dtil-10q_20200331.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, 2020

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)

 

(919) 314-5512

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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 May 8, 2020, the registrant had 51,861,374 shares of common stock, $0.000005 par value per share, outstanding.

 

 

 


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

5

Item 1.

Financial Statements

5

 

Condensed Consolidated Balance Sheets

5

 

Condensed Consolidated Statements of Operations

6

 

Condensed Consolidated Statements of Changes In Stockholders’ Equity

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

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

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

87

Item 3.

Defaults Upon Senior Securities

87

Item 4.

Mine Safety Disclosures

87

Item 5.

Other Information

88

Item 6.

Exhibits

89

Signatures

90

 

 

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 without limitation, statements regarding our future results of operations and financial position, business strategy and approach, including related results, prospective products, planned preclinical or greenhouse studies and clinical or field trials, the status and results of our preclinical and clinical studies, expected release of interim data, expectations regarding our allogeneic chimeric antigen receptor T cell immunotherapy product candidates, capabilities of our manufacturing facility, regulatory approvals, research and development costs, timing, expected results and likelihood of success, plans and objectives of management for future operations, as well as the impact of the COVID-19 pandemic may be forward-looking statements. Without limiting the foregoing, 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,” “seeks,” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. No forward-looking statement is a guarantee of future results, performance, or achievements, and one should avoid placing undue reliance on such statements.

Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to us. Such beliefs and assumptions may or may not prove to be correct.  Additionally, such forward-looking 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” in this Quarterly Report on Form 10-Q. 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 operating expenses and our ability to predict what those expenses will be;

 

our limited operating history;

 

the success of our programs and product candidates in which we expend our resources;

 

our dependence on our ARCUS technology;

 

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

 

public perception about genome editing technology and its applications;

 

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

 

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

 

pending and potential liability lawsuits and penalties against us or our collaborators related to our technology and our product candidates;

 

the U.S. and foreign regulatory landscape applicable to our and our collaborators’ development of product candidates;

 

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

3


 

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

 

potential manufacturing problems associated with the development or commercialization of any of our product candidates;

 

our ability to achieve our anticipated operating efficiencies at our manufacturing facility;

 

delays or difficulties in our and our collaborators’ ability to enroll patients;

 

if our product candidates do not work as intended or cause undesirable side effects;

 

risks associated with applicable healthcare, data privacy and security regulations and our compliance therewith;

 

the rate and degree of market acceptance of any of our product candidates;

 

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

 

our current and future relationships with third parties including suppliers and manufacturers;

 

our ability to obtain and maintain intellectual property protection for our technology and any of our product candidates;

 

potential litigation relating to infringement or misappropriation of intellectual property rights;

 

our ability to effectively manage the growth of our operations;

 

our ability to attract, retain, and motivate key scientific and management personnel;

 

market and economic conditions;

 

effects of natural and manmade disasters, public health emergencies and other natural catastrophic events

 

effects of the outbreak of COVID-19, or any pandemic, epidemic or outbreak of an infectious disease;

 

insurance expenses and exposure to uninsured liabilities; and

 

fluctuations in our stock price.

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. All forward-looking statements contained herein speak only as of the date of this Quarterly Report on Form 10-Q. 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.

As used in this Quarterly Report on Form 10-Q, unless otherwise stated or the context requires otherwise, references to “Precision,” the “Company,” “we,” “us,” and “our,” refer to Precision BioSciences, Inc. and its subsidiaries on a consolidated basis.

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)

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

154,187

 

 

$

180,886

 

Accounts receivable

 

 

3,858

 

 

 

965

 

Prepaid expenses

 

 

7,862

 

 

 

9,497

 

Other current assets

 

 

934

 

 

 

2,324

 

Total current assets

 

 

166,841

 

 

 

193,672

 

Property, equipment, and software—net

 

 

38,784

 

 

 

39,571

 

Intangible assets—net

 

 

1,417

 

 

 

1,432

 

Right-of-use assets

 

 

6,588

 

 

 

 

Other assets

 

 

572

 

 

 

558

 

Total assets

 

$

214,202

 

 

$

235,233

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,766

 

 

$

2,037

 

Accrued compensation

 

 

1,988

 

 

 

4,425

 

Accrued clinical and research and development expenses

 

 

2,534

 

 

 

2,400

 

Accrued other expenses and other current liabilities

 

 

2,433

 

 

 

1,584

 

Deferred revenue

 

 

13,307

 

 

 

16,486

 

Lease liabilities

 

 

1,729

 

 

 

 

Total current liabilities

 

 

23,757

 

 

 

26,932

 

Deferred revenue—noncurrent

 

 

65,935

 

 

 

65,895

 

Deferred rent—noncurrent

 

 

 

 

 

4,092

 

Lease liabilities—noncurrent

 

 

9,476

 

 

 

 

Total liabilities

 

 

99,168

 

 

 

96,919

 

Commitments and contingencies (Note 4)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value— 10,000,000 shares authorized as of March 31, 2020 and December 31, 2019; no shares issued and outstanding as of March 31, 2020 and December 31, 2019

 

 

 

 

 

 

Common stock; $0.000005 par value— 200,000,000 shares authorized as of March 31, 2020 and December 31, 2019; 52,253,327 shares issued and 51,442,855 shares outstanding as of March 31, 2020; 51,965,708 shares issued and 51,155,236 shares outstanding as of December 31, 2019

 

 

 

 

 

 

Additional paid-in capital

 

 

319,889

 

 

 

316,333

 

Accumulated deficit

 

 

(203,903

)

 

 

(177,067

)

Treasury stock

 

 

(952

)

 

 

(952

)

Total stockholders’ equity

 

 

115,034

 

 

 

138,314

 

Total liabilities and stockholders’ equity

 

$

214,202

 

 

$

235,233

 

 

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 March 31,

 

 

 

2020

 

 

2019

 

Revenue

 

$

6,998

 

 

$

5,462

 

Operating expenses

 

 

 

 

 

 

 

 

Research and development

 

 

24,879

 

 

 

19,961

 

General and administrative

 

 

9,615

 

 

 

4,995

 

Total operating expenses

 

 

34,494

 

 

 

24,956

 

Loss from operations

 

 

(27,496

)

 

 

(19,494

)

Other income (expense), net:

 

 

 

 

 

 

 

 

Change in fair value of convertible notes payable

 

 

 

 

 

(12,708

)

Interest expense

 

 

 

 

 

(182

)

Interest income

 

 

660

 

 

 

601

 

Total other income (expense), net

 

 

660

 

 

 

(12,289

)

Net loss and net loss attributable to common stockholders

 

$

(26,836

)

 

$

(31,783

)

Net loss per share attributable to common stockholders-

   basic and diluted

 

$

(0.52

)

 

$

(1.99

)

Weighted average shares of common stock outstanding-

   basic and diluted

 

 

51,312,770

 

 

 

15,967,036

 

 

See notes to condensed consolidated financial statements

 

 

6


Precision Biosciences, Inc.

Condensed Consolidated Statements of Changes in

Stockholders’ Equity

(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

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Stock

 

 

Equity

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance- January 1, 2020

 

 

 

 

$

 

 

 

 

 

$

 

 

 

51,965,708

 

 

$

 

 

$

316,333

 

 

$

(177,067

)

 

$

(952

)

 

$

138,314

 

Stock option exercises

 

 

 

 

 

 

 

 

 

 

 

 

 

 

244,999

 

 

 

 

 

 

212

 

 

 

 

 

 

 

 

 

212

 

Issuance of common stock under employee stock purchase plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42,620

 

 

 

 

 

 

239

 

 

 

 

 

 

 

 

 

239

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,105

 

 

 

 

 

 

 

 

 

3,105

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(26,836

)

 

 

 

 

 

(26,836

)

Balance- March 31, 2020

 

 

 

 

$

 

 

 

 

 

$

 

 

 

52,253,327

 

 

$

 

 

$

319,889

 

 

$

(203,903

)

 

$

(952

)

 

$

115,034

 

 

See notes to condensed consolidated financial statements

 

 

 

 

7


 

Precision Biosciences, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(26,836

)

 

$

(31,783

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,155

 

 

 

939

 

Share-based compensation

 

 

3,105

 

 

 

1,549

 

Non-cash interest expense

 

 

 

 

 

182

 

Change in fair value of convertible notes payable

 

 

 

 

 

12,708

 

Amortization of right-of-use assets

 

 

235

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses

 

 

1,635

 

 

 

613

 

Accounts receivable

 

 

(2,894

)

 

 

(5,634

)

Other assets and other current assets

 

 

1,411

 

 

 

(141

)

Accounts payable

 

 

(266

)

 

 

1,481

 

Accrued other expenses and other current liabilities

 

 

(916

)

 

 

(768

)

Deferred revenue

 

 

(3,139

)

 

 

947

 

Lease liabilities and right-of-use assets

 

 

(400

)

 

 

 

Net cash used in operating activities

 

 

(25,910

)

 

 

(19,907

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, equipment and software

 

 

(1,103

)

 

 

(5,082

)

Net cash used in investing activities

 

 

(1,103

)

 

 

(5,082

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

 

212

 

 

 

107

 

Proceeds from employee stock purchase plan

 

 

239

 

 

 

 

Deferred offering costs

 

 

(137

)

 

 

(1,362

)

Issuance of convertible notes

 

 

 

 

 

39,550

 

Net cash provided by financing activities

 

 

314

 

 

 

38,295

 

Net increase (decrease) in cash and cash equivalents

 

 

(26,699

)

 

 

13,306

 

Cash and cash equivalents—beginning of period

 

 

180,886

 

 

 

103,193

 

Cash and cash equivalents —end of period

 

$

154,187

 

 

$

116,499

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of noncash financing and investing activities:

 

 

 

 

 

 

 

 

Property, equipment and software additions included in accounts payable,

   accrued expenses and other current liabilities

 

$

651

 

 

$

3,951

 

Deferred offering costs included in accounts payable, accrued expenses

   and other current liabilities

 

$

66

 

 

$

800

 

 

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 dedicated to improving life through the application of its pioneering, proprietary ARCUS genome editing platform to treat human diseases and create healthy and sustainable food and agricultural solutions.  The Company is actively developing product candidates through two reportable segments: Therapeutics and Food.  The Therapeutics segment is focused on allogeneic CAR T cell immunotherapy and in vivo gene correction.  The Food segment focuses on applying ARCUS to develop food and nutrition products through collaboration agreements with consumer-facing companies.

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.  Elo Life Systems Australia Pty Ltd was incorporated on May 29, 2018 as a 100% owned subsidiary of Elo Life Systems, Inc.  Additionally, the Company’s 100% owned subsidiary Precision BioSciences UK Limited was incorporated on June 17, 2019.  The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries. 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 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.

In connection with the IPO, on March 15, 2019 the Company effected 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 were 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 notes payable including accrued interest were settled into 2,921,461 shares of common stock (see Note 5).  Subsequent to the closing of the IPO, there were no shares of Series A or Series B convertible preferred stock or convertible notes payable outstanding.

Management believes that existing cash and cash equivalents will allow the Company to continue its operations into the second half of 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. (“GAAP”), 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 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on March 10, 2020.

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 presentation of the Company’s consolidated financial position as of March 31, 2020 and consolidated results of operations for the three months ended March 31, 2020 and 2019 and the consolidated cash flows for the three months ended March 31, 2020 and 2019, have been made. The Company’s consolidated results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2020.

Summary of Significant Accounting Policies

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (“ASC 842”), to enhance the transparency and comparability of financial reporting related to leasing arrangements. In November 2019, the FASB issued ASU 2019-10, Financial Instruments — Credit losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which provided a one-year deferral of the effective dates of ASC 842. The Company adopted ASC 842 on January 1, 2020, or the effective date, and used the effective date as its date of initial application.

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and lease liabilities. The Company has elected not to recognize on the balance sheet leases with terms of one year or less. Lease liabilities and corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. However, certain adjustments to the right-of-use asset may be required for items such as prepaid and deferred rent. In calculating the present value of the lease payments, the Company has elected to apply the discount rate based on the remaining lease term as of the transition date, January 1, 2020.  However, as the rate implicit in the lease is not readily determinable, the Company utilizes its incremental borrowing rates, which are the rates incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

The Company has elected to account for the lease and non-lease components of each of its operating leases as a single lease component. The operating right-of-use asset recorded on the balance sheet is amortized on a straight-line basis as lease expense.

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 ASU No. 2014-09, Revenue: 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. 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.

10


 

At contract inception, once the contract is determined to be within the scope of ASC 606, the Company evaluates the performance obligations promised in the contract that are based on goods and services that will be transferred to the customer and determines whether those obligations are both (i) capable of being distinct and (ii) distinct in the context of the contract. Goods or services that meet these criteria are considered distinct performance obligations. If both these criteria are not met, the goods and services are combined into a single performance obligation. 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.  The Company assesses if these options provide a material right to the customer and if so, these options 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. For the three months ended March 31, 2020, the Company reduced revenue recognition by $1.6 million for changes in total estimated time to be incurred in the future to satisfy the performance obligation.

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 deferred revenue within current liabilities 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 – noncurrent. 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 8, “Collaboration and license agreements.”

11


 

Accounting Standards Updates

In February 2016, the FASB issued ASU 2016-02, Leases (“ASC 842”). In November 2019, the FASB issued ASU 2019-10, Financial Instruments — Credit losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which provided a one-year deferral of the effective dates of ASC 842. This standard was issued in order to improve comparability among organizations by recognizing lease assets and liabilities for all leases, with certain exceptions, on the balance sheet. The Company elected to early adopt ASC 842 on January 1, 2020, or the effective date, and used the effective date as its date of initial application. As such, the Company did not adjust prior period amounts. The Company also elected to adopt the package of practical expedients upon transition, which permits companies to not reassess lease identification, classification, and initial direct costs under ASC 842 for leases that commenced prior to the effective date. Upon adoption, the Company recorded lease liabilities of $11.6 million, right-of-use assets of $6.8 million, and a reduction of existing deferred rent balances of $4.8 million on the balance sheet as of January 1, 2020.

In May 2014, the Financial Accounting Standards Board, or FASB, issued ASC 606, which superseded the revenue requirements in ASC 605. 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 in the first quarter of 2019 to reduce the opening balance of accumulated deficit as of January 1, 2019 primarily as a result of the treatment of the up-front consideration received from the Company’s collaboration agreements under prior revenue recognition guidance. During the three months ended March 31, 2020, the Company recognized $3.7 million in revenue that was included in the deferred revenue balance as of December 31, 2019.

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 Servier. Under ASC 605, 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 may not be achieved. In addition, under ASC 605, the Company recognized revenue 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.

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 is intended to improve the effectiveness of disclosures in the notes to financial statements related to fair value measurements in Topic 820. This ASU will become effective for annual periods beginning after December 15, 2019, including interim periods within that period, and early adoption is permitted. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.

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 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.

12


 

NOTE 2:

STOCKHOLDERS’ EQUITY

Capital Structure

Upon the closing of the IPO, all of the Company’s outstanding shares of the Series A and Series B convertible preferred stock automatically converted into 22,301,190 shares of common stock and the Company’s outstanding convertible notes payable including accrued interest converted into 2,921,461 shares of common stock at the applicable conversion ratio. Subsequent to the closing of the IPO, there were no shares of preferred stock outstanding.

On April 1, 2019, the Company filed an amendment to its amended and restated certificate of incorporation pursuant to which, among other things, the Company increased its authorized shares to 210,000,000 shares of capital stock, of which 200,000,000 shares were designated as $0.000005 par value common stock and 10,000,000 shares were designated as $0.0001 par value preferred stock.

NOTE 3:

SHARE-BASED COMPENSATION

Under the terms of its equity incentive award plans, the Company’s board of directors may grant equity or equity-based awards to employees, directors and service providers. The Company granted 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 2006 Plan. There were 1,380,203 stock options outstanding under the 2006 Plan as of March 31, 2020.  

 

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 5,152,693 stock options outstanding as of March 31, 2020. 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 on March 27, 2019. On March 27, 2019, 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 share-based awards initially equal to 4,750,000 shares of common stock.  The 2019 Plan provides for an annual increase to the number of shares of common stock available for issuance 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) 4% of the aggregate number of shares of common stock outstanding on the final day of the immediately preceding calendar year and (ii) such smaller number of shares of common stock as determined by the board of directors. The number of shares available for issuance under the 2019 Plan was increased by 2,046,209 on January 1, 2020 pursuant to this provision. Any shares that are subject to awards outstanding under the Company’s 2006 Plan and 2015 Plan 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, will become available for award grants under the 2019 Plan.  The 2019 Plan had 2,453,540 stock options outstanding as of March 31, 2020.

Up to 525,000 shares of the Company’s common stock were initially reserved for issuance under the 2019 ESPP.  The 2019 ESPP provides for an annual increase to the number of shares available for issuance 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.  The number of shares available for issuance under the 2019 ESPP was increased by 511,552 shares on January 1, 2020 pursuant to this provision. 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 first ESPP offering period commenced on October 21, 2019 and ended on February 29, 2020; 42,620 shares were issued with respect to this offering period.  The next ESPP offering period commenced on March 1, 2020 and will end on August 31, 2020. 

The Company recorded employee and nonemployee share-based compensation expense as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Employee

 

$

2,929

 

 

$

1,439

 

Nonemployee

 

 

176

 

 

 

110

 

 

 

$

3,105

 

 

$

1,549

 

 

13


 

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,

 

 

 

2020

 

 

2019

 

Research and development

 

$

1,855

 

 

$

1,006

 

General and administrative

 

 

1,250

 

 

 

543

 

 

 

$

3,105

 

 

$

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 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,

 

 

 

2020

 

Estimated dividend yield

 

 

0.00

%

Weighted-average expected stock price volatility

 

 

72.43

%

Weighted-average risk-free interest rate

 

 

1.49

%

Expected life of options (in years)

 

 

6.58

 

Weighted-average fair value per option

 

$

8.15

 

 

The expected volatility rates are estimated based on the actual volatility of comparable public companies over the expected term. The expected term 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 utilizes a weighted value considering actual history and estimated expected term based on the midpoint of final vest date and expiration date. The risk-free rate is based on the United States Treasury yield curve during the expected life of the option.

The following table summarizes activity in the Company’s stock option plans for the three months ended March 31, 2020:

 

 

 

Outstanding Option Shares

 

 

Weighted-Average Exercise Price

 

Balance as of January 1, 2020

 

 

8,919,116

 

 

$

7.02

 

Granted

 

 

414,856

 

 

 

12.26

 

Exercised

 

 

(244,999

)

 

 

0.87

 

Forfeited/canceled

 

 

(102,537

)

 

 

7.99

 

Balance as of March 31, 2020

 

 

8,986,436

 

 

$

7.42

 

 

The intrinsic value of stock options exercised was $2.1 million and $1.9 million during the three months ended March 31, 2020 and 2019, respectively.

There was approximately $28.9 million of total unrecognized compensation cost related to unvested stock options as of March 31, 2020, which is expected to be recognized over a weighted-average period of 2.8 years.

NOTE 4:

COMMITMENTS AND CONTINGENCIES

Litigation

The Company is not subject to any material legal proceedings.

14


 

COVID-19 Pandemic

On March 11, 2020, the World Health Organization designated the outbreak of the novel strain of coronavirus known as COVID-19 as a global pandemic. Governments and businesses around the world have taken unprecedented actions to mitigate the spread of COVID-19, including, but not limited to, shelter-in-place orders, quarantines, significant restrictions on travel, as well as restrictions that prohibit many employees from going to work. Uncertainty with respect to the economic impacts of the pandemic has introduced significant volatility in the financial markets. The Company did not observe significant impacts on its business or results of operations for the three months ended March 31, 2020 due to the global emergence of COVID-19. While the extent to which COVID-19 impacts the Company’s future results will depend on future developments, the pandemic and associated economic impacts could result in a material impact to the Company’s future financial condition, results of operations and cash flows. To date, Precision has not experienced material delays to its planned or ongoing clinical trials.

Leases

The Company has operating leases for real estate in North Carolina and does not have any finance leases.

During the three months ended March 31, 2020, the Company entered into two related amendments to an existing real estate lease for additional space. The Company is involved in the construction and design of the space and anticipates that it will incur construction costs, subject to an allowance for tenant improvements of up to $0.9 million. The lease expires on August 31, 2027. The base rent is $0.5 million per year, subject to an annual upward adjustment of 3.0%. Variable lease payments include the Company’s allocated share of costs incurred and expenditures made by the landlord in the operation and management of the building. The lease commencement date, for accounting purposes, was not reached as of March 31, 2020 and therefore the lease is not included in the Company’s operating lease right-of-use asset or operating lease liabilities as of March 31, 2020. As part of the amendments, upon construction completion, the term of the existing space will be extended by one year, through August 31, 2027.

Many of the Company’s leases contain options to renew and extend lease terms and options to terminate leases early. Reflected in the right-of-use asset and lease liability on the Company’s balance sheet are the periods provided by renewal and extension options that the Company is reasonably certain to exercise, as well as the periods provided by termination options that the Company is reasonably certain to not exercise.

The Company has existing leases that include variable lease payments that are not included in the right-of-use asset and lease liability and are reflected as an expense in the period incurred. Such payments primarily include common area maintenance charges and fluctuations in rent payments that are driven by factors such as future changes in an index (e.g. the Consumer Price Index).

The Company has existing net leases in which the non-lease components (e.g., common area maintenance, consumables, etc.) are paid separately from rent based on actual costs incurred and therefore are not included in the right-of-use asset and lease liability but rather reflected as an expense in the period incurred. As of March 31, 2020, right-of-use assets of $6.6 million, current lease liabilities of $1.7 million, and non-current lease liabilities of $9.5 million are reflected on the balance sheet. The elements of lease expense were as follows:

 

(in thousands)

 

Three Months Ended

March 31, 2020

 

Lease Cost

 

 

 

 

Operating lease cost

 

$

467

 

Short-term lease cost

 

 

126

 

Variable lease cost

 

 

214

 

Total Lease Cost

 

$

807

 

 

 

 

 

 

Other Information

 

 

 

 

Operating cash flows used for operating leases

 

 

632

 

Operating lease liabilities arising from obtaining right-of-use assets

 

 

-

 

 

 

 

 

 

Operating Leases

 

 

 

 

Weighted average remaining lease term (in years)

 

 

5.2

 

 

 

 

 

 

Operating Leases

 

 

 

 

Weighted average discount rate

 

 

8.3

%

 

15


 

Future lease payments under non-cancelable leases with terms of greater than one year as of March 31, 2020, were as follows:

 

(in thousands)

 

March 31, 2020

 

2020 (excluding the 3 months ended March 31, 2020)

 

$

1,921

 

2021

 

 

2,635

 

2022

 

 

2,718

 

2023

 

 

2,795

 

2024

 

 

2,103

 

2025 and beyond

 

 

1,639

 

Total lease payments

 

 

13,811

 

Less: imputed interest

 

 

2,606

 

Total operating lease liabilities

 

$

11,205

 

 

Minimum lease payments under operating leases as of December 31, 2019 under superseded ASC 840 Leases accounting guidance were as follows:

 

(in thousands)

 

December 31, 2019

 

2020

 

$

2,706

 

2021

 

 

3,099

 

2022

 

 

3,196

 

2023

 

 

3,288

 

2024

 

 

2,611

 

2025 and beyond

 

 

3,066

 

Total minimum lease payments

 

$

17,966

 

 

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 and contract research organizations (“CROs”) for clinical trial services. 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 5:

DEBT

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 notes payable (the “2019 Notes”).

The 2019 Notes accrued 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 of $13.60 per share (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 $49.4 million as of April 1, 2019, the settlement date.

Revolving Line

In May 2019, the Company entered into a loan and security agreement with Pacific Western Bank (the “Pacific Western Loan Agreement”) pursuant to which the Company may request advances on a revolving line of credit of up to an aggregate principal of $50.0 million (the “Revolving Line”). The maturity date of the Revolving Line is May 15, 2022.  

16


 

The Revolving Line bears interest at an annual rate equal to the greater of (i) 1.25% below the prime rate then in effect, or (ii) 4.25% at all times when the Company maintains a daily balance of cash in its demand deposit accounts at Pacific Western Bank of at least $25.0 million, and the greater of (i) 0.25% above the prime rate then in effect; or (ii) 5.75% at all times when the Company does not maintain a daily balance of cash in demand deposit accounts at Pacific Western Bank of at least $25.0 million.  The Pacific Western Loan Agreement requires that the Company pay a quarterly fee in an amount equal to 0.50% per annum of the unused portion of the Revolving Line. The unused fee shall be waived for any quarter the Company maintains a daily balance in its demand deposit accounts of at least $25.0 million. The Pacific Western Loan Agreement includes customary representations, warranties and covenants (affirmative and negative).

There were no borrowings, and the Company was in compliance with its financial covenants, under the Pacific Western Loan Agreement as of March 31, 2020.

NOTE 6:

Income Taxes

The Company estimates an annual effective tax rate of 0% for the year ending December 31, 2020 as the Company incurred losses for the three months ended March 31, 2020 and is forecasting additional losses through the remainder of fiscal year ending December 31, 2020, resulting in an estimated net loss for both financial statement and tax purposes for the year ending December 31, 2020. Therefore, no federal or state income taxes are expected and none have been recorded at this time. Income taxes have been accounted for using the liability method.

Due to the Company's history of losses since inception, 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. Accordingly, the deferred tax assets have been reduced by a full valuation allowance, since the Company does not currently believe that realization of its deferred tax assets is more likely than not.

As of March 31, 2020, the Company had no unrecognized income tax benefits that would reduce the Company’s effective tax rate if recognized.

NOTE 7:

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

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, 2020 and December 31, 2019, 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):

 

March 31, 2020

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

10,090

 

 

$

10,090

 

 

$

 

 

$

 

Repurchase agreements

 

 

139,000

 

 

 

 

 

 

139,000

 

 

 

 

 

 

$

149,090

 

 

$

10,090

 

 

$

139,000

 

 

$

 

 

17


 

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 8:

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 predecessor entities to Servier. 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. 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 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 actual time of R&D activities performed relative to expected time to be incurred in the future to satisfy the performance obligation. Management evaluates and adjusts the total expected research effort for the performance obligation on a quarterly basis based upon actual research accomplishments and the probability of continuing research efforts in the future. 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 remaining performance obligation associated with the $105.0 million upfront payment is expected to be satisfied over a 4 year period as of March 31, 2020.

During the three months ended March 31, 2020 and 2019, the Company recognized revenue under the agreement with Servier of approximately $2.1 million and $1.5 million, respectively. Deferred revenue related to the agreement with Servier amounted to $78.7 million and $80.9 million as of March 31, 2020 and December 31, 2019, respectively, of which $12.8 million and $15.0 million, respectively is included in current liabilities. No development or sales-based milestone payments were received during the three months ended March 31, 2020 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.

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 each of the three months ended March 31, 2020 and 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 $0.5 million and $1.5 million as of March 31, 2020 and December 31, 2019, respectively, all of which is included in current liabilities. No development or sales-based milestone payments were received during the three months ended March 31, 2020.  

18


 

NOTE 9:

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). The Company previously 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 and presented such allocated expenditures separately from segment operational cash expenditures.  Beginning January 1, 2020, such allocated expenditures are included within segment operational cash expenditures.  Prior period information was presented consistent with the current period presentation.  In January 2019, the Food segment moved into a new leased facility at Research Triangle Park, North Carolina. The Company determined that the Food segment is no longer deriving benefit from the Company’s centralized research and development expenditures for early stage research, nuclease development and the purchase of general laboratory supplies and, as such, all these expenditures are allocated to the Therapeutics segment. Certain reclassifications have been made to the presentation of reportable segments as centralized research and development expenditures are no longer reported separately. The reportable segment operational cash expenditures include cash disbursements for compensation, laboratory supplies, purchases of property, equipment and software and procuring services from 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.

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.

19


 

Presented below is the financial information with respect to the Company’s reportable segments:

 

 

 

Three Months Ended March 31,

 

(in thousands)

 

2020

 

 

2019

 

Revenue:

 

 

 

 

 

 

 

 

Therapeutics

 

$

5,473

 

 

$

4,819

 

Food

 

 

1,525

 

 

 

643

 

Total segment revenue

 

 

6,998

 

 

 

5,462

 

Segment operational cash expenditures:

 

 

 

 

 

 

 

 

Therapeutics

 

$

19,257

 

 

$

16,663

 

Food

 

 

2,818

 

 

 

2,107

 

Total segment operational cash expenditures

 

 

22,075

 

 

 

18,770

 

Segment operating loss:

 

 

 

 

 

 

 

 

Therapeutics

 

$

(13,784

)

 

$

(11,844

)

Food

 

 

(1,293

)

 

 

(1,464

)

Total segment operating loss

 

 

(15,077

)

 

 

(13,308

)

Adjustments to reconcile segment operating loss to consolidated

   loss from operations:

 

 

 

 

 

 

 

 

Corporate general and administrative cash expenditures

 

$

(5,903

)

 

$

(7,022

)

Interest income received

 

 

(660

)

 

 

(601

)

Depreciation and amortization

 

 

(2,155

)

 

 

(939

)

Amortization of right-of-use asset

 

 

(235

)

 

 

-

 

Share-based compensation

 

 

(3,105

)

 

 

(1,549

)

Changes in prepaid expenses, accounts payable and accrued expenses

 

 

(361

)

 

 

3,925

 

Total consolidated loss from operations

 

$

(27,496

)

 

$

(19,494

)

 

20


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q. including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many important factors, including those set forth in Part II. Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in, or implied, by these forward-looking statements. As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to “we,” “us,” “our,” “the Company” and “Precision” refer to Precision BioSciences, Inc. and its subsidiaries on a consolidated basis.

Overview

We are a life sciences company dedicated to improving life through the application of our pioneering, proprietary ARCUS genome editing platform. We leverage ARCUS in the development of our product candidates, which are designed to treat human diseases and create healthy and sustainable food and agricultural solutions. We are actively developing product candidates in three innovative areas: allogeneic CAR T cell immunotherapy, in vivo gene correction, and food. We are currently conducting a Phase 1/2a clinical trial of PBCAR0191 in adult patients with relapsed or refractory, or R/R, non-Hodgkin lymphoma, or NHL, or R/R B-cell precursor acute lymphoblastic leukemia, or B-ALL. PBCAR0191 is our first gene-edited allogeneic chimeric antigen receptor, or CAR, T cell therapy candidate targeting CD19 and is being developed in collaboration with Les Laboratoires Servier, or Servier. We have received orphan drug designation, or ODD, for PBCAR0191 from the U.S. Food and Drug Administration, or FDA, for the treatment of ALL. The NHL cohort will include patients with mantle cell lymphoma (MCL), an aggressive subtype of NHL, for which we have received ODD from the FDA. Made from donor-derived T cells modified using our ARCUS genome editing technology, PBCAR0191 recognizes the well characterized tumor cell surface protein CD19, an important and validated target in several B-cell cancers, and is designed to avoid graft-versus-host disease, or GvHD, a significant complication associated with donor-derived, cell-based therapies. We believe that this trial, which is designed to assess the safety and tolerability of PBCAR0191 at increasing dose levels, as well as to evaluate anti-tumor activity, is the first U.S.-based clinical trial to evaluate an allogeneic CAR T therapy for R/R NHL. Furthermore, we believe that our proprietary, one-step engineering process for producing allogeneic CAR T cells with a potentially optimized cell phenotype, at large scale in a cost-effective manner, will enable us to overcome the fundamental clinical and manufacturing challenges that have limited the CAR T field to date.

In December 2019, we announced initial data from this ongoing Phase 1/2a clinical trial of PBCAR0191 in adult patients with R/R NHL and R/R B-ALL. A total of nine adult patients were reported in these initial Phase 1 trial results, including six with NHL (three treated at Dose Level 1 (3x105 cells/kg), or DL1, and three treated at Dose Level 2 (1x106 cells/kg), or DL2), and three with B-ALL (all treated at DL2). These data indicated no serious adverse events or dose limiting toxicities. In the NHL cohort, four of six patients demonstrated an objective tumor response by Lugano criteria at day 28, for an overall objective response rate of 67%, including three partial responses and one complete response. In the ALL cohort, one of three patients achieved a complete response at day 28 following treatment with PBCAR0191. As of December 31, 2019, dosing of patients at Dose Level 3 (3x106 cells/kg) was underway.  Based on the data observed at DL1 and DL2, we filed a protocol amendment for this trial with the FDA in December 2019.  The amended trial design is intended to specifically address key clinical questions. These include assessing the impact of higher total doses of cells on clinical activity and/or the impact of modified lymphodepletion on the ability to achieve durable clinical benefit with associated CAR T cell expansion and persistence. Following feedback from the FDA in late January 2020, the protocol amendment is now being implemented and we are actively advancing the cell dose and lymphodepletion regimen in order to maximize therapeutic benefit. The PBCAR0191 clinical trial continues to progress, and no dose limiting toxicities or serious adverse events have been observed to date. We expect to present updated interim clinical data from both the NHL and B-ALL cohorts of this trial during 2020.

In January 2020, the FDA accepted our IND application for our third allogeneic CAR T cell therapy product candidate, PBCAR269A, for which we expect to commence a Phase 1/2a clinical trial in 2020. PBCAR269A is wholly owned by us and is designed to target the validated tumor cell surface target BCMA. It will be investigated in subjects with R/R multiple myeloma and we have received orphan drug designation from the FDA for this indication.

Also in January 2020, we announced that we expect to advance a program targeting the rare genetic disease primary hyperoxaluria type 1, or PH1 as our lead wholly owned in vivo gene correction program. PH1 affects approximately 1-3 people per million in the United States and is caused by loss of function mutations in the AGXT gene, leading to the accumulation of calcium oxalate crystals in the kidneys. Patients suffer from painful kidney stones which may ultimately lead to renal failure. Using ARCUS, we are developing a potential therapeutic approach to PH1 that involves knocking out a gene called HAO1 which acts upstream of AGXT. Suppressing HAO1 has been shown in preclinical models by us to prevent the formation of calcium oxalate. We therefore believe that a one-time administration of an ARCUS nuclease targeting HAO1 may be a viable strategy for a durable treatment of PH1 patients. In preclinical studies we have demonstrated in a m