 2022 where the Company recognized 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.
Interest (Income)
December 31, Change
2022 2023 Amount %
Interest (income) $ (15,886) $ (42,247) $ (26,361) 166 %
Interest income increased by $26.4 million, or 166%, from the year ended December 31, 2022, compared to the year ended December 31, 2023. The increase was primarily driven by an increase in interest rates on our cash and cash
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equivalents and marketable securities balances in the year ended December 31, 2023, compared to the year ended December 31, 2022.
Grants and Incentives (Income)
December 31, Change
2022 2023 Amount %
Grants and incentives $ (10,554) $ (14,155) $ (3,601) 34 %
Grants and incentives increased by $3.6 million, or 34%, from the year ended December 31, 2022, compared to the year ended December 31, 2023. This increase was primarily driven by activity relating to research and development expenditures that are eligible for reimbursement under government programs for the period.
Other (Income)
December 31, Change
2022 2023 Amount %
Other $ 4,045 $ (6,776) $ (10,821) (268) %
Other (income) increased by $10.8 million, or 268%, from the year ended December 31, 2022, compared to the year ended December 31, 2023. The increase included other income and a gain on fair value adjustments related to held-for-trading marketable securities and contingent consideration of $11.0 million and a foreign exchange gain of $0.4 million due to fluctuations in the Canadian and U.S. dollar exchange rate.
Income Tax (Recovery) Expense
December 31, Change
2022 2023 Amount %
Income tax (recovery) expense $ 80,580 $ (27,631) $ (108,211) (134) %
Income tax expense decreased by $108.2 million, or (134)%, from the year ended December 31, 2022 compared to the year ended December 31, 2023. The decrease was driven by the current net loss in the year.
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
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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
headcount and $8.8 million of the increase relates to stock-based compensation expense. $20.0 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.
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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.
Grants and Incentives (Income)
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.
Other (Income)
Year Ended December 31, Change
2021 2022 Amount %
Other
$ 6,080 $ 4,045 $ (2,035) (33) %
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. Foreign 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.
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
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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, 2023, we had $760.6 million of cash, cash equivalents, and marketable securities, comprised of $133.3 million in cash and cash equivalents and $627.3 million in marketable securities. The decrease of $125.9 million since December 31, 2022 was from a combination of cash flow from operations with an increase in research and development activity, investment in long term assets and our internal pipeline, and continued investment in the capacity and capabilities of AbCellera’s discovery and development engine in the year ended December 31, 2023.
We have generated positive operating cash flow cumulatively since our inception in 2012 and in every year from 2018 to 2022. We intend to significantly invest in our business, and as a result may incur operating losses and negative operating cash flows 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, continued investments in partnered and internal programs, 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 available liquidity from existing cash, cash equivalents, marketable securities, receivables, and anticipated cash flows from operations and government contributions, will be sufficient to meet our working capital, capital expenditure needs, and expenditures required for later stage development of our internal pipeline. We do not anticipate the need of additional 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 and Government of British Columbia Contributions
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 ($125.6 million) was committed by the Government of Canada to support research and development efforts related to the discovery of antibodies to treat COVID-19, and to build technology and manufacturing infrastructure for antibody therapeutics against future pandemic threats. From inception to December 31, 2023, the Company has recorded CAD $140.8 million ($109.1 million) of the funding, of which CAD $58.7 million ($46.1 million) relates to the maximum claim amount under phase 1 of the agreement and CAD $82.1 million ($63.1 million) in respect of phase 2 of the funding commitment.
In May of 2023, we entered into multi-year contribution agreements of CAD $300.0 million ($222.3 million), of which CAD $225.0 million ($166.7 million) is with the Government of Canada and CAD $75.0 million ($55.6 million) is with the Government of British Columbia. These investments are intended to build new capabilities in Canada to develop, manufacture, and deliver antibody medicines to patients through Phase 1 clinical trials and build expertise in translational science, technical operations, and clinical operations and research. For the year ended December 31, 2023, the Company has recorded CAD $29.0 million ($21.6 million) in respect of the funding from the Government of Cananda and CAD $18.8 million ($14.1 million) from the Government of British Columbia.
Further information with respect to these contributions are outlined in Note 12 to the consolidated financial statements.
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Cash Flows
The following table summarizes our cash flows for the periods presented:
December 31,
2021 2022 2023
Net cash provided by (used in):
Operating activities $ 244,584 $ 277,360 $ (43,877)
Investing activities (332,247) (352,625) (221,108)
Financing activities (3,886) (1,628) 10,356
Effect of exchange rate fluctuations on cash and cash equivalents (1,425) (9,599) 589
Net decrease in cash and cash equivalents $ (92,974) $ (86,492) $ (254,040)
Operating Activities
Net cash provided by operating activities decreased from $277.4 million generated in the year ended December 31, 2022, to $43.9 million cash used by operating activities in the year ended December 31, 2023. The decrease in cash flows from operations is attributable to no royalty revenue and a reduction in royalty-related payments in the period, in addition to an increase in expenditures that reflect AbCellera’s investment in research and development activities and growth of the Company.
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.
Investing Activities
Net cash used in investing activities decreased from $352.6 million in the year ended December 31, 2022, to $221.1 million in the year ended December 31, 2023. Investing activities during the twelve months ended December 31, 2022 and 2023 were primarily attributable to purchases of property and equipment, marketable securities, and purchases of long-term investments. The decrease in investing activities for the twelve months ended December 31, 2023 was primarily due to the purchase of and proceeds from marketable securities.
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 2022 from the prior year due to a decrease in SIF-eligible research and development activities performed in the period.
Financing Activities
Net cash used in financing activities decreased from $1.6 million for the year ended December 31, 2022, to net cash provided by financing activities of $10.4 million for the year ended December 31, 2023. This was primarily due to the receipt of repayable government contributions.
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.
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Contractual Obligations and Commitments
The following table summarizes our commitments to settle contractual obligations as of December 31, 2023, 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)
238,805 — 88,226 150,579 —
Contingent consideration payable (2)
55,388 50,474 1,575 1,593 1,746
Total $ 294,193 $ 50,474 $ 89,801 $ 152,172 $ 1,746
(1) Includes commitments, primarily related to the construction of our new facilities, in addition to our leased facility where the lease commencement date is subsequent to December 31, 2023.
(2) As of December 31, 2023, the contingent consideration payable had an estimated fair value of approximately $55.4 million, which has been included as a liability on our consolidated balance sheets.
(3) Excludes financial arrangements disclosed in Note 8 and Note 12 to our audited consolidated financial statements.
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, 2023.
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.
Bruker Cellular Analysis 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.
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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. Where there is not a directly observable output to measure progress, an input which serves as a reasonable proxy for measuring progress is used.
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.
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
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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, 2023 and during the remainder of 2023.
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, 2023, 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 2023.
As part of our ongoing planned research and development and execution of our programs under contract and internal programs, 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. As of December 31, 2023, the contingent consideration payable had an estimated fair value of approximately $18.7 million , all of which is a short-term liability on our consolidated balance sheet. In connection with our acquisition of TetraGenetics, the contingent consideration payable at December 31, 2023 is $36.7 million , of which $31.8 million is a short-term liability and $4.9 million is a long-term liability on our consolidated balance sheet. Contingent consideration payable is a financial liability and measured at its fair value at each reporting period, with any changes in fair value from the previous reporting period recorded in the statements of income (loss) and comprehensive income (loss).
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 15 and 19 to our consolidated financial statements for further information related to the contingent considerations and Tetragenetics acquisition, respectively.
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, 2022, and 2023, there were no liability classified options outstanding.
Stock-based compensation expense is classified in our consolidated statements of income (loss) and comprehensive income (loss) based on the function to which the related services are provided. We recognize stock-based compensation expense for the portion of awards that have vested. Forfeitures are accounted for as they occur.
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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.
With no public market for our common shares prior to our IPO and limited historical data since, we determine the volatility for awards granted with reference to an analysis of reported data for a group of biotechnology 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.
See Note 10 to our consolidated financial statements for additional information regarding stock-based compensation expense and the 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, 2021, 2022, and 2023.
Recent Accounting Pronouncements
See Note 3 to our annual consolidated financial statements appearing elsewhere in this Annual Report for a description of recent accounting pronouncements applicable to our consolidated financial statements.
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