ftsv-10q_20190930.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 September 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: 001-38554

 

FORTY SEVEN, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

47-4065674

( State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

1490 O’Brien Drive, Suite A

Menlo Park, California 94025

 

94025

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (650) 352-4150

 

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

 

Title of each class

 

Ticker Symbol

 

Name of each exchange on which registered

Common Stock, $0.0001 par value

 

FTSV

 

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, 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 November 5, 2019, the registrant had 42,276,130 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 


Table of Contents

 

 

 

Page no.

PART I: FINANCIAL INFORMATION

 

Item 1.

Financial Statements

1

 

Condensed Balance Sheets

1

 

Condensed Statements of Operations and Comprehensive Loss

2

 

Condensed Statements of Convertible Preferred Stock and Stockholders’ Equity

3

 

Condensed Statements of Cash Flows

4

 

Notes to Condensed Financial Statements

5

Item 2.

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

14

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4.

Controls and Procedures

31

PART II: OTHER INFORMATION

 

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

65

Item 3.

Defaults Upon Senior Securities

65

Item 4.

Mine Safety Disclosures

65

Item 5.

Other Information

65

Item 6.

Exhibits

66

Signatures

 

67

 

Where You Can Find More Information

 

Investors and others should note that we may announce material business and financial information to our investors using our investor relations website (ir.fortyseveninc.com/investor-relations), SEC filings, webcasts, press releases, and conference calls. We use these mediums, including our website, to communicate with our stockholders and the public about our company, our products, and other issues. It is possible that the information that we make available may be deemed to be material information. We therefore encourage investors and others interested in our company to review the information that we make available on our website.

 

 

i


PART I: FINANCIAL INFORMATION

Item 1.

Financial Statements.

Forty Seven Inc.

Condensed Balance Sheets

(In thousands)

 

 

 

September 30,

2019

 

 

December 31,

2018

 

 

 

(Unaudited)

 

 

(1)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

31,783

 

 

$

10,837

 

Short-term investments

 

 

134,959

 

 

 

128,186

 

Prepaid expenses and other current assets

 

 

10,583

 

 

 

6,835

 

Total current assets

 

 

177,325

 

 

 

145,858

 

Property and equipment, net

 

 

1,315

 

 

 

1,360

 

Operating lease right-of-use assets

 

 

2,282

 

 

 

 

Other assets

 

 

2,661

 

 

 

2,219

 

Total assets

 

$

183,583

 

 

$

149,437

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,164

 

 

$

4,621

 

Accrued liabilities

 

 

16,519

 

 

 

9,044

 

Lease liabilities, current

 

 

1,434

 

 

 

 

Deferred grant funding, current

 

 

2,585

 

 

 

1,744

 

Total current liabilities

 

 

23,702

 

 

 

15,409

 

Lease liabilities, noncurrent

 

 

1,228

 

 

 

 

Deferred rent, noncurrent

 

 

 

 

 

331

 

Other long-term liabilities

 

 

323

 

 

 

476

 

Total liabilities

 

 

25,253

 

 

 

16,216

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock

 

 

4

 

 

 

3

 

Additional paid-in capital

 

 

359,390

 

 

 

273,069

 

Accumulated other comprehensive income (loss)

 

 

90

 

 

 

(82

)

Accumulated deficit

 

 

(201,154

)

 

 

(139,769

)

Total stockholders’ equity

 

 

158,330

 

 

 

133,221

 

Total liabilities and stockholders’ equity

 

$

183,583

 

 

$

149,437

 

 

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

 

(1)

The balance sheet as of December 31, 2018 is derived from the audited financial statements as of that date.

1


Forty Seven Inc.

Condensed Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, except share and per share data)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

License revenue

 

$

15,678

 

 

$

 

 

$

15,678

 

 

$

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

27,074

 

 

 

17,984

 

 

 

65,029

 

 

 

42,733

 

General and administrative

 

 

4,977

 

 

 

4,383

 

 

 

14,618

 

 

 

11,588

 

Total operating expenses

 

 

32,051

 

 

 

22,367

 

 

 

79,647

 

 

 

54,321

 

Loss from operations

 

 

(16,373

)

 

 

(22,367

)

 

 

(63,969

)

 

 

(54,321

)

Interest and other income, net

 

 

1,210

 

 

 

708

 

 

 

2,584

 

 

 

1,165

 

Net loss

 

 

(15,163

)

 

 

(21,659

)

 

 

(61,385

)

 

 

(53,156

)

Unrealized gains (losses) on available-for-sale securities

 

 

31

 

 

 

(4

)

 

 

172

 

 

 

12

 

Comprehensive loss

 

$

(15,132

)

 

$

(21,663

)

 

$

(61,213

)

 

$

(53,144

)

Net loss per share, basic and diluted

 

$

(0.38

)

 

$

(0.71

)

 

$

(1.80

)

 

$

(3.63

)

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

 

 

39,772,452

 

 

 

30,430,898

 

 

 

34,129,449

 

 

 

14,643,348

 

 

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


2


Forty Seven Inc.

Condensed Statements of Convertible Preferred Stock and Stockholders’ Equity

For the Three and Nine Months Ended September 30, 2019 and 2018

(Unaudited)

(In thousands, except share data)

 

 

Convertible Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders'

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2018

 

 

 

$

 

 

 

31,079,150

 

 

$

3

 

 

$

273,069

 

 

$

(82

)

 

$

(139,769

)

 

$

133,221

 

Issuance of common stock for exercise of stock options

 

 

 

 

 

 

 

174,793

 

 

 

 

 

 

789

 

 

 

 

 

 

 

 

 

789

 

Issuance of common stock pursuant to the ESPP

 

 

 

 

 

 

 

44,656

 

 

 

 

 

 

588

 

 

 

 

 

 

 

 

 

588

 

Vesting of early exercised stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

113

 

 

 

 

 

 

 

 

 

113

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

1,104

 

 

 

 

 

 

 

 

 

1,104

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,016

)

 

 

(23,016

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

100

 

 

 

 

 

 

100

 

Balance at March 31, 2019

 

 

 

 

 

 

 

31,298,599

 

 

 

3

 

 

 

275,663

 

 

 

18

 

 

 

(162,785

)

 

 

112,899

 

Issuance of common stock for exercise of stock options

 

 

 

 

 

 

 

133,723

 

 

 

 

 

$

612

 

 

 

 

 

 

 

 

 

612

 

Vesting of early exercised stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

13

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

1,125

 

 

 

 

 

 

 

 

 

1,125

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,206

)

 

 

(23,206

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

41

 

 

 

 

 

 

41

 

Balance at June 30, 2019

 

 

 

 

 

 

 

31,432,322

 

 

 

3

 

 

 

277,413

 

 

 

59

 

 

 

(185,991

)

 

 

91,484

 

Issuance of common stock in public offering, net of issuance costs

 

 

 

 

 

 

 

10,781,250

 

 

 

1

 

 

 

80,460

 

 

 

 

 

 

 

 

 

80,461

 

Issuance of common stock for exercise of stock options

 

 

 

 

 

 

 

7,568

 

 

 

 

 

 

24

 

 

 

 

 

 

 

 

 

24

 

Issuance of common stock pursuant to the ESPP

 

 

 

 

 

 

 

49,912

 

 

 

 

 

 

272

 

 

 

 

 

 

 

 

 

272

 

Vesting of early exercised stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

13

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

1,208

 

 

 

 

 

 

 

 

 

1,208

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,163

)

 

 

(15,163

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31

 

 

 

 

 

 

31

 

Balance at September 30, 2019

 

 

 

$

 

 

 

42,271,052

 

 

$

4

 

 

$

359,390

 

 

$

90

 

 

$

(201,154

)

 

$

158,330

 

 

 

 

Convertible Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated Other

 

 

Accumulated

 

 

Total

Stockholders'

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Comprehensive Loss

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2017

 

16,215,896

 

 

$

149,397

 

 

 

6,751,157

 

 

$

1

 

 

$

3,507

 

 

$

(44

)

 

$

(69,399

)

 

$

83,462

 

Settlement of fractional shares from reverse stock split

 

 

 

 

 

 

 

(15

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of early exercised stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

13

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

431

 

 

 

 

 

 

 

 

 

431

 

Repurchase of shares

 

 

 

 

 

 

 

(41,935

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,775

)

 

 

(14,775

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(27

)

 

 

 

 

 

(27

)

Balance at March 31, 2018

 

16,215,896

 

 

 

149,397

 

 

 

6,709,207

 

 

 

1

 

 

 

3,951

 

 

 

(71

)

 

 

(84,174

)

 

 

69,104

 

Issuance of common stock for exercise of stock options

 

 

 

 

 

 

 

28,630

 

 

 

 

 

 

55

 

 

 

 

 

 

 

 

 

55

 

Vesting of early exercised stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

171

 

 

 

 

 

 

 

 

 

171

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

616

 

 

 

 

 

 

 

 

 

616

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16,722

)

 

 

(16,722

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

43

 

 

 

 

 

 

43

 

Balance at June 30, 2018

 

16,215,896

 

 

 

149,397

 

 

 

6,737,837

 

 

 

1

 

 

 

4,793

 

 

 

(28

)

 

 

(100,896

)

 

 

53,267

 

Issuance of common stock upon initial public offering, net of issuance costs

 

 

 

 

-

 

 

 

8,090,250

 

 

 

1

 

 

 

116,335

 

 

 

 

 

 

 

 

 

116,336

 

Preferred stock conversion to common stock

 

(16,215,896

)

 

 

(149,397

)

 

 

16,215,896

 

 

 

1

 

 

 

149,396

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for exercise of options

 

 

 

 

 

 

 

4,106

 

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

11

 

Vesting of early exercised stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

13

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

1,271

 

 

 

 

 

 

 

 

 

1,271

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21,659

)

 

 

(21,659

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

 

 

 

(4

)

Balance at September 30, 2018

 

 

 

$

 

 

 

31,048,089

 

 

$

3

 

 

$

271,819

 

 

$

(32

)

 

$

(122,555

)

 

$

149,235

 

 

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

3


Forty Seven, Inc.

Condensed Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(61,385

)

 

$

(53,156

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

3,437

 

 

 

2,318

 

Depreciation and amortization

 

 

386

 

 

 

289

 

Amortization of right-of-use assets

 

 

759

 

 

 

 

Accretion of discounts on marketable securities

 

 

(977

)

 

 

(293

)

Realized gain on sale of available-for-sale securities

 

 

(6

)

 

 

 

Change in fair value of embedded derivative

 

 

(13

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(3,748

)

 

 

(2,172

)

Other assets

 

 

(445

)

 

 

69

 

Accounts payable

 

 

(1,469

)

 

 

185

 

Accrued liabilities

 

 

7,631

 

 

 

554

 

Deferred grant funding

 

 

841

 

 

 

1,375

 

Lease related liabilities

 

 

(866

)

 

 

(86

)

Other long-term liabilities

 

 

 

 

 

(1

)

Net cash used in operating activities

 

 

(55,855

)

 

 

(50,918

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(328

)

 

 

(106

)

Purchases of available-for-sale securities

 

 

(166,040

)

 

 

(138,071

)

Proceeds from sales of available-for-sale securities

 

 

3,996

 

 

 

 

Proceeds from maturities of available-for-sale securities

 

 

156,427

 

 

 

71,478

 

Net cash used in investing activities

 

 

(5,945

)

 

 

(66,699

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock upon ESPP purchase

 

 

859

 

 

 

 

Proceeds from issuance of common stock upon exercise of stock options

 

 

1,426

 

 

 

166

 

Proceeds from public offering of common stock, net of issuance costs

 

 

80,461

 

 

 

116,460

 

Net cash provided by financing activities

 

 

82,746

 

 

 

116,626

 

Net increase (decrease) in cash and cash equivalents

 

 

20,946

 

 

 

(991

)

Cash and cash equivalents — beginning of period

 

 

10,837

 

 

 

24,417

 

Cash and cash equivalents — end of period

 

$

31,783

 

 

$

23,426

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Operating cash flows paid for operating leases

 

$

1,015

 

 

$

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment included in accounts payable

 

$

13

 

 

$

 

Lease liability obtained in exchange for right-of-use asset

 

$

712

 

 

$

 

Conversion of convertible preferred stock to common stock at close of initial public offering

 

$

 

 

$

149,397

 

Deferred offering costs included in accounts payable and accrued liabilities

 

$

 

 

$

124

 

 

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

 

 

4


 

Forty Seven Inc.

Notes to Condensed Financial Statements

1.

Description of Business

The Company is a clinical-stage immuno-oncology company focused on developing novel checkpoint therapies to activate macrophages in the fight against cancer. Forty Seven was founded based on the insight that blocking CD47, a key signaling molecule that is over-expressed on cancer cells, renders tumors susceptible to macrophages and the innate immune system. By harnessing macrophages, the Company believes that its lead product candidate, magrolimab (formerly known as 5F9), dosed as a monotherapy and in combination with marketed cancer therapies, can transform the treatment of cancer.

Liquidity

In the course of its development activities, the Company has sustained operating losses and expects to continue to generate operating losses for the foreseeable future. The Company’s ultimate success depends on the outcome of its research and development activities. The Company had cash, cash equivalents and short-term investments of $166.7 million as of September 30, 2019. Since inception through September 30, 2019, the Company has incurred cumulative net losses of $201.2 million. Management expects to incur additional losses in the future to conduct product research and development and recognizes the need to raise additional capital to fully implement its business plan.

The Company intends to raise such capital through the issuance of additional equity financing and/or third-party collaboration funding. However, if such financing is not available at adequate levels, the Company will need to reevaluate its operating plan and may be required to delay the development of its products. The Company expects that its cash, cash equivalents and short-term investments will be sufficient to fund operating expenses and capital expenditure requirements for a period of at least one year from the date these interim condensed financial statements are filed with the Securities and Exchange Commission (“SEC”).        

In July 2019, the Company filed a Registration Statement on Form S-3, as amended (File No. 333-232498), declared effective by the SEC on July 12, 2019 (the “Shelf Registration Statement”), related to the offering of up to $250.0 million of common stock, preferred stock, debt securities and warrants. The Company may seek to use the Shelf Registration Statement at any time or from time to time to offer, in one or more offerings, common stock, preferred stock, debt securities and/or warrantsThe Shelf Registration Statement also included a prospectus covering the offering, issuance and sale of up to $60.0 million of shares of the Company’s common stock, from time to time, in “at-the-market offerings” pursuant to a Controlled Equity OfferingSM Sales Agreement (the “Sales Agreement”) entered into with Cantor Fitzgerald & Co. (the “Sales Agent”) on July 1, 2019. As of September 30, 2019, the Company had not sold any securities pursuant to the Sales Agreement.  

In July 2019, pursuant to the Shelf Registration Statement, the Company completed an underwritten public offering of 10,781,250 shares of the Company’s common stock, including 1,406,250 shares sold pursuant to the underwriters’ exercise of their option to purchase additional shares at a public offering price of $8.00 per share. The net proceeds from the offering to the Company were $80.5 million.

2.

Summary of Significant Accounting Policies

Basis of Presentation

The interim condensed financial statements are unaudited. The unaudited interim condensed financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods presented. The results of operations for the three and nine months ended September 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 condensed balance sheet as of December 31, 2018 included herein was derived from the audited financial statements as of that date. These condensed financial statements should be read in conjunction with the Company's audited financial statements and related notes as set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as filed with the SEC on March 28, 2019.

5


 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. 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 financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates and assumptions made in the accompanying financial statements include but are not limited to revenue recognition, the fair value of stock options, the fair value of investments, income tax uncertainties, lease liability, and certain accruals. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could differ from those estimates.

Revenue Recognition

License and Collaboration Arrangements

The Company accounts for revenue recognition under Accounting Standards Codification (“ASC”), Revenue from Contracts with Customers (Topic 606) (“ASC 606”). Under ASC 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. 

 

The Company enters into collaborative arrangements with partners that fall under the scope of ASC, Collaborative Arrangements (Topic 808) (“ASC 808”). The Company analyzes it collaboration arrangements to assess whether they are within the scope of ASC 808 to determine whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. The accounting for some of the activities under collaboration arrangements may be analogized to ASC 606 for distinct units of account that are reflective of a vendor-customer relationship. For other elements of collaboration arrangements, such as research and development performed under cost-sharing arrangements, the Company follows the illustrative examples in ASC 808 and generally records research and development reimbursements received as a reduction of research and development expenses.

 

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

 

If a 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 attributed to the license when the license is transferred to the customer and the customer is able to use and benefit from the license.

 

At the inception of each arrangement that includes development 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 revenue reversal 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 generally considered probable of being achieved until those approvals are received. At the end of each reporting period, the Company re-evaluates the probability of achievement of any development milestones, and if necessary, adjusts its estimate of the transaction price. Any such adjustments would be recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.

Foreign Currency Transactions

Gains or losses from foreign currency transactions are included in interest and other income, net, in the statements of operations and comprehensive loss. The Company recognized $0.3 million in foreign currency gains for the three months and nine months ended September 30, 2019. Foreign currency losses for the three months ended September 30, 2018 were immaterial. The Company recognized $0.2 million in foreign currency losses for the nine months ended September 30, 2018.

6


 

Fair Value Measurement

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. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

Level 1—Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active;

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.

Leases  

The Company adopted Accounting Standards Update No. 2016-02, Leases on January 1, 2019 using the modified retrospective method. For its operating leases in excess of 12 months, the Company recognizes a right-of-use asset and a lease liability on its balance sheet. The lease liability is determined as the present value of future lease payments using an estimated rate of interest that the Company would pay to borrow equivalent funds on a collateralized basis at the adoption date for the existing lease and at lease commencement date for new leases. The right-of-use asset is based on the liability adjusted for any prepaid or deferred rent, and lease incentives, as applicable. The lease term at the commencement date is determined by considering whether renewal options and termination options are reasonably assured of exercise.

Rent expense for the operating leases is recognized on a straight-line basis over the lease term and is included in operating expenses on the statements of operations and comprehensive loss. Variable lease payments include lease operating expenses.

The accompanying condensed financial statements as of and for the three and nine months ended September 30, 2019 are presented under ASC 842. The prior periods continue to be reported in accordance with previous lease guidance, ASC 840, Leases. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows the Company to carry forward the historical lease classification of the leases in place as of January 1, 2019. As allowed under ASC 842, the Company has elected to not separate lease and nonlease components. The Company has also elected to not apply the recognition requirement of ASC 842 to leases with a term of 12 months or less.

The impact of the adoption of ASC 842 on the accompanying condensed balance sheet as of January 1, 2019 was as follows:

 

 

 

December 31, 2018

 

 

Adjustments due to

the adoption of

ASC 842

 

 

January 1, 2019

 

 

 

(In thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease right-of-use asset

 

$

 

 

$

2,328