grts-10q_20190331.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 March 31, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 001-38663

 

Gritstone Oncology, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

47-4859534

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

5858 Horton Street, Suite 210

Emeryville, California

 

94608

(Address of Principal Executive Offices)

 

(Zip Code)

(510) 871-6100

(Registrant’s Telephone Number, Including Area Code)

 

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 9, 2019, there were 35,718,873 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

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, $0.0001 par value per share

 

GRTS

 

The Nasdaq Global Select Market

 


Gritstone Oncology, Inc.

Table of Contents

 

 

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

1

Item 1.

 

Financial Statements (unaudited)

 

1

 

 

Condensed Balance Sheets as of March 31, 2019 and December 31, 2018

 

1

 

 

Condensed Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2019 and 2018

 

2

 

 

Condensed Statements of Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018

 

3

 

 

Condensed Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018

 

4

 

 

Notes to Condensed Financial Statements (unaudited)

 

5

Item 2.

 

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

 

22

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risks

 

31

Item 4.

 

Controls and Procedures

 

31

 

 

 

 

 

PART II. OTHER INFORMATION

 

32

Item 1.

 

Legal Proceedings

 

32

Item 1A.

 

Risk Factors

 

32

Item 2.

 

Unregistered Sales of Equity Securities and Uses of Proceeds

 

72

Item 3.

 

Defaults Upon Senior Securities

 

73

Item 4.

 

Mine Safety Disclosures

 

73

Item 5.

 

Other Information

 

73

Item 6.

 

Exhibits

 

74

 

 

 

 

 

SIGNATURES

 

76

 

 


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Gritstone Oncology, Inc.

Condensed Balance Sheets

(Unaudited)

(In thousands, except share and per

share amounts)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,572

 

 

$

52,183

 

Marketable securities

 

 

97,590

 

 

 

100,927

 

Prepaid expenses and other current assets

 

 

2,838

 

 

 

4,526

 

Total current assets

 

 

135,000

 

 

 

157,636

 

Property and equipment, net

 

 

15,652

 

 

 

29,494

 

Operating lease right-of-use assets

 

 

22,018

 

 

 

 

Deposits and other long-term assets

 

 

2,817

 

 

 

2,428

 

Total assets

 

$

175,487

 

 

$

189,558

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,622

 

 

$

4,825

 

Accrued compensation

 

 

1,694

 

 

 

3,951

 

Accrued liabilities

 

 

803

 

 

 

992

 

Lease liabilities, current portion

 

 

2,574

 

 

 

 

Deferred revenue, current portion

 

 

5,419

 

 

 

5,340

 

Total current liabilities

 

 

14,112

 

 

 

15,108

 

Deferred rent, net of current portion

 

 

 

 

 

1,353

 

Other non-current liabilities

 

 

2

 

 

 

12

 

Lease financing obligation, net of current portion

 

 

 

 

 

10,490

 

Lease liabilities, net of current portion

 

 

17,104

 

 

 

 

Deferred revenue, net of current portion

 

 

12,047

 

 

 

13,473

 

Total liabilities

 

 

43,265

 

 

 

40,436

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Convertible preferred stock, $0.0001 par value; 10,000,000 shares

   authorized at March 31, 2019 and December 31, 2018; no shares issued

  and outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

 

 

 

 

Common stock, $0.0001 par value; 300,000,000 shares authorized at March

   31, 2019 and December 31, 2018; 29,024,382 and 28,823,130 shares

   issued and outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

16

 

 

 

16

 

Additional paid-in capital

 

 

276,703

 

 

 

275,593

 

Accumulated other comprehensive income (loss)

 

 

67

 

 

 

(85

)

Accumulated deficit

 

 

(144,564

)

 

 

(126,402

)

Total stockholders’ equity

 

 

132,222

 

 

 

149,122

 

Total liabilities and stockholders’ equity

 

$

175,487

 

 

$

189,558

 

 

See accompanying notes to the unaudited condensed financial statements.

1


Gritstone Oncology, Inc.

Condensed Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, except share and per share amounts)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Collaboration revenue

 

$

1,347

 

 

$

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

15,899

 

 

 

11,401

 

General and administrative

 

 

4,377

 

 

 

2,038

 

Total operating expenses

 

 

20,276

 

 

 

13,439

 

Loss from operations

 

 

(18,929

)

 

 

(13,439

)

Interest income, net

 

 

920

 

 

 

63

 

Net loss

 

 

(18,009

)

 

 

(13,376

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Unrealized gain (loss) on marketable securities, net of tax

 

 

152

 

 

 

(15

)

Net and comprehensive loss

 

$

(17,857

)

 

$

(13,391

)

Net loss per share, basic and diluted

 

$

(0.62

)

 

$

(6.03

)

Weighted-average number of shares used in computing net loss per share,

   basic and diluted

 

 

28,938,891

 

 

 

2,217,726

 

 

See accompanying notes to the unaudited condensed financial statements.

2


Gritstone Oncology, Inc.

Condensed Statements of Stockholders’ Equity

(Unaudited)

(In thousands, except share amounts)

Three Months Ended March 31, 2019:

 

 

 

Convertible

Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2018

 

 

 

 

$

 

 

 

28,823,130

 

 

$

16

 

 

$

275,593

 

 

$

(85

)

 

$

(126,402

)

 

$

149,122

 

Cumulative effect of adopting new accounting

   standard (Note 2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(153

)

 

 

(153

)

Unrealized gain on marketable securities,

   net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

152

 

 

 

 

 

 

152

 

Lapse of repurchase rights related to common

   stock issued pursuant to early exercises

 

 

 

 

 

 

 

 

51,314

 

 

 

 

 

 

17

 

 

 

 

 

 

 

 

 

17

 

Issuance of common stock upon exercise of

   stock options

 

 

 

 

 

 

 

 

149,938

 

 

 

 

 

 

86

 

 

 

 

 

 

 

 

 

86

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,007

 

 

 

 

 

 

 

 

 

1,007

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18,009

)

 

 

(18,009

)

Balance at March 31, 2019

 

 

 

 

$

 

 

 

29,024,382

 

 

 

16

 

 

 

276,703

 

 

 

67

 

 

 

(144,564

)

 

 

132,222

 

 

Three Months Ended March 31, 2018:

 

 

 

Convertible

Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2017

 

 

17,797,529

 

 

$

156,937

 

 

 

2,152,525

 

 

$

1

 

 

$

2,045

 

 

$

(74

)

 

$

(61,627

)

 

$

97,282

 

Unrealized loss on marketable securities,

   net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15

)

 

 

 

 

 

(15

)

Lapse of repurchase rights related to common

   stock issued pursuant to early exercises

 

 

 

 

 

 

 

 

63,048

 

 

 

 

 

 

22

 

 

 

 

 

 

 

 

 

22

 

Issuance of common stock upon exercise of

   stock options

 

 

 

 

 

 

 

 

8,194

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

6

 

Exercise of common stock warrants

 

 

 

 

 

 

 

 

 

 

40,257

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

 

 

13

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

354

 

 

 

 

 

 

 

 

 

354

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,376

)

 

 

(13,376

)

Balance at March 31, 2018

 

 

17,797,529

 

 

$

156,937

 

 

 

2,264,024

 

 

$

1

 

 

$

2,440

 

 

$

(89

)

 

$

(75,003

)

 

$

84,286

 

 

3


Gritstone Oncology, Inc.

Condensed Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(18,009

)

 

$

(13,376

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,036

 

 

 

909

 

Net amortization of premiums and discounts on marketable securities

 

 

(519

)

 

 

(103

)

Stock-based compensation

 

 

1,007

 

 

 

354

 

Non-cash operating lease expense

 

 

1,344

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

778

 

 

 

(41

)

Deposits and other long-term assets

 

 

(389

)

 

 

 

Accounts payable

 

 

(235

)

 

 

(642

)

Accrued compensation

 

 

(2,257

)

 

 

(1,186

)

Accrued and other non-current liabilities

 

 

104

 

 

 

(872

)

Deferred rent

 

 

 

 

 

(103

)

Lease liability

 

 

(640

)

 

 

 

Deferred revenue

 

 

(1,347

)

 

 

 

Net cash used in operating activities

 

 

(19,127

)

 

 

(15,060

)

Investing activities

 

 

 

 

 

 

 

 

Purchase of marketable securities

 

 

(9,592

)

 

 

 

Maturities of marketable securities

 

 

13,600

 

 

 

7,470

 

Purchase of property and equipment

 

 

(2,578

)

 

 

(1,692

)

Net cash provided by investing activities

 

 

1,430

 

 

 

5,778

 

Financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

86

 

 

 

9

 

Net cash provided by financing activities

 

 

86

 

 

 

9

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(17,611

)

 

 

(9,273

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

53,175

 

 

 

39,999

 

Cash, cash equivalents and restricted cash at end of period

 

$

35,564

 

 

$

30,726

 

Supplemental disclosures of non-cash investing and financing

   information

 

 

 

 

 

 

 

 

Property and equipment purchases accrued but not yet paid

 

$

513

 

 

$

328

 

Remeasurement of operating lease right-of-use asset for lease modification

 

$

1,779

 

 

$

 

 

See accompanying notes to the unaudited condensed financial statements.

4


Gritstone Oncology, Inc.

Notes to Condensed Financial Statements

(Unaudited)

1.

Organization

Description of Business

Gritstone Oncology, Inc. (“Gritstone” or the “Company”) is an immuno-oncology company developing personalized cancer immunotherapies to fight multiple cancer types. The Company was incorporated in the state of Delaware on August 5, 2015, and is based in Emeryville, California and Cambridge, Massachusetts, with a manufacturing facility in Pleasanton, California. The Company operates in one segment.

Initial Public Offering

In October 2018, the Company closed its initial public offering (“IPO”), of 6,854,202 shares of common stock, including 187,535 shares sold pursuant to the underwriters’ partial exercise of their option to purchase additional shares, at an offering price to the public of $15.00 per share. The Company received net proceeds of approximately $92.6 million, after deducting underwriting discounts and commissions and offering costs. In connection with the IPO, all of the Company’s outstanding shares of convertible preferred stock were automatically converted into 19,409,132 shares of common stock. The related carrying value of $177.9 million was reclassified to common stock and additional paid-in capital.

In connection with the completion of its IPO, on October 2, 2018, the Company’s certificate of incorporation was amended and restated to provide for 300,000,000 authorized shares of common stock with a par value of $0.0001 per share and 10,000,000 authorized shares of preferred stock with a par value of $0.0001 per share.

2.

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and the rules and regulations of Securities and Exchange Commission (“SEC”) for interim reporting.

The condensed financial statements are unaudited and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation for interim reporting. The results of operations for any interim period are not necessarily indicative of results of operations for any future period.

Certain information and footnote disclosures typically included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Accordingly, these unaudited interim condensed financial statements should be read in conjunction with the Company’s financial statements as of and for the year ended December 31, 2018, which are included in the Company’s Annual Report on Form 10-K, as filed with the SEC on March 28, 2019.

Reverse Stock Split

On September 20, 2018, the Company amended and restated its amended and restated certificate of incorporation to effect a 1-for-6.9 reverse split (“Reverse Split”) of shares of the Company’s common and convertible preferred stock. The par value and the authorized shares of common stock and convertible preferred stock were not adjusted as a result of the Reverse Split. All of the share and per share information included in the accompanying financial statements has been adjusted to reflect the Reverse Split.

Need for Additional Capital

The Company has incurred operating losses and has an accumulated deficit as a result of ongoing efforts to develop drug product candidates, including conducting preclinical and clinical trials and providing general and administrative support for these operations. The Company had cash, cash equivalents, and marketable securities of $132.2 million and $153.1 million as of March 31, 2019 and December 31, 2018, respectively. The Company had an accumulated deficit of $144.6 million and $126.4 million as of March 31, 2019 and December 31, 2018, respectively. The Company had net losses of $18.0 million and $13.4 million for the three months ended March 31, 2019 and 2018, respectively, and net cash used in operating activities of $19.1 million and $15.1 million for the three months ended March 31, 2019 and 2018, respectively. To date, none of the Company’s drug candidates have been approved for sale and therefore the Company has not generated any revenue from contracts with customers. The Company has evaluated and concluded there are no conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year following the date that these condensed financial statements are issued. Management expects operating losses to continue for the foreseeable future. As a result, the Company will need to raise additional capital. If sufficient funds on

5


acceptable terms are not available when needed, the Company could be required to significantly reduce its operating expenses and delay, reduce the scope of, or eliminate one or more of its development programs. Failure to manage discretionary spending or raise additional financing, as needed, may adversely impact the Company’s ability to achieve its intended business objectives.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the condensed financial statements and the reported amounts of revenue and expenses in the condensed financial statements and accompanying notes during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, clinical and preclinical study trial accruals, fair value of assets and liabilities the present value of lease liabilities and the corresponding right-of-use assets, and the fair value of common stock and stock-based compensation. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results could differ from those estimates.

Other Risks and Uncertainties

The Company is subject to a number of risks similar to those of other early-stage immuno-oncology companies, including dependence on key individuals; the need to develop commercially viable therapeutics; competition from other companies, many of which are larger and better capitalized; and the need to obtain adequate additional financing to fund the development of its products. The Company currently depends on third-party suppliers for key materials and services used in its research and development manufacturing process, and is subject to certain risks related to the loss of these third-party suppliers or their inability to supply the Company with adequate materials and services.

Cash, Cash Equivalents, and Restricted Cash

Cash equivalents, which consist primarily of highly liquid investments with maturities of three months or less when purchased, are stated at cost which approximates fair value. These assets include investments in money market funds that invest in U.S. Treasury obligations and certificates of deposit which are stated at fair value.

The Company has issued a letter of credit under a lease agreement which has been collateralized by a cash deposit for an equal amount and is recorded within deposits and other long-term assets on the balance sheet based on the term of the underlying lease. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the balance sheets that sum to the total of the same amounts shown in the statements of cash flows (in thousands).

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Cash and cash equivalents

 

$

34,572

 

 

$

52,183

 

Restricted cash

 

 

992

 

 

 

992

 

Total cash, cash equivalents and restricted cash

 

$

35,564

 

 

$

53,175

 

 

Leases

Prior to January 1, 2019, the Company rented its office space and facilities under non-cancelable operating lease agreements and recognizes related rent expense on a straight-line basis over the term of the lease. The Company’s lease agreements contained rent holidays, scheduled rent increases, and renewal options. Rent holidays and scheduled rent increases were included in the determination of rent expense to be recorded ratably over the lease term. The Company did not assume renewals in its determination of the lease term unless they were deemed to be reasonably assured at the inception of the lease. The Company began recognizing rent expense on the date that it obtained the legal right to use and control the leased space. Deferred rent consisted of the difference between cash payments and the recognition of rent expense on a straight-line basis for the buildings the Company occupied.

Funding of leasehold improvements by the Company’s landlord was accounted for as a tenant improvement allowance and recorded as current and non-current deferred rent liabilities and amortized on a straight-line basis as a reduction of rent expense over the term of the lease.

In certain arrangements, the Company was involved in the construction of improvements to buildings it was leasing. To the extent the Company was involved with the structural improvements of the construction project or takes construction risk, the Company was considered to be the owner of the building and related improvements for accounting purposes during the construction period. The Company recorded the fair value of the building and related improvements subject to the lease within property and equipment on the balance sheet. The Company also recorded a corresponding lease financing obligation on its balance sheet representing the amounts financed by the lessor for the building and lessor financed improvements. Lessor financed improvement incentives due but not yet received of $1.2 million at December 31, 2017 were recorded as prepaid expense and other current assets on the condensed balance sheet. Such amounts were fully collected in April 2018. Once a construction project was complete, the Company considered the

6


requirements for sale-leaseback accounting treatment. If the Company concluded the arrangement did not qualify for sale-leaseback accounting treatment, the building and related improvements remained on the Company’s condensed balance sheet and were subject to depreciation and assessment of impairment.

For such arrangements, at both pre and post the construction period, the Company bifurcated its lease payments into a portion allocated to the building and a portion allocated to the parcel of land on which the building had been built. The portion of the lease payments allocated to the land was treated for accounting purposes as operating lease payments, and therefore was recorded as rent expense in the condensed statements of operations and comprehensive loss. The portion of the lease payments allocated to the building were further bifurcated into a portion allocated to interest expense and a portion allocated to reduce the lease financing obligation. The interest rate used for the lease financing obligation represented the Company’s estimated incremental borrowing rate at the inception of the lease, adjusted to reduce any built in loss.

Subsequent to January 1, 2019, the Company determines whether the arrangement is or contains a lease at the inception of the arrangement and if such a lease is classified as a financing lease or operating lease. All of the Company’s leases are classified as operating leases. Leases with a term greater than one year are included in operating lease right-of-use assets, lease liabilities, current portion, and lease liabilities, net of current portion in our condensed balance sheet at March 31, 2019. The Company has elected not to recognize on the condensed balance sheet leases with terms of one year or less. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term.  In determining the net present value of lease payments, the interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received and impairment charges if we determine the ROU Asset is impaired.

The Company considers a lease term to be the noncancelable period that it has the right to use the underlying asset, including any periods where it is reasonably assured the Company will exercise the option to extend the contract. Periods covered by an option to extend are included in the lease term if the lessor controls the exercise of that option.

The Company recognizes lease expense on a straight-line basis over the expected lease term.

The Company has elected to not separate lease and non-lease components for its leased assets and accounts for all lease and non-lease components of its agreements as a single lease component.  The lease components resulting in a right-of-use asset have been recorded on the condensed balance sheet and amortized as lease expense on a straight-line basis over the lease term.

Revenue Recognition

The Company analyzes its collaboration agreements to assess whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. For collaboration arrangements that are considered to be in the scope of the collaboration guidance and that contain multiple elements, the Company first determines which elements of the collaboration are deemed to be within the scope of the collaboration guidance and those that are more reflective of a vendor-customer relationship and, therefore, within the scope of the revenue with contracts with customer guidance. For elements of collaboration arrangements that are accounted for pursuant to the revenue from contracts with customer guidance, an appropriate recognition method is determined and applied consistently, generally by analogy to the revenue from contracts with customers guidance.

The terms of the licensing and collaboration agreements entered into typically include payment of one or more of the following: non-refundable, up-front fees; development, regulatory, and commercial milestone payments; payments for manufacturing supply services; and royalties on net sales of licensed products. Each of these payments results in license, collaboration, and other revenues, except for revenues from royalties on net sales of licensed products, which are classified as royalty revenues. The core principle of the accounting for revenue from contracts with customers guidance is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received in exchange for those goods or services.

In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under each of its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

Amounts received prior to satisfying the revenue recognition criteria are recorded as deferred revenue in the Company’s balance sheets. If the related performance obligation is expected to be satisfied within the next twelve months this will be classified in current liabilities. Amounts recognized as revenue prior to receipt are recorded as contract assets in the Company’s balance sheets. If the

7


Company expects to have an unconditional right to receive consideration in the next twelve months, this will be classified in current assets. A net contract asset or liability is presented for each contract with a customer.

At contract inception, the Company assesses the goods or services promised in a contract with a customer and identifies those distinct goods and services that represent a performance obligation. A promised good or service may not be identified as a performance obligation if it is immaterial in the context of the contract with the customer, if it is not separately identifiable from other promises in the contract (either because it is not capable of being separated or because it is not separable in the context of the contract), or if the performance obligation does not provide the customer with a material right.

The Company considers the terms of the contract and its customary business practices to determine the transaction price. The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Variable consideration will only be included in the transaction price when it is not considered constrained, which is when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.

If it is determined that multiple performance obligations exist, the transaction price is allocated at the inception of the agreement to all identified performance obligations based on the relative standalone selling prices. The relative selling price for each deliverable is estimated using objective evidence if it is available. If objective evidence is not available, the Company uses its best estimate of the selling price for the deliverable.

Revenue is recognized when, or as, the Company satisfies a performance obligation by transferring a promised good or service to a customer. An asset is transferred when, or as, the customer obtains control of that asset, which for a service, is considered to be as the services are received and used. The Company recognizes revenue over time by measuring the progress toward complete satisfaction of the relevant performance obligation using an appropriate input or output method based on the nature of the good or service promised to the customer.

After contract inception, the transaction price is reassessed at every period end and updated for changes such as resolution of uncertain events. Any change in the transaction price is allocated to the performance obligations on the same basis as at contract inception.

Management may be required to exercise considerable judgment in estimating revenue to be recognized. Judgment is required in identifying performance obligations, estimating the transaction price, estimating the stand-alone selling prices of identified performance obligations, which may include forecasted revenue, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success, and estimating the progress towards satisfaction of performance obligations.

Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU No. 2016-13”), which requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU No. 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The new standard will be effective on January 1, 2020. Early adoption is permitted. The Company is currently evaluating the effect that the updated standard will have on its financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.  ASU No. 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements and requires companies to disclose certain information. The new standard will be effective for fiscal years, and interim periods within those year, beginning after December 15, 2019. The Company is currently evaluating the impact of adopting this accounting update on its financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This new standard also requires customers to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. This standard is effective for annual reporting periods beginning after December 15, 2019, and interim periods within that year. This new standard can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact of adoption on its financial statements.

8


In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606 , which clarifies that certain transactions between collaborative arrangement 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. In those situations, all the guidance in Topic 606 should be applied, including recognition, measurement, presentation, and disclosure requirements. The standard adds unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606, and requires that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer. The standard is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted, including adoption in any interim period for public business entities for periods in which financial statements have not been issued. Amendments in the standard should be applied retrospectively to the date of initial application of Topic 606, but entities may elect to apply the amendments in this Update retrospectively either to all contracts or only to contracts that are not completed at the date of initial application of Topic 606, and should disclose the election. An entity may also elect to apply the practical expedient for contract modifications that is permitted for entities using the modified retrospective transition method in Topic 606. The Company is currently assessing the impact of this standard on its condensed financial statements.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard requires the recognition of lease liabilities and right-of-use (ROU) assets on the balance sheet arising from lease transactions at the lease commencement date and the disclosure of key information about leasing arrangements. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements, which provides an additional transition method in which the new lease standard is applied at the adoption date and recognized as a cumulative-effect adjustment to retained earnings without adjustment to comparative periods (collectively “Topic 842”). The amendment has the same effective date and transition requirements as the new lease standard.

The Company adopted this standard on January 1, 2019 using the modified retrospective approach and elected the package of practical expedients permitted under transition guidance, which allowed the Company to carry forward its historical assessments of: 1) whether contracts are or contain leases, 2) lease classification and 3) initial direct costs, where applicable. The Company did not elect the practical expedient allowing the use-of-hindsight which would require the Company to reassess the lease term of its leases based on all facts and circumstances through the effective date and did not elect the practical expedient pertaining to land easements as this is not applicable to the current contract portfolio. The Company elected the post-transition practical expedient to not separate lease components from non-lease components for all existing lease classes. The Company also elected a policy of not recording leases on its condensed balance sheets when the leases have a term of 12 months or less and the Company is not reasonably certain to elect an option to purchase the leased asset.

 

The impact of the adoption of Topic 842 on the accompanying condensed balance sheet as of January 1, 2019 was as follows (in thousands):

 

 

 

December 31, 2018

 

Adjustments due to Adoption of Topic 842

 

January 1, 2019

 

Property and equipment, net

 

$

29,494

 

$

(14,524

)

$

14,970

 

Operating lease right-of-use assets

 

$

-

 

$

14,224

 

$

14,224

 

Operating liabilities:

 

 

 

 

 

 

 

 

 

 

Lease liabilities, current portion

 

$

-

 

$

2,200

 

$

2,200

 

Accrued liabilities

 

$

992

 

$

(475

)

$

517

 

Deferred rent, net of current portion

 

$

1,353

 

$

(1,353

)

$

-

 

Lease financing obligation, net of current portion

 

$

10,490

 

$

(10,490

)

$

-

 

Lease liabilities, net of current portion

 

$

-

 

$

8,980

 

$

8,980

 

Accumulated deficit

 

$

(126,402

)

$

(153

)

$

(126,555

)

 

The adjustments due to the adoption of Topic 842 primarily related to the recognition of operating lease ROU Assets and lease liabilities for the Company’s operating leases. In addition, the adoption of Topic 842 resulted in a change in classification of build-to-suit component of our lease in Pleasanton, California to an operating lease and resulted in the derecognition of the $15.4 million capitalized building and related accumulated depreciation of $0.9 and $10.5 million financing lease obligation, as the Company had been deemed to own the building under legacy GAAP (Note 6). The Company also recorded an insignificant reduction to opening accumulated deficit as of January 1, 2019 as a result of the adoption of Topic 842.

 

The impact of the adoption of Topic 842 on the accompanying condensed statements of operations was not material.

9


In August 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. These amendments eliminate, modify, or integrate into other SEC requirements certain disclosure rules. Among the amendments is the requirement to present an analysis of changes in stockholders’ equity in the interim financial statements included in quarterly reports on Form 10-Q. The analysis, which can be presented as a footnote or separate statement, is required for the current and comparative quarter and year-to-date interim periods. The amendments are effective for all filings made on or after November 5, 2018. In light of the anticipated timing of effectiveness of the amendments and expected proximity of effectiveness to the filing date for most filers’ quarterly reports, the SEC’s Division of Corporate Finance issued a Compliance and Disclosure Interpretation related to Exchange Act Forms, or CDI – Question 105.09, that provides transition guidance related to this disclosure requirement. CDI – Question 105.09 states that the SEC would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments. As such, the Company adopted these SEC amendments on November 5, 2018 and has presented the analysis of changes in stockholders’ equity in its interim financial statements in this Form 10-Q for the quarter ending March 31, 2019. Adoption of these SEC amendments did not have a material effect on the Company’s financial position, results of operations, cash flows or stockholders’ equity.

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU No. 2018-07”). ASU No. 2018-07 is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to non-employees (for example, service providers, external legal counsel, suppliers, etc.). The ASU expands the scope of Topic 718, Compensation—Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. ASU No. 2018-07 is effective for annual and interim periods beginning after December 15, 2018. Early adoption of the standard is permitted. The standard will be applied in a retrospective approach for each period presented. The Company adopted the standard during the quarter ended March 31, 2019, which did not have a material impact on its financial statements and related disclosures.

3.

Cash Equivalents and Marketable Securities

The amortized cost, unrealized gains and losses and fair values of cash equivalents and marketable securities were as follows (in thousands):

 

 

 

March 31, 2019

 

Description

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair

Value

 

Money market funds

 

$

28,813

 

 

$

 

 

$

 

 

$

28,813

 

Commercial paper

 

 

55,212

 

 

 

48

 

 

 

 

 

 

55,260

 

Corporate debt securities

 

 

43,310

 

 

 

20

 

 

 

 

 

 

43,330

 

 

 

$

127,335

 

 

$

68

 

 

$

 

 

$

127,403

 

Classified as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

29,813

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

97,590

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

$

127,403

 

 

 

 

December 31, 2018

 

Description

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair

Value

 

Money market funds

 

$

36,148

 

 

$

 

 

$

 

 

$

36,148

 

Commercial paper

 

 

45,244

 

 

 

 

 

 

(40

)

 

 

45,204

 

Corporate debt securities

 

 

67,815

 

 

 

1

 

 

 

(46

)

 

 

67,770

 

 

 

$

149,207

 

 

$

1

 

 

$

(86

)

 

$

149,122

 

Classified as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

48,195

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

100,927

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

$

149,122

 

 

10


All marketable securities held as of March 31, 2019, had contractual maturities of less than one year. There have been no realized gains or losses on marketable securities for the periods presented. None of the Company’s investments in marketable securities has been in an unrealized loss position for more than one year. The Company determined that it has the ability and intent to hold all marketable securities that have been in a continuous loss position until maturity or recovery, thus there has been no recognition of any other-than-temporary impairment in the three months ended March 31, 2019 and 2018.

See Note 4 for further information regarding the fair value of our financial instruments.

4.

Fair Value Measurements

The Company determines the fair value of financial and non-financial assets and liabilities based on the assumptions that market participants would use in pricing the asset or liability in orderly transaction between market participants at the measurement date. The identification of market participant assumptions provides a basis for determining what inputs are to be used for pricing each asset or liability. A fair value hierarchy has been established which gives precedence to fair value measurements calculated using observable inputs over those using unobservable inputs. This hierarchy prioritizes the inputs into three broad levels as follows:

 

Level 1 inputs are quoted prices in active markets that are accessible at the market date for identical assets or liabilities.

 

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the assets or liability. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The carrying amounts reflected on the balance sheets for cash and cash equivalents, prepaid expenses and other current assets, accounts payable, accrued compensation and accrued liabilities approximate their fair values due to their short-term nature.

The Company’s financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used in such measurements were as follows (in thousands):

 

 

 

March 31, 2019

 

Description

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds

 

$

28,813

 

 

$

28,813

 

 

$

 

 

$

 

Commercial paper

 

 

55,260

 

 

 

 

 

 

55,260

 

 

 

 

Corporate debt securities

 

 

43,330

 

 

 

 

 

 

43,330

 

 

 

 

Total

 

$

127,403

 

 

$

28,813

 

 

$

98,590

 

 

$

 

 

 

 

December 31, 2018

 

Description

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds

 

$

36,148

 

 

$

36,148

 

 

$

 

 

$

 

Commercial paper

 

 

45,204

 

 

 

 

 

 

45,204

 

 

 

 

Corporate debt securities

 

 

67,770

 

 

 

 

 

 

67,770

 

 

 

 

Total

 

$

149,122

 

 

$

36,148

 

 

$

112,974

 

 

$

 

 

The Company measures the fair value of money market funds based on quoted prices in active markets for identical securities. Commercial paper and corporate debt securities are valued taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads; benchmark securities; prepayment/default projections based on historical data; and other observable inputs.

There were no transfers between Level 1 and Level 2 during the periods presented. See Note 3 for further information regarding the amortized cost of our financial instruments.

11


5.

Property and Equipment, Net

Property and equipment and related accumulated depreciation and amortization are as follows (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Computer equipment and software

 

$

619

 

 

$

470

 

Furniture and fixtures

 

 

974

 

 

 

935

 

Laboratory equipment

 

 

17,548

 

 

 

16,406

 

Leasehold improvements

 

 

3,081

 

 

 

3,063

 

Buildings and related improvements capitalized under a lease financing

   transaction

 

 

 

 

 

15,371

 

Construction in progress

 

 

370

 

 

 

 

 

 

 

22,592

 

 

 

36,245

 

Less accumulated depreciation and amortization

 

 

(6,940

)

 

 

(6,751

)

Total property and equipment, net

 

$

15,652

 

 

$

29,494

 

 

Depreciation and amortization expense was $1.0 million and $0.9 million for the three months ended March 31, 2019 and 2018.

6.

Commitments and Contingencies

Leases

In November 2015, the Company entered into an 84-month non-cancelable operating lease, effective March 2016, for a facility in Emeryville, California, with laboratory and office space. In conjunction with signing the lease, the Company paid a cash security deposit of $50,000. The lease agreement includes an escalation clause for increased rent and a renewal provision allowing the Company to extend this lease for an additional three years at the prevailing rental rate. In September 2018 the Emeryville lease was amended whereby the Company entered into a 12-month operating lease for additional temporary space. The Company may terminate the temporary space lease agreement with 30 days advanced written notice to the landlord.

In January 2019, the Company entered into a 120-month operating lease for a new facility in Emeryville, California with office and laboratory space for the Company’s new principal executive offices. In conjunction with signing the lease, the Company paid a cash security deposit of $0.6 million, which is recorded as a deposit on the Company’s condensed balance sheet as of March 31, 2019. The lease agreement includes a free rent period, an escalation clause for increased rent and a renewal provision allowing the Company to extend this lease for an additional two five-year periods at the then market rental rate. The lessor provided the Company a tenant improvement allowance for a total of $4.0 million to complete the laboratory and office renovation. The Company’s obligation to pay rent will commence on November 1, 2019. The Company has determined the tenant improvements to be lessee owned and therefore has recorded a $10.4 million ROU Asset and a $10.7 million lease liability on the condensed balance sheet as of March 31, 2019.

In connection with the new lease agreement, the Company also entered into an agreement (the “Lease Termination Agreement”) to early terminate the Company’s existing lease dated November 2015, for its current premises. The current lease will terminate effective no later than 60 days after the rent commencement date under the new lease, which in October 2019. The Company accounted for the Lease Termination Agreement as a separate contract and recorded an adjustment of $1.8 million, which is included within the March 31, 2019 condensed balance sheet, to the ROU Asset and lease liability to reflect the remaining term of the modified agreement through October 2019.

In February 2016, the Company entered into a 67-month non-cancelable operating lease effective October 2016 for a facility in Cambridge, Massachusetts, with laboratory and office space. In conjunction with signing the lease, the Company paid a cash security deposit of $0.3 million, which is recorded in deposits and other long term assets on the Company’s condensed balance sheet as of March 31, 2019. The lease agreement includes an escalation clause for increased rent and a renewal provision allowing the Company to extend this lease for an additional three years at the prevailing rental rate. The lessor provided the Company a tenant improvement allowance for a total of $2.1 million to complete the laboratory and office renovation. The Company recorded the tenant allowance received as leasehold improvements under the property and equipment account and deferred rent liability on the accompanying condensed balance sheets. Upon adoption of Topic 842, the deferred rent liability was reclassified against the ROU Asset on the condensed balance sheet as of January 1, 2019.

In March 2017, the Company entered into a noncancelable operating lease (the “Pleasanton Lease”) to lease 42,620 square feet of office, cleanroom, and laboratory support manufacturing space in Pleasanton, California (the “Pleasanton Facility”). Subsequently, in April 2017, the Company took possession of the space. The Pleasanton Lease includes a free rent period, escalating rent payments and a term that expires on November 30, 2024. The Company has the option to extend the lease term for a period of five years at the then market rental rate. The Company’s obligation to pay rent commenced in December 2017. The Company obtained an irrevocable letter of credit in March 2017 in the initial amount of approximately $1.0 million as a security deposit to the Pleasanton Lease, which may be

12


drawn down by the landlord in the event the Company fails to fully and faithfully perform all of its obligations. The letter of credit may be reduced based on certain levels of cash and cash equivalents the Company holds. The Pleasanton Lease further provides that the Company is obligated to pay to the landlord its proportionate share of certain basic operating costs, including taxes and operating expenses.

In connection with the Pleasanton Lease, the Company received a tenant improvement allowance of $1.2 million from the landlord for the costs associated with the design, development and construction of tenant improvements for the Pleasanton Facility. The scope of the tenant improvements did not qualify under the lease accounting guidance as “normal tenant improvements” and the Company was deemed owner of the leased building during the construction period for accounting purposes. The Company had therefore capitalized the $9.3 million fair value of the leased building within property and equipment, net, and recognized a corresponding non-current lease financing obligation in the condensed balance sheet as of December 31, 2018. The fair value of the leased building was estimated using a market approach that utilized comparable observable sales for similar assets (Level 2 inputs). The Company had also recognized building improvements totaling $6.1 million for additions to the leased building incurred by the Company during the construction period, of which $1.2 million were due but had not yet been received from the landlord as of December 31, 2017 and were recorded as an increase to the lease financing obligation and prepaid and other current assets on the condensed balance sheet at that time. Such amounts were subsequently reimbursed by the landlord in April 2018. In November 2017, construction on the Pleasanton Facility was substantially completed and the leased property was placed into service. The Company determined the completed construction project did not qualify for sale-leaseback accounting due to the collateral held by the landlord in the form of a letter of credit and instead was accounted for as a financing lease transaction. The leased building for the Pleasanton Facility and related improvements remained on the Company’s balance sheet as of December 31, 2018 and rental payments associated with the Pleasanton Lease were allocated to operating lease expense for the ground underlying the leased building and principal and interest payments on the lease financing obligation.

Upon adoption of Topic 842, the Company analyzed the Pleasanton lease under the new guidance and determined that the lease would be classified as an operating lease under legacy GAAP. Additionally, given the Company had previously recognized the building and financing lease obligation solely as a result of the transactions build to suit designation under legacy GAAP, the Company derecognized the $14.5 million leased building and $10.5 million lease financing obligation from the condensed balance sheet on January 1, 2019. The unamortized tenant improvement allowance of $4.0 million and was recognized as a component of ROU Assets on January 1, 2019. The Company also recorded a $0.2 million reduction to opening accumulated deficit as of January 1, 2019.

In September 2018, the Company entered into a 24-month non-cancellable operating lease for an additional facility in Cambridge, Massachusetts with laboratory and office space. In conjunction with signing the lease, the Company prepaid the first twelve months base rent in the amount of $1.3 million, of which the remaining amount of $0.9 million as of January 1, 2019 was reclassified to the ROU Asset on the condensed balance sheet upon adoption of Topic 842. The Company also paid a cash security deposit of $0.3 million, which included $0.1 million for the last month’s rent and was reclassified to the ROU Assets on the condensed balance sheet upon adoption of Topic 842 on January 1, 2019. The remaining security deposit is recorded in deposits and other long term assets on the Company’s condensed balance sheet as of March 31, 2019.

The Company’s operating leases include various covenants, indemnities, defaults, termination rights, security deposits and other provisions customary for lease transactions of this nature.

The components of lease costs, which were included in our condensed statements of operations and comprehensive loss, were as follows (in thousands):

 

 

 

Three Months

Ended March 31,

 

 

 

2019

 

Lease cost

 

 

 

 

Operating lease cost

 

$

1,344

 

Short-term lease cost

 

 

56

 

Total lease cost

 

$

1,400

 

13


 

Supplemental information related to leases was as follows (in thousands):

 

 

Three Months

Ended March 31,

 

 

 

2019

 

Cash paid for amounts included in the measurement of lease liabilities (in thousands):

 

 

 

 

Operating cash flows from operating leases

 

$

640

 

New right-of-use assets obtained in exchange for lease obligations (in thousands):

 

 

 

 

Operating leases

 

$

10,542

 

Weighted average remaining lease term (years):

 

 

 

 

Operating leases

 

 

7.6

 

Weighted average discount rate:

 

 

 

 

Operating leases

 

 

9.0

%

 

 

 

As of March 31, 2019, minimum annual rental payments under the Company’s operating lease agreements are as follows (in thousands):

 

 

 

Operating

Leases

 

Year ending December 31:

 

 

 

 

2019 (remaining nine months)

 

$

2,386

 

2020

 

 

5,058

 

2021

 

 

4,267

 

2022

 

 

3,623

 

2023

 

 

3,337

 

Thereafter

 

 

15,876

 

Total minimum payments

 

$

34,547

 

Less: Amounts representing interest

 

 

(10,836

)

Less: Amounts representing tenant improvement allowance

 

 

(4,033

)

Present value of future minimum lease payments

 

 

19,678

 

Less: Current portion of lease liability

 

 

(2,574

)

Noncurrent portion of lease liability

 

$

17,104

 

The amount representing the tenant improvement allowance is expected to be received by the Company concurrent with the completion of construction in late 2019.

Agreement with CRO

In September 2017, the Company entered into a contract research and development agreement with a third party contract research organization (“CRO”) to provide research, analysis and antibody samples to further the Company’s development of its drug candidates. Under the agreement, the Company paid an upfront payment of $0.5 million to the CRO. The upfront payment was capitalized and recognized as research and development expense using the straight-line method over the term of the agreement, which is one year and ended on December 31, 2018. During the year ended December 31, 2018, the Company recognized a total of $1.1 million of research and development expense under the agreement. The Company is also obligated to pay the CRO certain milestone payments of up to $36.4 million on achievement of specified events. None of these events had occurred as of March 31, 2019. During the three months ended March 31, 2019, the Company recognized an insignificant amount of research and development expense under the agreement. During the three months ended March 31, 2018, the Company recognized a total of $0.3 million of research and development expense under the agreement.

Guarantees and Indemnifications

The Company, as permitted under Delaware law and in accordance with its certification of incorporation and bylaws, and pursuant to indemnification agreements with certain of its officers and directors, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, which the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period lasts as long as an officer or director may be subject to any proceeding arising out of acts or omissions of such officer or director in such capacity. The maximum amount of potential future indemnification is unlimited; however, the Company currently holds director and officer liability insurance. This insurance limits the Company’s exposure and may enable it to recover a portion of any future amounts paid. The Company believes that the fair value of these indemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to these obligations for any period presented.

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