Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to the valuation of share-based awards, MDS, and other fair value measurements, the discount rate used in estimating the present value of the right-of-use (ROU) assets and lease liabilities, the useful lives of property and equipment and intangible assets, the recoverability of long-lived assets, clinical trial accruals, periods over which revenue should be recognized, deferred income taxes and related valuation allowances, and the assessment of the Company’s ability to fund its operations for at least the next 12 months from the date of issuance of these consolidated financial statements. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. Estimates are assessed each reporting period and updated to reflect current information. As future events and their effects cannot be determined with precision, actual results may materially differ from those estimates or assumptions.

Due to the recent disruption in access to bank deposits and lending commitments due to bank failures, the COVID-19 pandemic and macroeconomic and geopolitical conditions, there has been uncertainty and disruption in the global economy and financial markets. The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of December 31, 2022. While there was no material impact to the Company’s consolidated financial statements as of and for the year ended December 31, 2022, these estimates may change, as new events occur and additional information is obtained, which could materially impact the Company’s consolidated financial statements in future reporting periods.

Risk and Uncertainties

Since December 2019, COVID-19, a novel strain of coronavirus has become a global pandemic. The virus continues to spread globally, has been declared a pandemic by the World Health Organization and has spread to over 100 countries, including the United States. The impact of this pandemic has been and will likely continue to be extensive in many aspects of society, which has resulted in and will likely continue to result in significant disruptions to the global economy, as well as businesses and capital markets around the world.

The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including expenses, clinical trials and other costs, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat COVID-19, as well as the economic impact on local, regional, national and international markets.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, MDS, and accounts receivable which are generally not collateralized. Deposits in the Company’s checking and money market accounts are maintained in federally insured financial institutions and are subject to federally insured limits or limits set by the Securities Investor Protection Corporation. In addition, the Company maintains cash and cash equivalents in foreign bank accounts, which are not federally insured.

The Company attempts to minimize credit risk associated with its cash and cash equivalents by periodically evaluating the credit quality of its primary financial institutions. The Company’s investment portfolio is maintained in accordance with its investment policy, which is designed to preserve capital, safeguard funds and limit exposure to risk. While the Company maintains cash deposits in FDIC insured financial institutions in excess of federally insured limits, it does not believe that it is exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. The Company has not experienced any losses on such accounts.

During the year ended December 31, 2022, revenues from the Company’s top two customers represented 65.9% and 25.6% of total revenues, respectively. During the year ended December 31, 2021, revenues from the Company’s top two customers represented 56.8% and 35.8% of total revenues, respectively.

As of December 31, 2022, billed accounts receivable for two customers represented 78.4% and 11.8% of total billed receivables, respectively. As of December 31, 2021, billed accounts receivable for two customers represented 74.6% and 21.3% of total billed receivables, respectively.

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents consist of readily available cash in checking accounts, money market funds and other MDS with original maturities of three months or less.

The following table provides a reconciliation of cash, cash equivalents and restricted cash, reported within the consolidated statements of cash flows for the years ended December 31, (in thousands):


	2022		2021
Cash and cash equivalents	$	55,610	$	170,064
Restricted cash		831		842
Total cash, cash equivalents, and restricted cash presented in the consolidated statements of cash flows	$	56,441	$	170,906

As of December 31, 2022 and 2021, the Company’s restricted cash consists of cash related to the Company’s clinical trials.

Contract Balances

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets) and deferred revenue (contract liabilities) on the consolidated balance sheet, recorded on a contract-by-contract basis at the end of each reporting period.

The majority of the Company’s contract amounts are invoiced as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Billing sometimes occurs subsequent to revenue recognition, resulting in contract assets. These contract assets are referred to as unbilled receivables and are reported within prepaid expenses and other current assets on the consolidated balance sheets. Unbilled receivables are transferred to accounts receivables, net, when the Company’s right of receipt becomes unconditional.

Contract liabilities from the Company’s R&D agreements (R&D Agreements) arise when amounts invoiced to customers exceed revenues recognized based upon measure of progress achieved. Contract liabilities additionally include advanced payments from customers on certain contracts. Contract liabilities decrease as the Company recognizes revenue from the satisfaction of the related performance obligation. Contract liabilities are included in deferred revenue, current portion and deferred revenue, net of current portion, on the consolidated balance sheets.

Marketable Debt Securities, Available-for-Sale

The Company’s MDS portfolio, which is classified as available-for-sale, is comprised of money market funds, commercial paper, U.S. government securities, debt securities of U.S. financial institutions, corporate debt and asset backed securities. The objective of the Company’s investment policy is to preserve capital and maintain liquidity, with acceptable levels of risk. The investment policy limits interest-bearing security investments to certain types of debt and money market instruments issued by institutions with investment grade credit ratings, and it places restrictions on maturities and concentrations by asset class and issuer.

MDS are classified as either current or non-current assets in the consolidated balance sheets based on each instrument's underlying contractual maturity date. Generally, at the time of purchase, MDS with remaining maturities of greater than three months and less than 12 months are classified as current assets and MDS with remaining maturities greater than 12 months for which the Company has the intent and ability to hold the investment for greater than 12 months are classified as non-current assets. The Company may sell certain of its MDS prior to their stated maturities for strategic purposes or in anticipation of credit deterioration.

The Company’s MDS are stated at fair value, with unrealized gains and losses, net of tax, if any, reported in accumulated other comprehensive loss in the consolidated balance sheets, until disposition or maturity. Dividend and interest income, amortization/accretion of premiums and discounts, and realized gains and losses, which are determined using the specific identification method, are recognized in investment income, net, in the consolidated statements of operations and comprehensive loss.

MDS are subject to a periodic impairment review. If the Company does not intend to sell and it is not more likely than not that it will be required to sell the security prior to recovery of its amortized cost basis, the Company will determine whether a decline in fair value below the amortized cost basis is due to credit-related factors. The credit loss is measured as the amount by which the debt security's amortized cost basis exceeds the estimate of the present value of cash flows expected to be collected, up to the difference between the amortized cost basis and the fair value. Impairment is assessed at the individual security level. Credit-related impairment is recognized as an allowance in the consolidated balance sheets with a corresponding adjustment to investment income, net, in the consolidated statements of operations and comprehensive loss. Any impairment that is not credit-related is recognized in accumulated other comprehensive loss in the consolidated balance sheets.

The Company does not separately measure an allowance for credit losses on accrued interest receivables on its MDS. The Company writes off accrued interest receivables by reversing interest income in the period deemed uncollectible in investment income, net, in the Company’s consolidated statements of operations and comprehensive loss. Any accrued interest receivable on MDS is recorded in prepaid expenses and other current assets in the consolidated balance sheets.

Property and Equipment, Net

Property and equipment is recorded at cost and depreciated over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are stated at cost and are amortized on a straight-line basis over the lesser of the remaining term of the related lease or the estimated useful lives of the assets. Repairs and maintenance costs are charged to expense as incurred and improvements and betterments are capitalized.

Depreciation is calculated over their estimated useful lives as follows:


Laboratory equipment		5 years
Computer, software and office equipment		3 - 8 years
Furniture and fixtures		5 years

The useful lives of the Company’s assets are reviewed annually. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the consolidated balance sheets and any resulting gain or loss is reflected in the consolidated statements of operations and comprehensive loss in the period realized.

Intangible Assets, Net

The Company records its intangible assets based on their fair values at the date of acquisition. The Company’s finite lived intangible assets related to acquired technologies has estimated remaining useful lives between three to 12 years as of December 31, 2022, and four to 13 years as of December 31, 2021. Amortization expense for the Company’s finite lived intangible assets is charged to research and development expense in the consolidated statements of operations and comprehensive loss on a straight-line basis over the assets’ estimated useful lives.

Impairment losses on finite-lived intangible assets are recorded when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. During the fourth quarter of 2021, the Company determined the estimated undiscounted future cash flows of one of its acquired technology intangible assets was less than its carrying value and therefore recorded an impairment charge of $0.5 million.

In the first quarter of 2022, the Company received a Notice of Termination of Collaboration and License agreement (Relaxin) between Bristol-Myers Squibb Company (BMS) and the Company (the Relaxin Agreement) from BMS to be effective three months from receipt of the notification. Due to this termination notice and the Company’s determination that the asset had no alternative future use, the Company concluded the net carrying value of the BMS Relaxin intangible asset was greater than its estimated fair value and therefore recorded an impairment charge of $2.5 million.

In the second quarter of 2022, the Company received verbal notification from BMS of its intent to terminate the Collaboration and License Agreement (FGF-21) between BMS and the Company (the FGF-21 Agreement), which was followed by a formal notification on July 18, 2022 to be effective three months from receipt of the formal notification date. Due to this termination notice and the Company’s determination that the asset had no alternative future use, the Company concluded the net carrying value of the BMS FGF-21 intangible asset was greater than its estimated fair value and therefore recorded an impairment charge of $7.2 million.

The Company’s intangible assets also include acquired in-process research and development (IPR&D) from a business combination, which is recognized as an indefinite lived intangible asset until completion or abandonment of the related R&D activities. When the related R&D activity is completed, the IPR&D intangible asset is reclassified as a finite-lived intangible asset and amortized over the remaining useful life. The Company’s acquired IPR&D is tested for impairment annually or more frequently if events or changes in circumstances between annual tests indicate that the asset may be impaired. On October 18, 2022, the Company announced a reprioritization of its product pipeline after conducting a strategic assessment that considered its cash runway and its product pipeline near term value creation opportunities, among other factors. As a result of this assessment, the Company paused its internal development of ARX788 and, among other potential activities, indicated it will seek development partners to further the development of ARX788 outside of China. The Company determined this reprioritization was a qualitative trigger of potential impairment of its IPR&D asset and had a quantitative analysis completed as of the reprioritization date. The quantitative analysis determined the IPR&D asset was not impaired as of the reprioritization date.

The Company’s annual impairment test for the years ended December 31, 2022 and 2021, performed in the fourth quarter, did not result in additional impairment losses related to its intangible assets.

While the Company’s current and historical operating losses and negative cash flows are possible indicators of impairment, management believes future cash flows to be generated by its remaining long-lived assets support the carrying value.

Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, MDS, accounts receivable, accounts payable and accrued liabilities. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are considered to be representative of their respective fair values because of the relatively short-term nature of those instruments.

The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Inputs which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis.

Clinical Trial Accruals

As part of the process of preparing the consolidated financial statements, the Company is required to estimate expenses resulting from obligations under contracts with vendors, clinical research organizations, consultants and under clinical site agreements relating to conducting clinical trials. The financial terms of these contracts vary and may result in payment flows that do not match the periods over which materials or services are provided under such contracts.

The Company’s objective is to reflect the appropriate clinical trial expenses in its consolidated financial statements by recording those expenses in the period in which services are performed and efforts are expended. The Company accounts for these expenses according to the progress of the clinical trial as measured by patient progression and the timing of various aspects of the clinical trial. Management determines accrual estimates, as of each balance sheet date, through discussions with applicable personnel and outside service providers as to the progress of clinical trials. During a clinical trial, the Company adjusts its expense recognition if actual results differ from previous estimates.

Leases

The Company determines if an arrangement is a lease at the inception of the contract. The asset component of the Company’s operating leases is recorded as a ROU asset and the liability component is recorded as current portion of operating lease liabilities and operating lease liabilities, net of current portion, in the consolidated balance sheets.

At the commencement, reassessment or modification date, the cost of the ROU asset includes all the following, if any: the amount of the initial measurement of the lease liability, any lease payments made to the lessor at or before the commencement date minus any lease incentive received and any initial direct costs incurred by the lessee. Operating lease liabilities are recognized based on the present value of lease payments over the lease term at the commencement date. The Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments if an implicit rate of return is not provided within the lease contract. When evaluating its incremental borrowing rate, management considers its borrowing rate on external collateralized debt with a term commensurate with the lease term, if any, or in the absence of external debt, the average incremental borrowing rate of its peer group. These amounts are estimated at the inception of or upon reassessment of a lease arrangement.

Lease cost is recognized on a straight-line basis over the lease term, and includes amounts related to short-term leases. Variable lease costs, such as common area maintenance, real estate taxes and management fees which do not depend on an index or rate are recognized as incurred. Short-term leases of 12 months or less are expensed as incurred, which approximates the straight-line basis due to the short-term nature of the leases. The Company has elected not to separate lease and non-lease components.

ROU assets and operating lease liabilities are remeasured upon lease reassessment using the present value of remaining lease payments and estimated incremental borrowing rates. The Company reviews any changes to its lease agreements for potential modifications and/or indicators of impairment of the respective ROU asset.

Revenue Recognition

The Company determines revenue recognition for arrangements within the scope of ASC Topic 606, Revenue from Contracts with Customers (ASC 606) by performing the following five steps: (i) identify the contract; (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, the Company satisfies a performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service and is the unit of accounting in ASC 606. A contract’s transaction price is allocated among each distinct performance obligation based on relative standalone selling price and recognized as revenue when, or as, the applicable performance obligation is satisfied.

The terms of the Company’s R&D Agreements include upfront fees, R&D funding or reimbursements, milestone and other contingent payments for the achievement of defined objectives and certain preclinical, clinical, regulatory and sales-based events, as well as royalties on sales of commercialized products. Agreements with certain upfront payments may require deferral of revenue recognition to a future period until the Company performs the obligations under these agreements. The Company uses the most likely amount method to estimate variable consideration for event-based milestones and other contingent payments and have been fully constrained given the degree of uncertainty around the occurrence of such events. The Company continues to re-evaluate the transaction price in each reporting period as contingencies are resolved and other changes in circumstances occur.

The Company is required to adjust the transaction price for the effects of the time value of money if the timing of payments agreed to by the parties to the contract, explicitly or implicitly, provides the Company or its customer with a significant benefit of financing the transfer of goods or services. The Company concluded that its contracts with the customers do not contain a significant financing component because the payment structure of the R&D Agreements arises from reasons other than providing a significant benefit of financing.

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenues.

R&D Agreements

The Company analyzes its R&D Agreements to assess whether they are within the scope of ASC Topic 808, Collaborative Arrangements (ASC 808), which includes determining whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities. This assessment is performed at contract inception and again, if changes in either the roles of the participants in the arrangement or the participants’ exposure to significant risks and rewards dependent on the ultimate commercial success of the arrangement are identified. For each of the periods presented, the Company determined that its contracts with customers do not fall within the guidance in ASC 808 as the Company is not exposed to significant risks that are dependent on commercial success of the collaborative activity.

License Fees

As part of the R&D Agreements, the Company licenses its intellectual property to customers for fees, which many times includes the receipt of upfront fees. If a license to the Company’s intellectual property is determined to be distinct from the other promises or performance obligations identified in the agreement, the Company recognizes revenue from non-refundable, upfront fees allocated to the license when the license is transferred to the customer.

In assessing whether a promise or performance obligation is distinct from the other promises, the Company considers factors such as the research, development, manufacturing and commercialization capabilities of the licensee and the availability of the associated expertise in the general marketplace. In addition, the Company considers whether the licensee can benefit from a promise for its intended purpose without the receipt of the remaining promise, whether the value of the promise is dependent on the unsatisfied promise, whether there are other vendors that could provide the remaining promise, and whether it is separately identifiable from the remaining promise. For licenses that are combined with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. For those license related performance obligations that are satisfied over time, the Company measures progress through actual effort, including hours incurred, and an estimation of time to completion based on the budget and research workplan.

Typical agreements require the transfer of knowledge so the customer can effectively use the license and the Company believes these measurements accurately represent the transfer of knowledge through its clinical research services. The Company evaluates the measure of progress each reporting period and, if circumstances change over time, the Company will update its measure of progress to reflect any changes in the outcome of the performance obligation and, therefore, adjust the measure of performance and related revenue recognition. The measure of progress, and thereby periods over which revenue should be recognized, is subject to estimates by management and may change over the course of the agreement. Such a change could have a material impact on the amount of revenues the Company records in future periods.

During the second half of 2021, the Company re-evaluated the measure of progress for a compound under one of its R&D Agreements, which resulted in an increased estimate in the timing and efforts of satisfaction of the Company’s performance obligations under the agreement. This change did not have an impact on the transaction price and/or the variable consideration to be received under the agreement. As a result of the re-evaluation, the Company recognized a cumulative catch-up adjustment reducing revenue by approximately $1.4 million with an equal increase in total contract liabilities (i.e., deferred revenue) from upfront payments as of December 31, 2021. The Company’s periodic reassessments, during the year ended December 31, 2022, did not result in any adjustments to its current revenue recognition methodology.

Reimbursements

As part of the R&D Agreements where the Company only provides R&D services, the Company is reimbursed by the customer for certain costs incurred as agreed to in the research plan. The Company elected the practical expedient for certain R&D reimbursements which allows it to recognize revenue in the amount for which the Company has a right to invoice if its right to consideration is an amount corresponding directly to the value of completed performance to date. The Company estimates variable consideration, if any, at contract inception and each reporting period, to determine if there were any changes in the transaction price. The transaction price will be adjusted to the extent the risk of significant revenue reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the milestones are subsequently resolved. Any such adjustments are recorded on a cumulative catch-up basis and revenues and earnings are impacted in the period of adjustment.

Milestones and Other Contingent Payments

At the inception of each R&D Agreement that includes milestones and other contingent payments, the Company evaluates whether the milestones or other contingent payments are considered probable of being achieved and estimates the amount to be included in the initial transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated value is included in the transaction price. Milestones or other contingent payments are only included in the transaction price to the extent the risk of a significant revenue reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the milestones are subsequently resolved. The Company evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular contingency in making this assessment. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur. At the end of each subsequent reporting period, the Company reevaluates the probability of achievement of all milestones and other contingencies subject to constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis and revenues and earnings are impacted in the period of adjustment.

R&D Services

Promises under the Company’s R&D Agreements may include R&D services to be performed by the Company on behalf of the counterparty. If these services are determined to be distinct from the other promises or performance obligations identified in the arrangement, the Company recognizes the transaction price allocated to these services as revenue over time based on an appropriate measure of progress of the performance. If these services are determined not to be distinct from the other promises or performance obligations identified in the arrangement, the Company recognizes the transaction price allocated to the combined performance obligation as the related performance obligation is satisfied. For those R&D services that are satisfied over time, the Company, measures progress through actual effort, including hours incurred, and an estimation of time to completion based on the budget and research workplan. Typical agreements require the transfer of knowledge and development of drug products and the Company believes these measurements accurately represent the transfer of clinical research services.

Customer Options

If an arrangement contains customer options, the Company evaluates whether the options are material rights because they allow the customer to acquire additional goods or services for free or at a discount incremental to the range of discounts typically given to a similar class of customers. If the customer options are determined to represent a material right, the material right is recognized as a separate performance obligation at the outset of the arrangement. The Company allocates the transaction price to material rights based on the relative stand-alone selling price, which is determined based on the identified discount and the probability that the customer will exercise the option. Amounts allocated to a material right are not recognized as revenue until, at the earliest, the future goods or services are transferred or upon expiration of the option. If the options are deemed not to be a material right, they are excluded as performance obligations at the outset of the arrangement.

Research and Development Expense

R&D expenses consist primarily of costs incurred in connection with the development of the Company’s technology platform, product candidates, discovery efforts and preclinical and clinical development of its product candidates. The Company’s research and development expenses include third-party costs with contract research organizations, contract manufacturing organizations and others conducting R&D activities and clinical trials on the Company’s behalf, manufacturing costs, outside consultant costs, laboratory supply and clinical trial material costs, and license payments for intellectual property used in R&D activities. The Company’s R&D expenses also include personnel costs, such as salaries, benefits, and other employee related costs, including share-based compensation, for personnel engaged in the Company’s R&D functions, amortization of finite-lived intangible assets, facility and equipment related costs, which include depreciation and amortization costs and expenses for rent and maintenance of facilities and other operating costs if specifically identifiable to R&D activities.

Share-Based Compensation

The Company accounts for share-based compensation under the provisions of ASC Topic 718, Compensation—Stock Compensation. The Company estimates the fair value of each option award on the date of grant using the Black-Scholes option pricing model (BSM). The BSM requires the use of highly subjective assumptions, including, but not limited to, expected share price volatility over the term of the awards and the expected term of the options.

The Company recognizes share-based compensation expense on a straight-line basis based upon the grant date fair value. For awards whose vesting is based upon satisfaction of both a requisite service period and a performance criterion, the Company records share-based compensation expense on a straight-line basis until the earlier of the completion of the explicit service period or the achievement of the performance criteria. Performance criteria for awards subject to regulatory approval do not become probable of occurrence until the board of director’s reviews and approves the satisfaction of the performance criteria. The Company recognizes the effect of forfeitures in compensation cost in the period that the award was forfeited. See Note 11—Share-Based Compensation for information on the assumptions used in determining the grant date fair value.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and the tax reporting basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, its provision for income taxes will increase or decrease, respectively, in the period such determination is made.

The accounting guidance for uncertainty in income taxes prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities based on the technical merits of the position. Interest and penalties, if any, related to unrecognized income tax positions are recognized in provision for income taxes, in the consolidated statements of operations and comprehensive loss.

Net Loss Per Share Attributable to Ambrx Biopharma Inc Ordinary Shareholders

Basic net loss per ordinary share is calculated by dividing the net loss attributable to ordinary Ambrx shareholders by the weighted-average number of ordinary shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to ordinary shareholders by the weighted-average number of ordinary shares and potentially dilutive securities outstanding for the period determined using the treasury-stock and if-converted methods. For purposes of the diluted net loss per share calculation, potentially dilutive securities are excluded from the calculation of diluted net loss per share because their effect was anti-dilutive and therefore, basic and diluted net loss per share were the same for all periods presented.

Potentially dilutive securities excluded from the calculation of diluted net loss per share included options to purchase 39,116,174 and 34,200,976 ordinary shares for the years ended December 31, 2022 and 2021, respectively.

Foreign Currency

The functional currency of Ambrx HK, Ambrx US and Ambrx AU is the U.S. dollar. Through June 30, 2021, the functional currency for Ambrx Shanghai was the Chinese Renminbi. The financial statements of Ambrx Shanghai were translated into U.S. dollars using exchange rates in effect at each period-end for assets and liabilities and average exchange rates during the period for results of operations. Upon completion of the Reorganization, Ambrx Shanghai became the Company’s wholly owned subsidiary at which time their functional currency became the U.S. dollar.

The adjustment resulting from translating the financial statements of the Company’s then majority-owned subsidiary was reflected in accumulated other comprehensive loss in the Company’s consolidated balance sheets. Foreign currency transaction gains and losses are reported as other income (expense), net, in the consolidated statements of operations and comprehensive loss. Foreign currency transaction gains and losses during the years ended December 31, 2022 and 2021, were not material.

Noncontrolling Interests

Through March 31, 2021, revenues, expenses, gains, losses, net loss and other comprehensive loss were reported in the consolidated financial statements at the consolidated amounts, which included the amounts attributable to both the controlling and redeemable noncontrolling interests.

Prior to March 2021, the Company’s noncontrolling interest was redeemable and classified outside of permanent equity because upon certain contingent events not being solely within the Company’s control it may be required to purchase the Company’s RNCI. In March 2021, upon execution of the Reorganization agreements, the Company’s noncontrolling interests became mandatorily redeemable with embedded derivatives and were therefore reclassified from outside of permanent equity to a current liability until settlement at which time the RNCI was no longer subject to allocation of losses or other comprehensive loss.