75

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2019

OR

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

For the transition period from ______________ to ______________

Commission File Number: 001-38542

 

Kezar Life Sciences, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

47-3366145

(State or other jurisdiction of

incorporation or organization)

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

4000 Shoreline Court, Suite 300

South San Francisco, CA, 94080

(650) 822-5600

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

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

Title of each class

Trading symbol

Name of each exchange on which registered

Common Stock, $0.001 par value

KZR

The Nasdaq Stock Market LLC

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

As of August 2, 2019, the registrant had 19,137,645 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

2

 

Condensed Consolidated Balance Sheets

2

 

Condensed Consolidated Statements of Operations

3

 

Condensed Consolidated Statements of Comprehensive Loss

4

 

Condensed Consolidated Statement of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

5

 

Condensed Consolidated Statements of Cash Flows

7

 

Notes to Unaudited Condensed Consolidated Financial Statements

8

Item 2.

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

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

Item 4.

Controls and Procedures

25

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

25

Item 1A.

Risk Factors

25

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

60

Item 3.

Defaults Upon Senior Securities

60

Item 4.

Mine Safety Disclosures

60

Item 5.

Other Information

60

Item 6.

Exhibits

61

 

 

 

 

 

i


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “should,” “would,” “potential,” “project,” “plan,” “expect,” “seek,” “should,” “target” or similar expressions, or the negative or plural of these words or expressions. These forward-looking statements include statements concerning the following:   

 

our plans to develop and commercialize our product candidates;

 

the initiation, timing, progress and expected results of our current and future clinical trials and our research and development programs;

 

our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;

 

our ability to successfully acquire or in-license additional product candidates or other technology on reasonable terms;

 

our ability to maintain and establish collaborations or strategic relationships or obtain additional funding;

 

the timing and likelihood of obtaining regulatory approval of our current and future product candidates;

 

our expectations regarding the potential market size and the rate and degree of market acceptance of such product candidates;

 

our ability to fund our working capital requirements and expectations regarding the sufficiency of our capital resources;

 

the implementation of our business model and strategic plans for our business and product candidates;

 

the scope of protection we are able to establish and maintain for intellectual property rights and the duration of our patent rights covering our product candidates;

 

developments or disputes concerning our intellectual property or other proprietary rights;

 

the scalability and commercial viability of our manufacturing methods and processes;

 

our expectations regarding government and third-party payor coverage and reimbursement;

 

our ability to compete in the markets for our product candidates;

 

the impact of government laws and regulations;

 

developments relating to our competitors and our industry; and

 

the factors that may impact our financial results.

These statements are only current predictions and are subject to known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. We discuss many of these risks in greater detail under the heading “Risk Factors” and elsewhere in this report. You should not rely upon forward-looking statements as predictions of future events.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we are under no duty to update or revise any of the forward-looking statements in this report, whether as a result of new information, future events or otherwise, after the date of this report.

Unless the context otherwise requires, the terms “Kezar,” “Kezar Life Sciences,” “the Company,” “we,” “us,” “our” and similar references in this Quarterly Report on Form 10-Q refer to Kezar Life Sciences, Inc. and our wholly owned Australian subsidiary, Kezar Life Sciences Australia Pty Ltd.

 


 

1


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

KEZAR LIFE SCIENCES, INC.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

 

 

June 30, 2019

 

 

December 31, 2018

 

 

 

(Unaudited)

 

 

(Note 2)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,031

 

 

$

24,182

 

Marketable securities

 

 

80,392

 

 

 

83,250

 

Prepaid expenses

 

 

1,653

 

 

 

1,884

 

Other current assets

 

 

1,160

 

 

 

489

 

Total current assets

 

 

96,236

 

 

 

109,805

 

Property and equipment, net

 

 

4,713

 

 

 

4,595

 

Operating lease right-of-use asset

 

 

4,036

 

 

 

 

Other assets

 

 

282

 

 

 

282

 

Total assets

 

$

105,267

 

 

$

114,682

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

955

 

 

$

193

 

Accrued liabilities

 

 

2,858

 

 

 

2,678

 

Operating lease liabilities, current

 

 

835

 

 

 

 

Deferred rent, current

 

 

 

 

 

354

 

Other liabilities, current

 

 

87

 

 

 

112

 

Total current liabilities

 

 

4,735

 

 

 

3,337

 

Operating lease liabilities, noncurrent

 

 

5,929

 

 

 

 

Deferred rent

 

 

 

 

 

2,548

 

Total liabilities

 

 

10,664

 

 

 

5,885

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 125,000,000 shares authorized as of June 30, 2019

   (unaudited) and December 31, 2018; 19,132,645 and 19,114,421 shares issued and

   outstanding as of June 30, 2019 (unaudited) and December 31, 2018, respectively

 

 

19

 

 

 

19

 

Preferred stock, $0.001 par value, 10,000,000 shares authorized as of

   June 30, 2019 (unaudited) and December 31, 2018; zero shares issued and

   outstanding as of June 30, 2019 (unaudited) and December 31, 2018

 

 

 

 

 

 

Additional paid-in capital

 

 

160,295

 

 

 

158,176

 

Accumulated other comprehensive loss

 

 

(156

)

 

 

(203

)

Accumulated deficit

 

 

(65,555

)

 

 

(49,195

)

Total stockholders' equity

 

 

94,603

 

 

 

108,797

 

Total liabilities and stockholders' equity

 

$

105,267

 

 

$

114,682

 

 

See accompanying notes to the unaudited interim condensed consolidated financial statements

 

 

2


KEZAR LIFE SCIENCES, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share amounts)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

6,925

 

 

$

5,228

 

 

$

12,852

 

 

$

8,800

 

General and administrative

 

 

2,430

 

 

 

1,722

 

 

 

4,812

 

 

 

3,236

 

Total operating expenses

 

 

9,355

 

 

 

6,950

 

 

 

17,664

 

 

 

12,036

 

Loss from operations

 

 

(9,355

)

 

 

(6,950

)

 

 

(17,664

)

 

 

(12,036

)

Interest income

 

 

637

 

 

 

175

 

 

 

1,304

 

 

 

314

 

Net loss

 

$

(8,718

)

 

$

(6,775

)

 

$

(16,360

)

 

$

(11,722

)

Net loss per common share, basic and diluted

 

$

(0.46

)

 

$

(3.31

)

 

$

(0.86

)

 

$

(8.35

)

Weighted-average shares used to compute net loss per common

   share, basic and diluted

 

 

19,073,830

 

 

 

2,044,027

 

 

 

19,058,263

 

 

 

1,404,392

 

 

See accompanying notes to the unaudited interim condensed consolidated financial statements

 

3


KEZAR LIFE SCIENCES, INC.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net loss

 

$

(8,718

)

 

$

(6,775

)

 

$

(16,360

)

 

$

(11,722

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(49

)

 

 

14

 

 

 

(41

)

 

 

(9

)

Unrealized gain on marketable securities

 

 

23

 

 

 

 

 

 

88

 

 

 

 

Total other comprehensive income (loss), net of tax

 

 

(26

)

 

 

14

 

 

 

47

 

 

 

(9

)

Comprehensive loss

 

$

(8,744

)

 

$

(6,761

)

 

$

(16,313

)

 

$

(11,731

)

 

See accompanying notes to the unaudited interim condensed consolidated financial statements

 

4


KEZAR LIFE SCIENCES, INC.

Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)

(Unaudited)

(In thousands, except share amounts)

 

 

 

REDEEMABLE

CONVERTIBLE

PREFERRED STOCK

 

 

 

COMMON STOCK

 

 

ADDITIONAL

PAID-IN

 

 

ACCUMULATED

OTHER

COMPREHENSIVE

 

 

ACCUMULATED

 

 

TOTAL

STOCKHOLDERS'

 

 

 

SHARES

 

 

AMOUNTS

 

 

 

SHARES

 

 

AMOUNTS

 

 

CAPITAL

 

 

LOSS

 

 

DEFICIT

 

 

EQUITY

 

Balance at December 31, 2018

 

 

 

 

 

 

 

 

 

19,114,421

 

 

$

19

 

 

$

158,176

 

 

$

(203

)

 

$

(49,195

)

 

$

108,797

 

Issuance of common stock upon exercise of stock options

 

 

 

 

 

 

 

 

 

4,000

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

4

 

Vesting related to shares of common stock issued pursuant to early exercises

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

 

 

 

 

 

 

 

 

12

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

901

 

 

 

 

 

 

 

 

 

901

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

73

 

 

 

 

 

 

73

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,642

)

 

 

(7,642

)

Balance at March 31, 2019

 

 

-

 

 

$

-

 

 

 

 

19,118,421

 

 

$

19

 

 

$

159,093

 

 

$

(130

)

 

$

(56,837

)

 

$

102,145

 

Issuance of common stock upon exercise of stock options

 

 

 

 

 

 

 

 

 

14,224

 

 

 

 

 

 

180

 

 

 

 

 

 

 

 

 

180

 

Vesting related to shares of common stock issued pursuant to early exercises

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

13

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,009

 

 

 

 

 

 

 

 

 

1,009

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(26

)

 

 

 

 

 

(26

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,718

)

 

 

(8,718

)

Balance at June 30, 2019

 

 

-

 

 

$

-

 

 

 

 

19,132,645

 

 

$

19

 

 

$

160,295

 

 

$

(156

)

 

$

(65,555

)

 

$

94,603

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REDEEMABLE

CONVERTIBLE

PREFERRED STOCK

 

 

 

COMMON STOCK

 

 

ADDITIONAL

PAID-IN

 

 

ACCUMULATED

OTHER

COMPREHENSIVE

 

 

ACCUMULATED

 

 

TOTAL

STOCKHOLDERS'

 

 

 

SHARES

 

 

AMOUNTS

 

 

 

SHARES

 

 

AMOUNTS

 

 

CAPITAL

 

 

LOSS

 

 

DEFICIT

 

 

EQUITY (DEFICIT)

 

Balance at December 31, 2017

 

 

12,263,126

 

 

$

77,931

 

 

 

 

948,578

 

 

$

1

 

 

$

451

 

 

$

(111

)

 

$

(26,028

)

 

$

(25,687

)

Issuance of common stock upon exercise of stock options, net of amount related to early exercised options

 

 

 

 

 

 

 

 

 

109,818

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

25

 

Vesting related to shares of common stock issued pursuant to early exercises

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17

 

 

 

 

 

 

 

 

 

17

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

126

 

 

 

 

 

 

 

 

 

126

 

 

5


Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23

)

 

 

 

 

 

(23

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,947

)

 

 

(4,947

)

Balance at March 31, 2018

 

 

12,263,126

 

 

$

77,931

 

 

 

 

1,058,396

 

 

$

1

 

 

$

619

 

 

$

(134

)

 

$

(30,975

)

 

$

(30,489

)

Conversion of redeemable convertible preferred stock to common stock

 

 

(12,263,126

)

 

 

(77,931

)

 

 

 

12,263,126

 

 

 

12

 

 

 

77,919

 

 

 

 

 

 

 

 

 

 

 

77,931

 

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

 

 

 

 

 

 

 

 

 

5,750,000

 

 

 

6

 

 

 

77,635

 

 

 

 

 

 

 

 

 

77,641

 

Issuance of common stock upon exercise of stock options, net of amount related to early exercised options

 

 

 

 

 

 

 

 

 

26,510

 

 

 

 

 

 

24

 

 

 

 

 

 

 

 

 

24

 

Issuance of common stock upon vesting of restricted stock units

 

 

 

 

 

 

 

 

 

10,189

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting related to shares of common stock issued pursuant to early exercises

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

7

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

988

 

 

 

 

 

 

 

 

 

988

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14

 

 

 

 

 

 

14

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,775

)

 

 

(6,775

)

Balance at June 30, 2018

 

 

-

 

 

$

-

 

 

 

 

19,108,221

 

 

$

19

 

 

$

157,192

 

 

$

(120

)

 

$

(37,750

)

 

$

119,341

 

 

See accompanying notes to the unaudited interim condensed consolidated financial statements

 

6


KEZAR LIFE SCIENCES, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(16,360

)

 

$

(11,722

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

628

 

 

 

281

 

Stock-based compensation

 

 

1,910

 

 

 

1,114

 

Amortization of premiums and discounts on marketable securities

 

 

(695

)

 

 

 

Loss on disposal of property and equipment

 

 

 

 

 

97

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(440

)

 

 

(949

)

Other assets

 

 

 

 

 

61

 

Accounts payable and accrued liabilities

 

 

919

 

 

 

548

 

Other liabilities, current

 

 

 

 

 

(8

)

Deferred rent

 

 

 

 

 

(137

)

Operating lease liabilities

 

 

(374

)

 

 

 

Net cash used in operating activities

 

 

(14,412

)

 

 

(10,715

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(523

)

 

 

(915

)

Purchases of marketable securities

 

 

(59,255

)

 

 

(16,412

)

Maturities of marketable securities

 

 

62,896

 

 

 

 

Proceeds from sale of property and equipment

 

 

 

 

 

10

 

Net cash provided by (used in) investing activities

 

 

3,118

 

 

 

(17,317

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

 

 

 

78,782

 

Proceeds from the exercise of stock options

 

 

184

 

 

 

213

 

Net cash provided by financing activities

 

 

184

 

 

 

78,995

 

Effect of exchange rate changes on cash and cash equivalents and restricted cash

 

 

(41

)

 

 

(36

)

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

 

 

(11,151

)

 

 

50,927

 

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

 

 

24,182

 

 

 

51,046

 

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

 

$

13,031

 

 

$

101,973

 

Supplemental disclosures of noncash investing and financing information:

 

 

 

 

 

 

 

 

Reclassification of employee stock liability to equity upon vesting

 

$

25

 

 

$

24

 

Addition of tenant improvement paid by landlord

 

$

 

 

$

2,703

 

Purchase of property and equipment in accounts payable

 

$

23

 

 

$

35

 

Conversion of redeemable convertible preferred stock into common stock

 

$

 

 

$

77,931

 

Deferred offering costs in accrued liabilities

 

$

 

 

$

1,141

 

 

See accompanying notes to the unaudited interim condensed consolidated financial statements 

 

 

 

7


 

Kezar Life Sciences, Inc

Notes to Unaudited Condensed Consolidated Financial Statements

1. Organization and Description of the Business

Description of Business

Kezar Life Sciences, Inc. (the “Company,” “we,” “us,” or “our”) was incorporated in the state of Delaware in February 2015 and commenced operations in June 2015. The Company is a clinical-stage biotechnology company, discovering and developing novel small molecule therapeutics to treat unmet needs in autoimmunity and cancer. The Company’s principal operations are in South San Francisco, California, and it operates in one segment.

Liquidity

Since commencing operations in mid-2015, substantially all of the Company’s efforts have been focused on research, development, and the advancement of the Company’s lead product candidate, KZR-616. The Company’s ultimate success depends on the outcome of the ongoing research and development activities. The Company has not yet generated product sales and as a result has experienced operating losses since inception and had an accumulated deficit of $65.6 million as of June 30, 2019. The Company expects to incur additional losses in the future to conduct research and development and will need to raise additional capital to fully implement management’s business plan. The Company intends to raise such capital through the issuance of additional equity, and potentially through borrowings, strategic alliances with partner companies and other licensing transactions. However, if such financing is not available at adequate levels, the Company may need to reevaluate its operating plans. Management believes that its existing cash, cash equivalents and marketable securities will be sufficient to fund the Company’s cash requirements for at least 12 months following the issuance of these financial statements.

2. Summary of Significant Accounting Policies

Significant Accounting Policies

The Company’s significant accounting policies are disclosed in the audited consolidated financial statements for the year ended December 31, 2018 and the notes thereto, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 26, 2019 and except for the adoption of the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), there have been no material changes during the six months ended June 30, 2019.

Basis of Presentation and Consolidation

The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and include the Company’s accounts and those of its wholly owned Australian subsidiary, Kezar Life Sciences Australia Pty Ltd, which is a proprietary company limited by shares. All intercompany balances and transactions have been eliminated upon consolidation.

The condensed consolidated balance sheet at December 31, 2018 has been derived from the audited consolidated financial statements at that date, but does not include all information and footnotes required by GAAP for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “Annual Report”).

Unaudited Interim Condensed Consolidated Financial Statements

The accompanying financial information as of June 30, 2019 is unaudited. The condensed consolidated financial statements included in this report reflect all adjustments (consisting only of normal recurring adjustments) that our management considers necessary for the fair statement of the results of operations for the interim periods covered and of our financial condition at the date of the interim balance sheet. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The results for interim periods are not necessarily indicative of the results for the entire year or any other interim period. The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto included in our Annual Report.

 

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Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant items subject to such estimates and assumptions include the useful lives of fixed assets, stock-based compensation, and accrued research and development costs. Management bases its estimates on historical experience and on various other market-specific relevant assumptions that management believes to be reasonable under the circumstances. Actual results may differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. Cash equivalents are stated at fair value.

Marketable Securities

All marketable securities have been classified as “available-for-sale” in accordance with the Company’s investment policy and cash management strategy. Short-term marketable securities mature within one-year from the balance sheet date. Investments in marketable securities are recorded at fair value, with any unrealized gains and losses reported within accumulated other comprehensive income as a separate component of stockholders’ deficit until realized or until a determination is made that an other-than-temporary decline in market value has occurred. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion, together with interest on securities, are included in interest income on the Company’s condensed consolidated statements of operations.

Leases

At lease commencement, the Company records a lease liability based on the present value of lease payments over the expected lease term. The Company calculates the present value of lease payments using the discount rate implicit in the lease, unless that rate cannot be readily determined. In that case, the Company uses its incremental borrowing rate, which is the rate of interest that the Company would have to pay to borrow on a collateralized basis an amount equal to the lease payments over the expected lease term. The Company records a corresponding right-of-use (“ROU”) lease asset based on the lease liability, adjusted for any lease incentives received and any initial direct costs paid to the lessor prior to the lease commencement date.

After lease commencement, the Company measures its leases as follows: (i) the lease liability based on the present value of the remaining lease payments using the discount rate determined at lease commencement; and (ii) the ROU lease asset based on the remeasured lease liability, adjusted for any unamortized lease incentives received, any unamortized initial direct costs and the cumulative difference between rent expense and amounts paid under the lease agreement. Any lease incentives received and any initial direct costs are amortized on a straight-line basis over the expected lease term. Rent expense is recorded on a straight-line basis over the expected lease term.

The Company elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company did not elect to apply the practical expedient to not separate lease and non-lease components for all of its leases.

Accounting Pronouncements Adopted in 2019

Leases (Topic 842)

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosing key information about leasing arrangements. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities the option to initially apply the transition provisions of ASU 2016-02 at its adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

The Company adopted the new standard on January 1, 2019 and used the effective date as its date of initial application. Consequently, financial information will not be restated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. The Company elected the package of transition practical expedients that allows the Company not to

 

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reassess the lease classification for any expired or existing contracts, whether initial direct costs were incurred, or whether any expired or existing contracts contained leases.

This standard had a material effect on the Company’s consolidated financial statements. The most significant effects relate to: (1) the recognition of new ROU asset and lease liabilities on the balance sheet for the operating lease for the Company’s headquarters at 4000 Shoreline Court, Suite 300, South San Francisco; and (2) providing significant new disclosures about its leasing activities.

The following table discloses the impact on the Company’s balance sheet upon adoption (in thousands):

 

 

January 1, 2019

 

 

December 31, 2018

 

Operating lease ROU asset

 

$

4,236

 

 

$

 

Operating lease liabilities, current

 

 

774

 

 

 

 

Operating lease liabilities, noncurrent

 

 

6,364

 

 

 

 

Deferred rent, current

 

 

 

 

 

354

 

Deferred rent, noncurrent

 

 

 

 

 

2,548

 

 

Stock Compensation (Topic 718)

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718). ASU 2018-07 simplifies the accounting for nonemployee share-based payment transactions. This ASU is effective for public entities for interim and annual reporting periods beginning after December 15, 2018. The Company adopted the new standard on January 1, 2019 and determined that it did not have a material impact on the Company’s consolidated financial statements.

New Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326). ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets. This guidance will become effective for us beginning in the first quarter of 2020 and must be adopted using a modified retrospective approach, with certain exceptions. Early adoption is permitted beginning in the first quarter of 2019. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. The amendment of ASU No. 2018-13 removes disclosure requirements from Topic 820 in the areas of: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value measurements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company does not expect the adoption of this new guidance to have a material impact on its consolidated financial statements.

3. Fair Value Measurements

Financial assets and liabilities are recorded at fair value. The carrying amount of certain financial instruments, including cash and cash equivalents, restricted cash, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities. Assets and liabilities recorded at fair value on a recurring basis in the condensed consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities.

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

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.

 

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

We determine the fair value of Level 1 assets using quoted prices in active markets for identical assets. We review trading activity and pricing for Level 2 investments as of each measurement date. Level 2 inputs, which are obtained from various third-party data providers, represent quoted prices for similar assets in active markets and were derived from observable market data, or, if not directly observable, were derived from or corroborated by other observable market data. There were no transfers between Level 1 and Level 2 securities in the periods presented.

In certain cases, where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3 within the valuation hierarchy. The Company does not have any assets or liabilities measured using Level 3 inputs as of June 30, 2019 or December 31, 2018.

The following table summarizes our financial assets measured at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above (in thousands):

 

 

 

June 30, 2019

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

12,646

 

 

$

12,646

 

 

$

 

 

$

 

U.S. Treasury securities

 

 

9,983

 

 

 

9,983

 

 

 

 

 

 

 

Commercial paper

 

 

16,899

 

 

 

 

 

 

16,899

 

 

 

 

Corporate debt securities

 

 

17,891

 

 

 

 

 

 

17,891

 

 

 

 

U.S. agency bonds

 

 

35,619

 

 

 

 

 

 

35,619

 

 

 

 

Total

 

$

93,038

 

 

$

22,629

 

 

$

70,409

 

 

$

 

 

 

 

December 31, 2018

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

23,156

 

 

$

23,156

 

 

$

 

 

$

 

U.S. Treasury securities

 

 

25,692

 

 

 

25,692

 

 

 

 

 

 

 

Commercial paper

 

 

19,190

 

 

 

 

 

 

19,190