adro-10q_20180630.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 June 30, 2018

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 001-37345

 

ADURO BIOTECH, INC.

(Exact name of Registrant as specified in its Charter)

 

 

Delaware

 

94-3348934

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

740 Heinz Avenue

Berkeley, California 94710

(Address of principal executive offices including zip code)

Registrant’s telephone number, including area code: (510) 848-4400

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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

 

  (Do not check if a small reporting company)

  

Small 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  

The number of shares of Registrant’s Common Stock outstanding as of July 27, 2018 was 79,059,764.

 

 

 

 


 

Table of Contents

 

 

 

 

Page

 

 

PART I—FINANCIAL INFORMATION

 

Item 1.

 

Condensed Consolidated Financial Statements (unaudited)

3

 

 

Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017

3

 

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017

4

 

 

Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2018 and 2017

5

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017

6

 

 

Notes to the Condensed Consolidated Financial Statements

7

Item 2.

 

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

22

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4.

 

Controls and Procedures

31

 

 

 

 

 

 

PART II—OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

32

Item 1A.

 

Risk Factors

32

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

62

Item 3.

 

Defaults Upon Senior Securities

62

Item 4.

 

Mine Safety Disclosures

62

Item 5.

 

Other Information

62

Item 6.

 

Exhibits

62

EXHIBIT INDEX

63

SIGNATURES

64

 

In this Quarterly Report on Form 10-Q, “we,” “our,” “us,” “Aduro” and the “Company” refer to Aduro Biotech, Inc. and its consolidated subsidiaries. Aduro, Aduro Biotech, the Aduro logo and other trade names, trademarks or service marks of Aduro are the property of Aduro Biotech, Inc. This report contains references to our trademarks and to trademarks belonging to other entities. Trade names, trademarks and service marks of other companies appearing in this report are the property of their respective holders. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

2


 

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (unaudited)

 

ADURO BIOTECH, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited) 

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

114,401

 

 

$

157,614

 

Short-term marketable securities

 

 

174,711

 

 

 

168,489

 

Accounts receivable

 

 

1,042

 

 

 

989

 

Income tax receivable

 

 

17,495

 

 

 

17,495

 

Prepaid expenses and other current assets

 

 

4,606

 

 

 

5,544

 

Total current assets

 

 

312,255

 

 

 

350,131

 

Long-term marketable securities

 

 

16,783

 

 

 

23,614

 

Property and equipment, net

 

 

30,331

 

 

 

31,085

 

Goodwill

 

 

8,506

 

 

 

8,723

 

Intangible assets, net

 

 

30,044

 

 

 

31,107

 

Restricted cash

 

 

468

 

 

 

468

 

Total assets

 

$

398,387

 

 

$

445,128

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

992

 

 

$

1,150

 

Accrued clinical trial and manufacturing expenses

 

 

4,110

 

 

 

5,898

 

Accrued expenses and other liabilities

 

 

8,801

 

 

 

12,601

 

Contingent consideration

 

 

6,799

 

 

 

6,829

 

Deferred revenue

 

 

17,613

 

 

 

14,923

 

Total current liabilities

 

 

38,315

 

 

 

41,401

 

Deferred rent

 

 

10,955

 

 

 

9,991

 

Contingent consideration

 

 

947

 

 

 

759

 

Deferred revenue

 

 

164,586

 

 

 

148,148

 

Deferred tax liabilities

 

 

6,319

 

 

 

6,538

 

Other long-term liabilities

 

 

831

 

 

 

818

 

Total liabilities

 

 

221,953

 

 

 

207,655

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 10,000,000 shares authorized; and no shares

   issued and outstanding at June 30, 2018 and December 31, 2017

 

 

 

 

 

 

Common stock, $0.0001 par value; 300,000,000 shares authorized; and 79,059,764

   and 77,736,201 shares issued and outstanding at June 30, 2018 and

   December 31, 2017

 

 

8

 

 

 

8

 

Additional paid-in capital

 

 

530,312

 

 

 

519,435

 

Accumulated other comprehensive income

 

 

1,179

 

 

 

1,893

 

Accumulated deficit

 

 

(355,065

)

 

 

(283,863

)

Total stockholders’ equity

 

 

176,434

 

 

 

237,473

 

Total liabilities and stockholders’ equity

 

$

398,387

 

 

$

445,128

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


 

ADURO BIOTECH, INC.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration and license revenue

 

$

2,639

 

 

$

5,876

 

 

$

9,266

 

 

$

9,648

 

Grant revenue

 

 

 

 

 

41

 

 

 

 

 

 

41

 

Total revenue

 

 

2,639

 

 

 

5,917

 

 

 

9,266

 

 

 

9,689

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

19,420

 

 

 

21,440

 

 

 

39,547

 

 

 

42,011

 

General and administrative

 

 

8,827

 

 

 

8,245

 

 

 

17,872

 

 

 

16,523

 

Amortization of intangible assets

 

 

147

 

 

 

136

 

 

 

299

 

 

 

268

 

Total operating expenses

 

 

28,394

 

 

 

29,821

 

 

 

57,718

 

 

 

58,802

 

Loss from operations

 

 

(25,755

)

 

 

(23,904

)

 

 

(48,452

)

 

 

(49,113

)

Interest income

 

 

1,340

 

 

 

780

 

 

 

2,539

 

 

 

1,430

 

Other loss, net

 

 

(20

)

 

 

(64

)

 

 

(36

)

 

 

(68

)

Loss before income tax

 

 

(24,435

)

 

 

(23,188

)

 

 

(45,949

)

 

 

(47,751

)

Income tax benefit

 

 

38

 

 

 

3,788

 

 

 

59

 

 

 

6,540

 

Net loss

 

$

(24,397

)

 

$

(19,400

)

 

$

(45,890

)

 

$

(41,211

)

Net loss per common share, basic and diluted

 

$

(0.31

)

 

$

(0.27

)

 

$

(0.59

)

 

$

(0.59

)

Shares used in computing net loss per common share, basic and diluted

 

 

78,817,840

 

 

 

71,101,336

 

 

 

78,364,914

 

 

 

69,679,746

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

4


 

ADURO BIOTECH, INC.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

 

$

(24,397

)

 

$

(19,400

)

 

$

(45,890

)

 

$

(41,211

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain/(loss) on marketable securities

 

 

53

 

 

 

25

 

 

 

(96

)

 

 

2

 

Foreign currency translation adjustments

 

 

(1,495

)

 

 

1,925

 

 

 

(618

)

 

 

2,290

 

Comprehensive loss

 

$

(25,839

)

 

$

(17,450

)

 

$

(46,604

)

 

$

(38,919

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

5


 

ADURO BIOTECH, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(45,890

)

 

$

(41,211

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,178

 

 

 

1,659

 

Amortization of intangible assets

 

 

299

 

 

 

268

 

Accretion of discounts and amortization of premiums on marketable securities

 

 

(519

)

 

 

497

 

Stock-based compensation

 

 

9,251

 

 

 

7,985

 

Loss from remeasurement of fair value of contingent consideration

 

 

360

 

 

 

1,636

 

Loss on disposal of property and equipment

 

 

3

 

 

 

5

 

Deferred income tax

 

 

(59

)

 

 

1,272

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(52

)

 

 

(2,238

)

Prepaid expenses and other assets

 

 

1,540

 

 

 

(5,832

)

Accounts payable

 

 

(669

)

 

 

607

 

Deferred revenue

 

 

(6,184

)

 

 

(7,514

)

Accrued clinical trial and manufacturing expenses

 

 

(1,740

)

 

 

(576

)

Accrued expenses and other liabilities

 

 

(3,464

)

 

 

(670

)

Net cash used in operating activities

 

 

(44,946

)

 

 

(44,112

)

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Purchase of marketable securities

 

 

(155,142

)

 

 

(140,626

)

Proceeds from maturities of marketable securities

 

 

156,174

 

 

 

233,678

 

Purchase of property and equipment

 

 

(825

)

 

 

(1,453

)

Proceeds from sale of property and equipment

 

 

4

 

 

 

 

Net cash provided by investing activities

 

 

211

 

 

 

91,599

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from the issuance of common stock, net of issuance costs

 

 

 

 

 

60,467

 

Proceeds from employee stock purchase plan

 

 

366

 

 

 

494

 

Proceeds from exercise of stock options and warrants

 

 

1,260

 

 

 

435

 

Net cash provided by financing activities

 

 

1,626

 

 

 

61,396

 

Effect of exchange rate changes

 

 

(104

)

 

 

 

Net (decrease) increase in cash, cash equivalents, and restricted cash

 

 

(43,213

)

 

 

108,883

 

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

 

 

158,082

 

 

 

75,400

 

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

 

$

114,869

 

 

$

184,283

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

 

Cash paid for taxes

 

$

 

 

$

850

 

Supplemental Disclosure of Non-Cash Investing and Financing Activities

 

 

 

 

 

 

 

 

Purchase of property and equipment in accounts payable and accrued liabilities

 

$

652

 

 

$

219

 

Reconciliation of Cash, Cash Equivalents and Restricted Cash

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

114,401

 

 

 

183,815

 

Restricted cash

 

 

468

 

 

 

468

 

Total cash, cash equivalents and restricted cash

 

$

114,869

 

 

$

184,283

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

6


 

ADURO BIOTECH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

1. Organization and Nature of Business

Aduro Biotech, Inc., and its wholly owned subsidiaries, or the Company, is an immunotherapy company focused on the discovery, development and commercialization of therapies that transform the treatment of challenging diseases, including cancer. The Company is located in Berkeley, California and its wholly-owned subsidiary, Aduro Biotech Holdings, Europe B.V., or Aduro Biotech Europe, is based in the Netherlands. The Company operates in one business segment.

The Company believes its technologies are uniquely positioned to recruit and direct the immune system by activating cancer-fighting immune cells and inhibiting immune suppressive cells known to allow tumor growth. Product candidates from the Company’s STING and B-select monoclonal antibody technology platforms and personalized, neoantigen-based LADD program are designed to stimulate and/or regulate innate and adaptive immune responses. The Company’s diverse technology platforms have led to a strong pipeline of clinical and preclinical candidates, which are being developed for a number of cancer indications. Further, the Company believes that many of its product candidates are combinable with other conventional and novel treatment options, leveraging potential synergies between Aduro’s agents and other therapies with established activity.  The Company is also collaborating with leading global pharmaceutical companies to expand its products and technology platforms.

 

 

2. Basis of Presentation, Use of Estimates and Recent Accounting Pronouncements

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, and follow the requirements of the Securities and Exchange Commission, or the SEC, for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2017 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements. These financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of the Company’s financial information. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for any other interim period or for any other future year.

The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 1, 2018.

The consolidated financial statements include the accounts of Aduro Biotech, Inc. and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and reported amounts of revenue and expenses in the financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, clinical trial accruals, contingent consideration, income taxes 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 these estimates.

Revenue Recognition

The Company recognizes revenue when its customers obtain control of the promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services.

7


 

Collaboration and license revenue

The Company’s collaboration agreements may include the transfer of intellectual property rights in the form of licenses, obligations to provide research and development services and obligations to participate on certain development committees with the collaboration party. The terms of such agreements include payment to the Company of one or more of the following: nonrefundable upfront fees, payment for research and development services, development, regulatory and commercial milestone payments, and royalties on net sales of licensed products. The Company assesses whether the promises in these agreements are considered distinct performance obligations that should be accounted for separately. Judgment is required to determine whether the license to the Company’s intellectual property is distinct from the research and development services or participation on development committees.

The transaction price in each agreement is allocated to the identified performance obligations based on the standalone selling price, or SSP, of each distinct performance obligation. Judgment is required to determine SSP. In instances where SSP is not directly observable, such as when a license or service is not sold separately, SSP is determined using information that may include market conditions and other observable inputs.  Due to the early stage of the Company’s licensed technology, the license of such technology is typically combined with the research and development services and committee participation as one performance obligation.

Revenue associated with nonrefundable upfront license fees where the license fees and research and development services cannot be accounted for as separate performance obligations is deferred and recognized as revenue over the expected period of performance using a cost-based input methodology. The Company utilizes judgment to assess the pattern of delivery of the performance obligation.

At the inception of each agreement that includes development, regulatory or commercial milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price by using the most likely amount method. If it is probable that a significant reversal of cumulative revenue would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received or the underlying activity has been completed. The transaction price is then allocated to each performance obligation in the agreement based on relative SSP. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of each such milestone and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.

Contract Balances

Upfront payments and fees are recorded as deferred revenue upon receipt or when due, and may require deferral of revenue recognition to a future period until the Company performs its obligations under these arrangements. Amounts payable to the Company are recorded as accounts receivable when the Company’s right to consideration is unconditional.

 

 

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-02, Leases (Topic 842), which establishes a comprehensive new lease accounting model. The new standard: (a) clarifies the definition of a lease; (b) requires a dual approach to lease classification similar to current lease classifications; and (c) causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. The new standard is effective for fiscal years and interim periods beginning after December 15, 2018 and requires modified retrospective application. Early adoption is permitted. In preparation for adoption of the standard, the Company engaged a third-party service provider to assist the Company with the evaluation. The Company continues to evaluate the overall impact the adoption of this new guidance will have on the Company’s consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The standard changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. The standard is effective for fiscal years and interim periods beginning after December 15, 2019. Early adoption is permitted for all periods beginning after December 15, 2018. The Company has evaluated the impact of this guidance and has concluded that adoption of the standard will not have a material impact on its consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220). The standard update allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the ASU 2018-02 eliminates the stranded tax effects resulting from the Tax Cuts and Jobs Act. The new standard is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period for reporting periods for which financial statements have not yet

8


 

been issued. The new standard should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company has evaluated the impact of this guidance and has concluded that adoption of the standard will not have a material impact on its consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07 – Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Shared-Based Payment Accounting. The standard update expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The new standard is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.

Recently Adopted Accounting Pronouncements

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments--Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. In February 2018, the FASB issued ASU No. 2018-03 which provides additional clarification and implementation guidance on the previously issued ASU No. 2016-01. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. The Company adopted this ASU on January 1, 2018. The adoption of the standard did not have a material impact on its condensed consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU as well as its related amendments affect any entity that either enters into contracts with customers to transfer goods and services or enters into contracts for the transfer of nonfinancial assets. ASU 2014-09 replaced most existing revenue recognition guidance in U.S. GAAP when it became effective. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. The Company adopted this standard on January 1, 2018 using the modified retrospective method. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of its accumulated deficit. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

 

As a result, the Company changed its accounting policy for revenue recognition, and the details of the significant changes and quantitative impact of the changes are disclosed below.

Milestone payments – under the milestone method ASC 605-28, payments that were contingent upon the achievement of a substantive milestone were recognized entirely as revenue in the period in which the milestone was achieved. To the extent that non-substantive milestones were achieved and the Company had remaining performance obligations, milestones were deferred and recognized as revenue over the estimated remaining period of performance. If there were no remaining performance obligations, the revenue from non-substantive milestones was recognized in the period it was earned. The milestone method no longer exists under the new revenue standard. The revenue from the milestone payments must be estimated using either the expected value method or the most likely amount method. Revenue that is not probable of significant reversal of cumulative revenue is included in the transaction price. Therefore, substantive milestones that were recognized when achieved under the legacy revenue guidance will be recognized as revenue over the performance period under the new standard with a cumulative catch-up recorded for the portion associated with the performance to date.

Pattern of revenue recognition – the Company recognized revenue from performance obligations delivered over time, such as licenses combined with research and development services and participation on development committees, on a straight-line basis over the period of performance under the legacy revenue guidance. The new standard allows entities to use either an input method or an output method to measure progress toward complete satisfaction of a performance obligation. For contracts in progress at the adoption date of the new standard the Company determined that the input method of measuring costs incurred to date compared to total estimated costs to be incurred under the contract most accurately depicts its performance.

The change in the pattern of revenue recognition upon adoption of Topic 606 for milestone payments and performance obligations delivered over time resulted in an increase in the balance of deferred revenue and an increase in the accumulated deficit balance of $25.3 million on January 1, 2018.

9


 

The following table summarizes the impact of adopting Topic 606 on select unaudited condensed consolidated balance sheet line items (in thousands):

 

 

 

June 30, 2018

 

 

 

As reported

 

 

Adjustments

 

 

Balances without

the adoption of

Topic 606

 

 

 

(in thousands)

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

$

17,613

 

 

$

(1,185

)

 

$

16,428

 

Deferred revenue – noncurrent

 

 

164,586

 

 

 

(25,432

)

 

 

139,154

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

 

(355,065

)

 

 

26,617

 

 

 

(328,448

)

 

The following table summarizes the impact of adopting Topic 606 on select unaudited condensed consolidated statement of operations line items (in thousands, except per share data):

 

 

Three Months Ended June 30, 2018

 

 

Six Months Ended June 30, 2018

 

 

 

As reported

 

 

Adjustments

 

 

Balances without

the adoption of

Topic 606

 

 

As reported

 

 

Adjustments

 

 

Balances without

the adoption of

Topic 606

 

 

 

 

 

 

(in thousands)

 

Collaboration and license revenue

 

$

2,639

 

 

$

1,185

 

 

$

3,824

 

 

$

9,266

 

 

$

1,305

 

 

$

10,571

 

Total revenue

 

 

2,639

 

 

 

1,185

 

 

 

3,824

 

 

 

9,266

 

 

 

1,305

 

 

 

10,571

 

Loss from operations

 

 

(25,755

)

 

 

1,185

 

 

 

(24,570

)

 

 

(48,452

)

 

 

1,305

 

 

 

(47,147

)

Net loss

 

 

(24,397

)

 

 

1,185

 

 

 

(23,212

)

 

 

(45,890

)

 

 

1,305

 

 

 

(44,585

)

Net loss per share, basic and diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table summarizes the impact of adopting Topic 606 on select unaudited condensed consolidated statement of cash flows line items (in thousands):

 

 

 

Six Months Ended June 30, 2018

 

 

 

As reported

 

 

Adjustments

 

 

Balances without

the adoption of

Topic 606

 

 

 

(in thousands)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(45,890

)

 

$

1,305

 

 

$

(44,585

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

 

(6,184

)

 

 

(1,305

)

 

 

(7,489

)

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 identifies how certain cash receipts and cash payments are presented and classified in the Statement of Cash Flows. The standard is effective for fiscal years and interim periods beginning after December 15, 2017. The standard should be applied retrospectively and early adoption is permitted, including adoption in an interim period. The Company adopted this standard on January 1, 2018 and the adoption of the standard did not have a material impact on its condensed consolidated statement of cash flows.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total cash, cash equivalents, and restricted cash. The standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. This standard should be applied retrospectively and early adoption is permitted, including adoption in an interim period. The Company adopted this standard on January 1, 2018 utilizing the required retrospective transition method and changed the presentation and classification of restricted cash in its condensed consolidated statement of cash flows.

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides clarity and reduces the complexity of applying the guidance in Topic 718, Compensation – Stock Compensation, to a change to the terms or conditions of a share-based payment award. This standard is effective for annual periods beginning after December 15, 2017. The Company adopted this ASU on January 1, 2018; the adoption of the standard did not have a material impact on its condensed consolidated financial statements.

10


 

In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which included amendments to expand income tax accounting and disclosure guidance pursuant to SEC Staff Accounting Bulletin No. 118 (“SAB 118”) issued by the SEC in December 2017. SAB 118 provides guidance on accounting for the income tax effects of the Tax Reform Act. The Company adopted this ASU in the first quarter of 2018. Refer to Note 10 Income Taxes for more information and disclosures related to this amended guidance.

 

 

3. Fair Value Measurements

The carrying amounts of certain of the Company’s financial instruments, including cash equivalents, accounts receivable and accounts payable, approximate their fair values due to their short maturities. Assets and liabilities recorded at fair value on a recurring basis in the balance sheets, as well as assets and liabilities measured at fair value on a non-recurring basis or disclosed at fair value, are categorized based upon the level of judgment associated with inputs used to measure their fair values. The accounting guidance for fair value provides a framework for measuring fair value and requires certain disclosures about how fair value is determined. Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The accounting guidance also establishes a three-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level 3—Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

The Company’s cash equivalents, which include money market funds, are classified as Level 1 because they are valued using quoted market prices. The Company’s marketable securities consist of available-for-sale securities and are generally classified as Level 2 because their value is based on valuations using significant inputs derived from or corroborated by observable market data.

In certain cases where there is limited activity or less transparency around the inputs to valuation, financial instruments are classified as Level 3. Level 3 liabilities consist of the contingent consideration liability.

The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

 

 

 

June 30, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

20,167

 

 

$

 

 

$

 

 

$

20,167

 

U.S. government and agency securities

 

 

 

 

 

87,965

 

 

 

 

 

 

87,965

 

Corporate debt securities

 

 

 

 

 

67,033

 

 

 

 

 

 

67,033

 

Commercial paper

 

 

 

 

 

105,547

 

 

 

 

 

 

105,547

 

Total

 

$

20,167

 

 

$

260,545

 

 

$

 

 

$

280,712

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration related to acquisition

 

$

 

 

$

 

 

$

7,746

 

 

$

7,746

 

Total

 

$

 

 

$

 

 

$

7,746

 

 

$

7,746

 

11


 

 

 

 

December 31, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

86,461

 

 

$

 

 

$

 

 

$

86,461

 

U.S. government and agency securities

 

 

 

 

 

108,076

 

 

 

 

 

 

108,076

 

Corporate debt securities

 

 

 

 

 

58,496

 

 

 

 

 

 

58,496

 

Commercial paper

 

 

 

 

 

74,011

 

 

 

 

 

 

74,011

 

Total

 

$

86,461

 

 

$

240,583

 

 

$

 

 

$

327,044

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration related to acquisition

 

$

 

 

$

 

 

$

7,588

 

 

$

7,588

 

Total

 

$

 

 

$

 

 

$

7,588

 

 

$

7,588

 

 

The acquisition-date fair value of the contingent consideration liability represents the future consideration that is contingent upon the achievement of specified development milestones for a product candidate. The fair value of the contingent consideration is based on the Company’s probability-weighted discounted cash flow assessment that considers probability and timing of future payments. The fair value measurement is based on significant Level 3 inputs such as anticipated timelines and probability of achieving development milestones. Changes in the fair value of the liability for contingent consideration, except for the impact of foreign currency, will be recognized as research and development expense in the condensed consolidated statements of operations until settlement.

The Company did not have any financial assets and liabilities measured at fair value on a non-recurring basis as of June 30, 2018 and December 31, 2017. There were no transfers between the fair value measurement category levels during any of the periods presented.

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities (in thousands):

 

 

 

Contingent

Consideration

 

Balance at December 31, 2017

 

$

7,588

 

Net change in fair value upon remeasurement

 

 

356

 

Foreign currency impact on contingent consideration

 

 

(198

)

Balance at June 30, 2018

 

$

7,746

 

 

The following tables summarize the estimated value of the Company’s cash, cash equivalents and marketable securities and the gross unrealized holding gains and losses (in thousands):

 

 

 

June 30, 2018

 

 

 

Amortized

cost

 

 

Unrealized

gains

 

 

Unrealized

losses

 

 

Estimated

Fair Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

25,183

 

 

$

 

 

$

 

 

$

25,183

 

Money market funds

 

 

20,167

 

 

 

 

 

 

 

 

 

20,167

 

Commercial paper

 

 

69,051

 

 

 

 

 

 

 

 

 

69,051

 

Total cash and cash equivalents

 

$

114,401

 

 

$

 

 

$

 

 

$

114,401

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

88,266

 

 

$

 

 

$

(301

)

 

$

87,965

 

Corporate debt securities

 

 

67,124

 

 

 

 

 

 

(91

)

 

 

67,033

 

Commercial paper

 

 

36,496

 

 

 

 

 

 

 

 

 

36,496

 

Total marketable securities

 

$

191,886

 

 

$

 

 

$

(392

)

 

$

191,494

 

12


 

 

 

 

December 31, 2017

 

 

 

Amortized

cost

 

 

Unrealized

gains

 

 

Unrealized

losses

 

 

Estimated

Fair Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

22,673

 

 

$

 

 

$

 

 

$

22,673

 

Money market funds

 

 

86,461

 

 

 

 

 

 

 

 

 

86,461

 

Commercial paper

 

 

48,480

 

 

 

 

 

 

 

 

 

48,480

 

Total cash and cash equivalents

 

$

157,614

 

 

$

 

 

$

 

 

$

157,614

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

108,317

 

 

$

 

 

$

(241

)

 

$

108,076

 

Corporate debt securities

 

 

58,551

 

 

 

1

 

 

 

(56

)

 

 

58,496

 

Commercial paper

 

 

25,531

 

 

 

 

 

 

 

 

 

25,531

 

Total marketable securities

 

$

192,399

 

 

$

1

 

 

$

(297

)

 

$

192,103

 

 

The amortized cost and estimated fair value of the Company’s available-for-sale marketable securities by contractual maturity are summarized below as of June 30, 2018 (in thousands):

 

 

 

Amortized cost

 

 

Estimated Fair Value

 

Mature in one year or less

 

$

175,000

 

 

$

174,711

 

Mature after one year through two years

 

 

16,886

 

 

 

16,783

 

Total available-for-sale marketable securities

 

$

191,886

 

 

$

191,494

 

 

 

4. Balance Sheet Components

Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Leasehold improvements

 

$

26,965

 

 

$

27,102

 

Lab equipment

 

 

7,906

 

 

 

7,243

 

Computer and office equipment

 

 

2,169

 

 

 

2,016

 

Furniture

 

 

1,797

 

 

 

1,767

 

Construction in progress

 

 

914

 

 

 

54

 

Total property and equipment

 

 

39,751

 

 

 

38,182

 

Less: accumulated depreciation

 

 

(9,420

)

 

 

(7,097

)

Property and equipment, net

 

$

30,331

 

 

$

31,085

 

 

Depreciation expense was $1.1 million and $0.8 million for the three months ended June 30, 2018 and 2017, respectively, and $2.2 million and $1.7 million for the six months ended June 30, 2018 and 2017, respectively.

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consisted of the following (in thousands):