INTELLIA THERAPEUTICS, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

Edgar Glimpses |

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 U.S. generally accepted accounting principles, or 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.

Management Overview

Intellia Therapeutics, Inc. ("we," "us," "our," "Intellia," or the "Company") is a leading genome editing company focused on the development of proprietary, curative therapeutics utilizing a biological tool known as CRISPR/Cas9. We believe that the CRISPR/Cas9 technology has the potential to transform medicine by permanently editing disease-associated genes or genetic material in the human body with a single treatment course. We intend to leverage our leading scientific expertise, clinical development experience and intellectual property position to unlock broad therapeutic applications of CRISPR/Cas9 genome editing and develop a potential new class of therapeutic products.

We commenced active operations in mid-2014, and our operations to date have been limited to organizing and staffing our company, business planning, raising capital, developing our technology, identifying potential product candidates, undertaking preclinical research and studies and evaluating a clinical path for our pipeline programs. To date, we have financed our operations primarily through our collaborations with Novartis Institutes for BioMedical Research, Inc., (Novartis), and Regeneron Pharmaceuticals, Inc., (Regeneron), our initial public offering and private placements of our common and preferred stock. All of our revenue to date has been collaboration revenue. Since our inception and through , we have raised an aggregate of approximately $502.6 million to fund our operations, of which $106.1 million was through our collaboration agreements, $170.5 million was from our initial public offering and concurrent private placements, $141.0 million was from a secondary offering and $85.0 million was from the sale of convertible preferred stock.

We believe our product focus, therapeutic discovery and development strength, delivery expertise and intellectual property portfolio make us well-positioned to translate the potential of the CRISPR/Cas9 system into clinically meaningful genome editing-based therapeutics. To maximize our opportunity to rapidly develop clinically successful products, we are applying a risk-mitigating approach with our initial indications. Our approach is defined by four primary criteria: (i) the type of edit-knockout, repair or insertion; (ii) the delivery modality for in vivo and ex vivo applications; (iii) the presence of established therapeutic endpoints; and (iv) the potential for the CRISPR/Cas9 system to provide therapeutic benefits when compared to existing therapeutic modalities. Our initial indications include in vivo programs focused on diseases attributable to genes expressed in the liver that have significant unmet medical needs - transthyretin amyloidosis, which we are co-developing with Regeneron, alpha-1 antitrypsin deficiency, inborn errors of metabolism, including primary hyperoxaluria, and chronic hepatitis B infection - as well as ex vivo applications of the technology in chimeric antigen receptor T cell (CAR-T cell) and hematopoietic stem cell (HSC), product candidates which are selectively partnered with our collaborator Novartis.


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The following table illustrates our discovery programs and opportunities as of :



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In , we presented data from our completed long-term, 52-week, durability mouse study, demonstrating in vivo genome editing following a single, intravenous administration of CRISPR/Cas9. With a single dose, we achieved and maintained an approximately 97 percent reduction in serum TTR protein levels through 12 months. This TTR reduction was accomplished by approximately 70 percent sustained editing at the target DNA site in the liver. This study confirmed that our lipid nanoparticle (LNP) system is transiently present with 99 percent clearance of messenger RNA (mRNA) within 10 hours and of single guide RNA (sgRNA) within 72 hours in the liver. The treatment was well-tolerated at the time of administration and no adverse events were noted throughout the 52-weeks of follow-up study. These mouse durability results followed our presentation in of initial data from rat studies demonstrating in vivo genome editing after a single, intravenous administration of CRISPR/Cas9. In our presentation, we reported that, using our LNP system in rats, we had observed up to 91 percent reduction in serum TTR protein levels and up to 66 percent editing at the target DNA site in the subject animals.

In , we released interim top-line data regarding our in vivo non-human primate (NHP) exploratory pre-clinical studies. Specifically, based on preliminary studies currently at varying points of progress, liver genome editing rates using CRISPR/Cas9 delivered via our proprietary LNP system have ranged from 0.10 percent up to 32.0 percent after a single dose with various exploratory NHP guide RNAs (gRNA), LNP formulations and dosing regimens as well as with exploratory human cross-reactive gRNAs. In NHPs redosed with a subsequent application of our LNP formulations, we observed further editing that surpassed those levels achieved after a single dose, with multiple animals achieving a total of over 20 percent liver genome editing after a second dose.

These NHP results were similar to the results we observed in our initial rodent studies. We are conducting further optimization of our delivery system and proceeding to human guide selection. We expect to achieve higher levels of editing and reductions in serum levels of TTR protein as we achieved when we optimized the delivery system and CRISPR/Cas9 cargo used in our rodent models. We expect to begin IND-enabling activities for a human therapeutic as soon as mid-2018.

To date, in both single and repeat dose experiments, our proprietary delivery LNP system has been well-tolerated with both NHP-specific gRNA and exploratory human cross-reactive gRNAs, as assessed by gross observation of the animals, clinical chemistry, hematology, and cytokine and complement levels. We are also encouraged by the reduction in serum TTR protein levels shown to date in animals with the highest levels of editing. We are


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conducting additional studies in multiple animal models to maximize editing rates through repeat dosing and formulation optimization.

In , we presented data from an in vivo mouse study showing, after a single systemic intracerebral injection, delivery to the brain of one of our proprietary LNP formulations as demonstrated by the expression of tdTomato protein. Additionally, we presented data from another in vivo mouse study showing gene editing in brain tissue following single intracerebral injections of several proprietary LNP formulations. Editing was assessed under various dosing regimens with six different proprietary LNP formulations following a single intracerebral injection targeting the striatum and cerebellum. Under these various conditions, editing levels from less than 1% up to 28% were achieved in the striatal and cerebellar tissue. The injections were well tolerated and the mice did not display any behavioral changes post dosing.

In , our collaborator Novartis presented initial data from our research collaboration on genome-edited human hematopoietic stem cells. These data showed successful ex vivo editing of the erythroid specific enhancer region of BCL11A, a gene associated with ameliorating sickle cell disease, and the ability of these cells to stably engraft in mice while maintaining their desired properties. Specifically, the data showed that approximately 80-95 percent target site modification in human hematopoietic stem and progenitor CD34+ cells was achieved following electroporation of ribonucleoprotein (RNP) composed of Cas9 and a gRNA, selected for efficacy and potency. In addition, we demonstrated an approximately 40 percent reduction in BCL11A mRNA with a corresponding two-fold increase in ?-globin transcript and 30-40 percent more fetal hemoglobin-positive cells above background. Editing of CD34+ cells from patient donors resulted in similar decreases in BCL11A mRNA and increases in ?-globin transcript. We also showed engraftment over 16 weeks following transplantation of edited human bone marrow CD34+ cells into immune compromised mice, while maintaining editing levels in engrafted cells. We did not observe any off-target events in CD34+ cells edited with the selected gRNA, as measured by targeted next generation sequencing of sites identified through in silico prediction and based on an unbiased, genome-wide, oligo-insertion detection method.

Collaborations

Novartis

As described in "Collaborations-Novartis Institutes for BioMedical Research, Inc.," in , we entered into a strategic collaboration agreement with Novartis primarily focused on the development of new ex vivo CRISPR/Cas9-based therapies using CAR-T cells and HSCs.

Through , excluding amounts allocated to Novartis' purchase of our Class A-1 and Class A-2 Preferred Units, we had recorded a total of $34.4 million in cash and accounts receivable under the Novartis agreement. Through , we have recognized $23.1 million of collaboration revenue, including $9.3 million, $7.8 million and $6.0 million in the years ended , 2016 and 2015, respectively, in the consolidated statements of operations related to this agreement. As of and , we had accounts receivable of $6.0 million and $6.0 million, respectively, related to this agreement. As of and 2016, we had deferred revenue of $11.2 million and $11.6 million, respectively, related to this agreement.

Regeneron

As described in "Collaborations-Regeneron Pharmaceuticals, Inc.," in , we entered into a license and collaboration agreement with Regeneron. The agreement includes a product component to research, develop and commercialize CRISPR/Cas-based therapeutic products primarily focused on genome editing in the liver as well as a technology collaboration component, pursuant to which we and Regeneron will engage in research and development activities aimed at discovering and developing novel technologies and improvements to CRISPR/Cas-based technology to enhance our genome editing platform. Under this agreement, we may access the Regeneron Genetics Center and proprietary mouse models to be provided by Regeneron for a limited number of our liver programs.

Through , we have recorded a $75.0 million upfront payment and $4.6 million for research and development services under the Regeneron agreement. Through , we have recognized $25.5


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million of collaboration revenue, including $16.8 million and $8.7 million in the years ended and 2016, respectively. As of and , we had accounts receivable of $4.5 million and $0.5 million, respectively, related to this agreement. As of and 2016, we had deferred revenue of $54.1 million and $66.7 million, respectively, related to this agreement.


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 funding and milestone payments earned under our collaboration and license agreements with Novartis and Regeneron.

Research and Development

Research and development expenses consist of expenses incurred in performing research and development activities, including compensation and benefits, which includes equity-based compensation, for full-time research and development employees, facility-related expenses, overhead expenses, lab supplies and contract research services.

General and Administrative

General and administrative expenses consist primarily of salaries and benefits, including equity-based compensation, for our executive, finance, legal, business development and support functions. Other general and administrative expenses include allocated facility-related costs not otherwise included in research and development expenses, travel expenses and professional fees for auditing, tax and legal services, including intellectual property-related legal services, and other consulting fees and expenses.

Interest Income

Interest income is income earned on our cash equivalents.

Results of Operations

Comparison of Years Ended , and 2016


The following table summarizes our results of operations for the years ended
 and 2016:



                                     Year Ended December 31,          Period-to-
                                       2017             2016         Period Change
      Collaboration revenue        $     26,117       $  16,479     $         9,638
      Operating expenses:
      Research and development           67,647          31,840              35,807
      General and administrative         28,025          16,798              11,227
      Total operating expenses           95,672          48,638              47,034
      Operating loss                    (69,555 )       (32,159 )           (37,396 )
      Interest income                     2,012             525               1,487
      Loss before income taxes          (67,543 )       (31,634 )           (35,909 )
      Income tax provision                    -               -                   -
      Net loss                     $    (67,543 )     $ (31,634 )   $       (35,909 )




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Collaboration Revenue

Collaboration revenue increased $9.6 million to $26.1 million during the year ended , as compared to $16.5 million during the year ended . The increase in collaboration revenue during the year ended is primarily related to the recognition of amounts under the Regeneron collaboration for a full year, including increased research and development services, as well as timing of the collaborations and the related commencement of amortization of the deferred revenue balances.

During the years ended and 2016, collaboration revenue consisted of amounts recognized from deferred revenue related to upfront technology access payments for licenses, technology access fees and research funding under the Novartis collaboration as well as amounts recognized from deferred revenue related to an upfront payment received and amounts for research and development services under the Regeneron collaboration.

Research and Development

Research and development expenses increased $35.8 million to $67.6 million during the year ended , as compared to $31.8 million during the year ended . This increase is primarily driven by our growth to 148 research and development employees as of from 77 research and development employees as of , and the further advancement of our early-stage research programs, collectively resulting in increases in salaries and related compensation expenses, facilities-related expenses as we moved into our new office space at the end of 2016 and invested in laboratory equipment through 2017, as well as laboratory supplies and research materials.

During 2018, we expect research and development expenses to increase as we continue to grow our research and development team and advance our research plans.

General and Administrative

General and administrative expenses increased by $11.2 million to $28.0 million during the year ended , as compared to $16.8 million during the year ended . This increase is primarily related to increased salary and related headcount-based expenses, including equity-based compensation expense, as we grew to 36 general and administrative employees as of from 27 general and administrative employees as of , as well as increased facilities-related expenses as we moved into our new office space at the end of 2016.

Interest Income

Interest income increased by $1.5 million to $2.0 million during the year ended as compared to $0.5 million during the year ended . This increase was caused by an increase in our average cash balance year over year.




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Comparison of Years Ended , and 2015


The following table summarizes our results of operations for the years ended
 and 2015:



                                     Year Ended December 31,          Period-to-
                                       2016             2015         Period Change
      Collaboration revenue        $     16,479       $   6,044     $        10,435
      Operating expenses:
      Research and development           31,840          11,170              20,670
      General and administrative         16,798           8,283               8,515
      Total operating expenses           48,638          19,453              29,185
      Operating loss                    (32,159 )       (13,409 )           (18,750 )
      Interest income                       525               -                 525
      Loss before income taxes          (31,634 )       (13,409 )           (18,225 )
      Income tax benefit                      -           1,012              (1,012 )
      Net loss                     $    (31,634 )     $ (12,397 )   $       (19,237 )




Collaboration Revenue

Collaboration revenue increased $10.4 million to $16.5 million during the year ended , as compared to $6.0 million during the year ended . The increase in collaboration revenue during the year ended is related to the recognition of amounts under the Regeneron collaboration, which was entered into in .

During the year ended , collaboration revenue consisted of amounts recognized from deferred revenue related to upfront technology access payments for licenses, technology access fees and research funding under the Novartis collaboration as well as amounts recognized from deferred revenue related to an upfront payment received and amounts for research and development services under the Regeneron collaboration. During the year ended , collaboration revenue consisted of amounts recognized from deferred revenue related to upfront technology access payments for licenses, technology access fees and research funding under the Novartis collaboration.

Research and Development

Research and development expenses increased $20.6 million to $31.8 million during the year ended , as compared to $11.2 million during the year ended . This increase is primarily driven by our growth to 77 research and development employees as of from 38 research and development employees as of , and the advancement of our early-stage research programs, collectively resulting in increases in salaries and related compensation expenses as well as laboratory supplies and research materials and services.

General and Administrative

General and administrative expenses increased by $8.5 million to $16.8 million during the year ended , as compared to $8.3 million during the year ended . This increase is primarily related to increased salary and related headcount-based expenses, including equity-based compensation expense, as we grew to 27 general and administrative employees as of from 14 general and administrative employees as of , as well as increased corporate insurance, legal and other professional expenses related to our operations as a public company beginning in .

Interest Income

Interest income increased by $0.5 million during the year ended as compared to the same period in 2015. This increase is due to the inclusion of interest-bearing money market accounts, commercial paper and U.S. treasury securities throughout 2016, as compared to no interest-bearing instruments in the prior year.


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Income Tax Expense

We did not recognize any net benefit from income taxes during the year ended or 2016 due to our uncertainty of realizing a tax benefit from the deferred tax assets. During the year ended , we allocated $2.6 million from the $30.0 million total fixed amount of consideration under the collaboration agreement with Novartis to the carrying value of the Class A-1 and Class A-2 preferred units to record those units based on their fair value at date of issuance. As a result of this allocation, during the year ended , we recorded an income tax provision of $1.0 million within members' equity as well as a corresponding income tax benefit of $1.0 million within continuing operations.

Liquidity and Capital Resources

Since our inception through , we have raised an aggregate of $502.6 million to fund our operations, of which $106.1 million was through our collaboration agreements, $170.5 million was from our initial public offering and concurrent private placements, $141.0 million was from a secondary offering in 2017 and $85.0 million was from the sale of convertible preferred stock. As of , we had $340.7 million in cash and cash equivalents.



In addition, we are entitled to receive technology access fees and research payments under our collaboration with Novartis and are also eligible to earn a significant amount of milestone payments and royalties, in each case, on a per-product basis under our collaboration with Novartis and on a per-target basis under our collaboration with Regeneron. Our ability to earn these milestones 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.

Funding Requirements

Our primary uses of capital are, and we expect will continue to be, research and development services, compensation and related expenses, laboratory and related supplies, legal and other regulatory expenses, patent prosecution filing and maintenance costs for our licensed intellectual property and general overhead costs. During 2018, we expect our expenses to increase compared to prior periods in connection with our ongoing activities, particularly as we continue research and development and preclinical activities.

Because our research programs are still in preclinical development 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 finance our ongoing cash needs through equity financings and collaboration arrangements. We are entitled to technology access fees and research payments under our collaboration with Novartis. Additionally, we are eligible to earn milestone payments and royalties, in each case, on a per-product basis under our collaboration with Novartis and on a per-target basis under our collaboration with Regeneron. 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 and cash equivalents as of , as well as technology access and research funding from Novartis and Regeneron, will enable us to fund our ongoing operating expenses and capital expenditures through mid-2020, excluding any potential milestone payments or extension fees that could be earned


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and distributed under the collaboration agreements with Novartis and Regeneron 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.

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; maintaining, protecting, and expanding our portfolio of intellectual property 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 ,
2016 and 2015:



                                                            Year Ended December 31,
                                                          2017         2016        2015
                                                                 (In millions)
  Net cash (used in) provided by operating activities   $   (65.3 )   $  36.1     $ (1.8 )
  Net cash used in investing activities                     (10.1 )      (6.2 )     (2.6 )
  Net cash provided by financing activities                 143.0       167.3       70.3



Net cash (used in) provided by operating activities

Net cash used in operating activities of $65.3 million during the year ended primarily reflects increased spend in our research and development and general and administrative activities, offset in part by the receipt of $9.0 million in additional payments from Novartis. Net cash provided by operating activities of $36.1 million during the year ended primarily reflects the receipt of a $75.0 million upfront payment under our collaboration with Regeneron and $4.0 million in additional payments from Novartis, offset in part by spend in our research and development and general and administrative activities as well as the payment of a $2.2 million security deposit for our new office and laboratory facilities in Cambridge, Massachusetts. Net cash used in operating activities of $1.8 million in the year ended primarily reflected compensation, laboratory and professional service expenses, offset in part by the receipt of a $10.0 million upfront technology access payment and $5.0 million annual technology access fee under the Novartis collaboration agreement, net of $2.6 million of such payments which was allocated to the recording of preferred units acquired by Novartis.

Net cash used in investing activities

Net cash used in investing activities during the years ended , 2016 and 2015 relate to purchases of property and equipment as we grow our operations and build out our office and laboratory facilities.

Net cash provided by financing activities

Net cash provided by financing activities of $143.0 million during the year ended includes $141.0 million in proceeds from our secondary offering, $1.2 million in cash received from the exercise of stock options and $0.8 million in cash received from the issuance of shares through our employee stock purchase plan. Net cash provided by financing activities of $167.3 million during the year ended includes $170.5 million in proceeds from our initial public offering and concurrent private placements, offset in part by the payment of offering costs and amounts paid that were allocated to the value of the intellectual property licensed from Caribou. Net cash provided by financing activities during the year ended related to the sale of preferred securities for net proceeds of $2.0 million, receipt of $2.6 million in consideration from Novartis related to


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their purchase of preferred securities from us and completion of the sale of preferred securities to new and existing investors for aggregate net proceeds of $67.4 million.

Contractual Obligations

The following summarizes our contractual obligations as of :



                                              Payments Due by Period
                                    Less than 1      1 to 3       3 to 5       More than 5
                        Total          Year           Years       Years           Years
                                                   (In millions)
      Property leases   $ 25.4     $         5.5     $  10.6     $    9.3     $           -



The amounts reported for property leases represent future minimum lease payments under non-cancelable operating leases in effect as of . The minimum lease payments do not include common area maintenance charges or real estate taxes.

The contractual obligations table does not include any potential future pass-through milestone payments of up to $26.4 million or royalty payments we may be required to make under the Caribou license agreement, through which we have received rights to CRISPR/Cas9 intellectual property for a specified field of human therapeutic applications, due to the uncertainty of the occurrence of the events requiring payment under that agreement. The table also excludes our obligation to pay 30.0% of Caribou's patent prosecution filing and maintenance costs for licensed intellectual property as such costs cannot be reliably estimated until incurred.

Under the Caribou license agreement, we sublicense a patent family that has been subject to interference proceedings declared by the Patent Trial and Appeal Board (PTAB) of the United States Patent and Trademarks Office (USPTO). Although these interference proceedings were dismissed by the PTAB on , additional substantial legal expenses may be incurred in relation to any appeal of the PTAB decision or any continued prosecution of other claims from the patent family or potential additional interference proceedings. In addition, the parties opposing the interference may seek to assert their intellectual property against us based on our scientific or business activities, including during commercialization. Defense of any such claims would involve substantial litigation expense, and any successful claim of infringement against us could require us to pay substantial damages or result in an injunction against one or more of our products.

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.


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We define our critical accounting policies as those accounting principles generally accepted in the U.S. that require us to make subjective estimates and judgments 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 for each identified unit of accounting when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the seller's price to the buyer is fixed or determinable; and collectability is reasonably assured.

The terms of our collaboration and license agreements contain multiple deliverables, which include licenses to CRISPR/Cas9-based therapeutic products directed to specific targets, referred to as exclusive licenses, as well as research and development activities to be performed by us on behalf of the collaboration partner related to the licensed targets. Payments that we may receive under these agreements include non-refundable technology access fees, payments for research activities, payments based upon the achievement of specified milestones and royalties on any resulting net product sales.

Multiple-Element Arrangements

Our collaboration and license agreements represent multiple-element arrangements. We evaluate our collaborative agreements for proper classification in our statements of operations based on the nature of the underlying activity. We generally reflect as revenue amounts due under our collaborative agreements related to reimbursement of development activities as we are generally the principal under the arrangement.

We evaluate multiple-element arrangements to determine (i) the deliverables included in the arrangement and (ii) whether the individual deliverables represent separate units of accounting or whether they must be accounted for as a combined unit of accounting. When deliverables are separable, consideration received is allocated to the separate units of accounting based on the relative selling price method and the appropriate revenue recognition principles are applied to each unit. When we determine that an arrangement should be accounted for as a single unit of accounting, we must determine the period over which the performance obligations will be satisfied and revenue will be recognized. This evaluation requires us to make judgments about the individual deliverables and whether such deliverables are separable from the other aspects of the contractual relationship. Deliverables are considered separate units of accounting provided that (i) the delivered item has value to the customer on a standalone basis and (ii) if the arrangement includes a general right of return with respect to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in our control. In assessing whether an item has standalone value, we consider factors such as the research, development, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. In addition, we consider whether the collaboration partner can use any other deliverable for its intended purpose without the receipt of the remaining deliverable, whether the value of the deliverable is dependent on the undelivered item, and whether there are other vendors that can provide the undelivered items.

The consideration received under an arrangement that is fixed or determinable is then allocated among the separate units of accounting based on the relative selling prices of the separate units of accounting. We determine the selling price of a unit of accounting within each arrangement using vendor-specific objective evidence of selling price, if available; third-party evidence of selling price if vendor-specific objective evidence is not available; or best estimate of selling price, if neither vendor-specific objective evidence nor third-party evidence is available. Determining the best estimate of selling price for a unit of accounting requires significant judgment. In developing the best estimate of selling price for a unit of accounting, we consider applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. We validate the best estimate of selling price for units of accounting by evaluating whether changes in the key assumptions used to determine the best estimate of selling price will have a significant effect on the allocation of arrangement consideration between multiple units of accounting.


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We recognize arrangement consideration allocated to each unit of accounting when all of the revenue recognition criteria are satisfied for that particular unit of accounting. In the event that a deliverable does not represent a separate unit of accounting, we recognize revenue from the combined unit of accounting over the contractual or estimated performance period for the undelivered items, which is typically the term of our research and development obligations. If there is no discernible pattern of performance or objectively measurable performance measures do not exist, then we recognize revenue under the arrangement on a straight-line basis over the period we are expected to satisfy our performance obligations. Conversely, if the pattern of performance over which the service is provided to the customer can be determined and objectively measurable performance measures exist, then we recognize revenue under the arrangement using the proportional performance method. Revenue recognized is limited to the lesser of the cumulative amount of payments received or the cumulative amount of revenue earned, as determined using the straight-line method or proportional performance method, as applicable, as of the period ending date.

Significant management judgment is required in determining the level of effort required under an arrangement and the period over which we are expected to complete our performance obligations under an arrangement. Steering committee services that are not inconsequential or perfunctory and that are determined to be performance obligations are combined with other research services or performance obligations required under an arrangement, if any, in determining the level of effort required in an arrangement and the period over which we expect to complete our aggregate performance obligations.

Milestone Revenue

Our collaboration and license agreements include contingent milestone payments related to specific development, regulatory and sales-based milestones. Development and regulatory milestones are typically payable when a product candidate initiates or advances in clinical trial phases, upon submission for marketing approval with regulatory authorities, and upon receipt of actual marketing approvals for a therapeutic or for additional indications. Sales-based milestones are typically payable when annual sales reach specified levels.

We evaluate whether each milestone is substantive and at risk to both parties on the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether: (i) the consideration is commensurate with either our performance to achieve the milestone or the enhancement of the value of the delivered item as a result of a specific outcome resulting from our performance to achieve the milestone, (ii) the consideration relates solely to past performance, and (iii) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. We evaluate factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the particular milestone and the level of effort and investment required to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining whether a milestone satisfies all of the criteria required to conclude that a milestone is substantive. We will recognize revenue in its entirety upon successful accomplishment of any substantive milestones, assuming all other revenue recognition criteria are met. Milestones that are not considered substantive are recognized as earned if there are no remaining performance obligations or over the remaining period of performance, with a cumulative catch-up being recognized for the elapsed portion of the period of performance, assuming all other revenue recognition criteria are met.

Non-refundable research, development and regulatory milestones that are expected to be achieved as a result of our efforts during the period of our performance obligations under the collaboration and license agreements are generally considered to be substantive and are recognized as revenue upon the achievement of the milestone, assuming all other revenue recognition criteria are met. If not considered to be substantive, revenue from achievement of milestones is initially deferred and recognized over the remaining term of our performance obligations. Milestones that are not considered substantive because we do not contribute effort to their achievement are recognized as revenue upon achievement, assuming all other revenue recognition criteria are met, as there are no undelivered elements remaining and no continuing performance obligations on our part.

Amounts received prior to satisfying the revenue recognition criteria listed above are recorded as deferred revenue in the accompanying balance sheets. Although we follow detailed guidelines in measuring revenue, certain judgments affect the application of our revenue policy. For example, in connection with our existing collaboration agreements, we have recorded on the balance sheet short-term and long-term deferred revenue based on our best estimate of when such revenue will be recognized. However, this estimate is based on our current research plan and,


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if our research plan should change in the future, we may recognize a different amount of deferred revenue over the following 12-month period.

The estimate of deferred revenue also reflects management's estimate of the periods of our involvement in the collaborations. Our primary performance obligations under these collaborations consist of research and development services. In certain instances, the timing of satisfying these obligations can be difficult to estimate. Accordingly, our estimates may change in the future. Such changes to estimates would result in a change in prospective revenue recognition amounts. If these estimates and judgments change over the course of our collaborative agreement, it may affect the timing and amount of revenue that we will recognize and record in future periods.

Equity-Based Compensation

We measure employee equity-based compensation based on the grant date fair value of the equity awards using the Black-Scholes option pricing model. Equity-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 condition, we recognize compensation expense based on our assessment of the probability that the performance condition will be achieved.

We measure equity awards granted to consultants and non-employees based on the fair value of the award on the date of vesting, which is generally the date on which goods or services are received. Compensation expense is recognized over the period during which services are rendered by such consultants and non-employees until completed. At the end of each financial reporting period prior to completion of the service, the fair value of these awards is remeasured using the then-current fair value of our common stock.

We classify equity-based compensation expense in our consolidated statement of operations 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

Please read 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.

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 rules and regulations of the Securities and Exchange Commission.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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