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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-38558
TRICIDA, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
46-3372526
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
7000 Shoreline Court, Suite 201, South San Francisco, CA 94080
(Address of principal executive offices, including zip code)
(415) 429-7800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
Title of each class
Trading Symbol(s)
Name of exchange on which registered
Common stock, par value $0.001 per share
TCDA
The Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
 
 
 
 
Non-accelerated filer
Smaller reporting company
 
 
 
 
Emerging growth company
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
On November 7, 2019, the registrant had 49,613,330 shares of common stock, par value $0.001 per share, outstanding.




TABLE OF CONTENTS
Note Regarding Forward-Looking Statements
Part I. Financial Information
 
Item 1.
Financial Statements (Unaudited):
 
Condensed Balance Sheets as of September 30, 2019 and December 31, 2018
 
Condensed Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2019 and 2018
 
Condensed Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the three and nine months ended September 30, 2019 and 2018
 
Condensed Statements of Cash Flows for the nine months ended September 30, 2019 and 2018
 
Notes to Condensed Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
Part II. Other Information
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
 
Signatures





NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Forward-looking statements generally can be identified by words such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:
estimates of our expenses, capital requirements and our needs for additional financing;
the prospects of veverimer (also known as TRC101), our only product candidate, which is still in development;
our ability to obtain approval of our New Drug Application, or NDA, for veverimer from the U.S Food and Drug Administration, or FDA, under the Accelerated Approval Program;
our expectations regarding the timing of the completion of our nonclinical studies;
the design of our ongoing confirmatory postmarketing trial, VALOR-CKD, including the sample size, trial duration, endpoint definition, event rate assumptions and eligibility criteria;
our expectations regarding the timing of the enrollment, completion and reporting of our confirmatory postmarketing trial, VALOR-CKD;
the outcome and results of our VALOR-CKD trial;
the market acceptance or commercial success of veverimer, if approved, and the degree of acceptance among physicians, patients, patient advocacy groups, health care payers and the medical community;
our expectations regarding competition, potential market size and the size of the patient population for veverimer, if approved for commercial use;
our expectations regarding our ability to draw under our credit facility with Hercules Capital, Inc.;
our expectations regarding the safety, efficacy and clinical benefit of veverimer;
our ability to achieve and maintain regulatory approval of veverimer, and any related restrictions, limitations and/or warnings in the label of veverimer;
our sales, marketing or distribution capabilities and our ability to commercialize veverimer, if we obtain regulatory approval;
our current and future agreements with third parties in connection with the manufacturing, commercialization, packaging and distribution of veverimer;
our expectations regarding the ability of our contract manufacturing partners to produce veverimer in the quantities and timeframe that we will require;
our expectations regarding our future costs of goods;
our ability to attract, retain and motivate key personnel and increase the size of our organization;
the scope of protection we are able to establish and maintain for intellectual property rights covering veverimer;
potential claims relating to our intellectual property and third-party intellectual property;
the duration of our intellectual property estate that will provide protection for veverimer;

1




our ability to establish collaborations in lieu of obtaining additional financing; and
our financial performance.
These forward-looking statements are based on management’s current expectations, estimates, forecasts, and projections about our business and the industry in which we operate and management’s beliefs and assumptions and are not guarantees of future performance or development and involve known and unknown risks, uncertainties, and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed in Item 1A. “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Investors in our securities are urged to consider these factors carefully in evaluating the forward-looking statements. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. Investors in our securities should, however, review the factors and risks we describe in the reports we will file from time to time with the Securities and Exchange Commission after the date of this Quarterly Report on Form 10-Q.

2




PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRICIDA, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
(in thousands, except share and per share amounts)
 
September 30,
2019
 
December 31,
2018
 

 

Assets
Current assets:
 
 
 
Cash and cash equivalents
$
30,368

 
$
37,172

Short-term investments
291,864

 
203,906

Prepaid expenses and other current assets
4,856

 
3,269

Total current assets
327,088

 
244,347

Long-term investments
41,342

 
2,287

Property and equipment, net
2,053

 
1,215

Operating lease right-of-use assets
9,694

 

Total assets
$
380,177

 
$
247,849

 
 
 
 
Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
4,471

 
$
8,460

Current operating lease liabilities
1,064

 

Accrued expenses and other current liabilities
15,601

 
6,344

Total current liabilities
21,136

 
14,804

 
 
 
 
Term Loan
38,016

 
38,071

Non-current operating lease liabilities
8,914

 

Other long-term liabilities
488

 
449

Total liabilities
68,554

 
53,324

Commitments and contingencies (Note 7)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value; 40,000,000 shares authorized, no shares issued or outstanding as of September 30, 2019 and December 31, 2018

 

Common stock, $0.001 par value; 400,000,000 shares authorized as of September 30, 2019 and December 31, 2018; 49,531,916 and 42,148,247 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively
50

 
42

Additional paid-in capital
621,923

 
386,830

Accumulated other comprehensive income (loss)
486

 
(153
)
Accumulated deficit
(310,836
)
 
(192,194
)
Total stockholders’ equity
311,623

 
194,525

Total liabilities and stockholders’ equity
$
380,177

 
$
247,849

See accompanying notes to condensed financial statements (unaudited).

3




TRICIDA, INC.
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(in thousands, except share and per share amounts)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Operating expenses:
 
 
 
 
 
 
 
Research and development
$
31,976

 
$
25,230

 
$
92,375

 
$
62,897

General and administrative
13,120

 
4,178

 
28,333

 
11,888

Total operating expenses
45,096

 
29,408

 
120,708

 
74,785

Loss from operations
(45,096
)
 
(29,408
)
 
(120,708
)
 
(74,785
)
Other income (expense), net
2,387

 
1,247

 
6,256

 
1,987

Interest expense
(1,410
)
 
(937
)
 
(4,190
)
 
(2,166
)
Net loss
(44,119
)
 
(29,098
)
 
(118,642
)
 
(74,964
)
Other comprehensive income (loss):
 
 
 
 

 

Net unrealized gain (loss) on available-for-sale investments
(143
)
 
(14
)
 
639

 
(27
)
Total comprehensive loss
$
(44,262
)
 
$
(29,112
)
 
$
(118,003
)
 
$
(74,991
)
Net loss per share, basic and diluted
$
(0.89
)
 
$
(0.71
)
 
$
(2.53
)
 
$
(4.86
)
Weighted-average number of shares outstanding, basic and diluted
49,418,025

 
41,261,703

 
46,813,876

 
15,415,194

See accompanying notes to condensed financial statements (unaudited).

4




TRICIDA, INC.
CONDENSED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share amounts)
 
Stockholders' Equity (Deficit)
 
Preferred Stock
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Accumulated Deficit
 
Total Stockholders’ Equity (Deficit)
 
Shares
 
Amount
 
 
Shares
 
Amount
 
Balance at December 31, 2018

 
$

 
 
42,148,247

 
$
42

 
$
386,830

 
$
(153
)
 
$
(192,194
)
 
$
194,525

Issuance of warrant in connection with Term Loan

 

 
 

 

 
284

 

 

 
284

Issuance of common stock under equity incentive plans

 

 
 
527,859

 
1

 
736

 

 

 
737

Stock-based compensation

 

 
 

 

 
2,658

 

 

 
2,658

Net unrealized gain (loss) on available-for-sale investments

 

 
 

 

 

 
302

 

 
302

Net loss

 

 
 

 

 

 

 
(37,897
)
 
(37,897
)
Balance at March 31, 2019

 

 
 
42,676,106

 
43

 
390,508

 
149

 
(230,091
)
 
160,609

Issuance of common stock in connection with public offering, net of underwriter discounts and issuance costs

 

 
 
6,440,000

 
6

 
217,003

 

 

 
217,009

Issuance of common stock under equity incentive plans

 

 
 
160,339

 

 
959

 

 

 
959

Stock-based compensation

 

 
 

 

 
4,413

 

 

 
4,413

Net unrealized gain (loss) on available-for-sale investments

 

 
 

 

 

 
480

 

 
480

Net loss

 

 
 

 

 

 

 
(36,626
)
 
(36,626
)
Balance at June 30, 2019

 

 
 
49,276,445

 
49

 
612,883

 
629

 
(266,717
)
 
346,844

Issuance of common stock under equity incentive plans

 

 
 
255,471

 
1

 
358

 

 

 
359

Stock-based compensation

 

 
 

 

 
8,682

 

 

 
8,682

Net unrealized gain (loss) on available-for-sale investments

 

 
 

 

 

 
(143
)
 

 
(143
)
Net loss

 

 
 

 

 

 

 
(44,119
)
 
(44,119
)
Balance at September 30, 2019

 
$

 
 
49,531,916

 
$
50

 
$
621,923

 
$
486

 
$
(310,836
)
 
$
311,623

See accompanying notes to condensed financial statements (unaudited).


5




 
Convertible
Preferred Stock
 
 
Stockholders' Equity (Deficit)
 
Shares
 
Amount
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Accumulated Deficit
 
Total Stockholders’ Equity (Deficit)
 
 
 
 
Shares
 
Amount
Balance at December 31, 2017
104,129,702

 
$
147,070

 
 
2,272,609

 
$
2

 
$
1,356

 
$
(13
)
 
$
(89,386
)
 
$
(88,041
)
Issuance of common stock under equity incentive plans

 

 
 
29,519

 

 
24

 

 

 
24

Stock-based compensation

 

 
 

 

 
353

 

 

 
353

Net unrealized gain (loss) on available-for-sale investments

 

 
 

 

 

 
(54
)
 

 
(54
)
Net loss

 

 
 

 

 

 

 
(20,504
)
 
(20,504
)
Balance at March 31, 2018
104,129,702

 
147,070

 
 
2,302,128

 
2

 
1,733

 
(67
)
 
(109,890
)
 
(108,222
)
Series A warrant exercise
95,936

 
458

 
 

 

 

 

 

 

Issuance of common stock under equity incentive plans

 

 
 
151,478

 

 
108

 

 

 
108

Reclassification of warrants from liability to equity

 

 
 

 

 
194

 

 

 
194

Stock-based compensation

 

 
 

 

 
970

 

 

 
970

Net unrealized gain (loss) on available-for-sale investments

 

 
 

 

 

 
41

 

 
41

Net loss

 

 
 

 

 

 

 
(25,362
)
 
(25,362
)
Balance at June 30, 2018
104,225,638

 
147,528

 
 
2,453,606

 
2

 
3,005

 
(26
)
 
(135,252
)
 
(132,271
)
Preferred shares converted into common stock
(104,225,638
)
 
(147,528
)
 
 
26,187,321

 
26

 
147,502

 

 

 
147,528

Issuance of common stock in connection with initial public offering, net of underwriter discounts and issuance costs

 

 
 
13,455,000

 
14

 
231,172

 

 

 
231,186

Issuance of common stock under equity incentive plans

 

 
 
4,396

 

 
34

 

 

 
34

Stock-based compensation

 

 
 

 

 
1,706

 

 

 
1,706

Net unrealized gain (loss) on available-for-sale investments

 

 
 

 

 

 
(14
)
 

 
(14
)
Net loss

 

 
 

 

 

 

 
(29,098
)
 
(29,098
)
Balance at September 30, 2018

 
$

 
 
42,100,323

 
$
42

 
$
383,419

 
$
(40
)
 
$
(164,350
)
 
$
219,071

See accompanying notes to condensed financial statements (unaudited).

6




TRICIDA, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Nine Months Ended
September 30,
 
2019
 
2018
Operating activities:
 
 
 
Net loss
$
(118,642
)
 
$
(74,964
)
Adjustments to reconcile net loss to net cash used in operating activities:

 

Depreciation and amortization
524

 
455

Amortization of operating lease right-of-use assets
646

 

Accretion (amortization) of premiums and discounts on investments
(3,143
)
 
(392
)
Amortization of Term Loan discount and issuance costs
1,564

 
902

Stock-based compensation
15,753

 
3,029

Changes in fair value of compound derivative liability and warrants
259

 
(238
)
Changes in operating assets and liabilities:

 

Prepaid expenses and other assets
(1,562
)
 
(184
)
Accounts payable
(4,235
)
 
2,251

Accrued expenses and other liabilities
9,544

 
7,166

Operating lease liabilities
(584
)
 

Net cash used in operating activities
(99,876
)
 
(61,975
)
Investing activities:

 

Purchases of investments
(375,385
)
 
(103,012
)
Maturities of investments
252,155

 
55,804

Purchases of property and equipment
(1,117
)
 
(712
)
Net cash used in investing activities
(124,347
)
 
(47,920
)
Financing activities:

 

Proceeds from equity offerings, net
217,930

 
237,750

Payments of equity offering costs
(921
)
 
(6,564
)
Proceeds from exercise of common stock under equity incentive plans
1,944

 
251

Proceeds from issuance of convertible preferred stock, net

 
85

Proceeds from leasehold improvement loan

 
276

Repayment of leasehold improvement loan
(85
)
 
(81
)
Proceeds (payments) under Term Loan, net
(1,449
)
 
23,622

Net cash provided by financing activities
217,419

 
255,339

Net increase (decrease) in cash and cash equivalents
(6,804
)
 
145,444

Cash and cash equivalents at beginning of period
37,172

 
9,774

Cash and cash equivalents at end of period
$
30,368

 
$
155,218

Supplemental disclosures

 

Cash paid for interest
$
2,504

 
$
1,073

Supplemental disclosures of non-cash investing and financing activities

 

Right-of-use assets obtained in exchange for lease obligations
$
8,084

 
$

Warrants and compound derivative liability related to Term Loan
$
284

 
$
810

Purchase of property and equipment in accounts payable and accrued expenses
$
271

 
$
116

See accompanying notes to condensed financial statements (unaudited).

7




TRICIDA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Organization—Tricida, Inc. (the Company) was incorporated in the state of Delaware on May 22, 2013 and was granted its certification of qualification in the state of California on August 5, 2013, or inception. The Company is focused on the development and commercialization of its drug candidate, veverimer (also known as TRC101), a non-absorbed, orally-administered polymer designed to treat metabolic acidosis in patients with chronic kidney disease.
The Company has sustained operating losses and expects such annual losses to continue over the next several years. The Company’s ultimate success depends on the outcome of its research and development and commercialization activities for veverimer, for which it expects to incur additional losses in the future. Through September 30, 2019, the Company has relied primarily on the proceeds from equity offerings and debt financing to finance its operations.
The Company recognizes that it may need to raise additional capital to fully implement its business plan, and if market conditions are favorable or if the Company identifies specific strategic opportunities or needs, intends to do so through the issuance of equity, borrowings, or strategic alliances with partner companies. However, if such financing is not available at adequate levels or on reasonable terms, the Company will need to reevaluate its operating plans.
Basis of Presentation—The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The condensed balance sheet as of September 30, 2019, the condensed statements of operations and comprehensive loss for the three and nine months ended September 30, 2019 and 2018, the condensed statements of convertible preferred stock and stockholders' equity (deficit) for the three and nine months ended September 30, 2019 and 2018 and the condensed statements of cash flows for the nine months ended September 30, 2019 and 2018 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company consider necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The condensed balance sheet at December 31, 2018 has been derived from audited financial statements.
Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnote information normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.
Results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying 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 year ended December 31, 2018.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
With the exception of the change for the accounting of leases as a result of the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), or Topic 842, there have been no new or material changes to the significant accounting policies discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, that are of significance, or potential significance, to the Company.
Leases—The Company determines if an arrangement contains a lease at inception. For arrangements where the Company is the lessee, operating leases are included in operating lease right-of-use (ROU) assets; current operating lease liabilities; and non-current operating lease liabilities on its condensed balance sheets. The Company currently does not have any finance leases.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. ROU assets also include any initial direct costs incurred and any lease payments made on or before the lease commencement date, less lease incentives received. The Company uses its incremental borrowing rate based on the information available at the

8




commencement date in determining the lease liabilities as the Company’s leases generally do not provide an implicit rate. The incremental borrowing rate is reevaluated upon a lease modification. The operating lease ROU asset also includes any initial direct costs and prepaid lease payments made less any lease incentives. The Company considered information available at the adoption date of Topic 842 to determine the incremental borrowing rate for leases in existence as of this date. Lease terms may include options to extend or terminate the lease when the Company is reasonably certain that the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term.
The Company elected to apply each of the practical expedients described in Accounting Standards Codification (ASC) Topic 842-10-65-1(f) which allow companies not to reassess: (i) whether any expired or existing agreements contain leases, (ii) the classification of any expired or existing leases, and (iii) the capitalization of initial direct costs for any existing leases. The Company also elected to apply the short-term lease measurement and recognition exemption in which ROU assets and lease liabilities are not recognized for short-term operating leases. A short-term is a lease that, at the commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
Recent Accounting Pronouncements
Adopted Standards
In February 2016, the Financial Accounting Standards Board (FASB) issued Topic 842, which amended prior accounting standards for leases. The Company adopted Topic 842 on January 1, 2019, using the alternative modified transition method, which applies the standard as of the effective date and therefore, the Company has not applied the standard to the comparative periods presented on the Company's condensed financial statements.
The Company elected the following practical expedients when assessing the transition impact available to lessees: (i) not to reassess whether any expired or existing contracts as of January 1, 2019, are or contain leases; (ii) not to reassess the lease classification for any expired or existing leases as of January 1, 2019; and (iii) not to reassess initial direct costs for any existing leases as of January 1, 2019.
As a lessee, the primary impact of the adoption of Topic 842 was the recognition of operating lease ROU assets of $2.3 million and operating lease liabilities of $2.5 million on its condensed balance sheet as of January 1, 2019. See Note 4 "Leases" for additional details.
Standards Not Yet Effective
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 implements an impairment model, known as the current expected credit loss model, based on expected losses rather than incurred losses. Under the new guidance, an entity will recognize, as an allowance, its estimate of expected credit losses. The ASU is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. The Company does not expect the adoption of ASU 2016-13 will have a material impact on its financial statements.
In September 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 amends ASC Topic 820, Fair Value Measurement. The FASB issued final guidance that eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. Under the ASU, entities will no longer be required to disclose the amount of transfers between Level 1 and Level 2 of the fair value hierarchy. Public companies will be required to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU No. 2018-13 is effective for public business entities for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption will be permitted in any interim or annual period. The Company plans to adopt this guidance on January 1, 2020. The new guidance only affects disclosures in the notes to the financial statements and will not affect the Company's financial statements.
NOTE 3. FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company’s financial assets and liabilities are determined in accordance with the fair value hierarchy established in the FASB's ASC Topic 820, Fair Value Measurements and Disclosures. ASC Topic 820

9




defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy of ASC Topic 820 requires an entity to maximize the use of observable inputs when measuring fair value and classifies those inputs into three levels:
Level 1—Observable inputs, such as quoted prices in active markets;
Level 2—Inputs, other than the quoted prices in active markets, which are observable either directly or indirectly such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the instrument’s anticipated life; and
Level 3—Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The Company's policy is to recognize transfers in and out of Level 1, 2 and 3 as of the end of the reporting period. There were no transfers of assets or liabilities between the fair value measurement levels during the nine months ended September 30, 2019.
The Company's financial instruments consist primarily of cash, cash equivalents, short-term and long-term investments, accounts payable and the Term Loan with Hercules.
Cash, cash equivalents and investments are reported at their respective fair values on the Company's condensed balance sheets. Where quoted prices are available in an active market, securities are classified as Level 1. The Company classifies money market funds as Level 1. When quoted market prices are not available for the specific security, then the Company estimates the fair value by using quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs obtained from various third-party data providers, including but not limited to benchmark yields, reported trades and broker/dealer quotes. Where applicable the market approach utilizes prices and information from market transactions for similar or identical assets. The Company classifies U.S. government agency securities, commercial paper, corporate debt securities and asset-backed securities as Level 2. The Company's short-term and long-term investments are classified as available-for-sale.
The following tables set forth the fair value of the Company's cash and financial assets remeasured on a recurring basis based on the three-tier fair value hierarchy by significant investment category as of September 30, 2019 and December 31, 2018.
 
 
September 30, 2019
 
 
 
 
 
 
 
 
 
 
Reported as:
(in thousands)
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
 
Cash and Cash Equivalents
 
Short-Term Investments
 
Long-Term Investments
Cash
 
$
1,644

 
$

 
$

 
$
1,644

 
$
1,644

 
$

 
$

Level 1:
 

 

 

 

 

 

 

Money market fund
 
28,724

 

 

 
28,724

 
28,724

 

 

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency securities
 
16,492

 
3

 
(2
)
 
16,493

 

 
2,000

 
14,493

Commercial paper
 
139,242

 
164

 
(2
)
 
139,404

 

 
139,404

 

Corporate debt securities
 
161,438

 
309

 
(6
)
 
161,741

 

 
134,892

 
26,849

Asset-backed securities
 
15,548

 
20

 

 
15,568

 

 
15,568

 

Subtotal
 
332,720

 
496

 
(10
)
 
333,206

 

 
291,864

 
41,342

Total assets measured at fair value
 
$
363,088

 
$
496

 
$
(10
)
 
$
363,574

 
$
30,368

 
$
291,864

 
$
41,342


10




 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
Reported as:
(in thousands)
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
 
Cash and Cash Equivalents
 
Short-Term Investments
 
Long-Term Investments
Cash
 
$
3,021

 
$

 
$

 
$
3,021

 
$
3,021

 
$

 
$

Level 1:
 

 

 

 

 

 

 

Money market fund
 
33,154

 

 

 
33,154

 
33,154

 

 

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
 
68,467

 

 
(63
)
 
68,404

 
997

 
67,407

 

Corporate debt securities
 
89,038

 
4

 
(63
)
 
88,979

 

 
86,692

 
2,287

Asset-backed securities
 
49,838

 
3

 
(34
)
 
49,807

 

 
49,807

 

Subtotal
 
207,343

 
7

 
(160
)
 
207,190

 
997

 
203,906

 
2,287

Total assets measured at fair value
 
$
243,518

 
$
7

 
$
(160
)
 
$
243,365

 
$
37,172

 
$
203,906

 
$
2,287


Interest income related to the Company's cash, cash equivalents and available-for-sale investments included in other income (expense), net was approximately $2.5 million and $1.3 million for the three months ended September 30, 2019 and 2018, respectively, and $6.7 million and $1.9 million for the nine months ended September 30, 2019 and 2018, respectively. There were no gross realized gains and gross realized losses for the three and nine months ended September 30, 2019 and 2018.
The following table summarizes the Company's available-for-sale investments that were in a continuous unrealized loss position but were not deemed to be other-than-temporarily impaired, as of September 30, 2019 and December 31, 2018.
 
 
September 30, 2019
 
December 31, 2018
(in thousands)
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
U.S. government agency securities
 
$
9,997

 
$
(2
)
 
$

 
$

Commercial paper
 
3,924

 
(2
)
 
67,407

 
(63
)
Corporate debt securities
 
15,733

 
(6
)
 
85,699

 
(63
)
Asset-backed securities
 

 

 
36,730

 
(34
)
Total
 
$
29,654

 
$
(10
)
 
$
189,836

 
$
(160
)

The Company held a total of 10 and 48 positions which were in an unrealized loss position as of September 30, 2019 and December 31, 2018, respectively. All available-for-sale investments in an unrealized loss position were in a continuous loss position for less than 12 months. As of September 30, 2019, unrealized losses on available-for-sale investments were not attributable to credit risk. The Company determined that there were no other-than-temporary impairments as of September 30, 2019 because the Company does not intend to sell these securities nor does the Company believe that it will be required to sell these securities before the recovery of their amortized cost basis.
The following table summarizes the maturities of the Company’s cash equivalents (excluding money market funds) and available-for-sale investments, as of September 30, 2019.
(in thousands)
 
Amortized Cost
 
Fair Value
Mature in less than one year
 
$
291,396

 
$
291,864

Mature in one to five years
 
41,324

 
41,342

Total
 
$
332,720

 
$
333,206



11




The following table presents a reconciliation of financial liabilities measured at fair value on a recurring basis using Level 3 unobservable inputs for the nine months ended September 30, 2019 and 2018.
 
 
Nine Months Ended September 30,
 
 
2019
 
2018
(in thousands)
 
Compound Derivative Liability
 
Compound Derivative Liability
 
Warrant
Liability
Fair value at beginning of period
 
$
161

 
$

 
$
106

Additions
 

 
654

 
156

Change in fair value
 
259

 
(543
)
 
305

Reclassification to equity
 

 

 
(194
)
Issuance of convertible preferred stock on exercise of warrant
 

 

 
(373
)
Fair value at end of period
 
$
420

 
$
111

 
$


The following table presents information about significant unobservable inputs related to the Company's Level 3 financial liabilities as of September 30, 2019.
 
 
September 30, 2019
(in thousands)
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Input
 
Input
Compound derivative liability
 
$
420

 
Discounted cash flow
 
Discount rate
 
11.4
%
 
 
 
 
 
 
Probability of the occurrence of certain events
 
10.0
%

Term Loan
The estimated fair value of the Term Loan was $39.7 million as of September 30, 2019 which approximates the carrying value and is classified as Level 3. The Company utilized a market yield analysis and income approach to estimate a value for the Term Loan. The key valuation assumptions used consist of the discount rate of 11.4% and the probability of the occurrence of certain events of 10.0%.
NOTE 4. LEASES
As described in Note 2. "Summary of Significant Accounting Policies", the Company adopted Topic 842 as of January 1, 2019. Comparative prior period amounts have not been adjusted and are reported in accordance with historic accounting under Topic 840.
In July 2014, the Company entered into a five-year noncancelable operating lease for its offices and laboratory space in South San Francisco, California that was scheduled to expire in June 2019, with an option for the Company to extend the lease for an additional three years. In August 2017, the Company entered into an amendment which extended the existing operating lease to June 2021 and added 13,258 square feet of additional lease space resulting in a total of 26,987 square feet being leased in the aggregate under the amended lease. In November 2017, the Company entered into a second amendment which reduced the common areas resulting in a total of 26,897 square feet being leased in aggregate under the second amendment.
On August 14, 2019, the Company entered into a third amendment to the existing operating lease which will extend the leased space by an additional 19,177 square feet, or Second Expansion Premises, which will result in a total of 46,074 square feet being leased in aggregate. The operating lease for the Second Expansion Premises will commence on the date they are delivered to the Company, which is expected to be September 1, 2020 (the Second Expansion Premises Commencement Date). In conjunction with the third amendment, the Company also agreed to lease 5,569 square feet of temporary office space effective August 15, 2019 to the Second Expansion Premises Commencement Date. The third amendment will extend the lease by 84 months from the Second Expansion Premises Commencement Date, with an option to extend the lease for an additional 36 months subject to certain conditions. The Company determined that the Second Expansion Premises shall be accounted for as a new lease at the Second Expansion Premises Commencement Date. Further, the Company determined that the amendment to the existing operating lease and temporary office space shall be accounted as a lease modification as of September 30, 2019. The Company recognized an operating lease ROU asset of $8.1 million and operating lease liability of $8.1 million on its condensed balance sheet upon the execution of the third amendment on August 14, 2019, and

12




will measure and record an additional ROU asset and operating lease liability for the Second Expansion Premises upon the Second Expansion Premises Commencement Date.
Operating lease expense was $0.4 million and $0.9 million for the three and nine months ended September 30, 2019, respectively. Operating cash flows for the nine months ended September 30, 2019 included $0.8 million in cash payments for operating leases. Expense related to short-term leases was not significant for the three and nine months ended September 30, 2019.
The following table presents the maturity analysis of the Company's operating lease liabilities showing the aggregate lease payments as of September 30, 2019.
(in thousands)
 
September 30, 2019
2019 (remaining three months)
 
$
273

2020
 
1,107

2021
 
1,377

2022
 
1,662

2023 and thereafter
 
8,434

Total lease payments (1)
 
12,853

Less: imputed interest
 
(2,875
)
Total operating lease liabilities
 
$
9,978


(1) As noted above, The operating lease for the Second Expansion Premises will commence in fiscal year 2020 and therefore the lease related to the Second Expansion Premises is not recognized on the condensed consolidated balance sheet as of September 30, 2019. As of September 30, 2019, future minimum lease payments related to the Second Expansion Premises are expected to be $8.2 million over the lease term of 7.0 years.
Operating lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term. In determining the present value of lease payments, the Company uses its incremental borrowing rate. The weighted average discount rate used to determine the operating lease liabilities as of September 30, 2019 was 6.0%. The Company's weighted average remaining lease term was 7.9 years as of September 30, 2019.
ASC Topic 840 Disclosures
The Company elected the alternative modified transition method and is required to present previously disclosed information under the prior accounting standard for leases. The following table presents the future minimum lease commitments under the Company’s operating leases as of December 31, 2018, as previously disclosed.
(in thousands)
 
December 31, 2018

2019
 
$
1,076

2020
 
1,108

2021
 
562

2022 and thereafter
 

Total future minimum lease payments
 
$
2,746



13




NOTE 5. OTHER BALANCE SHEET COMPONENTS
Property and Equipment, Net
The following table presents the components of property and equipment, net as of September 30, 2019 and December 31, 2018.
(in thousands)
 
September 30,
2019
 
December 31,
2018
Furniture and fixtures
 
$
210


$
193

Computer and lab equipment
 
3,125


1,888

Leasehold improvements
 
1,163


1,055

 
 
4,498


3,136

Less: accumulated depreciation and amortization
 
(2,445
)

(1,921
)
Total property and equipment, net