cala-10q_20190630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

For the quarterly period ended June 30, 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: 001-36644

 

CALITHERA BIOSCIENCES, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

27-2366329

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

343 Oyster Point Blvd., Suite 200

South San Francisco, CA 94080

(Address of principal executive offices including zip code)

Registrant’s telephone number, including area code: (650) 870-1000

 

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

 

CALA

 

The Nasdaq Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 August 2, 2019, the registrant had 53,774,902 shares of common stock, $0.0001 par value per share, outstanding.

 

 


Calithera Biosciences, Inc.

Quarterly Report on Form 10-Q

For the Quarter Ended June 30, 2019

INDEX

 

 

  

Page

PART I. FINANCIAL INFORMATION 

  

3

 

 

 

Item 1.

 

Financial Statements (Unaudited)

  

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets at June 30, 2019, and December 31, 2018

 

3

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018 

 

4

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2019 and 2018

 

5

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018

 

6

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018

 

8

 

 

Notes to Condensed Consolidated Financial Statements 

  

9

 

 

 

 

 

Item 2.

 

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

  

20

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk 

  

29

 

 

 

 

 

Item 4.

 

Controls and Procedures 

  

29

 

 

 

 

 

PART II. OTHER INFORMATION 

  

30

 

 

 

Item 1.

 

Legal Proceedings

  

30

 

 

 

 

 

Item 1A.

 

Risk Factors

  

30

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

54

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

  

54

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

  

54

 

 

 

 

 

Item 5.

 

Other Information

  

54

 

 

 

 

 

Item 6.

 

Exhibits

  

55

 

 

 

 

 

SIGNATURES

  

56

 

 

 

 

 

2


PART I. – FINANCIAL INFORMATION

Item 1. Financial Statements

 

Calithera Biosciences, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except per share amounts)

 

 

June 30, 2019

 

 

December 31, 2018

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

76,792

 

 

$

51,058

 

Short-term investments

 

76,420

 

 

 

85,095

 

Receivables from collaborations

 

1,740

 

 

 

1,997

 

Prepaid expenses and other current assets

 

1,526

 

 

 

2,102

 

Total current assets

 

156,478

 

 

 

140,252

 

Other assets

 

284

 

 

 

569

 

Restricted cash

 

440

 

 

 

440

 

Property and equipment, net

 

1,214

 

 

 

1,464

 

Operating lease right-of-use asset

 

7,960

 

 

 

 

Total assets

$

166,376

 

 

$

142,725

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

1,259

 

 

$

1,247

 

Accrued and other liabilities

 

18,159

 

 

 

13,634

 

Total current liabilities

 

19,418

 

 

 

14,881

 

Noncurrent operating lease liability

 

7,576

 

 

 

 

Deferred rent

 

 

 

 

1,130

 

Total liabilities

 

26,994

 

 

 

16,011

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.0001 par value, 200,000 shares authorized

    as of June 30, 2019, and December 31, 2018;

    53,771 and 38,834 shares issued and outstanding as

    of June 30, 2019, and December 31, 2018, respectively

 

5

 

 

 

4

 

Additional paid-in capital

 

383,419

 

 

 

322,993

 

Accumulated deficit

 

(244,080

)

 

 

(196,170

)

Accumulated other comprehensive income (loss)

 

38

 

 

 

(113

)

Total stockholders’ equity

 

139,382

 

 

 

126,714

 

Total liabilities and stock and stockholders’ equity

$

166,376

 

 

$

142,725

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

3


Calithera Biosciences, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share amounts)

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration revenue

$

 

 

$

17,065

 

 

$

 

 

$

22,254

 

Total revenue

 

 

 

 

17,065

 

 

 

 

 

 

22,254

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

20,928

 

 

 

17,305

 

 

 

41,167

 

 

 

32,798

 

General and administrative

 

3,984

 

 

 

3,498

 

 

 

8,148

 

 

 

7,006

 

Total operating expenses

 

24,912

 

 

 

20,803

 

 

 

49,315

 

 

 

39,804

 

Loss from operations

 

(24,912

)

 

 

(3,738

)

 

 

(49,315

)

 

 

(17,550

)

Interest and other income, net

 

760

 

 

 

663

 

 

 

1,476

 

 

 

1,269

 

Net loss

$

(24,152

)

 

$

(3,075

)

 

$

(47,839

)

 

$

(16,281

)

Net loss per share, basic and diluted

$

(0.58

)

 

$

(0.09

)

 

$

(1.19

)

 

$

(0.45

)

Weighted average common shares used to

     compute net loss per share, basic and

     diluted

 

41,303

 

 

 

35,874

 

 

 

40,091

 

 

 

35,827

 

 

See accompanying notes.

 

4


Calithera Biosciences, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands)

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net loss

$

(24,152

)

 

$

(3,075

)

 

$

(47,839

)

 

$

(16,281

)

Other comprehensive gain:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on

   available-for-sale securities

 

45

 

 

 

75

 

 

 

151

 

 

 

19

 

Total comprehensive loss

$

(24,107

)

 

$

(3,000

)

 

$

(47,688

)

 

$

(16,262

)

 

See accompanying notes.

 

 

5


Calithera Biosciences, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(In thousands)

 

 

 

Three Months Ended June 30, 2019

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional Paid-In Capital

 

 

Accumulated  Deficit

 

 

Accumulated Other Comprehensive (Loss) Income

 

 

Total Stockholders' Equity

 

Balance at March 31, 2019

 

 

39,083

 

 

$

4

 

 

$

325,905

 

 

$

(219,928

)

 

$

(7

)

 

$

105,974

 

Issuance of common stock in connection with

   public offering, net of underwriting

   commissions and issuance costs

 

 

14,375

 

 

 

1

 

 

 

53,760

 

 

 

 

 

 

 

 

 

53,761

 

Issuance of common stock in connection with

   at-the-market offering, net of underwriting

   commissions and issuance costs

 

 

150

 

 

 

 

 

 

1,373

 

 

 

 

 

 

 

 

 

1,373

 

Exercise of stock options

 

 

72

 

 

 

 

 

 

208

 

 

 

 

 

 

 

 

 

208

 

Issuance of common stock per employee stock

   plan purchases

 

 

91

 

 

 

 

 

 

378

 

 

 

 

 

 

 

 

 

378

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,795

 

 

 

 

 

 

 

 

 

1,795

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(24,152

)

 

 

 

 

 

(24,152

)

Unrealized gain on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45

 

 

 

45

 

Balance at June 30, 2019

 

 

53,771

 

 

$

5

 

 

$

383,419

 

 

$

(244,080

)

 

$

38

 

 

$

139,382

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2018

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional Paid-In Capital

 

 

Accumulated  Deficit

 

 

Accumulated Other Comprehensive Loss

 

 

Total Stockholders' Equity

 

Balance at March 31, 2018

 

 

35,828

 

 

$

4

 

 

$

302,937

 

 

$

(154,748

)

 

$

(326

)

 

$

147,867

 

Exercise of stock options

 

 

16

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

8

 

Issuance of common stock per employee stock

   plan purchases

 

 

119

 

 

 

 

 

 

370

 

 

 

 

 

 

 

 

 

370

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,920

 

 

 

 

 

 

 

 

 

1,920

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(3,075

)

 

 

 

 

 

(3,075

)

Unrealized gain on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

75

 

 

 

75

 

Balance at June 30, 2018

 

 

35,963

 

 

$

4

 

 

$

305,235

 

 

$

(157,823

)

 

$

(251

)

 

$

147,165

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.


6


Calithera Biosciences, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(In thousands)

 

 

 

Six Months Ended June 30, 2019

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional Paid-In Capital

 

 

Accumulated  Deficit

 

 

Accumulated Other Comprehensive (Loss) Income

 

 

Total Stockholders' Equity

 

Balance at December 31, 2018

 

 

38,834

 

 

$

4

 

 

$

322,993

 

 

$

(196,170

)

 

$

(113

)

 

$

126,714

 

Issuance of common stock in connection with

   public offering, net of underwriting

   commissions and issuance costs

 

 

14,375

 

 

 

1

 

 

 

53,760

 

 

 

 

 

 

 

 

 

53,761

 

Issuance of common stock in connection with

   at-the-market offering, net of underwriting

   commissions and issuance costs

 

 

393

 

 

 

 

 

 

2,523

 

 

 

 

 

 

 

 

 

2,523

 

Exercise of stock options

 

 

78

 

 

 

 

 

 

216

 

 

 

 

 

 

 

 

 

216

 

Issuance of common stock per employee stock

   plan purchases

 

 

91

 

 

 

 

 

 

378

 

 

 

 

 

 

 

 

 

378

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

3,478

 

 

 

 

 

 

 

 

 

3,478

 

Cumulative-effect adjustment from adoption

   of ASU 2018-07 accounting standard on

   stock compensation

 

 

 

 

 

 

 

 

71

 

 

 

(71

)

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(47,839

)

 

 

 

 

 

(47,839

)

Unrealized gain on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

151

 

 

 

151

 

Balance at June 30, 2019

 

 

53,771

 

 

$

5

 

 

$

383,419

 

 

$

(244,080

)

 

$

38

 

 

$

139,382

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2018

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional Paid-In Capital

 

 

Accumulated  Deficit

 

 

Accumulated Other Comprehensive Loss

 

 

Total Stockholders' Equity

 

Balance at December 31, 2017

 

 

35,759

 

 

$

4

 

 

$

300,906

 

 

$

(150,333

)

 

$

(270

)

 

$

150,307

 

Exercise of stock options

 

 

85

 

 

 

 

 

 

158

 

 

 

 

 

 

 

 

 

158

 

Issuance of common stock per employee stock

   plan purchases

 

 

119

 

 

 

 

 

 

370

 

 

 

 

 

 

 

 

 

370

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

3,801

 

 

 

 

 

 

 

 

 

3,801

 

Cumulative-effect adjustment from adoption

   of ASC 606 accounting standard on revenue

   recognition

 

 

 

 

 

 

 

 

 

 

 

8,791

 

 

 

 

 

 

8,791

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(16,281

)

 

 

 

 

 

(16,281

)

Unrealized gain on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19

 

 

 

19

 

Balance at June 30, 2018

 

 

35,963

 

 

$

4

 

 

$

305,235

 

 

$

(157,823

)

 

$

(251

)

 

$

147,165

 

 

 

 

See accompanying notes.

7


 

Calithera Biosciences, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

Six Months Ended June 30,

 

 

2019

 

 

2018

 

Cash Flows Used In Operating Activities

 

 

 

 

 

 

 

Net loss

$

(47,839

)

 

$

(16,281

)

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

 

 

 

 

 

 

 

Depreciation

 

250

 

 

 

248

 

Amortization of premiums (discounts) on investments

 

(444

)

 

 

5

 

Stock-based compensation

 

3,478

 

 

 

3,801

 

Non-cash lease expense

 

666

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Receivables from collaborations

 

257

 

 

 

(1,369

)

Prepaid expenses and other current assets

 

401

 

 

 

1,246

 

Other assets

 

285

 

 

 

(410

)

Accounts payable

 

12

 

 

 

(42

)

Accrued liabilities

 

2,973

 

 

 

595

 

Lease liability

 

(713

)

 

 

 

Deferred revenue

 

 

 

 

(22,254

)

Deferred rent, non-current

 

 

 

 

69

 

Net cash used in operating activities

 

(40,674

)

 

 

(34,392

)

 

 

 

 

 

 

 

 

Cash Flows Provided by Investing Activities

 

 

 

 

 

 

 

Purchases of investments

 

(51,030

)

 

 

(41,349

)

Proceeds from maturity of investments

 

60,300

 

 

 

82,670

 

Purchases of property and equipment

 

 

 

 

(62

)

Net cash provided by investing activities

 

9,270

 

 

 

41,259

 

 

 

 

 

 

 

 

 

Cash Flows Provided By Financing Activities

 

 

 

 

 

 

 

Proceeds from issuance of common stock upon public offering, net

 

54,044

 

 

 

 

Proceeds from issuance of common stock through an at-the-market offering, net

 

2,500

 

 

 

 

Proceeds from stock option exercises and employee stock plan purchases

 

594

 

 

 

528

 

Net cash provided by financing activities

 

57,138

 

 

 

528

 

 

 

 

 

 

 

 

 

Net increase in cash, cash equivalents, and restricted cash

 

25,734

 

 

 

7,395

 

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

 

51,498

 

 

 

48,915

 

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

$

77,232

 

 

$

56,310

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Non-Cash Activities:

 

 

 

 

 

 

 

Unpaid amounts related to stock issuance and deferred financing costs

$

284

 

 

$

27

 

Unpaid amounts related to property and equipment purchases

$

 

 

$

58

 

 

 

 

See accompanying notes.

 

 

8


Calithera Biosciences, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

1. Organization and Basis of Presentation

Organization

Calithera Biosciences, Inc., or the Company, was incorporated in the State of Delaware on March 9, 2010. The Company is a clinical-stage biopharmaceutical company focused on discovering and developing small molecule drugs that target novel and critical metabolic pathways in tumor and cancer-fighting immune cells. The Company’s principal operations are based in South San Francisco, California, and it operates in one segment.

Presentation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Calithera Biosciences UK Limited and Calithera Biosciences Ireland Limited. All significant intercompany accounts and transactions have been eliminated from the condensed consolidated financial statements.

2. Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The interim condensed consolidated balance sheet as of June 30, 2019, the statements of operations, comprehensive loss, and stockholders’ equity for the three and six months ended June 30, 2019 and 2018, and the statements of cash flows for the six months ended June 30, 2019 and 2018 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and reflect, in the opinion of management, all adjustments of a normal and recurring nature that are necessary for the fair presentation of the Company’s condensed consolidated financial statements included in this report. The financial data and the other information disclosed in these notes to the condensed consolidated financial statements related to the three and six-month periods are also unaudited. The results of operations for the  three and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any other future annual or interim period. The balance sheet as of December 31, 2018 included herein was derived from the audited consolidated financial statements as of that date. These condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements included in the Company’s Form 10-K as filed with the Securities and Exchange Commission, or SEC.

Use of Estimates

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to clinical trial accrued liabilities, revenue recognition, fair value of marketable securities, 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 those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents, which consist primarily of amounts invested in money market accounts, are stated at fair value.

 

Investments

All investments have been classified as “available-for-sale” and are carried at estimated fair value as determined based upon quoted market prices or pricing models for similar securities. Management determines the appropriate classification of its investments at the time of purchase and reevaluates such designation as of each balance sheet date. Unrealized gains and losses are excluded from earnings and are reported as a component of comprehensive loss. Realized gains and losses and declines in fair value judged to be other than temporary, if any, on available-for-sale securities are included in interest and other income, net. The cost of securities sold is based on the specific-identification method. Interest on marketable securities is included in interest and other income, net.

9


Restricted Cash

Restricted cash consists of money market funds held by the Company’s financial institution as collateral for the Company’s obligations under its facility lease for the Company’s corporate headquarters in South San Francisco, California.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, investments and restricted cash. The Company invests in a variety of financial instruments and, by its policy, limits these financial instruments to high credit quality securities issued by the U.S. government, U.S. government-sponsored agencies and highly rated banks and corporations, subject to certain concentration limits. The Company’s cash, cash equivalents, investments and restricted cash are held by financial institutions in the United States that management believes are of high credit quality. Amounts on deposit may at times exceed federally insured limits.

All of the Company’s collaboration revenue and the majority of the Company’s receivables from collaborations are derived from its collaboration and license agreement with Incyte Corporation, or Incyte, as described in Note 10, Collaboration and Licensing Agreements - Incyte Collaboration and License Agreement.

Revenue Recognition

The Company records revenue in accordance with Accounting Standards Codification, or ASC No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASC 606.  Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.  

The Company has a collaboration and license agreement with Incyte, or the Incyte Collaboration Agreement, that is within the scope of ASC 606, under which it licenses certain rights to one of its product candidates to Incyte Corporation. The terms of this arrangement include payment to the Company of a non-refundable, upfront license fee, and potential development, regulatory and sales milestones, and sales royalties. Each of these payments results in collaboration revenues, except for revenues from royalties on net sales of licensed products, which would be classified as royalty revenues.

In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under its agreement, 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; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. As part of the accounting for these arrangements, the Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. 

Licenses of Intellectual Property:  If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, upfront fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promised goods or services, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, upfront fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

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Milestone Payments:  At the inception of each arrangement 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 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 on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones 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 collaboration revenue in the period of adjustment. 

Royalties:  For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements.

 

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.

The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensees and the transfer of the promised goods or services to the licensees will be one year or less.

The Company had no contract assets or liabilities as of June 30, 2019, and had no changes in contract assets and liabilities during the six months ended June 30, 2019.

Accrued Research and Development Costs

The Company records accrued liabilities for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of preclinical and clinical studies, and contract manufacturing activities. The Company records the estimated costs of research and development activities based upon the estimated amount of services provided but not yet invoiced, and includes these costs in accrued and other liabilities in the consolidated balance sheets and within research and development expense in the consolidated statements of operations. These costs are a significant component of the Company’s research and development expenses. The Company accrues for these costs based on factors such as estimates of the work completed and in accordance with agreements established with its third-party service providers under the service agreements. The Company makes significant judgments and estimates in determining the accrued liabilities balance in each reporting period. As actual costs become known, the Company adjusts its accrued liabilities. The Company has not experienced any material differences between accrued costs and actual costs incurred. However, the status and timing of actual services performed, number of patients enrolled, and the rate of patient enrollments may vary from the Company’s estimates, resulting in adjustments to expense in future periods. Changes in these estimates that result in material changes to the Company’s accruals could materially affect the Company’s results of operations.

Leases

Effective January 1, 2019, the Company adopted ASU No. 2016-02, Leases (Topic 842), or ASU 842. Operating lease right-of-use, or ROU, assets and lease liabilities are recognized at commencement and are recorded for leases with durations greater than 12 months.

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ROU assets represent the Company’s right to use an underlying asset during the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company estimates an incremental borrowing rate based on the information available at commencement date, in determining the present value of lease payments. The operating lease ROU asset also includes lease incentives. Lease expense is recognized on a straight-line basis over the lease term. The Company elected to not separate lease components and non-lease components for its long-term facility lease. Variable lease payments include lease operating expenses.

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of shares of common stock outstanding during the period without consideration of common stock equivalents. Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all potential common shares outstanding would have been anti-dilutive.  

Recent Accounting Pronouncements

In 2016, the Financial Accounting Standards Board, or FASB, issued ASU 842, which is aimed at making leasing activities more transparent, and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability. The ASU was previously required to be applied with a modified retrospective approach to each prior reporting period presented. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, or ASU No. 2018-11. In issuing ASU No. 2018-11, the FASB is permitting another transition method for ASU 2016-02, which allows the transition to the new lease standard by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted the ASU on January 1, 2019, using a modified retrospective approach, and elected the transition method, which allowed the Company to record a cumulative adjustment to its accumulated deficit upon adoption. The condensed consolidated financial statements for the three and six -months ended June 30, 2019, are presented under the new standard, while previous periods are not adjusted and continue to be reported in accordance with the Company’s historical accounting policy. The Company elected the practical expedients upon transition to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs. The Company also elected the practical expedient for lessees to combine lease and non-lease components for all asset classes, and elected the practical expedient to use hindsight in determining the lease term and in assessing impairment of the Company’s right-of-use assets. Upon adoption, the Company recognized in the condensed consolidated balance sheet an operating lease right-of-use asset and lease liability of approximately $8.6 million and $9.7 million, respectively, and eliminated the previously recorded deferred rent of $1.2 million, related to its facility lease. There was no impact to accumulated deficit upon adoption. Refer to Note 6, Leases, for more information.

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, or ASU 2018-07. The ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. The ASU also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Revenue from Contracts with Customers (Topic 606). The Company adopted the ASU on January 1, 2019. Upon adoption, the Company recorded a cumulative-effect adjustment of $71,000 to accumulated deficit in the condensed consolidated statement of stockholders’ equity.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. This guidance is effective for fiscal years beginning after December 15, 2019, and interim periods therein. Early adoption is permitted. The Company is currently evaluating the impact of adoption of this new standard on its related disclosures.

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. The Company adopted this new guidance and included this information in its condensed consolidated statements of stockholders’ equity in this Quarterly Report on Form 10-Q.

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In November 2018, the FASB issued ASU 2018-18—Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, or ASU 2018-18. This standard provides guidance on the interaction between Revenue Recognition (Topic 606) and Collaborative Arrangements (Topic 808) by aligning the unit of account guidance between the two topics and clarifying whether certain transactions between collaborative participants should be accounted for as revenue under Topic 606. ASU 2018-18 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company plans to adopt this new standard on January 1, 2020, and is currently evaluating the impact ASU 2018-18 will have on its financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU 2016-13The updated accounting guidance requires changes to the recognition of credit losses on financial instruments not accounted for at fair value through net income. In May 2019, the FASB issued ASU No. 2019-05, Targeted Transition Relief, which provides transition guidance to entities that elect the fair value option for eligible instruments. These standards are effective for interim and annual periods beginning after December 15, 2019 using a modified retrospective approach with the cumulative effect recognized as an adjustment to retained earnings. A prospective transition approach is required for debt securities that have recognized an other-than-temporary impairment prior to the effective date. The Company is currently evaluating the effect the guidance will have on its financial statements and related disclosures.

3. Fair Value Measurements

Fair value accounting is applied for all financial assets and liabilities that are recognized or disclosed at fair value in the condensed consolidated financial statements on a recurring basis (at least annually). Financial instruments include cash and cash equivalents, investments, receivables from collaborations, accounts payable, accrued liabilities and the current portion of deferred revenue that approximate fair value due to their relatively short maturities.

Assets and liabilities recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance on fair value measurements establishes a three tier fair value hierarchy for disclosure of fair value measurements 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.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Where quoted prices are available in an active market, securities are classified as Level 1. The Company classifies money market funds as Level 1. When quoted market prices are not available for the specific security, then the Company estimates fair value by using quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs obtained from various third party data providers, including but not limited to, benchmark yields, interest rate curves, reported trades, broker/dealer quotes and market reference data. The Company classifies its corporate notes and U.S. government agency securities as Level 2. Level 2 inputs for the valuations are limited to quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability. There were no transfers between Level 1 and Level 2 during the periods presented.

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The following table sets forth the fair value of our financial assets and liabilities, allocated into Level 1, Level 2 and Level 3, that was measured on a recurring basis (in thousands):

 

 

 

June 30, 2019

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

39,709

 

 

$

 

 

$

 

 

$

39,709

 

Corporate notes and commercial paper

 

 

 

 

 

67,962

 

 

 

 

 

 

67,962

 

U.S. treasury securities

 

 

 

 

 

31,902

 

 

 

 

 

 

31,902

 

U.S. government agency securities

 

 

 

 

 

13,496

 

 

 

 

 

 

13,496

 

Total financial assets

 

$

39,709

 

 

$

113,360

 

 

$

 

 

$

153,069

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

14,077

 

 

$

 

 

$

 

 

$

14,077

 

Corporate notes and commercial paper

 

 

 

 

 

73,733

 

 

 

 

 

 

73,733

 

U.S. treasury securities

 

 

 

 

 

20,334

 

 

 

 

 

 

20,334

 

U.S. government agency securities

 

 

 

 

 

28,072

 

 

 

 

 

 

28,072

 

Total financial assets

 

$

14,077

 

 

$

122,139

 

 

$

 

 

$

136,216

 

 

4. Financial Instruments

Cash equivalents and investments, all of which are classified as available-for-sale securities and restricted cash, consisted of the following (in thousands):

 

 

June 30, 2019

 

 

December 31, 2018

 

 

Cost

 

 

Unrealized Gain

 

 

Unrealized (Loss)

 

 

Estimated Fair Value

 

 

Cost

 

 

Unrealized Gain

 

 

Unrealized (Loss)

 

 

Estimated Fair Value

 

Money market funds

$

39,709

 

 

$

 

 

$

 

 

$

39,709

 

 

 

$

14,077

 

 

$

 

 

$

 

 

$

14,077

 

Corporate notes and

     commercial paper

 

67,960

 

 

 

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