prnb-10q_20190331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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: 001-38653

 

Principia Biopharma Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

26-3487603

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

220 East Grand Avenue

South San Francisco, California

94080

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (650) 416-7700

 

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  

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, Par Value $0.0001 Per Share

PRNB

 

The Nasdaq Global Select Market

As of May 1, 2019, the registrant had 23,866,681 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 


Table of Contents

 

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements (Unaudited)

 

1

 

Condensed Consolidated Balance Sheets

 

1

 

Condensed Consolidated Statements of Operations

 

2

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

 

3

 

Condensed Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit)

 

4

 

Condensed Consolidated Statements of Cash Flows

 

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

6

Item 2.

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

 

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

27

Item 4.

Controls and Procedures

 

27

PART II.

OTHER INFORMATION

 

29

Item 1.

Legal Proceedings

 

29

Item 1A.

Risk Factors

 

29

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

64

Item 3.

Defaults Upon Senior Securities

 

64

Item 4.

Mine Safety Disclosures

 

64

Item 5.

Other Information

 

64

Item 6.

Exhibits

 

65

Signatures

 

66

 

 


i


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report contains forward-looking statements that involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management, which are in turn based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Risk Factors” included under Part II, Item 1A below. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

 

ii


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

PRINCIPIA BIOPHARMA INC.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share amounts)

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

14,670

 

 

$

34,489

 

Short-term marketable securities

 

 

148,949

 

 

 

142,436

 

Restricted cash

 

 

 

 

 

82

 

Prepaid expenses and other current assets

 

 

3,294

 

 

 

3,765

 

Total current assets

 

 

166,913

 

 

 

180,772

 

Property and equipment, net

 

 

10,671

 

 

 

1,666

 

Long-term restricted cash

 

 

567

 

 

 

567

 

Long-term marketable securities

 

 

 

 

 

3,712

 

Other long-term assets

 

 

480

 

 

 

8,804

 

Total assets

 

$

178,631

 

 

$

195,521

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,182

 

 

$

4,439

 

Deferred rent, current portion

 

 

1,105

 

 

 

344

 

Deferred revenue

 

 

 

 

 

5,616

 

Accrued research and development liabilities

 

 

2,680

 

 

 

1,520

 

Accrued other liabilities

 

 

958

 

 

 

649

 

Accrued compensation

 

 

2,224

 

 

 

4,312

 

Total current liabilities

 

 

11,149

 

 

 

16,880

 

Long-term deferred rent

 

 

8,492

 

 

 

8,781

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Stockholders' equity (deficit)

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value, 500,000,000 authorized at March 31,

   2019 and December 31, 2018; 23,866,681 and 23,865,451 shares

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

   respectively

 

 

2

 

 

 

2

 

Additional paid-in-capital

 

 

304,605

 

 

 

302,393

 

Accumulated other comprehensive income (loss)

 

 

21

 

 

 

(128

)

Accumulated deficit

 

 

(145,638

)

 

 

(132,407

)

Total stockholders' equity

 

 

158,990

 

 

 

169,860

 

Total liabilities and stockholders’ equity

 

$

178,631

 

 

$

195,521

 

 

See accompanying notes.

1


PRINCIPIA BIOPHARMA INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share amounts)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Revenue

 

$

5,160

 

 

$

11,449

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

15,523

 

 

 

8,761

 

General and administrative

 

 

4,508

 

 

 

2,156

 

Total operating expenses

 

 

20,031

 

 

 

10,917

 

Income (loss) from operations

 

 

(14,871

)

 

 

532

 

Other income (expense), net

 

 

1

 

 

 

(337

)

Interest income

 

 

1,183

 

 

 

115

 

Net income (loss)

 

$

(13,687

)

 

$

310

 

Net income (loss) attributable to common stockholders

 

$

(13,687

)

 

$

-

 

Net income (loss) per share attributable to common

   stockholders

 

 

 

 

 

 

 

 

Basic

 

$

(0.57

)

 

$

-

 

Diluted

 

$

(0.57

)

 

$

-

 

Weighted-average shares used to calculate net income

   (loss) per share attributable to common stockholders

 

 

 

 

 

 

 

 

Basic

 

 

23,866,066

 

 

 

630,359

 

Diluted

 

 

23,866,066

 

 

 

1,170,670

 

 

See accompanying notes.

2


PRINCIPIA BIOPHARMA INC.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Net income (loss)

 

$

(13,687

)

 

$

310

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Net unrealized gain on available-for-sale securities

 

 

149

 

 

 

 

Comprehensive income (loss)

 

$

(13,538

)

 

$

310

 

 

See accompanying notes.


3


PRINCIPIA BIOPHARMA INC.

Condensed Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(Unaudited)

(In thousands, except share amounts)

 

 

 

Convertible Preferred Stock

 

 

 

Common Stock

 

 

Additional

 

 

Accumulated

Other

 

 

 

 

 

 

Total

Stockholders'

 

 

 

Number of

Shares

 

 

Amount

 

 

 

Number of

Shares

 

 

$0.0001

Par Value

 

 

Paid-In

Capital

 

 

Comprehensive

Income (Loss)

 

 

Accumulated

Deficit

 

 

Equity

(Deficit)

 

Balance at December 31, 2018

 

 

 

 

$

 

 

 

 

23,865,451

 

 

$

2

 

 

$

302,393

 

 

$

(128

)

 

$

(132,407

)

 

$

169,860

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,205

 

 

 

 

 

 

 

 

 

2,205

 

Exercise of stock options and vesting of early exercise

   shares

 

 

 

 

 

 

 

 

 

1,230

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

7

 

Unrealized gain on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

149

 

 

 

 

 

 

149

 

Cumulative-effect adjustment from adoption of ASC 606 accounting standard on revenue recognition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

456

 

 

 

456

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,687

)

 

 

(13,687

)

Balance at March 31, 2019

 

 

 

 

$

 

 

 

 

23,866,681

 

 

$

2

 

 

$

304,605

 

 

$

21

 

 

$

(145,638

)

 

$

158,990

 

 

 

 

Convertible Preferred Stock

 

 

 

Common Stock

 

 

Additional

 

 

Accumulated

Other

 

 

 

 

 

 

Total

Stockholders'

 

 

 

Number of

Shares

 

 

Amount

 

 

 

Number of

Shares

 

 

$0.0001

Par Value

 

 

Paid-In

Capital

 

 

Comprehensive

Income (Loss)

 

 

Accumulated

Deficit

 

 

Equity

(Deficit)

 

Balance at December 31, 2017

 

 

12,285,434

 

 

$

128,531

 

 

 

 

626,613

 

 

$

1

 

 

$

7,201

 

 

$

(90

)

 

$

(150,574

)

 

$

(143,462

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

366

 

 

 

 

 

 

 

 

 

366

 

Exercise of stock options and vesting of early exercise

   shares

 

 

 

 

 

 

 

 

 

32,169

 

 

 

 

 

 

126

 

 

 

 

 

 

 

 

 

126

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

310

 

 

 

310

 

Balance at March 31, 2018

 

 

12,285,434

 

 

$

128,531

 

 

 

 

658,782

 

 

$

1

 

 

$

7,693

 

 

$

(90

)

 

$

(150,264

)

 

$

(142,660

)

 

See accompanying notes.

 

4


PRINCIPIA BIOPHARMA INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(13,687

)

 

$

310

 

Adjustments to reconcile net income (loss) to net cash used in

   operating activities:

 

 

 

 

 

 

 

 

Change in fair value of convertible preferred stock

   warrant liability

 

 

 

 

 

322

 

Amortization of discount on marketable securities

 

 

(526

)

 

 

 

Depreciation

 

 

346

 

 

 

46

 

Stock-based compensation

 

 

2,205

 

 

 

366

 

Deferred rent

 

 

472

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

471

 

 

 

520

 

Deferred revenue

 

 

(5,160

)

 

 

(11,449

)

Accounts payable

 

 

(35

)

 

 

(981

)

Accrued liabilities

 

 

(492

)

 

 

(159

)

Net cash used in operating activities

 

 

(16,406

)

 

 

(11,025

)

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,376

)

 

 

(153

)

Maturities of marketable securities

 

 

34,410

 

 

 

 

Purchases of marketable securities

 

 

(36,536

)

 

 

 

Net cash used in investing activities

 

 

(3,502

)

 

 

(153

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

7

 

 

 

126

 

Net cash provided by financing activities

 

 

7

 

 

 

126

 

Net increase in cash, cash equivalents and restricted cash

 

 

(19,901

)

 

 

(11,052

)

Cash, cash equivalents and restricted cash at beginning

   of period

 

 

35,138

 

 

 

41,236

 

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

 

$

15,237

 

 

$

30,184

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Non cash tenant improvement allowance used for leasehold improvements

 

 

8,324

 

 

 

 

Purchases of property and equipment accrued but not yet paid

 

 

293

 

 

 

144

 

 

See accompanying notes.

 

5


 

PRINCIPIA BIOPHARMA INC.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Organization

Description of Business

We, Principia Biopharma Inc. (“Principia”), are a late-stage biopharmaceutical company focused on developing novel therapies for immunology and oncology. We were incorporated on October 6, 2008, began operations in February 2011, and are headquartered in South San Francisco, California.

2. Significant Accounting Policies

Basis of Presentation

The accompanying interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and include the accounts of Principia and our wholly-owned Australian subsidiary. All intercompany accounts, transactions and balances have been eliminated. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the applicable rules and regulations of the Securities and Exchange Commission (“SEC”).

These interim condensed consolidated financial statements and related disclosures are unaudited, have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal and recurring nature that are necessary for the fair presentation of our financial position and results of operations for the periods presented. The condensed consolidated balance sheets as of December 31, 2018 included herein were derived from audited consolidated financial statements as of that date. This quarterly report should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on March 19, 2019 (“2018 Annual Report”).

Use of Estimates

The preparation of our financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities. Significant estimates include amounts to determine the fair value of common stock-based awards, warrants, and other issuances, embedded derivatives, accruals for research and development costs and uncertain tax positions, and the estimated periods of performance used in the determination of collaboration revenues. We base our estimates on historical experience and on various other market specific and relevant assumptions that our management believes to be reasonable under the circumstances. Actual results could differ materially from our estimates.

Concentration of Credit Risk and Other Risks and Uncertainties

Financial instruments that potentially subject us to a significant concentration of credit risk consist primarily of cash, cash equivalents and marketable securities. The majority of our cash and cash equivalents is maintained with one financial institution in the United States. Deposits with this financial institution have exceeded and will continue to exceed federally insured limits. We have not experienced any losses on our cash deposits. Additionally, we have established guidelines regarding the diversification of our investments in approved instruments, their credit quality ratings and maturities. The guidelines are designed to preserve principal balances and provide liquidity. Cash, cash equivalents and marketable securities totaled $163.6 million and $180.6 million at March 31, 2019 and December 31, 2018, respectively.

We are subject to a number of risks similar to other early-stage biopharmaceutical companies, including, but not limited to, the need to obtain adequate additional funding, possible failure of current or future preclinical studies or clinical trials, our reliance on third parties or partners to conduct our clinical trials, the need to obtain regulatory and marketing approvals for our drug candidates or to rely on partners to do so, competitors developing new technological innovations, the need to successfully commercialize and gain market acceptance of our drug candidates, our right to develop and commercialize our drug candidates pursuant to the terms and conditions of the licenses granted to us, protection of proprietary technology, the ability to make or collect milestone, royalty or other payments due, or due to us, under any license or collaboration agreements, and the need to secure and maintain adequate manufacturing arrangements with third parties. If we do not successfully commercialize or partner any of our drug candidates, we will be unable to generate product revenue or achieve profitability.

6


 

Cash and Cash Equivalents

We consider all highly liquid financial instruments with original maturities of 90 days or less at the date of purchase to be cash equivalents. Cash equivalents are stated at fair value.

Marketable Securities

We carry marketable securities consisting primarily of money market funds, U.S. Treasury securities and obligations of government-sponsored enterprises and corporate bonds and commercial paper. Marketable securities with maturities greater than 90 days at the time of purchase and that mature less than one year from the consolidated balance sheet date are classified as short-term. Marketable securities with a maturity date greater than one year at each balance sheet date are classified as long-term. All of our marketable securities are considered available-for-sale and carried at estimated fair values on the consolidated balance sheets. Unrealized gains or losses are excluded from net income and reported in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity on the consolidated balance sheets. Realized gains and losses and declines in fair value judged to be other than temporary, if any, on marketable securities are included in other income (expense), net. The cost of securities sold is based on the specific-identification method. Interest earned on marketable securities is included in interest income. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts and such amortization and accretion are included as a component of interest income.

Restricted Cash

As of both March 31, 2019 and December 31, 2018, we had $0.6 million in long-term restricted cash for a lease security deposit. This amount is separated from cash and cash equivalents on the condensed consolidated balance sheets.

Segments

We have one operating segment. Our chief operating decision maker, our President and Chief Executive Officer, manages our operations on a consolidated basis in assessing performance and allocating resources.

Leases

We enter into lease agreements for our laboratory and office facilities. These leases are classified as operating leases. Rent expense is recognized on a straight-line basis over the term of the lease. Deferred rent consists of the difference between cash payments and the recognition of rent expense for the buildings we occupy.

Lease incentives and allowance provided by our landlord for the construction of leasehold improvements are recorded as lease incentive obligations as the related construction costs are incurred, up to the maximum aggregate allowances. Lease incentive obligations are classified as a component of deferred rent and are amortized on a straight-line basis over the lease term as a reduction of rent expense.

Rent expense from operating leases is recognized on a straight-line basis over the lease term. The difference between rent expense recognized and rental payments is recorded as deferred rent in the condensed consolidated balance sheets.

Revenue Recognition

Effective January 1, 2019, we adopted Accounting Standards Codification, or ASC No. 2014-09, Revenue from Contracts with Customers, or ASC 606, using the modified retrospective approach. Under this approach, we recorded a cumulative adjustment to decrease accumulated deficit and deferred revenue by $0.4 million as of the adoption date. 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 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. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods and services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract, determine those that are performance obligations and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

7


 

We have entered into licensing and collaboration agreements that are within the scope of ASC 606. In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under such licensing and collaboration agreements, we perform the five-step model under ASC 606. As part of the accounting for these arrangements, we 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 our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize 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, we utilize 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. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

Milestone Payments:  At the inception of each arrangement that includes development, regulatory or commercial milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate 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 our control or that of our 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 we recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of such development milestones and any related constraint, and if necessary, adjust our 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, we recognize 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, we have not recognized any royalty revenue resulting from any of our licensing arrangements.

The impact of the adoption of ASC 606 on our unaudited condensed consolidated balance sheet as of March 31, 2019 was as follows (in thousands):

 

 

December 31, 2018

 

 

Adjustments

Due to ASC 606

 

 

January 1, 2019

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

$

5,616

 

 

$

(456

)

 

$

5,160

 

Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

 

(132,407

)

 

 

456

 

 

 

(131,951

)

The deferred revenue was fully recognized due to the agreed termination of our collaboration with AbbVie. Refer to Note 6 for further information.

The impact of the adoption of ASC 606 on our unaudited condensed consolidated statement of operations for the three months ended March 31, 2019 was as follows (in thousands):

 

 

 

Three Months Ended March 31, 2019

 

 

 

As Reported

 

 

Adjustments

 

 

Balance without

ASC 606 Adoption

 

Revenue

 

$

5,160

 

 

$

456

 

 

$

5,616

 

Income (loss) from operations

 

 

(14,871

)

 

 

456

 

 

 

(14,415

)

Net income (loss)

 

 

(13,687

)

 

 

456

 

 

 

(13,231

)

Net loss per share, basic and diluted

 

 

(0.57

)

 

 

0.02

 

 

 

(0.55

)

8


 

During the three months ended March 31, 2019, we did not recognize any revenue from performance obligations satisfied in previous periods.

Convertible Preferred Stock Warrants

In connection with the issuance of certain convertible notes in 2016 and 2017 (the “Notes”), we issued warrants to purchase our capital stock. Freestanding warrants to purchase our convertible preferred stock were recorded as a liability on our condensed consolidated balance sheets because the underlying shares of convertible preferred stock are contingently redeemable, which, therefore, may obligate us to transfer assets to settle those warrants. The warrants are subject to revaluation at each balance sheet date, with changes in fair value recognized as a component of other income, net, on the condensed consolidated statements of operations. During the three months ended March 31, 2018, other income, net, included $0.3 million related to the change in fair value of the preferred stock warrant liability.

Upon the completion of our IPO in September 2018, all of our convertible preferred stock warrants were converted into warrants to purchase shares of common stock. We re-valued the convertible preferred stock warrants upon completion of our IPO and reclassified the estimated fair value of the warrants to additional paid in capital.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in stockholders’ equity (deficit) of a business enterprise during a period, resulting from transactions from non-owner sources, and consists primarily of unrealized gains or losses related to our available-for-sale marketable securities, which are carried at estimated fair values on the consolidated balance sheets, and losses on foreign currency translation related to our wholly-owned Australian subsidiary.

Net Income (Loss) per Share

Basic net income (loss) per share attributable to common stockholders is calculated by dividing the net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period.

Diluted net income (loss) per share includes the effect of potentially dilutive securities, which include outstanding warrants and stock options if the effect of their inclusion would be dilutive. In periods of net loss, diluted net loss per share is the same as basic net loss per share as the inclusion of potentially dilutive securities in the calculation would be anti-dilutive.

We have issued securities other than common stock that participate in dividends to the extent declared (“Participating Securities”), and therefore utilize the two-class method to calculate net income (loss) per share. These Participating Securities include Series A, Series B-1, Series B-2, Series B-3 and Series C redeemable convertible preferred stock. The two-class method requires a portion of net income (loss) to be allocated to the Participating Securities to determine net income (loss) attributable to common stockholders. Net income (loss) attributable to common stockholders is equal to the net income (loss) less dividends paid on preferred stock with any remaining earnings allocated in accordance with the bylaws between the outstanding common and redeemable convertible preferred stock as of the end of each period. In September 2018, upon our IPO, all shares of convertible preferred stock were converted into equal number shares of common stock.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies and adopted by us as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on our condensed consolidated financial statements upon adoption. Under the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”), we meet the definition of an emerging growth company, and have elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

Recently Adopted Accounting Standards Updates

In November 2016, the FASB issued accounting standard update (“ASU”) 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash.  The ASU requires that the statements of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statements of cash flows. The ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years with early adoption is permitted. We early adopted ASU 2016-18 during the fourth quarter of 2018 and the adoption did not have a material impact on our consolidated financial statements and related disclosures.

9


 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), as subsequently amended, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most recent current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Entities have the option of applying either a full retrospective approach to all periods presented, or a modified approach that reflects differences prior to the date of adoption as an adjustment to equity. We adopted ASC No. 2014-09 on January 1, 2019 using the modified retrospective method of transition applied to contracts that were not completed at January 1, 2019. Therefore, comparative information will not be adjusted and the impact of the transition is reflected as an adjustment to the opening accumulated deficit. A completed contract is a contract for which all, or substantially all, of the revenue was recognized in accordance with revenue guidance in effect before the date of initial application. The new revenue recognition standard differs from the previous accounting standard in many respects, such as in the accounting for variable consideration and the measurement of progress toward completion of performance obligations.

Recently Issued Accounting Standards or Updates Not Yet Effective

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. The ASU will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. We have elected the extended transition period provided by the JOBS Act and accordingly ASU 2016-02 is effective for us for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. The ASU is expected to impact our financial statements as we have certain operating lease agreements under which we are the lessee. We are currently evaluating the impact of the adoption of this ASU and anticipate the recognition of additional assets and corresponding liabilities on our balance sheet related to leases.

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. This ASU eliminates, modifies and adds disclosure requirements for fair value measurements. The amendments in this ASU are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the effects of this ASU on our consolidated financial statements and related disclosures.

3. Fair Value Measurements

Financial assets and liabilities are recorded at fair value. We determine fair value using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:

Level 1 inputs include quoted prices in active markets for identical assets or liabilities.

Level 2 inputs include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3 inputs include unobservable inputs that are supported by little or no market activity and are significant to the fair value of the underlying asset or liability. Such inputs reflect our best estimate of what market participants would use in pricing the asset or liability at the reporting date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires our management to make judgments and consider factors specific to the asset or liability.

10


 

Assets and liabilities measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018 were as follows (in thousands):

 

 

 

March 31, 2019

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

14,068

 

 

$

 

 

$

 

 

$

14,068

 

Corporate commercial paper

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

 

 

 

 

 

 

 

 

 

 

Short-term marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate commercial paper

 

 

 

 

 

43,981

 

 

 

 

 

 

43,981

 

Corporate debt securities

 

 

 

 

 

91,541

 

 

 

 

 

 

91,541

 

Government‑ sponsored enterprise securities

 

 

 

 

 

8,682

 

 

 

 

 

 

8,682

 

U.S. Treasury securities

 

 

 

 

 

4,746

 

 

 

 

 

 

4,746

 

Long-term marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

14,068

 

 

$

148,950

 

 

$

 

 

$

163,018

 

 

 

 

December 31, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

19,861

 

 

$

 

 

$

 

 

$

19,861

 

Corporate commercial paper

 

 

 

 

 

7,465

 

 

 

 

 

 

7,465

 

Corporate debt securities

 

 

 

 

 

4,499

 

 

 

 

 

 

4,499

 

Short-term marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate commercial paper

 

 

 

 

 

36,180

 

 

 

 

 

 

36,180

 

Corporate debt securities

 

 

 

 

 

71,903

 

 

 

 

 

 

71,903

 

Government‑ sponsored enterprise securities

 

 

 

 

 

9,906

 

 

 

 

 

 

9,906

 

U.S. Treasury securities

 

 

 

 

 

24,447

 

 

 

 

 

 

24,447

 

Long-term marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

 

 

 

3,712

 

 

 

 

 

 

3,712

 

Total

 

$

19,861

 

 

$

158,112

 

 

$

 

 

$

177,973

 

The carrying amounts of accounts payable and accrued liabilities approximate their fair values due to their short-term maturities. Our Level 2 securities are valued using third-party pricing sources. 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. There were no transfers of assets or liabilities between the fair value measurement levels during the three months ended March 31, 2019 and 2018.

11


 

4. Cash Equivalents and Marketable Securities

Cash equivalents and marketable securities consisted of the following as of March 31, 2019 and December 31, 2018 (in thousands):

 

 

 

March 31, 2019

 

 

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Value

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

14,068

 

 

$

 

 

$

 

 

$

14,068

 

Corporate commercial paper

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

 

 

 

 

 

 

 

 

 

 

Total cash equivalents

 

$

14,068

 

 

$

 

 

$

 

 

$

14,068

 

Short-term marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate commercial paper

 

 

43,943

 

 

 

40

 

 

 

(2

)

 

 

43,981

 

Corporate debt securities

 

 

91,468

 

 

 

73

 

 

 

 

 

 

91,541

 

Government‑ sponsored enterprise securities

 

 

8,682

 

 

 

 

 

 

 

 

 

8,682

 

U.S. Treasury securities

 

 

4,747

 

 

 

 

 

 

(1

)

 

 

4,746

 

Total short-term marketable securities

 

$

148,840

 

 

$

113

 

 

$

(3

)

 

$

148,950

 

Total

 

$

162,908

 

 

$

113

 

 

$

(3

)

 

$

163,018

 

 

 

 

December 31, 2018

 

 

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Value

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

19,861

 

 

$

 

 

$

 

 

$

19,861

 

Corporate commercial paper

 

 

7,466

 

 

 

 

 

 

(1

)

 

 

7,465

 

Corporate debt securities

 

 

4,499

 

 

 

 

 

 

 

 

 

4,499

 

Total cash equivalents

 

$

31,826

 

 

$

 

 

$

(1

)

 

$

31,825

 

Short-term marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate commercial paper

 

 

36,197

 

 

 

 

 

 

(17

)

 

 

36,180

 

Corporate debt securities

 

 

71,920

 

 

 

8

 

 

 

(25

)

 

 

71,903

 

Government‑ sponsored enterprise securities

 

 

9,911

 

 

 

 

 

 

(5

)

 

 

9,906

 

U.S. Treasury securities

 

 

24,451

 

 

 

 

 

 

(4

)

 

 

24,447

 

Total short-term marketable securities

 

$

142,479

 

 

$

8

 

 

$

(51

)