dtil-10q_20190630.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 June 30, 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) 314-5512

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.000005 per share

DTIL

The Nasdaq Global Select Market

 

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 August 8, 2019, the registrant had 50,630,932 shares of common stock, $0.000005 par value per share, outstanding.

 

 

 


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

5

 

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

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

Item 4.

Controls and Procedures

37

PART II.

OTHER INFORMATION

39

Item 1.

Legal Proceedings

39

Item 1A.

Risk Factors

39

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

91

Item 3.

Defaults Upon Senior Securities

91

Item 4.

Mine Safety Disclosures

91

Item 5.

Other Information

91

Item 6.

Exhibits

92

Signatures

94

 

 

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, expectations regarding our allogeneic chimeric antigen receptor T cell immunotherapy product candidates and our manufacturing center, 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 and requirements under our current debt instruments;

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)

 

 

 

June 30, 2019

 

 

December 31, 2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

226,099

 

 

$

103,193

 

Accounts receivable

 

 

250

 

 

 

523

 

Prepaid expenses

 

 

8,265

 

 

 

8,913

 

Other current assets

 

 

2,474

 

 

 

3,046

 

Total current assets

 

 

237,088

 

 

 

115,675

 

Property, equipment, and software—net

 

 

32,962

 

 

 

21,147

 

Intangible assets—net

 

 

1,453

 

 

 

1,466

 

Other assets

 

 

417

 

 

 

312

 

Total assets

 

$

271,920

 

 

$

138,600

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,882

 

 

$

2,218

 

Accrued expenses and other current liabilities

 

 

5,809

 

 

 

3,421

 

Deferred revenue

 

 

7,129

 

 

 

8,436

 

Total current liabilities

 

 

15,820

 

 

 

14,075

 

Deferred revenue—noncurrent

 

 

79,245

 

 

 

82,807

 

Deferred rent—noncurrent

 

 

2,877

 

 

 

1,758

 

Total liabilities

 

 

97,942

 

 

 

98,640

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

   authorized, issued and outstanding as of December 31, 2018

 

 

 

 

 

3

 

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

   authorized; 21,956,095 shares issued and outstanding as of December 31,

   2018

 

 

 

 

 

2

 

Preferred stock, $0.0001 par value— 10,000,000 shares authorized as of June

   30, 2019 and no shares authorized as of December 31, 2018; no shares issued

   and outstanding as of June 30, 2019

 

 

 

 

 

 

Common stock; $0.000005 par value— 200,000,000 shares authorized,

   51,401,015 issued and 50,590,543 shares outstanding as of June 30, 2019;

   130,000,000 shares authorized, 16,717,117 shares issued and 15,906,645

   shares outstanding as of December 31, 2018

 

 

 

 

 

 

Additional paid-in capital

 

 

310,339

 

 

 

126,094

 

Accumulated deficit

 

 

(135,409

)

 

 

(85,187

)

Treasury stock

 

 

(952

)

 

 

(952

)

Total stockholders’ equity

 

 

173,978

 

 

 

39,960

 

Total liabilities and stockholders’ equity

 

$

271,920

 

 

$

138,600

 

 

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)

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue

 

$

5,389

 

 

$

1,874

 

 

$

10,851

 

 

$

3,402

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

22,760

 

 

 

10,869

 

 

 

42,721

 

 

 

18,986

 

General and administrative

 

 

6,500

 

 

 

3,130

 

 

 

11,495

 

 

 

5,776

 

Total operating expenses

 

 

29,260

 

 

 

13,999

 

 

 

54,216

 

 

 

24,762

 

Loss from operations

 

 

(23,871

)

 

 

(12,125

)

 

 

(43,365

)

 

 

(21,360

)

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of convertible note payable

 

 

2,950

 

 

 

 

 

 

(9,758

)

 

 

 

Interest expense

 

 

 

 

 

 

 

 

(182

)

 

 

 

Interest income

 

 

1,485

 

 

 

299

 

 

 

2,086

 

 

 

522

 

Total other income (expense), net

 

 

4,435

 

 

 

299

 

 

 

(7,854

)

 

 

522

 

Net loss and net loss attributable to common stockholders

 

$

(19,436

)

 

$

(11,826

)

 

$

(51,219

)

 

$

(20,838

)

Net loss per share attributable to common stockholders-

   basic and diluted

 

$

(0.39

)

 

$

(0.75

)

 

$

(1.55

)

 

$

(1.33

)

Weighted average shares of common stock outstanding-

   basic and diluted

 

 

50,035,370

 

 

 

15,730,747

 

 

 

33,095,314

 

 

 

15,717,719

 

 

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

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Treasury

 

 

Total

Stockholder's

Equity

 

 

 

Shares

 

 

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Stock

 

 

(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

)

Issuance of Series B convertible

   preferred stock, net of issuance

   costs

 

 

 

 

 

 

 

 

 

 

17,579,843

 

 

 

2

 

 

 

 

 

 

 

 

 

87,824

 

 

 

 

 

 

 

 

 

87,826

 

Stock option exercises

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

65,449

 

 

 

 

 

 

62

 

 

 

 

 

 

 

 

 

62

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

254

 

 

 

 

 

 

 

 

 

254

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,826

)

 

 

 

 

 

(11,826

)

Balance- June 30, 2018

 

 

25,650,000

 

 

 

 

$

3

 

 

 

17,579,843

 

 

$

2

 

 

 

16,592,052

 

 

$

 

 

$

102,040

 

 

$

(59,987

)

 

$

(952

)

 

$

41,106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Conversion of convertible preferred

   stock into common stock upon

   initial public offering

 

 

(25,650,000

)

 

 

 

 

(3

)

 

 

(21,956,095

)

 

 

(2

)

 

 

22,301,190

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon

   conversion of convertible notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,921,461

 

 

 

 

 

 

49,490

 

 

 

 

 

 

 

 

 

49,490

 

Issuance of common stock in initial

   public offering, net of discounts

   and issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,085,000

 

 

 

 

 

 

130,543

 

 

 

 

 

 

 

 

 

130,543

 

Stock option exercises

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

230,272

 

 

 

 

 

 

272

 

 

 

 

 

 

 

 

 

 

 

272

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,279

 

 

 

 

 

 

 

 

 

2,279

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(19,436

)

 

 

 

 

 

(19,436

)

Balance- June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

$

 

 

 

51,401,015

 

 

$

 

 

$

310,339

 

 

$

(135,409

)

 

$

(952

)

 

$

173,978

 

 

See notes to condensed consolidated financial statements

 

 

 

7


 

Precision Biosciences, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(51,219

)

 

$

(20,838

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,107

 

 

 

970

 

Share-based compensation

 

 

3,828

 

 

 

405

 

Loss on disposal of assets

 

 

22

 

 

 

8

 

Non-cash interest expense

 

 

182

 

 

 

 

Change in fair value of convertible notes payable

 

 

9,758

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses

 

 

648

 

 

 

(3,190

)

Accounts receivable

 

 

273

 

 

 

 

Other assets

 

 

(852

)

 

 

(30

)

Accounts payable

 

 

207

 

 

 

234

 

Accrued expenses

 

 

2,436

 

 

 

1,306

 

Deferred revenue

 

 

(3,872

)

 

 

(2,629

)

Net cash used in operating activities

 

 

(36,482

)

 

 

(23,764

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, equipment and software

 

 

(13,219

)

 

 

(1,747

)

Net cash used in investing activities

 

 

(13,219

)

 

 

(1,747

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

 

379

 

 

 

82

 

Issuance of Series B convertible preferred stock, net of issuance costs

 

 

 

 

 

88,020

 

Deferred offering costs

 

 

(2,507

)

 

 

(50

)

Issuance of convertible notes

 

 

39,550

 

 

 

 

Proceeds from IPO, net of underwriting discounts and commissions

 

 

135,185

 

 

 

 

Net cash provided by financing activities

 

 

172,607

 

 

 

88,052

 

Net increase in cash and cash equivalents

 

 

122,906

 

 

 

62,541

 

Cash and cash equivalents—beginning of period

 

 

103,193

 

 

 

62,802

 

Cash and cash equivalents —end of period

 

$

226,099

 

 

$

125,343

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of noncash financing and investing activities:

 

 

 

 

 

 

 

 

Common stock issued on conversion of convertible notes

 

$

49,490

 

 

$

 

Property, equipment and software additions included in accounts payable,

   accrued expenses and other current liabilities

 

$

2,052

 

 

$

1,088

 

Series B convertible preferred stock offering costs included in accounts

   payable, accrued expenses and other current liabilities

 

$

 

 

$

194

 

Deferred offering costs included in accounts payable, accrued expenses

   and other current liabilities

 

$

 

 

$

31

 

 

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 $130.5 million in net proceeds, after deducting underwriting discounts and commission of approximately $10.2 million and issuance costs of approximately $4.6 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 are not affected by the Reverse Stock Split.  Upon the closing of the IPO, all of the outstanding shares of convertible preferred stock automatically converted into 22,301,190 shares of common stock at the applicable ratio then in effect and the outstanding convertible promissory notes including accrued interest were settled into 2,921,461 shares of common stock (see Note 6).  Subsequent to the closing of the IPO, there were no shares of Series A or Series B convertible preferred stock or convertible promissory notes outstanding.

Management believes that existing cash and cash equivalents will allow the Company to continue its operations into 2021. 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 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 28, 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 June 30, 2019 and consolidated results of operations for the three and six months ended June 30, 2019 and 2018 and the consolidated cash flows for the six months ended June 30, 2019 and 2018, have been made. The Company’s consolidated results of operations for the three and six months ended June 30, 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.

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 condensed 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.

10


 

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 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.

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As a result of adopting ASC 606, the Company recorded a $1.0 million transition adjustment to reduce 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 June 30, 2019

 

(in thousands)

 

As reported under

ASC 606

 

 

Adjustments

 

 

Balances without

adoption of

ASC 606

 

Other current assets

 

$

2,474

 

 

$

(28

)

 

$

2,446

 

Deferred revenue, current portion

 

 

7,129

 

 

 

1,148

 

 

 

8,277

 

Deferred revenue, net of current portion

 

 

79,245

 

 

 

980

 

 

 

80,225

 

Accumulated deficit

 

 

(135,409

)

 

 

2,100

 

 

 

(133,309

)

 

 

 

Impact of ASC 606 Adoption on Condensed

Consolidated Statement of Operations

for the Three Months Ended

June 30, 2019

 

 

Impact of ASC 606 Adoption on Condensed

Consolidated Statement of Operations

for the Six Months Ended

June 30, 2019

 

(in thousands, except per share data)

 

As reported under

ASC 606

 

 

Adjustments

 

 

Balances

without

adoption of

ASC 606

 

 

As reported under

ASC 606

 

 

Adjustments

 

 

Balances

without

adoption of

ASC 606

 

Revenue

 

$

5,389

 

 

$

(474

)

 

$

4,915

 

 

$

10,851

 

 

$

(1,103

)

 

$

9,748

 

Net loss

 

 

(19,436

)

 

 

(474

)

 

 

(19,910

)

 

 

(51,219

)

 

 

(1,103

)

 

 

(52,322

)

Net loss per share - basic and diluted

 

 

(0.39

)

 

 

(0.01

)

 

 

(0.40

)

 

 

(1.55

)

 

 

(0.03

)

 

 

(1.58

)

 

 

 

Impact of ASC 606 Adoption on Condensed Consolidated

Statement of Cash Flows for the Six Months Ended

June 30, 2019

 

(in thousands)

 

As reported under

ASC 606

 

 

Adjustments

 

 

Balances without

adoption of

ASC 606

 

Net loss

 

$

(51,219

)

 

$

(1,103

)

 

$

(52,322

)

Changes in prepaid expenses

 

 

648

 

 

 

(28

)

 

 

620

 

Changes in deferred revenue

 

 

(3,872

)

 

 

1,131

 

 

 

(2,741

)

 

During the six months ended June 30, 2019, the Company recorded $5.1 million in revenue that was included in deferred revenue 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 consideration as the early-stage pre-IND development milestones were deemed to be non-substantive. Under ASC 606,

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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 r