fate-10q_20190930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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 September 30, 2019

OR

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934

From the transition period from            to             .

Commission File Number 001-36076

FATE THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

65-1311552

(State or other jurisdiction

of incorporation or organization)

 

(IRS Employer

Identification No.)

 

 

 

3535 General Atomics Court, Suite 200, San Diego, CA

 

92121

(Address of principal executive offices)

 

(Zip Code)

 

(858) 875-1800

(Registrant’s telephone number, including area code)

 

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

FATE

Nasdaq Global 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 November 4, 2019, 75,592,739 shares of the registrant’s common stock, par value $0.001 per share, were issued and outstanding.

 

 


 

FATE THERAPEUTICS, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

Item 1.

Condensed Consolidated Financial Statements (unaudited)

 

3

 

Condensed Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018 (unaudited)

 

3

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2019 and 2018 (unaudited)

 

4

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited)

 

5

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

6

Item 2.

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

 

22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

31

Item 4.

Controls and Procedures

 

32

 

 

 

 

PART II. OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

33

Item 1A.

Risk Factors

 

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

59

Item 3.

Defaults Upon Senior Securities

 

59

Item 4.

Mine Safety Disclosures

 

59

Item 5.

Other Information

 

59

Item 6.

Exhibits

 

60

 

 

 

 

SIGNATURES

 

61

 

 

 

2


PART I. FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements (unaudited)

Fate Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

249,588

 

 

$

190,514

 

Accounts receivable

 

 

 

 

 

500

 

Short-term investments and related maturity receivables

 

 

53,235

 

 

 

10,493

 

Prepaid expenses and other current assets

 

 

2,810

 

 

 

3,689

 

Total current assets

 

 

305,633

 

 

 

205,196

 

Property and equipment, net

 

 

9,653

 

 

 

5,125

 

Operating lease right-of-use assets

 

 

23,160

 

 

 

 

Restricted cash

 

 

227

 

 

 

227

 

Collaboration contract asset

 

 

1,525

 

 

 

1,958

 

Other assets

 

 

9

 

 

 

526

 

Total assets

 

$

340,207

 

 

$

213,032

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,715

 

 

$

4,205

 

Accrued expenses

 

 

13,843

 

 

 

10,926

 

CIRM award liability, current portion

 

 

2,106

 

 

 

2,106

 

Deferred revenue, current portion

 

 

3,367

 

 

 

7,588

 

Operating lease liabilities, current portion

 

 

1,632

 

 

 

 

Long-term debt, current portion

 

 

13,932

 

 

 

2,438

 

Total current liabilities

 

 

40,595

 

 

 

27,263

 

Deferred rent

 

 

 

 

 

3,401

 

Accrued expenses

 

 

 

 

 

549

 

Deferred revenue, net of current portion

 

 

4,496

 

 

 

7,500

 

CIRM award liability, net of current portion

 

 

1,404

 

 

 

1,404

 

Operating lease liabilities, net of current portion

 

 

25,670

 

 

 

 

Long-term debt, net of current portion

 

 

 

 

 

12,446

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; authorized shares—5,000,000

   at September 30, 2019 and December 31, 2018; Class A Convertible

   Preferred shares issued and outstanding—2,794,549 at September 30, 2019

   and 2,819,549 at December 31, 2018

 

 

3

 

 

 

3

 

Common stock, $0.001 par value; authorized shares—150,000,000 at

  September 30, 2019 and December 31, 2018; issued and

   outstanding—75,415,948 at September 30, 2019 and 64,693,681 at

   December 31, 2018

 

 

75

 

 

 

65

 

Additional paid-in capital

 

 

623,156

 

 

 

445,799

 

Accumulated other comprehensive gain (loss)

 

 

51

 

 

 

(2

)

Accumulated deficit

 

 

(355,243

)

 

 

(285,396

)

Total stockholders’ equity

 

 

268,042

 

 

 

160,469

 

Total liabilities and stockholders’ equity

 

$

340,207

 

 

$

213,032

 

 

See accompanying notes.

3


Fate Therapeutics, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share data)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

(unaudited)

 

Collaboration revenue

 

$

2,429

 

 

$

1,026

 

 

$

7,878

 

 

$

3,079

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

23,202

 

 

 

13,637

 

 

 

62,561

 

 

 

41,929

 

General and administrative

 

 

6,346

 

 

 

4,081

 

 

 

16,966

 

 

 

11,501

 

Total operating expenses

 

 

29,548

 

 

 

17,718

 

 

 

79,527

 

 

 

53,430

 

Loss from operations

 

 

(27,119

)

 

 

(16,692

)

 

 

(71,649

)

 

 

(50,351

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

910

 

 

 

339

 

 

 

3,016

 

 

 

1,046

 

Interest expense

 

 

(400

)

 

 

(429

)

 

 

(1,214

)

 

 

(1,266

)

Total other income (expense), net

 

 

510

 

 

 

(90

)

 

 

1,802

 

 

 

(220

)

Net loss

 

$

(26,609

)

 

$

(16,782

)

 

$

(69,847

)

 

$

(50,571

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on available-for-sale securities, net

 

 

(42

)

 

 

1

 

 

 

53

 

 

 

(11

)

Comprehensive loss

 

$

(26,651

)

 

$

(16,781

)

 

$

(69,794

)

 

$

(50,582

)

Net loss per common share, basic and diluted

 

$

(0.40

)

 

$

(0.31

)

 

$

(1.06

)

 

$

(0.95

)

Weighted-average common shares used to compute basic and diluted net loss per share

 

 

66,929,503

 

 

 

54,185,022

 

 

 

65,695,188

 

 

 

53,364,823

 

 

See accompanying notes.

 

 

4


Fate Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(69,847

)

 

$

(50,571

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,570

 

 

 

877

 

Stock-based compensation

 

 

12,827

 

 

 

4,509

 

Amortization of debt discounts and debt issuance costs

 

 

47

 

 

 

57

 

Accretion and amortization of premiums and discounts on investments, net

 

 

(558

)

 

 

(299

)

Amortization of collaboration contract asset

 

 

433

 

 

 

 

Noncash interest expense

 

 

238

 

 

 

279

 

Deferred rent

 

 

 

 

 

137

 

Deferred revenue

 

 

(7,225

)

 

 

8,421

 

Issuance of common stock for license agreement

 

 

 

 

 

6,100

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

500

 

 

 

(500

)

Prepaid expenses and other assets

 

 

867

 

 

 

(558

)

Accounts payable and accrued expenses

 

 

2,766

 

 

 

3,918

 

Right-of-use assets and lease liabilities, net

 

 

742

 

 

 

 

Net cash used in operating activities

 

 

(57,640

)

 

 

(27,630

)

Investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(4,805

)

 

 

(1,186

)

Purchases of short-term investments

 

 

(106,182

)

 

 

(55,660

)

Maturities of short-term investments

 

 

64,050

 

 

 

40,000

 

Net cash used in investing activities

 

 

(46,937

)

 

 

(16,846

)

Financing activities

 

 

 

 

 

 

 

 

Issuance of common stock from equity incentive plans, net of issuance

   costs

 

 

2,109

 

 

 

1,914

 

Proceeds from public offering of common stock, net of issuance costs

 

 

162,542

 

 

 

134,822

 

Proceeds from CIRM award

 

 

 

 

 

2,140

 

Principal repayments of long-term debt

 

 

(1,000

)

 

 

 

Net cash provided by financing activities

 

 

163,651

 

 

 

138,876

 

Net change in cash, cash equivalents and restricted cash

 

 

59,074

 

 

 

94,400

 

Cash, cash equivalents and restricted cash at beginning of the period

 

 

190,741

 

 

 

89,074

 

Cash, cash equivalents and restricted cash at end of the period

 

$

249,815

 

 

$

183,474

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Interest paid

 

$

938

 

 

$

929

 

Supplemental schedule of noncash investing and financing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment in accounts payable

 

$

804

 

 

$

50

 

 

See accompanying notes.

 

 

5


Fate Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

1.

Organization and Summary of Significant Accounting Policies

Organization

Fate Therapeutics, Inc. (the Company) was incorporated in the state of Delaware on April 27, 2007 and has its principal operations in San Diego, California. The Company is a clinical-stage biopharmaceutical company dedicated to the development of programmed cellular immunotherapies for cancer and immune disorders. The Company’s cell therapy pipeline is comprised of NK- and T-cell immuno-oncology programs, including off-the-shelf engineered product candidates derived from clonal master induced pluripotent stem cell (iPSC) lines, and immuno-regulatory programs, including product candidates to prevent life-threatening complications in patients undergoing hematopoietic cell transplantation and to promote immune tolerance in patients with autoimmune disease. Its adaptive cell therapy programs are based on the Company’s novel ex vivo cell programming approach, which it applies to modulate the therapeutic function and direct the fate of immune cells.

As of September 30, 2019, the Company has devoted substantially all of its efforts to product development, raising capital and building infrastructure and has not generated any revenues from any sales of its therapeutic products. To date, the Company’s revenues have been derived from collaboration agreements and government grants.

Public Equity Offerings

In September 2019, the Company completed a public offering of common stock in which investors, certain of which are affiliated with the directors of the Company, purchased 9,890,000 shares of its common stock at a price of $17.50 per share under a shelf registration statement. Gross proceeds from the offering were $173.1 million, and, after giving effect to $10.7 million of costs related to the offering (of which $0.1 million was unpaid as of September 30, 2019), net proceeds were $162.4 million.

In September 2018, the Company completed a public offering of common stock in which investors, certain of which are affiliated with the directors of the Company, purchased 10,648,149 shares of its common stock at a price of $13.50 per share under a shelf registration statement. Gross proceeds from the offering were $143.8 million, and, after giving effect to $8.9 million of costs related to the offering, net proceeds were $134.9 million.

In December 2017, the Company completed a public offering of common stock in which investors purchased 10,953,750 shares of its common stock at a price of $4.20 per share under a shelf registration statement. Gross proceeds from the offering were $46.0 million, and, after giving effect to $3.0 million of costs related to the offering (of which $0.3 million was paid during the nine months ended September 30, 2018), net proceeds were $43.0 million.

Use of Estimates

The Company’s unaudited condensed consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (GAAP). The preparation of the Company’s unaudited condensed consolidated financial statements requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the Company’s unaudited condensed consolidated financial statements and accompanying notes. The most significant estimates in the Company’s unaudited condensed consolidated financial statements relate to accrued expenses. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries, Fate Therapeutics Ltd., incorporated in the United Kingdom, Fate Therapeutics, B.V., incorporated in the Netherlands, and Tfinity Therapeutics, Inc., incorporated in the United States. To date, the aggregate operations of these subsidiaries have not been significant and all intercompany transactions and balances have been eliminated in consolidation.

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents include cash in readily available checking and savings accounts, money market accounts and money market funds. The Company considers all highly liquid investments with an original maturity of three months or less from the date of purchase to be cash equivalents.

6


The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the unaudited condensed consolidated balance sheets that sum to the total of the same such amount shown in the unaudited condensed consolidated statements of cash flows as of September 30, 2019 (in thousands):

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

Cash and cash equivalents

 

$

249,588

 

 

$

183,247

 

Restricted cash

 

 

227

 

 

 

227

 

Total cash, cash equivalents, and restricted cash shown in the unaudited condensed consolidated statement of cash flows

 

$

249,815

 

 

$

183,474

 

 

Amounts included in restricted cash represent security deposits required to secure the Company’s credit card limit and its facilities lease.

Investments

Investments are accounted for as available-for-sale securities and are carried at fair value, with the unrealized gains and losses reported in other comprehensive income (loss). The amortized cost of investments classified as available-for-sale debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on investments classified as available-for-sale securities are included in other income or expense. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income.

Unaudited Interim Financial Information

The accompanying interim condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP and following the requirements of the U.S. Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required can be condensed or omitted. The interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s financial statements and accompanying notes for the fiscal year ended December 31, 2018, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed by the Company with the SEC on March 5, 2019. In management’s opinion, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position and its results of operations and comprehensive loss and its cash flows for the periods presented. The results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results expected for the full fiscal year or any other interim period or any future year or period.

Revenue Recognition

The Company recognizes revenue in a manner that depicts the transfer of control of a product or a service to a customer and reflects the amount of the consideration the Company is entitled to receive in exchange for such product or service. In doing so, the Company follows a five-step approach: (i) identify the contract 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, and (v) recognize revenue when (or as) the customer obtains control of the product or service. The Company considers the terms of a contract and all relevant facts and circumstances when applying the revenue recognition standard. The Company applies the revenue recognition standard, including the use of any practical expedients, consistently to contracts with similar characteristics and in similar circumstances.

A customer is a party that has entered into a contract with the Company, where the purpose of the contract is to obtain a product or a service that is an output of the Company’s ordinary activities in exchange for consideration. To be considered a contract, (i) the contract must be approved (in writing, orally, or in accordance with other customary business practices), (ii) each party’s rights regarding the product or the service to be transferred can be identified, (iii) the payment terms for the product or the service to be transferred can be identified, (iv) the contract must have commercial substance (that is, the risk, timing or amount of future cash flows is expected to change as a result of the contract), and (v) it is probable that the Company will collect substantially all of the consideration to which it is entitled to receive in exchange for the transfer of the product or the service.

7


A performance obligation is defined as a promise to transfer a product or a service to a customer. The Company identifies each promise to transfer a product or a service (or a bundle of products or services, or a series of products and services that are substantially the same and have the same pattern of transfer) that is distinct. A product or a service is distinct if both (i) the customer can benefit from the product or the service either on its own or together with other resources that are readily available to the customer and (ii) the Company’s promise to transfer the product or the service to the customer is separately identifiable from other promises in the contract. Each distinct promise to transfer a product or a service is a unit of accounting for revenue recognition. If a promise to transfer a product or a service is not separately identifiable from other promises in the contract, such promises should be combined into a single performance obligation.

The transaction price is the amount of consideration the Company is entitled to receive in exchange for the transfer of control of a product or a service to a customer. To determine the transaction price, the Company considers the existence of any significant financing component, the effects of any variable elements, noncash considerations and consideration payable to the customer. If a significant financing component exists, the transaction price is adjusted for the time value of money. If an element of variability exists, the Company must estimate the consideration it expects to receive and uses that amount as the basis for recognizing revenue as the product or the service is transferred to the customer. There are two methods for determining the amount of variable consideration: (i) the expected value method, which is the sum of probability-weighted amounts in a range of possible consideration amounts, and (ii) the mostly likely amount method, which identifies the single most likely amount in a range of possible consideration amounts.

If a contract has multiple performance obligations, the Company allocates the transaction price to each distinct performance obligation in an amount that reflects the consideration the Company is entitled to receive in exchange for satisfying each distinct performance obligation. For each distinct performance obligation, revenue is recognized when (or as) the Company transfers control of the product or the service applicable to such performance obligation.

In those instances where the Company first receives consideration in advance of satisfying its performance obligation, the Company classifies such consideration as deferred revenue until (or as) the Company satisfies such performance obligation. In those instances where the Company first satisfies its performance obligation prior to its receipt of consideration, the consideration is recorded as accounts receivable.

The Company expenses incremental costs of obtaining and fulfilling a contract as and when incurred if the expected amortization period of the asset that would be recognized is one year or less, or if the amount of the asset is immaterial. Otherwise, such costs are capitalized as contract assets if they are incremental to the contract and amortized to expense proportionate to revenue recognition of the underlying contract.

Leases

Effective January 1, 2019, the Company determines if a contract contains a lease at the inception of the contract. The Company currently has leases related to its facilities leased for office and laboratory space, which are classified as operating leases. These leases result in operating right-of-use (ROU) assets, current operating lease liabilities, and non-current operating lease liabilities in the condensed consolidated balance sheets. The Company does not have any financing leases. Leases with a term of 12 months or less are considered short-term and a ROU asset and lease obligation are not recognized. Payments associated with short-term leases are expensed on a straight-line basis over the lease term.

Lease liabilities represent an obligation to make lease payments arising from the lease and ROU assets represent the right to use the underlying asset identified in the lease for the lease term. Lease liabilities are measured at the present value of the lease payments not yet paid discounted using the discount rate for the lease established at the lease commencement date. To determine the present value, the implicit rate is used when readily determinable. For those leases where the implicit rate is not provided, the Company determines an incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. ROU assets are measured as the present value of the lease payments and also include any prepaid lease payments made and any other indirect costs, and exclude any lease incentives received. Lease terms may include the impact of options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term. The Company aggregates all lease and non-lease components for each class of underlying assets into a single lease component.

Stock-Based Compensation

Stock-based compensation expense represents the cost of the grant date fair value of employee stock option and restricted stock unit grants recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis. For stock option grants for which vesting is subject to performance-based milestones, the expense is recorded over the remaining service period after the point when the achievement of the milestone is probable or the performance condition has been achieved. For stock option grants for which vesting is subject to both performance-based milestones and market conditions, expense is recorded over the derived service period after the point when the achievement of the performance-based milestone is probable or the performance condition has been achieved. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model, with the exception of option grants for which vesting is subject to both performance-based milestones and market conditions, which are valued using a lattice-based model. The fair value of restricted stock units is based on the closing price of the Company’s common stock as reported on The Nasdaq Global Market on the date of grant. The Company recognizes forfeitures for all awards as such forfeitures occur.

8


Convertible Preferred Stock

The Company applies the relevant accounting standards to distinguish liabilities from equity when assessing the classification and measurement of preferred stock. Preferred shares subject to mandatory redemptions are considered liabilities and measured at fair value. Conditionally redeemable preferred shares are considered temporary equity. All other preferred shares are considered as stockholders’ equity.

The Company applies the relevant accounting standards for derivatives and hedging (in addition to distinguishing liabilities from equity) when accounting for hybrid contracts that contain conversion options. Conversion options must be bifurcated from the host instruments and accounted for as free-standing financial instruments according to certain criteria. These criteria include circumstances when (i) the economic characteristics and risks of the embedded derivative instruments are not clearly and closely related to the economic characteristics and risks of the host contract, (ii) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable accounting principles with changes in fair value reported in earnings as they occurred, and (iii) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. The derivative is subsequently measured at fair value at each reporting date, with the changes in fair value reported in earnings.  

Comprehensive Loss

Comprehensive loss is defined as a change in equity during a period from transactions and other events and circumstances from non‑owner sources. Other comprehensive loss includes unrealized gains and losses on investments classified as available-for-sale securities, which was the only difference between net loss and comprehensive loss for the applicable periods.

Net Loss per Common Share

Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding for the period, without consideration for common stock equivalents. Dilutive common stock equivalents for the periods presented include convertible preferred stock, warrants for the purchase of common stock, and common stock options and restricted stock units outstanding under the Company’s stock option and incentive plan. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position.

For the three and nine months ended September 30, 2019, the Company realized a net loss of $26.6 million and $69.8 million, respectively. Shares of potentially dilutive securities totaled 24.0 million for the three and nine months ended September 30, 2019, including 14.0 million shares associated with a hypothetical conversion of all outstanding shares of the Company’s Class A convertible preferred stock, and an aggregate of 10.0 million shares of common stock issuable upon the exercise of outstanding stock options and the settlement of outstanding restricted stock units.

For the three and nine months ended September 30, 2018, the Company realized a net loss of $16.8 million and $50.6 million, respectively. Shares of potentially dilutive securities totaled 21.7 million for the three and nine months ended September 30, 2018, including 14.1 million shares associated with a hypothetical conversion of all outstanding shares of the Company’s Class A convertible preferred stock, and an aggregate of 7.5 million shares of common stock issuable upon the exercise of outstanding stock options and the settlement of outstanding restricted stock units.

Going Concern Assessment

Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year from the financial statement issuance date. The Company determined that there are no conditions or events that raise substantial doubt about its ability to continue as a going concern for a period of at least twelve months from the date of issuance of these financial statements.

Recently Adopted Accounting Pronouncements

In June 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-07. ASU 2018-07 expands the scope of Accounting Standards Codification (ASC) 718, Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Consistent with the accounting requirement for employee share-based payment awards, nonemployee share-based payment awards within the scope of ASC 718 will be measured at the grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018. The Company adopted the update in the first quarter of fiscal year 2019 using the modified retrospective method. The adoption did not have a material effect on the Company’s unaudited condensed consolidated financial statements.

9


In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASC 842), which requires a lessee to recognize a lease liability and a right-of-use asset for all leases with lease terms of more than 12 months. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those years, and early adoption is permitted. Companies may adopt this guidance using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. In July 2018, the FASB issued ASU 2018-11, which provides the option of an additional transition method that allows entities to initially apply the new lease guidance at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

The Company adopted the standard effective January 1, 2019 using the optional transition method as detailed in ASU 2018-11, which resulted in an increase in operating right-of-use assets of $16.6 million and an increase in total liabilities of $18.2 million on the unaudited condensed consolidated balance sheet as of the effective date. There was no material impact on the Company’s unaudited condensed consolidated statement of operations and comprehensive loss for the three and nine months ended September 30, 2019 as a result of the adoption of ASU 2016-02. There was no impact to the unaudited condensed consolidated financial statements for the prior periods presented due to the transition method elected. The Company elected the package of practical expedients permitted under the transition guidance, which among other things, allowed the Company to carry forward the historical lease classification. Additionally, the Company elected the hindsight provision for determining the lease term and elected to aggregate all lease and non-lease components for each class of underlying assets into a single lease component.   

Recently Issued Accounting Pronouncements

In November 2018, the FASB issued ASU 2018-18, which clarifies the interaction between ASC Topic 808, Collaborative Arrangements, and ASC Topic 606, Revenue from Contracts with Customers. The guidance, among other items, clarifies that certain transactions between collaborative participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. ASU 2018-18 is effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the expected impact of the guidance, but does not believe the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities. The standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the expected impact of the guidance, but does not believe the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13 (ASU 2018-13). ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, amends the disclosure requirements in ASC 820 by adding, changing, or removing certain disclosures. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the expected impact of the guidance, but does not believe the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.

2.

Collaboration and License Agreements

Ono Collaboration and Option Agreement

On September 14, 2018, the Company entered into a Collaboration and Option Agreement (the Ono Agreement) with Ono Pharmaceutical Co. Ltd. (Ono) for the joint development and commercialization of two off-the-shelf iPSC-derived chimeric antigen receptor (CAR) T-cell product candidates. The first off-the-shelf, iPSC-derived CAR T-cell candidate (Candidate 1) targets an antigen expressed on certain lymphoblastic leukemias, and the second off-the-shelf, iPSC-derived CAR T-cell candidate (Candidate 2) targets a novel antigen identified by Ono expressed on certain solid tumors (each a Candidate and collectively the Candidates).

Pursuant to the Ono Agreement, the Company and Ono are jointly conducting research and development activities under a joint development plan, with the goal of advancing each Candidate to a pre-defined preclinical milestone. The Company has granted to Ono, during a specified period of time, an option to obtain an exclusive license under certain intellectual property rights to develop and commercialize (a) Candidate 1 in Asia, with the Company retaining rights for development and commercialization in all other territories of the world and (b) Candidate 2 in all territories of the world, with the Company retaining the right to co-develop and co-commercialize Candidate 2 in the United States and Europe under a joint arrangement whereby it is eligible to share at least 50% of the profits and losses (each, an Option).

For each Candidate, the Option will expire upon the earliest of: (a) the achievement of the pre-defined preclinical milestone, (b) termination by Ono of research and development activities for the Candidate and (c) the date that is the later of (i) four years after the Effective Date and (ii) completion of all applicable activities contemplated under the joint development plan (the Option Period). The Company has maintained worldwide rights of manufacture for both Candidates.

10


Under the terms of the Ono Agreement, Ono paid the Company an upfront, non-refundable and non-creditable payment of $10.0 million in connection with entering into the Ono Agreement. Additionally, as consideration for the Company’s conduct of research and preclinical development under a joint development plan, Ono pays the Company annual research and development fees set forth in the annual budget included in the joint development plan, which fees are estimated to be $20.0 million in aggregate over the course of the joint development plan. The Company received $5.0 million in October 2018 as a prepayment for the first year of research and development.

Further, under the terms of the Ono Agreement, Ono has agreed to pay the Company up to an additional $40.0 million, subject to the achievement of a preclinical milestone (Option Milestone) and the exercise by Ono of the Options (Option Exercise Fees) during the Option Period. Such fees are in addition to the upfront payment and research and development fees.

Subject to Ono’s exercise of the Options and to the achievement of certain clinical, regulatory and commercial milestones (Milestones) with respect to each Candidate in specified territories, the Company is entitled to receive an aggregate of up to $285.0 million in milestone payments for Candidate 1 and an aggregate of up to $895.0 million in milestone payments for Candidate 2, with the applicable milestone payments for Candidate 2 for the United States and Europe subject to reduction by 50% if the Company elects to co-develop and co-commercialize Candidate 2 as described above. The Company is also eligible to receive tiered royalties (Royalties) ranging from the mid-single digits to the low-double digits based on annual net sales by Ono of each Candidate in specified territories, with such royalties subject to certain reductions.

The Ono Agreement will terminate with respect to a Candidate if Ono does not exercise its Option for a Candidate within the Option Period, or in its entirety if Ono does not exercise any of its Options for the Candidates within their respective Option Periods. In addition, either party may terminate the Ono Agreement in the event of breach, insolvency or patent challenges by the other party; provided, that Ono may terminate the Ono Agreement in its sole discretion (x) on a Candidate-by-Candidate basis at any time after the second anniversary of the effective date of the Ono Agreement or (y) on a Candidate-by-Candidate or country-by-country basis at any time after the expiration of the Option Period, subject to certain limitations. The Ono Agreement will expire on a Candidate-by-Candidate and country-by-country basis upon the expiration of the applicable royalty term, or in its entirety upon the expiration of all applicable payment obligations under the Ono Agreement.

The Company applied ASC 808, Collaborative Arrangements and determined that the Ono Agreement is applicable to such guidance. The Company concluded that Ono represented a customer and applied relevant guidance from ASC 606, Revenue from Contracts with Customers (ASC 606) to evaluate the appropriate accounting for the Ono Agreement. In accordance with this guidance, the Company identified its performance obligations, including its grant of a license to Ono to certain of its intellectual property subject to certain conditions, its conduct of research services, and its participation in a joint steering committee. The Company determined that its grant of a license to Ono to certain of its intellectual property subject to certain conditions was not distinct from other performance obligations because such grant is dependent on the conduct and results of the research services. As a result, the license is classified as symbolic intellectual property under ASC 606. Additionally, the Company determined that its conduct of research services was not distinct from other performance obligations since such conduct is dependent on the guidance of the joint steering committee. Accordingly, the Company determined that all performance obligations should be accounted for as one combined performance obligation, and that the combined performance obligation is transferred over the expected term of the conduct of the research services, which is estimated to be four years.

The Company also assessed, in connection with the upfront, non-refundable and non-creditable payment of $10.0 million received in September 2018 and the $5.0 million prepayment of the first-year research and development fees in October 2018, whether a significant financing component exists under the Ono Agreement. Such assessment evaluated whether: (i) a substantial amount of the consideration is variable, (ii) the amount, or timing of payment, of the consideration would have varied based on the occurrence or non-occurrence of future events that are not substantially within the control of the Company or Ono, and (iii) the timing of the transfer of the performance obligations is at the discretion of Ono. Based on its assessment, the Company concluded that there was not a significant financing component.

The Company also assessed the effects of any variable elements under the Ono Agreement. Such assessment evaluated, among other things, the likelihood of receiving (i) preclinical milestone and option fees, (ii) various clinical, regulatory and commercial milestone payments, and (iii) royalties on net sales of either product Candidate. Based on its assessment, the Company concluded that, based on the likelihood of these variable components occurring, there was not a significant variable element included in the transaction price.

In accordance with ASC 606, the Company determined that the initial transaction price under the Ono Agreement equals $30.0 million, consisting of the upfront, non-refundable and non-creditable payment of $10.0 million and the aggregate estimated research and development fees of $20.0 million. The upfront payment of $10.0 million was recorded as deferred revenue and is being recognized as revenue over time in conjunction with the Company’s conduct of research services over the estimated four-year period based on actual costs incurred compared to the estimated total costs expected to be incurred under the Ono Agreement, as the research and development activities are the primary component of the combined performance obligation. The Company recorded the $5.0 million prepayment of the first-year research and development fees as deferred revenue, and such fees are recognized as revenue as the research services are delivered.

11


The Company has not assigned a transaction price to any Option Milestone, Milestones or Option Exercise Fees given the substantial uncertainty related to their achievement and has not assigned a transaction price to any Royalties.

As a direct result of the Company’s entry into the Ono Agreement, the Company incurred an aggregate of $2.0 million in sublicense consideration to existing licensors of the Company. The $2.0 million in sublicense consideration represents an asset under ASC 340, Other Assets and Deferred Costs and is amortized to research and development expense in conjunction with the Company’s revenue recognition under the Ono Agreement. During the three and nine months ended September 30, 2019, the Company recognized $0.2 million and $0.4 million of such expense, respectively. The Company did not recognize any amortization expense for the three and nine months ended September 30, 2018. As of September 30, 2019, the Ono Agreement contract asset balance was $1.5 million.

The Company recognized revenue of $2.4 million and $6.5 million under the Ono Agreement for the three and nine months ended September 30, 2019, respectively. Such revenue comprised $1.6 million associated with research services and $0.8 million associated with the upfront payment for the three months ended September 30, 2019, and $4.3 million associated with research services and $2.2 million associated with the upfront payment for the nine months ended September 30, 2019. The Company did not recognize any revenue under the Ono Agreement for the three and nine months ended September 30, 2018. As of September 30, 2019, aggregate deferred revenue related to the Ono Agreement was $7.9 million, of which $3.4 million is classified as current.

Juno Collaboration and License Agreement

On May 4, 2015, the Company entered into a strategic research collaboration and license agreement (the Juno Agreement) with Juno Therapeutics, Inc. (Juno) to screen for and identify small molecules that enhance the therapeutic properties of Juno’s genetically-engineered T-cell immunotherapies. The four-year initial research term under the Juno Agreement concluded as scheduled on May 4, 2019, and the overall agreement was terminated upon the receipt of the last quarterly research payment of $0.2 million, which occurred in May 2019. No additional funding is expected from Juno.

The Company applied ASC 606 to evaluate the appropriate accounting for the Juno Agreement. In accordance with this guidance, the Company identified its performance obligations, including its grant of an exclusive worldwide license to certain of its intellectual property subject to certain conditions, its conduct of research services and its participation in a joint research committee.

No revenue was recognized under the Juno Agreement during the three months ended September 30, 2019. Total revenue recognized under the Juno Agreement during the nine months ended September 30, 2019 was $1.4 million, which comprised $0.7 million associated with the upfront fee and equity premium, and $0.7 million associated with research services. Total revenue recognized under the Juno Agreement for the three and nine months ended September 30, 2018 was $1.0 million and $3.1 million, respectively. No additional revenue is expected to be recognized under the Juno Agreement in future periods. 

Memorial Sloan Kettering Cancer Center License Agreement

On May 15, 2018, the Company entered into an Amended and Restated Exclusive License Agreement (the Amended MSK License) with Memorial Sloan Kettering Cancer Center (MSK). The Amended MSK License amends and restates the Exclusive License Agreement entered into between the Company and MSK on August 19, 2016 (the Original MSK License), pursuant to which the Company entered into an exclusive license agreement with MSK for rights relating to compositions and methods covering iPSC-derived cellular immunotherapy, including T-cells and NK-cells derived from iPSCs engineered with CARs.  

Pursuant to the Amended MSK License, MSK granted to the Company additional licenses to certain patents and patent applications relating to new CAR constructs and off-the-shelf CAR T cells, including the use of clustered regularly interspaced short palindromic repeat (CRISPR) and other innovative technologies for their production, in each case to research, develop, and commercialize licensed products in the field of all human therapeutic uses worldwide. The Company has the right to grant sublicenses to certain licensed rights in accordance with the terms of the Amended MSK License, in which case it is obligated to pay MSK a percentage of certain sublicense income received by the Company.

The Company issued 500,000 shares of the Company’s common stock to MSK (the MSK Shares), and, in return, MSK returned its entire interest in Tfinity Therapeutics, Inc. (Tfinity) to the Company. As a result, as of the effective date of the Amended MSK License, Tfinity is a wholly-owned subsidiary of the Company. The MSK Shares were issued pursuant to an exemption from registration under the Securities Act of 1933, as amended (the Securities Act), in reliance on Section 4(a)(2) of the Securities Act regarding transactions by an issuer not involving a public offering. 

Additionally, the Company paid an upfront fee of $0.5 million. The Company is also obligated to pay to MSK an annual license maintenance fee during the term of the agreement, and milestone payments upon the achievement of specified clinical, regulatory and commercial milestones for licensed products as well as royalty payments on net sales of licensed products.

Furthermore, in the event a licensed product achieves a specified clinical milestone, MSK is then eligible to receive additional milestone payments, where the amount of such payments owed to MSK contingent upon certain increases in the price of the Company’s common stock relative to the price of the common stock following the date of achievement of such clinical milestone.

12


Given the high degree of uncertainty surrounding the achievement of clinical milestones and the requisite increase in the price of the Company’s common stock, the Company has not recorded a liability for such payments.

Upon execution of the contract, the Company recognized an aggregate of $5.3 million of research and development expenses, consisting of the $0.5 million upfront cash payment to MSK and the issuance of the MSK Shares, valued at $4.8 million, associated with the Amended MSK License.

Gladstone License Agreement

On September 11, 2018, the Company entered into an exclusive license agreement (the Gladstone License Agreement) with the J. David Gladstone Institutes (Gladstone).

Pursuant to the Gladstone License Agreement, Gladstone granted to the Company exclusive licenses to certain patents and patent applications (the Patent Rights) for the research, development, manufacturing, and commercialization of human therapeutics derived from iPSCs. The Patent Rights cover the use of the CRISPR and engineered nuclease-deactivated CRISPR-associated protein-9 (dCas9) system, known as the CRISPR activation (CRISPRa) system, for cellular reprogramming and iPSC generation.

In consideration for the rights granted under the Gladstone License Agreement, the Company issued to Gladstone 100,000 shares of the Company’s common stock (the Gladstone Shares). The Gladstone Shares were issued pursuant to an exemption from registration under the Securities Act, in reliance on Section 4(a)(2) of the Securities Act regarding transactions by an issuer not involving a public offering.

Additionally, the Company paid Gladstone an upfront fee of $0.1 million and is obligated to pay Gladstone milestone payments in an aggregate amount of up to approximately $1.9 million upon the achievement of specified clinical, regulatory and commercial milestones as well as tiered royalties in the low single digits on net sales of human therapeutic products covered by the Patent Rights. The Company is also obligated to pay Gladstone a tiered percentage in the low- to mid-single digits of certain income received by the Company in connection with the sublicense of the licensed Patent Rights.

Upon execution of the contract, the Company recognized an aggregate of $1.4 million of research and development expenses, consisting of the $0.1 million upfront cash payment to Gladstone and the issuance of the Gladstone Shares, valued at $1.3 million, associated with the Gladstone License Agreement.

3.

California Institute for Regenerative Medicine Award

On April 5, 2018, the Company executed an award agreement with the California Institute for Regenerative Medicine (CIRM) pursuant to which CIRM awarded the Company $4.0 million to advance the Company’s FT516 product candidate into a first-in-human clinical trial for the treatment of subjects with advanced solid tumors, including in combination with monoclonal antibody therapy (the Award). Pursuant to the terms of the Award, the Company is eligible to receive five disbursements in varying amounts totaling $4.0 million, with one disbursement receivable upon the execution of the Award, and four disbursements receivable upon the completion of certain milestones throughout the project period. The Award is subject to certain co-funding requirements by the Company, and the Company is required to provide CIRM progress and financial update reports under the Award. In December 2018, the Company discussed with CIRM its intent to pursue the clinical development of FT516 in relapsed / refractory hematologic malignancies in addition to advanced solid tumors, and the Company’s preference to first submit an IND application for FT516 in relapsed / refractory hematologic malignancies rather than in advanced solid tumors. In January 2019, the Company submitted its IND application for FT516 in relapsed / refractory hematologic malignancies, which IND submission was allowed by the FDA in February 2019. The Company and CIRM have agreed to suspend the Award until such time as the Company submits an IND application for FT516 in advanced solid tumors. The Company has notified CIRM of its intent to do so. At the time of suspension, an additional $0.5 million was available for funding under the Award. 

Pursuant to the terms of the Award, the Company, in its sole discretion, has the option to treat the Award either as a loan or as a grant. In the event the Company elects to treat the Award as a loan, the Company will be obligated to repay i) 60%, ii) 80%, iii) 100% or iv) 100% plus interest at 7% plus LIBOR, of the total Award to CIRM, where such repayment rate is dependent upon the phase of clinical development of FT516 at the time of the Company’s election. If the Company does not elect to treat the Award as a loan within 10 years of the date of the Award, the Award will be considered a grant and the Company will be obligated to pay to CIRM a royalty on commercial sales of FT516 until such royalty payments equal nine times the total amount awarded to the Company under the Award.

Since the Company may, at its election, repay some or all of the Award, the Company accounts for the Award as a liability until the time of election. As of September 30, 2019, the Company has received aggregate disbursements under the Award in the amount of $3.5 million. The aggregate amount received is recorded as a CIRM Liability on the accompanying unaudited condensed consolidated balance sheets and classified as current or non-current based on the potential amount payable within twelve months of the current balance sheet.

13


4.

Investments

The Company invests portions of excess cash in United States Treasuries with maturities ranging from three to twelve months from the purchase date. These debt securities are classified as short-term investments in the accompanying unaudited condensed consolidated balance sheets based on the maturity date and are accounted for as available-for-sale securities.

The following table summarizes the Company’s investments accounted for as available-for-sale securities as of September 30, 2019, and December 31, 2018 (in thousands):

 

 

 

Maturity

(in years)

 

Amortized

Cost

 

 

Unrealized

Losses

 

 

Unrealized

Gains

 

 

Estimated

Fair Value

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury debt securities

 

1 or less

 

 

53,184

 

 

 

 

 

 

51

 

 

 

53,235

 

Total

 

 

 

$

53,184

 

 

$

 

 

$

51

 

 

$

53,235

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury debt securities

 

1 or less

 

 

10,495

 

 

 

(2

)

 

 

 

 

 

10,493

 

Total

 

 

 

$

10,495

 

 

$

(2

)

 

$

 

 

$

10,493

 

 

The Company reviews its investment holdings at the end of each reporting period and determines if any unrealized losses are other-than-temporary using a variety of factors including the Company’s intent to sell the underlying securities prior to maturity and whether it is more likely than not that the Company would be required to sell the securities before the recovery of their amortized basis. During each of the three and nine months ended September 30, 2019 and 2018, the Company did not recognize any impairment or realized gains or losses on sales of investments and the Company does not consider any of its investments as other-than-temporarily impaired.

5.

Fair Value Measurements

The carrying amounts of accounts payable and accrued liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments. Based on the borrowing rates available to the Company for loans with similar terms, which is considered a Level 2 input as described below, the Company believes that the fair value of long-term debt approximates its carrying value.

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

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

14


Financial assets measured at fair value on a recurring basis consist of the Company’s cash equivalents and short-term investments. Cash equivalents consisted of money market funds and short-term investments consisted of U.S. Treasuries. The following table presents the Company’s assets which were measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018 (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements at

Reporting Date Using

 

 

 

Total

 

 

Quoted Prices

in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

As of September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

249,588

 

 

$

249,588

 

 

$

 

 

$

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury debt securities

 

 

53,235

 

 

 

53,235

 

 

 

 

 

 

 

Total

 

$

302,823

 

 

$

302,823

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

190,514

 

 

$

190,514

 

 

$

 

 

$

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury debt securities

 

 

10,493

 

 

 

10,493

 

 

 

 

 

 

 

Total

 

$

201,007

 

 

$

201,007

 

 

$

 

 

$

 

 

The Company obtains pricing information from quoted market prices from its investment manager and generally determines the fair value of investment securities using standard observable inputs, including reported trades, broker/dealer quotes, and bids and/or offers.

None of the Company’s non-financial assets or liabilities are recorded at fair value on a non-recurring basis. No transfers between levels have occurred during the periods presented.

As of September 30, 2019, and December 31, 2018, the Company had no material financial liabilities measured at fair value on a recurring basis.

6.

Accrued Expenses and Long-Term Debt

Accrued Expenses

Current accrued expenses consist of the following (in thousands):

 

 

 

September 30,

2019

 

 

December 31,

2018

 

Accrued payroll and other employee benefits

 

$

3,451

 

 

$

2,938

 

Accrued clinical trial related costs

 

 

5,946

 

 

 

4,729

 

Accrued other

 

 

4,446

 

 

 

3,259

 

Current accrued expenses

 

$

13,843

 

 

$

10,926

 

 

 

 

 

 

 

 

 

 

 

Long-term accrued expenses consist of accruals for the final payment fees associated with the Company’s long-term debt.

15


Long-Term Debt

Long-term debt and unamortized discount balances are as follows (in thousands):

 

 

 

September 30,

2019

 

 

December 31,

2018

 

Long-term debt

 

$

14,000

 

 

$

15,000

 

Less debt issuance costs and discount, net of current

   portion

 

 

 

 

 

(54

)

Long-term debt, net of long-term portion of debt issuance

   costs and discount

 

 

14,000

 

 

 

14,946

 

Less current portion of long-term debt

 

 

(14,000

)

 

 

(2,500

)

Long-term debt, net

 

$

 

 

$

12,446

 

Current portion of long-term debt

 

$

14,000

 

 

$

2,500

 

Less current portion of debt issuance costs and discount

 

 

(68

)

 

 

(62

)

Current portion of long-term debt, net

 

$

13,932

 

 

$

2,438

 

 

Silicon Valley Bank Debt Facilities

On July 30, 2014, the Company entered into the Amended and Restated Loan and Security Agreement (the Restated LSA) with Silicon Valley Bank (the Bank), collateralized by substantially all of the Company’s assets, excluding certain intellectual property. The Restated LSA amends and restates the Loan and Security Agreement, dated as of January 5, 2009, as amended, by and between us and the Bank (Loan Agreement). Pursuant to the Restated LSA, the Bank agreed to make loans to the Company in an aggregate principal amount of up to $20.0 million, comprised of (i) a $10.0 million term loan, funded at the closing date (the Term A Loan) and (ii) subject to the achievement of a specified clinical milestone, additional term loans totaling up to $10.0 million in the aggregate, which were available until December 31, 2014 (each, a Term B Loan). On December 24, 2014, the Company elected to draw on the full $10.0 million under a Term B Loan.

On July 14, 2017 (the First Amendment Effective Date), the Company and the Bank entered into the First Amendment (the SVB Loan Amendment) to the Restated LSA between the Company and the Bank dated July 30, 2014. Pursuant to the SVB Loan Amendment, the Bank extended an additional term loan to the Company on July 14, 2017 in the principal amount of $15.0 million (the 2017 Term Loan), a portion of which was applied to repay in full the Company’s existing outstanding debt with the Bank under the Restated LSA, which included outstanding principal, accrued interest, and final payment fees. Following such repayment in full of the Company’s existing outstanding debt with the Bank under the Restated LSA, cash proceeds to the Company from the remaining portion of the 2017 Term Loan were $7.5 million. The Company determined the repayment of the Restated LSA and issuance of the 2017 Term Loan was a debt extinguishment and accounted for the 2017 Term Loan at fair value as of the First Amendment Effective Date accordingly.   

The 2017 Term Loan matures on January 1, 2022 (the Term Loan Maturity Date) and bears interest at a floating per annum rate equal to the greater of (i) 3.50% above the Prime Rate (as defined in the SVB Loan Amendment) or (ii) 7.25%; provided, however, that in no event shall such interest rate exceed 8.25%. Interest is payable on a monthly basis on the first day of each month. The interest rate as of September 30, 2019 was 8.25%.

From August 1, 2017 through January 1, 2019 (the Interest-only Period), the Company was required to make monthly payments of interest only. In January 2019, after achievement of a product development milestone, the Company elected to extend the Interest Only Period from January 1, 2019 through and including July 31, 2019. The Company is required to repay the principal, plus monthly payments of accrued interest, in 30 equal monthly installments based on a 30-month amortization schedule. During the three and nine months ended September 30, 2019, the Company made principal payments totaling $1.0 million on the 2017 Term Loan.

The Company’s final payment, due on the Term Loan Maturity Date, shall include all outstanding principal and accrued and unpaid interest under the 2017 Term Loan, plus a 7.5%, or $1.1 million, final payment fee. This final payment fee is accrued as interest expense over the term of the 2017 Term Loan and recorded in accrued expenses.

As of September 30, 2019, the Company assessed its ability and intent to repay the 2017 Term Loan in order to determine the proper balance sheet classification for amounts outstanding under the 2017 Term Loan. The Company intends to use funds on hand as of September 30, 2019 to repay the balance on the 2017 Term Loan within the next twelve months, and as such, has classified all remaining balances associated with the debt as short-term on the condensed consolidated balance sheet.

The Company is required under its loan agreement with the Bank to maintain its deposit and securities accounts with the Bank and to comply with various operating covenants and default clauses. A breach of any of these covenants or clauses could result in a default under the agreement, which would cause all of the outstanding indebtedness under the facility to become immediately due and payable. The Company has maintained compliance with all such covenants and clauses to date.

16


For both the three months ended September 30, 2019 and 2018, the Company recorded $0.4 million in aggregate interest expense related to the 2017 Term Loan. During the nine months ended September 30, 2019 and 2018, the Company recorded $1.2 million and $1.3 million, respectively, in aggregate interest expense related to the 2017 Term Loan.

Warrants

In connection with the funding of the Term B Loan under the Restated LSA, the Company issued the Bank and one of its affiliates fully-exercisable warrants to purchase an aggregate of 98,039 shares of the Company’s common stock (the 2014 Warrants) at an exercise price of $4.08 per share. During March 2018, a portion of the 2014 Warrants were exercised in exchange for 34,149 shares of the Company’s common stock in a cashless transaction. During July 2019, the remaining balance of the 2014 Warrants outstanding was exercised for 39,263 shares of the Company’s common stock in a cashless transaction. As a result, none of the 2014 Warrants remain outstanding as of September 30, 2019.

In connection with the SVB Loan Amendment, the Company issued to the Bank on the First Amendment Effective Date a fully exercisable warrant (the 2017 Warrant), expiring in July 2024, to purchase up to an aggregate of 91,463 shares of the Company’s common stock, subject to adjustment, at an exercise price equal to $3.28 per share. The aggregate fair value of the 2017 Warrant was determined to be $0.2 million using the Black-Scholes option pricing model and was recorded as a debt discount on the 2017 Term Loan. This debt discount is amortized to interest expense over the term of the 2017 Term Loan using the effective interest method. The Company determined the effective interest rate of the 2017 Term Loan to be 10.2% as of the First Amendment Effective Date. During September 2018, the 2017 Warrant was fully exercised in exchange for 67,952 shares of the Company’s common stock in a cashless transaction.

In connection with a prior debt agreement between the Company and the Bank in 2009, the Company issued the Bank fully exercisable warrants to purchase an aggregate of 36,074 shares of the Company’s common stock at a weighted-average exercise price of $7.21 per share. During January 2019, a portion of the warrants were exercised in exchange for 1,245 shares of the Company’s common stock in a cashless transaction. During July 2019, the remaining balance of the warrants outstanding was exercised for 21,012 shares of the Company’s common stock in a cashless transaction. No warrants related to the prior debt agreement remain outstanding as of September 30, 2019. 

7.

Leases

The Company leases its headquarters office and laboratory space under a non-cancelable operating lease. In May 2018, the Company amended this lease, extending the term of the lease through the end of 2028 and agreeing to lease additional space in the same building as its existing space beginning in January 2019. The additional space leased as a result of the amendment was considered a separate lease for accounting purposes and was recorded on the unaudited condensed consolidated balance sheets as of the lease inception date during January 2019, resulting in an increase in operating right-of-use assets of $7.7 million and an increase in the aggregate lease liability of $9.6 million. The Company can extend the term of each lease for five years after the end of 2028 at the then prevalent market rate, subject to the Company's delivery to the landlord of twelve months' prior written notice. Additionally, the Company maintains the right to terminate each lease after October 2025, subject to the Company's delivery to the landlord of twelve month's prior written notice and an early termination payment of $2.5 million. As of the date of adoption of ASC 842 and upon the lease inception date, the Company was not reasonably certain that it would exercise the extension option or the termination option, and as such, did not include these options in the determination of the total lease terms. The leases are subject to additional variable charges for common area maintenance and other variable costs. Given the variable nature of such costs, they are recognized as expense as incurred. Further, the leases are subject to certain fixed amenities fees for the duration of the lease. These costs are considered non-lease components, which have been aggregated with the lease components into a single lease component for purposes of determining the total future lease payments. In connection with the leases, the Company has a cash-collateralized irrevocable standby letter of credit in the amount of $0.2 million.

As of September 30, 2019, future minimum payments under the Company’s operating leases were $39.1 million, which will be paid over a remaining weighted-average lease term of 9.3 years. The weighted-average discount rate for the operating lease liabilities was 8.0%, which was the Company's incremental borrowing rate at the date of adopting ASC 842 and upon lease inception.  

For the three months ended September 30, 2019, total operating lease expense was $1.5 million, which consisted of $0.9 million associated with the straight-line recognition of fixed payments, and $0.6 million associated with variable costs associated with the leases. For the nine months ended September 30, 2019, total operating lease expense was $4.6 million, which consisted of $2.8 million associated with the straight-line recognition of fixed payments, and $1.8 million associated with variable costs associated with the leases.

Total short-term lease expense associated with short-term leases for the three and nine months ended September 30, 2019 was $0.4 million and $0.6 million, respectively.

17


Future minimum payments under the Company’s operating leases as of September 30, 2019 are as follows (in thousands):

 

 

 

Operating

Lease Payments

 

Remaining in 2019

 

$

913

 

2020

 

 

3,760

 

2021

 

 

3,873

 

2022

 

 

3,989

 

2023

 

 

4,109

 

2024

 

 

4,232

 

Thereafter

 

 

18,238

 

Total undiscounted lease payments

 

$

39,114

 

Less: imputed interest

 

 

(11,812

)

Total lease liability

 

$

27,302

 

 

The Company has an additional operating lease for office and laboratory space in New York that has not yet commenced. The lease is expected to commence in the fourth quarter of fiscal year 2019 and has a lease term of two years. Total future minimum payments under the operating lease that has not yet commenced are $0.3 million.

 

 

8.

Convertible Preferred Stock and Stockholders’ Equity

Convertible Preferred Stock

In November 2016, the Company completed a private placement of stock in which investors, certain of which are affiliated with the directors and officers of the Company, purchased convertible preferred stock and common stock of the Company (the November 2016 Placement). The Company issued 2,819,549 shares of non-voting Class A Convertible Preferred Stock (the Class A Preferred) at $13.30 per share, each of which is convertible into five shares of common stock upon certain conditions defined in the Certificate of Designation of Preferences, Rights and Limitations of the Class A Preferred filed with the Delaware Secretary of State on November 22, 2016 (the CoD). The Class A Preferred were purchased exclusively by entities affiliated with Redmile Group, LLC (collectively, Redmile). The terms of the CoD prohibited Redmile from converting the Class A Preferred into shares of the Company’s common stock if, as a result of conversion, Redmile, together with its affiliates, would own more than 9.99% of the Company’s common stock then issued and outstanding (the Redmile Percentage Limitation), which percentage could change at Redmile’s election upon 61 days’ notice to the Company to (i) any other number less than or equal to 19.99% or (ii) subject to approval of the Company’s stockholders to the extent required in accordance with the Nasdaq Global Market rules, any number in excess of 19.99%. On May 2, 2017, the Company’s stockholders approved the issuance of up to an aggregate of 14,097,745 shares of common stock upon the conversion of the outstanding shares of Class A Preferred. As a result, Redmile has the right to increase the Redmile Percentage Limitation to any percentage in excess of 19.99% at its election. The Company also issued 7,236,837 shares of common stock at $2.66 per share as part of the November 2016 Placement. Gross proceeds from the November 2016 Placement were $56.7 million, and after giving effect to costs related to placement, net proceeds were $54.9 million.

The Class A Preferred are non-voting shares and have a stated par value of $0.001 per share and are convertible into five shares of the Company’s common stock at a conversion price of $2.66 per share, which was the fair value of the Company’s common stock on the date of issuance. Holders of the Class A Preferred have the same dividend rights as holders of the Company’s common stock. Additionally, the liquidation preferences of the Class A Preferred are pari passu among holders of the Company’s common stock and holders of the Class A Preferred, pro rata based on the number of shares held by each such holder (treated for this purpose as if the Class A Preferred had been converted to common stock).

The Company evaluated the Class A Preferred for liability or equity classification under ASC 480, Distinguishing Liabilities from Equity, and determined that equity treatment was appropriate because the Class A Preferred did not meet the definition of the liability instruments defined thereunder for convertible instruments. Specifically, the Class A Preferred are not mandatorily redeemable and do not embody an obligation to buy back the shares outside of the Company’s control in a manner that could require the transfer of assets. Additionally, the Company determined that the Class A Preferred would be recorded as permanent equity, not temporary equity, based on the guidance of ASC 480 given that they are not redeemable for cash or other assets (i) on a fixed or determinable date, (ii) at the option of the holder, and (iii) upon the occurrence of an event that is not solely within control of the Company.

The Company also evaluated the Class A Preferred in accordance with the provisions of ASC 815, Derivatives and Hedging, including the consideration of embedded derivatives requiring bifurcation from the equity host. Based on this assessment, the Company determined that the conversion option is clearly and closely related to the equity host, and thus, bifurcation is not required.

The issuance of convertible preferred stock could generate a beneficial conversion feature (BCF), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor (or in-the-money) at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock on the commitment date.

18


The Class A Preferred have an effective conversion price of $2.66 per common share, which was equal to the market price of the Company’s stock on the commitment date. Therefore, no BCF was present.

The Company also entered into a registration rights agreement (the Registration Rights Agreement) with certain of the purchasers in the November 2016 Placement, excluding those purchasers affiliated with the Company’s directors and officers, requiring the Company to register for the resale of the relevant shares. The Company registered all of the relevant shares issued in the November 2016 Placement for resale on a Form S-3 filed with the SEC, as required under the Registration Rights Agreement, and the registration statement was declared effective in January 2017.

During the three months ended September 30, 2019, 25,000 shares of the Class A Preferred were converted into 125,000 shares of the Company’s common stock.

Stock Options and Restricted Stock Units

Stock option activity under all equity and stock option plans is summarized as follows:

 

 

 

Number of

Options

 

 

Weighted-

Average Price

 

Balance at December 31, 2018

 

 

6,980,581

 

 

$

5.58

 

Granted

 

 

3,293,860

 

 

 

16.63

 

Cancelled

 

 

(332,299

)

 

 

10.62

 

Exercised

 

 

(645,747

)

 

 

3.28

 

Balance at September 30, 2019

 

 

9,296,395

 

 

$

9.48

 

 

Restricted stock unit activity under all equity and stock option plans is summarized as follows:

 

 

 

Number of

Restricted Stock Units

 

 

Weighted-

Average Grant Date Fair Value per Share

 

Balance at December 31, 2018

 

 

188,625

 

 

$

4.89

 

Granted

 

 

520,000

 

 

 

16.41

 

Cancelled

 

 

(16,000

)

 

 

4.89

 

Vested

 

 

 

 

 

 

Balance at September 30, 2019

 

 

692,625

 

 

$

13.54

 

 

The allocation of stock-based compensation for all stock awards is as follows (in thousands):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Research and development

 

$

2,560

 

 

$

939

 

 

$

7,222

 

 

$

2,598

 

General and administrative

 

 

2,013

 

 

 

703

 

 

 

5,605

 

 

 

1,911

 

Total

 

$

4,573

 

 

$

1,642

 

 

$

12,827

 

 

$

4,509

 

 

As of September 30, 2019, the unrecognized compensation cost related to outstanding options was $41.3 million and is expected to be recognized as expense over a weighted-average period of approximately 3.0 years.

As of September 30, 2019, the unrecognized compensation cost related to restricted stock units was $6.8 million which is expected to be recognized as expense over a weighted-average period of approximately 2.9 years.

19


As of January 1, 2019, the Company adopted ASU 2018-07, which aligned the guidance on share-based payments to nonemployees with that for share-based payments to employees. In accordance with ASU 2018-07, the measurement of equity-classified nonemployee awards is fixed at the grant date and entities are not required to remeasure nonemployee equity awards at each reporting date until such time that the measurement date is established. The weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of the employee and nonemployee stock option grants were as follows:

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

Risk-free interest rate

 

 

2.5

%

 

 

2.5

%

Expected volatility

 

 

79.9

%

 

 

79.3

%

Expected term (in years)

 

 

6.0

 

 

 

6.1

 

Expected dividend yield

 

 

0.0

%

 

 

0.0

%

 

Reconciliation of Consolidated Stockholders’ Equity Accounts

The following table summarizes the Company’s changes in stockholders’ equity accounts for the three and nine months ended September 30, 2019 (in thousands, except share data):

 

 

Convertible

Preferred Stock

 

 

Common

Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total Stockholders'

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Gain (Loss)

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2018

 

2,819,549

 

 

$

3

 

 

 

64,693,681

 

 

$

65

 

 

$

445,799

 

 

$

(2

)

 

$

(285,396

)

 

$

160,469

 

Exercise of stock options, net of issuance costs

 

 

 

 

 

 

 

420,920

 

 

 

 

 

 

1,258

 

 

 

 

 

 

 

 

 

1,258

 

Issuance of common stock upon cashless warrant exercise

 

 

 

 

 

 

 

1,245

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

3,868

 

 

 

 

 

 

 

 

 

3,868

 

Unrealized gain on short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

2

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(19,760

)

 

 

(19,760

)

Balance at March 31, 2019

 

2,819,549

 

 

$

3

 

 

 

65,115,846

 

 

$

65

 

 

$

450,925

 

 

$

 

 

$

(305,156

)

 

$

145,837

 

Exercise of stock options, net of issuance costs

 

 

 

 

 

 

 

194,045

 

 

 

 

 

 

688