10-Q 1 edit-20160930x10q.htm 10-Q edit_Current_Folio_10Q

 

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 September 30, 2016

 

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 001-37687


EDITAS MEDICINE, INC.

(Exact name of registrant as specified in its charter)


 

 

 

 

Delaware
(State or other jurisdiction of
incorporation or organization)

 

46‑4097528
(I.R.S. Employer
Identification No.)

 

 

 

11 Hurley Street
Cambridge, Massachusetts
(Address of principal executive offices)

 

02141
(Zip Code)

 

(617) 401‑9000

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b‑2 of the Exchange Act. (Check one):

 

 

 

 

 

 

 

Large accelerated filer

Accelerated filer 

 

 

 

 

Non‑accelerated filer

☒  (Do not check if a smaller reporting company)

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐  No ☒

 

The number of shares of the Common Stock outstanding as of November 1, 2016 was 36,655,936.

 

 


 

Editas Medicine, Inc.

TABLE OF CONTENTS

 

 

 

 

 

    

    

Page

 

 

 

PART I. FINANCIAL INFORMATION 

 

 

 

 

Item 1. 

Financial Statements (unaudited)

 

 

Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2016 and 2015

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015

 

 

Notes to Condensed Consolidated Financial Statements

 

Item 2. 

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

 

23 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

33 

Item 4. 

Controls and Procedures

 

34 

 

 

 

 

PART II. OTHER INFORMATION 

 

35 

 

 

 

 

Item 1. 

Legal Proceedings

 

35 

Item 1A. 

Risk Factors

 

36 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

85 

Item 6. 

Exhibits

 

85 

 

 

 

 

Signatures 

 

86 

 

 

 

 

2


 

PART I. FINANCIAL INFORMATION

 

Item 1.    Financial Statements.

Editas Medicine, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(amounts in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2016

 

2015

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

199,874

 

$

143,180

 

Accounts receivable

 

 

1,122

 

 

1,019

 

Prepaid expenses and other current assets

 

 

2,453

 

 

786

 

Total current assets

 

 

203,449

 

 

144,985

 

Property and equipment, net

 

 

37,072

 

 

2,130

 

Restricted cash and other non-current assets

 

 

1,632

 

 

2,248

 

Total assets

 

$

242,153

 

$

149,363

 

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND  STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

3,718

 

$

1,381

 

Accrued expenses

 

 

9,492

 

 

5,456

 

Deferred rent, current portion

 

 

 —

 

 

88

 

Other current liabilities

 

 

547

 

 

 —

 

Total current liabilities

 

 

13,757

 

 

6,925

 

Deferred rent, net of current portion

 

 

353

 

 

 —

 

Deferred revenue

 

 

25,800

 

 

25,321

 

Warrant to purchase redeemable securities

 

 

 —

 

 

289

 

Construction financing lease obligation, net of current portion

 

 

32,048

 

 

 —

 

Other non-current liabilities

 

 

19

 

 

27

 

Total liabilities

 

 

71,977

 

 

32,562

 

Commitments and contingencies (see note 6)

 

 

 

 

 

 

 

Series A-1 redeemable convertible preferred stock, $0.0001 par value per share: no shares and 21,320,000 shares authorized at September 30, 2016 and December 31, 2015, respectively; no shares and 21,260,000 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively

 

 

 —

 

 

21,137

 

Series A-2 redeemable convertible preferred stock, $0.0001 par value per share: no shares and 16,890,699 shares authorized, issued and outstanding at September 30, 2016 and December 31, 2015, respectively

 

 

 —

 

 

59,027

 

Series B redeemable convertible preferred stock, $0.0001 par value per share: no shares and 26,666,660 shares authorized, issued and outstanding at September 30, 2016 and December 31, 2015, respectively

 

 

 —

 

 

119,751

 

Stockholders’ equity (deficit)

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 5,000,000 shares and no shares authorized, at September 30, 2016 and December 31, 2015, respectively; no shares issued or outstanding at September 30, 2016 and December 31, 2015, respectively

 

 

 —

 

 

 —

 

Common stock, $0.0001 par value per share: 195,000,000 shares and 92,000,000 shares authorized at September 30, 2016 and December 31, 2015, respectively; 36,651,129 and 4,869,829 shares issued and 35,608,637 and 3,233,638 shares outstanding at September 30, 2016 and December 31, 2015, respectively

 

 

4

 

 

 —

 

Additional paid-in capital

 

 

316,322

 

 

5,234

 

Accumulated deficit

 

 

(146,150)

 

 

(88,348)

 

Total stockholders’ equity (deficit)

 

 

170,176

 

 

(83,114)

 

Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)

 

$

242,153

 

$

149,363

 

 

 

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

3


 

 

Editas Medicine, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

(amounts in thousands, except per share and share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2016

 

2015

    

2016

    

2015

 

Collaboration and other research and development revenues

 

$

962

 

$

670

 

$

5,155

 

$

837

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

10,832

 

 

3,850

 

 

30,144

 

 

13,020

 

General and administrative

 

 

11,295

 

 

4,202

 

 

33,215

 

 

10,756

 

Total operating expenses

 

 

22,127

 

 

8,052

 

 

63,359

 

 

23,776

 

Operating loss

 

 

(21,165)

 

 

(7,382)

 

 

(58,204)

 

 

(22,939)

 

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

3

 

 

21

 

 

(22)

 

 

(37,219)

 

Interest income (expense), net

 

 

142

 

 

(44)

 

 

419

 

 

(109)

 

Total other income (expense), net

 

 

145

 

 

(23)

 

 

397

 

 

(37,328)

 

Net loss and comprehensive loss

 

$

(21,020)

 

$

(7,405)

 

$

(57,807)

 

$

(60,267)

 

Reconciliation of net loss to net loss attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(21,020)

 

$

(7,405)

 

$

(57,807)

 

$

(60,267)

 

Accretion of redeemable convertible preferred stock to redemption value

 

 

 —

 

 

(104)

 

 

(47)

 

 

(295)

 

Net loss attributable to common stockholders

 

$

(21,020)

 

$

(7,509)

 

$

(57,854)

 

$

(60,562)

 

Net loss per share attributable to common stockholders, basic and diluted

 

$

(0.59)

 

$

(2.57)

 

$

(1.86)

 

$

(25.53)

 

Weighted-average common shares outstanding, basic and diluted

 

 

35,505,429

 

 

2,925,843

 

 

31,040,670

 

 

2,371,976

 

 

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

 

 

4


 

Editas Medicine, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

    

2016

    

2015

 

Cash flow from operating activities

 

 

 

 

 

 

 

Net loss

 

$

(57,807)

 

$

(60,267)

 

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

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

13,099

 

 

1,562

 

Depreciation

 

 

714

 

 

323

 

Non-cash interest expense

 

 

 —

 

 

45

 

Changes in fair value of warrant liability

 

 

87

 

 

92

 

Change in fair value of preferred stock tranche asset or liability

 

 

 —

 

 

35,551

 

Changes in fair value of anti-dilutive protection liability

 

 

 —

 

 

1,609

 

Changes in deferred rent

 

 

265

 

 

(71)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(103)

 

 

(1,040)

 

Prepaid expenses and other current assets

 

 

(1,667)

 

 

(147)

 

Other non-current assets

 

 

2,235

 

 

 —

 

Accounts payable

 

 

2,095

 

 

(1,080)

 

Accrued expenses

 

 

4,034

 

 

823

 

Deferred revenue

 

 

479

 

 

25,165

 

Net cash (used in) provided by operating activities

 

 

(36,569)

 

 

2,565

 

Cash flow from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,817)

 

 

(1,030)

 

Changes in restricted cash

 

 

(1,619)

 

 

 —

 

Net cash used in investing activities

 

 

(4,436)

 

 

(1,030)

 

Cash flow from financing activities

 

 

 

 

 

 

 

Proceeds from equipment loan, net of issuance costs

 

 

 —

 

 

1,500

 

Proceeds from the issuance of redeemable convertible preferred stock and tranche rights, net of issuance costs

 

 

 —

 

 

141,711

 

Payments of equipment loan principal

 

 

 —

 

 

(70)

 

Proceeds from the issuance of common stock and restricted stock

 

 

 —

 

 

2

 

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

 

 

97,488

 

 

 —

 

Proceeds from stock option exercises

 

 

211

 

 

 —

 

Net cash provided by financing activities

 

 

97,699

 

 

143,143

 

Net increase in cash and cash equivalents

 

 

56,694

 

 

144,678

 

Cash and cash equivalents, beginning of period

 

 

143,180

 

 

10,623

 

Cash and cash equivalents, end of period

 

$

199,874

 

$

155,301

 

Supplemental disclosure of cash and non-cash activities:

 

 

 

 

 

 

 

Conversion of preferred stock to common stock upon closing of the initial public offering

 

$

199,915

 

$

 —

 

Capitalization of construction-in-progress related to facility lease obligation

 

 

32,595

 

 

 —

 

Fixed asset additions included in accounts payable and accrued expenses

 

 

244

 

 

 —

 

Initial public offering costs incurred but unpaid at period end

 

 

 —

 

 

661

 

Reclassification of warrants to additional paid-in capital

 

 

376

 

 

 —

 

Accretion of redeemable convertible preferred stock to redemption value

 

 

47

 

 

295

 

Reclassification of liability for common stock subject to repurchase

 

 

8

 

 

14

 

Conversion of anti-dilutive protection liability to common stock

 

 

 —

 

 

1,936

 

Reclassification of preferred stock tranche liability upon settlement

 

 

 —

 

 

37,038

 

Accrual of final payment fee on equipment loan and debt discount

 

 

 —

 

 

60

 

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

5


 

Editas Medicine, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1. Nature of business

 

Editas Medicine, Inc. (the “Company”) is a research stage company dedicated to treating patients with genetically defined diseases by correcting their disease‑causing genes. The Company was incorporated in the state of Delaware in September 2013. Its principal offices are in Cambridge, Massachusetts.

 

Since its inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, and raising capital, and has financed its operations through various equity and debt financings, including the initial public offering of its common stock (the “IPO”), private placements of preferred stock and an equipment loan, and from upfront, milestone and research and development fees paid under a research collaboration with Juno Therapeutics, Inc. (“Juno Therapeutics”).

 

The Company is subject to risks common to companies in the biotechnology industry, including but not limited to, risks of failure of preclinical studies and clinical trials, the need to obtain marketing approval for any drug product candidate that it may identify and develop, the need to successfully commercialize and gain market acceptance of its product candidates, dependence on key personnel, protection of proprietary technology, compliance with government regulations, development by competitors of technological innovations and ability to transition from pilot‑scale manufacturing to large‑scale production of products.

 

In February 2016, the Company completed its IPO whereby the Company sold 6,785,000 shares of its common stock, inclusive of 885,000 shares of common stock sold by the Company pursuant to the full exercise of an overallotment option granted to the underwriters in connection with the offering, at a price to the public of $16.00 per share. The shares began trading on the NASDAQ Global Select Market on February 3, 2016. The aggregate net proceeds received by the Company from the offering were $97.5 million, after deducting underwriting discounts and commissions and other offering expenses payable by the Company. In connection with the IPO, the board of directors and the stockholders of the Company approved a one-for-2.6 reverse stock split of the Company’s issued and outstanding common stock. The reverse stock split became effective on January 15, 2016. All share and per share amounts in the condensed consolidated financial statements have been retroactively adjusted for all periods presented to give effect to the reverse stock split, including reclassifying an amount equal to the reduction in par value to additional paid-in capital. Upon the closing of the IPO, all outstanding shares of convertible preferred stock converted into 24,929,709 shares of common stock. As of September 30, 2016, there were 35,608,637 shares of common stock outstanding. The significant increase in shares outstanding in the first quarter of 2016 is expected to impact the year-over-year comparability of the Company’s net loss per share calculations for the next six months.

 

The Company has incurred annual net operating losses in every year since its inception. The Company had an accumulated deficit of $146.2 million at September 30, 2016, and will require substantial additional capital to fund its operations. The Company has not generated any product revenues and has financed its operations primarily through a public offering, private placements of its equity securities, an equipment loan, and funding from its collaboration with Juno Therapeutics. There can be no assurance that the Company will be able to obtain additional debt or equity financing or generate product revenue or revenues from collaborative partners, on terms acceptable to the Company, on a timely basis or at all. The failure of the Company to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the Company’s business, results of operations, and financial condition.

 

6


 

2. Summary of significant accounting policies

 

Unaudited interim financial information

 

The condensed consolidated financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from this report, as is permitted by such rules and regulations. Accordingly, these condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (the “Annual Report”).

 

The unaudited condensed consolidated financial statements include the accounts of Editas Medicine, Inc. and its wholly owned subsidiary. All intercompany transactions and balances of the subsidiary have been eliminated in consolidation. In the opinion of management, the information furnished reflects all adjustments, all of which are of a normal and recurring nature, necessary for a fair presentation of the results for the reported interim periods. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. The three months ended September 30, 2016 and 2015 are referred to as the third quarter of 2016 and 2015, respectively. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year or any other interim period.

 

Use of estimates 

   

The preparation of condensed consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. On an ongoing basis, the Company’s management evaluates its estimates, which include, but are not limited to, estimates related to revenue recognition, accrued expenses, stock‑based compensation expense, valuation of the redeemable convertible preferred stock tranche liability and the anti‑dilutive protection liability, valuation of the warrant liability, deferred tax valuation allowances, the fair value of common stock prior to the completion of the IPO, and construction lease financing obligations. The Company bases its estimates on historical experience and other market‑specific or relevant assumptions that it believes to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.

   

Summary of significant accounting policies

 

The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in the Annual Report. There have been no material changes to the significant accounting policies previously disclosed in the Annual Report.

 

Recent accounting pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014‑09, Revenue From Contracts With Customers (“ASU No. 2014-09”). ASU No. 2014‑09 amends Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition, by outlining a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU No. 2014‑09 will be effective for the Company for interim and annual periods beginning after December 15, 2017. The Company is evaluating the impact that this ASU may have on its consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014‑15, Presentation of Financial Statements—Going Concern, which requires management to assess an entity’s ability to continue as a going concern every reporting period, and provide certain disclosures if management has substantial doubt about the entity’s ability to operate as a going concern, or an express statement if not, by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. This guidance is effective for the annual period ending after December 15, 2016, and for annual periods and

7


 

interim periods within annual periods beginning thereafter. Early application is permitted. The Company is in process of evaluating this guidance and determining the expected effect on its consolidated financial statements, but does not expect it to have a significant impact on the Company's results of operations, cash flows or financial position.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which applies to all leases and will require lessees to put most leases on the balance sheet, but recognize expense in a manner similar to the current standard. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those years. Entities are required to use a modified retrospective approach of adoption for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited. The Company is evaluating the impact that this ASU may have on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU No. 2016-09”), which simplifies share-based payment accounting through a variety of amendments. The standard will be effective for annual reporting periods and interim periods within those annual periods, beginning after December 15, 2016, and early adoption is permitted. The Company is currently evaluating the potential impact ASU 2016-09 may have on its financial position.

 

3. Fair Value Measurements

 

The Company classifies fair value based measurements using a three-level hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows: Level 1, quoted market prices in active markets for identical assets or liabilities; Level 2, observable inputs other than quoted market prices included in Level 1 such as quoted market prices for markets that are not active or other inputs that are observable or can be corroborated by observable market data; 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, including estimates and assumptions developed by the Company, reflective of those that a market participant would use, as inputs to certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

 

Assets measured at fair value on a recurring basis as of September 30, 2016 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

    

 

 

    

Quoted Prices

    

Significant

    

 

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

September 30, 

 

Identical Assets

 

Inputs

 

Inputs

 

Financial Assets:

 

2016

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Cash and cash equivalents

 

$

199,874

 

$

199,874

 

$

 —

 

$

 —

 

Money market funds, included in other current assets

 

 

320

 

 

320

 

 

 —

 

 

 —

 

Money market funds, included in other non-current assets

 

 

1,619

 

 

1,619

 

 

 —

 

 

 —

 

Total financial assets

 

$

201,813

 

$

201,813

 

$

 

$

 

 

8


 

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Quoted Prices

    

Significant

    

 

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

December 31, 

 

Identical Assets

 

Inputs

 

Inputs

 

Financial Assets:

 

2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Cash and cash equivalents

 

$

143,180

 

$

143,180

 

$

 —

 

$

 —

 

Money market funds, included in other current assets

 

 

320

 

 

320

 

 

 —

 

 

 —

 

Total financial assets

 

$

143,500

 

$

143,500

 

$

 —

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrant liability

 

$

289

 

$

 

$

 

$

289

 

Total financial liabilities

 

$

289

 

$

 —

 

$

 —

 

$

289

 

 

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

 

 

 

 

 

 

 

    

 

 

Warrant

 

 

 

 

 

Liability

 

Fair value at December 31, 2015

 

 

$

289

 

Changes in fair value recognized in other expense

 

 

 

87

 

Reclassification to additional paid-in capital in connection with IPO

 

 

 

(376)

 

Fair value at September 30, 2016

 

 

$

 —

 

 

There were no transfers between fair value measurement levels during the nine month period ended     September 30, 2016 or 2015. The fair value of the preferred stock warrant liability was determined based on “Level 3” inputs utilizing the Black-Scholes option pricing model. Upon the completion of the IPO, the Company’s outstanding warrant to purchase preferred stock converted into a warrant to purchase common stock and the Company reclassified the fair value of the warrant to additional paid-in capital.

 

Cash and cash equivalents

 

The Company considers all highly liquid securities with original final maturities of three months or less from the date of purchase to be cash equivalents. As of September 30, 2016 and December 31, 2015, cash and cash equivalents comprised of funds in cash and money market accounts.

 

 

4. Accrued expenses

 

Accrued expenses consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

September 30, 

 

December 31, 

 

 

    

2016

    

2015

 

Patent and license fees

 

$

5,762

 

$

3,395

 

Deferred initial public offering costs

 

 

 —

 

 

283

 

Employee compensation costs

 

 

1,930

 

 

1,016

 

Professional services

 

 

1,163

 

 

382

 

Other

 

 

637

 

 

380

 

Total

 

$

9,492

 

$

5,456

 

 

 

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5. Property and equipment, net

 

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

 

 

 

 

 

 

 

 

 

 

 

    

As of

 

 

 

September 30, 

 

December 31, 

 

 

    

2016

    

2015

 

Construction-in-progress

 

$

32,595

 

$

 —

 

Laboratory equipment

 

 

4,734

 

 

2,215

 

Computer equipment

 

 

726

 

 

447

 

Furniture and office equipment

 

 

169

 

 

74

 

Leasehold improvements

 

 

191

 

 

23

 

Total property and equipment

 

 

38,415

 

 

2,759

 

Less: accumulated depreciation

 

 

(1,343)

 

 

(629)

 

Property and equipment, net

 

$

37,072

 

$

2,130

 

 

 

6. Commitments and contingencies

 

Facility leases

 

In December 2013, the Company entered into an agreement to sublease its facility under a non‑cancelable operating lease that was set to expire at the end of September 2016. In August 2016, the Company amended the sublease to extend the expiration date from September 30, 2016 until the earlier of (i) 30 days following the date on which the Company gives the landlord written notice that it intends to vacate the premises and (ii) November 30, 2016. In September 2016, the Company delivered notice of its intent to vacate as of October 31, 2016, such that the sublease expired on November 1, 2016. Pursuant to the sublease agreement, the Company maintained restricted cash of $0.3 million in a collateral account that was held until the termination of the Company’s obligations under the agreement. The sublease agreement could not be extended beyond the expiration date of the sublease. The sublease contained escalating rent clauses which required higher rent payments in future years. The Company expensed rent on a straight‑line basis over the term of the sublease, including any rent‑free periods. The deposit is recorded in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet as of September 30, 2016 and December 31, 2015.

 

In November 2015, the Company entered into a real estate license agreement to sublease from the licensor additional laboratory space in Cambridge, Massachusetts. The term of the lease is from December 1, 2015 to November 30, 2016. The Company’s contractual obligation related to lease payments over the term of the sublease is approximately $1.9 million. The Company delivered notice of its intent to vacate these premises in September 2016, in accordance with its right to cancel the sublease upon no less than 30 days’ written notice, provided that the Company remains liable to continue to pay the monthly rental fee for the remainder of the term unless the licensor can sublease the space. If the licensor can sublease the space to another party, the Company will be credited the lesser of (i) the rental fee paid by such party corresponding to the remainder of the term and (ii) 50% of the rental for the remainder of the term.

 

Hurley Street, Cambridge, MA

 

In February 2016, the Company entered into a lease agreement for approximately 59,783 square feet of office and laboratory space located on Hurley Street in Cambridge, Massachusetts. The term of the lease began on October 1, 2016. In connection with the lease and as a security deposit, the Company deposited with the landlord a letter of credit in the amount of approximately $1.6 million. Subject to the terms of the lease and certain reduction requirements specified therein, the $1.6 million security deposit may decrease over time. The letter of credit, which is collateralized by the Company with cash held in a money market account, is recorded in restricted cash and other non-current assets in the accompanying condensed consolidated financial statement as of September 30, 2016. 

 

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In connection with this lease, the landlord provided a tenant improvement allowance for costs associated with the design, engineering, and construction of tenant improvements for the leased facility. For accounting purposes, the Company was deemed the owner of the building during the construction period due to the fact that the Company was involved in the construction project, including having responsibilities for cost overruns for planned tenant improvements that did not qualify as “normal tenant improvements” under the lease accounting guidance. Throughout the construction period, the Company recorded the project construction costs incurred as an asset, along with a corresponding facility lease obligation, on its balance sheet for the total amount of the project costs incurred whether funded by the Company or the landlord. As of September 30, 2016, the Company had recorded construction in progress of $32.6 million, which was included in property and equipment, net, and a corresponding facility lease obligation of $32.6 million. The Company did not pay any cash to the landlord related to the building for the nine months ended September 30, 2016.

 

Construction was completed in October 2016, and the Company considered the requirements for sale-leaseback accounting treatment, which included an evaluation of whether all risks of ownership had transferred back to the landlord, as evidenced by a lack of continuing involvement in the leased property. The Company determined that the arrangement did not qualify for sale-leaseback accounting treatment, the building asset will remain on the Company’s balance sheet at its historical cost, and such asset will be depreciated over its estimated useful life of 30 years.

 

The Company bifurcates its future lease payments pursuant to the Hurley Street lease into (i) a portion that is allocated to the building and (ii) a portion that is allocated to the land on which the building is located, which is recorded as rental expense. Although the Company did not begin making lease payments pursuant to the Hurley Street lease until November 2016, the portion of the lease obligation allocated to the land is treated for accounting purposes as an operating lease that commenced upon execution of the Hurley Street lease in February 2016. During the nine months ended September 30, 2016, the Company recognized $0.4 million of non-cash rental expense attributable to the land.

 

The lease will continue until October 2023. The Company has the option to extend the lease for an additional five-year term at market-based rates. The base rent is subject to increases over the term of the lease. The non-cancelable minimum annual lease payments for the annual periods beginning upon commencement of the lease are $3.9 million, $4.0 million, $4.1 million, $4.2 million and $4.3 million in the first five years of the lease, respectively, and $9.2 million in total thereafter, plus the Company’s share of the facility operating expenses and other costs that are reimbursable to the landlord under the lease. The Company began using this space as its headquarters in October 2016 and rental payments for this property began in November 2016.

 

Licensor Expense Reimbursement

 

The Company is obligated to reimburse The Broad Institute Inc. (“Broad”), and the President and Fellows of Harvard College (“Harvard”), for expenses incurred by each of them associated with the prosecution and maintenance of the patent rights that the Company licenses from them pursuant to the license agreement by and among the Company, Broad and Harvard, including the interference and opposition proceedings involving patents licensed to the Company under the license agreement. As such, the Company anticipates that it has a substantial commitment in connection with these proceedings until such time as these proceedings have been resolved, but the amount of such commitment is not determinable. The Company incurred an aggregate of $16.0 million and $3.9 million in expense for such reimbursement during the nine months ended September 30, 2016 and 2015, respectively. During the three months ended September 30, 2016 and 2015, the Company recognized $5.0 million and $1.1 million in expense for such reimbursement, respectively.

 

11


 

Massachusetts General Hospital

 

In August 2016, the Company entered into an exclusive patent license agreement (the “2016 MGH Agreement”) with The General Hospital Corporation, d/b/a Massachusetts General Hospital (“MGH”). Pursuant to the terms of such license, the Company is required to make certain success payments to MGH, payable in cash or common stock (the “MGH Success Payments”) at the Company’s election. The MGH Success Payments are payable, if and when, the Company’s market capitalization reaches specified thresholds or upon a sale of the Company for consideration in excess of those thresholds, as discussed more fully in Note 7 (collectively the “Payment Conditions”).

 

The MGH Success Payments were accounted for under the provisions of FASB ASC, Topic 505-50, Equity-Based Payments to Non-Employees. The Company has the right to terminate the agreement at will upon 90 days written notice to MGH. Absent any of the Payment Conditions being achieved prior to termination, the Company would not be obligated to pay any MGH Success Payments. As such, the Company will recognize the expense and liability associated with each MGH Success Payment upon achievement of the associated Payment Conditions, if ever. The Company did not incur any expenses related to the MGH Success Payments during the three or nine months ended September 30, 2016.

 

Litigation

 

The Company is not a party to any litigation and did not have contingency reserves established for any litigation liabilities as of September 30, 2016 or December 31, 2015.

 

7. Significant Agreements

 

Juno Therapeutics Collaboration Agreement

 

Summary of Agreement

 

In May 2015, the Company entered into a Collaboration and License Agreement (the “Collaboration Agreement”) with Juno Therapeutics. The collaboration is focused on the research and development of engineered T cells with chimeric antigen receptors (“CARs”) and T cell receptors (“TCRs”) that have been genetically modified to recognize and kill other cells. The parties will pursue the research and development of CAR and TCR engineered T cell products utilizing the Company’s genome editing technologies with Juno Therapeutics’ CAR and TCR technologies across three research areas.

 

The collaborative program of research to be undertaken by the parties pursuant to the Collaboration Agreement will be conducted in accordance with a mutually agreed upon research plan which outlines each party’s research and development responsibilities across the three research areas. The Company’s research and development responsibilities under the research plan are related to generating genome editing reagents that modify gene targets selected by Juno Therapeutics. Juno Therapeutics is responsible for evaluating and selecting for further research and development CAR and TCR engineered T cell products modified with the Company’s genome editing reagents. Except with respect to the Company’s obligations under the mutually agreed upon research plan, Juno Therapeutics has sole responsibility, at its own cost, for the worldwide research, development, manufacturing and commercialization of products within each of the three research areas for the diagnosis, treatment or prevention of any cancer in humans through the use of engineered T cells, excluding the diagnosis, treatment or prevention of medullary cystic kidney disease 1 (the “Exclusive Field”).

 

The initial term of the research program commenced on May 26, 2015 and continues for five years ending on May 26, 2020 (the “Initial Research Program Term”). Juno Therapeutics may extend the Initial Research Program Term for up to two additional one year periods upon the payment of extension fees for each one year extension period, assuming the Company has agreed to the extension request(s) (together, the initial term and any extension period(s) are referred to as the “Research Program Term”).

 

Under the terms of the Collaboration Agreement, the Company granted to Juno Therapeutics during the Research Program Term a nonexclusive, worldwide, royalty‑free, sublicensable (subject to certain conditions) license under certain of the intellectual property controlled by the Company solely for the purpose of conducting activities

12


 

required under the specified research under the Collaboration Agreement: (i) conduct activities assigned to Juno Therapeutics under the research plan, (ii) conduct activities assigned to the Company under the research plan that the Company fails or refuses to conduct in a timely manner, (iii) use certain genome editing reagents generated under the research program to research, evaluate and conduct preclinical testing and development of certain engineered T cells and (iv) evaluate the data developed in the conduct of activities under the research plan (the “Research License”). Additionally, as it relates to two of the three research areas, the Company granted to Juno Therapeutics an exclusive, milestone and royalty‑bearing, sublicensable license under certain of the intellectual property controlled by the Company to research, develop, make and have made, use, offer for sale, sell, import and export selected CAR and TCR engineered T cell products in the Exclusive Field on a worldwide basis, specifically as it relates to certain targets selected by Juno Therapeutics pursuant to the research program. Furthermore, as it relates to the same two research areas, the Company granted to Juno Therapeutics a non‑exclusive, milestone and royalty‑bearing, sub licensable license under certain of the intellectual property controlled by the Company to use genome editing reagents generated under the research program that are used in the creation of certain CAR or TCR engineered T cell products on which Juno Therapeutics has filed an IND in the Exclusive Field for the treatment or prevention of a cancer in humans to research, develop, make and have made, use, offer for sale, sell, import and export those CAR or TCR engineered T cell products in all fields outside of the Exclusive Field (the “Non‑Exclusive Field”) on a worldwide basis, specifically as it relates to certain targets selected by Juno Therapeutics pursuant to the research program (together, the license in the Exclusive Field and the license in the Non‑Exclusive Field are referred to as the “Development and Commercialization License” for each particular research area). Lastly, as it relates to the third research area, the Company granted to Juno Therapeutics a milestone and royalty‑bearing, sublicensable license under certain of the intellectual property controlled by the Company to use the genome editing reagents generated under the research program that are associated with certain CAR or TCR engineered T cell products to research, develop, make and have made, use, offer for sale, sell, import or export those CAR or TCR engineered T cell products in the Exclusive Field on a worldwide basis, specifically as it relates to certain products selected by Juno Therapeutics pursuant to the research program. The license associated with the third research area is exclusive as it relates to CAR or TCR engineered T cell products directed to certain targets as selected by Juno Therapeutics, but is otherwise non‑exclusive (referred to as the “Development and Commercialization License” for the third research area).

 

The Collaboration Agreement will be managed on an overall basis by a project leader from each of the Company and Juno Therapeutics. The project leaders will serve as the contact point between the parties with respect to the research program and will be primarily responsible for facilitating the flow of information, interaction, and collaboration between the parties. In addition, the activities under the Collaboration Agreement during the Research Program Term will be governed by a joint research committee (“JRC”) formed by an equal number of representatives from the Company and Juno Therapeutics. The JRC will oversee, review and recommend direction of the research program. Among other responsibilities, the JRC will monitor and report research progress and ensure open and frequent exchange between the parties regarding research program activities.

 

Under the terms of the Collaboration Agreement, the Company received a $25.0 million up‑front, non‑refundable, non‑creditable cash payment. In addition, Juno Therapeutics will pay to the Company an aggregate of up to $22.0 million in research and development funding over the initial five year term of the research program across the three research areas consisting primarily of funding for up to a specified maximum number of full time equivalents personnel each year over the initial five year term of the research program across three research areas. Under the terms of the Collaboration Agreement, there is no incremental compensation due to the Company with respect to the Development and Commercialization License granted to Juno Therapeutics associated with the first target or product, as applicable, designated by Juno Therapeutics within each of the three research areas. However, for two of the three research areas, Juno Therapeutics has the option to purchase up to three additional Development and Commercialization Licenses associated with other gene targets for an additional fee of approximately $2.5 million per target. In addition, Juno Therapeutics would be required to make certain milestone payments to the Company upon the achievement of specified development, regulatory and commercial events. More specifically, for the first product to achieve the associated event in each of the three research areas, the Company is eligible to receive up to a $77.5 million in development milestone payments and up to $80 million in regulatory milestone payments. In addition, the Company is eligible to receive additional development and regulatory milestone payments for subsequent products developed within each of the three research areas. Moreover, the Company is eligible for up to $75.0 million in commercial milestone payments associated with aggregate sales of all products within each of the three research areas. Development milestone payments are triggered upon the achievement of certain specified development criteria or upon initiation of a defined

13


 

phase of clinical research for a product candidate. Regulatory milestone payments are triggered upon approval to market a product candidate by the United States Food and Drug Administration (“FDA”) or other global regulatory authorities. Commercial milestone payments are triggered when an approved pharmaceutical product reaches certain defined levels of net sales by the licensee.

 

In addition, to the extent any of the product candidates covered by the licenses conveyed to Juno Therapeutics are commercialized, the Company would be entitled to receive tiered royalty payments of low double digits based on a percentage of net sales. Royalty payments are subject to certain reductions, including for any royalty payments required to be made by Juno Therapeutics related to a third‑party’s intellectual property rights, subject to an aggregate minimum floor. Royalties are due on a licensed product‑by‑licensed product and country‑by‑country basis from the date of the first commercial sale of each product in a country until the later of: (i) the tenth anniversary of the first commercial sale of such licensed product in such country and (ii) the expiration date in such country of the last to expire valid claim within the licensed intellectual property covering the manufacture, use or sale of such licensed product in such country. In May 2016, the Company achieved a $2.5 million milestone under the collaboration resulting from technical progress in a research program to create engineered T cells with CARs and TCRs to treat cancer. Due to the uncertainty of pharmaceutical development and the high historical failure rates generally associated with drug development, no additional milestone or royalty payments may ever be received from Juno Therapeutics. As of September 30, 2016, the next potential milestone payment that the Company may be entitled to receive under the agreement is a substantive milestone payment of $2.5 million for the achievement of certain development criteria. The Company would recognize the milestone payment as revenue upon achievement. There are no cancellation, termination or refund provisions in the Collaboration Agreement that contain material financial consequences to the Company.

 

Unless earlier terminated, the Collaboration Agreement will continue in full force and effect, on a product‑by‑product and country‑by‑country basis until the date no further payments are due to the Company from Juno Therapeutics. Either party may terminate the Collaboration Agreement if the other party has materially breached or defaulted in the performance of any of its material obligations and such breach or default continues after the specified cure period. Either party may terminate the Collaboration Agreement in the event of the commencement of any proceeding in or for bankruptcy, insolvency, dissolution or winding up by or against the other party that is not dismissed or otherwise disposed of within a specified time period. Juno Therapeutics may terminate the Collaboration Agreement for convenience upon not less than six months prior written notice to the Company. The Company may terminate the Collaboration Agreement in the event that Juno Therapeutics brings, assumes, or participates in, or knowingly, willfully or recklessly assists in bringing a dispute or challenge against the Company related to its intellectual property.

 

Termination of the Collaboration Agreement for any reason does not release either party from any liability which, at the time of such termination, has already accrued to the other party or which is attributable to a period prior to such termination nor preclude either party from pursuing any rights and remedies it may have under the agreement or at law or in equity with respect to any breach of the Collaboration Agreement. If Juno Therapeutics terminates the Collaboration Agreement as a result of the Company’s uncured material breach or default, then: (i) the licenses and rights conveyed to Juno Therapeutics will continue as set forth in the agreement, (ii) Juno Therapeutics’ obligations related to milestones and royalties will continue as set forth in the agreement and (iii) Juno Therapeutics’ rights to prosecute, maintain and enforce certain intellectual property rights will continue as set forth in the agreement. If Juno Therapeutics terminates the Collaboration Agreement for convenience or if the Company terminates the Collaboration Agreement as a result of Juno Therapeutics’ uncured material breach or default, then the licenses conveyed to Juno will terminate.

 

Accounting Analysis

 

The Company evaluated the Collaboration Agreement in accordance with the provisions of ASC, Topic 605-25Revenue Recognition—Multiple Element Arrangements. The Company’s arrangement with Juno Therapeutics contains the following deliverables: (i) research and development services during the Initial Research Program Term (the “R&D Services Deliverable”), (ii) the Research License, (iii) the Development and Commercialization Licenses related to each of the three research areas (each, the “Development and Commercialization License Deliverable” for the respective research area), (iv) significant and incremental discount related to the option to purchase up to three additional

14


 

Development and Commercialization Licenses for two of the research areas (each, the “Discount Deliverable” for the associated option) and (v) JRC services during the Initial Research Program Term (the “JRC Deliverable”).

 

The Company has determined that the options to purchase additional development and commercialization licenses within two of the research program areas related to other gene targets are substantive options. Juno Therapeutics is not contractually obligated to exercise the options. Moreover, as a result of the uncertain outcome of the discovery, research and development activities, there is significant uncertainty as to whether Juno Therapeutics will decide to exercise its option for any additional gene targets within either of the two applicable research areas. Consequently, the Company is at risk with regard to whether Juno Therapeutics will exercise the options. However, the Company has determined that the options to purchase additional development and commercialization licenses with respect to other gene targets within the two applicable research program areas are priced at a significant and incremental discount. As a result, the Company has concluded that the discounts to purchase development and commercialization licenses for up to three additional gene targets within both of the research areas represent separate elements in the arrangement at inception. Accordingly, the deliverables identified at inception of the arrangement include six separate deliverables related to the significant and incremental discount inherent in the pricing of the option to purchase up to three additional development and commercialization licenses for two of the research areas included within the research program.

 

The Company has concluded that the Research License deliverable does not qualify for separation from the R&D Services Deliverable. As it relates to the assessment of standalone value, the Company has determined that Juno Therapeutics cannot fully exploit the value of the Research License deliverable without receipt of the R&D Services Deliverable. This is primarily due to the fact that Juno Therapeutics must rely upon the Company to provide the research and development services included in the research plan because the services incorporate technology that is proprietary to the Company. The services to be provided by the Company involve unique skills and specialized expertise, particularly as it relates to genome editing technology that is not available in the marketplace. Accordingly, Juno Therapeutics must obtain the research and development services from the Company which significantly limits the ability for Juno Therapeutics to utilize the Research License for its intended purpose on a standalone basis. Therefore, the Research License deliverable does not have standalone value from the R&D Services Deliverable. As a result, the Research License deliverable and the R&D Services Deliverable have been combined as a single unit of accounting (the “R&D Services Unit of Accounting”). Conversely, the Company has concluded that each of the other deliverables identified at the inception of the arrangement has standalone value from each of the other elements based on their nature. Factors considered in this determination included, among other things, the capabilities of the collaboration partner, whether any other vendor sells the item separately, whether the value of the deliverable is dependent on the other elements in the arrangement, whether there are other vendors that can provide the items and if the customer could use the item for its intended purpose without the other deliverables in the arrangement. Additionally, the Collaboration Agreement does not include a general right of return. Accordingly, each of the other deliverables included in the Juno Therapeutics arrangement qualifies as a separate unit of accounting.

 

Therefore, the Company has identified eleven units of accounting in connection with its obligations under the collaboration arrangement with Juno Therapeutics as follows: (i) the R&D Services Unit of Accounting, (ii) three units of accounting related to the Development and Commercialization Licenses for each of the three research areas, (iii) six units of accounting related to each of the Discount Deliverables, and (iv) the JRC Deliverable.

 

The Company has determined that neither vendor specific objective evidence of selling price nor third-party evidence of selling price is available for any of the units of accounting identified at inception of the arrangement with Juno Therapeutics. Accordingly, the selling price of each unit of accounting was determined based on the Company’s best estimate of selling price (“BESP”). The Company developed the BESP for all of the units of accounting included in the Collaboration Agreement with the objective of determining the price at which it would sell such an item if it were to be sold regularly on a standalone basis. The Company developed the BESP for the R&D Services Unit of Accounting and the JRC Deliverable primarily based on the nature of the services to be performed and estimates of the associated effort and cost of the services, adjusted for a reasonable profit margin that would be expected to be realized under similar contracts. The Company developed the BESP for each of the Development and Commercialization License units of accounting based on the probability‑weighted present value of expected future cash flows associated with each license related to each specific research area. In developing such estimate, the Company also considered applicable market conditions and relevant entity‑specific factors, including those factors contemplated in negotiating the agreement,

15


 

probability of success and the time needed to commercialize a product candidate pursuant to the associated license. The Company developed the BESP for each of the Discount Deliverables based on the estimated value of the associated in‑the‑money options. In developing such estimate, the Company considered the period to exercise the option, an appropriate discount rate and the likelihood that a market participant who was entitled to the discount would exercise the option.

 

Allocable arrangement consideration at inception is comprised of: (i) the up‑front payment of $25.0 million, (ii) the research support of $20.0 million and (iii) payments related to specialized materials costs of $2.0 million. The research support of $20.0 million and payments related to specialized materials costs of $2.0 million represent contingent revenue features because the Company’s retention of the associated arrangement consideration is dependent upon its future performance of research support services and development of specialized materials. The aggregate allocable arrangement consideration of $47.0 million was allocated among the separate units of accounting using the relative selling price method as follows: (i) R&D Services Unit of Accounting: $16.7 million, (ii) Development and Commercialization License for the first research area: $9.3 million, (iii) Development and Commercialization License for the second research area: $15.4 million, (iv) Development and Commercialization License for the third research area: $0.2 million, (v) the first Discount Deliverable for the first research area: $0.7 million, (vi) the second Discount Deliverable for the first research area: $0.4 million, (vii) the third Discount Deliverable for the first research area: $0.2 million, (viii) the first Discount Deliverable for the second research area: $2.0 million, (ix) the second Discount Deliverable for the second research area: $1.3 million, and (x) the third Discount Deliverable for the second research area: $0.8 million. No amounts were allocated to the JRC Deliverable because the associated BESP was determined to be de minimis. The amounts allocated to each of the development and commercialization licenses are based on the respective BESP calculations, which reflect the level of risk and expected probability of success inherent in the nature of the associated research area.

 

The Company will recognize revenue related to amounts allocated to the R&D Services Unit of Accounting as the underlying services are performed. The Company will recognize revenue related to amounts allocated to each of the Development and Commercialization Licenses upon delivery of the associated license, assuming the research services are substantially complete at the time the license is delivered. The rights to be conveyed to Juno Therapeutics pursuant to each of the Development and Commercialization Licenses extend exclusively to an individual target or product, as applicable; therefore, delivery is deemed to occur upon the designation by Juno Therapeutics of the specific target or product, as applicable, whereupon the license becomes effective. The Company will recognize revenue related to amounts allocated to each of the Discount Deliverables upon the earlier of exercise of the associated option or upon lapsing of the underlying right, if the respective option expires unexercised.

 

The Company has evaluated all of the milestones that may be received in connection with the Juno Therapeutics arrangement. In evaluating if a milestone is substantive, the Company assesses whether: (i) the consideration is commensurate with either the Company’s performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the Company’s performance to achieve the milestone, (ii) the consideration relates solely to past performance, and (iii) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. All development and regulatory milestones are considered substantive on the basis of the contingent nature of the milestone, specifically reviewing factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the milestone as well as the level of effort and investment required. Accordingly, such amounts will be recognized as revenue in full in the period in which the associated milestone is achieved, assuming all other revenue recognition criteria are met. All commercial milestones will be accounted for in the same manner as royalties and recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met. The Company will recognize royalty revenue in the period of sale of the related product(s), based on the underlying contract terms, provided that the reported sales are reliably measurable and the Company has no remaining performance obligations, assuming all other revenue recognition criteria are met.

 

During the three months ended September 30, 2016 and 2015, the Company recognized revenue totaling approximately $0.8 million and $0.7 million, respectively, with respect to the collaboration with Juno Therapeutics. During the nine months ended September 30, 2016 and 2015, the Company recognized revenue totaling approximately $4.9 million ($2.5 million of which related to the first milestone payment) and $0.8 million, respectively, with respect to

16


 

the collaboration with Juno Therapeutics. The revenue is classified as collaboration and other research and development revenue in the accompanying condensed consolidated statement of operations. As of September 30, 2016, there was approximately $25.8 million of deferred revenue related to the Company’s collaboration with Juno Therapeutics, all of which is classified as long‑term in the accompanying condensed consolidated balance sheet. In addition, as of September 30, 2016, the Company has recorded accounts receivable of $1.0 million related to reimbursable research and development costs under the Collaboration Agreement for activities performed during the third quarter of 2016.

 

Cystic Fibrosis Foundation Therapeutics, Inc. Award Agreement

 

In May 2016, the Company entered into an award agreement (the “CF Award Agreement”) with the Cystic Fibrosis Foundation Therapeutics, Inc. (“CFFT”), a non-profit drug discovery and development affiliate of the Cystic Fibrosis Foundation, pursuant to which it received a development award for up to $5.0 million in funding over the agreement’s three year term (the “Award”). The funding from the Award is supporting the Company’s cystic fibrosis development program and related technology research and development. The Company is required to contribute additional funds to the program in an amount equal to the funds contributed by CFFT under the agreement.

 

Pursuant to the terms of the CF Award Agreement, the Company is obligated to make royalty payments to CFFT contingent upon commercialization of an editing package, a delivery package, or a combination thereof, for modification of the cystic fibrosis transmembrane conductance regulator gene, the research or development of which was derived in whole or in part from the development program (a “CF Product”), including payments each equal to two times the amount the Company receives under the agreement, following the first commercial sale of a CF Product in the United States and the European Union, respectively. The Company is also obligated to make a payment to CFFT equal to two times the amount the Company receives under the CF Award Agreement, due in the first calendar year in which the aggregate cumulative net sales of a CF Product exceed $100 million. The payments due will not, in the aggregate, exceed ten percent of net sales of a CF Product in a year; the remaining obligation will be carried forward to subsequent year(s) until the payment of any such remaining payment does not, in the aggregate, exceed ten percent of net sales of a CF Product. The Company is also obligated to make payments to CFFT of up to two times the Award amount if the Company transfers, sells or licenses the development program technology, or if the Company enters into a change of control transaction, with such payments to be credited against the payments due upon commercialization. Following the first year anniversary of the effective date of the agreement, either party can terminate the agreement without cause by providing 90 days’ notice. The Company’s payment obligations survive the termination of the CF Award Agreement.

 

During the nine months ended September 30, 2016, the Company recognized revenue of $0.2 million with respect to the Award. The revenue is classified as collaboration and other research and development revenue in the accompanying condensed consolidated statement of operations.

 

Adverum Biotechnologies, Inc. Collaboration, Option, and License Agreement

 

In August 2016, the Company entered into an agreement with Adverum Biotechnologies, Inc. (“Adverum”) to explore the delivery of genome editing medicines to treat up to five inherited retinal diseases. Under the terms of the agreement, the Company paid an upfront non-refundable fee of $1.0 million to evaluate Adverum’s next generation adeno-associated viral vectors (“AAVs”) for use in clinical development. The Company will support all preclinical activities related to this agreement, including research and development activities to be performed by Adverum, with $0.5 million of the upfront fee being creditable against this funding obligation. Accordingly, the Company has deferred and capitalized $0.5 million of the $1.0 million upfront fee as an advance payment for future research and development activities which the Company believes will be incurred in the future. The capitalized amount will be expensed as research and development expenses in the Company’s consolidated statements of operations as the related services are performed. The Company expensed the remaining $0.5 million as research and development expense in the accompanying statement of operations during the three and nine months ended September 30, 2016.

 

Additionally, the Company may pay, at its discretion, an additional fee of $1.0 million, per exercise, to exercise an option to receive an exclusive license to Adverum’s next generation AAVs for use in an indication chosen under the agreement. Adverum is also entitled to receive development and regulatory milestone payments up to a maximum of a mid-single digit millions of dollars per license based on the achievement of specific events for a product candidate that

17


 

includes an Adverum vector (“Adverum Product”) and a low to mid-single digit millions of dollars based on the achievement of specific events for a product candidate that doesn’t include an Adverum vector (“Non-Adverum Product”). Adverum is also entitled to receive certain commercial milestone payments for Adverum Products up to a maximum amount of a low double digit million dollar amount per product. The Company is also obligated to pay Adverum single digit to low double digit percentage royalties on net sales of Adverum Products and low single digit percentage royalties on sales of Non-Adverum Products sold in applicable territories during the royalty term.

 

Other Agreements

 

Licensing Agreements

 

The Company is a party to a number of license agreements under which the Company licenses patents, patent applications and other intellectual property from third parties. The Company anticipates entering into these types of license agreements in the future. The Company believes the following agreements are significant to the business:

 

The General Hospital Corporation License Agreements—In August 2014, the Company entered into an agreement to license certain patent rights owned or co‑owned by MGH. Consideration for the granting of the license included the payment of an upfront license fee of $0.1 million, the issuance of 66,848 shares of the Company’s common stock, which was based on 0.5% of the Company’s outstanding stock on a fully diluted basis, and the right to receive future issuances of shares of common stock to maintain MGH’s ownership following the third tranche of the Company’s Series A redeemable convertible preferred stock financing (e.g. anti‑dilution protection liability), which was settled in June 2015. MGH is entitled to nominal annual license fees and to receive future clinical, regulatory and commercial milestone payments aggregating to a maximum of $3.7 million and aggregate of $1.8 million upon the occurrence of certain sales milestones. The Company is also obligated to pay MGH low single digit percentage royalties on net sales of products for the prevention or treatment of human disease, and ranging from low single digit to low double digit percentage royalties on net sales of other products and services made by the Company, its affiliates or its sublicenses. The royalty percentage depends on the product and service, and whether such licensed product or licensed service is covered by a valid claim within the certain patent rights that the Company licenses from MGH.

 

In August 2016, the Company entered into the 2016 MGH Agreement to license certain patent rights owned or co-owned by MGH (the “Additional MGH Patent Rights”). Consideration for granting the license included the payment of an upfront nonrefundable license fee of $0.8 million, which the Company recorded as research and development expense in the accompanying consolidated statement of operations. Under the 2016 MGH Agreement, MGH is entitled to nominal annual license fees, clinical and regulatory milestone payments totaling less than $1.0 million in the aggregate per licensed product up to four licensed products or processes to achieve the specified clinical and regulatory milestones, and commercial sales milestone payments totaling up to $4.9 million in the aggregate, consisting of milestone payments due upon the first commercial sales for up to four licensed products or processes and milestone payments due upon annual net sales of products or processes meeting specified thresholds. The Company is also obligated to pay MGH royalties of less than 1% on net sales of products and processes for the prevention or treatment of human disease, and royalties of a low single-digit percentage on net sales of products and processes for the prevention or treatment of a non-human animal disease, made by the Company, its affiliates, or its sublicensees. The royalty percentages that the Company is obligated to pay are subject to reduction if at the time of sale the applicable product or process is not covered by a valid claim within the Additional MGH Patent Rights. Under the 2016 MGH Agreement, the Company is obligated to reimburse MGH for all patent costs and future reasonable costs associated with the prosecution, filing, and maintenance of the licensed patents.

 

MGH is also entitled under the 2016 MGH Agreement to receive MGH Success Payments of up to $6.0 million in the event the Company’s market capitalization reaches specified thresholds exceeding a low ten digit dollar amount, on or prior to the expiration or termination of the 2016 MGH Agreement (or if earlier, a Company sale) (“Market Cap Success Payments”) or a Company sale for consideration in excess of those thresholds (“Company Sale Success Payments”).  Additional Market Cap Success Payments become payable, and the amount of potential Company Sale Success Payments would increase further,  if the Company’s market capitalization reaches additional higher thresholds and the Company has at least one product candidate that is covered by a claim of an Additional MGH Patent Right and that (i) is the subject of a Phase 1 clinical trial of which the Company or an affiliate or sublicensee of the Company is the

18


 

sponsor, (ii) was the subject of a Phase 1 clinical trial of which the Company or an affiliate or sublicensee of the Company was the sponsor with the Company having determined to conduct a subsequent clinical trial with respect to such product candidate, or (iii) has been approved for sale in either the United States or European Union.  Market Cap Success Payments are payable in cash or shares of Company common stock at the Company’s discretion, and Company Sale Success Payments are payable solely in cash. For additional information regarding the 2016 MGH Agreement, see Note 6 to these condensed consolidated financial statements.

 

The Broad Institute, Inc., The President and Fellows of Harvard College, and Massachusetts Institute of Technology License Agreement—In October 2014, the Company entered into an agreement with Harvard and Broad to license certain patent rights owned or co‑owned by, or among, Harvard, Massachusetts Institute of Technology (“MIT”), and the Broad (collectively, the “Institutions”). Consideration for the granting of the license included the payment of an upfront license issuance fee of $0.2 million, the issuance of 561,531 shares of the Company’s common stock, which was equal to 4.2% of the Company’s outstanding stock on a fully diluted basis and, the right to receive future issuances of shares of common stock to maintain the Institutions’ ownership following the third tranche of the Series A Preferred Stock financing (e.g. anti‑dilution protection liability), which was settled in June 2015. The Institutions are collectively entitled to receive clinical and regulatory milestone payments totaling up to $14.8 million in the aggregate per licensed product approved in the United States, European Union, and Japan for the treatment of a human disease that afflicts at least a specified number of patients in the aggregate in the United States. If the Company undergoes a change of control during the term of the license agreement, the clinical and regulatory milestone payments will be increased by a certain percentage in the mid‑double digits. The Company is also obligated to make additional payments to the Institutions, collectively, of up to an aggregate of $54.0 million upon the occurrence of certain sales milestones per licensed product for the treatment of a human disease that afflicts at least a specified number of patients in the aggregate in the United States. The Institutions are collectively entitled to receive clinical and regulatory milestone payments totaling up to $4.1 million in the aggregate per licensed product approved in the U.S. and at least one jurisdiction outside the U.S. for the treatment of a human disease based on certain criteria. The Company is also obligated to make additional payments to the Institutions, collectively, of up to an aggregate of $36.0 million upon the occurrence of certain sales milestones per licensed product for the treatment of a rare disease meeting certain criteria. The Institutions are entitled to receive from the Company nominal annual license fees and a mid‑single digit percentage royalties on net sales of products for the prevention or treatment of human disease, and ranging from low single digit to high single digit percentage royalties on net sales of other products and services, made by the Company, its affiliates, or its sublicensees. The royalty percentage depends on the product and service, and whether such licensed product or licensed service is covered by a valid claim within the certain patent rights that the Company licenses from the Institutions.

 

Duke University License Agreement—In October 2014, the Company entered into an exclusive license agreement with Duke University (“Duke”) to access intellectual property and technology related to the CRISPR/Cas9 and TALEN genome editing systems. In consideration for the granting of the license, the Company paid Duke an upfront fee of $0.1 million. Duke is entitled to receive clinical, regulatory, and commercial milestone payments totaling up to $0.6 million in the aggregate per licensed product. The Company is also obligated to pay to Duke nominal annual license fees and low single digit royalties based on annual net sales of licensed products and licensed services by the Company and its affiliates and sublicensees.

 

Each of the above license agreements obligates the Company to use commercially reasonable efforts to research, develop, and commercialize products for the prevention or treatment of human disease. The Company is also required to achieve certain development milestones within specific time periods. Each licensor has the right to terminate the license if the Company fails to achieve the development milestones. Each license agreement requires the Company to pay an annual license maintenance fee and reimburse the licensor for expenses associated with the prosecution and maintenance of the licensed patent rights.

 

The Company recorded the upfront issuance fees and the fair value of the common stock issued to the licensors as research and development expense (as the licenses do not have alternative future use) in accordance with ASC Topic 730, Research and Development. The anti‑dilutive protection obligation was classified as a liability and was recorded at its grant date fair value on the effective date of the respective agreements with the initial fair value being recorded to research and development expense as it represented additional consideration paid to the licensor in connection with the license agreement. The anti-dilution liability was settled in June 2015.

19


 

 

 

8.  Stock‑based compensation

 

Total compensation cost recognized for all stock‑based compensation awards in the condensed consolidated statements of operations and comprehensive loss was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2016

 

2015

    

2016

    

2015

 

Research and development

 

$

2,619

 

$

921

 

$

10,021

 

$

1,391

 

General and administrative

 

 

1,072

 

 

136

 

 

3,078

 

 

171

 

Total stock-compensation expense

 

$

3,691

 

$

1,057

 

$

13,099

 

$

1,562

 

 

Restricted Stock

 

From time to time, upon approval by the Company’s board of directors, certain employees and advisors have been granted restricted shares of common stock. These shares of restricted stock are subject to repurchase rights. Accordingly, the Company has recorded the proceeds from the issuance of restricted stock as a liability in the condensed consolidated balance sheets included as a component of accrued expenses or other long term liabilities based on the scheduled vesting dates. The restricted stock liability is reclassified into stockholders’ equity (deficit) as the restricted stock vests. A summary of the status of and changes in unvested restricted stock as of September 30, 2016 is as follows:

 

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

 

 

Average

 

 

 

 

 

Grant Date

 

 

 

 

 

Fair Value

 

 

 

Shares

 

Per Share

 

Unvested Restricted Common Stock as of December 31, 2015

 

1,596,853

 

$

0.0188

 

Issued

 

 

 

 —

 

Vested

 

(580,662)

 

$

0.0162

 

Unvested Restricted Common Stock as of September 30, 2016

 

1,016,191

 

$

0.0203

 

 

For the nine months ended September 30, 2016, the expense related to restricted stock awards granted to employees and non‑employees was $0 and $7.0 million, respectively. For the nine months ended September 30, 2015, the expense related to restricted stock awards granted to employees and non‑employees was $0 and $1.2 million, respectively.

 

As of September 30, 2016, the Company had no unrecognized stock‑based compensation expense related to its employee unvested restricted stock awards. As of September 30, 2016, the Company had unrecognized stock‑based compensation expense related to its non‑employee unvested restricted stock awards of $4.1 million which is expected to be recognized over the remaining weighted average vesting period of 0.8 years.

 

Stock Options

 

Certain of the Company’s stock option agreements allow for the exercise of unvested awards. During 2014, options to purchase 75,304 shares of common stock for $0.03 per share were exercised prior to their vesting. The unvested shares are subject to repurchase by the Company if the employees cease to provide service to the Company, with or without cause. As such, the Company does not treat the exercise of unvested options as a substantive exercise. The Company has recorded the proceeds from the exercise of unvested stock options as a liability in the condensed consolidated balance sheets as a component of accrued expenses or other long term liabilities based on the scheduled vesting dates. The liability for unvested common stock subject to repurchase is reclassified into stockholders’ equity (deficit) as the shares vest.

20


 

 

The following is a summary of stock option activity for the nine months ended September 30, 2016: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted Average

    

Remaining

    

Aggregate Intrinsic

 

 

 

Shares

 

Exercise Price

 

Contractual Life (years)

 

Value (in thousands)

 

Outstanding at December 31, 2015

 

1,713,385

 

$

6.31

 

9.6

 

$

15,580

 

Granted

 

1,450,441

 

$

21.36

 

 

 

 

 

 

Exercised

 

(60,357)

 

$

3.47

 

 

 

 

 

 

Cancelled

 

(12,659)

 

$

9.71

 

 

 

 

 

 

Outstanding at September 30, 2016

 

3,090,810

 

$

13.41

 

9.1

 

$

11,639

 

Vested and expected to vest at September 30, 2016

 

3,040,552

 

$

13.41

 

9.1

 

$

11,449

 

Exercisable at September 30, 2016

 

362,474

 

$

5.20

 

8.8

 

$

3,055

 

 

The table above reflects unvested stock options as exercised on the dates that the shares are no longer subject to repurchase. The Company had 26,301 and 39,338 shares of unvested restricted common stock outstanding at September 30, 2016 and December 31, 2015, respectively, resulting from the exercise of unvested stock options.

 

Using the Black‑Scholes option pricing model, the weighted average fair value of options granted to employees and directors during the three and nine months ended September 30, 2016 and 2015 was $15.01 and $4.71, respectively. The expense related to options granted to employees and directors was $4.0 million and $0.3 million for the nine months ended September 30, 2016 and 2015, respectively.

 

The fair value of each option issued to employees and directors was estimated at the date of grant using the Black‑Scholes option pricing model with the following weighted‑average assumptions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

September 30, 

 

 

September 30, 

 

 

 

 

2016

 

2015

 

    

2016

    

2015

 

 

Risk free interest rate

 

1.3

%  

1.8

%

 

1.4

%  

1.7

%

 

Expected dividend yield

 

 —

 

 —

 

 

 —

 

 

 

Expected term (in years)

 

6.25

 

6.25

 

 

6.25

 

6.25

 

 

Expected volatility

 

76.5

%  

79.2

%

 

78.9

%  

80.0

%

 

 

There were 100,000 options granted to persons other than employees and directors during the nine months ended September 30, 2016. For the three and nine months ended September 30, 2016 and 2015, the fair value of each option issued to persons other than employees and directors was estimated at the date of grant using the Black‑Scholes option pricing model with the weighted‑average assumptions set forth in the table below:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

September 30, 

 

 

 

2016

 

2015

 

    

2016

    

2015

 

Risk free interest rate

 

1.6

%  

2.2

%

 

1.6

%

2.2

%

Expected dividend yield

 

 

 

 

 

 

Expected term (in years)

 

10.0

 

10.0

 

 

10.0

 

9.8

 

Expected volatility

 

76.5

%  

80.0

%

 

76.5

%

79.6

%

 

As of September 30, 2016, the Company had unrecognized stock‑based compensation expense related to its employee stock options of $22.8 million which the Company expects to recognize over the remaining weighted average vesting period of 3.0 years.

 

9. Net loss per share

 

Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period, without consideration for potentially

21


 

dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury stock and if converted methods. Contingently issuable shares are included in the calculation of basic loss per share as of the beginning of the period in which all the necessary conditions have been satisfied. Contingently issuable shares are included in diluted loss per share based on the number of shares, if any, that would be issuable under the terms of the arrangement if the end of the reporting period was the end of the contingency period, if the results are dilutive.

 

For purposes of the diluted net loss per share calculation, stock options and warrants are considered to be common stock equivalents, but they were excluded from the Company’s calculation of diluted net loss per share allocable to common stockholders because their inclusion would have been anti-dilutive. Therefore, basic and diluted net loss per share applicable to common stockholders was the same for all periods presented. Contingently issuable shares of common stock pursuant to the 2016 MGH Agreement (Note 6) are excluded from the calculation of basic and diluted net loss per share calculation as the Payment Conditions have not been satisfied.

 

Upon the closing of the IPO in February 2016, the Company sold 6,785,000 shares of common stock and issued an additional 24,929,709 shares of common stock in connection with the automatic conversion of its redeemable convertible preferred stock. The issuance of these shares resulted in a significant increase in the Company’s weighted-average shares outstanding for the nine months ended September 30, 2016 when compared to the comparable prior year period and is expected to continue to impact the year-over-year comparability of the Company’s net loss per share calculations for the next six months.

 

The following common stock equivalents were excluded from the calculation of diluted net loss per share allocable to common stockholders because their inclusion would have been anti-dilutive:

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 

 

 

    

 

2016

    

2015

 

Redeemable convertible preferred stock

 

 

 —

 

24,929,709

 

Warrant to purchase redeemable convertible preferred stock

 

 

 —

 

23,076

 

Unvested restricted common stock

 

 

1,016,191

 

1,809,639

 

Outstanding stock options

 

 

3,090,810

 

1,199,371

 

Total

 

 

4,107,001

 

27,961,795

 

 

 

 

 

 

 

 

10. Related‑party transactions

 

During the nine months ended September 30, 2016 and 2015, the Company paid a related party $1.3 million and $1.2 million in rent and facility-related fees, respectively. In addition, during the nine months ended September 30, 2015 the Company paid one of its investors $0.1 million in professional fees.

 

 

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the Securities and Exchange Commission on March 30, 2016 (the “2015 10-K”).

 

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by forward-looking statements. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the section entitled “Risk Factors” in Part II, Item 1A that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.

 

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q,and we do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

 

Overview

 

We are a leading genome editing company dedicated to treating patients with genetically defined diseases by correcting their disease‑causing genes. Our mission is to translate the promise of genome editing science into a broad class of transformative genomic medicines to benefit the greatest number of patients. To this end, we are developing a proprietary genome editing platform based on CRISPR/Cas9 technology. Our product development strategy is to target genetically defined diseases with an initial focus on debilitating illnesses where there are no approved treatments and where the genetic basis of disease is well understood. We are advancing discovery research programs, including programs to address genetic, infectious, and oncologic diseases of the liver, lung, blood, eye, and muscle. Our most advanced program is designed to address a specific genetic form of retinal degeneration called Leber Congenital Amaurosis type 10 (“LCA10”), a disease with no available therapies or potential treatments in clinical trials in either the United States or European Union. We aim to initiate a clinical trial in this program in 2017. In May 2015, we entered into a collaboration with Juno Therapeutics, Inc. (“Juno Therapeutics”), a leader in the emerging field of immuno‑oncology, to develop novel engineered T cell therapies for cancer.

 

Since our inception in September 2013, our operations have focused on organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio, assembling our core capabilities in genome editing, seeking to identify potential product candidates, and undertaking preclinical studies. All of our research programs are still in the preclinical or research stage of development and their risk of failure is high. We have not generated any revenue from product sales. We have funded our operations primarily through the initial public offering of our common stock (“IPO”), private placements of our preferred stock, an equipment loan, and payments received under our collaboration with Juno Therapeutics. From inception through September 30, 2016, we raised an aggregate of $294.4 million to fund our operations.

 

In February 2016, we completed our IPO and sold 6,785,000 shares of our common stock, including 885,000 shares of our common stock pursuant to the full exercise by the underwriters of an option to purchase additional shares, at a public offering price of $16.00 per share for an aggregate offering of approximately $108.6 million. We received

23


 

aggregate net proceeds from our IPO of approximately $97.5 million, after deducting underwriting discounts and commissions and other offering expenses payable by us.

 

Since inception, we have incurred significant operating losses. We incurred a net loss of $57.8 million for the nine months ended September 30, 2016. As of September 30, 2016, we had an accumulated deficit of $146.2 million. We expect to continue to incur significant expenses and operating losses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and from year to year. We anticipate that our expenses will increase substantially as we continue our current research programs and our preclinical development activities; seek to identify additional research programs and additional product candidates; initiate preclinical testing and clinical trials for any product candidates we identify and develop; maintain, expand, and protect our intellectual property portfolio, including, reimbursing our licensors for such expenses related to the intellectual property that we in-license from such licensors; further develop our genome editing platform; hire additional clinical, quality control, and scientific personnel; and incur additional costs associated with operating as a public company. We do not expect to be profitable for the year ending December 31, 2016 or the foreseeable future.

 

Financial Operations Overview

 

Revenue

 

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from product sales for the foreseeable future. In connection with entering into our collaboration with Juno Therapeutics in May 2015, we received an upfront payment of $25.0 million, and in May 2016, we received a milestone payment under the collaboration of $2.5 million. In addition, we will receive up to $22.0 million in research support over the five years of the collaboration and across the three programs under the collaboration, subject to adjustment in accordance with the terms of the agreement, of which, we have recognized $4.1 million to date and $2.4 million during the nine month period ended September 30, 2016.

 

For the nine month period ended September 30, 2016, we recognized $4.9 million of collaboration revenue related to our collaboration with Juno Therapeutics, including $2.5 million recognized during the second quarter in connection with the achievement of our first milestone under the collaboration, resulting from technical progress in a research program under the collaboration. For additional information about our revenue recognition policy related to the Juno Therapeutics collaboration, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Revenue” in our 2015 10-K.

 

In May 2016, we entered into an award agreement with Cystic Fibrosis Foundation Therapeutics, Inc. (“CFFT”), pursuant to which CFFT has agreed to pay us up to $5.0 million over the agreement’s three year term to support our cystic fibrosis development program and related technology research and development. Under the terms of the agreement, we are required to contribute additional funds to the program in an amount equal to the funds contributed by CFFT and to pay certain amounts to CFFT upon the achievement of specified events. For the nine month period ended September 30, 2016, we recognized $0.2 million of revenue related to our agreement with CFFT.

 

For the foreseeable future, we expect substantially all of our revenue will be generated from our collaboration with Juno Therapeutics, our agreement with CFFT and any other collaborations or agreements we may enter into.

 

Expenses

 

Research and Development Expenses

 

Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts and preclinical studies under our research programs, which include:

 

·

employee‑related expenses including salaries, benefits, and stock‑based compensation expense;

 

24


 

·

costs of funding research performed by third parties that conduct research and development and preclinical activities on our behalf;

 

·

costs of purchasing lab supplies and non‑capital equipment used in our preclinical activities and in manufacturing preclinical study materials;

 

·

consultant fees;

 

·

facility costs including rent, depreciation, and maintenance expenses; and

 

·

fees for maintaining licenses under our third‑party licensing agreements.

 

Research and development costs are expensed as incurred. At this time, we cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete the development of any product candidates we may identify and develop. This is due to the numerous risks and uncertainties associated with developing such product candidates, including the uncertainty of:

 

·

successful completion of preclinical studies and Investigational New Drug‑enabling studies;

 

·

successful enrollment in, and completion of, clinical trials;

 

·

receipt of marketing approvals from applicable regulatory authorities;

 

·

establishing commercial manufacturing capabilities or making arrangements with third‑party manufacturers;

 

·

obtaining and maintaining patent and trade secret protection and non‑patent exclusivity;

 

·

launching commercial sales of the product, if and when approved, whether alone or in collaboration with others;

 

·

acceptance of the product, if and when approved, by patients, the medical community, and third‑party payors;

 

·

effectively competing with other therapies and treatment options;

 

·

a continued acceptable safety profile following approval;

 

·

enforcing and defending intellectual property and proprietary rights and claims; and

 

·

achieving desirable medicinal properties for the intended indications.

 

A change in the outcome of any of these variables with respect to the development of any product candidates we may develop would significantly change the costs, timing, and viability associated with the development of that product candidate.

 

Other than in connection with our collaboration with Juno Therapeutics and our agreement with CFFT, we do not track research and development costs on a program‑by‑program basis as we have not yet identified a product candidate for advancement into clinical trials. We plan to track research and development costs for any individual development program when we identify a product candidate from the program that we believe we can advance into clinical trials.

 

25


 

Research and development activities are central to our business model. We expect research and development costs to increase significantly for the foreseeable future as our development programs progress, including as we continue to support the preclinical studies for our LCA10 program as well as our other research programs.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of salaries and other related costs, including stock‑based compensation for personnel in executive, finance, accounting, business development, legal, and human resource functions. Other significant costs include corporate facility costs not otherwise included in research and development expenses, legal fees related to patent and corporate matters, and fees for accounting and consulting services.

 

We anticipate that our general and administrative expenses will increase in the future to support continued research and development activities and potential commercialization of any product candidates we identify and develop. These increases will include increased costs associated with the lease of a new facility for our headquarters and will likely include increased costs related to the hiring of additional personnel, and fees to outside consultants. We also anticipate increased expenses related to reimbursement of third‑party patent‑related expenses and increased expenses associated with being a public company, including costs for audit, legal, regulatory, and tax‑related services, director and officer insurance premiums, and investor relations costs. With respect to reimbursement of third-party patent-related expenses specifically, given the ongoing nature of the interference and opposition proceedings involving the patents licensed to us under our license agreement with The Broad Institute, Inc. (“Broad”) and the President and Fellows of Harvard College (“Harvard”) (described in more detail in Part II. Other Information. Item 1A. Risk Factors—Risks Related to Our Intellectual Property—Some of our in‑licensed patents are subject to priority disputes), we anticipate that our obligation to reimburse Broad and Harvard for expenses related to these proceedings during future periods will be substantial until such interference and opposition proceedings are resolved.

Other Income (Expense), Net

 

For the nine months ended September 30, 2016, other income (expense), net consisted primarily of interest income earned on our cash equivalents and government grant income, net of re-measurement losses associated with changes in the fair value of our liability for a warrant to purchase preferred stock. Upon the completion of our IPO, our outstanding warrant to purchase preferred stock converted into a warrant to purchase common stock and we reclassified the fair value of the warrant to additional paid-in capital. As a result, we ceased recognizing further re-measurement gains or losses associated with the warrant after the first quarter of 2016.

 

For the nine months ended September 30, 2015, other income (expense), net consisted primarily of re‑measurement losses associated with changes in the fair value of tranche rights associated with our Series A‑1 preferred stock, warrant liability associated with the warrant we issued to our equipment loan lender, and the anti‑dilutive protection liability associated with our issuance of common stock to certain licensors. Other expenses also included interest expense and the amortization of deferred financing costs associated with our equipment loan. As a result of the settlement of the tranche rights and anti-dilutive protection rights in June 2015, we ceased recognizing re-measurement gains and losses associated with those rights after the second quarter of 2015.

 

Critical Accounting Policies and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of our condensed consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. We base our estimates on historical experience, known trends and events, and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts, and experience. The effects of material revisions in estimates, if any, will be reflected in the condensed consolidated financial statements prospectively from the date of change in estimates.

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In the first quarter of 2016, we began recording certain estimated construction costs incurred and reported to us by a landlord as an asset and corresponding construction financing lease obligation on our condensed consolidated balance sheets. Construction was completed in October 2016 and we considered the requirements for sale-leaseback accounting treatment, which included an evaluation of whether all risks of ownership had transferred back to the landlord as evidenced by a lack of continuing involvement in the leased property. We determined that the arrangement did not qualify for sale-leaseback accounting treatment, the building asset would remain on our balance sheet at its historical cost, and such asset would be depreciated over its estimated useful life. For additional information, see Note 6 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

 

In August 2016, we entered into an exclusive patent license agreement (the “2016 MGH Agreement”) with The General Hospital Corporation, d/b/a Massachusetts General Hospital (“MGH”), pursuant to which we granted certain share-based success payment rights to MGH. Pursuant to the terms of such license, we are required to make certain success payments to MGH, payable in cash or common stock, if and when, our market capitalization reaches specified thresholds or upon a sale of our company for consideration in excess of those thresholds, subject to certain limitations (the “MGH Success Payments”). For additional information regarding the 2016 MGH Agreement, see Notes 6 and 7 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. The MGH Success Payments were accounted for under the provisions of Financial Accounting Standards Board Accounting Standards Codification (“ASC”), Topic 505-50, Equity-Based Payments to Non-Employees, and a liability and related expense will be recorded only upon the achievement of the market capitalization thresholds or a sale of our business for consideration in excess of such thresholds.

 

There have been no material changes to our critical accounting policies from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2015 10-K.

 

Results of Operations

 

Comparison of the Three Months ended September 30, 2016 and 2015

 

The following table summarizes our results of operations for the three months ended September 30, 2016 and 2015, together with the changes in those items in dollars (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

September 30, 

 

 

 

 

 

    

2016

    

2015

    

Dollar Change

 

Collaboration and other research and development revenues

 

$

962

 

$

670

 

$

292

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

10,832

 

 

3,850

 

 

6,982

 

General and administrative

 

 

11,295

 

 

4,202

 

 

7,093

 

Total operating expenses

 

 

22,127

 

 

8,052

 

 

14,075

 

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

Other income, net

 

 

3

 

 

21

 

 

(18)

 

Interest income (expense), net

 

 

142

 

 

(44)

 

 

186

 

Total other income (expense), net

 

 

145

 

 

(23)

 

 

168

 

Net loss

 

$

(21,020)

 

$

(7,405)

 

$

(13,615)

 

 

Collaboration and other research and development revenues

 

Collaboration and other research and development revenues were $1.0 million for the three months ended September 30, 2016 and consisted of $0.8 million of revenue recognized pursuant to our collaboration with Juno Therapeutics and $0.2 million of revenue recognized pursuant to our agreement with CFFT. Collaboration and other research and development revenues were $0.7 million for the three months ended September 30, 2015 and consisted of revenue recognized pursuant to our collaboration with Juno Therapeutics.

 

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Research and Development Expenses

 

Research and development expenses increased by $6.9 million, to $10.8 million for the three months ended September 30, 2016 from $3.9 million for the three months ended September 30, 2015. The $6.9 million increase was due to a $2.8 million increase in employee and non-employee related expenses, including stock-based compensation resulting from an increase in the size of our workforce, a $2.2 million increase in our process and platform development expenses due to increased research activity, a $1.1 million increase in facility-related costs as a result of additional office and laboratory space, and an increase of $0.8 million for certain license fees and expenses.

 

The following table summarizes our research and development expenses for the three months ended September 30, 2016 and September 30, 2015, together with the changes in those items in dollars (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

September 30, 

 

 

 

 

 

    

2016

    

2015

    

Dollar Change

 

Employee and non-employee related expenses

 

$

5,243

 

$

2,394

 

$

2,849

 

Process and platform development expenses

 

 

3,223

 

 

1,020