Intellia Therapeutics, Inc. (NTLA) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements included in this Annual Report on Form 10-K, which have been prepared by us in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and with Regulation S-X, promulgated under the Securities Exchange Act of 1934, as amended. This discussion and analysis should be read in conjunction with these consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in Part I, Item 1A. Risk Factors of this Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Information pertaining to fiscal year 2019 was included in our Annual Report on Form 10-K for the year ended December 31, 2020 on pages 91 through 100 under Part II, Item 7, “Management’s Discussion and Analysis of Financial Position and Results of Operations,” which was filed with the Securities and Exchange Commission (the “SEC”) on February 26, 2021.

Management Overview

Intellia Therapeutics, Inc. (“we,” “us,” “our,” “Intellia,” or the “Company”) is a leading clinical-stage genome editing company, focused on developing novel, potentially curative CRISPR/Cas9-based therapeutics. CRISPR/Cas9, an acronym for Clustered, Regularly Interspaced Short Palindromic Repeats (“CRISPR”)/CRISPR associated 9 (“Cas9”), is a technology for genome editing, the process of altering selected sequences of genomic deoxyribonucleic acid (“DNA”). To realize the transformative potential of CRISPR/Cas9-based technologies, we are building a full-spectrum genome editing company, by leveraging our modular platform, to advance in vivo and ex vivo therapies for diseases with high unmet need. For our in vivo programs to address genetic diseases, we use intravenously administered CRISPR as the therapy, in which our proprietary delivery technology enables highly precise editing of disease-causing genes directly within specific target tissues. For our ex vivo programs to address immuno-oncology and autoimmune diseases, we use CRISPR to create the therapy by engineering cells outside of the body. Our deep scientific, technical and clinical development experience, along with our robust intellectual property (“IP”) portfolio, enables us to unlock broad therapeutic applications of CRISPR/Cas9 and related technologies to create new classes of genetic medicine. For more information regarding our business, mission and pipeline, see above sections in Part I entitled “Overview”, “Strategy” and “Our Pipeline”.

Financial Overview

Collaboration Revenue

Our revenue consists of collaboration revenue, including amounts recognized related to upfront technology access payments for licenses, technology access fees, research funding and milestone payments earned under our collaboration and license agreements with Regeneron Pharmaceuticals, Inc. (“Regeneron”), Novartis Institutes for BioMedical Research, Inc. (“Novartis”) and AvenCell Therapeutics, Inc. (“AvenCell”), a new universal CAR-T cell therapy joint venture and privately held company that was formed by us, Cellex Cell Professionals GmbH (“Cellex”) and funds managed by Blackstone Life Sciences Advisors L.L.C. (“BXLS”).

Research and Development

Research and development expenses consist of expenses incurred in performing research and development activities, such as compensation and benefits, which includes equity-based compensation, for full-time research and development employees, allocated facility-related expenses, overhead expenses, license and milestone fees, contract research, development and manufacturing services, clinical trial costs and other related costs.

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General and Administrative

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

Interest Income

Interest income is income earned on our cash, cash equivalents, restricted cash equivalents and marketable securities.

Results of Operations

The following discussion of the financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and the related footnotes thereto.

Comparison of Years Ended December 31, 2021 and 2020

The following table summarizes our results of operations for the years ended December 31, 2021 and 2020 (in thousands):

Collaboration Revenue

Collaboration revenue decreased by $24.9 million to $33.1 million during the year ended December 31, 2021, as compared to $58.0 million during the year ended December 31, 2020. The decrease in collaboration revenue during the year ended December 31, 2021 is primarily due to our recording $15.3 million related to the transfer of control of the license to develop the Factor VIII target for hemophilia A, an $8.4 million one-time cumulative catch-up adjustment related to the modification of our agreement with Regeneron, and a $5.0 million milestone payment earned from Novartis for the Investigational New Drug (“IND”) application submission of OTQ923, all of which were recorded in 2020. These decreases are offset in part by $6.1 million in revenue recorded in 2021 from our joint venture with AvenCell. Refer to Note 9 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for further details.

Research and Development

Research and development expenses increased by $79.4 million to $229.8 million during the year ended December 31, 2021, as compared to $150.4 million during the year ended December 31, 2020.

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The following table summarizes our research and development expenses for the years ended December 31, 2021 and 2020, together with the changes in those items in dollars (in thousands) and the respective percentages of change.

The increase in research and development expenses for the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily attributable to:

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a $2.1 million increase in external costs related to the development of NTLA-2001, our lead product candidate, primarily due to an increase in contracted services, offset in part by decreases in consulting and manufactured components incurred as compared to the prior period;

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a $1.5 million increase in external costs related to the development of NTLA-2002, primarily due to increases in component costs and contracted services as we prepared to enroll patients;

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a $7.7 million increase in external costs related to the development of NTLA-5001, primarily due to an increase in contracted services as we prepared to enter into the clinic;

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a $28.6 million increase in employee-related expenses driven by the expansion of our development organization;

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a $15.5 million increase in research materials and contracted services primarily due to an increase in drug components and research and development contracted services;

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a $7.3 million increase in facility-related expenses primarily related to rent, depreciation and technology expense allocated to research and development; and

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a $16.5 million increase in stock-based compensation driven by our larger workforce as well as our increased stock price as compared to the prior year.

During 2022, we expect research and development expenses to increase as we continue to grow our development team, execute clinical trials for NTLA-2001 and NTLA-2002, progress our NTLA-5001 program and nominate new development candidates to enter the clinic.

General and Administrative

General and administrative expenses increased by approximately $26.9 million to $71.1 million during the year ended December 31, 2021, compared to $44.2 million during the year ended December 31, 2020. This increase was primarily related to an increase in employee-related expenses, including stock-based compensation of $10.6 million, driven by our larger workforce as well as our increased stock price as compared to the prior year.

Loss from Equity Method Investment

Loss from equity method investment represents our share of two months of AvenCell's losses generated in the third quarter of 2021, amounting to $1.3 million, as we are recording our share of their losses on a one-quarter lag. Refer to Note 9 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for further details.

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Interest Income

Interest income decreased by approximately $1.1 million to $1.3 million during the year ended December 31, 2021 as compared to $2.4 million during the year ended December 31, 2020. This decrease was due to a decline in investment income due to overall market conditions.

Liquidity and Capital Resources

Since our inception through December 31, 2021, we have raised an aggregate of $1,817.9 million to fund our operations through our initial public offering (“IPO”) and concurrent private placements, follow-on public offerings, at-the-market offerings and the sale of convertible preferred stock, as well as through our collaboration agreements.

As of December 31, 2021, we had $1,086.0 million in cash, cash equivalents and marketable securities.

We are eligible to earn a significant amount of milestone payments and royalties, in each case, on a per-product basis under our collaborations with Novartis and SparingVision SAS (“SparingVision”), on a per-target basis under our collaboration with Regeneron and upon achievement of certain events under our collaboration with Kyverna Therapeutics, Inc. (“Kyverna”). Our ability to earn these milestone payments and the timing of achieving these milestones is dependent upon the outcome of our research and development activities and is uncertain at this time. Our rights to payments under our collaboration agreements are our only committed external source of funds.

Follow-on Offerings

On June 1, 2020, we entered into an underwriting agreement related to a public offering of 6,301,370 shares of our common stock, par value $0.0001 per share, including the exercise in full by the underwriters of their option to purchase an additional 821,917 shares, at the public offering price of $18.25 per share. The offering closed on June 5, 2020 and we received net proceeds of $107.7 million, after deducting the underwriting discount, commissions and offering expenses.

On December 1, 2020, we entered into an underwriting agreement related to a public offering of 5,513,699 shares of our common stock, par value $0.0001 per share, including the exercise in full by the underwriters of their option to purchase an additional 719,178 shares, at the public offering price of $36.50 per share. The offering closed on December 4, 2020 and we received net proceeds of $188.9 million, after deducting the underwriting discount, commissions and offering expenses.

In July 2021, we closed an underwritten public offering of 4,758,620 shares of common stock, including the exercise in full of the underwriters’ option to purchase an additional 620,689 shares of common stock, at the public offering price of $145.00 per share, for aggregate net proceeds of $648.3 million, after deducting approximately $41.7 million in underwriting discounts and offering costs.

At-the-Market Offering Programs

In August 2019, we entered into an Open Market Sale Agreement (the “2019 Sale Agreement”) with Jefferies LLC (“Jefferies”), under which Jefferies is able to offer and sell, from time to time in “at-the-market” offerings, shares of our common stock having aggregate gross proceeds of up to $150.0 million. We agreed to pay to Jefferies cash commissions of 3.0% of the gross proceeds of sales of common stock under the 2019 Sale Agreement. During the year ended December 31, 2019, we issued 287,231 shares of our common stock, in a series of sales, at an average price of $16.48 per share, in accordance with the 2019 Sale Agreement for aggregate net proceeds of $4.4 million, after payment of cash commissions to Jefferies and approximately $0.2 million related to legal, accounting and other fees in connection with the sales. During the year ended December 31, 2020, we issued 2,270,161 shares of our common stock in a series of sales at an average price of $22.53 per share in accordance with the 2019 Sale Agreement, for aggregate net proceeds of $49.5 million after payment of cash commissions to Jefferies and approximately $0.2 million related to legal, accounting and other fees in connection with the sales. During the year ended December 31, 2021, we issued 641,709 shares of our common stock in a series of sales at an average price of $72.79 per share in accordance with the 2019 Sale Agreement, for aggregate net proceeds of $45.3 million after payment of cash commissions to Jefferies and approximately $0.1 million related to legal, accounting and other fees in connection with the sales.

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As of December 31, 2021, $47.4 million in shares of common stock remain eligible for sale under the 2019 Sale Agreement.

Shares Issued in Private Placement to Regeneron

As described in Note 9 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, in May 2020 we entered into the 2020 Regeneron Amendment. Simultaneously with the 2020 Regeneron Amendment, we and Regeneron entered into the 2020 Stock Purchase Agreement, under which we sold to Regeneron 925,218 shares of our common stock, par value $0.0001 per share, for aggregate cash consideration of $30.0 million, or $32.42 per share, representing a 100% premium over the volume-weighted average trading price of our common stock during the 30-day period prior to the closing. Under the 2020 Stock Purchase Agreement, Regeneron will not dispose of any shares of common stock it beneficially owns in Intellia until the termination of the Technology Collaboration Term (see Note 9). After applying equity accounting guidance to measure the issuance of the shares, $12.6 million was recorded as fair value in the consolidated statement of stockholders’ equity for the shares.

Funding Requirements

Our primary uses of capital are, and we expect will continue to be, research and development contracted services, clinical trial costs, compensation and related expenses, laboratory and office facilities, research supplies, legal and regulatory expenses, patent prosecution filing and maintenance costs for our licensed IP, milestone and royalty payments and general overhead costs. During 2022, we expect our expenses to increase compared to prior periods in connection with our ongoing activities as we continue to grow our research and development team and clinical development in NTLA-2001, NTLA-2002 and NTLA-5001 and advance additional programs into clinical development.

Because our lead programs are still in the early clinical stage and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of any future product candidates or whether, or when, we may achieve profitability. Until such time as we can generate substantial product revenues, if ever, we expect to finance our ongoing cash needs through equity financings and collaboration arrangements. We receive cost reimbursements from Regeneron for the transthyretin (“ATTR”) amyloidosis and hemophilia programs. Additionally, we are eligible to earn milestone payments and royalties, in each case, on a per-product basis under our collaborations with Novartis and SparingVision, on a per-target basis under our collaboration with Regeneron, and upon achievement of certain events with Kyverna, subject to the provisions of our agreements with each of them. Except for these sources of funding, we will not have any committed external source of liquidity. To the extent that we raise additional capital through the future sale of equity, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing stockholders. If we raise additional funds through collaboration arrangements in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Outlook

Based on our research and development plans and our expectations related to the progress of our programs, we expect that our cash, cash equivalents and marketable securities as of December 31, 2021, as well as research and cost reimbursement funding from Regeneron, AvenCell and SparingVision, will enable us to fund our ongoing operating expenses and capital expenditure requirements beyond the next 24 months, excluding any potential milestone payments or extension fees that could be earned and distributed under our collaboration agreements or any strategic use of capital not currently in the base case planning assumptions. We have based this estimate on current assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect.

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

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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 IP rights, including patents, trade secrets, and know-how; and attracting, hiring, and retaining qualified personnel.

Cash Flows

The following is a summary of cash flows for the years ended December 31, 2021 and 2020:

Net cash used in operating activities

Net cash used in operating activities of $225.0 million during the year ended December 31, 2021 primarily reflects increased spend in our research and development activities offset by the receipt of $6.7 million in payments from our collaboration partners during that period. Net cash used in operating activities of $49.9 million during the year ended December 31, 2020 primarily reflects increased spend in our research and development activities, offset in part by the receipt of a $70.0 million up-front payment and $12.2 million in additional payments under our collaboration with Regeneron and $6.0 million in payments from Novartis.

Net cash used in investing activities

During the year ended December 31, 2021, our investing activities used net cash of $550.8 million. The increase in the year ended December 31, 2021 is primarily due to marketable securities activity during the period, as $1,020.6 million in marketable securities were purchased and $485.6 million in marketable securities matured, as well as the use of $12.8 million in cash for the purchase of property and equipment and $3.0 million for an investment in Kyverna. During the year ended December 31, 2020, our investing activities used net cash of $214.5 million. The decrease in the year ended December 31, 2020 is primarily related to a decrease of $210.9 million from marketable securities activity during the period, as $473.7 million in marketable securities were purchased and $262.8 million in marketable securities matured, as well as the use of $3.6 million in cash for the purchase of property and equipment.

Net cash provided by financing activities

Net cash provided by financing activities of $736.7 million during the year ended December 31, 2021 is primarily due to the receipt of $648.3 million in net proceeds from a follow-on offering of our common stock, $45.3 million in net proceeds from at-the-market offerings, $41.1 million in cash received from the exercise of stock options and $2.0 million in cash received from the issuance of shares through our employee stock purchase plan. Net cash provided by financing activities of $371.8 million during the year ended December 31, 2020 includes $296.6 million in proceeds from follow-on offerings, $49.5 million in net proceeds from at-the-market offerings, $12.6 million in proceeds from the issuance of common stock to Regeneron in a private placement, $11.6 million in cash received from the exercise of stock options and $1.6 million in cash received from the issuance of shares through our employee stock purchase plan.

Contractual and Other Obligations

We have entered into arrangements that contractually obligate us to make payments that will affect our liquidity and cash flows in future periods.

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Property Leases - Commenced

As of December 31, 2021, our contractual commitments for leases were $91.8 million, which will be paid over the term of such leases. For additional information on our leases and timing of future payments refer to Note 11 of the consolidated financial statements included in this Annual Report on Form 10-K.

Property Leases – Not Yet Commenced

In January 2022, we entered into a lease agreement for office and laboratory space at 730 Main Street in Cambridge, Massachusetts, which is described in further detail in Note 17 of the consolidated financial statements included in this Annual Report on Form 10-K. In connection therewith, we have committed to making at least $56.1 million in rental payments over a lease term of 120 months.

In February 2022, we entered into a lease agreement for good manufacturing practice (“GMP”) manufacturing space at 840 Winter Street in Waltham, Massachusetts, which is described in further detail in Note 17 of the consolidated financial statements included in this Annual Report on Form 10-K. In connection therewith, we have committed to making at least $146.0 million in rental payments over a lease term of 144 months estimated to begin in 2024.

Other Obligations

We enter into contracts in the normal course of business with various third parties for clinical trials, preclinical research studies, supply manufacturing and other services and products for operating purposes. As of December 31, 2021, we have $9.1 million of commitments that are legally enforceable and due within one year.

We do not include any potential future pass-through milestone payments or royalty payments we may be required to make under our existing license agreements or the merger agreement related to our acquisition of Rewrite Therapeutics, Inc. (“Rewrite”) due to the uncertainty of the occurrence of the events requiring payment under those agreements. These payments are not reflected in the disclosures above.

Critical Accounting Policies and Use of Estimates

Our management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the balance sheets and the reported amounts of collaboration revenue and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances at the time such estimates are made. Actual results and outcomes may differ materially from our estimates, judgments and assumptions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in the consolidated financial statements prospectively from the date of the change in estimate. Refer to Note 2 to our consolidated financial statements of this Annual Report on Form 10-K for our significant accounting policies related to our critical accounting estimates.

We define our critical accounting policies as those accounting principles generally accepted in the U.S. that require the most significant 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 in accordance with Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) and its related amendments (collectively known as Accounting Standard Codification (“ASC”) 606 “ASC 606”).

At inception, we determine whether contracts are within the scope of ASC 606 or other topics. For contracts that are determined to be within the scope of ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which we expect to be entitled to

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receive in exchange for these goods and services. To achieve this core principle, we apply the following five steps: (i) identify the contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when or as we satisfy a performance obligation. We only apply the five-step model to contracts when we determine that collection of substantially all consideration for goods and services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration.

As of December 31, 2021, our only revenue recognized is related to collaboration agreements with third parties which are either within the scope of ASC 606, under which we license certain rights to our product candidates to third parties, or within the scope of ASC 808, Collaborative Arrangements (“ASC 808”) if it involves a joint operating activity pursuant to which we are an active participant and are exposed to significant risks and rewards with respect to the arrangement. As discussed in further detail in Note 9 to our consolidated financial statements of this Annual Report on Form 10-K, we enter into out-licensing agreements which are within the scope of ASC 606, under which we license certain rights to our product candidates to third parties and may provide services related to the research and development of the product candidates. The terms of these arrangements typically include consideration payable to us of one or more of the following: nonrefundable, upfront fees; development, regulatory, and commercial milestone payments; research and development funding payments; and royalties on the net sales of licensed products. Additionally, the terms of certain arrangements may include an equity interest in the other company. Consideration received from each of these payments results in collaboration revenues, except for revenues from royalties on the net sales of licensed products, which are classified as royalty revenues. For arrangements within the scope of ASC 808, the terms of these arrangements typically include payments received or made under the cost sharing provisions which are recognized as a component of collaboration revenues in the consolidated statements of operations and comprehensive loss.

In determining the accounting for each contract, the significant areas of management judgement or estimation include determining the transaction price, identifying the distinct performance obligations within a contract, determining the standalone selling prices for distinct performance obligations when more than one distinct performance obligation is identified within a contract and determining the revenue recognition pattern for each performance obligation that best reflects the timing of when we transfer control of goods and services to the customer. If the consideration received in exchange for entering into a contract is in the form of noncash consideration, we are required to estimate the fair value of the noncash consideration received. If our estimates of the noncash consideration received are not appropriate it could impact the total amount of revenue recognized for the contract. Furthermore, many of our performance obligations, whether distinct or combined, do not have readily available standalone selling prices and therefore we are required to make judgements and estimates regarding the standalone selling prices when relevant. To the extent the estimates are not appropriate in the circumstances, it could impact the timing of our revenue recognition. We evaluate the measure of progress each reporting period and if estimates related to the measure of progress change, related revenue recognition is adjusted accordingly.

Investment Valuation

As discussed in Notes 9 and 10 to our consolidated financial statements of this Annual Report on Form 10-K, during the year ended December 31, 2021, we entered into agreements with AvenCell, SparingVision and Kyverna, which resulted in us applying judgment in determining the accounting for the agreements, and in particular, measuring the fair value of the non-cash consideration we received in exchange for our licenses granted and related research and development services, which includes equity in private companies in which the fair value is not readily available. The fair value of these investments represents the transaction price of the arrangement and will drive the amount of revenue we recognize in future periods.

We engaged an independent valuation specialist to determine the fair value of the equity interest received related to the AvenCell and SparingVision investments; see Note 10 to our consolidated financial statements for specifics related to the valuation model and inputs utilized. One of the key inputs in the AvenCell model is the anticipated holding period to an exit and liquidity event. An increase in this input by 1 year would increase the value of the AvenCell investment by $5.7 million. A decrease in this input by 1 year would decrease the value of the AvenCell investment by $6.3 million.

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In the SparingVision model, the key input is the internal rate of return. A 10% increase in this input would increase the value of the SparingVision investment by $0.8 million. A 10% decrease in this assumption would decrease the value of the SparingVision investment by $0.9 million.

Accrued Research and Development Expenses

As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. Examples of estimated accrued research and development expenses include fees paid to vendors in connection with clinical research organizations (“CROs”) in connection with clinical studies, vendors in connection with preclinical development activities and vendors related to development, manufacturing and distribution of clinical trial materials.

We base our expenses related to preclinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs that conduct and manage clinical studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense.

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 stock-based compensation expense using the accelerated attribution method, based on our assessment of the probability that the performance condition will be achieved. Our stock price is a key input that will drive the grant date fair value of the equity awards.

We classify equity-based compensation expense in our consolidated statements of operations and comprehensive loss in the same manner in which the award recipient’s salary and related costs are classified or in which the award recipient’s service payments are classified.

Recent Accounting Pronouncements

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.