Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with the section titled
“Selected Financial Data,” and our audited consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis and other parts
of this Annual Report on Form 10-K contain forward-looking statements based upon current beliefs, plans and expectations related to future events and our future financial performance that involve risks,
uncertainties and assumptions, such as statements regarding our intentions, plans, objectives and expectations for our business. Our actual results and the timing of selected events could differ materially from those described in or implied by these
forward-looking statements as a result of several factors, including those set forth in the section titled “Risk Factors.” See also the section titled “Special Note Regarding Forward-Looking Statements.”
Overview
We were founded on the belief
that engineered cells will be one of the most important transformations in medicine over the next several decades. The burden of diseases that can be addressed at their root cause through engineered cells is significant. We view engineered cells as
having the potential to be as therapeutically disruptive as biologics to clinical practice. Our long-term aspirations are to be able to control or modify any gene in the body, to replace any cell that is damaged or missing, and to markedly improve
access to cellular and gene-based medicines. We have brought together an experienced group of scientists, engineers, and company builders and combined them with the necessary technologies to move this vision forward. We are developing in vivo
and ex vivo cell engineering platforms to revolutionize treatment across a broad array of therapeutic areas with unmet treatment needs, including oncology, diabetes, central nervous system (CNS) disorders, cardiovascular diseases, and genetic
disorders, among others. While our current product candidates are all in preclinical development, our goal is to file multiple investigational new drug applications (INDs) both in 2022 and 2023.
The process of repairing and controlling genes in the body, referred to as gene therapy or in vivo cell engineering, requires in vivo
delivery of a therapeutic payload and modification of the genome. Of these, we believe delivery of a therapeutic payload represents the greatest unmet need and is thus at the core of our strategic focus, with our ultimate goal being the delivery of
any payload to any cell in a specific and repeatable way. Our initial effort is on cell-specific delivery and increasing the diversity and size of payloads. Using our fusogen technology, we have shown in preclinical studies that we can specifically
target numerous cell surface receptors that, when combined with delivery vehicles to form fusosomes, allow cell-specific delivery across multiple different cell types. We have initially chosen to focus this technology on delivering payloads to
T cells, hepatocytes, and hematopoietic stem cells.
Frequently in disease, cells are damaged or missing entirely, and an effective
therapy needs to replace the entire cell, an approach referred to as cell therapy or ex vivo cell engineering. A successful therapeutic requires an ability to manufacture cells at scale that engraft, function, and have the necessary
persistence in the body. Of these, long-term persistence related to overcoming immunologic rejection of another person’s cells has been the most challenging, which has led many to focus on autologous, or a patient’s own, cells as the
therapeutic source. However, autologous therapies require a complex process of harvesting cells from the patients, manipulating them outside the body, and returning them to the patient. Products utilizing this approach have had to manage significant
challenges such as scalability, product variability, product quality, cost, patient accessibility, and a limited number of cell types being amenable to this approach. Given these limitations, rather than utilizing autologous cells to overcome immune
rejection, we have invested in creating hypoimmune cells that can “hide” from the patient’s immune system. We are striving to make therapies utilizing pluripotent stem cells with our hypoimmune genetic modifications as the starting
material, which we then differentiate into a specific cell type, such as a pancreatic beta cell, before treating the patient. Additionally, for cell types for which effective differentiation protocols from a stem cell have not yet been developed,
such as T cells, instead of starting from a pluripotent stem cell, we can utilize an allogeneic cell, differentiated cells sourced from a donor, as the starting material to which we then apply our hypoimmune genetic modifications.
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We believe the time is right to develop engineered cell therapies across a broad range of
therapeutic areas. Substantial progress in the understanding of genetics, gene editing, gene control, protein engineering, stem cell biology, immunology, process analytics, and computational biology have converged to create an opportunity to
markedly increase the breadth and depth of the potential impact of genetic and cellular medicines. We are focused on creating transformative in vivo and ex vivo engineered cell therapies across a range of therapeutic areas. We are in
the early stages of development across a broad pipeline of product candidates, all of which are currently in the preclinical stage of development and are summarized below:
Our ex vivo and in vivo technology represents an aggregation of years of innovation and
technology from multiple academic institutions and companies, including our fusogen technology acquired from Cobalt Biomedicines Inc. (Cobalt), our ex vivo cell engineering programs focused on replacing damaged cells in the heart and certain
brain disorders acquired from Cytocardia Inc. (Cytocardia) and Oscine Corp. (Oscine), respectively, and hypoimmune technology licensed from the President and Fellows of Harvard College (Harvard) and The Regents of the University of California
(UCSF), amongst others. See the subsections titled “Business—Key Intellectual Property Agreements” and Note 3, Acquisitions and Note 5, License and collaboration agreements to our consolidated financial statements included elsewhere
in this Annual Report on Form 10-K.
We were incorporated in July 2018 and commenced operations
thereafter. Our operations to date have included developing our in vivo and ex vivo cell engineering platforms, identifying and developing potential product candidates, executing preclinical studies, acquiring technology, organizing
and staffing the company, business planning, establishing our intellectual property portfolio, raising capital, and providing general and administrative support for these operations. All of our programs are currently in the development stage, and we
do not have any products approved for sale. Since our inception, we have incurred net losses each year. Our net losses were $285.3 million and $130.8 million for the years ended December 31, 2020 and 2019, respectively. As of
December 31, 2020, we had an accumulated deficit of $429.4 million. Our net losses resulted primarily from our research and development programs and, to a lesser extent, general and administrative costs associated with our operations.
In February 2021, we completed our initial public offering (IPO) and issued 27.0 million shares of our common stock, including
3.5 million shares pursuant to the full exercise of the underwriters’ option to purchase additional shares, at a price of $25.00 per share and received net proceeds of $626.6 million. Prior to the IPO, we funded our operations from
the issuance and sale of our convertible preferred stock raising an aggregate of $705.5 million in gross proceeds. As of December 31, 2020, we had cash, cash equivalents, and marketable securities of $412.0 million. Based on our
current operating plan, we believe that our existing cash, cash equivalents, and marketable securities, together with the proceeds from the IPO, will be sufficient to meet our working capital and capital expenditure needs for at least the next 36
months.
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We anticipate that our expenses and operating losses will increase substantially over the
foreseeable future. The expected increase in expenses will be driven in large part by our ongoing activities, if and as we:
• continue to advance our in vivo and ex vivo cell engineering platforms;
• commence clinical studies of our current and future product candidates;
• seek regulatory approval of our current and future product candidates;
We are also investing early in building world class capabilities in key
areas of manufacturing sciences and operations, including development of our in vivo and ex vivo cell engineering platforms, product characterization, and process analytics from the time candidates are in early research phases. Our
investments also include scaled research solutions, scaled infrastructure, and novel technologies to improve efficiency, characterization, and scalability of manufacturing.
The global COVID-19 pandemic continues to evolve rapidly, and we will continue to monitor it closely.
The extent of the impact of the COVID-19 pandemic on our business, operations, and clinical development timelines and plans remains uncertain and will depend on certain developments, including the duration and
spread of the outbreak and its impact on our clinical trial enrollment, trial sites, contract research organizations (CROs), contract manufacturing organizations, and other third parties with whom we do business, as well as its impact on regulatory
authorities and our key scientific and management personnel. We have experienced modest delays in our discovery and development activities as a result of the COVID-19 pandemic, primarily due to temporary and
partial shutdowns at certain of our CROs and academic institutions that have since resumed operations, and due to the Washington, California and Massachusetts
stay-at-home orders where our operations are located. However, to the extent possible, we are conducting business as usual, with necessary or advisable modifications to
employee travel and most of our non-laboratory employees working remotely. We will continue to actively monitor the situation related to COVID-19 and may take further
actions that alter our operations, including those that may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business.
We anticipate that we will need to raise additional financing in the future to fund our operations, including the commercialization of any
approved product candidates. Until such time, if ever, as we can generate significant product revenue, we expect to finance our operations with our existing cash, cash equivalents, and marketable securities, the net proceeds from the IPO, any future
equity or debt financings, and upfront, milestone, and royalty payments, if any, received under future license or collaboration agreements. We may not be able to raise additional capital on terms acceptable to us or at all. If we are unable to raise
additional capital when desired, our business, results of operations, and financial condition would be adversely affected.
Acquisitions
We have completed various acquisitions since inception. For details regarding our acquisitions, see the subsection titled
“Business—Key Intellectual Property Agreements” and Note 3, Acquisitions, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
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License and collaboration agreements
We have entered into license and collaboration arrangements with various third parties. For details regarding these agreements, see the
subsections titled “Business— Key Intellectual Property Agreements” and Note 5, License and collaboration agreements, to our consolidated financial statements included elsewhere in this Annual Report on
10-K.
Success payments and contingent consideration
Cobalt success payment and contingent consideration
Pursuant to the terms of the Cobalt acquisition agreement, we may be required to pay contingent consideration of up to an aggregate of
$500.0 million upon the achievement of certain pre-specified development milestones (Cobalt Contingent Consideration), and a success payment of up to $500.0 million payable in cash or stock, at our
discretion (the Cobalt Success Payment). Prior to the IPO in February 2021, the Cobalt Success Payment was payable, if at pre-determined valuation measurement dates, our value was equal to or exceeded three
times our value implied by the per share value of the Company’s Series B convertible preferred stock at issuance, or any security into which such stock has been converted or exchanged, and we had a program based on the fusogen technology in a
clinical trial pursuant to an IND, or have filed for, or received approval for, a biologics license application (BLA) or new drug application (NDA). Subsequent to the IPO, the threshold to determine if a payment is due will be based on whether our
market capitalization equals or exceeds $8.1 billion, and we have a program based on the fusogen technology in a clinical trial pursuant to an IND, or have filed for, or received approval for, a BLA or NDA. The valuation measurement dates for
the Cobalt Success Payment are an IPO, which occurred in February 2021, and periodically thereafter. A Cobalt Success Payment was not triggered upon the IPO. In addition to an IPO, a valuation measurement date is triggered upon a change of control
when at least one of our programs based on the fusogen technology is the subject of an active research program. If there is a change of control and our market capitalization falls below certain thresholds on the change of control date, the amount of
the potential Cobalt Success Payment will decrease, and the amount of potential Cobalt Contingent Consideration will increase. See Note 3, Acquisitions to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for details on the different market capitalizations and impact to the amount of the potential Cobalt Success Payment and potential Cobalt Contingent Consideration if there is a change of control.
As of December 31, 2020 and 2019, the estimated fair value of the Cobalt Success Payment liability was $64.7 million and
$2.4 million, respectively, and the estimated fair value of the Cobalt Contingent Consideration was $121.9 million and $69.1 million, respectively. For the years ended December 31, 2020 and 2019 the Company recognized
$62.3 million and an immaterial amount in research and development expense in connection with the change in fair value of the Cobalt Success Payment, respectively, and $52.8 million and $17.9 million in research and development
expense in connection with the change in fair value of the Cobalt Contingent Consideration, respectively. See the subsections below titled “ —Success payments” and “ —Contingent consideration” for more information on
the accounting treatment.
Harvard success payments
Pursuant to the terms of the Harvard Agreement, we may be required to make success payments (the Harvard Success Payments) up to an aggregate
of $175.0 million, payable in cash, based on increases in the per share fair market value of our Series A convertible preferred stock. Concurrent with the closing of the IPO in February 2021, our Series A convertible preferred stock was
converted into common stock, and as a result, going forward the per share fair market value of our common stock will determine whether a success payment is owed to Harvard. The potential Harvard Success Payments are based on multiples of increased
value ranging from 5x to 40x based on a comparison of the per share fair market value of our common stock relative to the original issuance price of $4.00 per share at pre-determined valuation measurement
dates. The Harvard Success Payments can be achieved over a maximum of 12 years from the effective date of the agreement. See Note 5, License and collaboration agreements to our consolidated financial statements included elsewhere in this Annual
Report on Form 10-K for more details on the various per share common stock values that trigger a Harvard Success Payment.
We anticipate the first valuation measurement date to occur in February 2022, the one-year anniversary
of our IPO, with valuation dates occurring periodically after this date. Additional valuation measurement dates are triggered by events which include: a merger, an asset sale, the sale of the majority of the shares held by Series A convertible
preferred stockholders, and the last day of the term of the success payments. If a higher success payment tier is met at the same time
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a lower tier is met, both tiers will be owed. Any previous success payments made under the Harvard Agreement are credited against the success payment owed as of any valuation measurement date, so
that Harvard does not receive multiple success payments in connection with the same threshold.
The estimated fair value of the Harvard
Success Payment liability was $11.8 million and $1.9 million as of December 31, 2020 and 2019, and we recorded research and development expense of $9.9 million and $1.9 million for the years ended December 31, 2020 and
2019, respectively. See the subsection below titled “—Success payments” for more information on the accounting treatment of the Harvard Success Payments.
Components of operating results
Operating expenses
Research and development
To date, research and development expenses have related primarily to discovery and development of our platform technology and product
candidates. Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are recorded as prepaid expenses until the goods or services are received.
Research and development expenses consist of personnel-related costs, including salaries, benefits, and
non-cash stock-based compensation, external research and development expenses incurred under arrangements with third parties, laboratory supplies, costs to acquire and license technologies aligned with our
goal of translating engineered cells to medicines, facility and other allocated expenses, including rent, depreciation, and allocated overhead costs, and other research and development expenses.
Research and development expenses also include the change in the estimated fair value of our success payment liabilities and contingent
consideration. Research and development expense related to our success payment liabilities and contingent consideration is unpredictable and may vary significantly from quarter to quarter and year to year due to changes in the assumptions used in
the calculation. In addition, we may incur research and development expense to acquire and license technologies in the future, and the timing and amount of those expenses cannot be estimated with reliability and may also fluctuate from quarter to
quarter and year to year.
We deploy our employee and infrastructure resources across multiple research and development programs for
developing our in vivo and ex vivo cell engineering platforms, identifying and developing product candidates, and establishing manufacturing capabilities. Due to our early stage of development, number of ongoing projects, and our
ability to use resources across several projects, the vast majority of our research and development costs are not recorded on a program-specific basis. These include costs for personnel, laboratory, and other indirect facility and operating costs.
Research and development activities account for a significant portion of our operating expenses. Excluding amounts attributable to
changes in the estimated fair value of our success payment liabilities and contingent consideration, we anticipate that our research and development expenses will increase over the foreseeable future as we expand our research and development efforts
including expanding the capabilities of our cell engineering platforms, identifying product candidates, completing preclinical studies and commencing clinical trials, seeking regulatory approval of our product candidates, and incurring costs to
acquire and license technologies aligned with our goal of translating engineered cells to medicines. A change in the outcome of any of these factors could result in a significant change in the costs and timing associated with the development of our
product candidates.
General and administrative
General and administrative expenses consist of personnel-related costs, including salaries, benefits, and
non-cash stock-based compensation for our employees in finance, human resources, legal, information technology, executive, and other administrative functions, legal and consulting fees, recruiting costs, and
facility costs not otherwise included in research and development expenses. Legal fees include those related to corporate and patent matters.
We anticipate that our general and administrative expenses will increase over the foreseeable future to support our continued research and
development activities, grow our business, and support future possible business development
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opportunities. We also anticipate incurring additional expenses related to audit and legal services associated with operating as a public company, maintaining compliance with the rules and
regulations of the Securities and Exchange Commission (SEC) and standards applicable to companies listed on a national securities exchange, investor relations activities, and other administrative and professional services.
Interest income, net
Interest income, net consists of interest earned on our cash, cash equivalents, and marketable securities.
Benefit from income taxes
Benefit from income taxes consists of the release of the valuation allowance on net deferred tax assets triggered by the deferred tax
liabilities recorded as a result of the acquisition of Cobalt in 2019.
The results of operations, liquidity, capital resources, and
capital requirements sections below include a comparison of the years ended December 31, 2020 and 2019. For a comparison of the year ended December 31, 2019 and the period from July 13, 2018 (inception) refer to our prospectus for our
IPO filed with the SEC on February 5, 2021.
Results of operations
Comparison of the years ended December 31, 2020 and 2019
The following table summarizes our results of operations for the periods presented:
Year Ended December 31,
(in thousands)
Operating expenses:
Other income (expense), net 97 (29) 126
Benefit from income taxes - 7,547 (7,547)
Research and Development Expenses
The following table summarizes the components of our research and development expenses for the periods presented:
Year Ended December 31,
(in thousands)
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Research and development expenses were $257.9 million and $119.4 million for the
years ended December 31, 2020 and 2019, respectively. The increase of $138.5 million was primarily due to:
These increases were partially offset by a decline in costs to acquire and license technology
of $15.8 million due to costs incurred under the Harvard and UCSF Agreements, and the upfront fee for the acquisition of Cytocardia 2019, partially offset by the upfront fee for the acquisition of Oscine in 2020.
General and administrative Expenses
General and administrative expense were $28.3 million and $21.8 million for the years ended December 31, 2020 and 2019,
respectively. The increase of $6.5 million was primarily due to increased personnel-related expenses of $3.2 million primarily attributable to an increase in headcount to build our infrastructure, increased information technology and
facility costs including rent of $1.4 million, increased business taxes and insurance of $0.8 million, and increased consulting and legal fees of $0.5 million.
Interest income, net
Interest income, net was $0.7 million and $2.9 million for the years ended December 31, 2020 and 2019, respectively. The
decrease of $2.2 million was due to lower interest rates on cash and marketable securities balances.
Benefit from income taxes
The benefit from income taxes of $7.5 million for the year ended December 31, 2019, was due to a release of valuation
allowance associated with the deferred tax liability of $7.5 million recorded in connection with the intangible asset from the Cobalt acquisition. There was no benefit from income taxes for the year ended December 31, 2020.
Liquidity, capital resources, and capital requirements
Sources of liquidity
As of
December 31, 2020, we had $412.0 million in cash, cash equivalents, and marketable securities and an accumulated deficit of $429.4 million. From July 13, 2018 (inception) through December 31, 2020, we raised an aggregate of
$705.5 million in gross proceeds from the sale of our convertible preferred stock. In February 2021, we completed our IPO and issued 27.0 million shares of our common stock, including 3.5 million shares pursuant to the full exercise
of the underwriters’ option to purchase additional shares, at a price of $25.00 per share and received net proceeds of $626.6 million. Since our inception, we have not generated any revenue from product sales or any other sources, and we
have incurred significant operating losses. We have not yet commercialized any products and we do not expect to generate revenue from sales of any product candidates for a number of years, if ever.
Future funding requirements
We
expect to incur additional losses in the foreseeable future as we conduct and expand our research and development efforts, including conducting preclinical studies and clinical trials, developing new product candidates, establishing internal and
external manufacturing capabilities, and funding our operations generally.
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Based on our current operating plan, we believe that our existing cash, cash equivalents,
and marketable securities, together with the net proceeds from the IPO, will be sufficient to meet our working capital and capital expenditure needs for at least the next 36 months. However, we anticipate that we will need to raise additional
financing in the future to fund our operations, including the commercialization of any approved product candidates. We are subject to the risks typically related to the development of new products, and we may encounter unforeseen expenses,
difficulties, complications, delays, and other unknown factors that may adversely affect our business.
Our future capital requirements
will depend on many factors, including:
• expenses to attract, hire and retain, skilled personnel;
• the costs of operating as a public company;
• the effect of competing technological and market developments; and
Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations from the sale of
additional equity or debt financings, or other capital which may come in the form of strategic collaborations, licensing, or other arrangements. In the event that additional financing is required, we may not be able to raise it on terms acceptable
to us, or at all. If we raise additional funds through the issuance of equity or convertible debt securities, it may result in dilution to our existing stockholders. Debt financing, if available, may result in increased fixed payment obligations,
and the existence of securities with rights that may be senior to those of our common stock. If we incur indebtedness, we could become subject to covenants that would restrict our operations. If we raise funds through strategic collaborations,
licensing or other arrangements, we may relinquish significant rights or grant licenses on terms that are not favorable to us. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the
recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic and otherwise. If we are unable to raise additional
capital when desired, our business, results of operations, and financial condition would be adversely affected.
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Cash flows
The following table summarizes our cash flows for the periods indicated:
Year Ended December 31,
(in thousands)
Net cash provided by (used in):
Net increase in cash, cash equivalents, and restricted cash $ 45,142 $ 50,361
Operating activities
During the year ended December 31, 2020, net cash used in operating activities was $138.0 million, consisting primarily of our net
loss of $285.3 million partially offset by non-cash charges of $141.2 million and an increase in our net operating assets of $6.2 million. The non-cash
charges of $141.2 million consisted of $72.1 million for revaluation of our success payment liabilities, $52.8 million for revaluation of contingent consideration, depreciation expense of $5.9 million, non-cash stock-based compensation expense of $5.8 million, right-of-use assets lease expense of $4.3 million, and other non-cash charges of $0.3 million.
During the year ended December 31, 2019, net cash used in
operating activities was $85.5 million, consisting primarily of our net loss of $130.8 million and a tax benefit of $7.5 million recorded in connection with the Cobalt acquisition, partially offset by
non-cash charges of $42.3 million and an increase in our net operating assets of $10.5 million. The non-cash charges of $42.3 million consisted of
$17.9 million for revaluation of contingent consideration, $11.9 million for the issuance of stock in connection with license agreements, $6.5 million for revaluation of success payment and contingent liabilities, depreciation expense
of $1.8 million, and other non-cash charges of $4.2 million.
Investing activities
During the years ended December 31, 2020 and 2019, cash used in investing activities was $252.6 million and
$87.9 million, respectively. This consisted primarily of net purchases, sales, and maturities of marketable securities of $228.7 million and $58.5 million, respectively, and purchases of property and equipment of $23.9 million
and $26.2 million, for the years ended December 31, 2020 and 2019, respectively. For the year ended December 31, 2019, net cash used investing activities included $3.2 million for the Cobalt acquisition.
Financing activities
During the years ended December 31, 2020 and 2019, cash provided by financing activities was $435.7 million and $223.7 million,
respectively, consisting primarily of net proceeds from the sale of our convertible preferred stock.
Contractual obligations and commitments
The following table summarizes our significant contractual obligations and commitments as of December 31, 2020:
Payments Due by Period
Less than 1 Year 1 to 3 Years 3 to 5 Years More than 5 Years Total
Other than as disclosed in the table above, the payment obligations under our license, collaboration, and
acquisition agreements as of December 31, 2020 are contingent upon future events such as our achievement of pre-specified development, regulatory, and commercial milestones, or royalties on net product
sales. See the section titled “Business—
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Key Intellectual Property Agreements” for more information about these payment obligations. We are also obligated to make a success payments to Cobalt of up to $500.0 million, payable
in cash or stock at our discretion, pursuant to the terms and conditions in the Cobalt acquisition agreement, and success payments to Harvard up to an aggregate of $175.0 million, payable in cash. See the subsection below titled
“—Critical accounting policies and significant judgments and estimates—Success payments” and Note 3, Acquisitions, and Note 5, License and collaboration agreements to our consolidated financial statements located elsewhere in
this Annual Report on Form 10-K for more information on the success payments. As of December 31, 2020, the timing and likelihood of achieving the milestones and success payments and generating future
product sales are uncertain and therefore, any related payments are not included in the table above.
We also enter into agreements in the
normal course of business for sponsored research, preclinical studies, contract manufacturing, and other services and products for operating purposes, which are generally cancelable upon written notice. These obligations and commitments are not
included in the table above.
Off-balance sheet arrangements
Since our inception, we have not engaged in any off-balance sheet arrangements as defined
under the rules and regulations of the SEC.
JOBS Act accounting election
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the JOBS Act). We will cease to
be an emerging growth company until the earliest of (1) December 31, 2026, (2) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (3) the last day of the fiscal year in which we
are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the fair market value of our common stock held by
non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year, or (4) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. For so long as we remain an emerging growth company, we are permitted and intend to rely on certain exemptions from various public company
reporting requirements, including not being required to have our internal control over financial reporting by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations
regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. In
addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use
the extended transition period for any new or revised accounting standards during the period in which we remain an emerging growth company; however, we may adopt certain new or revised accounting standards early if the standard allows early
adoption.
Critical accounting policies and significant judgments and estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. The
preparation of these financial statements requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Our estimates are based on our historical experience and on
various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in more detail in the notes to our consolidated financial statements and related notes included elsewhere in this
Annual Report on Form 10-K. We believe the following accounting policies relate to the significant areas involving management’s judgments and estimates and are critical to understanding our historical and
future performance.
Research and development expenses
We record research and development costs in the periods in which they are incurred. We accrue for research and development costs based on the
estimated services performed, but not yet invoiced, pursuant to contracts with research institutions or other service providers that conduct and manage preclinical studies and other research services on our
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behalf and record these costs in accrued and other current liabilities. We make judgments and estimates in determining the accrued liabilities balance at each reporting period. Payments made
prior to the receipt of goods or services to be used in research and development are recorded as prepaid expenses until the goods or services are received.
Research and development costs also include the estimated fair value of contingent consideration and success payment liabilities. See the
subsections below titled “—Contingent consideration” and “—Success payments” for more information.
To date,
we have not experienced any material differences between accrued costs and actual costs incurred. However, the status and timing of actual services performed may vary from our estimates, resulting in adjustments to expense in future periods. Changes
in these estimates that result in material changes to our accruals could materially affect our results of operations.
Acquisitions
We account for business combinations using the acquisition method of accounting, which requires the assets acquired, including in-process research and development (IPR&D), and liabilities assumed, be recorded at their fair values as of the acquisition date. Any excess of the purchase price over the fair value of net assets acquired is
recorded as goodwill. The determination of the estimated fair value of these items requires us to make significant estimates and assumptions.
If we determine the acquisition does not meet the definition of a business combination under the acquisition method of accounting, the
transaction is accounted for as an asset acquisition and no goodwill or contingent consideration are recognized at the acquisition date. In an asset acquisition, up-front payments allocated to IPR&D are
recorded in research and development expense if it is determined that there is no alternative future use, and subsequent milestone payments are recorded in research and development expense when achieved.
Intangible assets and goodwill
Accounting for business combinations requires us to make significant estimates and assumptions with respect to tangible and intangible assets
acquired and liabilities assumed. We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date as well as the useful lives of those acquired
intangible assets. Intangible assets are reviewed for impairment annually and upon the occurrence of triggering events or substantive changes in circumstances that could indicate a potential impairment.
Goodwill represents the excess of the purchase price over the estimated fair value of the identifiable assets acquired and liabilities assumed
in a business combination. We evaluate goodwill for impairment annually and upon the occurrence of triggering events or substantive changes in circumstances that could indicate a potential impairment. Our evaluation includes assessing qualitative
factors or performing a quantitative analysis to determine whether it is more-likely-than-not that the fair value of net assets are below the carrying amounts.
Contingent consideration
At the
acquisition date of a business combination contingent consideration obligations are estimated at fair value and at each subsequent balance sheet date with changes recorded in research and development expense. The fair value of contingent
consideration is determined by calculating the probability-weighted estimated value of the milestone payments based on the assessment of the likelihood and estimated timing that the milestones would be achieved and applying the relevant discount
rates. We utilize significant estimates and assumptions in determining the estimated contingent consideration and associated expense or gain at each balance sheet date. The valuation of contingent consideration uses assumptions we believe would be
made by a market participant. In evaluating the fair value of contingent consideration, a significant amount of judgment is required to estimate the likelihood and timing that the milestones would be achieved. We assess these estimates on an on-going basis as additional data impacting the assumptions become available. Contingent consideration may change significantly as development progresses and additional data is obtained, impacting our assumptions
regarding probabilities of successful achievement of the related milestones used to estimate the fair value
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of the liability and the timing in which they are expected to be achieved. Accordingly, the use of different market assumptions and/or different valuation techniques could result in materially
different fair value estimates.
Success payments
The Cobalt and Harvard Success Payments are accounted for under Accounting Standards Codification 815, Derivatives and Hedging. The Cobalt
Success Payment was recorded as a liability on the consolidated balance sheets at fair value on the acquisition date and is remeasured at each subsequent reporting period with changes in fair value recognized in research and development expense. For
the Harvard Success Payments, both the initial value and subsequent changes in fair value are recorded in research and development expense. To determine the estimated fair value of the success payment liabilities we use a Monte Carlo simulation
methodology which models the estimated fair value of the liability based on several key assumptions, including the estimated number and timing of valuation measurement dates on the basis of which payments may be triggered, term of the success
payments, the risk-free interest rate, and expected volatility, which is estimated using peer company stocks for a period of time commensurate with the expected term assumption. Prior to the IPO, the calculation of the Harvard Success Payment
liability incorporated the estimated fair value of our Series A convertible preferred stock and the Cobalt Success Payment liability incorporated our estimated future value implied by the per share value of the Series B convertible preferred stock
at issuance, or any security into which such stock has been converted or exchanged. Concurrent with the closing of our IPO in February 2021, the Series A and Series B convertible preferred stock converted into common stock. Subsequent to the IPO,
the computation of the estimated fair value of the Harvard Success Payments will incorporate the per share fair market value of our common stock at the end of each reporting period and the computation of the estimated fair value of the Cobalt
Success Payment will incorporate our market capitalization. The assumptions used to calculate the fair value of the success payments are subject to a significant amount of judgment and a small change in the assumptions may have a relatively large
change in the estimated liability and resulting expense or gain.
Stock-based compensation
We recognize compensation costs related to restricted stock awards, restricted stock units, and stock options granted to employees and
nonemployees based on the estimated fair value of the awards on the date of grant, and we recognize forfeitures as they occur. For restricted stock awards, the fair value of our common stock is used to determine the resulting stock-based
compensation expense. For stock options we estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option pricing model. The fair value of the stock-based awards is recognized as an expense on
a straight-line basis over the requisite service period, which is generally the vesting period.
The Black-Scholes option pricing model
requires the use of highly subjective assumptions to determine the fair value of stock-based awards. These assumptions include:
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See Note 13, Stock-based compensation to our consolidated financial statements included
elsewhere in this Annual Report on Form 10-K for information concerning certain of specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our
stock options granted in the years ended December 31, 2020 and 2019. Such assumptions involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly
different assumptions or estimates, our stock-based compensation could be materially different.
Common stock valuations
For all periods prior to the IPO there was no active public market for our common stock. Therefore, our board of directors, with the assistance
and upon the recommendation of management, had for financial reporting purposes periodically determined the estimated per share fair value of our common stock on the date of grant in part using contemporaneous independent third-party valuations
consistent with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation (Practice Aid) as well as a range of factors and assumptions including, but not limited
to:
• committed future rounds of funding;
• our stage of development and material risks related to our business;
• progress of our research and development activities;
• the lack of marketability of our common stock as a private company;
• the hiring of key personnel and the experience of management;
• trends and developments in our industry; and
Our board of directors exercised significant judgment in estimating the fair value of our common stock. Such estimates involve inherent
uncertainties and the application of significant judgment. As a result, if factors or expected outcomes changed and we used significantly different assumptions or estimates, our equity-based compensation could have been materially different. Changes
in judgments could have a material impact on our results of operations.
For our valuations performed prior to September 30, 2020, in
accordance with the Practice Aid, we determined the option pricing model (OPM) backsolve method was the most appropriate method for determining the fair value of our common stock based on our stage of development and other relevant factors. In an
OPM framework, the backsolve method for inferring the equity value implied by a recent financing transaction involves making assumptions for the expected time to liquidity, volatility, discount for lack of marketability, and risk-free rate and then
solving for the value of equity such that value for the most recent financing equals the amount paid. This method was selected as management concluded that the contemporaneous financing transactions were arms’ length transactions.
For our valuations performed from September 30, 2020 to December 31, 2020, in accordance with the Practice Aid, we determined the
hybrid method of the OPM and the Probability-Weighted Expected Return Method (PWERM) was the
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most appropriate method for determining the fair value of our common stock based on our stage of development and other relevant factors. The PWERM considers various potential liquidity outcomes.
Our approach included assumptions for different timing of initial public offering scenarios, the sale of our company, and dissolution. Under the hybrid OPM and PWERM method, the per share value calculated under the OPM and PWERM are weighted based
on expected exit outcomes and the quality of the information specific to each allocation methodology to arrive at a final estimated fair value per share value of the common stock before a discount for lack of marketability is applied.
Following the closing of the IPO, our board of directors will determine the fair market value of our common stock based on its closing price
as reported on the Nasdaq Global Select Market on the date of grant.
Recently adopted and recent accounting pronouncements
See Note 2, Summary of significant accounting policies to our consolidated financial statements included elsewhere in this Annual Report on
Form 10-K for information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one yet, of their potential impact on our financial condition or
results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities.
Interest rate risk
We had cash, cash equivalents, and restricted cash of $126.9 million as of December 31, 2020, which consisted of bank deposits and
money market funds. We also had marketable securities of $287.2 million as of December 31, 2020. The primary objective of our investment activities is to preserve capital to fund our operations while earning a low risk return. Because our
marketable securities are primarily short-term in duration, we believe that our exposure to interest rate risk is not significant, and a hypothetical 1% change in market interest rates during any of the periods presented would not have had a
significant impact on the total value of our portfolio. We had no debt outstanding as of December 31, 2020.
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Item 8. Financial Statements and Supplementary Data.
SANA BIOTECHNOLOGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm 163
Consolidated Balance Sheets 164
Consolidated Statements of Operations 165
Consolidated Statements of Comprehensive Loss 166
Consolidated Statements of Cash Flows 168
Notes to Consolidated Financial Statements 169
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Sana Biotechnology Inc.
Opinion on the Financial Statements
We have audited
the accompanying consolidated balance sheets of Sana Biotechnology Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, convertible preferred stock and stockholders’
deficit and cash flows for the years ended December 31, 2020 and 2019 and for the period from July 13, 2018 (inception) to December 31, 2018, and the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for the
years ended December 31, 2020 and 2019 and for the period from July 13, 2018 (inception) to December 31, 2018, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As
part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the
Company’s auditor since 2018
Seattle, Washington
March 24, 2021
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Sana Biotechnology, Inc.
Consolidated Balance Sheets
(in thousands, except per share amounts)
December 31,
ASSETS
Current assets:
Prepaid expenses and other current assets 6,203 5,281
Operating lease right-of-use assets, net 63,168 40,897
Long-term marketable securities 33,731 -
Other non-current assets 190 522
LIABILITIES, CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable $ 2,253 $ -
Accrued expenses and other current liabilities 9,466 9,887
Operating lease liabilities, net of current portion 68,197 46,359
Other non-current liabilities 540 1,233
Commitments and contingencies (Note 10)
Stockholders’ deficit:
Accumulated other comprehensive income 30 26
The accompanying notes are an integral part of these consolidated financial statements.
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Sana Biotechnology, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
Year Ended December 31, Period from July 13,2018 (Inception) toDecember 31, 2018
Operating expenses:
Other income (expense), net 97 (29) (1)
Benefit from income taxes - 7,547 -
Net loss per share, basic and diluted $ (21.92) $ (26.68) $ (13.91)
Weighted-average shares outstanding, basic and diluted 13,014 4,903 952
The accompanying notes are an integral part of these consolidated financial statements.
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Sana Biotechnology, Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)
Year Ended December 31, Period from July 13,2018 (Inception) toDecember 31, 2018
Other comprehensive income, net of tax:
Unrealized gain on marketable securities, net 4 26 -
The accompanying notes are an integral part of these consolidated financial statements.
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Sana Biotechnology, Inc.
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit
(in thousands)
Shares Amount Shares Amount
Balance as of July 13, 2018 (Inception) - $ - - $ - $ - $ - $ - $ -
Issuance of common stock - - 351 - - - - -
Stock-based compensation expense - - 1,226 - 59 - - 59
Exercise of stock options - - 1 - 1 - - 1
Unrealized gain on marketable securities, net - - - - - 26 - 26
Exercise of stock options - - 103 - 149 - - 149
Unrealized gain on marketable securities, net - - - - - 4 - 4
The accompanying notes are an integral part of these consolidated financial statements.
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Sana Biotechnology, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31, Period from July 13, 2018 (Inception) to
OPERATING ACTIVITIES:
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income tax - (7,547 ) -
Change in fair value of contingent consideration 52,793 17,860 -
Change in fair value of success payment liabilities 72,142 1,924 -
Non-cash expense in connection with license agreement - 4,557 -
Non-cash expense in connection with asset acquisition 850 1,200 -
Non-cash expense for operating lease right-of-use assets 4,250 2,095 -
Other non-cash items, net (1,297 ) (592 ) -
Changes in operating assets and liabilities:
Operating lease right-of-use assets and liabilities 91 5,697 -
INVESTING ACTIVITIES:
Proceeds from sales and maturities of marketable securities 158,741 82,977 -
Acquisitions, net of cash acquired - (3,195 ) -
Proceeds from disposal of assets - 59 -
Issuance of promissory note - - (320)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 149 1 -
Payment of contingent consideration - (14 ) -
Net increase in cash, cash equivalents, and restricted cash 45,142 50,361 31,446
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash received from lessor for tenant improvement allowance $ 91 $ 5,697 $ -
Issuance of convertible preferred stock for acquisition $ - $ 135,971 $ -
The accompanying notes are an integral part of these consolidated financial statements.
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Sana Biotechnology, Inc.
Notes to Consolidated Financial Statements
1. Organization
Sana Biotechnology, Inc.
(the Company or Sana) was incorporated in Delaware on July 13, 2018 (inception) as FD Therapeutics, Inc., and changed its name to Sana Biotechnology, Inc. on September 17, 2018. Sana is a biotechnology company, focusing on utilizing
engineered cells as medicines. The Company’s operations to date have included identifying and developing potential product candidates, executing preclinical studies, acquiring technology, organizing and staffing the Company, business planning,
establishing the Company’s intellectual property portfolio, raising capital, and providing general and administrative support for these operations.
In September 2020, the Company acquired 100% of the outstanding shares of common stock of Oscine Corp. (Oscine), a privately-held early-stage
biotechnology company developing ex vivo glial progenitor cell programs focused on brain disorders. The acquisition of Oscine complements the Company’s ex vivo cell engineering portfolio. See Note 3, Acquisitions.
In November 2019, the Company acquired Cytocardia, Inc. (Cytocardia), a privately-held early-stage biotechnology company whose primary asset
was in-process research and development related to its ex vivo cell engineering programs focused on replacement of damaged heart cells. See Note 3, Acquisitions.
In February 2019, the Company acquired 100% of the outstanding equity in Cobalt Biomedicine, Inc. (Cobalt), a privately-held early-stage
biotechnology company developing a platform technology using its fusogen technology to specifically and consistently deliver various biological payloads to cells. The Cobalt acquisition adds in-vivo cell
engineering technology to complement the Company’s existing ex-vivo cell engineering technology. See Note 3, Acquisitions.
Reverse stock split
On
January 26, 2021, the Company’s board of directors approved an amendment to the Company’s amended and restated certificate of incorporation to effect a
1-for-4 reverse stock split of shares of the Company’s common and convertible preferred stock, which was effected on January 27, 2021. The par value per share
and authorized shares of common and convertible preferred stock were not adjusted as a result of the reverse stock split. All share and per share information included in the accompanying consolidated financial statements have been adjusted to
reflect the reverse stock split.
Initial public offering
In February 2021, the Company completed its initial public offering (IPO) of its common stock. In connection with its IPO, the Company issued
27.0 million shares of its common stock, including 3.5 million shares pursuant to the full exercise of the underwriters’ option to purchase additional shares, at a price of $25.00 per share, and received $626.6 million in net
proceeds, after deducting underwriting discounts and commissions of $45.2 million and offering expenses of $3.8 million. At the closing of the IPO, 134.1 million shares of convertible preferred stock then outstanding were
automatically converted into shares of common stock. The related carrying value of the converted preferred stock of $852.9 million was reclassified to common stock and additional paid in-capital.
Additionally, the Company amended and restated its certificate of incorporation, effective February 2021, increasing the number of shares of all classes of stock the Company has authority to issue to 800.0 million shares, of which
750.0 million shares shall be common stock, and 50.0 million shares shall be convertible preferred stock.
Need for additional capital
The Company is subject to a number of risks and uncertainties similar to other biotechnology companies in the development stage
including, but not limited to, the need to obtain adequate additional funding, possible failure of preclinical testing or clinical trials, the need to obtain marketing approval for its product candidates, competitors developing new technological
innovations, the need to successfully commercialize and gain market acceptance of the
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Company’s products, protect the Company’s intellectual property and proprietary technology, and the need to attract and retain key scientific and management personnel. If the Company
does not successfully commercialize or partner any of its product candidates, it will be unable to generate product revenue or achieve profitability. Until such time as the Company can generate significant revenue from product sales, if ever, it
expects to finance its operations from the sale of additional equity or debt financings, or other capital which come in the form of strategic collaborations, licensing, or other arrangements. In the event that additional financing is required, the
Company may not be able to raise it on terms acceptable to it, or at all.
The Company has incurred operating losses each year since
inception and expects such losses to continue for the foreseeable future. As of December 31, 2020, the Company had an accumulated deficit of $429.4 million and cash, cash equivalents, and marketable securities of $412.0 million.
2. Summary of significant accounting policies
Basis of presentation
The
accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The Company’s consolidated financial statements have been prepared in accordance with generally accepted accounting principles
in the United States (GAAP). Certain prior period amounts have been reclassified to conform to current period presentation.
Use of estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and accompanying notes. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and
assumptions when facts and circumstances dictate. Actual results could materially differ from those estimates. The most significant estimates in the Company’s consolidated financial statements relate to success payment liabilities, contingent
consideration, business combinations, accrued expenses, the valuation of convertible preferred stock, common stock, and stock options.
Cash and
cash equivalents
Cash and cash equivalents include cash and highly liquid investments with original maturities of three months or
less at acquisition. Cash equivalents include investments in money market funds with commercial banks and financial institutions and are stated at fair value.
Marketable securities
Marketable
securities are classified as available-for-sale debt securities and are carried at fair value which is derived from independent pricing sources based on quoted prices in
active markets for similar securities. Unrealized gains and losses are reported as a component of accumulated comprehensive income (loss). Amortization, accretion, interest, dividends, realized gains and losses, and declines in value judged to be
other than-temporary are included in other income (expense). The cost of securities sold is based on the specific-identification method. Investments in securities with maturities of less than one year, or those which management intends to use to
fund current operations, are included in current assets.
The Company evaluates whether an investment is other-than-temporarily impaired
based on the specific facts and circumstances. Factors that are considered in determining whether an other-than-temporary decline in value has occurred include the market value of the security in relation to its cost basis, the financial condition
of the investee, and the intent and ability to retain the investment for a sufficient period of time to allow for recovery in the market value of the investment.
Concentrations of credit risk and off-balance sheet risk
The Company maintains its cash, cash equivalents, and marketable securities with high quality, accredited financial institutions. These
amounts, at times, may exceed federally insured limits. The Company has not experienced any credit
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losses in such accounts and does not believe it is exposed to significant risk on these funds. The Company has no off-balance sheet concentrations of
credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements.
Fair value measurement
The Company accounts for certain assets and liabilities at fair value and is required to disclose information that enables an assessment of the
inputs used in determining the reported fair values. The fair value hierarchy prioritizes valuation inputs based on the observable nature of those inputs. The hierarchy applies only to the valuation inputs used to determine the reported fair value
of the investments and is not a measure of the investment credit quality. The hierarchy defines three levels of valuation inputs:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly or indirectly.
Level 3 – Unobservable inputs that reflect the Company’s own assumptions about the
assumptions market participants would use in pricing the asset or liability.
The Company’s financial instruments include cash and
cash equivalents, marketable securities, note receivable, accounts payable, contingent consideration, success payment liabilities, contingent license liability, and other accrued liabilities. The carrying amounts of cash, cash equivalents, accounts
payable, and accrued liabilities approximate fair value due to the short-term nature of these instruments. To the extent the valuation of financial instruments is based on models or inputs that are less observable or unobservable in the market, the
determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. See Note 7, Fair value measurements.
Property and equipment, net
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation of property and equipment is computed using the
straight-line method over the estimated useful lives of the respective assets, generally three to five years. Leasehold improvements are depreciated over the lesser of their useful lives or the remaining life of the lease. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from the balance sheet and the resulting gain or loss is recorded in other income (expense), net in the period realized. Maintenance and repairs are