ck0001357874-10q_20190331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-38841

 

Precision BioSciences, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

20-4206017

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

302 East Pettigrew St., Suite A-100

Durham, North Carolina

27701

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (919) 314-6612

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No 

As of April 26, 2019, the registrant had 50,361,705 shares of common stock, $0.000005 par value per share, outstanding.

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

 

 

Condensed Consolidated Balance Sheets

5

 

Condensed Consolidated Statements of Operations

6

 

Condensed Consolidated Statements of Changes In Stockholders’ Equity (Deficit)

7

 

Condensed Consolidated Statements of Cash Flows

8

 

Notes to Unaudited Condensed Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

Item 4.

Controls and Procedures

32

PART II.

OTHER INFORMATION

33

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

85

Item 3.

Defaults Upon Senior Securities

85

Item 4.

Mine Safety Disclosures

85

Item 5.

Other Information

85

Item 6.

Exhibits

86

Signatures

88

 

 

2


FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of present and historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy, prospective products, planned preclinical or greenhouse studies and clinical or field trials, regulatory approvals, research and development costs, and timing and likelihood of success, as well as plans and objectives of management for future operations, may be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words.

 

Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to us. Such statements are subject to a number of known and unknown risks, uncertainties and assumptions, and actual results may differ materially from those expressed or implied in the forward-looking statements due to various factors, including, but not limited to, those identified in Part I. Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II. Item 1A “Risk Factors.” These risks and uncertainties include, but are not limited to:

 

our ability to become profitable;

our ability to procure sufficient funding;

our limited operating history;

our ability to identify, develop and commercialize our product candidates;

our dependence on our ARCUS technology;

the initiation, cost, timing, progress and results of research and development activities, preclinical or greenhouse studies and clinical or field trials;

our or our collaborators’ ability to identify, develop and commercialize product candidates;

our or our collaborators’ ability to advance product candidates into, and successfully complete, clinical or field trials;

our or our collaborators’ ability to obtain and maintain regulatory approval of future product candidates, and any related restrictions, limitations and/or warnings in the label of an approved product candidate;

the regulatory landscape that will apply to our and our collaborators’ development of product candidates;

our ability to achieve our anticipated operating efficiencies as we commence manufacturing operations at our new facility;

our ability to obtain and maintain intellectual property protection for our technology and any of our product candidates; the potential for off-target editing or other adverse events, undesirable side effects or unexpected characteristics associated with any of our product candidates;

the success of our existing collaboration agreements; our ability to enter into new collaboration arrangements;

public perception about genome editing technology and its applications;

competition in the genome editing, biopharmaceutical, biotechnology and agricultural biotechnology fields;

3


potential manufacturing problems associated with any of our product candidates;

potential liability lawsuits and penalties related to our technology and our product candidates; and

our current and future relationships with third parties.

Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties.

You should read this Quarterly Report on Form 10-Q and the documents that we reference herein completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

4


Part I. Financial information

 

Item 1.  Financial Statements.

Precision Biosciences, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

December 31, 2018

 

 

March 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

103,193

 

 

$

116,499

 

Accounts receivable

 

 

523

 

 

 

6,157

 

Prepaid expenses

 

 

8,913

 

 

 

8,299

 

Other current assets

 

 

3,046

 

 

 

6,025

 

Total current assets

 

 

115,675

 

 

 

136,980

 

Property, equipment, and software—net

 

 

21,147

 

 

 

27,908

 

Intangible assets—net

 

 

1,466

 

 

 

1,460

 

Other assets

 

 

312

 

 

 

453

 

Total assets

 

$

138,600

 

 

$

166,801

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,218

 

 

$

5,057

 

Accrued expenses and other current liabilities

 

 

3,421

 

 

 

4,416

 

Convertible notes payable

 

 

 

 

 

52,440

 

Deferred revenue

 

 

8,436

 

 

 

9,471

 

Total current liabilities

 

 

14,075

 

 

 

71,384

 

Deferred revenue—noncurrent

 

 

82,807

 

 

 

81,722

 

Deferred rent—noncurrent

 

 

1,758

 

 

 

2,865

 

Total liabilities

 

 

98,640

 

 

 

155,971

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Series A convertible preferred stock; $0.0001 par value—25,650,000 shares

   authorized as of December 31, 2018 and March 31, 2019; 25,650,000 shares

   issued and outstanding as of December 31, 2018 and March 31, 2019

 

 

3

 

 

 

3

 

Series B convertible preferred stock; $0.0001 par value— 21,956,100 shares

   authorized as of December 31, 2018 and March 31, 2019; 21,956,095 shares

   issued and outstanding as of December 31, 2018 and March 31, 2019

 

 

2

 

 

 

2

 

Common stock; $0.000005 par value—130,000,000 shares authorized,

   16,717,117 shares issued and 15,906,645 shares outstanding as of

   December 31, 2018; 130,000,000 shares authorized, 16,863,092 issued and

   16,052,620 shares outstanding as of March 31, 2019

 

 

 

 

 

 

Additional paid-in capital

 

 

126,094

 

 

 

127,750

 

Accumulated deficit

 

 

(85,187

)

 

 

(115,973

)

Treasury stock

 

 

(952

)

 

 

(952

)

Total stockholders’ equity

 

 

39,960

 

 

 

10,830

 

Total liabilities and stockholders’ equity

 

$

138,600

 

 

$

166,801

 

 

See notes to condensed consolidated financial statements

5


Precision Biosciences, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(Unaudited)

 

 

Three months ended March 31,

 

 

2018

 

 

2019

 

Revenue

$

1,528

 

 

$

5,462

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

8,117

 

 

 

19,961

 

General and administrative

 

2,646

 

 

 

4,995

 

Total operating expenses

 

10,763

 

 

 

24,956

 

Loss from operations

 

(9,235

)

 

 

(19,494

)

Other income (expense), net:

 

 

 

 

 

 

 

Change in fair value of convertible note payable

 

 

 

 

(12,708

)

Interest expense

 

 

 

 

(182

)

Interest income

 

223

 

 

 

601

 

Total other income (expense), net

 

223

 

 

 

(12,289

)

Net loss and net loss attributable to common stockholders

$

(9,012

)

 

$

(31,783

)

Net loss per share attributable to common stockholders-basic and diluted

$

(0.57

)

 

$

(1.99

)

Weighted average shares of common stock outstanding-basic and diluted

 

15,704,551

 

 

 

15,967,036

 

 

See notes to condensed consolidated financial statements

 

 

6


 

Precision Biosciences, Inc.

Condensed Consolidated Statements of Changes in

Stockholders’ Equity (Deficit)

(In thousands, except share amounts)

(Unaudited)

 

 

 

Series A Convertible

Preferred Stock

 

 

Series B Convertible

Preferred Stock

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Additional

Paid-In

Capital

 

 

Accumulated

Deficit

 

 

Treasury

Stock

 

 

Total

Stockholder's

Equity

(Deficit)

 

Balance- January 1, 2018

 

 

25,650,000

 

 

$

3

 

 

 

 

 

$

 

 

 

16,496,801

 

 

$

 

 

$

13,691

 

 

$

(39,111

)

 

$

(952

)

 

$

(26,369

)

Stock option exercises

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29,802

 

 

 

 

 

 

20

 

 

 

 

 

 

 

 

 

20

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

189

 

 

 

(38

)

 

 

 

 

 

151

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,012

)

 

 

 

 

 

(9,012

)

Balance- March 31, 2018

 

 

25,650,000

 

 

$

3

 

 

 

 

 

$

 

 

 

16,526,603

 

 

$

 

 

$

13,900

 

 

$

(48,161

)

 

$

(952

)

 

$

(35,210

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance- January 1, 2019

 

 

25,650,000

 

 

$

3

 

 

 

21,956,095

 

 

$

2

 

 

 

16,717,117

 

 

$

 

 

$

126,094

 

 

$

(85,187

)

 

$

(952

)

 

$

39,960

 

Adjustment to beginning accumulated

   deficit from adoption of ASU

   2014-09

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

997

 

 

 

 

 

 

997

 

Stock option exercises

 

 

 

 

 

 

 

 

 

 

 

 

 

 

145,975

 

 

 

 

 

 

107

 

 

 

 

 

 

 

 

 

107

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,549

 

 

 

 

 

 

 

 

 

1,549

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(31,783

)

 

 

 

 

 

(31,783

)

Balance- March 31, 2019

 

 

25,650,000

 

 

$

3

 

 

 

21,956,095

 

 

$

2

 

 

 

16,863,092

 

 

$

 

 

$

127,750

 

 

$

(115,973

)

 

$

(952

)

 

$

10,830

 

 

See notes to condensed consolidated financial statements

 

 

 

7


Precision Biosciences, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three months ended March 31,

 

 

 

2018

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(9,012

)

 

$

(31,783

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

458

 

 

 

939

 

Share based compensation

 

 

150

 

 

 

1,549

 

Loss on disposal of assets

 

 

6

 

 

 

 

Non-cash interest expense

 

 

 

 

 

182

 

Change in fair value of convertible notes payable

 

 

 

 

 

12,708

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses

 

 

(4,948

)

 

 

613

 

Accounts receivable

 

 

 

 

 

(5,634

)

Other assets

 

 

(25

)

 

 

(141

)

Accounts payable

 

 

355

 

 

 

1,481

 

Accrued expenses

 

 

(217

)

 

 

(768

)

Deferred revenue

 

 

(1,221

)

 

 

947

 

Net cash used in operating activities

 

 

(14,454

)

 

 

(19,907

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, equipment and software

 

 

(619

)

 

 

(5,082

)

Net cash used in investing activities

 

 

(619

)

 

 

(5,082

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

 

20

 

 

 

107

 

Deferred offering costs

 

 

 

 

 

(1,362

)

Issuance of convertible notes

 

 

 

 

 

39,550

 

Net cash provided by financing activities

 

 

20

 

 

 

38,295

 

Net (decrease) increase in cash and cash equivalents

 

 

(15,053

)

 

 

13,306

 

Cash and cash equivalents—beginning of period

 

 

62,802

 

 

 

103,193

 

Cash and cash equivalents —end of period

 

$

47,749

 

 

$

116,499

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of noncash financing and investing activities:

 

 

 

 

 

 

 

 

Deferred offering costs included in accounts payable, accrued expenses

   and other current liabilities

 

$

 

 

$

800

 

Property, equipment and software additions included in accounts payable

   and accrued expenses and other current liabilities

 

$

652

 

 

$

3,951

 

 

See notes to condensed consolidated financial statements

 

8


 

Precision BioSciences, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 1:

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Precision BioSciences, Inc. (the “Company”) was incorporated on January 26, 2006 under the laws of the State of Delaware and is based in Durham, North Carolina. The Company is focused on utilizing its proprietary genome editing platform to help overcome cancers, cure genetic diseases and enable the development of safer, more productive food sources.

The Company’s 100% owned subsidiary, Precision PlantSciences, Inc., was incorporated on January 4, 2012. Precision PlantSciences, Inc. amended its certificate of incorporation on January 16, 2018 to change its name to Elo Life Systems, Inc. The accompanying condensed consolidated financial statements include the accounts of the Company and Elo Life Systems, Inc. Intercompany balances and transactions have been eliminated in consolidation.

Since its inception, the Company has devoted substantially all of its efforts to research and development activities, recruiting skilled personnel, developing manufacturing processes, establishing its intellectual property portfolio and providing general and administrative support for these operations. The Company is subject to a number of risks similar to those of other companies conducting high-risk, early-stage research and development of product candidates. Principal among these risks are dependence on key individuals and intellectual property, competition from other products and companies, and the technical risks associated with the successful research, development and clinical manufacturing of its product candidates. The Company’s success is dependent upon its ability to continue to raise additional capital in order to fund ongoing research and development, obtain regulatory approval of its products, successfully commercialize its products, generate revenue, meet its obligations, and, ultimately, attain profitable operations.

On April 1, 2019, the Company completed its initial public offering (“IPO”) in which the Company issued and sold 9,085,000 shares of its common stock, including shares issued upon the exercise in full of the underwriters’ over-allotment option, at a public offering price of $16.00 per share and received approximately $130.9 million in net proceeds, after deducting underwriting discounts and commission of approximately $10.2 million and offering expenses of approximately $4.3 million. The Company expects to incur additional operating losses and negative operating cash flows for the foreseeable future.

In connection with the IPO, on March 15, 2019 the Company filed an amendment to the Company’s amended and restated certificate of incorporation to effect a reverse split of shares of the Company’s common stock on a 1-for-2.134686 basis (the “Reverse Stock Split”) of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for the Company’s Series A and Series B preferred stock.  Accordingly, all common shares, stock option shares, and per share amounts for all periods presented in the accompanying financial statements and notes thereto have been retroactively adjusted, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios.  Authorized common shares, as well as outstanding and issued Series A and B preferred convertible stock are not affected by the reverse stock split.  Each share of the Series A and Series B preferred stock were automatically converted into shares of common stock, at the applicable conversion rate then in effect, at the closing of the IPO.

The condensed consolidated financial statements as of March 31, 2019, including share and per share amounts, do not give effect to the IPO as it closed subsequent to March 31, 2019.  

Management believes that existing cash and cash equivalents, together with the net proceeds from the IPO, will allow the Company to continue its operations through 2020. In the absence of a significant source of recurring revenue, the continued viability of the Company beyond that point is dependent on its ability to continue to raise additional capital to finance its operations. There can be no assurance that the Company will be able to obtain sufficient capital to cover its costs on acceptable terms, if at all.

9


 

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated financial statements as of March 31, 2019 and condensed consolidated statement of operations for the three months ended March 31, 2019 and 2018 and notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and note disclosures normally included in the annual financial statements, prepared in accordance with accounting principles generally accepted in the U.S., have been condensed or omitted pursuant to those rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2018 included in the Company's final prospectus that forms a part of the Company’s Registration Statement on Form S-1 (Reg. No. 333-230034), filed with the SEC pursuant to Rule 424(b)(4) on March 27, 2019.

The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the Company’s consolidated financial position as of March 31, 2019 and consolidated results of operations for the three months ended March 31, 2019 and 2018 and the consolidated cash flows for the three months ended March 31, 2019 and 2018, have been made. The Company’s consolidated results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2019.

Summary of Significant Accounting Policies

Revenue Recognition for Contracts with Customers

The Company’s revenues are generated primarily through collaborative research, license, development and commercialization agreements.

Effective January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue (ASC 606): Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective transition method. Under this method, results for reporting periods beginning on January 1, 2019 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with ASC Topic 605, Revenue Recognition (“ASC 605”). The Company applied the modified retrospective transition method to contracts that were not completed as of January 1, 2019, the effective date of adoption for ASC 606. ASC 606 applies to all contracts with customers, except for contracts that are within the scope of other standards. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a 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) the entity satisfies a performance obligation.

At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally considered options.  We assess if these options provide a material right to the customer and if so, they are considered performance obligations. The exercise of a material right is accounted for as a contract modification for accounting purposes.

The Company recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) each performance obligation is satisfied at a point in time or over time, and if over time this is based on the use of an output or input method.

10


 

Amounts received prior to revenue recognition are recorded as deferred revenue.  Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current portion of deferred revenue in the accompanying consolidated balance sheets. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion. Amounts recognized as revenue, but not yet received or invoiced are generally recognized as contract assets in the Other Current Assets line item in the Condensed Consolidated Balance Sheets.

Milestone Payments If an arrangement includes development and regulatory milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s control or the licensee’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received.

Royalties For arrangements that include sales-based royalties, including milestone payments based on a level of sales, which are the result of a customer-vendor relationship and for which the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements.

Significant Financing Component – In determining the transaction price, the Company adjusts consideration for the effects of the time value of money if the timing of payments provides the Company with a significant benefit of financing.  The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensees and the transfer of the promised goods or services to the licensees will be one year or less.  The Company assessed each of its revenue arrangements in order to determine whether a significant financing component exists and concluded that a significant financing component does not exist in any of its arrangements.

Collaborative Arrangements – The Company has entered into collaboration agreements, which are within the scope of ASC 606, to discover, develop, manufacture and commercialize product candidates. The terms of these agreements typically contain multiple promises or obligations, which may include: (1) licenses, or options to obtain licenses, to use the Company’s technology, (2) research and development activities to be performed on behalf of the collaboration partner, and (3) in certain cases, services in connection with the manufacturing of preclinical and clinical material. Payments the Company receives under these arrangements typically include one or more of the following: non-refundable, upfront license fees; option exercise fees; funding of research and/or development efforts; clinical and development, regulatory, and sales milestone payments; and royalties on future product sales.

The Company analyzes its collaboration arrangements to assess whether they are within the scope of ASC 808, Collaborative Arrangements (“ASC 808”) to determine 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 throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. For collaboration arrangements within the scope of ASC 808 that contain multiple elements, the Company first determines which elements of the collaboration are deemed to be within the scope of ASC 808 and those that are more reflective of a vendor-customer relationship and, therefore, are within the scope of ASC 606. For elements of collaboration arrangements that are accounted for pursuant to ASC 808, an appropriate recognition method is determined and applied consistently, generally by analogy to ASC 606.  For those elements of the arrangement that are accounted for pursuant to ASC 606, the Company applies the five-step model described above.

For a complete discussion of accounting for collaboration revenues, see Note 10, “Collaboration and license agreements”.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU No. 2014-09, Revenue (ASC 606): Revenue from Contracts with Customers (“ASC 606”), which superseded the revenue requirements in ASU No. 2009-13 (ASC 605), Revenue Recognition. In 2015 and 2016, the FASB issued additional ASUs related to ASC 606 that delayed the effective date of the guidance and clarified various aspects of the new revenue guidance, including

11


 

principal versus agent considerations, identifying performance obligations, and licensing, and they include other improvements and practical expedients. Effective January 1, 2019, the Company adopted ASC 606 using the modified retrospective transition method.

As a result of adopting ASC 606, the Company recorded a $1.0 million transition adjustment to the opening balance of accumulated deficit in the first quarter of 2019 primarily as a result of the treatment of the up-front consideration received from the Company’s collaboration agreements under superseded prior revenue recognition guidance.

A summary of the amount by which each financial statement line item was affected by the impact of the cumulative adjustment is set forth in the table below:

 

 

 

Impact of ASC 606 Adoption on Condensed Consolidated

Balance Sheet as of January 1, 2019

 

(in thousands)

 

As reported under

ASC 606

 

 

Adjustments

 

 

Balances without

adoption of

ASC 606

 

Deferred revenue, current portion

 

$

8,029

 

 

$

407

 

 

$

8,436

 

Deferred revenue, net of current portion

 

 

82,217

 

 

 

590

 

 

 

82,807

 

Accumulated deficit

 

 

(84,190

)

 

 

(997

)

 

 

(85,187

)

 

A summary of the amount by which each financial statement line item was affected in the current reporting period by ASC 606 as compared with the guidance that was in effect prior to adoption is set forth in the tables below:

 

 

 

Impact of ASC 606 Adoption on Condensed Consolidated

Balance Sheet as of March 31, 2019

 

(in thousands)

 

As reported under

ASC 606

 

 

Adjustments

 

 

Balances without

adoption of

ASC 606

 

Other current assets

 

$

6,025

 

 

$

(58

)

 

$

5,967

 

Deferred revenue, current portion

 

 

9,471

 

 

 

1,608

 

 

 

11,079

 

Deferred revenue, net of current portion

 

 

81,722

 

 

 

(42

)

 

 

81,680

 

Accumulated deficit

 

 

(115,973

)

 

 

(1,624

)

 

 

(117,597

)

 

 

 

Impact of ASC 606 Adoption on Condensed Consolidated

Statement of Operations for the Three Months Ended

March 31, 2019

 

(in thousands, except per share data)

 

As reported under

ASC 606

 

 

Adjustments

 

 

Balances without

adoption of

ASC 606

 

Revenue

 

$

5,462

 

 

$

(627

)

 

$

4,835

 

Net loss

 

 

(31,783

)

 

 

(627

)

 

 

(32,410

)

Net loss per share - basic and diluted

 

 

(1.99

)

 

 

 

 

 

 

(2.03

)

 

 

 

Impact of ASC 606 Adoption on Condensed Consolidated

Statement of Cash Flows for the Three Months Ended

March 31, 2019

 

(in thousands)

 

As reported under

ASC 606

 

 

Adjustments

 

 

Balances without

adoption of

ASC 606

 

Net loss

 

$

(31,783

)

 

$

(627

)

 

$

(32,410

)

Prepaid expenses

 

 

613

 

 

 

58

 

 

 

671

 

Deferred revenue

 

 

947

 

 

 

569

 

 

 

1,516

 

 

During the quarter ended March 31, 2019, the Company recorded $4.0 million in revenue that was included in the deferred revenue balance as of December 31, 2018.  The most significant change to the Company’s revenue recognition as a result of the adoption of ASC 606 relates to the accounting for certain option fees and milestone payments in determining the transaction price (step (iii)), and the revenue recognition pattern (step (v)) related to the Company’s development and commercial license agreement with Laboratoires Servier (“Servier”) (see Note 10). Under prior revenue recognition guidance, the option fees payable by the Company to exercise the 50/50 co-development and co-promotion option was accounted for as a reduction in the arrangement consideration, and certain development milestones that may be earned for early-stage pre-IND development milestones were included in the arrangement

12


 

consideration as the early-stage pre-IND development milestones were deemed to be non-substantive. Under ASC 606, the option fees were not accounted for as a reduction in the transaction price as the option fees are contingent upon Servier’s exercise of its commercial (customer) options on licensed product candidates, and the milestone payments were excluded from the transaction price based on the assessment of the most likely amount and application of the variable consideration constraint, since the milestones relate to successful achievement of certain developmental goals, which might not be achieved. In addition, under prior revenue recognition guidance, the Company recognized revenue for the combined unit of accounting on a straight‑line basis over the period the Company expected to complete its obligations. Under ASC 606, the Company recognizes revenue based on the proportional performance of the services related to the performance obligation expected. For further discussion of the adoption of ASC 606 see Note 10, “Collaboration and license agreements.”

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808)—Clarifying the Interaction between Topic 808 and ASC 606 (“ASU 2018-18”). The amendments in ASU 2018-18 make targeted improvements to generally accepted accounting principles (GAAP) for collaborative arrangements by clarifying that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all the guidance in ASC 606 should be applied, including recognition, measurement, presentation, and disclosure requirements. In addition, unit-of-account guidance in ASU 2018-18 was aligned with the guidance in ASC 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of ASC 606.  ASU 2018-18 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The amendments should be applied retrospectively to the date of initial application of ASC 606. The Company adopted this guidance effective January 1, 2019 with its initial application of ASC 606. The adoption of the standard did not have an impact on the Company’s condensed consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), in order to improve comparability among organizations by recognizing lease assets and liabilities in the consolidated balance sheets for those leases previously classified as operating leases under GAAP. The update requires a lessee to recognize in its consolidated balance sheet a liability to make lease payments and also a right-of-use asset representing its right to use the underlying asset for the lease term. ASU 2016-02 is effective for the Company for annual periods beginning after December 15, 2019 requiring the use of a modified retrospective transition approach applied at the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU No. 2018-11, Leases, Targeted Improvements to ASC 842, Leases, (“ASU 2018-11”), which contains certain amendments to ASU 2016-02 intended to provide relief in implementing the new standard. ASU 2018-11 provides registrants with an option to not restate comparative periods presented in the financial statements. The Company intends to elect this new transition approach using a cumulative-effect adjustment on the effective date of the standard, for which comparative periods will be presented in accordance with the previous guidance in ASC 840, Leases.

13


 

The Company is currently evaluating the potential impact ASU 2016-02 may have on its financial position, results of operations, and related footnotes. The Company expects it will elect to utilize the available package of practical expedients permitted under the transition guidance within the new standard, which does not require the reassessment of the following: i) whether existing or expired arrangements are or contain a lease, ii) the lease classification of existing or expired leases, and iii) whether previous initial direct costs would qualify for capitalization under the new lease standard. Additionally, the Company expects it will make an accounting policy election to keep leases with an initial term of 12 months or less off of its balance sheet.  The Company’s assessment will include, but is not limited to, evaluating the impact that this standard has on the lease of its corporate headquarters in Durham, North Carolina as well as laboratory, manufacturing and office space in Research Triangle Park, North Carolina.

NOTE 2:

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following (in thousands):

 

 

 

December 31, 2018

 

 

March 31, 2019

 

Accrued compensation

 

$

965

 

 

$

728

 

Accrued clinical and research and development expenses

 

 

1,569

 

 

 

943

 

Accrued property, equipment and software purchases

 

 

219

 

 

 

1,259

 

Accrued deferred offering costs

 

 

193

 

 

 

800

 

Deferred rent

 

 

198

 

 

 

380

 

Accrued legal fees

 

 

107

 

 

 

55

 

Other

 

 

170

 

 

 

251

 

Total accrued expenses and other current liabilities

 

$

3,421

 

 

$

4,416

 

 

NOTE 3:

STOCKHOLDERS’ EQUITY

Capital Structure

Upon the closing of the IPO, all of the Company’s outstanding shares of convertible preferred stock automatically converted into 22,301,190 shares of common stock and the Company’s outstanding convertible debt including accrued interest converted into 2,921,461 shares of common stock at the applicable conversion ratio then in effect. Each share of the Series A and Series B preferred stock were automatically converted into shares of common stock, at the applicable conversion rate then in effect, at the closing of the IPO.

NOTE 4:

STOCK OPTIONS

 

Under the terms of its stock option plans, the Company’s board of directors may grant stock options to employees, directors and service providers. The Company issued stock options under the 2006 Stock Incentive Plan (“2006 plan”) until April 2015, when the 2015 Stock Incentive Plan (“2015 plan”) was adopted. The 2006 plan expired in 2016 and there are no remaining shares available to be granted under the plan. There were 1,397,203 stock options outstanding under the 2006 Plan as of March 31, 2019.  

 

Upon adoption of the 2015 plan, there were 5,270,095 shares of common stock reserved for issuance. In May 2018, the Company amended the 2015 plan to increase the number of shares reserved for issuance to 8,211,980. The 2015 plan had 6,490,792 stock options outstanding as of March 31, 2019. The Company’s board of directors determines the terms of stock options granted under the 2015 plan, including option exercise prices and vesting.

 

On March 12, 2019, the Company’s board of directors adopted, and the Company’s stockholders approved the Precision BioSciences, Inc. 2019 Incentive Award Plan (“2019 Plan”) and the 2019 Employee Stock Purchase Plan (“2019 ESPP”), both of which became effective upon the effective date of the registration statement on Form S-1 for the Company’s IPO. Upon the effectiveness of the 2019 Plan, the Company ceased granting new awards under the 2015 Plan.

 

The 2019 Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards initially equal to 4,750,000 shares of common stock.  The 2019 Plan includes an annual increase of common stock shares on the first day of each calendar year beginning January 1, 2020 and ending on January 1, 2029 by an amount equal to the lesser of (i) 4% of the aggregate number of shares of common stock outstanding on the final day of the immediately preceding calendar year and (ii)

14


 

such smaller number of shares of common stock as determined by the board of directors (but no more than 5,000,000 shares may be issued upon the exercise of incentive stock options), plus any shares that are subject to awards outstanding under the Company’s 2006 and 2015 Stock Incentive Plans as of the effective date of the 2019 Plan that expire, lapse, or are terminated, exchanged for cash, surrendered, repurchased, or canceled without having been fully exercised or forfeited, to the extent so unused.

The 2019 ESPP provides for the option to purchase initially up to 525,000 shares of the Company’s common stock plus an annual increase on the first day of each calendar year beginning January 1, 2020 and ending on and including January 1, 2029 by an amount equal to the lesser of (i) 1% of the shares outstanding on the final day of the immediately preceding calendar year and (ii) such smaller number of shares as is determined by our board of directors, provided that no more than 5,250,000 shares of our common stock may be issued under our 2019 ESPP. The purchase price of the shares, in the absence of a contrary designation, will be 85% of the lower of the fair market value of our common stock on the first trading day of the offering period or on the purchase date.

The Company recorded $0.1 million and $1.5 million in employee share-based compensation expense for the three months ended March 31, 2018 and 2019, respectively. Total nonemployee share-based compensation expense was an amount less than $0.1 million for each of the three months ended March 31, 2018 and 2019.

 

Share-based compensation expense related to stock options is included in the following line items in the condensed consolidated statements of operations (in thousands):

 

 

 

Three months ended March 31,

 

 

 

2018

 

 

2019

 

Research and development

 

$

101

 

 

$

1,006

 

General and administrative

 

 

49

 

 

 

543

 

 

 

$

150

 

 

$

1,549

 

 

Determining the appropriate fair value model to measure the fair value of the stock option grants on the date of grant and the related assumptions requires judgment. The Company did not grant any stock options for the three months ended March 31, 2018. The fair value of each stock option grant is estimated using a Black-Scholes option-pricing model on the date of grant as follows:

 

 

 

 

 

 

 

 

Three months ended March 31, 2019

 

Estimated dividend yield

 

 

0.00

%

Weighted-average expected stock price volatility

 

 

68.00

%

Weighted-average risk-free interest rate

 

 

2.50

%

Expected life of options (in years)

 

 

6.04

 

Weighted-average fair value per option

 

$

8.65

 

 

The expected volatility rates are estimated based on the actual volatility of comparable public companies over the expected term. The expected life represents the average time that stock options that vest are expected to be outstanding.

The Company does not have sufficient history of exercising stock options to estimate the expected term of employee stock options and thus continues to calculate expected life based on the midpoint between the vesting date and the contractual term which is in accordance with the simplified method. The expected term for share-based compensation granted to nonemployees is the contractual life. The risk-free rate is based on the United States Treasury yield curve during the expected life of the option.

 

15


 

The following table summarizes activity in the Company’s stock option plans for the three months ended March 31, 2019:

 

 

 

Outstanding

Option Shares

 

 

Weighted- Average

Exercise Price

 

Balance as of January 1, 2019

 

 

7,763,464

 

 

$

5.00

 

Granted

 

 

550,418

 

 

 

13.80

 

Exercised

 

 

(145,975

)

 

 

0.73

 

Forfeited/canceled

 

 

(279,912

)

 

 

9.80

 

Balance as of March 31, 2019

 

 

7,887,995

 

 

 

5.53

 

 

The intrinsic value of options exercised was $71,143 and $1,857,235 during the three months ended March 31, 2018 and 2019, respectively.

 

There was approximately $23.2 million of total unrecognized compensation cost related to unvested stock options as of March 31, 2019, which is expected to be recognized over a weighted-average period of 3.33 years.

NOTE 5:

COMMITMENTS AND CONTINGENCIES

Litigation

The Company is not subject to any material legal proceedings.

Leases

The Company leases office and laboratory space under long-term operating leases.  All the leases provide tenant improvement allowances and rent abatements as incentives for the Company to either enter into the initial lease agreement or expand within an existing premises already under lease.  The Company leases office and laboratory space at 302 East Pettigrew Street, Durham, North Carolina, which is the Company’s corporate headquarters. The property is leased through July 2024 with the option to extend. The Company leases laboratory and office space at 5 Laboratory Drive, Research Triangle Park, North Carolina. The property is leased through April 2026 with the option to extend. The Company leases laboratory space at 20 TW Alexander Drive, Research Triangle Park, North Carolina. The property is leased through August 2026 with the option to extend.

The following is a schedule of future minimum lease payments for all leases as of March 31, 2019 (in thousands):

 

 

 

Operating Leases

 

Remainder of 2019

 

$

1,754

 

2020

 

 

2,690

 

2021

 

 

2,635

 

2022

 

 

2,718

 

2023

 

 

2,795

 

2024 and beyond

 

 

3,742

 

 

Supply Agreements

The Company enters into contracts in the normal course of business with contract manufacturing organizations (“CMOs”) for the manufacture of clinical trial materials. These agreements provide for termination at the request of either party with less than one-year notice and are, therefore, cancelable contracts and, if canceled, are not anticipated to have a material effect on the condensed consolidated financial condition, results of operations, or cash flows of the Company.

NOTE 6:

CONVERTIBLE NOTES PAYABLE (2019 NOTES)

 

In March 2019, the Company entered into a note purchase agreement pursuant to which it sold and issued an aggregate of $39.6 million of convertible promissory notes (the “2019 Notes”) in a private placement transaction.

 

16


 

The 2019 Notes accrue interest at a rate of 6% per annum.  The 2019 Notes were settled in 2,921,461 shares of common stock in connection with the closing of the Company’s IPO (see Note 1) at a settlement price equal to 85% of the IPO price per share.  

 

On issuance, the Company elected to account for the 2019 Notes at fair value with any changes in fair value being recognized through the condensed consolidated statements of operations until the 2019 Notes are settled. The fair value of the 2019 Notes was determined to be $39.6 million on issuance and $52.5 million as of March 31, 2019. For the three-months ended March 31, 2019, the Company recognized $12.7 million as changes in fair value and $0.2 million of interest expense.

NOTE 7:

net loss per share

Net Loss Per Share

Basic and diluted net loss per share attributable to common stockholders was calculated as follows (in thousands, except share and per share amounts):

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(9,012

)

 

$

(31,783

)

Denominator:

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding — basic and diluted

 

 

15,704,551

 

 

 

15,967,036

 

Net loss per share attributable to common stockholders— basic and diluted

 

$

(0.57

)

 

$

(1.99

)

 

NOTE 8:

Income Taxes

The Company estimates an annual effective tax rate of 0% for the year ending December 31, 2019 and has not recorded an income tax benefit for the three months ended March 31, 2019 and 2018 since it determined that a full valuation allowance is required against the Company’s deferred tax assets.

 

Due to the Company's cumulative loss position, there is not enough evidence at this time to support that the Company will generate future income of a sufficient amount and nature to utilize the benefits of its net deferred tax assets. The deferred tax assets have been reduced by a full valuation allowance.

The Company reflects in the condensed consolidated financial statements the benefit of positions taken in a previously filed tax return or expected to be taken in a future tax return only if it is considered “more-likely-than-not” that the position taken will be sustained by the appropriate taxing authority. As of March 31, 2019, the Company had no unrecognized income tax benefits. The Company records interest and penalties relating to uncertain income tax positions as a component of income tax expense in the accompanying condensed consolidated statements of operations. As March 31, 2019, the Company had no such accruals.

NOTE 9:

FAIR VALUE MEASUREMENTS

The carrying amounts of the Company’s financial instruments, including accounts receivable, accounts payable, and accrued expenses and other current liabilities, approximate their respective fair values due to their short-term nature. The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis and to minimize the use of unobservable inputs when determining their fair value. The three tiers are defined as follows:

Level 1—Observable inputs based on unadjusted quoted prices in active markets for identical assets or liabilities

Level 2—Inputs, other than quoted prices in active markets, that are observable either directly or indirectly

Level 3—Unobservable inputs for which there is little or no market date, which require the Company to develop its own assumptions

17


 

The Company classifies investments in money market funds within Level 1 as the prices are available from quoted prices in active markets. Investments in repurchase agreements are classified within Level 2 as these instruments are valued using observable market inputs including reported trades, broker/dealer quotes, bids and/or offers.

As of March 31, 2019 and December 31, 2018, the Company held cash equivalents which are composed of money market funds and repurchase agreements that were purchased through repurchase intermediary banks and collateralized by deposits in the form of government securities and obligations.

The following represents assets measured at fair value on a recurring basis by the Company (in thousands):

 

December 31, 2018

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

781

 

 

$

781

 

 

$

 

 

$

 

Repurchase agreements

 

 

94,500

 

 

 

 

 

 

94,500

 

 

 

 

 

 

$

95,281

 

 

$

781

 

 

$

94,500

 

 

$

 

 

March 31, 2019

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

881

 

 

$

881

 

 

$

 

 

$

 

Repurchase agreements

 

 

109,000

 

 

 

 

 

 

109,000

 

 

 

 

 

 

$

109,881

 

 

$

881

 

 

$

109,000

 

 

$

 

 

NOTE 10:

COLLABORATION AND LICENSE AGREEMENTS

Development and Commercial License Agreement with Servier

On February 24, 2016, the Company entered into a development and commercial license agreement, as subsequently amended, with Baxalta (now Shire), which was assigned to Servier in connection with its acquisition of Shire’s oncology business in August 2018. This agreement establishes a collaboration between the Company and Servier to develop allogeneic chimeric antigen receptor T (“CAR T”) cell therapies for up to six unique antigen targets selected by Servier. Servier selected one target at the agreement’s inception, and Servier is entitled to select the remaining five targets over the first four years of the agreement. Servier is required to make a milestone payment to the Company upon achievement of an early-stage pre- investigational new drug application (“IND”) development milestone event completed for each of the remaining five targets selected, if any. The Company granted Servier a development license and will perform early-stage R&D on the selected targets and develop the resulting therapeutic product candidates through Phase 1 clinical trials and manufacture clinical trial material for use in Phase 2 clinical trials. Also, the Company and Servier have formed a joint steering committee (“JSC”) to provide high-level oversight and decision making regarding the activities covered under the agreement.

The Company received an upfront payment of $105.0 million under the agreement. At the Phase 2 readiness stage for any product candidate, Servier may exercise a commercial option, subject to payment of commercial option exercise fees, to proceed with development and commercialization of the product candidate and perform late-stage R&D, including Phase 2 and Phase 3 clinical trials and obtaining regulatory approvals. The Company has the ability to receive total payments, in the aggregate across all six targets that may be selected by Servier, of up to approximately $1.6 billion, including the upfront payment of $105.0 million and up to $1.5 billion in milestone payments, consisting of up to $401.3 million in development milestone payments and up to $1.1 billion in commercial milestone payments. The Company is also entitled to receive tiered royalties ranging from the mid-single digit percentages to the sub-teen percentages on worldwide net sales of any products developed, subject to customary potential reductions. The Company also has the right to opt in and participate in the development and commercialization of any products resulting from the collaboration through a 50/50 codevelopment and co-promotion option in the United States. This will require the Company to pay a codevelopment and co-promotion option fee on each licensed product for which the Company elects to participate. This option is exercisable at the Phase 2 readiness stage and only after Servier exercises its commercial option.

The Company assessed this arrangement in accordance with ASC 606 and concluded that the promises in the agreement represent transactions with a customer. The Company has determined that the promises associated with the research and development activities for each of the six targets are not distinct because they are all based on the ARCUS proprietary genome editing platform. The Company has concluded that the agreement with Servier contains the following promises: (i) a development license; (ii) performance of early-stage R&D services, (iii) the manufacture of

18


 

clinical trial material for use in Phase 2 clinical trials, and (iv) JSC participation. The Company determined that the license, manufacture of clinical trial material, and R&D services were not distinct from each other, as the license, pre-clinical and clinical supply, and R&D services are highly interdependent upon one another. Participation on the JSC to oversee the research and development activities are combined into the single performance obligation as these activities are highly interdependent with the other R&D services. As such, the Company determined that these promises should be combined into a single performance obligation.

Under the agreement with Servier, in order to evaluate the appropriate transaction price, the Company determined that the upfront amount of $105.0 million constituted the entire consideration to be included in the transaction price as of the outset of the arrangement.  As such, this amount was allocated to the single performance obligation. The commercial option exercise fees that may be received are excluded from the transaction price until each customer option is exercised as it was determined that the options are not material rights. The potential development milestone payments that the Company is eligible to receive prior to the exercise of the options as well as commercial milestones, were excluded from the transaction price, as all milestone amounts were fully constrained based on the probability of achievement, since the milestones relate to successful achievement of certain developmental goals, which might not be achieved. None of the future royalty payments were included in the transaction price, as the potential payments represent sales-based consideration. The Company will reevaluate the transaction price, including all constrained amounts, at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur, and, if necessary, adjust its estimate of the transaction price.

The Company recognizes revenue from the upfront payment of $105.0 million based on an input method in the form of research effort relative to expected research effort at the completion of the performance obligation, which is based on the relative costs and timelines of the related to the R&D activities incurred and expected to be incurred in the future to satisfy the performance obligation. This period is estimated to be approximately 7 years.  The transfer of control occurs over this time period and, in management’s judgment, is the best measure of progress towards satisfying the performance obligation. The estimated period of performance and project cost is reviewed quarterly and adjusted, as needed, to reflect the Company’s current assumptions regarding the timing of its deliverables.

During the three months ended March 31, 2018 and 2019, the Company recognized revenue under the agreement with Servier of approximately $1.4 million and $1.5 million, respectively. Deferred revenue related to the agreement with Servier amounted to $92.9 million and $86.7 million as of March 31, 2018 and 2019, respectively, of which $5.8 million and $5.0 million, respectively is included in current liabilities. No development or sales-based milestone payments were received during the three months ended March 31, 2018 and 2019.  

 

   

Collaboration and License Agreement with Gilead

 

On September 10, 2018, the Company and Gilead Sciences, Inc. (“Gilead”) entered into a collaboration and license agreement to develop genome editing tools to target viral DNA associated with Hepatitis B. Pursuant to the terms of the agreement, Gilead will receive an exclusive license to exploit the resulting synthetic nucleases and products that use them to treat Hepatitis B in humans (“development license”), and the Company is entitled to receive up to $40.0 million in research funding for early-stage R&D services, paid in semi-annual increments, over an initial three year term and development and commercial milestone payments of up to an aggregate of $445.0 million, consisting of up to $105.0 million in development milestone payments and up to $340.0 million in commercial milestone payments. The Company is also entitled to receive tiered royalties ranging from the high single digit percentages to the mid-teen percentages on worldwide net sales of the products developed through the term of the agreement, subject to customary potential reductions. Gilead is responsible for obtaining regulatory approvals and, upon completion of the collaboration, will assume sole responsibility for the development and commercialization of such gene editing therapies and products. The Company will provide technology transfer of its development know-how prior to Gilead assuming responsibility. Also, the Company and Gilead will negotiate a separate supply agreement for the Company to manufacture specifically identified products for Gilead to use in clinical trials at price based on the Company’s costs. The Company and Gilead have formed a joint steering committee (“JSC”) and a joint research and development committee (“JRDC”) that collectively will provide oversight, decision making and implementation guidance regarding the collaboration activities covered under the agreement.

 

The Company assessed this arrangement in accordance with ASC 606 and concluded that the promises in the agreement represent transactions with a customer. The Company has concluded that the agreement with Gilead contains the following promises: (i) a development license; (ii) performance of early-stage R&D services, including technology transfer services, iii) JSC and JRDC participation, and (iv) regulatory responsibilities related to non-clinical and chemistry, manufacturing and control (“CMC”) reports. The Company determined that the license and R&D services were not distinct from each other, as the license and R&D services are highly interdependent upon one another. Participation on the JRC and JRDC to oversee the research and development activities are combined into the

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single performance obligation as these activities are highly interdependent with the other R&D services. The regulatory responsibilities related to non-clinical and CMC filings do not represent separate performance obligations based on their dependence on the research and development efforts. As such, the Company determined that these promises should be combined into a single performance obligation.

 

Under the agreement with Gilead, in order to evaluate the appropriate transaction price, the Company determined that the $40.0 million research funding for early-stage R&D services, paid in semi-annual increments over an initial three-year term, constituted the entire consideration to be included in the transaction price as of the outset of the arrangement. As such, this amount was allocated to the single performance obligation. The potential development and commercial milestone payments that the Company is eligible to receive were excluded from the transaction price, as all milestone amounts were fully constrained based on the probability of achievement, since the milestones relate to successful achievement of certain developmental goals, which might not be achieved. None of the future royalty payments were included in the transaction price, as the potential payments represent sales-based consideration.  The Company will reevaluate the transaction price at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur, and, if necessary, adjust its estimate of the transaction price.

 

Revenue associated with the combined performance obligation is being recognized as revenue on a straight-line basis as the R&D services are provided over the initial three-year term.  The transfer of control occurs over this time period and, in management’s judgment, is the best measure of progress towards satisfying the performance obligation.

 

During the three months ended March 31, 2019, the Company recognized revenue under the agreement with Gilead of approximately $3.3 million. Deferred revenue related to the agreement with Gilead amounted to $4.5 million as of March 31, 2019, of which $4.5 million is included in current liabilities. No development or sales-based milestone payments were received during the three months ended March 31, 2019.  

NOTE 11:

SEGMENT REPORTING

The Company has developed a genome editing platform and performed related research for human therapeutic and agricultural applications. The Company’s Chief Operating Decision Maker (“CODM”) evaluates the Company’s financial performance based on two reportable segments: Therapeutics and Food. The Therapeutics segment is focused on the development of products in the field of immuno-oncology and of novel products outside immuno-oncology to treat human diseases. The Food segment is focused on applying ARCUS to develop food and nutrition products through collaboration agreements with consumer-facing companies. The CODM reviews segment performance and allocates resources based upon segment revenue and segment operating loss of the Therapeutics and Food reportable segments.

Segment operating loss is derived by deducting operational cash expenditures, net, from GAAP revenue. Operational cash expenditures are cash disbursements made that are directly attributable to the reportable segment (including directly attributable research and development and property, equipment, and software expenditures).  For the three months ended March 31, 2018, the Company allocated centralized research and development expenditures for early stage research, nuclease development and the purchase of general laboratory supplies to the Therapeutics and Food segments based on headcount.  In January 2019, the Food segment moved into a new leased facility at Research Triangle Park, North Carolina. The Company has determined that the Food segment is no longer deriving benefit from the Company’s centralized research and development expenditures, thus all these expenditures are allocated to the Therapeutics segment for the three months ended March 31, 2019. The reportable segment and centralized research and development operational cash expenditures include cash disbursements for compensation, lab supplies, purchases of property, equipment, and software and procuring services from contract research organizations (“CROs”), CMOs, and research organizations.

 

Certain cost items are not allocated to the Company’s reportable segments. These cost items primarily consist of compensation and general operational expenses associated with the Company’s executive, business development, finance, operations, human resources and legal functions. The Company does not allocate non-cash income statement amounts to its reportable segments, such as share based compensation, depreciation and amortization, intangible asset impairment charges, non-cash interest expense and losses on the disposal of assets. When reconciling segment operating loss to consolidated loss from operations, the Company makes an adjustment to convert the cash expenditures to the accrual basis to reflect GAAP.

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All segment revenue is earned in the United States and there are no intersegment revenues. Additionally, the Company reports assets on a consolidated basis and does not allocate assets to its reportable segments for purposes of assessing segment performance or allocating resources.

Presented below is the financial information with respect to the Company’s reportable segments (in thousands):

 

 

 

Three months ended March  31,

 

 

 

2018

 

 

2019

 

Revenue:

 

 

 

 

 

 

 

 

Therapeutics

 

$

1,447

 

 

$

4,819

 

Food

 

 

81

 

 

 

643

 

Total segment revenue

 

 

1,528

 

 

 

5,462

 

Segment operational cash expenditures:

 

 

 

 

 

 

 

 

Therapeutics

 

$

9,250

 

 

$

12,910

 

Food

 

 

1,059

 

 

 

2,107

 

Total segment operational cash expenditures

 

 

10,309

 

 

 

15,017

 

Allocation of centralized research and development operational

   cash expenditures:

 

 

 

 

 

 

 

 

Therapeutics

 

$

2,037

 

 

$

3,753

 

Food

 

 

417

 

 

 

 

Total allocation of centralized research and development

   operational cash expenditures

 

 

2,454

 

 

 

3,753

 

Segment operating loss:

 

 

 

 

 

 

 

 

Therapeutics

 

$

(9,840

)

 

$

(11,844

)

Food

 

 

(1,396

)

 

 

(1,464

)

Total segment operating loss

 

 

(11,236

)

 

 

(13,308

)

Adjustments to reconcile segment operating loss to consolidated

   loss from operations:

 

 

 

 

 

 

 

 

Corporate general and administrative cash expenditures

 

$

(2,559

)

 

$

(7,022

)

Interest income received

 

 

(223

)

 

 

(601

)

Depreciation and amortization

 

 

(458

)

 

 

(939

)

Share-based compensation

 

 

(150

)

 

 

(1,549

)

Loss on disposal of assets

 

 

(6

)