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Item 7. Management’s Discussion and Analysis

2021-03-15 compared with 2020-03-30 · 124 added, 232 removed, 170 unchanged (68% of the section changed)

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Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under Item 1A, Risk factors, in this Annual Report on Form 10-K.

We are a research stage biotechnology company committed to creating a new class of precision genetic medicines, based on our proprietary base editing technology, with a vision of providing life-long cures to patients suffering from serious diseases.

Our proprietary base editing technology potentially enables an entirely new class of precision genetic medicines that targets a single base in the genome without making a double-stranded break in the DNA.

This approach uses a chemical reaction designed to create precise, predictable and efficient genetic outcomes at the targeted sequence, which we believe will dramatically increase the impact of gene editing for a broad range of therapeutic applications.

We believe we will be able to rapidly advance our portfolio of novel base editing programs by building on the significant recent advances in the field of genetic medicines.

Our novel base editors have two principal components that are fused together to form a single protein:

We are a biotechnology company committed to establishing the leading, fully integrated platform for precision genetic medicines.

Our vision is to provide life-long cures to patients suffering from serious diseases.

To achieve this vision, we have assembled a platform that includes a suite of gene editing and delivery technologies and are in the process of developing internal manufacturing capabilities.

Our suite of gene editing technologies is anchored by our proprietary base editing technology, which potentially enables an entirely new class of precision genetic medicines that target a single base in the genome without making a double-stranded break in the DNA.

This approach uses a chemical reaction designed to create precise, predictable and efficient genetic outcomes at the targeted sequence.

Our novel base editors have two principal components:

(i) a CRISPR protein, bound to a guide RNA, that leverages the established DNA-targeting ability of CRISPR, but modified to not cause a double-stranded break, and (ii) a base editing enzyme, such as a deaminase, which carries out the desired chemical modification of the target DNA base.

We have achieved proof-of-concept in vivo with long-term engraftment of ex vivo base edited human CD34 cells in mice for our Hereditary Persistence of Fetal Hemoglobin, or HPFH, program, and we have demonstrated base editing of cells in vitro at therapeutically relevant levels for the majority of our remaining programs.

We have also successfully demonstrated feasibility of base editing with each of our three delivery modalities in relevant cell types (electroporation and AAV) and in vivo in mice (LNP).

We expect to achieve additional preclinical proofs-of-concept in vivo for additional programs in 2020, which could include engraftment results for the Makassar precise correction sickle cell program, xenograft models for our CAR-T programs or in vivo based editing in our programs using LNP or AAV delivery.

If successful, and provided the coronavirus disease of 2019, or COVID-19, does not cause our timelines to slip materially, this will allow us to initiate investigational new drug, or IND, enabling studies for multiple programs beginning in 2020.

We expect to file an initial wave of IND filings beginning in 2021.

We believe this design contributes to a more precise and efficient edit compared to traditional gene editing methods, which operate by creating targeted double-stranded breaks in the DNA;

these breaks can result in unwanted DNA modifications.

We believe that the precision of our editors will dramatically increase the impact of gene editing for a broad range of therapeutic applications.

To unlock the full potential of our base editing technology across a wide range of therapeutic applications, we are pursuing a broad suite of clinically validated and novel delivery modalities.

For a given tissue type, we use the delivery modality with the most compelling biodistribution.

Our current programs are organized by delivery modality into three distinct pipelines:

electroporation for efficient delivery to blood cells and immune cells ex vivo ;

lipid nanoparticles, or LNPs, for non-viral in vivo delivery to the liver and potentially other organs in the future;

and adeno-associated viral vectors, or AAV, for in vivo viral delivery to the eye and central nervous system, or CNS.

The elegance of the base editing approach combined with a tissue specific delivery modality, provides the basis for a targeted efficient, precise, and highly versatile gene editing system, capable of gene correction, gene silencing/gene activation, and or multiplex editing of several genes simultaneously.

We are currently advancing a broad, diversified portfolio of base editing programs against distinct editing targets, utilizing the full range of our development capabilities.

We believe the flexibility and versatility of our base editors may lead to broad therapeutic applicability and transformational potential for the field of precision genetic medicines.

Recent Developments

In February 2021, we entered into an Agreement and Plan of Merger to acquire Guide Therapeutics, or Guide.

Pursuant to the merger agreement, we paid Guide’s former stockholders and optionholders upfront consideration in an aggregate amount of $120.0 million, excluding customary purchase price adjustments, in shares of our common stock, based upon the volume-weighted average price of the common stock over the ten trading day period ending on February 19, 2021.

In addition, Guide’s former stockholders and optionholders will be eligible to receive up to an additional $100.0 million in technology and $220.0 million in product success milestone payments, payable in our common stock.

Manufacturing

In August 2020, we entered into a lease agreement with Alexandria Real Estate Equities, Inc.

to build a 100,000 square foot current Good Manufacturing Practice, or cGMP, compliant manufacturing facility in Research Triangle Park, North Carolina intended to support a broad range of clinical programs.

We will invest up to $83.0 million over a five-year period and anticipate that the facility will be operational by the first quarter of 2023.

The project will be facilitated, in part, by a Job Development Investment Grant approved by the North Carolina Economic Investment Committee, which authorizes potential reimbursements based on new tax revenues generated through the project.

The facility will be designed to support manufacturing for our ex vivo cell therapy programs in hematology and oncology and in vivo non-viral delivery programs for liver diseases, with flexibility to support manufacturing of our viral delivery programs, and ultimately, scale-up to support potential commercial supply.

For our initial waves of clinical programs, we will use contract manufacturing organizations, or CMOs, with relevant manufacturing experience in genetic medicines.

With the ongoing concern related to the COVID-19 pandemic, we have maintained and expanded the business continuity plans to address and mitigate the impact of the COVID-19 pandemic on our business.

In March 2020, to protect the health of our employees, and their families and communities, we restricted access to our offices to personnel who performed critical activities that must be completed on-site, limited the number of such personnel that can be present at our facilities at any one time, and requested that most of our employees work remotely.

In May 2020, as certain states eased restrictions, we established new protocols to better allow our full laboratory staff access to our facilities.

These protocols included several shifts working over a seven-day-week protocol.

We expect to continue incurring additional costs to ensure we adhere to the guidelines instituted by the CDC and to provide a safe working environment to our onsite employees.

The extent to which the COVID-19 pandemic impacts our business, our corporate development objectives, results of operations and financial condition, including and the value of and market for our common stock, will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure requirements, and the effectiveness of actions taken globally to contain and treat the disease.

Disruptions to the global economy, disruption of global healthcare systems, and other significant impacts of the COVID-19 pandemic could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

While the COVID-19 pandemic did not significantly impact our business or results of operations during the year ended December 31, 2020, the length and extent of the pandemic, its consequences, and containment efforts will determine the future impact on our operations and financial condition.

Financial operations overview

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Since our inception, we have devoted substantially all of our resources to building our base editing platform and advancing development of our portfolio of programs, establishing and protecting our intellectual property, conducting research and development activities, organizing and staffing our company, business planning, raising capital and providing general and administrative support for these operations.

To date, we have financed our operations primarily through the sales of our Series A-1 redeemable convertible preferred stock, or the Series A-1 Preferred Stock, Series A-2 redeemable convertible preferred stock, or the Series A-2 Preferred Stock, and Series B redeemable convertible preferred stock, or the Series B Preferred Stock and, together with the Series A-1 Preferred Stock and the Series A-2 Preferred Stock, the Preferred Stock, and through proceeds from our February 2020 IPO.

Through December 31, 2019, we have raised an aggregate of $223.6 million from the sale of our Preferred Stock.

On May 9, 2018, we entered into a merger option agreement with Blink Therapeutics Inc., or Blink.

In September 2018, we exercised our option to acquire Blink, or the Blink Merger, and Blink thereafter became our wholly owned subsidiary.

Blink held rights to certain intellectual property related to RNA-based editing.

Pursuant to the Blink Merger, we issued two shares of our Series A-2 Preferred Stock for each share of redeemable convertible series A preferred stock of Blink, and we issued 0.446 shares of our common stock for each share of Blink common stock.

We began consolidating Blink on May 9, 2018.

To date, we have financed our operations primarily through the sales of our redeemable convertible preferred stock and proceeds from our IPO and follow on offerings.

We are a development stage company, and all of our programs are at a preclinical stage of development.

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As of December 31, 2020, we had an accumulated deficit of $397.6 million.

Our total operating expenses were $75.2 million and $45.7 million for the years ended December 31, 2019 and 2018, respectively.

We expect to continue to incur significant expenses and increasing operating losses in connection with ongoing development activities related to our portfolio of programs as we continue our preclinical development of product candidates;

advance these product candidates toward clinical development;

further develop our base editing platform;

research activities as we seek to discover and develop additional product candidates;

maintenance, expansion enforcement, defense, and protection of our intellectual property portfolio;

and hiring research and development, clinical and commercial personnel.

In addition, upon the closing of our IPO, we expect to incur additional costs associated with operating as a public company.

build and operate our GMP facility in North Carolina, further develop our base editing platform;

continue to make investments in delivery technology for our base editors, including in connection with our recent acquisition of Guide Therapeutics;

conduct research activities as we seek to discover and develop additional product candidates;

maintain, expand, enforce, defend and protect our intellectual property portfolio;

and continue to hire research and development, clinical and commercial personnel.

In addition, we expect to continue to incur additional costs associated with operating as a public company and implementing controls over financing reporting.

As a result of these anticipated expenditures, we will need additional financing to support our continuing operations and pursue our growth strategy.

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Research and development expenses consist of costs incurred in performing research and development activities, which include:

Expenses incurred in connection with investments in delivery technology for our base editors, including as a result of our acquisition of Guide Therapeutics;

the cost to obtain licenses to intellectual property, such as those with Harvard University, or Harvard, Broad Institute of MIT and Harvard, or Broad Institute, and Editas Medicine, Inc, or Editas, and related future payments should certain success, development and regulatory milestones be achieved;

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expenses incurred in connection with the discovery and preclinical development of our research programs, including under agreements with third parties, such as consultants, contractors and contract research organizations;

the cost of developing and validating our manufacturing process for use in our preclinical studies and future clinical trials;

expenses incurred in connection with the building of our base editing platform;

the cost of manufacturing for use in our preclinical studies and future clinical trials;

laboratory supplies and research materials;

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The prepaid amounts are expensed as the benefits are consumed.

In the early phases of development, our research and development costs are often devoted to product platform and proof-of-concept studies that are not necessarily allocable to a specific target, therefore, we have not yet begun tracking our expenses on a program-by-program basis.

In the early phases of development, our research and development costs are often devoted to product platform and proof-of-concept studies that are not necessarily allocable to a specific target.

We expect that our research and development expenses will increase substantially in connection with our planned preclinical and future clinical development activities.

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We anticipate that our general and administrative expenses will increase in the future to support increased research and development activities.

We also expect to incur increased costs associated with being a public company, including costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with Nasdaq and SEC requirements, director and officer insurance costs, and investor and public relations costs.

We also expect to continue to incur increased costs associated with being a public company and implementing controls over financial reporting, including costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with Nasdaq and SEC requirements, director and officer insurance costs, and investor and public relations costs.

Other income and expenses

Other income and expenses consist of the following items:

Change in fair value of derivative liabilities consists primarily of remeasurement gains or losses associated with changes in the anti-dilution issuance rights, finance milestone payment liabilities and success payment liabilities associated with our license agreement with Harvard, dated as of June 27, 2017, as amended, or the Harvard License Agreement, and the license agreement between Blink and Broad Institute, as amended, dated as of May 9, 2018, or the Broad License Agreement.

Anti-dilution issuance rights were issued to Harvard and Broad Institute allowing Harvard and Broad Institute to maintain a defined ownership percentage in us on a fully diluted basis upon subsequent equity financings until we achieved a defined aggregate level of preferred stock financing.

At the inception of the agreements, the liability for the anti-dilution right was recorded at fair value with cost recorded as research and development expense and was remeasured at each reporting period and at the termination of the right with changes recorded in other income (expense).

Financing milestone payment liabilities are derived from future cash payments due to Harvard and Broad Institute upon the closing of additional rounds of Preferred Stock.

At the inception of the agreements, the liabilities were recorded at fair value with cost recorded as research and development expense and were remeasured at each reporting period with changes recorded in other income (expense).

Success payment liabilities are derived from future increases in the per share fair market value of the Series A-1 Preferred Stock and Series A-2 Preferred Stock at specified future dates.

At inception of the agreements, the success payment liabilities were recorded at fair market value with cost recorded as research and development expense and were remeasured at each reporting period with changes recorded in other income (expense).

Depending on our valuation, the success payment liabilities could fluctuate significantly from period to period.

All anti-dilution issuance rights and finance milestone liabilities pursuant to our Harvard License Agreement and Broad License Agreement have been met as of December 31, 2018.

Accordingly, we are no longer required to record liabilities for these rights.

Loss on issuance of preferred stock in connection with Blink Merger represents the expense recognized upon the consummation of the Blink Merger.

Pursuant to the Blink Merger, we issued two shares of our Series A-2 Preferred Stock for each share of Blink and took a charge representing the excess of the fair value of our Series A-2 Preferred Stock issued to Blink shareholders over the value of the Blink preferred stock exchanged by Blink shareholders.

Loss on issuance of preferred stock to investors consists of a charge taken upon issuance of our Preferred Stock at a discount due to an increase in value above the sale price.

Change in fair value of preferred stock tranche liabilities consist primarily of remeasurement gains or losses associated with changes in the fair value of the tranche rights associated with our Series A-1 Preferred Stock and Series A-2 Preferred Stock.

All obligations have been met at December 31, 2018 and therefore there will be no further remeasurement.

Change in fair value of derivative liabilities consists primarily of remeasurement gains or losses associated with changes in success payment liabilities associated with our license agreement with Harvard, dated as of June 27, 2017, as amended, or the Harvard License Agreement, and the license agreement between Blink and Broad Institute, as amended, dated as of May 9, 2018, or the Broad License Agreement.

Interest and other income (expense), net consists primarily of interest income as well as interest expense related to our equipment financings.

Results of operations

Comparison of the years ended December 31, 2020 and 2019

The following table summarizes our results of operations for the years ended December 31, 2019 and 2018, together with the change in dollars (in thousands) :

(in thousands)

The following table summarizes our results of operations (in thousands) :

Years Ended December 31,

License revenue

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Change in fair value of derivative liabilities

Loss on issuance of preferred stock in connection with Blink Merger

Loss on issuance of preferred stock to investors

Change in fair value of preferred stock tranche liabilities

Interest income

Interest expense

Other expense

Interest and other income (expense), net

Total other income (expense)

License revenue

License revenue was $18,000 for the year ended December 31, 2019 representing Verve license revenue recorded under the Collaboration and License Agreement executed in April 2019.

There was no revenue for the year ended December 31, 2018.

License revenue was approximately $24,000 for the year ended December 31, 2020 compared to approximately $18,000 for the year ended December 31, 2019.

License revenue represents Verve license revenue recorded under the Collaboration and License Agreement executed in April 2019.

Research and development expenses

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The increase of $48.6 million was primarily due to the following:

Increases of $16.4 million in lab supplies and outsourced services, $10.7 million in personnel-related costs, and $4.6 million in facility-related costs, including depreciation.

An increase of $20.8 million in outsourced services and lab supplies, driven primarily by external research services such as CMOs, IND enabling studies and sponsored research agreements.

An increase of $5.9 million in milestone and license expenses, primarily related to our agreement with Prime Medicine.

During the year ended December 31, 2020, we recognized $5.5 million of expense, representing the fair value of our common stock issued to Prime Medicine in October 2020.

Increases of $8.6 million in personnel-related costs and $5.6 million in facility-related costs, including depreciation.

These increases were due to the growth in the number of research and development employees from 97 at December 31, 2019 to 149 at December 31, 2020, and their related activities, as well as the expense allocated to research and development related to our leased facilities.

A decrease of $1.7 million in stock compensation due to a one-time charge of $3.6 million for the year ended December 31, 2018 related to the Blink merger offset by an increase in stock compensation expense for additional stock option awards due to the increase in the number of research and development employees in 2019.

A decrease of $10.0 million in expenses related to technology licenses.

For the year ended December 31, 2019, technology license expense was $3.4 million, which consisted primarily of option fees of $2.4 million related to a technology license agreement and $0.8 million, which consisted primarily of the license fee and fair value of Beam common stock provided to Bio Palette in conjunction with a license agreement executed in March 2019.

For the year ended December 31, 2018, technology license expense was $13.3 million, which included:

$5.3 million related to the Broad License Agreement for the initial value of anti-dilution rights, financing milestone payment liabilities, success payment liabilities, and the initial shares of common stock issued to Broad Institute, $3.7 million related to the issuance of 3,055,555 shares of Preferred Stock under a license agreement with Editas, $2.2 million for additional shares of stock issued to Broad Institute upon the Blink merger, and other technology license expenses of $2.0 million.

An increase of $7.0 million in stock compensation from additional stock option and restricted stock awards granted due to the increase in the number of research and development employees, as well as an increase in the value of our common stock.

Research and development expenses will continue to increase as we continue our current research programs, initiate new research programs, continue our preclinical development of product candidates and conduct future clinical trials for any of our product candidates.

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General and administrative expenses were $29.6 million and $20.6 million for the years ended December 31, 2020 and 2019, respectively.

The increase of $8.7 million was primarily a result of a $4.4 million increase in personnel related costs due to an increase in general and administrative employees from eight employees as of December 31, 2018 to 21 employees as of December 31, 2019, a $1.7 million increase in stock-based compensation due to an increase in the number of general and administrative employees as well as an increase in the value of our common stock, a $1.2 million increase in outsourced services including audit services as well as consulting services to supplement our internal capabilities, a $1.1 million increase in other administrative expenses, and a $0.3 million increase in expense allocated to general and administrative expense related to our leased facilities, including depreciation, to support the growing organization.

Change in fair value of derivative liabilities

During the year ended December 31, 2018, the anti-dilution rights related to the Harvard License Agreement and the Broad License Agreement terminated and we issued 765,549 shares of our common stock to Harvard and Blink issued 920,000 shares of its common stock (which was converted into 410,320 shares of our common stock in connection with the Blink Merger) to Broad Institute.

For the year ended December 31, 2018, we recorded a $1.3 million change in fair value expense related to these anti-dilution issuance rights.

During the year ended December 31, 2018, we recorded a $9.7 million change in fair value expense related to financial milestone payments.

All remaining financing milestone obligations were met in 2018.

During the year ended December 31, 2019, we recorded a $5.4 million change in fair value expense related to the success payment liabilities as compared to a $0.7 million expense for the year ended December 31, 2018.

The success payment obligations are still outstanding as of December 31, 2019 and will continue to be revalued at each reporting period.

Loss on issuance of preferred stock in connection with Blink Merger

Loss on issuance of preferred stock in connection with the Blink Merger of $49.5 million for the year ended December 31, 2018 represented the excess of the fair value of our Series A-2 Preferred Stock issued to Blink shareholders over the value of the Blink preferred stock exchanged by Blink shareholders at the time of the Blink Merger.

Loss on issuance of preferred stock to investors

Loss on issuance of preferred stock to investors of $5.7 million for the year ended December 31, 2018 resulted from issuance of our Series A-1 Preferred Stock at a fair value of the preferred stock in excess of the cash proceeds received.

Change in fair value of preferred stock tranche liabilities

We have determined that our obligation to issue and our investors’ obligation to purchase additional shares of Series A-1 Preferred Stock and Series A-2 Preferred Stock represented a freestanding financial instrument.

The resulting preferred stock tranche liability was initially recorded at fair value, with gains and losses arising from changes in fair value recognized in the consolidated statement of operations at each period while such instruments were outstanding.

As a result of the changes in fair value, we recognized other expense of $4.3 million for the year ended December 31, 2018.

As of December 31, 2018, the tranche rights had been exercised and the liabilities have been reclassified to preferred stock.

Interest income

Interest income was $2.5 million for the year ended December 31, 2019 as compared to $0.3 million for the year ended December 31, 2018.

We began actively investing our funds in 2019.

Interest expense

Interest expense of $0.2 million for the year ended December 31, 2019 was related to our equipment financing leases.

There was no corresponding interest expense in 2018.

Comparison of year ended December 31, 2018 and period ended December 31, 2017

2017 (Inception)

to December 31,

(in thousands)

Operating expenses:

Research and development

General and administrative

Total operating expenses

Other income (expense):

Loss on issuance of preferred stock in connection with Blink Merger

Loss on issuance of preferred stock to investors

Change in fair value of derivative liabilities

Change in fair value of preferred stock tranche liabilities

Other expense

Interest income

Total other income (expense)

Research and development expenses

Research and development expenses were $33.9 million for the year ended December 31, 2018, compared to $5.9 million for the period from January 25, 2017 (Inception) to December 31, 2017.

The increase of $9.1 million was primarily due to the following:

An $8.5 million increase in expenses related to technology licenses.

In 2018, technology license expense included:

$5.3 million related to the Broad License Agreement for the initial value of anti-dilution rights, financing milestone payment liabilities, success payment liabilities, and the initial shares of common stock issued to Broad Institute, $2.2 million related to the issuance of 410,320 additional shares of Beam common stock to Broad Institute in connection with the Blink Merger, $3.7 million related to the issuance of 3,055,555 shares of Preferred Stock under a license agreement with Editas;

and other technology license expenses of $2.0 million.

In 2017, technology license expenses included $4.8 million related to the Harvard License Agreement for the initial value of anti-dilution rights, financing milestone payment liabilities, success payment liabilities, and the initial shares of common stock issued to Harvard.

These amounts were recorded as research and development expenses as they are considered compensation for the respective license agreements.

Increases of $5.9 million in lab supplies and outsourced services, $4.4 million in personnel-related costs, and $3.2 million in facility-related costs, including depreciation.

These increases were due to the growth in the number of research and development employees from four at December 31, 2017 to 40 at December 31, 2018, and their related activities, as well as the expense allocated to research and development related to our new leased facility.

An increase of $5.7 million in stock compensation, including $3.6 million of expense representing the difference in value of the fully vested shares issued to the scientific founders of Blink and the value exchanged by the Blink shareholders at the

time of the Blink Merger.

The remainder of the increase was due to the increase in the number of research and development employees from December 31, 2017 to December 31, 2018.

General and administrative expenses

General and administrative expenses were $11.9 million for the year ended December 31, 2018, compared to $2.0 million for the period from January 25, 2017 (Inception) ended December 31, 2017.

The increase of $9.8 million was primarily due to an increase in legal and patent costs of $4.3 million associated with establishing our patent portfolio, $1.7 million increase in personnel related costs due to an increase in general and administrative employees from one employee as of December 31, 2017 to eight employees as of December 31, 2018, $1.3 million increase in consulting services to supplement our internal capabilities, $1.1 million increase in stock-based compensation, and an increase in expense allocated to general and administrative expense related to our new leased facility, including depreciation of $0.7 million, to support the growing organization.

Loss on issuance of preferred stock in connection with Blink Merger

Loss on issuance of preferred stock in connection with the Blink Merger consists of a $49.5 million charge for the year ended December 31, 2018 related to the Blink Merger.

This charge represented the excess of the fair value of our Series A-2 Preferred Stock issued to Blink shareholders over the value of the Blink preferred stock exchanged by Blink shareholders at the time of the Blink Merger.

Loss on issuance of preferred stock to investors

Loss on issuance of preferred stock to investors consisted of a $5.7 million discount for the year ended December 31, 2018, resulted from issuance of our Series A-2 Preferred Stock due to the fair value of the preferred stock issued being in excess of the cash proceeds received.

An increase of $2.9 million in insurance costs due to increased directors and officers insurance costs as a result of our being a public company.

Increases of $2.7 million in personnel related costs and $1.1 million in other (primarily information technology related) costs due to an increase in general and administrative employees from 21 employees as of December 31, 2019 to 32 employees as of December 31, 2020.

An increase of $1.5 million in intellectual property costs, offset by a $0.6 million decrease in corporate legal expenses.

An increase of $1.4 million in stock-based compensation from additional stock options granted due to an increase in the number of general and administrative employees, as well as an increase in the value of our common stock.

Change in fair value of derivative liabilities

During the year ended December 31, 2018, the anti-dilution rights related to the Harvard License Agreement and the Broad License Agreement have terminated and, during the year ended December 31, 2018 we issued 765,549 shares of our common stock and Blink issued 920,000 shares of its common stock (which was converted into 410,320 shares of our common stock in connection with the Blink Merger) to Harvard and Broad Institute , respectively.

In 2018, we recorded a $1.3 million change in fair value expense related to the anti-dilution issuance right as compared to no change in fair value expense in 2017.

In 2018, we recorded a $9.7 million change in fair value expense related to the financial milestone payment as compared to a $0.4 million expense in 2017.

All remaining financing milestone obligations have been met in 2018, and we recorded a $13.8 million financing milestone liability for any unpaid balances on our consolidated balance sheets as of December 31, 2018.

In 2018, we recorded a $0.7 million change in fair value expense related to the success payment liabilities as compared to a $0.1 million expense in 2017.

The increase was a result of an increase in our valuation from December 31, 2017 to December 31, 2018.

Change in fair value of preferred stock tranche liabilities

As a result of the changes in fair value, we recognized other expense of $4.3 million for the year ended December 31, 2018, compared to $0.4 million in other income for the period from January 25, 2017 (Inception) to December 31, 2017.

As of December 31, 2018, the tranche rights have been exercised and the liabilities have been reclassified to preferred stock.

Interest income

Interest income was $0.3 million in 2018 due our investment in money market funds.

There were no investments in 2017.

During the year ended December 31, 2020, we recorded a $63.4 million change in fair value expense related to the success payment liabilities as compared to a $5.4 million expense for the year ended December 31, 2019, due to a significant increase in the value of our common stock.

The success payment obligations are still outstanding as of December 31, 2020 and will continue to be revalued at each reporting period.

Interest and other income (expense), net

Interest and other income (expense), net was $1.6 million for the year ended December 31, 2020 as compared to $2.2 million for the year ended December 31, 2019.

The decrease of $0.7 million was primarily due to a decrease in interest income of $1.1 million as a result of decreases in interest rates related to our investment portfolio and an increase in interest expense of $0.4 million due to the occurrence of additional drawdowns on our equipment line in 2020, partially offset by an increase in the fair value of our investment in certain corporate equity securities of $0.5 million, which are accounted for as investments in equity securities.

Liquidity and capital resources

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We expect to incur significant expenses and operating losses for the foreseeable future as we advance the preclinical and, if successful, the clinical development of our programs.

To date, we have funded our operations primarily with proceeds from the sales of Preferred Stock.

Through December 31, 2019, we raised an aggregate of $223.6 million in gross proceeds from sales of our Preferred Stock.

In February 2020, we completed our IPO in which we issued and sold 12,176,471 shares of our common stock, including 1,588,235 shares of common stock sold pursuant to the underwriters’ full exercise of their option to purchase additional shares, at a public offering price of $17.00 per share.

We received net proceeds from our IPO of $188.3 million, after deducting underwriting discounts and offering expenses payable by us.

In October 2020, we issued and sold 5,750,000 shares of our common stock, including 750,000 shares pursuant to the full exercise of the underwriters’ option to purchase additional shares, at a public offering price of $23.50 per share, for aggregate gross proceeds of $135.1 million.

We received approximately $126.6 million in net proceeds after deducting applicable underwriting discounts and offering expenses payable by us.

To date, we have funded our operations primarily through equity offerings.

As of December 31, 2020, we had $299.7 million in cash, cash equivalents, and marketable securities.

On February 10, 2020, we completed our IPO in which we issued and sold 12,176,471 shares of our common stock, including 1,588,235 shares of common stock sold pursuant to the underwriters’ full exercise of their option to purchase additional shares, at a public offering price of $17.00 per share.

We received net proceeds from our IPO of $188.3 million, after deducting underwriting discounts and estimated offering expenses payable by us.

In January 2021, we issued and sold 2,795,700 shares of our common stock in a private placement at an offering price of $93.00 per share for aggregate gross proceeds of $260.0 million.

We received $252.1 million in net proceeds after deducting estimated offering expenses payable by us .

We are required to make success payments to Harvard and Broad Institute based on increases in the per share fair market value of our Series A-1 Preferred Stock and Series A-2 Preferred Stock or, subsequent to our IPO, our common stock.

The first success payment measurement will occur during May of 2021, and any amounts due may be settled in cash or shares of our common stock, at our discretion.

We have assessed the liability and several key variables thereto, including probability of event occurrence, timing of event occurrence, as well as the price per share at the time of success payment and have determined that a significant portion of the liability may be coming due within the next twelve months, which could affect our cash resources if not settled in shares of our common stock.

To date, we have not generated any revenue from product sales and do not expect to generate revenue from the sale of products for the foreseeable future.

We anticipate the need for additional capital in order to continue to fund our research and development, including our plans for clinical and preclinical trials and new product development, as well as to fund general operations.

We anticipate the need for additional capital in order to continue to fund our research and development, including our plans for preclinical and clinical trials, building, maintaining, and operating a commercial-scale cGMP manufacturing facility, and new product development, as well as to fund general operations.

As and if necessary, we will seek to raise these additional funds through various potential sources, such as equity and debt financings or through corporate collaboration and license agreements.

Especially in light of COVID-19, we can give no assurances that we will be able to secure such additional sources of funds to support our operations, or, if such funds are available to us, that such additional financing will be sufficient to meet our needs For a more detailed discussion of risks related to our COVID-19, please see Item 1A., Risk factors— Risks related to our relationships with third parties , in this Annual Report on Form 10-K.

The following table summarizes our sources and uses of cash for the years ended December 31, 2019 and 2018 (in thousands):

Especially in light of the COVID-19 pandemic, we can give no assurances that we will be able to secure such additional sources of funds to support our operations, or, if such funds are available to us, that such additional financing will be sufficient to meet our needs.

For a more detailed discussion of risks related to COVID-19, please see Part II, Item 1A, Risk Factors—Risks related to our relationships with third parties , in this Annual Report on Form 10-K .

The following table summarizes our sources and uses of cash (in thousands):

Years Ended December 31,

Net cash used in operating activities

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Net cash provided by financing activities

Net (decrease) increase in in cash, cash equivalents and restricted cash

Net increase (decrease) in in cash, cash equivalents and restricted cash

Operating activities

Net cash used in operating activities for the year ended December 31, 2019 was $72.0 million, consisting primarily of our net loss of $78.3 million, a decrease in financing milestone liabilities of $13.8 million resulting from payment of these liabilities, a decrease in operating lease liabilities of $2.5 million, and an increase in prepaids and other assets of $1.9 million offset by cash provided by increases in accounts payable and accrued expenses of $7.7 million, and noncash charges consisting primarily of stock based compensation expense of $7.0 million, change in fair value of derivative liabilities of $5.4 million, depreciation of $3.5 million, and non-cash lease expense of $1.9 million, offset by amortization of investment premiums of $0.9 million.

Net cash used in operating activities for the year ended December 31, 2018 was $20.3 million, consisting primarily of our net loss of $116.7 million offset by the following noncash charges:

loss on issuance of preferred stock in connection with the Blink Merger of $49.5 million, change in fair value of derivatives consisting of anti-dilution rights, financial milestone payment liabilities and success payment liabilities of $11.7 million, non-cash research and development license expense of $7.4 million, loss on issuance of preferred stock to investors of $5.7 million, change in fair value of preferred stock tranche liabilities of $4.3 million, and stock-based compensation of $7.0 million, as well as increases in deferred rent liability of $7.6 million due to the lease of a new facility in 2018 and increases in accounts payable and accrued expenses of $4.0 million due to our growth.

Net cash used in operating activities for the period from January 25, 2017 (Inception) to December 31, 2017 was $2.7 million, consisting primarily of our net loss of $8.0 million partially offset by non-cash charges of $4.6 million primarily consisting of a non-cash research and development license expense of $4.3 million associated with our Harvard License Agreement;

and increases in accounts payable and accrued expenses of $0.9 million.

Net cash used in operating activities for the year ended December 31, 2020 was $95.7 million, consisting primarily of our net loss of $194.6 million and an increase in prepaid expenses and other current assets of $5.7 million, offset by cash provided by increases in accrued expenses of $7.0 million, operating lease liabilities of $3.2 million and long-term liabilities of $1.0 million.

Net cash used in operating activities was also offset by non-cash charges consisting primarily of a change in the fair value of derivative liabilities of $63.4 million, stock-based compensation expense of $15.4 million, non-cash license expenses of $5.7 million, depreciation of $4.7 million, and non-cash lease expense of $4.7 million, offset by a $0.5 million non-cash change in the fair value of equity investments.

Net cash used in operating activities for the year ended December 31, 2019 was $72.0 million, consisting primarily of our net loss of $78.3 million, a decrease in financing milestone liabilities of $13.8 million resulting from payment of these liabilities, a decrease in operating lease liabilities of $2.5 million, and an increase in prepaids and other assets of $1.9 million offset by cash provided by increases in accounts payable and accrued expenses of $7.7 million and non-cash charges consisting primarily of stock based compensation expense of $7.0 million, change in fair value of derivative liabilities of $5.4 million, depreciation of $3.5 million, and non-cash lease expense of $1.9 million, offset by amortization of investment premiums of $0.9 million.

Investing activities

For the year ended December 31, 2020, cash used in investing activities was primarily the net result of purchases of marketable securities partially offset by maturities of marketable securities of $83.0 million, in addition to purchases of property and equipment of $16.4 million.

For the year ended December 31, 2018 and period from January 25, 2017 (Inception) to December 31, 2017, cash used in investing activities consisted primarily of $13.1 million and $0.3 million of purchases of property and equipment, respectively.

For the year ended December 31, 2019, cash used in investing activities was primarily the net result of purchases of marketable securities partially offset by maturities of marketable securities of $53.7 million, in addition to purchases of property and equipment of $12.5 million.

Financing activities

Net cash provided by financing activities for the year ended December 31, 2019 consisted primarily of the net proceeds from the issuance of Series B Preferred Stock of $37.9 million, and net proceeds of $5.7 million from equipment financing, offset by an increase in equity issuance costs of $2.5 million.

Net cash provided by financing activities for the year ended December 31, 2018 consisted primarily of the net proceeds from the issuance of Series A-1 Preferred Stock of $19.8 million, Series A-2 Preferred Stock of $48.5 million, Blink Series A Preferred Stock of $14.9 million, and Series B Preferred Stock of $96.5 million.

Net cash provided by financing activities for the period from January 25, 2017 (Inception) to December 31, 2017 was $5.0 million consisting of net proceeds from the first tranche of the issuance of Series A-1 Preferred Stock.

Net cash provided by financing activities for the year ended December 31, 2020 consisted primarily of proceeds from our IPO and follow on public offering of $319.5 million, net of underwriting discounts, net proceeds of $3.3 million from equipment financing, and proceeds from the exercise of stock options of $3.2 million, offset in part by the payment of equity offering costs of $2.1 million and repayments of equipment financing liabilities of $1.6 million.

Net cash provided by financing activities for the year ended December 31, 2019 consisted primarily of the net proceeds from the issuance of Series B Preferred Stock of $37.9 million, and net proceeds of $5.7 million from equipment financing, offset by the payment of equity issuance costs of $2.5 million.

Funding requirements

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seek marketing approvals for any of our product candidates that successfully complete clinical trials;

ultimately establish a sales, marketing, and distribution infrastructure to commercialize any medicines for which we may obtain marketing approval;

establish a sales, marketing, and distribution infrastructure to commercialize any medicines for which we may obtain marketing approval;

further develop our base editing platform;

hire additional personnel including research and development, clinical and commercial personnel;

further develop delivery technology for our base editors, resulting from our acquisition of Guide Therapeutics;

continue to hire additional personnel including research and development, clinical and commercial personnel;

add operational, financial, and management information systems and personnel, including personnel to support our product development;

acquire or in-license products, intellectual property, medicines and technologies;

should we decide to do so, build and maintain a commercial-scale current Good Manufacturing Practices, or cGMP, manufacturing facility;

operate as a public company.

We expect that our cash, cash equivalents and marketable securities at December 31, 2019, together with the net proceeds from our February 2020 IPO, will enable us to fund our current and planned operating expenses and capital expenditures for at least the next 12 months.

build, maintain, and operate a commercial-scale cGMP manufacturing facility.

We expect that our cash, cash equivalents at December 31, 2020 will enable us to fund our current and planned operating expenses and capital expenditures for at least the next 12 months.

We have based these estimates on assumptions that may prove to be imprecise, and we may exhaust our available capital resources sooner that we currently expect.

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the achievement of milestones or occurrence of other developments that trigger payments under any additional collaboration agreements we obtain;

the payment of success liabilities, should we choose to pay in cash;

the extent to which we acquire or in-license products, intellectual property, and technologies;

the costs of operating as a public company.

the costs of obtaining, building, operating and expanding our manufacturing capacity.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, and licensing arrangements.

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The minimum lease payments above do not include any related common area maintenance charges or real estate taxes.

The table above does not include our amended lease for additional laboratory space in Cambridge, Massachusetts, which commenced on March 1, 2020 and expires on March 31, 2023.

The incremental increase in total amount as a result of the amended lease is approximately $3.2 million, which does not include the additional lease payments of $1.6 million we would incur if we were to exercise our option to extend the lease for one year.

The table above does not include rent payments related to the second phase of our April 2019 lease for office and laboratory space to be built, with the rent payments expected to commence during the first quarter of 2022.

The minimum amount of anticipated undiscounted lease payments due under the second phase of this lease is $42.7 million.

In addition, the table above does not include our lease agreement with Alexandria Real Estate Equities, Inc.

to build a 100,000 square foot manufacturing facility in Research Triangle Park, North Carolina.

The initial estimate of minimum amount of undiscounted lease payments due under this lease is $63.9 million, which is expected to be paid over a lease term of 15 years.

The table above also does not include potential milestone and success fees, sublicense fees, royalty fees, licensing maintenance fees, and reimbursement of patent maintenance costs that we may be required to pay under agreements we have entered into with certain institutions to license intellectual property.

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The fair value of our common stock is used to determine the fair value of restricted stock awards.

Determination of the fair value of our common stock issued prior to our IPO

Prior to our IPO in February 2020, there was no public market for our common stock.

As a result, prior to our IPO, the estimated fair value of our common stock was determined by our board of directors as of the date of each option grant, with input from management, considering our most recently available third-party valuations of common stock and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant.

Third party valuations were performed in accordance with the framework of the American Institute of Certified Public Accountants , Valuation of Privately-Held Company Equity Securities Issued as Compensation .

Our common stock valuations were prepared using either an option pricing method, or OPM, or a hybrid method of the probability-weighted expected return method, or PWERM, both of which used market approaches to estimate our enterprise value.

The OPM treats common stock and preferred stock 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.

Under this method, the common stock has value only if the funds available for distribution to stockholders exceeded the value of the preferred stock liquidation preferences at the time of the liquidity event, such as a strategic sale or a merger.

The common stock is modeled as a call option on the underlying equity value at a predetermined exercise price.

In the model, the exercise price is based on a comparison with the total equity value rather than, as in the case of a regular call option, a comparison with a per share stock price.

Thus, common stock is considered to be a call option with a claim on the enterprise at an exercise price equal to the remaining value immediately after the preferred stock liquidation preference is paid.

A discount for lack of marketability of the common stock is then applied to arrive at an indication of value for the common stock.

The hybrid method is a probability-weighted expected return method, where the equity value in one or more scenarios is calculated using an OPM.

The PWERM is a scenario-based methodology that estimates the fair value of our common stock based upon an analysis of future values, assuming various outcomes.

The common stock value is based on the probability-weighted present value of expected future investment returns considering each of the possible outcomes available as well as the rights of each class of stock.

The future value of the common stock under each outcome is discounted back to the valuation date at an appropriate risk-adjusted discount rate and probability weighted to arrive at an indication of value for the common stock.

These third-party valuations were performed at various dates, which resulted in valuations of our common stock of $0.49 per share as of June 30, 2017, $0.67 per share as of March 26, 2018, $1.03 per share as of June 11, 2018, $4.22 per share as of December 1, 2018, $7.22 per share as of April 30, 2019, $11.88 per share as of July 22, 2019, and $13.68 per share as of August 27, 2019.

In addition to considering the results of these third-party valuations, our board of directors considered various objective and subjective factors to determine the fair value of our common stock as of each grant date including:

prices at which we sold shares of Preferred Stock and the superior rights and preferences of the Preferred Stock relative to our common stock at the time of each grant;

the progress of our research and development programs, including the status and results of preclinical studies for our product candidates;

our stage of development and our business strategy and the material risks related to our business and industry;

external market conditions affecting the biopharmaceutical industry and the material risks related to our business and industry;

and trends within the biopharmaceutical industry;

our financial position, including cash on hand, and our historical and forecasted performance and operating results;

the lack of an active public market for our common stock and our Preferred Stock;

the likelihood of achieving a liquidity event, such as an IPO or sale of our company in light of prevailing market conditions;

the analysis of IPOs and the market performance of similar companies in the biopharmaceutical industry.

The assumptions underlying these valuations represent management’s best estimates, which involve inherent uncertainties and the application of management judgement.

As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different.

Following our IPO, the fair value of our common stock will be determined based on the quoted market price of our common stock.

Variable interest entities

We review each legal entity formed by parties related to us to determine whether or not the entity is a variable interest entity, or VIE.

If the entity is a VIE, we assess whether or not we are the primary beneficiary of that VIE based on a number of factors, including (i) which party has the power to direct the activities that most significantly affect the VIE’s economic performance, (ii) the parties’ contractual rights and responsibilities pursuant to any contractual agreements and (iii) which party has the obligation to absorb losses or the right to receive benefits from the VIE.

If we determine that we are the primary beneficiary of a VIE, we consolidate the financial statements of the VIE into our consolidated financial statements at the time that determination is made.

On a quarterly basis we evaluate whether we continue to be the primary beneficiary of any consolidated VIEs.

If we determine that we are no longer the primary beneficiary of a consolidated VIE, or no longer have a variable interest in the VIE, we deconsolidate the VIE in the period that the determination is made.

On March 22, 2018, certain of our investors, or the Primary Investors, formed Blink to hold certain intellectual property related to RNA base editing.

On May 9, 2018, we entered into a merger option agreement, or the Option Agreement, with Blink.

On the same date, Blink entered into the Broad License Agreement, issued 5,000,000 shares of Blink series A preferred stock to its investors at $1.00 per share, and issued restricted common stock to certain scientific founders.

As of the date of the Option Agreement, Beam and Blink were both owned by members of the same group or Primary Investors, having over 75% ownership in each entity, which consisted primarily of our initial investors and scientific founders.

Under the Option Agreement, Blink granted us an option, exercisable on the date that Blink issued an aggregate of 10,000,000 additional shares of Blink series A preferred stock and ending on the second anniversary of such date, to consummate a merger with Blink in exchange for a $121,000 option premium.

In connection with the Blink Merger, we issued two shares of our Series A-2 Preferred Stock for each share of Blink series A preferred stock and issued 0.446 shares of our common stock for each share of Blink common stock.

As of May 9, 2018, as a result of the design and purpose of Blink and the Option Agreement, we determined that Blink was a VIE and that we were the primary beneficiary, because we had both (1) the power to direct the activities of Blink that most significantly impacted Blink’s economic performance and (2) the right to receive benefits from Blink that could be significant to Blink.

As a result, we began consolidating Blink on May 9, 2018.

The operating activity of Blink from its formation on March 22, 2018 to May 9, 2018 was immaterial.

In August 2018, Blink issued 10,000,000 shares of Blink series A preferred stock at $1.00 per share to the Primary Investors and we paid the $121,000 option premium to exercise our option to merge with Blink.

On September 25, 2018, or the Merger Date, the merger was consummated, and Blink became a wholly owned subsidiary of Beam.

We recognized expense for the excess in value of the Beam Series A-2 Preferred Stock and common stock exchanged for the Blink series A preferred stock and common stock, because the excess value was only transferred to certain investors of Beam and there were no other rights or privileges identified that require separate accounting as an asset.

Fair value measurements

Preferred stock tranche rights

We have determined that our obligation to issue, and our investors’ obligation to purchase, additional shares of Series A-1 Preferred Stock pursuant to the second closing and Series A-2 Preferred Stock pursuant to the third closing represented a freestanding instrument.

The resulting preferred stock tranche liability was initially recorded at fair value, with gains and losses arising from changes in fair value recognized in other income (expense) in the consolidated statement of operations.

The preferred stock tranche liabilities were remeasured at each reporting period and upon the exercise or expiration of the obligation.

The preferred stock tranche liabilities were valued using an option pricing model which utilized the fair value of the Preferred Stock, expected volatility, as well as the expected term.

As of December 31, 2018, all redeemable convertible Series A-1 Preferred Stock and redeemable convertible Series A-2 Preferred Stock closings have occurred, and all tranche liabilities have been remeasured and reclassified to Preferred Stock.

Anti-dilution issuance right

Additional shares of common stock were issued to Harvard and Broad Institute upon equity financings allowing Harvard and Broad Institute to maintain a defined ownership percentage in us on a fully diluted basis until we achieved a defined aggregate level of preferred stock financing.

These anti-dilution issuance rights were accounted for under ASC 815, Derivatives and Hedging , and were initially recorded at fair value with a corresponding charge to research and development expense.

As such, we recorded this instrument as a liability at its fair value with a corresponding amount recorded as research and development expense and marked it to market at each reporting period, with changes in fair value recognized in other income (expense) in the consolidated statement of operations at each period-end while this instrument was outstanding.

The liability was valued using a Monte Carlo simulation model, which models the value of the liability based on the change of several key variables, including the time to the capital raise, the probability of the capital raise, as well as the fair value of our common stock.

During 2018, the anti-dilution rights were satisfied and there is no additional derivative liability accounting.

Financing milestone payments

We were required to make cash payments to Harvard and Broad Institute upon the achievement of future financing milestones tied to the closing of additional rounds of Preferred Stock.

The financing milestone payments were accounted for under ASC 815, and were initially recorded at fair value with a corresponding charge to research and development expense.

The liabilities were marked to market at each balance sheet date with all changes in value recognized in other income or expense in the consolidated statement of operations.

We adjusted the liability for changes in fair value until the achievement of the financing milestones.

To determine the estimated fair value of the financial milestone payments, we used a Monte Carlo simulation model, which models the value of the liability based on the change of several key variables, including time to capital raise, probabilities to capital raise, cost of debt, as well as the projected price per share upon issuance.

As of December 31, 2018, all financing milestone payments have been achieved and were either paid in cash or are recorded in accrued expenses for actual amounts due.

Success payments

Subsequent to the February 2020 IPO, the amount of success payments will be based on the market value of our common stock.

The success payments are accounted for under ASC 815 and are initially recorded at fair value with a corresponding charge to research and development expense.

The liabilities are marked to market at each balance sheet date with all changes in value recognized in other income (expense) in the consolidated statement of operations.

Following our IPO, the fair value of our common stock is determined based on the quoted market price of our common stock.

Fair value measurements – Success payments

Any amounts due may be settled in cash or shares of our common stock, at our discretion.

The success payments are accounted for under Accounting Standards Codification 815, Derivatives and Hedging and were initially recorded at fair value with a corresponding charge to research and development expense.

The liabilities are marked to market at each balance sheet date with all changes in value recognized in interest and other income (expense), net in the consolidated statement of operations and other comprehensive loss.

We will continue to adjust the liability for changes in fair value until the earlier of the achievement or expiration of the success payment obligation.

To determine the estimated fair value of the success payments, we used a Monte Carlo simulation model, which models the value of the liability based on several key variables, including probability of event occurrence, timing of event occurrence, as well as the price per share at the time of success payment.

Accrued research and development costs

As part of the process of preparing our financial statements, we are required to estimate our accrued expenses.

This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost.

The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met.

We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time.

Examples of estimated accrued research and development expenses include fees paid to vendors in connection with preclinical development activities and vendors related to development, manufacturing and distribution of product candidate materials.

We base our expenses related to preclinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple vendors that conduct and manage preclinical studies on our behalf.

The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows.

There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense.

In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period and adjust accordingly.

On January 1, 2019, we adopted ASU No.

2016-02, Leases (Topic 842) , or ASC 842, which requires the recognition of the right-of-use assets and related operating and finance lease liabilities on the balance sheet.

We adopted ASC 842 using a modified retrospective approach for all leases existing at January 1, 2019.

The adoption of ASC 842 had a substantial impact on our consolidated balance sheet but did not have a material effect on the company’s consolidated statements of operations and other comprehensive loss, consolidated statements of redeemable convertible preferred stock and stockholders’ deficit.

Upon adoption of ASC 842, we recorded $14.2 million and $21.7 million to operating lease right-of-use assets and the related lease liabilities, respectively.

The operating lease liabilities are based on the present value of the remaining minimum lease payments discounted using our secured incremental borrowing rate at the effective date of January 1, 2019.

For contracts entered into on or after the effective date, at the inception of a contract, we assess whether the contract is, or contains, a lease.

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The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, our secured incremental borrowing rate for the same term as the underlying lease.

For real estate leases and other operating leases, we use its secured incremental borrowing rate.

For finance leases, we use the rate implicit in the lease or its secured incremental borrowing rate if the implicit lease rate cannot be determined.

For real estate leases and other operating leases, we use our secured incremental borrowing rate.

For finance leases, we use the rate implicit in the lease or our secured incremental borrowing rate if the implicit lease rate cannot be determined.

Lease payments included in the measurement of the lease liability comprise the following:

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The lease payments are allocated between a reduction of the lease liability and interest expense.

Leasehold improvements are not unique and are retained by the lessor at the end of the lease.

However, in the case of a space designed to be suitable for our specific real estate needs and if we are responsible for cost overruns, we are the accounting owner of the leasehold improvements.

We made an accounting policy election to not recognize leases with an initial term of 12 months or less within our consolidated balance sheets and to recognize those lease payments on a straight-line basis in our consolidated statements of income over the lease term.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis