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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



☐	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		1
Part I. Financial Information
Item 1.	Financial Statements (Unaudited):	3
	Condensed Balance Sheets as of September 30, 2019 and December 31, 2018	3
	Condensed Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2019 and 2018	4
	Condensed Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the three and nine months ended September 30, 2019 and 2018	5
	Condensed Statements of Cash Flows for the nine months ended September 30, 2019 and 2018	7
	Notes to Condensed Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29
Item 4.	Controls and Procedures	30
Part II. Other Information
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	74
Item 3.	Defaults Upon Senior Securities	74
Item 4.	Mine Safety Disclosures	74
Item 5.	Other Information	74
Item 6.	Exhibits	75
	Signatures	76

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;


•	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.

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).

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).

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		Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders’ Equity (Deficit)
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).



	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			Shares	Amount		Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders’ Equity (Deficit)
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).

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).

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

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

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



	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

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

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

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