Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements included in this Annual Report on Form 10-K, which have been prepared by us in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and with Regulation S-X, promulgated under the Securities Exchange Act of 1934, as amended. This discussion and analysis should be read in conjunction with these consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in Part I, Item 1A. Risk Factors of this Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Information pertaining to fiscal year 2021 was included in our Annual Report on Form 10-K for the year ended December 31, 2022 under Part II, Item 7, “Management’s Discussion and Analysis of Financial Position and Results of Operations,” which was filed with the Securities and Exchange Commission (the “SEC”) on February 23, 2023.
Management Overview
Intellia Therapeutics, Inc. (“we,” “us,” “our,” “Intellia,” or the “Company”) is a leading clinical-stage gene editing company, focused on developing potentially curative therapeutics using CRISPR/Cas9-based technologies. CRISPR/Cas9, an acronym for C lustered, R egularly I nterspaced S hort P alindromic R epeats (“CRISPR”)/ C RISPR a ssociated 9 (“Cas9”), is a technology for genome editing, the process of altering selected sequences of genomic deoxyribonucleic acid (“DNA”). To fully realize the transformative potential of CRISPR/Cas9-based technologies, we are building a full-spectrum gene editing company, by leveraging our modular platform, to advance in vivo and ex vivo therapies for diseases with high unmet need by pursuing two primary approaches. For in vivo applications to address genetic diseases, we deploy CRISPR/Cas9 as the therapy. Our in vivo programs use CRISPR to enable precise editing of disease-causing genes directly inside the human body. In addition, we are advancing ex vivo applications to address immuno-oncology and autoimmune diseases, where we use CRISPR/Cas9 as the tool to create the engineered cell therapy. For our ex vivo programs, CRISPR/Cas9 is used to engineer human cells outside the body. Our deep scientific, technical and clinical development experience, along with our robust intellectual property (“IP”) portfolio, have enabled us to unlock broad therapeutic applications of CRISPR/Cas9 and related technologies to create new classes of genetic medicine. For more information regarding our business, mission and pipeline, see above sections in Part I entitled “ Overview ”, “ Strategy ” and “ Our Pipeline ”.
Financial Overview
Collaboration Revenue
Our revenue consists of collaboration revenue, including amounts recognized related to upfront technology access payments for licenses, technology access fees, research materials shipped, research funding and milestone payments earned under our collaboration and license agreements.
Research and Development
Research and development costs consist of expenses incurred in performing research and development activities, such as compensation and benefits, which includes stock-based compensation, for full-time research and development employees, allocated facility-related expenses, overhead expenses, license and milestone fees, contract research, development and manufacturing services, clinical trial costs and other related costs.
General and Administrative
General and administrative expenses consist primarily of compensation and benefits, including stock-based compensation, for our executive, finance, legal, human resources, business development and support functions. Also included in general and administrative expenses are allocated facility-related costs not otherwise included in research and development expenses, travel expenses and professional fees for auditing, tax and legal services, including IP-related legal services, and other consulting fees and expenses.
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Other Income (Expense), Net
Other income (expense) consists of interest income earned on our cash, cash equivalents, restricted cash equivalents and marketable securities, loss from equity method investment and change in fair value of contingent consideration.
Results of Operations
The following discussion of the financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and the related footnotes thereto.
Comparison of Years Ended December 31, 2023 and 2022
The following table summarizes our results of operations for the years ended December 31, 2023 and 2022 (in thousands):
Year Ended December 31,
Period-to-
2023
2022
Period Change
Collaboration revenue
$
36,275
$
52,121
$
(15,846
)
Operating expenses:
Research and development
435,069
419,979
15,090
General and administrative
116,497
90,306
26,191
Total operating expenses
551,566
510,285
41,281
Operating loss
(515,291
)
(458,164
)
(57,127
)
Other income (expense), net:
Interest income
49,832
8,542
41,290
Loss from equity method investment
(15,633
)
(11,079
)
(4,554
)
Change in fair value of contingent consideration
(100
)
(13,485
)
13,385
Total other income (expense), net
34,099
(16,022
)
50,121
Net loss
$
(481,192
)
$
(474,186
)
$
(7,006
)
Collaboration Revenue
Collaboration revenue decreased by $15.8 million to $36.3 million during the year ended December 31, 2023, as compared to $52.1 million during the year ended December 31, 2022. This decrease was primarily driven by a $10.3 million cumulative adjustment related to a contract modification resulting from Regeneron exercising a one-time option to extend the term of our technology collaboration for an additional two years. Refer to Note 9 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for further details.
Research and Development
Research and development expenses increased by $15.1 million to $435.1 million during the year ended December 31, 2023, as compared to $420.0 million during the year ended December 31, 2022.
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The following table summarizes our research and development expenses for the years ended December 31, 2023 and 2022, together with the changes in those items in dollars (in thousands) and the respective percentages of change.
Year Ended December 31,
Period-to-
Percent
2023
2022
Period Change
Change
External development expenses by program:
NTLA-2001
$
54,454
$
37,849
$
16,605
44
%
NTLA-2002
24,560
11,611
12,949
112
%
NTLA-3001
17,312
11,506
5,806
50
%
NTLA-5001
-
17,827
(17,827
)
-100
%
Unallocated research and development expenses:
Employee-related expenses
136,628
112,931
23,697
21
%
Research materials and contracted services
60,726
74,834
(14,108
)
-19
%
In-process research and development
-
55,990
(55,990
)
-100
%
Research milestone
874
-
874
-
Facility-related expenses
53,141
37,618
15,523
41
%
Stock-based compensation
82,211
56,279
25,932
46
%
Other
5,163
3,534
1,629
46
%
Total research and development expenses
$
435,069
$
419,979
$
15,090
4
%
The increase in research and development expenses for the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily attributable to:
• a $16.6 million increase in external costs related to the development of NTLA-2001, our lead product candidate, primarily due to an increase in spend on drug components and contracted services;
• a $12.9 million increase in external costs related to the development of NTLA-2002, primarily due to an increase in spend on drug components, contracted services and consulting services;
• a $5.8 million increase in external costs related to NTLA-3001, primarily related to an increase in spend on drug components and consulting and professional services, offset in part by a decrease in spend on contracted services;
• a $17.8 million decrease in external costs related to the development of NTLA-5001, as we discontinued this program as part of our pivot to an allogeneic pipeline;
• a $23.7 million increase in employee-related expenses, primarily driven by the increase in personnel growth to support our lead programs;
• a $14.1 million decrease in research materials and contracted services primarily driven by a decrease in drug component expenses and contracted services related to early stage programs;
• a $56.0 million decrease in in-process research and development expense related to the acquisition of Rewrite Therapeutics, Inc. in the first half of 2022;
• a $15.5 million increase in facility-related expenses primarily related to rent, depreciation, maintenance and services, and technology expense allocated to research and development; and
• a $25.9 million increase in stock-based compensation driven by increases in employee headcount in 2023 compared to 2022.
During 2024, we expect research and development expenses to increase as we advance our global pivotal trials for NTLA-2001 and NTLA-2002, progress our NTLA-3001 program and nominate new development candidates.
General and Administrative
General and administrative expenses increased by $26.2 million to $116.5 million during the year ended December 31, 2023, compared to $90.3 million during the year ended December 31, 2022. This increase was primarily related to an increase in employee-related expenses, including stock-based compensation of $16.7 million.
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Other Income (Expense), Net
The increase in other income (expense), net of $50.1 million is primarily related to a $41.3 million increase in interest income, driven by an increase in market rates, and a $13.4 million decrease in other expense related to the change in fair value of contingent consideration, offset in part by a $4.6 million increase in the loss from our equity method investment.
Liquidity and Capital Resources
Since our inception through December 31, 2023, we have raised an aggregate of $2,534.1 million to fund our operations through our collaboration agreements, our initial public offering and concurrent private placements, follow-on public offerings, at-the-market offerings and the sale of convertible preferred stock.
As of December 31, 2023, we had $1,012.1 million in cash, cash equivalents and marketable securities.
At-the-Market Offering Programs
2019 Sale Agreement
In August 2019, we entered into an Open Market Sale Agreement (the “2019 Sale Agreement”) with Jefferies LLC (“Jefferies”), under which Jefferies was able to offer and sell, from time to time in “at-the-market” offerings, shares of our common stock having aggregate gross proceeds of up to $150.0 million. We agreed to pay cash commissions of 3.0% of the gross proceeds of sales of common stock under the 2019 Sale Agreement. Under the 2019 Sale Agreement, we issued 3,778,889 shares of our common stock.
During the first quarter of 2022, we issued 579,788 shares of our common stock in a series of sales at an average price of $69.43 per share in accordance with the 2019 Sale Agreement, for aggregate net proceeds of $38.9 million after payment of cash commissions and legal, accounting and other fees in connection with the sales. The 2019 Sale Agreement expired in the third quarter of 2022.
2022 Sale Agreement
In March 2022, we entered into an Open Market Sale Agreement (the “2022 Sale Agreement”) with Jefferies, under which Jefferies is able to offer and sell, from time to time in “at-the-market” offerings, shares of our common stock having aggregate gross proceeds of up to $400.0 million. We agreed to pay cash commissions of 3.0% of the gross proceeds of sales of common stock under the 2022 Sale Agreement. Through December 31, 2023 we have issued 7,518,163 shares of our common stock under the 2022 Sale Agreement.
During the year ended December 31, 2023, we issued 4,122,824 shares of our common stock, in a series of sales, at an average price of $30.57 per share, in accordance with the 2022 Sale Agreement for aggregate net proceeds of $121.9 million, after payment of cash commissions and legal, accounting and other fees in connection with the sales. As of December 31, 2023, $2.1 million of these proceeds are included in “Prepaid expenses and other current assets” on our consolidated balance sheet, representing offerings with trade dates in December 2023 that were settled in January 2024.
During the year ended December 31, 2022, we issued 3,395,339 shares of our common stock, in a series of sales, at an average price of $57.43 per share, in accordance with the 2022 Sale Agreement for aggregate net proceeds of $189.0 million, after payment of cash commissions and legal, accounting and other fees in connection with the sales.
Follow-on Offering
In December 2022, we closed an underwritten public offering of 7,532,751 shares of common stock, including the exercise in full of the underwriters’ option to purchase an additional 982,532 shares of common stock, at the public offering price of $45.80 per share, for aggregate net proceeds of $337.9 million, after deducting the underwriting discount, commissions and legal, accounting and other fees in connection with the sales.
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Funding Requirements
Our primary uses of capital are, and we expect will continue to be, research and development research materials and contracted services, clinical trial costs, compensation and related expenses, laboratory and office facilities, research supplies, legal and regulatory expenses, patent prosecution filing and maintenance costs for our licensed IP, milestone and royalty payments and general overhead costs. During 2024, we expect our expenses to increase compared to prior periods in connection with our ongoing activities as we continue to develop our clinical programs and advance additional programs into clinical development.
We are eligible to earn a significant amount of milestone payments and royalties, in each case, on a per-product basis under our collaborations with SparingVision SAS (“SparingVision”) and ONK Therapeutics, Ltd. (“ONK”), on a per-target basis under our collaboration with Regeneron Pharmaceuticals, Inc. (“Regeneron”) and upon achievement of certain events under our collaboration with Kyverna Therapeutics, Inc. (“Kyverna”). Our ability to earn these milestone payments and the timing of achieving these milestones is dependent upon the outcome of our research and development activities and is uncertain at this time. Our rights to payments under our collaboration agreements are our only committed external source of funds.
Because our lead programs are in the clinical stage and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of any future product candidates or whether, or when, we may achieve profitability. Until such time as we can generate substantial product revenues, if ever, we expect to fund our ongoing cash needs through equity financings and collaboration arrangements. We receive cost reimbursements from Regeneron related to our collaboration agreements with them. Additionally, we are eligible to earn milestone payments and royalties, in each case, on a per-product basis under our collaborations with SparingVision and ONK, on a per-target basis under our collaboration with Regeneron, and upon achievement of certain events with Kyverna, subject to the provisions of our agreements with each of them. Except for these sources of funding, we will not have any committed external source of liquidity. To the extent that we raise additional capital through the future sale of equity, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing stockholders. If we raise additional funds through collaboration arrangements in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity 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.
Outlook
Based on our research and development plans and our expectations related to the progress of our programs, we expect that our cash, cash equivalents and marketable securities as of December 31, 2023, as well as research and cost reimbursement funding from our collaboration agreements will enable us to fund our ongoing operating expenses and capital expenditure requirements into mid-2026, excluding any potential milestone payments or extension fees that could be earned and distributed under our collaboration agreements or any strategic use of capital not currently in the base case planning assumptions. We have based this estimate on current assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect. In January 2024, following an internal strategic review, we announced an effort to streamline company-wide operations to further focus resources on key strategic priorities and programs. These changes resulted in a pause of select exploratory research-stage programs and a workforce reduction of approximately 15%.
Our ability to generate revenue and achieve profitability depends significantly on our success in many areas, including: developing our delivery technologies and our CRISPR/Cas9 technology platform; selecting appropriate product candidates to develop; completing research and preclinical and clinical development of selected product candidates; obtaining regulatory approvals and marketing authorizations for product candidates for which we complete clinical trials; developing a sustainable and scalable manufacturing process for product candidates; launching and commercializing product candidates for which we obtain regulatory approvals and marketing authorizations, either directly or with a collaborator or distributor; obtaining market acceptance of our product candidates; addressing any competing technological and market developments; negotiating favorable terms in any collaboration, licensing, or other arrangements into which we may enter; maintaining good relationships with our collaborators and licensors;
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maintaining, protecting, and expanding our portfolio of IP rights, including patents, trade secrets, and know-how; and attracting, hiring, and retaining qualified personnel.
Cash Flows
The following is a summary of cash flows for the years ended December 31, 2023 and 2022:
Year Ended December 31,
2023
2022
(In thousands)
Net cash used in operating activities
$
(394,086
)
$
(333,287
)
Net cash (used in) provided by investing activities
(31,347
)
160,309
Net cash provided by financing activities
130,323
582,955
Net cash used in operating activities
Net cash used in operating activities of $394.1 million during the year ended December 31, 2023 primarily consists of a net loss of $481.2 million, further reduced by changes in operating assets and liabilities of $52.5 million, including the receipt of $18.7 million in payments from our collaboration partners during that period and offset in part by non-cash charges of stock-based compensation of $134.1 million, loss on equity method investment of $22.3 million and depreciation of $9.0 million.
Net cash used in operating activities of $333.3 million during the year ended December 31, 2022 primarily consists of a net loss of $474.2 million, further reduced by changes in operating assets and liabilities of $53.9 million, including the receipt of $10.7 million in payments from our collaboration partners during that period and offset in part by non-cash charges of stock-based compensation of $91.4 million, in-process research and development expense of $56.0 million, losses on equity method investment of $22.5 million and depreciation of $7.6 million.
Net cash (used in) provided by investing activities
During the year ended December 31, 2023, our investing activities used cash of $31.3 million primarily due to $904.5 million of marketable securities purchased and $14.0 million in cash for the purchase of property and equipment, offset in part by $887.1 million in marketable securities maturing.
During the year ended December 31, 2022, our investing activities provided net cash of $160.3 million primarily due to $647.6 million in marketable securities maturing, offset in part by $429.0 million of marketable securities purchased, $44.8 million in net cash for the acquisition of Rewrite, and $13.6 million in cash for the purchase of property and equipment.
Net cash provided by financing activities
Net cash provided by financing activities of $130.3 million during the year ended December 31, 2023 is primarily due to the receipt of $119.8 million in net proceeds from at-the-market offerings, $6.6 million in cash received from the exercise of stock options and $3.9 million in cash received from the issuance of shares through our employee stock purchase plan.
Net cash provided by financing activities of $583.0 million during the year ended December 31, 2022 is primarily due to the receipt of $337.9 million in net proceeds from a follow-on offering of our common stock, $227.9 million in net proceeds from at-the-market offerings, $14.5 million in cash received from the exercise of stock options and $2.6 million in cash received from the issuance of shares through our employee stock purchase plan.
Contractual and Other Obligations
We have entered into arrangements that contractually obligate us to make payments that will affect our liquidity and cash flows in future periods .
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Property Leases - Commenced
As of December 31, 2023, our contractual commitments for leases were $146.5 million, which will be paid over the term of such leases. For additional information on our leases and timing of future payments refer to Note 12 of the consolidated financial statements included in this Annual Report on Form 10-K.
Property Leases – Not Yet Commenced
In February 2022, we entered into a lease agreement for office, general laboratory and planned good manufacturing practice (“GMP”) manufacturing space at 840 Winter Street in Waltham, Massachusetts, which is described in further detail in Note 12 of the consolidated financial statements included in this Annual Report on Form 10-K. In connection therewith, we have committed to making at least $146.0 million in rental payments over a lease term of 144 months estimated to begin in the second half of 2024.
Other Obligations
We enter into contracts in the normal course of business with various third parties for clinical trials, preclinical research studies, supply manufacturing and other services and products for operating purposes. These contracts are generally cancelable at any time by us upon prior written notice.
We do not include any potential future pass-through milestone payments or royalty payments we may be required to make under our existing license agreements or the merger agreement related to our acquisition of Rewrite due to the uncertainty of the occurrence of the events requiring payment under those agreements. These payments are not reflected in the disclosures above. In January 2023, a research milestone related to Rewrite was achieved and settled (see Note 11 of the consolidated financial statements included in this Annual Report on Form 10-K ).
Critical Accounting Policies and Use of Estimates
Our management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the balance sheets and the reported amounts of collaboration revenue and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances at the time such estimates are made. Actual results and outcomes may differ materially from our estimates, judgments and assumptions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in the consolidated financial statements prospectively from the date of the change in estimate. Refer to Note 2 to our consolidated financial statements of this Annual Report on Form 10-K for our significant accounting policies related to our critical accounting estimates.
We define our critical accounting policies as those accounting principles generally accepted in the U.S. that require the most significant judgments and estimates about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations as well as the specific manner in which we apply those principles. We believe the critical accounting policies used in the preparation of our consolidated financial statements which require significant estimates and judgments are as follows:
Revenue Recognition
We recognize revenue in accordance with Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) and its related amendments (collectively known as Accounting Standard Codification (“ASC”) 606 (“ASC 606”).
At inception, we determine whether contracts are within the scope of ASC 606 or other topics. For contracts that are determined to be within the scope of ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which we expect to be entitled to receive in exchange for these goods and services. To achieve this core principle, we apply the following five steps: (i) identify the contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the
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transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when or as we satisfy a performance obligation. We only apply the five-step model to contracts when we determine that collection of substantially all consideration for goods and services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration.
As of December 31, 2023, our revenue recognized is solely related to collaboration agreements with third parties which are either within the scope of ASC 606, under which we license certain rights to our product candidates to third parties, or within the scope of ASC 808, Collaborative Arrangements (“ASC 808”) if it involves a joint operating activity pursuant to which we are an active participant and are exposed to significant risks and rewards with respect to the arrangement. As discussed in further detail in Note 9 to our consolidated financial statements of this Annual Report on Form 10-K, we enter into out-licensing agreements which are within the scope of ASC 606, under which we license certain rights to our product candidates to third parties and may provide services related to the research and development of the product candidates. The terms of these arrangements typically include consideration payable to us of one or more of the following: nonrefundable, upfront fees; development, regulatory, and commercial milestone payments; research and development funding payments; and royalties on the net sales of licensed products. Additionally, the terms of certain arrangements may include an equity interest in the other company. Consideration received from each of these payments results in collaboration revenues, except for revenues from royalties on the net sales of licensed products, which are classified as royalty revenues. For arrangements within the scope of ASC 808, the terms of these arrangements typically include payments received or made under the cost sharing provisions which are recognized as a component of collaboration revenues in the consolidated statements of operations and comprehensive loss.
In determining the accounting for each contract, the significant areas of management judgment or estimation include the determination of accounting for contract changes as modifications and whether those are separate and distinct or part of a partially satisfied performance obligation, determining the transaction price, identifying the distinct performance obligations within a contract, determining the standalone selling prices for distinct performance obligations when more than one distinct performance obligation is identified within a contract and determining the revenue recognition pattern for each performance obligation that best reflects the timing of when we transfer control of goods and services to the customer. If the consideration received in exchange for entering into a contract is in the form of noncash consideration, we are required to estimate the fair value of the noncash consideration received. If our estimates of the noncash consideration received are not appropriate it could impact the total amount of revenue recognized for the contract. Furthermore, many of our performance obligations, whether distinct or combined, do not have readily available standalone selling prices and therefore we are required to make judgments and estimates regarding the standalone selling prices when relevant. To the extent the estimates are not appropriate in the circumstances, it could impact the timing of our revenue recognition. We evaluate the measure of progress each reporting period and if estimates related to the measure of progress change, related revenue recognition is adjusted accordingly.
Accrued Research and Development Expenses
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 clinical research organizations (“CROs”) in connection with clinical studies, vendors in connection with preclinical development activities and vendors related to development, manufacturing and distribution of clinical trial materials.
We base our expenses related to preclinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs that conduct and manage clinical 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.
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Stock-Based Compensation
We measure employee stock-based compensation based on the grant date fair value of the equity awards using the Black-Scholes option pricing model. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period of the awards and is adjusted for pre-vesting forfeitures in the period in which the forfeitures occur. For equity awards that have a performance or market condition, we recognize stock-based compensation expense using the accelerated attribution method. Estimates of stock-based compensation expense for an award with a performance condition are based on our assessment of the probability that the performance condition will be achieved. Our stock price is a key input that will drive the grant date fair value of the equity awards.
Significant judgments made with respect to stock-based compensation relate to certain assumptions made when selecting model inputs used in the Black-Scholes option pricing model, in particular the volatility and expected life assumptions. Volatility assumptions are calculated based on historical volatility of the Company’s stock. We estimate the expected term of options using the simplified method. In addition, an expected dividend yield of zero is used in the option valuation model because we do not pay cash dividends and do not expect to pay any cash dividends in the foreseeable future. The fair value of market-based restricted stock units is determined using a Monte Carlo simulation model, which uses multiple input variables to determine the probability of satisfying the market condition requirements.
Stock-based compensation expense for an award with performance conditions also include significant judgment with respect to the probability that the performance condition will be achieved, as the amount of expense recorded is based on the probable outcome of the performance conditions.
We classify stock-based compensation expense in our consolidated statements of operations and comprehensive loss in the same manner in which the award recipient’s salary and related costs are classified or in which the award recipient’s service payments are classified.
Recent Accounting Pronouncements
Refer to Note 2 to our consolidated financial statements included in Part IV, Item 15, “Notes to Consolidated Financial Statements,” of this Annual Report on Form 10-K for a description of recent accounting pronouncements applicable to our business.
Item 7A. Quantitative and Qualitati ve Disclosures about Market Risk
The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates. As of December 31, 2023, we had cash equivalents, restricted cash equivalents and marketable securities of $921.6 million consisting of interest-bearing money market accounts, corporate and financial institution debt securities, U.S. Treasury and other government securities and asset-backed securities. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are primarily in marketable securities. Due to the short-term duration of our investment portfolios and the low risk profile of our investments, we do not believe an immediate change of 100 basis points, or one percentage point, would have a material effect on the fair market value of our investment portfolio. Declines in interest rates, however, would reduce future investment income.
We do not have any foreign currency or derivative financial instruments. Inflation generally affects us by increasing our cost of labor, preclinical and clinical trial costs. We do not believe that inflation had a material effect on our results of operations during the year ended December 31, 2023.
Item 8. Financial Statement s and Supplementary Data
The information required by this item is presented at the end of this report beginning on page F-1.
Item 9. Changes in and Disagreements with Accou ntants on Accounting and Financial Disclosure
None.
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