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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

☐	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

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;

•	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.

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

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

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

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

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.

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.

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.

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,

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”),