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2018-10-01 2018-12-31

SS

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 March 31, 2020  

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: 001-37923

 

CRISPR THERAPEUTICS AG

(Exact name of Registrant as specified in its charter)

 

 

Switzerland

Not Applicable

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

Baarerstrasse 14

6300 Zug , Switzerland

Not Applicable

(Address of principal executive offices)

(zip code)

+ 41 (0)41 561 32 77

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Shares, CHF 0.03 par value

CRSP

The Nasdaq Global 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, a smaller reporting company, or emerging growth company. See definition 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 registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES       NO  

As of April 24, 2020, there were 61,017,707 shares of registrant’s common shares outstanding.

 

 

 


Throughout this Quarterly Report on Form 10-Q, the “Company,” “CRISPR,” “CRISPR Therapeutics,” “we,” “us,” and “our,” except where the context requires otherwise, refer to CRISPR Therapeutics AG and its consolidated subsidiaries.

 

“CRISPR Therapeutics” is a registered trademark of CRISPR Therapeutics AG. The trademarks for “CTX001 TM ,” “CTX110 TM ,” “CTX120 TM ,” and “CTX130 TM ” are pending in the United States and the trademark for “CRISPR Therapeutics” is pending in the European Union, Switzerland and the United Kingdom. Other brands, logos, names and trademarks contained in this Quarterly Report on Form 10-Q are the property of their respective owners.  Solely for convenience, trademarks, service marks and trade names referred to in this Quarterly Report on Form 10-Q may appear without the  ®  or   symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks, service marks and trade names.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve substantial risks and uncertainties.  All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q are forward-looking statements. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “potential,” “will,” “would” or the negative or plural of these words or similar expressions or variations, although not all forward-looking statements contain these identifying words. Forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

 

potential impacts due to the coronavirus pandemic such as delays, interruptions or other adverse effects to clinical trials, delays in regulatory review, manufacturing and supply chain interruptions, adverse effects on healthcare systems and disruption of the global economy, and the overall impact of the coronavirus pandemic on our business, financial condition and results of operations;

 

the safety, efficacy and clinical progress of our various clinical programs including those for CTX001 TM , CTX110 TM , CTX120 TM and CTX130 TM ;

 

the status of clinical trials, development timelines and discussions with regulatory authorities related to product candidates under development by us and our collaborators;

 

the initiation, timing, progress and results of our preclinical studies and clinical trials, including our ongoing clinical trials and any planned clinical trials for CTX001, CTX110, CTX120 and CTX130, and our research and development programs, including delays or disruptions in clinical trials, non-clinical experiments and investigational new drug application-enabling studies;

 

our ability to advance product candidates into, and successfully complete, clinical trials;

 

our intellectual property coverage and positions, including those of our licensors and third parties as well as the status and potential outcome of proceedings involving any such intellectual property;

 

our ability to obtain funding for our operations and the sufficiency of our cash resources; and

 

the therapeutic value, development, and commercial potential of CRISPR/Cas9 gene-editing technologies and therapies.

Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and assumptions that could cause our actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors,” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q, if any, our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on February 12, 2020, and in other SEC filings.  You should not rely upon forward-looking statements as predictions of future events. Such forward-looking statements speak only as of the date of this report. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make or enter into.

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results, performance or achievements may be materially different from what we expect. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Investors and others should note that we announce material information to our investors using our investor relations website (https://crisprtx.gcs-web.com/), SEC filings, press releases, public conference calls and webcasts. We use these channels as well as social media to communicate with the public about our company, our business, our product candidates and other matters. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the social media channels listed on our investor relations website.


Index

 

 

Page

Number

PART I: FINANCIAL INFORMATION

 

 

 

Item 1. Condensed Consolidated Financial Statements (unaudited)

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

2

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2020 and 2019

3

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2020 and 2019

4

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019

5

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

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

19

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

25

 

 

Item 4. Controls and Procedures

25

 

 

PART II: OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

27

 

 

Item 1A. Risk Factors

27

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

28

 

 

Item 5. Other Information

29

 

 

Item 6. Exhibits

29

 

 

SIGNATURES

30

 

 


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

CRISPR Therapeutics AG

Condensed Consolidated Balance Sheets

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

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Assets

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

889,712

 

 

$

943,771

 

Accounts receivable

 

 

25,117

 

 

 

99

 

Prepaid expenses and other current assets

 

 

14,453

 

 

 

43,677

 

Total current assets

 

 

929,282

 

 

 

987,547

 

Property and equipment, net

 

 

31,773

 

 

 

31,330

 

Intangible assets, net

 

 

221

 

 

 

235

 

Restricted cash

 

 

5,041

 

 

 

5,041

 

Operating lease assets

 

 

40,321

 

 

 

41,502

 

Other non-current assets

 

 

662

 

 

 

1,097

 

Total assets

 

$

1,007,300

 

 

$

1,066,752

 

Liabilities and shareholders’ equity

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

11,277

 

 

$

5,944

 

Accrued expenses

 

 

21,924

 

 

 

30,180

 

Deferred revenue, current

 

 

803

 

 

 

960

 

Accrued tax liabilities

 

 

284

 

 

 

583

 

Operating lease liabilities

 

 

9,005

 

 

 

8,489

 

Other current liabilities

 

 

11,793

 

 

 

10,950

 

Total current liabilities

 

 

55,086

 

 

 

57,106

 

Deferred revenue, non-current

 

 

11,776

 

 

 

11,776

 

Operating lease liabilities, net of current portion

 

 

42,390

 

 

 

44,050

 

Other non-current liabilities

 

 

11,951

 

 

 

14,395

 

Total liabilities

 

 

121,203

 

 

 

127,327

 

Commitments and contingencies, see Note 4

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common shares, CHF 0.03 par value, 103,901,006 and 103,901,006 shares authorized at

  March 31, 2020 and December 31, 2019, respectively, 61,122,431 and 61,034,025 shares

   issued at March 31, 2020 and December 31, 2019, respectively 60,890,035 and

   60,783,799 shares outstanding at March 31, 2020 and December 31, 2019, respectively.

 

 

1,850

 

 

 

1,847

 

Treasury shares, at cost, 232,396 and 250,226 shares at March 31, 2020 and December 31,

   2019, respectively.

 

 

( 63

)

 

 

( 63

)

Additional paid-in capital

 

 

1,178,770

 

 

 

1,162,345

 

Accumulated deficit

 

 

( 294,442

)

 

 

( 224,711

)

Accumulated other comprehensive (loss) income

 

 

( 18

)

 

 

7

 

Total shareholders' equity

 

 

886,097

 

 

 

939,425

 

Total liabilities and shareholders’ equity

 

$

1,007,300

 

 

$

1,066,752

 

 

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

2


 

CRISPR Therapeutics AG

Condensed Consolidated Statements of Operations and Comprehensive Loss

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Collaboration revenue (1)

 

$

157

 

 

$

328

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development (2)

 

 

54,193

 

 

 

33,822

 

General and administrative

 

 

19,550

 

 

 

14,929

 

Total operating expenses

 

 

73,743

 

 

 

48,751

 

Loss from operations

 

 

( 73,586

)

 

 

( 48,423

)

Other income (expense):

 

 

 

 

 

 

 

 

Loss from equity method investment

 

 

-

 

 

 

( 1,025

)

Other income, net

 

 

4,232

 

 

 

1,125

 

Total other income, net

 

 

4,232

 

 

 

100

 

Net loss before income taxes

 

 

( 69,354

)

 

 

( 48,323

)

Provision for income taxes

 

 

( 377

)

 

 

( 85

)

Net loss

 

 

( 69,731

)

 

 

( 48,408

)

Foreign currency translation adjustment

 

 

( 25

)

 

 

8

 

Comprehensive loss

 

$

( 69,756

)

 

$

( 48,400

)

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common shareholders—basic and diluted

 

$

( 1.15

)

 

$

( 0.93

)

Weighted-average common shares outstanding used in net loss per share attributable to common shareholders—basic and diluted

 

 

60,847,683

 

 

 

52,093,208

 

 

 

 

 

 

 

 

 

 

(1) Including the following revenue from a related party, see Notes 5 & 10:

 

$

 

 

$

328

 

(2) Including the following research and development expense with a related party, see Notes 5 & 10:

 

$

 

 

$

7,587

 

 

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

 

 

 

3


 

CRISPR Therapeutics AG

Consolidated Statements of Shareholders’ Equity

(In thousands, except share and per share data)

 

 

Common Shares

 

Treasury Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

CHF  0.03

Par Value

 

Shares

 

Amount,

at cost

 

Additional

Paid-in

Capital

 

Accumulated

Deficit

 

Accumulated Other

Comprehensive

Income (Loss)

 

 

 

 

Total Shareholders’

Equity

 

Balance at December 31, 2018

 

51,852,862

 

 

1,584

 

 

307,936

 

 

( 57

)

 

682,245

 

 

( 291,569

)

 

( 8

)

 

 

 

 

392,195

 

Issuance of common shares, net of issuance costs of $ 1.2 million

 

631,580

 

 

 

 

 

 

 

 

23,472

 

 

 

 

 

 

 

 

 

23,472

 

Vesting of restricted shares

 

9,288

 

 

 

 

 

 

 

 

15

 

 

 

 

 

 

 

 

 

15

 

Exercise of vested options

 

141,915

 

 

5

 

 

 

 

 

 

1,827

 

 

 

 

 

 

 

 

 

1,832

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

10,696

 

 

 

 

 

 

 

 

 

10,696

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

 

 

 

 

8

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

( 48,408

)

 

 

 

 

 

 

( 48,408

)

Balance at March 31, 2019

 

52,635,645

 

$

1,589

 

 

307,936

 

$

( 57

)

$

718,255

 

$

( 339,977

)

$

-

 

 

 

 

$

379,810

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

60,783,799

 

 

1,847

 

 

250,226

 

 

( 63

)

 

1,162,345

 

 

( 224,711

)

 

7

 

 

 

 

 

939,425

 

Vesting of restricted shares

 

5,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

Exercise of vested options

 

83,406

 

 

3

 

 

 

 

 

 

1,385

 

 

 

 

 

 

 

 

 

1,388

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

14,151

 

 

 

 

 

 

 

 

 

14,151

 

Issuance of common shares related to license agreement

 

17,830

 

 

 

 

( 17,830

)

 

 

 

889

 

 

 

 

 

 

 

 

 

889

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

( 25

)

 

 

 

 

( 25

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

( 69,731

)

 

 

 

 

 

 

( 69,731

)

Balance at March 31, 2020

 

60,890,035

 

$

1,850

 

 

232,396

 

$

( 63

)

$

1,178,770

 

$

( 294,442

)

$

( 18

)

 

 

 

$

886,097

 

 

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

 

4


 

CRISPR Therapeutics AG

Condensed Consolidated Statements of Cash Flows

(unaudited, in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

( 69,731

)

 

$

( 48,408

)

Reconciliation of net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,091

 

 

 

812

 

Equity-based compensation

 

 

14,151

 

 

 

9,671

 

Loss from equity method investment

 

 

-

 

 

 

1,025

 

Other expense, non-cash

 

 

890

 

 

 

-

 

Changes in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

( 25,018

)

 

 

( 243

)

Prepaid expenses and other assets

 

 

29,659

 

 

 

( 3,051

)

Accounts payable and accrued expenses

 

 

( 2,496

)

 

 

( 3,324

)

Deferred revenue

 

 

( 157

)

 

 

( 25

)

Operating lease assets and liabilities

 

 

37

 

 

 

 

Other liabilities, net

 

 

( 1,601

)

 

 

( 194

)

Net cash used in operating activities

 

 

( 52,175

)

 

 

( 43,737

)

Investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

( 2,991

)

 

 

( 1,097

)

Net cash used in investing activities

 

 

( 2,991

)

 

 

( 1,097

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common shares, net of issuance costs

 

 

-

 

 

 

23,894

 

Proceeds from exercise of options, net of issuance costs

 

 

1,132

 

 

 

1,832

 

Net cash provided by financing activities

 

 

1,132

 

 

 

25,726

 

Effect of exchange rate changes on cash

 

 

( 25

)

 

 

8

 

Decrease in cash

 

 

( 54,059

)

 

 

( 19,100

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

948,812

 

 

 

459,812

 

Cash, cash equivalents and restricted cash, end of period

 

$

894,753

 

 

$

440,712

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Property and equipment purchases in accounts payable and accrued expenses

 

$

1,340

 

 

$

579

 

Equity issuance costs in accounts payable and accrued expenses

 

$

39

 

 

$

181

 

 

 

 

As of March 31,

 

Reconciliation to amounts within the condensed consolidated balance sheets

 

2020

 

 

2019

 

Cash and cash equivalents

 

$

889,712

 

 

$

437,549

 

Restricted cash

 

 

5,041

 

 

 

3,163

 

Cash, cash equivalents and restricted cash at end of period

 

 

894,753

 

 

 

440,712

 

 

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

 

 

 

5


 

C RISPR Therapeutics AG

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited and have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America, or GAAP.  

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Prior to December 13, 2019, the Company accounted for its  50 % investment in Casebia Therapeutics Limited Liability Partnership, or Casebia, under the equity method. As described in Note 5, on December 13, 2019, Casebia became a fully-owned subsidiary and, as a result, the Company consolidated Casebia’s financial results from that date forward. All intercompany balances and transactions have been eliminated in consolidation. The Company views its operations and manages its business in one operating segment, which is the business of discovering, developing and commercializing therapies derived from or incorporating genome-editing technology. Certain information and footnote disclosures normally included in the Company’s annual financial statements have been condensed or omitted. These interim financial statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for the three-month interim periods ended March 31, 2020 and 2019.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2019, which are contained in the 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on February 12, 2020.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company’s management evaluates its estimates, which include, but are not limited to, revenue recognition, equity-based compensation expense and reported amounts of expenses during the period. Significant estimates in these consolidated financial statements have been made in connection with revenue recognition and equity-based compensation expense. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions. Changes in estimates are reflected in reported results in the period in which they become known.

Significant Accounting Policies

The significant accounting policies used in preparation of these condensed consolidated financial statements for the three months ended March 31, 2020 are consistent with those discussed in Note 2 to the consolidated financial statements in the Company’s 2019 Annual Report on Form 10-K filed with the SEC on February 12, 2020, except with respect to the Company’s policy on credit losses noted within the “Recently adopted accounting standards” section below.

Recently Adopted Accounting Standards

Credit Losses

On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Statements , or ASC 326. The new standard requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. It also limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The targeted transition relief standard allows filers an option to irrevocably elect the fair value option of ASC 825-10 , Financial Instruments-Overall , applied on an instrument-by-instrument basis for eligible instruments. The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost. The adoption of ASU 2016-13 did not have a material impact on the Company’s financial position or results of operations upon adoption.

6


 

2. Property and Equipment, net

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

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Computer equipment

 

$

727

 

 

$

727

 

Furniture, fixtures and other

 

 

3,215

 

 

 

3,215

 

Laboratory equipment

 

 

18,555

 

 

 

16,640

 

Leasehold improvements

 

 

21,400

 

 

 

21,400

 

Construction work in process

 

 

1,999

 

 

 

1,394

 

Total property and equipment, gross

 

 

45,896

 

 

 

43,376

 

Accumulated depreciation

 

 

( 14,123

)

 

 

( 12,046

)

Total property and equipment, net

 

$

31,773

 

 

$

31,330

 

 

Depreciation expense for the three months ended March 31, 2020 and 2019 was $ 2.1 million and $ 1.0 million, respectively.

3. Accrued Expenses

Accrued expenses consist of the following (in thousands):  

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Payroll and employee-related costs

 

$

5,431

 

 

$

15,229

 

Research costs

 

 

11,113

 

 

 

9,434

 

Licensing fees

 

 

 

 

 

750

 

Professional fees

 

 

1,694

 

 

 

2,040

 

Intellectual property costs

 

 

2,780

 

 

 

2,311

 

Accrued property and equipment

 

 

148

 

 

 

407

 

Other

 

 

758

 

 

 

9

 

Total

 

$

21,924

 

 

$

30,180

 

 

4. Commitments and Contingencies

Future Lease Commitments

The Company has entered into certain leasing commitments, for which, right of use assets and right of use liabilities are not reflected on the consolidated balance sheet as the leases have not yet commenced.  

In November 2019, the Company, together with one of its partners, committed to making payments to a clinical manufacturing organization under a lease arrangement. The lease arrangement is expected to commence in the second half of 2020, at which time an upfront payment of $ 2.6 million is due. In addition, the Company and its partner have committed to paying approximately $ 3.7 million in annual rental payments for a five-year period following commencement. All payments will be split equally between the Company and its partner.

Litigation

In the ordinary course of business, the Company is from time to time involved in lawsuits, claims, investigations, proceedings, and threats of litigation relating to intellectual property, commercial arrangements, employment and other matters. While the outcome of those proceedings and claims cannot be predicted with certainty, the Company is not party to any legal or arbitration proceedings that may have significant effects on its financial position. It is not a party to any material proceedings in which any director, member of executive management or affiliate of the Company is either a party adverse to it or its subsidiaries or has a material interest adverse to it or its subsidiaries.

7


 

Letters of Credit

As of March 31, 2020, the Company had restricted cash of $ 5.0 million representing letters of credit securing the Company’s obligations under certain leased facilities in Cambridge, Massachusetts, as well as certain credit card arrangements. The letters of credit are secured by cash held in a restricted depository account. The cash deposit is recorded in restricted cash in the accompanying consolidated balance sheet as of March 31, 2020.

Research, License and Intellectual Property Agreements

The Company has engaged several research institutions and companies to identify new delivery strategies and applications of the Company’s gene-editing technology. The Company is also a party to a number of research license agreements which require significant upfront payments and may be required to make future royalty payments and potential milestone payments from time to time. In addition, the Company is also a party to intellectual property agreements, which require maintenance and milestone payments from time to time. Further, the Company is a party to a number of manufacturing agreements that require upfront payments for the future performance of services.

In association with these agreements, on a product-by-product basis, the counterparties are eligible to receive up to low eight-digit potential payments upon specified research, development and regulatory milestones. In addition, on a product-by-product basis, the counterparties are eligible to receive potential commercial milestone payments based on specified annual sales thresholds. The potential payments are low-single digit percentages of the specified annual sales thresholds. The counterparties are also eligible to receive low single-digit royalties on future net sales.  

Under certain circumstances and if certain contingent future events occur, Vertex Pharmaceuticals Incorporated and certain of its subsidiaries, or Vertex, is eligible to receive up to $ 395.0 million in potential specified research, development, regulatory and commercial milestones and tiered single-digit royalties on future net sales.  Refer to Note 5 for further discussion on the Company’s arrangements with Vertex.

 

5. Significant Contracts

Agreements with Vertex Pharmaceuticals Incorporated and certain of its subsidiaries

Summary

On October 26, 2015, the Company entered into a strategic collaboration, option and license agreement, or the 2015 Collaboration Agreement, with Vertex. The 2015 Collaboration Agreement is focused on the use of the Company’s CRISPR/Cas9 gene-editing technology to discover and develop potential new treatments aimed at the underlying genetic causes of human disease.

On December 12, 2017, the Company and Vertex entered into Amendment No. 1 to the 2015 Collaboration Agreement, or Amendment No. 1, and the Joint Development Agreement, or the JDA. Amendment No. 1, among other things, modified certain definitions and provisions of the 2015 Collaboration Agreement to make them consistent with the JDA and clarified how many options are exercised (or deemed exercised) in connection with certain targets specified under the 2015 Collaboration Agreement. Amendment No. 1 also amended other provisions of the 2015 Collaboration Agreement, including the expiration terms.

In connection with the 2015 Collaboration Agreement, Vertex made a nonrefundable upfront payment of $ 75.0 million. Under the 2015 Collaboration Agreement, Vertex agreed to fund the discovery activities conducted pursuant to the agreement while retaining options to co-exclusive and exclusive licenses. In December 2017, upon execution of the JDA and Amendment No. 1, Vertex exercised its option to obtain a co-exclusive license to develop and commercialize hemoglobinopathy and beta-globin targets. As such, for potential hemoglobinopathy treatments, including treatments for sickle cell disease, the Company and Vertex will share equally all research and development costs and worldwide revenues. In connection with the JDA, the Company received a $ 7.0 million up-front payment from Vertex and subsequently received a one-time low seven-digit milestone payment upon the dosing of the second patient in a clinical trial with the initial product candidate. In addition, upon execution of the JDA and Amendment No. 1, it was clarified that Vertex may elect to license up to four remaining targets, for which it will lead global development and commercialization activities and the Company received the right to receive up to $ 420.0 million in development, regulatory and commercial milestones and royalties on net product sales for each of the targets (inclusive of $ 10 million due upon exercise of each exclusive option).

8


 

In June 2019, the Company and Vertex entered into a series of agreements, which closed on July 23, 2019, including a strategic collaboration and license agreement, or the 2019 Collaboration Agreement, for the development and commercialization of products for the treatment of Duchenne muscular dystrophy, or DMD, and myotonic dystrophy type 1, or DM1. Under the terms of the 2019 Collaboration Agreement, the Company received an upfront, nonrefundable payment of $ 175.0 million. In addition, the Company is eligible to receive potential aggregate payments of up to $ 825.0 million based upon the successful achievement of specified research, development, regulatory and commercial milestones for the DMD and DM1 programs. The Company is also eligible to receive tiered royalties on future net sales on any products that may result from this collaboration. For the DMD program, Vertex is responsible for all research, development, manufacturing and commercialization activities and all related costs. For the DM1 program, the Company will perform specified guide RNA research and Vertex is responsible for all other research, development, manufacturing and commercialization costs. Upon Investigational New Drug, or IND, application filing, the Company has the option to forego the DM1 milestones and royalties and instead, co-develop and co-commercialize all DM1 products globally in exchange for payment of 50 % of research and development costs incurred by Vertex from the effective date of the agreement through IND filing.

In connection with the execution of the 2019 Collaboration Agreement, the Company and Vertex entered into a second amendment to the 2015 Collaboration Agreement, or Amendment No. 2. Among other things, Amendment No. 2 modified certain definitions and provisions of the 2015 Collaboration Agreement to make them consistent with the 2019 Collaboration Agreement and set forth the number and identity of the collaboration targets under the 2015 Collaboration Agreement. The Company and Vertex agreed that one of the four remaining options under the 2015 Collaboration Agreement, as amended, would not be exercised; instead, the Company will reacquire the exclusive rights and will conduct research and development activities for the specified target. Vertex will have the option to co-develop and co-commercialize the specified target upon IND filing in exchange for payment of 50 % of research and development costs incurred by the Company from the effective date of the agreement through IND filing. If Vertex does not exercise its option to co-develop and co-commercialize the specified target, Vertex is eligible to receive up to $ 395.0 million in potential specified research, development, regulatory and commercial milestones and tiered single-digit royalties on future net sales.

In October 2019, Vertex exercised the remaining three options granted to it under the 2015 Collaboration Agreement to exclusively license the collaboration targets developed under the 2015 Collaboration Agreement, resulting in a payment of $ 30.0 million to the Company in the fourth quarter of 2019. The Company achieved the first milestone under the 2019 Collaboration Agreement in the first quarter of 2020 and in connection therewith received a payment of $ 25.0 million in April 2020.

Accounting for the Vertex Agreements

The 2015 Collaboration Agreement, Amendment No. 1, and JDA are collectively the “2015 Agreements” and the 2019 Collaboration Agreement and Amendment No. 2.  are collectively the “2019 Agreements.” The 2015 Collaboration Agreement, Amendment No. 1, Amendment No. 2, JDA and 2019 Collaboration Agreement are collectively the “Vertex Agreements.”

The Vertex Agreements include components of a customer-vendor relationship as defined under ASC 606, Revenue from Contracts with Customers , or ASC 606, collaborative arrangements as defined under ASC 808, Collaborative Agreements , or ASC 808, and research and development costs as defined under ASC 730, Research and Development , or ASC 730.  

Accounting Analysis Under ASC 606

Accounting for the 2019 Agreements

Identification of the Contract

The 2019 Agreements represented a contract modification to the 2015 Agreements.  As a result, the 2019 Agreements and the 2015 Agreements are combined for accounting purposes and treated as a single arrangement.  

Identification of Performance Obligations

The Company concluded the following material promises were both capable of being distinct and distinct within the context of the Vertex Agreements and represented separate performance obligations: (i) an exclusive license for worldwide rights for DMD gene editing products, or DMD License; (ii) an exclusive license for worldwide rights for DM1 gene editing products, or DM1 License; (iii) the performance of specified guide RNA research for DM1, or DM1 R&D Services; (iv) a material right representing the option to obtain a co-exclusive development and commercialization license for a specified target, or Specified Target Option; (v) three material rights representing the option for up to three exclusive licenses to develop and commercialize the collaboration targets, or Collaboration Target Options; and (vi) the waiving of Vertex’s material right associated with its option to a fourth exclusive license in connection with the Company’s reacquisition of exclusive rights to the specified target.

9


 

Determination of Transaction Price

The overall transaction price was determined based on the remaining transaction price from the 2015 Agreements, as well as the transaction price from the 2019 Agreements. The transaction price includes variable consideration estimated using the most likely amount methodology. As such, the Company determined the transaction price totaling $ 268.6 million was comprised of: (i) $ 57.8 million of pre-existing deferred revenue from the 2015 Agreements; (ii) non-cash consideration of $ 10.0 million related to the waiving of Vertex’s material right associated with its option to a fourth exclusive license in connection with the Company’s reacquisition of exclusive rights to the specified target; (iii) an upfront payment of $ 175.0 million; (iv) variable consideration of $ 25.0 million which represented the Company’s estimate related to a near-term research and development milestone for which the Company determined that it is not probable that a significant reversal of cumulative consideration will occur at the onset of the transaction; and (v) variable consideration of $ 0.8 million which represents the Company’s estimate of payments from Vertex for DM1 R&D Services.

The Company determined that all other possible variable consideration resulting from milestones and royalties discussed above was fully constrained as of March 31, 2020. The Company will re-evaluate the transaction price in each reporting period.

Allocation of Transaction Price to Performance Obligations

The selling price of each performance obligation was determined based on the Company’s estimated standalone selling price, or the ESSP. The Company developed the ESSP for all the performance obligations included in the Vertex Agreements with the objective of determining the price at which it would sell such an item if it were to be sold regularly on a standalone basis. The Company then allocated the transaction price to each performance obligation on a relative standalone selling price basis.

The ESSP for the DMD License and DM1 License was determined to be $ 224.6 million and $ 76.2 million, respectively. The ESSP was determined based on probability and present value adjusted cash flows from projected worldwide net profit for each of the respective programs based on probability assessments, projections based on internal forecasts, industry data, and information from other guideline companies within the same industry and other relevant factors. On a relative basis, $ 151.1 million and $ 51.3 million of the transaction price was allocated to the DMD License and DM1 License, respectively.

The ESSP for the Specified Target Option material right was determined to be $ 17.5 million, which was based on the incremental discount between (i) the value of the probability and present value adjusted cash flows from the equal sharing of projected worldwide net profit increased by the value of the option provided to Vertex less (ii) the expected exercise price at the time of option exercise. The present value adjusted cash flows also considered projections based on internal forecasts, industry data, and information from other guideline companies within the same industry and other relevant factors. On a relative basis, $ 11.8 million of the transaction price was allocated to the Specified Target Option material right.

The ESSP for each of the three Collaboration Target Option material rights was determined to be $ 25.0 million, $ 22.2 million and $ 22.2 million, respectively, which was determined based on the probability and present value adjusted cash flows from milestone payments owed for exclusive licenses, less the price paid to exercise each option. On a relative basis, $ 46.7 million of the transaction price was allocated to the Collaboration Target Option material rights.  

The aforementioned ESSPs reflect the level of risk and expected probability of success inherent in the nature of the associated research area.  

The ESSP for the waiving of Vertex’s material right associated with its option to a fourth exclusive license under the 2015 Agreements was determined to be $ 10.0 million, or the contractual value of the option. On a relative basis, $ 6.7 million of the transaction price was allocated to the waiving of Vertex’s material right associated with its option to a fourth exclusive license under the 2015 Agreements.  

The ESSP for the DM1 R&D Services was determined to be $ 1.7 million, which was based on estimates of the associated effort and cost of the services, adjusted for a reasonable profit margin that would be expected to be realized under similar contracts. On a relative basis, $ 1.1 million of the transaction price was allocated to the DM1 R&D Services.

Recognition of Revenue

The Company determined that the DMD License and DM1 License represent functional intellectual property, as the intellectual property provides Vertex with the ability to perform a function or task in the form of research and development. As such, the revenue related to the licenses was recognized at the point in time in which they were delivered during the third quarter of 2019.

10


 

The revenue allocated to the waiving of Vertex’s material right associated with its option to a fourth exclusive license in connection with Company’s reacquisition of exclusive rights to the specified target was recognized at the point in time in which the option was waived, on the effective date of the 2019 Agreements.  

The Company concluded that the Specified Target Option and Collaboration Target Options were considered material rights under the Vertex Agreements. Revenue related to the three Collaboration Target Options material right was recognized at the point in time in which Vertex exercised the Collaboration Target Options, which occurred in the fourth quarter of 2019. Revenue related to the Specified Target Option will be recognized at the point in time in which the option is exercised.  

The Company recognizes revenue related to the DM1 R&D Services over time as the services are rendered, which is expected to be over an 18-month period from the effective date of the 2019 Agreements.  

Accounting for the 2015 Agreements (prior to the execution of the 2019 Agreements)

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective approach. The Company applied the practical expedient in ASC 606-10-65-1 in identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price under the practical expedient in ASC 606 . There was no significant impact on revenue recognized under ASC 606 and the prior revenue recognition as a result of the adoption.    

Identification of the Contract

Amendment No. 1 and the JDA represented a contract modification to the 2015 Collaboration Agreement. As a result, the 2015 Agreements are combined for accounting purposes and treated as a single arrangement.  

Identification of Performance Obligations

The Company concluded the following material promises were both capable of being distinct and distinct within the context of the 2015 Agreements and represented separate performance obligations: (i) the non-exclusive research license; (ii) four material rights representing the option for up to four exclusive licenses to develop and commercialize the collaboration targets; (iii) a combined performance obligation representing the co-exclusive research license, and a development and commercialization license to develop and commercialize hemoglobinopathies and beta-globin targets; and (iv) the performance of R&D Services.

Determination of Transaction Price

The overall transaction price was comprised of: (i) original upfront payment of $ 75.0 million, (ii) an upfront payment of $ 7.0 million under the JDA, and (iii) $ 19.3 million of variable consideration associated with the R&D services.

The Company determined that all other possible variable consideration resulting from milestones and royalties discussed above was fully constrained at the time of the transaction.  

Allocation of Transaction Price to Performance Obligations

The selling price of each performance obligation was determined based on the Company’s ESSP. The Company developed the ESSP for all the performance obligations included in the 2015 Agreements with the objective of determining the price at which it would sell such an item if it were to be sold regularly on a standalone basis. The Company then allocated the transaction price to each performance obligation on a relative standalone selling price basis.

The ESSP for R&D Services was determined to be $ 19.3 million. The Company developed the ESSP for the R&D Services primarily based on the nature of the services to be performed and estimates of the associated effort and cost of the services, adjusted for a reasonable profit margin that would be expected to be realized under similar contracts. The Company allocated $ 19.3 million of the transaction price to R&D Services.

The Company’s ESSP for each of the remaining material rights to obtain an exclusive license to develop and commercialize a single collaboration target are $ 45.6 million, $ 38.4 million, $ 17.3 million and $ 17.3 million for a total of $ 118.6 million. ESSPs for these items were determined based on the probability and present value adjusted cash flows from milestone payments owed for exclusive licenses, less the price paid to exercise each option. On a relative basis, $ 57.7 million of the transaction price was allocated to these material rights.

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The Company’s ESSP for the co-exclusive research license and the development and commercialization licenses for hemoglobinopathy and beta-globin targets is $ 48.9 million. The ESSP for this item was determined based on probability and present value adjusted cash flows from the equal sharing of projected worldwide net profit. ESSP reflects the level of risk and expected probability of success inherent in the nature of the associated research area. On a relative basis, $ 23.8 million of the transaction price was allocated to the co-exclusive research license and the development and commercialization licenses for hemoglobinopathy and beta-globin targets.

The Company used a market-based approach to determine the ESSP of the non-exclusive research license of $ 1.0 million.  The Company determined ESSP by use of comparative data, including in-licensed research agreements negotiated and executed within the Company. On a relative basis, $ 0.5 million of the transaction price was allocated to the non-exclusive research license.

The aforementioned ESSPs reflect the level of risk and expected probability of success inherent in the nature of the associated research area.

Recognition of Revenue

The Company determined that the non-exclusive research license is symbolic intellectual property as Vertex receives value from the license through the Company’s ongoing activities, and, as such, the revenue related to the non-exclusive research license was recognized ratably over the term of the arrangement. Upon the execution of the JDA, a co-exclusive research, development and commercialization license was granted for hemoglobinopathy and beta-globin targets. The Company determined that the revenue related to these licenses was recognized at a point in time, in which they were delivered at inception of the JDA in December 2017. As Vertex has the material right in its option to obtain four additional exclusive licenses to develop and commercialize four additional collaboration targets, the Company determined that consideration allocated to these material rights would be included in the transaction price of the exclusive license and recognized at a point in time, upon the exercise of the option by Vertex or expiration. As the Company has a right to consideration from Vertex in an amount that corresponds directly with the value of the Company’s performance completed to date for the R&D services, the Company recognized revenue related to the R&D services as invoiced, in line with the practical expedient in ASC 606-10-55-18.

Revenue recognized in connection with the Vertex Agreements

Revenue recognized under the 2019 Agreements and revenue recognized under the 2015 Agreements for the three months ended March 31, 2020 and 2019, respectively, was not material.

As of March 31, 2020, there was $ 0.8 million of current deferred revenue related to the collaboration with Vertex compared to $ 0.9 million as of December 31, 2019. As of March 31, 2020, there was $ 11.8 million of non-current deferred revenue related to the collaboration with Vertex, which is unchanged from December 31, 2019. The transaction price allocated to the remaining performance obligations was $ 12.6 million.

Milestones under the Vertex Agreements

The Company has evaluated the milestones that may be received in connection with the Vertex Agreements. As discussed above, the Company is eligible to receive up to $ 410.0 million in additional development, regulatory and commercial milestones and royalties on net product sales for each of the three collaboration targets that Vertex licensed in the fourth quarter of 2019. Each milestone is payable only once per collaboration target, regardless of the number of products directed to such collaboration target that achieve the relevant milestone event.

The Company is eligible to receive potential future payments of up to $ 800.0 million based upon the successful achievement of specified research, development, regulatory and commercial milestones for the DMD and DM1 programs. As discussed above, the first research milestone of $ 25.0 million was included in the transaction price. T his amount was recorded as a contract asset within prepaid expenses and other current assets on the condensed consolidated balance sheet at December 31, 2019. This milestone was achieved during the first quarter of 2020 and paid during the second quarter of 2020. As of March 31, 2020, the $ 25.0 million milestone was recorded in accounts receivable on the condensed consolidated balance sheet. The Company is also eligible to receive tiered royalties on future net sales on any products that may result from this collaboration; however, the Company has the option to forego the DM1 milestones and royalties to co-develop and co-commercialize all DM1 products globally.

Each of the remaining milestones are fully constrained as of March 31, 2020. There is uncertainty that the events to obtain the research and developmental milestones will be achieved given the nature of clinical development and the stage of the CRISPR/Cas9 technology. The remaining research, development and regulatory milestones will be constrained until it is probable that a significant revenue reversal will not occur. Commercial milestones and royalties relate predominantly to a license of intellectual property and are determined by sales or usage-based thresholds. The commercial milestones and royalties are accounted for under the royalty recognition constraint and will be accounted for as constrained variable consideration. The Company applies the royalty recognition constraint for each commercial milestone and will not recognize revenue for each until the subsequent sale of a licensed product (achievement of each) occurs.  

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Accounting Analysis under ASC 808

In connection with the 2019 Agreements, the Company identified the following collaborative elements, which were unchanged as those identified with the 2015 Agreements and are accounted for under ASC 808: (i) development and commercialization services for shared products; (ii) R&D Services for follow-on products; and (iii) committee participation. The related impact of the cost sharing associated with research and development is included in research and development expense. Expenses related to services performed by the Company are classified as research and development expense. Payments received from Vertex for partial reimbursement of expenses are recorded as a reduction of research and development expense.

During the three months ended March 31, 2020 and 2019, the Company recognized $ 9.1 million and $ 7.1 million of research and development expense related to the Vertex Agreements. Research and development expense for the three months ended March 31, 2020 and 2019 was net of $ 5.5 million and $ 4.5 million of reimbursements from Vertex, respectively.

Accounting Analysis under ASC 730

In connection with the 2019 Vertex Agreements, the Company and Vertex agreed that one of the four remaining options under the 2015 Agreements, as amended, would not be exercised; instead, the Company will conduct research and development activities for a specified target. Vertex will have the option to co-develop and co-commercialize the specified target upon IND filing in exchange for payment of 50 % of research and development costs incurred by the Company from the effective date of the agreement through IND filing. If Vertex does not exercise its option to do so within a specified time period, Vertex is eligible to receive up to $ 395.0 million in potential specified research, development, regulatory and commercial milestones and tiered single-digit royalties on future net sales.