# Arcturus Therapeutics Holdings Inc. (ARCT) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Arcturus Therapeutics Holdings Inc.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1768224/000095017025034787/arct-20241231.htm
Accession: 0000950170-25-034787
Filing date: 2025-03-06
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ARCT/
All MD&A years: /company/ARCT/mda/
Previous year: /company/ARCT/mda/fy2023/ (FY 2023)
Next year: /company/ARCT/mda/fy2025/ (FY 2025)

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

You should read the following discussion and analysis together with the consolidated financial statements and related notes included elsewhere herein.

This report includes forward-looking statements which, although based on assumptions that we consider reasonable, are subject to risks and uncertainties which could cause actual events or conditions to differ materially from those currently anticipated and expressed or implied by such forward-looking statements.

Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 that are not included in this Form 10-K can be found within Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2023.

Overview

We are a messenger RNA medicines company focused on the development of infectious disease vaccines and opportunities within liver and respiratory rare diseases. We developed the world’s first approved self-amplifying messenger RNA (sa-mRNA) vaccine, KOSTAIVE® (“KOSTAIVE”). KOSTAIVE achieved approval in Japan in 2023 as a vaccine against COVID-19. Sales of KOSTAIVE began in Japan in October 2024, marking our transition to a commercial stage company.

We have several key platform technologies that we leverage to develop and advance a pipeline of mRNA-based vaccines and therapeutics for infectious diseases and for rare genetic disorders with significant unmet medical needs. Current mRNA medicines have two critical components: the messenger RNA (“mRNA”) constructs and the lipid nanoparticles (“LNP”) which help deliver the mRNA to disease-relevant target tissues. We believe we are among the world leaders in both areas. We have extensive expertise in the design and optimization of mRNA constructs, including with respect to a type of mRNA technology known as self-amplifying mRNA (sa-mRNA). Our proprietary self-amplifying mRNA technology platform, or STARR® (“STARR”), has been demonstrated to induce a longer-lasting and broader humoral immune response at lower dose levels than conventional mRNA-based vaccines. Our proprietary LNP delivery system, LUNAR® (“LUNAR”), is intended to address the major hurdle in RNA drug development, namely the effective and safe delivery of RNA therapeutics to disease-relevant target tissues. LUNAR may enable multiple nucleic acid medicines. The approval of KOSTAIVE in Japan was a significant milestone which validates our LUNAR and STARR platforms, as well as sa-mRNA more generally as a meaningful modality. Finally, we have significant expertise and valuable know-how in the development and scalability of complex and robust manufacturing processes required to deliver the next generation of nucleic acid medicines.

Our internal pipeline includes RNA therapeutic candidates to potentially treat ornithine transcarbamylase (OTC) deficiency and cystic fibrosis (CF), both rare diseases. In our vaccine program, we have partnered with Seqirus, Inc. (“CSL Seqirus”), a part of CSL Limited and one of the world’s leading influenza vaccine providers, on the development and commercialization of mRNA vaccines for COVID-19, influenza and certain other infectious diseases.

We made significant progress in 2024. Commercial sales of KOSTAIVE began in October 2024 in Japan by Meiji Seika Pharma (“Meiji”), CSL Seqirus’ exclusive partner in Japan, marking the first commercial sales of an Arcturus-developed product. In February 2025, we received approval of KOSTAIVE from the European Commission (EC), which provided further validation of our platform by another significant regulatory authority.

KOSTAIVE is the brand name approved in Japan and Europe for ARCT-154, which is the version of the sa-mRNA COVID vaccine encoding the ancestral strain of SARS-CoV-2, and also for updated variant-specific versions of this vaccine. We may use KOSTAIVE or the specific internally generated name, such as ARCT-154, ARCT-2301 and ARCT-2303, to identify a version of the vaccine.

We initiated dosing in a Phase 1 clinical trial of a novel seasonal influenza sa-mRNA vaccine candidate under our collaboration with CSL Seqirus in January 2024. In December 2024, we initiated dosing of an sa-mRNA vaccine candidate against pandemic avian influenza (bird flu) in a Phase 1 trial funded by the Biomedical Advanced Research and Development Authority (“BARDA”).

In our OTC program, we completed dosing of eight subjects in August 2024 in a Phase 2 double-blind multiple-dose study of ARCT-810. In the second quarter of 2024, we expanded the Phase 2 clinical program of ARCT-810 with an open-label, multiple-dose study which initiated dosing in December 2024. ARCT-810 has

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received Orphan Drug Designation from the FDA and Orphan Medicinal Product Designation from the European Medicines Agency (the “EMA”) for treatment of OTC deficiency, as well as Fast Track Designation and Rare Pediatric Disease Designation from the FDA.

In our CF program, we initiated dosing in December 2024 in a Phase 2 multiple ascending dose study of ARCT-032 designed to identify a safe and effective dose in people with Class I (null) CFTR mutations and other CF patients who do not benefit from CFTR modulators. In July 2024, we completed dosing and follow-up visits for seven participants in a safety and tolerability Phase 1b clinical study in New Zealand of ARCT-032 in adults with CF. ARCT-032 has received Orphan Drug Designation by the FDA and Orphan Medicinal Product Designation by the EMA for the treatment of CF, and Rare Pediatric Disease Designation from the FDA.

We also improved our platform technologies and advanced our early-stage research activities and manufacturing process development and operations. We conducted exploratory platform development activities, including the evaluation of genome editing, and new targeting approaches, where our LUNAR and STARR platforms could potentially be useful for identification and development of additional products for our portfolio. Also, with our sourcing partners, we manufactured cGMP (current good manufacturing practices) batches yielding significant quantities of clinical trial materials for global studies of our candidates, and with our collaborator, CSL Seqirus, we have established commercial production processes for the COVID-19 vaccine program.

Our activities since inception have consisted principally of performing research and development activities, clinical research activities, general and administrative activities and raising capital to fund those efforts. Our activities are subject to significant risks and uncertainties, including failing to secure additional funding before we achieve sustainable revenues and profit from operations. As of December 31, 2024, we had an accumulated deficit of $448.8 million.

Liquidity and Capital Resources

From the Company’s inception through the year ended December 31, 2024, the Company has funded its operations principally with the proceeds from revenues earned through collaboration agreements and government contracts, the sale of capital stock and long-term debt. During fiscal year 2024, we received milestone payments totaling $96.0 million from CSL Seqirus. We expect to receive future payments from CSL Seqirus primarily by meeting future milestones related to the CSL Collaboration Agreement. At December 31, 2024, the Company’s balance of cash and cash equivalents, including restricted cash, was $293.9 million.

CSL Seqirus, Inc. Collaboration and License Agreement

In 2022, we entered into the CSL Collaboration Agreement with CSL Seqirus, a part of CSL Limited, one of the world’s leading influenza vaccine providers, for the global exclusive rights to research, develop, manufacture and commercialize mRNA vaccines.

CSL Seqirus received exclusive global rights to our technology for vaccines against SARS-CoV-2 (COVID-19), influenza and three other infectious diseases with non-exclusive rights to pandemic pathogens. We received an up-front payment of $200.0 million during the fourth quarter of 2022. We will be eligible to receive development milestones totaling more than $1.3 billion if all products are registered in the licensed fields. We will also be entitled to receive up to $3.0 billion in commercial milestones based on “net sales” of vaccines in the various fields.

In addition, we are entitled to receive a 40% share of net profits from COVID-19 vaccine sales and up to low double-digit royalties of annual net sales for vaccines against influenza and the other three specified infectious disease pathogens, as well as royalties on revenues from vaccines that may be developed for pandemic preparedness.

The CSL Collaboration Agreement sets forth how CSL Seqirus and we shall collaborate to research and develop vaccine candidates. In the COVID-19 field, we will lead activities for certain regulatory filings for ARCT-154 in the US and Europe and for research and development activities of a next-generation COVID vaccine candidate. CSL Seqirus will lead and be responsible for all other research and development in COVID-19, influenza and the other fields.

Wells Fargo Credit Agreement

On April 21, 2023, the Company’s wholly-owned subsidiary, Arcturus Therapeutics, Inc. entered into a credit agreement with Wells Fargo Bank, National Association (“Wells Fargo”) whereby Wells Fargo agreed to make a $50.0 million revolving credit line available to the Company (as amended, the “Wells Fargo Loan”) with each Wells Fargo Loan evidenced by a revolving line of credit note (each, a “Note”). On June 26, 2024, the parties entered into

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Amendment No. 1 to the Wells Fargo Loan, whereby the term was extended by one year to April 2026. As of December 31, 2024, no borrowings were made against the Wells Fargo Loan.

Borrowings under the agreement will bear interest at a rate of 1.00% above either the Daily Simple SOFR or Term SOFR (as such terms are defined in the Wells Fargo Loan), with “SOFR” being the rate per annum equal to the secured overnight financing rate as administered by the Federal Reserve Bank of New York. If an Event of Default (as defined in the credit agreement) occurs, then all Wells Fargo Loans shall bear interest at a rate equal to 2.00% above the interest rate applicable immediately prior to the occurrence of the Event of Default.

The original term of the agreement is two years, with an option for one-year renewals subject to Wells Fargo approval and the Company furnishing to Wells Fargo a non-refundable commitment fee equal to 0.25% of the Wells Fargo Loan amount for each such renewal. There is no penalty for terminating the agreement. There is no penalty for terminating the facility prior to the maturity date of the Wells Fargo Loan. As collateral, the Company has agreed to pledge $55.0 million in cash to be held at the Company’s securities accounts with Wells Fargo Securities, LLC, an affiliate of Wells Fargo, pursuant to a security agreement.

Grant from the Biomedical Advanced Research and Development Authority

On August 31, 2022, we entered into a cost reimbursement contract (the “BARDA Contract”) with the Biomedical Advanced Research and Development Authority (“BARDA”), a division of the Office of the Assistant Secretary for Preparedness and Response (“ASPR”) within the U.S. Department of Health and Human Services (“HHS”) to support the development of a low-dose pandemic influenza candidate based on our proprietary self-amplifying messenger RNA-based vaccine platform. The BARDA Contract is to support our non-clinical and pre-clinical development, early-stage clinical development through Phase 1, and associated drug product manufacturing, regulatory and quality-assurance activities over a period of three years. It provides for reimbursement by BARDA of our permitted costs up to $63.2 million. As of December 31, 2024, the remaining available funding net of revenue earned was $40.0 million.

Vinbiocare Agreement

During 2021, we entered into a technology license and technical support agreement and the framework drug substance supply agreement with Vinbiocare, a member of Vingroup Joint Stock Company (collectively, the “Vinbiocare License & Supply Agreements”), whereby we would provide technical expertise and support services to Vinbiocare to assist in the build out of an mRNA drug product manufacturing facility in Vietnam. We received an upfront payment in aggregate of $40.0 million as part of the Vinbiocare License and Supply Agreements. In October 2022, in association with the termination of the Vinbiocare License and Supply Agreements, we signed the Vinbiocare Support Agreement with Vinbiocare which continues Vinbiocare’s clinical obligations and reserved a portion of the original $40.0 million upfront payment received from the License and Supply Agreements to be paid over the future periods.

The Vinbiocare Support Agreement requires us to pay to Vinbiocare certain limited payments, including upon the occurrence of specified events through the first quarter of 2025. Vinbiocare is also eligible to receive a single digit percentage of amounts received by Arcturus on net sales, if any, of ARCT-154 (or next-generation COVID vaccine) up to a capped amount.

General Financial Resources

A portion of our current cash balance is expected to be utilized during fiscal year 2025 to fund (i) the continued Phase 2 trial of ARCT-810, our LUNAR-OTC candidate, (ii) advances to our LUNAR-CF program in clinical trials, (iii) expenses incurred prior to customer payments under the CSL Collaboration Agreement and BARDA agreement and (iv) continued exploratory activities related to our platform and other general administrative activities.

Our future capital requirements are difficult to forecast and will depend on many factors that are out of our control. If we are unable to maintain sufficient financial resources, our business, financial condition and results of operations will be materially and adversely affected. There can be no assurance that we will be able to obtain additional needed financing on acceptable terms or at all. Additionally, equity or debt financings may have a dilutive effect on the holdings of our existing shareholders.

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We expect to continue to incur additional losses in the long term, and we will need to execute on milestones within the CSL Collaboration Agreement, raise additional debt or equity financing or enter into additional partnerships to fund development. Our ability to transition to profitability is dependent on regulatory approvals and subsequent sales of KOSTAIVE, executing on milestones within the CSL Collaboration Agreement and identifying and developing other successful mRNA drug and vaccine candidates. If we are not able to achieve planned milestones or incur costs in excess of our forecasts, we will need to reduce discretionary spending, discontinue the development of some or all of our programs, which will delay part of our development programs, all of which will have a material adverse effect on our ability to achieve our intended business objectives.

Funding Requirements

We anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek regulatory approvals for, our product candidates, and begin commercialization of our products. As a result, we will require additional capital to fund our operations in order to support our long-term plans. We believe that our current cash position will be sufficient to meet our anticipated cash requirements through at least the next twelve months, assuming, among other things, no significant unforeseen expenses and continued funding from partners at anticipated levels. We intend to seek additional capital through equity and/or debt financings, collaborative or other funding arrangements with partners or through other sources of financing when and as needed. Should we seek additional financing from outside sources, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to scale back or discontinue the advancement of product candidates, reduce headcount, liquidate our assets, file for bankruptcy, reorganize, merge with another entity, or cease operations.

Our future funding requirements are difficult to forecast and will depend on many factors, including but not limited to the following:

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the development of our LUNAR-COV19 and LUNAR-FLU vaccine candidates;

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the achievement of milestones under our strategic alliance agreements;

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maintaining and/or expanding our manufacturing network and capabilities;

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the terms and timing of any other strategic alliance, licensing and other arrangements that we may establish, including those with CSL Seqirus and CSL Seqirus’ arrangement with Meiji, and any related payments thereunder;

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the initiation, progress, timing and completion of preclinical studies and clinical trials for our product candidates;

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the number and characteristics of product candidates that we pursue;

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the outcome, timing and cost of regulatory approvals;

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delays that may be caused by changing regulatory requirements;

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the cost and timing of hiring new employees to support our continued growth;

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the costs involved in filing and prosecuting patent applications and enforcing and defending patent claims;

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the costs and timing of procuring clinical and commercial supplies of our product candidates;

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the costs and timing of establishing sales, marketing and distribution capabilities;

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the costs associated with legal proceedings;

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the costs associated with potential litigation related to collaboration agreements; and

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the extent to which we acquire or invest in businesses, products or technologies.

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The following table shows a summary of our cash flows for the years ended December 31, 2024 and 2023:

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[[/GREPCENT_TABLE]]

Operating Activities

Net cash used in operating activities was $59.7 million for the year ended December 31, 2024, compared to $18.1 million for the year ended December 31, 2023. The $41.6 million increase in cash used was primarily driven by a $93.8 million year-over-year impact from deferred revenue, as 2023 benefited from a $38.6 million deferred revenue inflow, while 2024 saw a $55.2 million outflow due to revenue recognition exceeding new milestone payments under the CSL collaboration agreement. Additionally, the increase in cash outflows was due to a higher net loss and the absence of a $34.0 million debt extinguishment gain recognized in 2023. These impacts were partially offset by a $57.4 million improvement in accounts receivable, as payments from CSL and BARDA were received in 2024 and a $6.5 million increase in accrued liabilities, primarily due to the timing of bonus accruals.

Investing Activities

Net cash used in investing activities of $0.6 million in 2024 and $2.9 million in 2023 reflected the acquisition of property and equipment.

Financing Activities

Net cash provided by financing activities was $5.4 million for the year ended December 31, 2024, compared to a net cash outflow of $24.1 million in 2023 ,representing a $29.5 million increase. The primary drivers of this increase were the repayments of the Singapore Loan and the Loan and Security Agreement with Western Alliance Bank during 2023, with no similar debt repayments occurring in 2024.

Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements included in this Annual Report. Our historical results of operations and the year-to-year comparisons of our results of operations that follow are not necessarily indicative of future results.

Revenues

We enter into arrangements with pharmaceutical and biotechnology partners and government agencies that may contain upfront payments, license fees for research and development arrangements, research and development funding, milestone payments, option exercise and exclusivity fees and royalties on future sales. The following table summarizes our total revenues for the periods indicated:

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,","Change 2024 vs 2023"],["(in thousands)","","2024","","","2023","","","Change","","","%"],["Collaboration revenue","","$","138,389","","","$","157,748","","","$","(19,359",")","","","-12","%"],["Grant revenue","","","13,921","","","","9,051","","","","4,870","","","","54","%"],["Total","","$","152,310","","","$","166,799","","","$","(14,489",")","","","-9","%"]]
[[/GREPCENT_TABLE]]

Revenue decreased by $14.5 million during the year ended December 31, 2024 as compared to the year ended December 31, 2023. The decrease during 2024 primarily relates to a $15.9 million decrease in revenue related to the CSL collaboration agreement, primarily due to an $82.0 million decrease in milestone achievements during 2024 as compared to 2023, offset by a $23.4 million increase in revenue related to CSL commercial supply agreements and increased revenue recognition from amortization due to the progress of the CSL development programs during 2024. The remaining decrease is primarily due to a decrease of $1.8 million related to the completion of the amortization of the upfront payment during 2023 from the 2015 Research Collaboration and License Agreement with Ultragenyx

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Pharmaceuticals, Inc., as well as $0.7 million less revenue in 2024 due the termination of the 2017 Research Collaboration and License Agreement with Janssen Pharmaceuticals, Inc. The decrease was primarily offset by an increase in the revenue of $4.8 million related to the increase in reimbursable research and development expenses for the grant agreement with BARDA.

Operating Expenses

Our operating expenses consist of research and development and general and administrative expenses.

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,","","","Change 2024 vs 2023"],["(in thousands)","","2024","","","2023","","","Change","","","%"],["Operating expenses:"],["Research and development, net","","$","195,156","","","$","192,133","","","$","3,023","","","","2","%"],["General and administrative","","","52,823","","","","52,871","","","","(48",")","","","0","%"],["Total","","$","247,979","","","$","245,004","","","$","2,975","","","","1","%"]]
[[/GREPCENT_TABLE]]

The following table presents our total research and development expenses by category:

Research and Development Expenses, net

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Our research and development expenses consist primarily of external manufacturing costs, in-vivo research studies and clinical trials performed by contract research organizations, clinical and regulatory consultants, personnel related expenses, facility related expenses and laboratory supplies related to conducting research and development activities. Research and development expenses were $195.2 million for the year ended December 31, 2024, compared with $192.1 million for the year ended December 31, 2023, primarily reflecting increased payroll and benefits costs due to share-based compensation expense, progress within our BARDA, LUNAR-CF, and LUNAR-FLU programs, and clinical trial costs for the LUNAR-COVID program. The overall increase was offset by decreased manufacturing-related expenses due to lower costs associated with drug product supply agreements related to the LUNAR-COVID program during the year ended December 31, 2024. We expect that our research and development efforts and associated costs will continue to be substantial over the next several years as our pipeline progresses.

Early-stage programs represent programs that are in the pre-clinical or Phase 1 clinical stage and may be partnered or unpartnered, and primarily includes the LUNAR-FLU program which is partnered with CSL Seqirus. Discovery technologies represent our efforts to expand our product pipeline and are primarily related to pre-partnered studies and new capabilities assessment. A few of our programs are part of our collaborative relationships. The related expenses may be partially offset with funds that have been reimbursed or awarded to the Company and consist of external manufacturing costs, lab supplies, equipment, and consulting and professional fees. Expenses for both early-stage programs and discovery technologies are expected to decrease as we shift our focus to later-stage programs.

Payroll and benefits primarily consists of employee salaries and benefits, share-based compensation and consultant costs. Although such expenses increased during 2024 as compared to 2023, we expect that they will not increase over the next twelve months due to reduced share-based compensation.

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Facilities and equipment expenses include rent, common area maintenance (“CAM”) costs, depreciation, shipping costs and various other costs related to the operation of our two office and laboratory locations. These costs decreased during 2024 as compared to 2023 as we downsized from three to two facilities. Facilities and equipment expenses are not expected to increase during the next twelve months.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related benefits for our executive, administrative and accounting functions and professional service fees for legal and accounting services as well as other general and administrative expenses.

General and administrative expenses were $52.8 million and $52.9 million for the years ended December 31, 2024 and 2023, respectively. We expect that general and administrative expenses will decrease slightly during the next twelve months due to reduced share-based compensation from fully vested stock options.

Finance income (expense), net

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,","","","Change 2024 vs 2023"],["(in thousands)","","2024","","","2023","","","Change","","","%"],["Interest income","","$","15,195","","","$","17,359","","","$","(2,164",")","","","-12","%"],["Interest expense","","","-","","","","(768",")","","","768","","","","-100","%"],["Total","","$","15,195","","","$","16,591","","","$","(1,396",")","","","-8","%"]]
[[/GREPCENT_TABLE]]

Interest income is generated on cash and cash equivalents. The decrease in interest income from 2023 to 2024 was the result of lower interest rates during the year ended 2024 and a decrease in cash and cash equivalents.

Interest expense decreased during the year ended 2024 as compared to the year ended 2023 as no interest expense has been incurred since to the first quarter of 2023. This was a result of the extinguishment of the Loan and Security Agreement dated October 12, 2018 with Western Alliance Bank, and forgiveness of the term loan from Economic Development Board of the Republic of Singapore pursuant to the Manufacturing Support Agreement dated November 7, 2020.

Critical Accounting Policies and Estimates

Our significant accounting policies are summarized in “Note 2 Summary of Significant Accounting Policies,” included in our consolidated financial statements included elsewhere in this annual report on Form 10-K.

The preparation of our consolidated financial statements in conformity with “GAAP” requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, assumptions related to revenue recognition, accrual of research and development expenses, determination of incremental borrowing rates, and the valuations of stock options. We based our estimates on historical experience, known trends and other market-specific or other relevant factors that we believe to be reasonable under the circumstances. On an ongoing basis, management evaluates these estimates when there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

Revenue Recognition

We recognize revenue when control of the products and services is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied.

Our collaboration agreements typically contain promised goods and services, including technology licenses or options to obtain technology licenses, research and development and regulatory services. Upon entering into a collaboration agreement, we are required to make the following judgments:

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Identifying the performance obligations and measuring progress

Our assessment of what constitutes a separate performance obligation requires us to apply judgment. Specifically, we are required to identify which goods and services we are required to provide under the contract are distinct, if any. For performance obligations that are satisfied over time, we typically use the percentage-of-completion method which requires us to estimate the total forecasted costs required to complete the performance obligation. Adjustments to these estimates could materially impact the timing and amount of recognized revenue. If actual costs exceed initial estimates, revenue recognized to date may need to be adjusted downward, negatively impacting current period results. Conversely, favorable cost variances could accelerate revenue recognition.

Determining the transaction price, including any variable consideration

To determine the transaction price, we review the amount of consideration we are eligible to earn under the agreement. We apply a constraint to any payments we may receive in the future to avoid significant reversals since the payments are typically not probable because they are contingent upon certain future events.

We are required to reassess the total transaction price at each reporting period to determine if we should include additional payments that have become probable in the transaction price.

Allocating the transaction price to each of our performance obligations

When we allocate the transaction price to more than one performance obligation, we make estimates of the relative stand-alone selling price of each performance obligation because we do not typically sell our goods or services on a stand-alone basis. The estimate of the relative stand-alone selling price requires us in some cases to make significant judgments. In cases where we deliver a license at the start of an agreement, we use valuation methodologies, such as costs to recreate plus margin, to value the license. Additionally, when we estimate the selling price for research and development and regulatory services, we make estimates, including: the number of internal hours we will spend on the services, the cost of work we and third parties will perform and the cost of clinical trial material we will use.

The revenue we recognize each period is comprised of several types of revenue, including license fees, amortization from upfront payments, milestone payments, research and development and other services. Each of these types of revenue require us to make various judgments and estimates.

Amortization from Upfront Payments

For certain agreements, we recognize revenue from the amortization of upfront payments as we perform research and development, technology transfer and consulting services. We use an input method to estimate the amount of revenue to recognize each period. This method requires us to make estimates of the total costs we expect to incur in order to complete our promised research and development services or the total length of time it will take us to complete our promised research and development services. If we change our estimates, we may have to adjust our revenue.

Milestone Payments

When recognizing revenue related to milestone payments, we typically judge and estimate whether the milestone payment is probable (discussed in detail above under “Determining the transaction price, including any variable consideration”).

License Fees

In some cases, we deliver a license upon execution of an agreement. If we determine that our partner has full use of the license and we do not have any additional material performance obligations related to the license after delivery, then we consider the license to be a separate performance obligation. We generally recognize as license revenue the total amount of the transaction price we determine to be allocated to the performance obligation based upon the relative stand-alone selling price of a license when we deliver the license to our partner. We discuss the estimates we make related to the relative stand-alone selling price of a license in detail above under “Allocating the transaction price to our performance obligations.”

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Research and Development Expenses, Including Clinical Trial Accruals/Expenses

Research and development costs consist of salaries and benefits, including share-based compensation, laboratory supplies and facility costs, as well as fees paid to other entities that conduct certain research and development activities on our behalf, such as clinical research organizations, or CROs, and contract manufacturing organizations, or CDMOs. Research and development costs are expensed as incurred.

Clinical trial expenses are a significant component of research and development expenses, and we outsource a significant portion of these clinical trial activities to third parties. Third-party clinical trial expenses include investigator fees, site and patient costs, CRO costs, and costs for central laboratory testing and data management. The accrual for site and patient costs includes inputs such as estimates of patient enrollment, patient cycles incurred, clinical site activations, and other pass-through costs. These inputs are required to be estimated due to a lag in receiving the actual clinical information from third parties. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected on the balance sheets as prepaid assets or accrued expenses. These third-party agreements are generally cancelable, and related costs are recorded as research and development expenses as incurred. Non-refundable advance clinical payments for goods or services that will be used or rendered for future research and development activities are recorded as a prepaid asset and recognized as expense as the related goods are delivered or the related services are performed. When evaluating the adequacy of the accrued expenses, we analyze progress of the studies, including the phase or completion of events, invoices received and contracted costs. We make estimates of our accrued balances as of each balance sheet date based on facts and circumstances known to our internal personnel at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Judgments and estimates may be made in determining the accrued balances at the end of any reporting period. Actual results could differ from the estimates made. Our historical clinical trial accrual estimates have not been materially different from our actual costs.

Leases

We cannot readily determine the interest rate implicit in the lease, therefore, we use our incremental borrowing rate to measure lease liabilities. The incremental borrowing rate is the rate of interest that we would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use, or ROU, asset in a similar economic environment. The incremental borrowing rate therefore reflects what we ‘would have to pay’, which requires estimation when no observable rates are available or when they need to be adjusted to reflect the terms and conditions of the lease. We estimate the incremental borrowing rate using observable inputs (such as market interest rates) when available and are required to make certain entity and asset-specific estimates. The incremental borrowing rate used in the calculation of the present value of lease payments in calculating lease liabilities and the corresponding ROU requires the use of significant judgment by management.

Share-Based Compensation

We recognize compensation expense related to stock options granted to employees and nonemployees based on the estimated grant date fair value and recognize forfeitures as they occur. We estimate the grant date fair value, and the resulting share-based compensation expense, using the Black-Scholes option-pricing model for service-based and performance-based awards. The grant date fair value of the share-based awards is recognized on a straight-line basis over the requisite service period, which is typically the vesting period of the respective awards. The Black-Scholes option-pricing model requires the use of highly subjective assumptions to determine the fair value of share-based awards. 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 share-based compensation could be materially different.