Beam Therapeutics Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operati ons . The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Some of the numbers included herein have been rounded for the convenience of presentation. 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. Overview 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 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. 94 COVID-19 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 General We were incorporated on January 25, 2017 and commenced operations shortly thereafter. 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 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. 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. Since inception we have incurred significant operating losses. Our net losses for the years ended December 31, 2020 and 2019 were $194.6 million and $78.3 million, respectively. As of December 31, 2020, we had an accumulated deficit of $397.6 million. 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; 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. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic alliances, and licensing arrangements. We may be unable to raise additional funds or enter into such other agreements when needed on favorable terms or at all. Our inability to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We can give no assurance 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 funding will be sufficient to meet our needs. 95 Research and development expenses 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; • personnel-related expenses, including salaries, bonuses, benefits and stock-based compensation for employees engaged in research and development functions; • 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; • 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; and • facilities, depreciation and other expenses which include direct and allocated expenses. We expense research and development costs as incurred. Advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. 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. We expect that our research and development expenses will increase substantially in connection with our planned preclinical and future clinical development activities. General and administrative expenses General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, intellectual property, business development, and administrative functions. General and administrative expenses also include legal fees relating to intellectual property and corporate matters, professional fees for accounting, auditing, tax and consulting services, insurance costs, travel, and direct and allocated facility related expenses and other operating costs. We anticipate that our general and administrative expenses will increase in the future to support increased research and development activities. 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 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. 96 Results of operations Comparison of the years ended December 31, 2020 and 2019 The following table summarizes our results of operations (in thousands) : Years Ended December 31, 2020 2019 Change License revenue $ 24 $ 18 $ 6 Operating expenses: Research and development 103,179 54,619 48,560 General and administrative 29,605 20,553 9,052 Total operating expenses 132,784 75,172 57,612 Loss from operations (132,760 ) (75,154 ) (57,606 ) Other income (expense): Change in fair value of derivative liabilities (63,400 ) (5,400 ) (58,000 ) Interest and other income (expense), net 1,568 2,228 (660 ) Total other income (expense) (61,832 ) (3,172 ) (58,660 ) Net loss $ (194,592 ) $ (78,326 ) $ (116,266 ) License revenue 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 Research and development expenses were $103.2 million and $54.6 million for the years ended December 31, 2020 and 2019 , respectively. The increase of $48.6 million was primarily due to the following: • 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. • 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. General and administrative expenses 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 $9.1 million was primarily due to the following: • 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. 97 Change in fair value of derivative liabilities 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 Since our inception in January 2017, we have incurred significant operating losses. 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. 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. 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 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 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 . Cash flows The following table summarizes our sources and uses of cash (in thousands): Years Ended December 31, 2020 2019 Net cash used in operating activities $ (95,741 ) $ (72,003 ) Net cash used in investing activities (100,123 ) (66,659 ) Net cash provided by financing activities 322,322 41,279 Net increase (decrease) in in cash, cash equivalents and restricted cash $ 126,458 $ (97,383 ) 98 Operating activities 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, 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, 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 Our operating expenses are expected to increase substantially as we continue to advance our portfolio of programs. Specifically, our expenses will increase if and as we: • continue our current research programs and our preclinical development of product candidates from our current research programs; • seek to identify additional research programs and additional product candidates; • initiate preclinical testing and clinical trials for any product candidates we identify and develop; • maintain, expand, enforce, defend, and protect our intellectual property portfolio and provide reimbursement of third-party expenses related to our patent portfolio; • seek marketing approvals for any of our product candidates that successfully complete clinical trials; • establish a sales, marketing, and distribution infrastructure to commercialize any medicines for which we may obtain marketing approval; • further develop our base editing platform; • 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; 99 • acquire or in-license products, intellectual property, medicines and technologies; and • 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. Because of the numerous risks and uncertainties associated with the development our programs, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our future funding requirements will depend on many factors including: • the cost of continuing to build our base editing platform; • the costs of acquiring licenses for the delivery modalities that will be used with our product candidates; • the scope, progress, results, and costs of discovery, preclinical development, laboratory testing, manufacturing and clinical trials for the product candidates we may develop; • the costs of preparing, filing, and prosecuting patent applications, maintaining and enforcing our intellectual property and proprietary rights, and defending intellectual property-related claims; • the costs, timing, and outcome of regulatory review of the product candidates we may develop; • the costs of future activities, including product sales, medical affairs, marketing, manufacturing, distribution, coverage and reimbursement for any product candidates for which we receive regulatory approval; • the success of our license agreements and our collaborations; • our ability to establish and maintain additional collaborations on favorable terms, if at all; • 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; and • 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. We do not have any committed external source of funds. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. If we raise funds through additional collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, or product candidates, or we may have to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce, or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. We can give no assurance 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 funding will be sufficient to meet our needs. Contractual obligations The following is a summary of our significant contractual obligations as of December 31, 2020: Contractual obligation Total Less than 1 year More than 1 year and less than 3 More than 3 years and less than 5 More than 5 years (in thousands) (in thousands) Operating lease obligations (1) $ 169,344 $ 9,096 $ 27,774 $ 29,412 $ 103,062 Financing obligations 7,872 2,685 4,676 511 — Total $ 177,216 $ 11,781 $ 32,450 $ 29,923 $ 103,062 (1) Represents future minimum lease payments under our operating leases for office and lab space in Cambridge, Massachusetts. The minimum lease payments above do not include any related common area maintenance charges or real estate taxes. 100 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. Our agreements to license intellectual property include potential milestone payments that are dependent upon the development of products using the intellectual property licensed under the agreements and contingent upon the achievement of development or regulatory approval milestones, as well as commercial and success payment milestones. We have not included such potential obligations in the table above because they are contingent upon the occurrence of future events and the timing and likelihood of such potential obligations are not known with certainty. Additionally, we enter into contracts in the normal course of business with contract research organizations and other vendors to assist in the performance of our research and development activities and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore are cancelable contracts and not included in the table of contractual obligations and commitments. Off-balance sheet arrangements We did not have during the periods presented and we do not currently have, any off-balance sheet arrangements, as defined under the applicable regulations of the SEC. Critical accounting policies and significant judgements Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 2, Summary of significant accounting policies , to our consolidated financial statements in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements. Stock-based compensation We measure stock options and other stock-based awards granted to our employees, directors, consultants or founders based upon their fair value on the date of the grant and recognize stock-based compensation expense over the requisite service period, which is generally the vesting period of the respective award. We recognize forfeitures as they occur. The majority of our stock-based compensation awards are subject to either service- or performance-based vesting conditions. We apply the straight-line method of expense recognition to all awards with service-based vesting and recognize stock-based compensation for performance-based awards over the service period using the accelerated attribution method to the extent achievement of the of performance condition is probable. We estimate the fair value of each stock option grant on the date of grant using the Black-Scholes option-pricing model, which uses inputs such as the fair value of our common stock, assumptions we make for the volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield. The fair value of our common stock is used to determine the fair value of restricted stock awards. 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. Following our IPO, the fair value of our common stock is determined based on the quoted market price of our common stock. 101 Fair value measurements – Success payments 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. 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. Leases 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. 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. The assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether we have the right to direct the use of the asset. At inception of a lease, we allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. Leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any of these criteria. For all leases at the lease commencement date, a right-of-use asset and a lease liability are recognized. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease. The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred if any, less any lease incentives received. All right-of-use assets are reviewed for impairment. 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 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: the fixed noncancelable lease payments, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early. 102 Lease cost for operating leases consists of the lease payments plus any initial direct costs, primarily brokerage commissions, and is recognized on a straight-line basis over the lease term. Included in lease cost are any variable lease payments incurred in the period that are not included in the initial lease liability and lease payments incurred in the period for any leases with an initial term of 12 months or less. Lease cost for finance leases consists of the amortization of the right-of-use asset on a straight-line basis over the lease term and interest expense determined on an amortized cost basis. 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. JOBS Act We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies, including reduced disclosure about our executive compensation arrangements, exemption from the requirements to hold non-binding advisory votes on executive compensation and golden parachute payments and exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting. We may take advantage of these exemptions until December 31, 2025 or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company earlier if we have more than $1.07 billion in annual revenue, we have more than $700.0 million in market value of our stock held by non-affiliates (and we have been a public company for at least 12 months and have filed one annual report on Form 10-K) or we issue more than $1.0 billion of non-convertible debt securities over a three-year period. For so long as we remain an emerging growth company, we are permitted, and intend, to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. We may choose to take advantage of some, but not all, of the available exemptions. In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected not to “opt out” of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time private companies adopt the new or revised standard and will do so until such time that we either (i) irrevocably elect to “opt out” of such extended transition period or (ii) no longer qualify as an emerging growth company. Therefore, the reported results of operations contained in our consolidated financial statements may not be directly comparable to those of other public companies.