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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2020

OR

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

For the transition period from ________ to ________

Commission File Number: 001-38662

 

SUTRO BIOPHARMA, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

47-0926186

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

310 Utah Avenue, Suite 150

South San Francisco, California

94080

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (650) 392-8412

Not Applicable:

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Common stock, $0.001 par value

 

STRO

 

Nasdaq Global Market

 

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 May 1, 2020, the registrant had 23,228,263 shares of common stock, $0.001 par value per share, outstanding.

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

1

 

Condensed Balance Sheets

1

 

Condensed Statements of Operations

2

 

Condensed Statements of Comprehensive Loss

3

 

Condensed Statements of Stockholders’ (Deficit) Equity

4

 

Condensed Statements of Cash Flows

5

 

Notes to Unaudited Condensed Financial Statements

6

Item 2.

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

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

Item 4.

Controls and Procedures

35

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

36

Item 1A.

Risk Factors

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

78

Item 3.

Defaults Upon Senior Securities

78

Item 4.

Mine Safety Disclosures

78

Item 5.

Other Information

78

Item 6.

Exhibits

79

Signatures

 

80

 

 

i


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Sutro Biopharma, Inc.

Condensed Balance Sheets

(In thousands, except share and per share amounts)

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

 

(See Note 2)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

43,565

 

 

$

4,960

 

Marketable securities

 

 

71,826

 

 

 

112,904

 

Accounts receivable (including amounts from related parties of

   $6,404 and $1,050 as of March 31, 2020 and December 31, 2019, respectively)

 

 

9,079

 

 

 

6,298

 

Prepaid expenses and other current assets

 

 

2,989

 

 

 

4,406

 

Total current assets

 

 

127,459

 

 

 

128,568

 

Property and equipment, net

 

 

9,527

 

 

 

9,633

 

Marketable securities, non-current

 

 

14,191

 

 

 

15,609

 

Other non-current assets

 

 

2,683

 

 

 

2,545

 

Restricted cash

 

 

15

 

 

 

15

 

Total assets

 

$

153,875

 

 

$

156,370

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,839

 

 

$

5,584

 

Accrued compensation

 

 

2,944

 

 

 

6,017

 

Deferred revenue—current

 

 

22,873

 

 

 

19,465

 

Debt—current

 

 

-

 

 

 

1,000

 

Other current liabilities

 

 

352

 

 

 

901

 

Total current liabilities

 

 

32,008

 

 

 

32,967

 

Deferred revenue, non-current

 

 

15,113

 

 

 

16,195

 

Deferred rent

 

 

373

 

 

 

409

 

Debt—non-current

 

 

24,155

 

 

 

8,876

 

Other noncurrent liabilities

 

 

141

 

 

 

134

 

Total liabilities

 

 

71,790

 

 

 

58,581

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value — 10,000,000 shares authorized

   as of March 31, 2020 and December 31, 2019; 0 shares issued and

   outstanding as of March 31, 2020 and December 31, 2019

 

 

 

 

 

 

Common stock, $0.001 par value — 300,000,000 shares authorized

   as of March 31, 2020 and December 31, 2019; 23,227,421 and

  23,098,969 shares issued and outstanding as of

  March 31, 2020 and December 31, 2019, respectively

 

 

23

 

 

 

23

 

Additional paid-in-capital

 

 

297,374

 

 

 

293,346

 

Accumulated other comprehensive income

 

 

28

 

 

 

165

 

Accumulated deficit

 

 

(215,340

)

 

 

(195,745

)

Total stockholders’ equity

 

 

82,085

 

 

 

97,789

 

Total Liabilities and Stockholders’ Equity

 

$

153,875

 

 

$

156,370

 

 

See accompanying notes to unaudited interim condensed financial statements.

1


 

Sutro Biopharma, Inc.

Condensed Statements of Operations

(Unaudited)

(In thousands, except share and per share amounts)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Revenues (including amounts from related

   parties of $2,813 during the three

   months ended March 31, 2020, and

   $4,916 during the three months

   ended March 31, 2019)

 

$

7,152

 

 

$

8,629

 

Operating expenses

 

 

 

 

 

 

 

 

Research and development

 

 

17,619

 

 

 

15,180

 

General and administrative

 

 

8,713

 

 

 

7,715

 

Total operating expenses

 

 

26,332

 

 

 

22,895

 

Loss from operations

 

 

(19,180

)

 

 

(14,266

)

Interest income

 

 

641

 

 

 

1,176

 

Interest and other income (expense), net

 

 

(1,056

)

 

 

(1,160

)

Net loss

 

$

(19,595

)

 

$

(14,250

)

Net loss per share

 

$

(0.84

)

 

$

(0.62

)

Weighted-average shares used in computing

   net loss per share

 

 

23,197,971

 

 

 

22,865,075

 

 

See accompanying notes to unaudited interim condensed financial statements.

2


 

Sutro Biopharma, Inc.

Condensed Statements of Comprehensive Loss

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Net loss

 

$

(19,595

)

 

$

(14,250

)

Other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized (loss)/gain on available-for-sale securities

 

 

(137

)

 

 

103

 

Comprehensive loss

 

$

(19,732

)

 

$

(14,147

)

 

See accompanying notes to unaudited interim condensed financial statements.

3


 

Sutro Biopharma, Inc.

Condensed Statements of Stockholders’ Equity

(Unaudited)

(In thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Paid-In-

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

Balances at December 31, 2019

 

 

-

 

 

$

-

 

 

 

23,098,969

 

 

$

23

 

 

$

293,346

 

 

$

165

 

 

$

(195,745

)

 

$

97,789

 

Exercise of common stock options

 

 

 

 

 

 

 

 

12,937

 

 

 

 

 

 

56

 

 

 

 

 

 

 

 

 

56

 

Issuance of common stock under Employee Stock

   Purchase Plan

 

 

 

 

 

 

 

 

74,465

 

 

 

 

 

 

646

 

 

 

 

 

 

 

 

 

646

 

Vesting of restricted stock units

 

 

 

 

 

 

 

 

41,050

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,707

 

 

 

 

 

 

 

 

 

2,707

 

Issuance of common stock warrants in connection

   with debt refinancing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

619

 

 

 

 

 

 

 

 

 

619

 

Net unrealized loss on available-for- sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(137

)

 

 

 

 

 

(137

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(19,595

)

 

 

(19,595

)

Balances at March 31, 2020

 

 

-

 

 

$

-

 

 

 

23,227,421

 

 

$

23

 

 

$

297,374

 

 

$

28

 

 

$

(215,340

)

 

$

82,085

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Paid-In-

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balances at December 31, 2018

 

 

-

 

 

$

-

 

 

 

22,848,184

 

 

$

23

 

 

$

281,891

 

 

$

(47

)

 

$

(150,328

)

 

$

131,539

 

Adoption of Accounting Standards Update (ASU)

   No. 2014-09, Revenue from Contracts with

   Customers (Topic 606)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,327

 

 

 

10,327

 

Exercise of common stock options

 

 

 

 

 

 

 

 

8,347

 

 

 

 

 

 

42

 

 

 

 

 

 

 

 

 

42

 

Issuance of common stock under Employee Stock

   Purchase Plan

 

 

 

 

 

 

 

 

68,910

 

 

 

 

 

 

671

 

 

 

 

 

 

 

 

 

671

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,286

 

 

 

 

 

 

 

 

 

2,286

 

Net unrealized gain on available-for- sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

103

 

 

 

 

 

 

103

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,250

)

 

 

(14,250

)

Balances at March 31, 2019

 

 

-

 

 

$

-

 

 

 

22,925,441

 

 

$

23

 

 

$

284,890

 

 

$

56

 

 

$

(154,251

)

 

$

130,718

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited interim condensed financial statements.

4


 

Sutro Biopharma, Inc.

Condensed Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(19,595

)

 

$

(14,250

)

Adjustments to reconcile net loss to net cash (used in) provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,099

 

 

 

1,137

 

Accretion of discount on marketable securities

 

 

(41

)

 

 

(600

)

Stock-based compensation

 

 

2,707

 

 

 

2,286

 

Recognition of expense (income) on derivative liability

 

 

7

 

 

 

(127

)

Other

 

 

(19

)

 

 

73

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,781

)

 

 

(849

)

Prepaid expenses and other assets

 

 

1,417

 

 

 

336

 

Accounts payable

 

 

-

 

 

 

476

 

Accrued compensation

 

 

(3,073

)

 

 

(3,715

)

Other liabilities

 

 

(745

)

 

 

397

 

Deferred rent

 

 

(36

)

 

 

(7

)

Deferred revenue

 

 

2,326

 

 

 

(5,302

)

Net cash used in operating activities

 

 

(18,734

)

 

 

(20,145

)

Investing activities

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(3,600

)

 

 

(119,053

)

Maturities of marketable securities

 

 

37,500

 

 

 

37,750

 

Sales of marketable securities

 

 

8,500

 

 

 

3,500

 

Purchases of equipment

 

 

(763

)

 

 

(276

)

Net cash provided by (used in) investing activities

 

 

41,637

 

 

 

(78,079

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from debt refinancing

 

 

25,000

 

 

 

 

Payments of debt

 

 

(10,000

)

 

 

(500

)

Proceeds from exercise of common stock options

 

 

56

 

 

 

42

 

Proceeds from employee stock purchase plan

 

 

646

 

 

 

 

Net cash provided by (used in) financing activities

 

 

15,702

 

 

 

(458

)

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

 

 

38,605

 

 

 

(98,682

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

4,975

 

 

 

125,313

 

Cash, cash equivalents and restricted cash at end of period

 

$

43,580

 

 

$

26,631

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

134

 

 

$

330

 

Supplemental disclosure of non-cash investing and financing information:

 

 

 

 

 

 

 

 

Purchase of property and equipment included in accounts payable

 

$

255

 

 

$

63

 

Embedded interest associated with program fees

 

$

600

 

 

$

860

 

Warrants issued to lenders as part of debt discount

 

$

619

 

 

$

 

 

See accompanying notes to unaudited interim condensed financial statements.

5


 

Sutro Biopharma, Inc.

Notes to Unaudited Interim Condensed Financial Statements

1. Organization and Principal Activities

Description of Business

Sutro Biopharma, Inc. (the “Company”), is a clinical stage drug discovery, development and manufacturing company focused on deploying its proprietary integrated cell-free protein synthesis platform, XpressCF®, to create a broad variety of optimally designed, next-generation protein therapeutics initially for cancer and autoimmune disorders. The Company was incorporated on April 21, 2003 and is headquartered in South San Francisco, California.

The Company operates in one business segment, the development of biopharmaceutical products.

 

Liquidity

The Company has incurred significant losses and has negative cash flows from operations. As of March 31, 2020, the Company had an accumulated deficit of $215.3 million. Management expects to continue to incur additional substantial losses in the foreseeable future as a result of the Company’s research and development activities and costs to operate as a public company.

As of March 31, 2020, the Company had unrestricted cash, cash equivalents and marketable securities of $129.6 million, which are available to fund future operations. The Company will need to raise additional capital to support the completion of its research and development activities and its operations.

The Company believes that its unrestricted cash, cash equivalents and marketable securities as of March 31, 2020 will be sufficient for the Company to continue for at least one year from the issuance date of its unaudited interim condensed financial statements.

 

2. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The accompanying interim condensed financial statements of the Company are unaudited. These interim condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The December 31, 2019 condensed balance sheet was derived from the audited financial statements as of that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company bases its estimates on historical experience and market-specific or other relevant assumptions that it believes are reasonable under the circumstances. The amounts of assets and liabilities reported in the Company’s balance sheets and the amount of expenses and income reported for each of the periods presented are affected by estimates and assumptions, which are used for, but are not limited to, determining research and development periods under multiple element arrangements, stock-based compensation expense, fair value of redeemable convertible preferred stock warrant liabilities (prior to closing of the Company’s IPO), income taxes and certain accrued liabilities. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including revenue, expenses, manufacturing, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, as well as the economic impact on local, regional, national and international customers and markets. We have made estimates of the impact of COVID-19 within our financial statements and there may be changes to those estimates in future periods. Actual results could differ from such estimates or assumptions.

6


 

The accompanying unaudited interim condensed financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to state fairly the Company's financial position, results of operations, comprehensive income (loss), and cash flows for the interim periods. The interim results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020, or for any other future annual or interim period.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company's audited financial statements included in the Annual Report on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for the year ended December 31, 2019.

Change in Estimate

In the quarter ended March 31, 2020, the Company recorded an adjustment to revenue related to a change in estimate in connection with its Exclusive Patent License and Research Collaboration Agreement (the “2018 Merck Agreement”) with Merck, a related party of the Company. The 2018 Merck Agreement provides for the joint development of up to three research programs focusing on cytokine derivatives for cancer and autoimmune disorders. Under the 2018 Merck Agreement, the Company received from Merck a non-refundable, non-creditable, upfront payment of $60.0 million in August 2018 for access to the Company’s technology and the identification and preclinical research and development of two target programs. Under ASC 606, the Company identified five performance obligations under the 2018 Merck Agreement, two of which relate to the performance of services for 1) the first target program and 2) the second target program. At the inception of the 2018 Merck Agreement, the transaction price of $60.0 million was allocated among the performance obligations using the Company’s best estimate of standalone selling price (“SSP”) for each of the associated performance obligations. Revenue allocated to the first and second target programs, which totaled $47.1 million is being recognized on a proportion of performance basis, using the full-time equivalent (“FTE”) cost as the basis of measurement, with such performance expected to occur over an estimated service period of three years for each target program.

In March 2020, the Company adjusted revenue recognized for the first and second target programs as the parties determined additional resources should be assigned to the first target program with a reduction of resources attributed to the second target program. This resulted in a decrease in the measure of proportional performance for the first target program and an increase in the measure of proportional performance for the second target program. These adjustments collectively decreased revenues by $5.1 million, increased net loss by $5.1 million and increased the Company’s basic and diluted net loss per share by $0.22 for the quarter ended March 31, 2020.

Adoption of New Accounting Principles

In August 2018, the FASB issued ASU 2018-13 (Topic 820), Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, reducing certain disclosures concerning the fair value hierarchy. The guidance is effective for the Company in annual periods beginning after December 15, 2019, and interim periods within those annual periods. The adoption of this guidance does not have a material impact on the Company’s condensed financial statements.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13 (Topic 326), Financial Instruments Credit Losses, which requires consideration of a broader range of reasonable and supportable information to developing credit loss estimates. For public entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including all interim periods within those years. As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, ASU 2016-13 is effective for the Company for the fiscal years beginning after December 15, 2020, including all interim periods within those years. Early adoption is permitted. The Company is currently assessing the impact that the adoption of ASU 2016-13 will have on its condensed financial statements and related disclosures.

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606 (ASU 2018-18). ASU 2018-18 clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the counterparty is a customer for a distinct good or service. For units of account that are in the scope of Topic 606, all of the guidance in Topic 606 should be applied, including the guidance on recognition, measurement, presentation and disclosure. ASU 2018-18 also adds a reference in ASC Topic 808, Collaborative Arrangements (Topic 808) to the unit of account guidance in Topic 606 and requires that it be applied only to assess whether transactions in a collaborative arrangement are in the scope of Topic 606. ASU 2018-18 will preclude entities from presenting amounts related to transactions with a counterparty in a collaborative arrangement that is not a customer as revenue from contracts with customers. For public entities, ASU

7


 

2018-18 is effective for fiscal years beginning after December 15, 2019, including all interim periods within those years. As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, ASU 2018-18 is effective for the Company for fiscal years beginning after December 15, 2020, including all interim periods within those years. Early adoption is permitted. The Company has not yet determined the effects of this ASU on its condensed financial statements.

In February 2016, the FASB issued ASU 2016-02 (Topic 842), Leases (“ASC 842”). ASC 842 supersedes the lease recognition requirements in ASC 840, Leases. ASC 842 clarifies the definition of a lease and requires lessees to recognize right-of-use assets and lease liabilities for all leases, including those classified as operating leases under previous lease accounting guidance. For public entities, ASU 2016-02 was effective for fiscal years beginning after December 15, 2018, including all interim periods within that year.  As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, ASC842 will be effective for the Company on January 1, 2021.  Originally, entities were required to adopt ASC 842 using a modified retrospective transition method. However, in July 2018, the FASB issued ASU 2018-11 (Topic 842), Leases: Targeted Improvements, which provides entities with an additional transition method. Under ASU 2018-11, entities have the option of initially applying ASC 842 at the adoption date, rather than at the beginning of the earliest period presented, and recognizing the cumulative effect of applying the new standard as an adjustment to beginning retained earnings in the year of adoption while continuing to present all prior periods under previous lease accounting guidance. The Company is currently evaluating the impact of adopting this guidance on the Company’s condensed financial statements. The Company currently expects that its operating lease commitments will be subject to the new standard and recognized as right-of-use assets and operating lease liabilities upon adoption of this standard, which will increase the total assets and total liabilities that it reports relative to such amounts presented prior to adoption.    

Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the balance sheets that sum to the total of the same amounts shown in the statements of cash flows.

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

(in thousands)

 

Cash and cash equivalents

 

$

43,565

 

 

$

26,616

 

Restricted cash

 

 

15

 

 

 

15

 

Total cash, cash equivalents, and restricted cash shown in the

   statements of cash flows

 

$

43,580

 

 

$

26,631

 

 

Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, or an exit price, in the principal or most advantageous market for that asset or liability in an orderly transaction between market participants on the measurement date, and establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available, and minimizes the use of unobservable inputs when measuring fair value. The Company determined the fair value of financial assets and liabilities using the fair value hierarchy that describes three levels of inputs that may be used to measure fair value, as follows:

Level 1—Quoted prices in active markets for identical assets and liabilities;

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices 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 assets or liabilities; and

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

The carrying amounts of accounts receivable, prepaid expenses, accounts payable, accrued liabilities and accrued compensation approximate fair value due to the short-term nature of these items.

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The fair value of the Company’s outstanding loan (See Note 6) is estimated using the net present value of the payments, discounted at an interest rate that is consistent with market interest rate, which is a Level 2 input. The estimated fair value of the Company’s outstanding loan approximates the carrying amount, as the loan bears a floating rate that approximates the market interest rate.

Revenue Recognition

The Company has no products approved for commercial sale and has not generated any revenue from commercial product sales. The total revenue to date has been generated principally from collaboration and license agreements and to a lesser extent, from manufacturing, supply and services and products the Company provides to its collaboration partners.

Collaboration revenue

The Company derives revenue from collaboration arrangements, under which the Company may grant licenses to its collaboration partners to further develop and commercialize its proprietary product candidates. The Company may also perform research and development activities under the collaboration agreements. Consideration under these contracts generally includes a nonrefundable upfront payment, development, regulatory and commercial milestones and other contingent payments, and royalties based on net sales of approved products. Additionally, the collaborations may provide options for the customer to acquire from the Company materials and reagents, clinical product supply or additional research and development services under separate agreements.

The Company assesses which activities in the collaboration agreements are considered distinct performance obligations that should be accounted for separately. The Company develops assumptions that require judgement to determine whether the license to the Company’s intellectual property is distinct from the research and development services or participation in activities under the collaboration agreements.

At the inception of each agreement, the Company determines the arrangement transaction price, which includes variable consideration, based on the assessment of the probability of achievement of future milestones and contingent payments and other potential consideration.

For arrangements that include multiple performance obligations, the Company allocates the transaction price to the identified performance obligations based on SSP of each distinct performance obligation. In instances where SSP is not directly observable, the Company develops assumptions that require judgment to determine the SSP for each performance obligation identified in the contract. These key assumptions may include FTE, personnel effort, estimated costs, discount rates and probabilities of clinical development and regulatory success.

Upfront Payments: For collaboration arrangements that include a nonrefundable upfront payment, if the license fee and research and development services cannot be accounted for as separate performance obligations, the transaction price is deferred and recognized as revenue over the expected period of performance using a cost-based input methodology. The Company uses judgement to assess the pattern of delivery of the performance obligation.  In addition, amounts paid in advance of services being rendered may result in an associated financing component to the upfront payment.  Accordingly, the interest on such borrowing cost component will be recorded as interest expense and revenue, based on an appropriate borrowing rate applied to the value of services to be performed by the Company over the estimated service performance period.

License Grants: For collaboration arrangements that include a grant of a license to the Company’s intellectual property, the Company considers whether the license grant is distinct from the other performance obligations included in the arrangement. For licenses that are distinct, the Company recognizes revenues from nonrefundable, upfront payments and other consideration allocated to the license when the license term has begun and the Company has provided all necessary information regarding the underlying intellectual property to the customer, which generally occurs at or near the inception of the arrangement.

Milestone and Contingent Payments: At the inception of the arrangement and at each reporting date thereafter, the Company assesses whether it should include any milestone and contingent payments or other forms of variable consideration in the transaction price using the most likely amount method. If it is probable that a significant reversal of cumulative revenue would not occur upon resolution of the uncertainty, the associated milestone value is included in the transaction price. 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. Since milestone and contingent payments may become payable to the Company upon the initiation of a clinical study or filing for or receipt of regulatory approval, the Company reviews the relevant facts and circumstances to determine when the Company should update the transaction price, which may occur before the triggering event. When the Company updates the transaction price for milestone and contingent payments, the Company allocates the changes in the total transaction price to each performance obligation in the agreement on the same basis as the initial allocation. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment, which may result in

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recognizing revenue for previously satisfied performance obligations in such period. The Company’s collaborators generally pay milestones and contingent payments subsequent to achievement of the triggering event.

Research and Development Services: For amounts allocated to the Company’s research and development obligations in a collaboration arrangement, the Company recognizes revenue over time using a cost-based input methodology, representing the transfer of goods or services as activities are performed over the term of the agreement.

Materials Supply: The Company provides materials and reagents, clinical materials and services to certain of its collaborators under separate agreements. The consideration for such services is generally based on FTE personnel effort used to manufacture those materials reimbursed at an agreed upon rate in addition to agreed-upon pricing for the provided materials. The amounts billed are recognized as revenue as the performance obligations are met by the Company.

3. Fair Value Measurements

The following table sets forth the fair value of the Company’s financial assets and liabilities measured on a recurring basis by level within the fair value hierarchy:

 

 

 

March 31, 2020

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

41,473

 

 

$

41,473

 

 

$

 

 

$

 

Commercial paper

 

 

4,977

 

 

 

 

 

 

4,977

 

 

 

 

Corporate debt securities

 

 

49,767