fate-10q_20200331.htm
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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 March 31, 2020

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 May 7, 2020, 77,691,848 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 March 31, 2020 (unaudited) and December 31, 2019 (unaudited)

 

3

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2020 and 2019 (unaudited)

 

4

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (unaudited)

 

5

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

6

Item 2.

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

 

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

28

Item 4.

Controls and Procedures

 

29

 

 

 

 

PART II. OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

30

Item 1A.

Risk Factors

 

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

60

Item 3.

Defaults Upon Senior Securities

 

60

Item 4.

Mine Safety Disclosures

 

60

Item 5.

Other Information

 

60

Item 6.

Exhibits

 

61

 

 

 

 

SIGNATURES

 

62

 

 

 

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)

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

83,366

 

 

$

99,814

 

Short-term investments and related maturity receivables

 

 

119,918

 

 

 

121,613

 

Prepaid expenses and other current assets

 

 

4,965

 

 

 

5,662

 

Total current assets

 

 

208,249

 

 

 

227,089

 

Long-term investments

 

 

16,139

 

 

 

39,440

 

Property and equipment, net

 

 

11,896

 

 

 

11,419

 

Operating lease right-of-use assets

 

 

69,200

 

 

 

22,752

 

Restricted cash

 

 

15,227

 

 

 

227

 

Collaboration contract asset

 

 

1,170

 

 

 

1,338

 

Other assets

 

 

9

 

 

 

9

 

Total assets

 

$

321,890

 

 

$

302,274

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,173

 

 

$

5,822

 

Accrued expenses

 

 

11,770

 

 

 

14,697

 

CIRM award liability, current portion

 

 

3,160

 

 

 

2,808

 

Deferred revenue, current portion

 

 

2,923

 

 

 

2,787

 

Operating lease liabilities, current portion

 

 

1,898

 

 

 

1,692

 

Total current liabilities

 

 

24,924

 

 

 

27,806

 

Deferred revenue, net of current portion

 

 

3,124

 

 

 

3,775

 

CIRM award liability, net of current portion

 

 

790

 

 

 

702

 

Operating lease liabilities, net of current portion

 

 

73,834

 

 

 

25,235

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

   at March 31, 2020 and December 31, 2019; Class A Convertible Preferred

   shares issued and outstanding—2,794,549 at March 31, 2020 and

   December 31, 2019

 

 

3

 

 

 

3

 

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

   March 31, 2020 and December 31, 2019; issued and outstanding—75,996,075

   at March 31, 2020 and 75,730,260 at December 31, 2019

 

 

76

 

 

 

76

 

Additional paid-in capital

 

 

636,062

 

 

 

628,200

 

Accumulated other comprehensive gain

 

 

142

 

 

 

22

 

Accumulated deficit

 

 

(417,065

)

 

 

(383,545

)

Total stockholders’ equity

 

 

219,218

 

 

 

244,756

 

Total liabilities and stockholders’ equity

 

$

321,890

 

 

$

302,274

 

 

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 March 31,

 

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

Collaboration revenue

 

$

2,515

 

 

$

2,632

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

29,278

 

 

 

17,728

 

General and administrative

 

 

7,729

 

 

 

5,350

 

Total operating expenses

 

 

37,007

 

 

 

23,078

 

Loss from operations

 

 

(34,492

)

 

 

(20,446

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

972

 

 

 

1,091

 

Interest expense

 

 

 

 

 

(405

)

Total other income, net

 

 

972

 

 

 

686

 

Net loss

 

$

(33,520

)

 

$

(19,760

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Unrealized gain on available-for-sale securities, net

 

 

120

 

 

 

2

 

Comprehensive loss

 

$

(33,400

)

 

$

(19,758

)

Net loss per common share, basic and diluted

 

$

(0.44

)

 

$

(0.30

)

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

 

 

75,886,964

 

 

 

64,920,621

 

 

See accompanying notes.

 

 

4


Fate Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(33,520

)

 

$

(19,760

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

705

 

 

 

440

 

Stock-based compensation

 

 

6,913

 

 

 

3,868

 

Amortization of debt discounts and debt issuance costs

 

 

 

 

 

15

 

Accretion and amortization of premiums and discounts on investments, net

 

 

271

 

 

 

(5

)

Amortization of collaboration contract asset

 

 

168

 

 

 

107

 

Noncash interest expense

 

 

 

 

 

79

 

Deferred revenue

 

 

(515

)

 

 

(2,132

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

636

 

 

 

792

 

Accounts payable and accrued expenses

 

 

(3,316

)

 

 

(1,258

)

Right-of-use assets and lease liabilities, net

 

 

1,985

 

 

 

361

 

Net cash used in operating activities

 

 

(26,673

)

 

 

(17,493

)

Investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,070

)

 

 

(1,746

)

Maturities of investments

 

 

24,844

 

 

 

10,500

 

Net cash provided by investing activities

 

 

23,774

 

 

 

8,754

 

Financing activities

 

 

 

 

 

 

 

 

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

 

 

1,011

 

 

 

1,258

 

Proceeds from CIRM award

 

 

440

 

 

 

 

Net cash provided by financing activities

 

 

1,451

 

 

 

1,258

 

Net change in cash, cash equivalents and restricted cash

 

 

(1,448

)

 

 

(7,481

)

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

 

 

100,041

 

 

 

190,741

 

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

 

$

98,593

 

 

$

183,260

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Interest paid

 

$

 

 

$

309

 

Supplemental schedule of noncash investing and financing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment in accounts payable

 

$

343

 

 

$

1,482

 

Right-of use assets obtained in exchange for lease obligations

 

$

47,808

 

 

$

7,705

 

 

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 therapeutic pipeline is comprised of immuno-oncology programs, including off-the-shelf engineered natural killer (NK) and T-cell 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. The Company’s product candidates are based on its proprietary cell programming approach, which it applies to modulate the therapeutic function and direct the fate of immune cells.

As of March 31, 2020, 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 Offering

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, net proceeds were $162.4 million.

Use of Estimates

The Company’s unaudited condensed consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (U.S. 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 and assumptions in the Company’s unaudited condensed consolidated financial statements relate to its contracts containing leases, accrued expenses and the estimated total costs expected to be incurred under the Company’s collaboration agreements. 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.

Risks and Uncertainties

Due to the global outbreak of SARS-CoV-2, the novel strain of coronavirus that causes Coronavirus disease 19 (COVID-19), the Company experienced impacts on certain aspects of its business, including its clinical trial and research and development activities, during the three months ended March 31, 2020. For example, certain of the Company’s research and development activities have been delayed or disrupted as a result of measures the Company implemented in response to governmental “stay at home” orders and in the interests of public health and safety, and the Company has experienced delays or disruptions in the initiation and conduct of its clinical trials as a result of prioritization of hospital and other medical resources toward pandemic efforts, policies and procedures implemented at clinical sites with respect to the conduct of clinical trials, and other precautionary measures taken in treating patients or in practicing medicine in response to the COVID-19 pandemic. The scope and duration of these delays and disruptions, and the ultimate impacts of COVID-19 on the Company’s operations, are currently unknown. The Company is continuing to actively monitor the situation and may take further precautionary and preemptive actions as may be required by federal, state or local authorities or that it determines are in the best interests of public health and safety and that of the Company’s patient community, employees, partners, and stockholders. The Company cannot predict the effects that such actions, or the impact of COVID-19 on global business operations and economic conditions, may have on its business, strategy, collaborations, or financial and operating results.

 

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.

6


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.

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 March 31, 2020 (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Cash and cash equivalents

 

$

83,366

 

 

$

183,033

 

Restricted cash

 

 

15,227

 

 

 

227

 

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

 

$

98,593

 

 

$

183,260

 

 

During the three months ended March 31, 2020, the Company entered into a lease for a facility in San Diego that it intends to use as its new corporate headquarters. In lieu of a security deposit, Silicon Valley Bank issued a $15.0 million letter of credit on the Company’s behalf, which letter of credit is secured by a deposit of equal amount. For the three months ended March 31, 2020 and 2019, the restricted cash balance includes cash-collateralized irrevocable standby letters of credit in the amounts of $15.2 million and $0.2 million, respectively, associated with the Company’s facilities leases.

Investments

Investments are accounted for as available-for-sale securities and are carried at fair value on the unaudited condensed consolidated balance sheets. Upon initial recognition of the investment and at each reporting period, the Company evaluates whether any unrealized losses on investments are attributable to a credit loss or other factors. Any unrealized losses attributable to credit loss are recorded through an allowance for credit losses, limited to the amount by which the fair value is below amortized cost, with the offsetting amount recorded in other income or expense in the unaudited condensed consolidated statement of operations and comprehensive loss. Unrealized losses not attributable to an expected credit loss and unrealized gains on investments are recorded in other comprehensive income (loss) on the condensed consolidated statements of operations and comprehensive loss. Realized gains and losses, if any, on investments classified as available-for-sale securities are included in other income or expense.

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. 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 U.S. GAAP and following the requirements of the United States 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, 2019, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed by the Company with the SEC on March 2, 2020. 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 months ended March 31, 2020 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.

7


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.

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

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 unaudited 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 incurred, 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.

8


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.

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, other than losses attributable to a credit loss which are included in other income and expense, 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 months ended March 31, 2020, the Company realized a net loss of $33.5 million. Shares of potentially dilutive securities totaled 25.9 million for the three months ended March 31, 2020, 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 11.9 million shares of common stock issuable upon the exercise of outstanding stock options and the settlement of outstanding restricted stock units.

For the three months ended March 31, 2019, the Company realized a net loss of $19.8 million. Shares of potentially dilutive securities totaled 23.9 million for the three months ended March 31, 2019, 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 9.7 million shares of common stock issuable upon the exercise of outstanding stock options and the settlement of outstanding restricted stock units.

9


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 December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Accounting Standards Codification (ASC) Topic 740 and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. The only exception addressed in ASU 2019-12 applicable to the Company is the elimination of the intra-period exception to allocating income taxes when there are losses from continuing operations. The guidance is to be applied prospectively at the beginning in the year of adoption. The Company elected to early adopt the standard as of January 1, 2020 using the prospective method, and such adoption did not have a material impact on the Company’s consolidated financial statements.

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 adopted the standard effective January 1, 2020, and such adoption did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which 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 adopted the standard effective January 1, 2020, and such adoption did not 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 adopted the standard effective January 1, 2020 using the modified retrospective approach. Due to the nature of the Company’s investment portfolio, the adoption of the guidance did not have a material effect on the Company’s unaudited condensed consolidated financial statements and no allowance was recorded for expected credit losses.

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).

10


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.

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. As of March 31, 2020, the Company received $8.5 million in aggregate research and development fees from Ono.

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.

11


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 were recognized as revenue as the research services were delivered.

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 months ended March 31, 2020 and 2019, the Company recognized $0.2 million and $0.1 million of such expense, respectively. As of March 31, 2020, the Ono Agreement contract asset balance was $1.2 million.

The Company recognized revenue of $2.5 million under the Ono Agreement for the three months ended March 31, 2020. Such revenue comprised $1.7 million associated with research services and $0.8 million associated with the upfront payment for the three months ended March 31, 2020. During the three months ended March 31, 2019, the Company recognized revenue of $1.6 million under the Ono Agreement. Such revenue comprised $1.1 million associated with research services and $0.5 million associated with the upfront payment. As of March 31, 2020, aggregate deferred revenue related to the Ono Agreement was $6.0 million, of which $2.9 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 March 31, 2020. Total revenue recognized under the Juno Agreement during the three months ended March 31, 2019 was $1.0 million. Such revenue comprised $0.5 million associated with the upfront fee and equity premium, and $0.5 million associated with research services. No additional revenue is expected to be recognized under the Juno Agreement in future periods. 

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 Investigational New Drug (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 agreed to suspend the Award until such time as the Company elected to proceed with its submission of an IND application for FT516 in advanced solid tumors. In November 2019, the Company filed an IND application for FT516 in advanced solid tumors and the Award was removed from suspension by CIRM in January 2020. In February 2020, the Company received a $0.4 million disbursement based on a milestone achievement. 

12


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 March 31, 2020, the Company has received aggregate disbursements under the Award in the amount of $4.0 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.

4.

Investments

The Company invests portions of excess cash in United States treasuries and corporate debt securities with maturities ranging from three to eighteen months from the purchase date. These securities are classified as short-term and long-term investments in the accompanying unaudited condensed consolidated balance sheets based on each security’s contractual 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 March 31, 2020 and December 31, 2019 (in thousands):

 

 

 

Maturity

(in years)

 

Amortized

Cost

 

 

Unrealized

Losses

 

 

Unrealized

Gains

 

 

Estimated

Fair Value

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified as current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury debt securities

 

1 or less

 

$

41,769

 

 

$

 

 

$

330

 

 

$

42,099

 

Corporate debt securities

 

1 or less

 

 

77,981

 

 

 

(162

)

 

 

 

 

 

77,819

 

Total short-term investments

 

 

 

$

119,750

 

 

$

(162

)

 

$

330

 

 

$

119,918

 

Classified as non-current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

Greater than 1

 

 

16,165

 

 

 

(26

)

 

 

 

 

 

16,139

 

Total long-term investments

 

 

 

$

16,165

 

 

$

(26

)

 

$

0

 

 

$

16,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified as current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury debt securities

 

1 or less

 

$

50,445

 

 

$

(4

)

 

$

16

 

 

$

50,457

 

Corporate debt securities

 

1 or less

 

 

71,171

 

 

 

(24

)

 

 

9

 

 

 

71,156

 

Total short-term investments

 

 

 

$

121,616

 

 

$

(28

)

 

$

25

 

 

$

121,613

 

Classified as non-current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury debt securities

 

Greater than 1

 

$

9,841

 

 

$

 

 

$

5

 

 

$

9,846

 

Corporate debt securities

 

Greater than 1

 

 

29,572

 

 

 

(1

)

 

 

23

 

 

 

29,594

 

Total long-term investments

 

 

 

$

39,413

 

 

$

(1

)

 

$

28

 

 

$

39,440

 

 

The Company reviews its investment holdings at the end of each reporting period and evaluates any unrealized losses using the expected credit loss model to determine if the unrealized loss is a result of a credit loss or other factors. The Company also evaluates its investment holdings for impairment 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 months ended March 31, 2020 and 2019, the Company did not recognize any impairment or realized gains or losses on sales of investments and the Company did not record an allowance for, or recognize, any expected credit losses.

13


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 approximated its carrying value during the periods the debt was outstanding.

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.

Financial assets measured at fair value on a recurring basis consist of the Company’s cash equivalents and investments. Cash equivalents consisted of money market funds and investments consisted of United States treasuries and corporate debt securities. The following table presents the Company’s assets which were measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019 (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 March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

83,366

 

 

$

83,366

 

 

$

 

 

$

 

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury debt securities

 

 

42,099

 

 

 

42,099

 

 

 

 

 

 

 

Corporate debt securities

 

 

93,958

 

 

 

 

 

 

93,958

 

 

 

 

 

Total assets measured at fair value on a recurring basis

 

$

219,423

 

 

$

125,465

 

 

$

93,958

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

84,814

 

 

$

84,814

 

 

$

 

 

$

 

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury debt securities

 

 

60,303

 

 

 

60,303

 

 

 

 

 

 

 

Corporate debt securities

 

 

100,750

 

 

 

 

 

 

100,750

 

 

 

 

Total assets measured at fair value on a recurring basis

 

$

245,867

 

 

$

145,117

 

 

$

100,750

 

 

$

 

 

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 March 31, 2020, and December 31, 2019, the Company had no material financial liabilities measured at fair value on a recurring basis.

14


6.

Accrued Expenses and Long-Term Debt

Accrued Expenses

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

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Accrued payroll and other employee benefits

 

$

3,059

 

 

$

5,329

 

Accrued clinical trial related costs

 

 

5,473

 

 

 

5,976

 

Accrued other

 

 

3,238

 

 

 

3,392

 

Total current accrued expenses

 

$

11,770

 

 

$

14,697

 

 

Long-Term Debt

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 the Company and the Bank (Loan Agreement). 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. On November 13, 2019, the Company repaid in full all outstanding obligations under the 2017 Term Loan. The Company used cash on hand in the amount of $14.2 million for the repayment of such obligations associated with the 2017 Term Loan, including the repayment of $13.0 million in principal and $1.2 million associated with the final fee and outstanding interest. The Company expensed the remaining debt issuance cost capitalized of $0.1 million to interest expense upon the repayment of the 2017 Term Loan.

For the three months ended March 31, 2019, the Company recorded $0.4 million in aggregate interest expense related to the 2017 Term Loan.

7.

Leases

The Company has lease agreements for office, laboratory and manufacturing spaces that are classified as operating leases on the unaudited condensed consolidated balance sheets. These leases have terms varying from two to approximately sixteen years, with renewal options of up to ten years, as well as early termination options. Extension and termination options are included in the total lease term when the Company is reasonably certain to exercise them. The leases are subject to additional variable charges, including common area maintenance, property taxes, property insurance and other variable costs. Given the variable nature of such costs, they are recognized as expense as incurred. Additionally, some of the Company’s leases are subject to certain fixed fees which the Company has determined to be non-lease components. The Company has elected to combine and account for lease and non-lease components as a single lease component for purposes of determining the total future lease payments. 

In January 2020, the Company entered into a lease agreement (the Premises), and such lease is accounted for as an operating lease. The Premises is located in San Diego, California and the Company intends to move its corporate headquarters to the Premises in the middle of 2021. Lease payments shall commence, subject to certain conditions, in May 2021 (the Rent Commencement Date) and the lease has a lease term of 15 years starting from the Rent Commencement Date. The Company has the option to extend the lease for two successive five-year periods. The Company also has a one-time option to terminate the lease after 10 years from the Rent Commencement Date, subject to payment of a $30.0 million early termination fee. The landlord of the Premises is obligated to contribute an aggregate of up to $29.8 million toward tenant improvements of the Premises. As of March 31, 2020, the Company had utilized $0.5 million associated with the tenant improvements allowance and expects the remainder of the tenant improvements to be utilized within the next twelve months. In connection with the lease, the Company maintains a letter of credit for the benefit of the landlord in an amount equal to $15.0 million, which amount is subject to reduction over time.

As of March 31, 2020, future undiscounted minimum contractual payments under the Company’s operating leases were $195.7 million, which will be paid over a remaining weighted-average lease term of 13.5 years. The weighted-average discount rate for the operating lease liabilities was 8.4%, which was the Company's incremental borrowing rate at lease commencement, as the discount rates implicit in the leases could not be readily determined.  

15


For the three months ended March 31, 2020, total operating lease expense was $3.5 million, which consisted of $2.9 million associated with the straight-line recognition of fixed payments, and $0.6 million associated with variable costs associated with the leases. For the three months ended March 31, 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.

Total short-term lease expense associated with short-term leases for the three months ended March 31, 2020 was $0.6 million. The Company did not recognize any short-term lease expense during the three months ended March 31, 2019.

Future minimum lease payments under the Company’s operating leases as of March 31, 2020 are as follows (in thousands):

 

 

 

Operating

Lease Payments

 

Remaining in 2020

 

$

2,938

 

2021

 

 

9,541

 

2022

 

 

12,610

 

2023

 

 

12,988

 

2024

 

 

13,378

 

2025

 

 

13,779

 

Thereafter

 

 

130,447

 

Total undiscounted lease payments

 

$

195,681

 

Less: imputed interest

 

 

(90,678

)

Less: amounts associated with tenant improvement allowance not yet utilized

 

 

(29,271

)

Total lease liability

 

$

75,732

 

 

  

8.

Convertible Preferred Stock and Stockholders’ Equity

Convertible Preferred Stock

In November 2016, the Company completed a private placement of stock in which investors, including investors 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.

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).

During the year ended December 31, 2019, 25,000 shares of the Class A Preferred were converted into 125,000 shares of the Company’s common stock.

16


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, 2019

 

 

9,327,742

 

 

$

9.67

 

Granted

 

 

1,460,708

 

 

 

22.44

 

Exercised

 

 

(188,315

)

 

 

5.11

 

Cancelled

 

 

(110,986

)

 

 

14.16

 

Balance at March 31, 2020

 

 

10,489,149

 

 

$

11.48

 

 

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, 2019

 

 

520,000

 

 

$

16.41

 

Granted

 

 

979,323

 

 

 

21.95

 

Vested

 

 

(77,500

)

 

 

16.34

 

Cancelled

 

 

(18,573

)

 

 

21.94

 

Balance at March 31, 2020

 

 

1,403,250

 

 

$

20.21

 

 

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

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Research and development

 

$

4,253

 

 

$

2,183

 

General and administrative

 

 

2,660