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ubx-10q_20190331.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 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: 001-38470

Unity Biotechnology, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	26-4726035
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

3280 Bayshore Blvd. Suite 100 Brisbane, CA	94005
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (650) 416-1192

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 ☒

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001	UBX	The Nasdaq Global Select Market

As of May 1, 2019, the registrant had 42,907,149 shares of common stock outstanding.

UNITY BIOTECHNOLOGY, INC.

QUARTERLY REPORT ON FORM 10-Q

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1	Condensed Financial Statements	2
	Condensed Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018	2
	Condensed Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2019 and 2018 (unaudited)	3
	Condensed Statements of Stockholders’ Equity (Deficit) for the Three Months Ended March 31, 2019 and 2018 (unaudited)	4
	Condensed Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (unaudited)	5
	Notes to Condensed Financial Statements (unaudited)	6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4	Controls and Procedures	25

PART II. OTHER INFORMATION

Item 1	Legal Proceedings	26
Item 1A	Risk Factors	26
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	68
Item 3	Default Upon Senior Securities	68
Item 4	Mine Safety Disclosures	68
Item 5	Other Information	68
Item 6	Exhibits	69
Signatures		70

PART I. FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

Unity Biotechnology, Inc.

Condensed Balance Sheets

(In thousands, except share and per share amounts)

	March 31, 2019			December 31, 2018
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	34,249		$	15,399
Short-term marketable securities		115,949			155,736
Prepaid expenses and other current assets		1,642			1,830
Total current assets		151,840			172,965
Property and equipment, net		5,880			6,238
Restricted cash		1,446			550
Other long-term assets		1,631			1,622
Total assets	$	160,797		$	181,375
Liabilities, convertible preferred stock, and stockholders’ equity
Current liabilities:
Accounts payable	$	4,071		$	4,847
Accrued compensation		1,674			3,791
Accrued and other current liabilities		4,920			4,990
Settlement liability		—			2,059
Contingent consideration liability		446			895
Total current liabilities		11,111			16,582
Deferred rent, net of current portion		2,265			2,467
Contingent consideration liability, net of current portion		792			1,588
Other non-current liabilities		26			45
Total liabilities		14,194			20,682
Commitments and contingencies (Note 6)
Convertible preferred stock, $0.0001 par value; 10,000,000 shares authorized as of March 31, 2019 and December 31, 2018; no shares issued and outstanding as of March 31, 2019 and December 31, 2018		—			—
Stockholders’ equity:
Common stock, $0.0001 par value; 300,000,000 shares authorized as of March 31, 2019 and December 31, 2018; 42,888,359 and 42,414,294 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively		4			4
Additional paid-in capital		329,226			324,663
Related party promissory notes for purchase of common stock		(201	)		(201	)
Employee promissory notes for purchase of common stock		(400	)		(400	)
Accumulated other comprehensive loss		19			(95	)
Accumulated deficit		(182,045	)		(163,278	)
Total stockholders’ equity		146,603			160,693
Total liabilities, convertible preferred stock, and stockholders’ equity	$	160,797		$	181,375

See accompanying notes to the condensed financial statements.

Unity Biotechnology, Inc.

Condensed Statements of Operations and Comprehensive Loss

(In thousands, except share and per share amounts)

(Unaudited)

	Three Months Ended March 31,
	2019			2018
Operating expenses:
Research and development	$	16,505		$	13,025
General and administrative		4,477			3,457
Change in fair value of contingent consideration		(1,245	)		—
Total operating expenses		19,737			16,482
Loss from operations		(19,737	)		(16,482	)
Interest income (expense), net		1,006			352
Other expense, net		(36	)		(3	)
Net loss		(18,767	)		(16,133	)
Other comprehensive loss
Unrealized gain (loss) on marketable securities, net of tax		114			(34	)
Comprehensive loss	$	(18,653	)	$	(16,167	)
Net loss per share, basic and diluted	$	(0.44	)	$	(4.69	)
Weighted-average number of shares used in computing net loss per share, basic and diluted		42,190,457			3,437,345

See accompanying notes to the condensed financial statements.

Unity Biotechnology, Inc.

Statements of Stockholders’ Equity

(In thousands, except share and per share amounts)

(Unaudited)

For the Three Months Ended March 31, 2019

	Convertible Preferred Stock				Common Stock				Additional Paid-In		Related Party Promissory Notes for Purchase of			Employee Promissory Notes for Purchase of			Accumulated Other Comprehensive			Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount		Capital		Common Stock			Common Stock			Loss			Deficit			Equity (Deficit)
Balances at December 31, 2018		—	$	—		42,414,294	$	4	$	324,663	$	(201	)	$	(400	)	$	(95	)	$	(163,278	)	$	160,693
Issuance of common stock upon exercise of stock options		—		—		340,731		—		300		—			—			—			—			300
Vesting of early exercised stock options		—		—		—		—		207		—			—			—			—			207
Stock-based compensation		—		—		—		—		1,997		—			—			—			—			1,997
Common stock issued to third parties		—		—		133,334		—		2,059		—			—			—			—			2,059
Unrealized gain on available-for-sale marketable securities, net of tax		—		—		—		—		—		—			—			114			—			114
Net loss		—		—		—		—		—		—			—			—			(18,767	)		(18,767	)
Balances at March 31, 2019		—	$	—		42,888,359		4		329,226		(201	)		(400	)		19			(182,045	)		146,603

For the Three Months Ended March 31, 2018

	Convertible Preferred Stock				Common Stock				Additional Paid-In		Related Party Promissory Notes for Purchase of			Employee Promissory Notes for Purchase of			Accumulated Other Comprehensive			Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount		Capital		Common Stock			Common Stock			Loss			Deficit			Equity (Deficit)
Balances at December 31, 2017		28,159,724	$	173,956		4,830,389	$	1	$	4,072	$	(202	)	$	—		$	(104	)	$	(86,880	)	$	(83,113	)
Issuance of Series C convertible preferred stock at $15.3317 per share for cash, net of issuance costs of $100		3,590,573		54,950		—		—		—		—			—			—			—			—
Issuance of common stock upon exercise of stock options		—		—		400,587		—		31		—			—			—			—			31
Vesting of early exercised stock options		—		—		—		—		38		—			—			—			—			38
Stock-based compensation		—		—		—		—		1,370		—			—			—			—			1,370
Unrealized gain on available-for-sale marketable securities, net of tax		—		—		—		—		—		—			—			(34	)		—			(34	)
Receipt of promissory note from related party for purchase of common stock		—		—		—		—		—		(390	)		—			—			—			(390	)
Receipt of promissory note from employee for purchase of common stock		—		—		—		—		—		—			(400	)		—			—			(400	)
Net loss		—		—		—		—		—		—			—			—			(16,133	)		(16,133	)
Balances at March 31, 2018		31,750,297	$	228,906		5,230,976		1		5,511		(592	)		(400	)		(138	)		(103,013	)		(98,631	)

See accompanying notes to the condensed financial statements.

Unity Biotechnology, Inc.

Condensed Statements of Cash Flows

(In thousands)

(Unaudited)

	Three Months Ended March 31,
	2019			2018
Operating activities
Net loss	$	(18,767	)	$	(16,133	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		637			502
Amortization of premium and discounts on marketable securities		(366	)		(33	)
Stock-based compensation		1,997			1,370
Accretion of tenant improvement allowance		(152	)		(152	)
Change in fair value of contingent consideration for license agreements		(1,245	)		—
Changes in operating assets and liabilities:
Contribution receivable		—			1,382
Prepaid expenses and other current assets		188			291
Other long-term assets		(9	)		(4	)
Accounts payable		(776	)		1,830
Accrued compensation		(2,117	)		(1,223	)
Accrued liabilities and other current liabilities		65			239
Deferred rent, net of current portion		(51	)		48
Net cash used in operating activities		(20,596	)		(11,883	)
Investing activities
Purchase of marketable securities		(18,054	)		(6,225	)
Maturities of marketable securities		58,321			19,273
Purchase of property and equipment		(207	)		(101	)
Net cash provided by investing activities		40,060			12,947
Financing activities
Proceeds from issuance of convertible preferred stock, net of issuance costs		—			54,951
Proceeds from issuance of common stock upon exercise of stock options, net of repurchases		300			27
Payments of deferred offering costs		—			(569	)
Payments made on capital lease obligations		(18	)		(17	)
Net cash provided by financing activities		282			54,392
Net increase in cash, cash equivalents and restricted cash		19,746			55,456
Cash, cash equivalents and restricted cash at beginning of the period		15,949			7,848
Cash, cash equivalents and restricted cash at end of the period	$	35,695		$	63,304
Supplemental Disclosures of Non-Cash Investing and Financing Information
Issuance of common stock to settle contingent consideration liability	$	2,059		$	—
Property and equipment included in accounts payable and accrued liabilities	$	71		$	34
Deferred offering costs included in accounts payable and accrued liabilities	$	—		$	1,138
Receipt of promissory note from related party for purchase of common stock	$	—		$	390
Receipt of promissory note from employees for purchase of common stock	$	—		$	400

See accompanying notes to the condensed financial statements.

Unity Biotechnology, Inc.

Notes to Condensed Financial Statements

(Unaudited)

1. Organization

Description of Business

Unity Biotechnology, Inc. (the “Company”) is a biotechnology company engaged in the research and development of therapeutics to extend human healthspan. The Company devotes substantially all of its time and efforts to performing research and development, raising capital and recruiting personnel. The Company is located in Brisbane, California, was incorporated in the State of Delaware in 2009 and operates in one segment.

Need for Additional Capital

The Company has incurred operating losses and has an accumulated deficit as a result of ongoing efforts to develop drug product candidates, including conducting preclinical and clinical trials and providing general and administrative support for these operations. The Company had an accumulated deficit of $182.0 million and $163.3 million as of March 31, 2019 and December 31, 2018, respectively. The Company had net losses of $18.8 million and $16.1 million for the three months ended March 31, 2019 and 2018, respectively, and net cash used in operating activities of $20.6 million and $11.9 million for the three months ended March 31, 2019 and 2018, respectively. To date, none of the Company’s drug candidates have been approved for sale. The Company has not generated any revenue from contracts with customers and does not expect positive cash flows from operations in the foreseeable future. The Company has historically financed its operations primarily through the issuance and sale of convertible preferred stock and convertible promissory notes. The Company has evaluated and concluded there are no conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year following the date that these financial statements are issued. Management expects operating losses to continue for the foreseeable future. As a result, the Company will need to raise additional capital. If sufficient funds on acceptable terms are not available when needed, the Company could be required to significantly reduce its operating expenses and delay, reduce the scope of, or eliminate one or more of its development programs. Failure to manage discretionary spending or raise additional financing, as needed, may adversely impact the Company’s ability to achieve its intended business objectives.

2. Summary of Significant Accounting Policies

Basis of Presentation

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of United States Securities and Exchange Commission (“SEC”) for interim reporting.

The condensed financial statements are unaudited and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation for interim reporting. The results of operations for any interim period are not necessarily indicative of results of operations for any future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, the unaudited condensed financial statements should be read in conjunction with the audited financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC.

Reverse Stock Split

On April 19, 2018, the Company’s board of directors approved an amendment to the Company’s amended and restated certificate of incorporation to effect a 1-for-2.95 reverse split (“Reverse Split”) of shares of the Company’s common and convertible preferred stock, which was effected on April 20, 2018. The par value and authorized shares of common stock and convertible preferred stock were not adjusted as a result of the Reverse Split. All of the share

and per share information included in the accompanying financial statements have been adjusted to reflect the Reverse Split. Accordingly, all share and per share information presented in the condensed financial statements herein, and notes thereto, have been retroactively adjusted to reflect the Reverse Split.

Initial Public Offering

On May 7, 2018, the Company closed its initial public offering (“IPO”), of 5,000,000 shares of common stock, at an offering price to the public of $17.00 per share. The Company received net proceeds of approximately $75.9 million, after deducting underwriting discounts, commissions and offering related transaction costs of approximately $9.1 million. In connection with the IPO, all of the Company’s outstanding shares of convertible preferred stock were automatically converted into 32,073,149 shares of common stock. In addition, all of our convertible preferred stock warrants were converted into warrants to purchase shares of common stock.

In connection with the completion of its IPO, on May 7, 2018, the Company’s certificate of incorporation was amended and restated to provide for 300,000,000 authorized shares of common stock with a par value of $0.0001 per share and 10,000,000 authorized shares of preferred stock with a par value of $0.0001 per share.

Use of Estimates

The condensed financial statements have been prepared in accordance with GAAP, which requires management to make estimates and assumptions that affect the amounts and disclosures reported in the condensed financial statements and accompanying notes. The Company bases its estimates on historical experience and market-specific or other relevant assumptions that it believes are reasonable under the circumstances. The amounts of assets and liabilities reported in the Company’s condensed balance sheets and the amount of expenses and income reported for each of the periods presented are affected by estimates and assumptions, which are used for, but are not limited to, determining the fair value of assets and liabilities, common stock valuation, contingent consideration liability and stock-based compensation. Actual results could differ from such estimates or assumptions.

Contingent Consideration Liability

The Company has entered into, and may continue to enter into, license agreements to access and utilize certain technology. In each case, the Company evaluates if the license agreement results in the acquisition of an asset or a business. To date none of the Company’s license agreements have been considered an acquisition of a business. For asset acquisitions, the upfront payments to acquire such licenses, as well as any future milestone payments made before product approval, are immediately recognized as research and development expense when due, provided there is no alternative future use of the rights in other research and development projects. These license agreements also include contingent consideration in the form of additional issuances of the Company’s common stock based on the achievement of certain milestones. For asset acquisitions, the Company assesses on a continuous basis whether such contingent consideration meets the definition of a derivative and can or cannot be classified within stockholders’ equity, until such time that equity classification criteria are met or the milestones expire. The derivative related to this contingent consideration is measured at fair value as of each balance sheet date with the related change in fair value being reflected in operating expenses. Upon a reassessment event that results in the contingent consideration no longer meeting the definition of a derivative and/or meeting equity classification criteria, the final change in fair value of the instrument is recorded within operating expenses and the liability is reclassified into stockholders’ equity. As of March 31, 2019, the Company has recorded a liability related to contingent consideration as the net settlement criteria of the definition of a derivative had been met.

Deferred Offering Costs

Deferred offering costs, consisting of direct incremental legal, accounting, filing and other fees incurred related to the preparation of the IPO, have been capitalized and were offset against proceeds upon completion of the offering in May 2018. As of March 31, 2018, $1.7 million of deferred offering costs were capitalized and included in current assets on the balance sheet. There were no capitalized deferred offering costs at March 31, 2019.

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with original maturities of 90 days or less from the date of purchase to be cash equivalents. Cash equivalents primarily include money market funds that invest in U.S. Treasury obligations which are stated at fair value.

The Company has issued a letter of credit under a lease agreement which has been collateralized. This cash is classified as noncurrent restricted cash on the balance sheet based on the term of the underlying lease.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash within the balance sheets that sum to the total of the same amounts shown in the condensed statements of cash flows (in thousands).

	March 31, 2019		December 31, 2018
Cash and cash equivalents	$	34,249	$	15,399
Restricted cash		1,446		550
Total cash, cash equivalents and restricted cash	$	35,695	$	15,949

Variable Interest Entities

The Company reviews agreements it enters into with third-party entities, pursuant to which the Company may have a variable interest in the entity, in order to determine if the entity is a variable interest entity (“VIE”). If the entity is a VIE, the Company assesses whether or not it is the primary beneficiary of that entity. In determining whether the Company is the primary beneficiary of an entity, the Company applies a qualitative approach that determines whether it has both (i) the power to direct the economically significant activities of the entity and (ii) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. If the Company determines it is the primary beneficiary of a VIE, it consolidates that VIE into the Company’s financial statements. The Company’s determination about whether it should consolidate such VIEs is made continuously as changes to existing relationships or future transactions may result in a consolidation or deconsolidation event.

Concentrations of Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, restricted cash and marketable securities. Substantially all of the Company’s cash and cash equivalents and restricted cash is deposited in accounts with financial institutions that management believes are of high credit quality. Such deposits have and will continue to exceed federally insured limits. The Company maintains its cash with accredited financial institutions, and accordingly, such funds are subject to minimal credit risk. The Company has not experienced any losses on its cash deposits.

The Company’s investment policy limits investments to certain types of securities issued by the U.S. government, its agencies and institutions with investment-grade credit ratings and places restrictions on maturities and concentration by type and issuer. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash, cash equivalents, restricted cash and marketable securities and issuers of marketable securities to the extent recorded on the balance sheets. As of March 31, 2019, the Company had no off-balance sheet concentrations of credit risk.

The Company depends on third-party suppliers for key raw materials used in its manufacturing processes and is subject to certain risks related to the loss of these third-party suppliers or their inability to supply the Company with adequate raw materials.

Recently Adopted Accounting Pronouncements

In August 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. The Company adopted the amendments during the first quarter of fiscal year 2019, and as a result, disclosed in its statements of stockholders’ equity the quarterly activity of each

caption of stockholders’ equity for the three months ended March 31, 2019 and 2018. The adoption of the amendments did not have a material impact on the Company’s condensed financial statements.

In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-01, Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance makes amendments to the classification and measurement of financial instruments and revises the accounting related to: (1) the classification and measurement of investments in equity securities (except for investments accounted for under the equity method of accounting); and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. In addition, the update also amends certain disclosure requirements associated with the fair value of financial instruments. The guidance is effective for the Company for annual periods beginning in 2019 and interim periods beginning in 2020. Early adoptions of certain amendments within the update are permitted. The Company adopted this guidance during the first quarter of fiscal year 2019. The adoption of this guidance did not have a material impact on the Company's condensed financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for the Company for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company adopted this ASU during the first quarter of fiscal year 2019. The adoption of this ASU did not have a significant impact on its condensed financial statements and related disclosures.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230: Classification of Certain Cash Receipts and Cash Payments). This guidance addresses specific cash flow issues with the objective of reducing the diversity in practice for the treatment of these issues. The areas identified include: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and application of the predominance principle with respect to separately identifiable cash flows. The guidance will generally be applied retrospectively and is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company adopted this ASU during the first quarter of fiscal year 2019. The adoption of this ASU did not have a significant impact on its condensed financial statements and related disclosures.

Recently Issued Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued ASU No. 2018-15, Intangibles (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This new standard also requires customers to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. This standard is effective for the Company for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. This new standard can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact of adoption on its condensed financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, modifies and adds disclosure requirements for fair value measurements. The amendments in this ASU are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the effects of this ASU on its condensed financial statements and related disclosures.

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this ASU expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. This new guidance is effective for the Company in fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the effects of this ASU on its condensed financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses, or Topic 326, Measurement of Credit Losses on Financial Instruments which changes the accounting for recognizing impairments of financial assets. The ASU changes the impairment model for certain financial instruments. The new model is a forward-looking expected loss model and will apply to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures. This includes loans, held-to-maturity debt securities, loan commitments, financial guarantees and net investments in leases, as well as trade receivables. For available-for-sale debt securities with unrealized losses, credit losses will be measured in a manner similar to today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The standard will be effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years. Early adoption is permitted. The Company is currently assessing the effect that this ASU will have on its financial position, results of operations, and disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), and related amendments which supersedes the guidance in former ASC 840, Leases. The new standard, as amended by subsequent ASUs on the Topic, requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. For the Company, this standard is effective for annual reporting periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020. Early adoption is permitted. The ASU is expected to impact the Company’s financial statements as the Company has certain operating lease arrangements for which the Company is the lessee. While the Company is currently evaluating the impact of the adoption of this standard on its financial statements, the Company anticipates the recognition of additional assets and corresponding liabilities on its balance sheet related to these leases. The adoption of this accounting standard update is also expected to impact the Company’s condensed financial statement disclosures

3. Fair Value Measurements

The Company determines the fair value of financial and non-financial assets and liabilities based on the assumptions that market participants would use in pricing the asset or liability in an orderly transaction between market participants at the measurement date. The identification of market participant assumptions provides a basis for determining what inputs are to be used for pricing each asset or liability. A fair value hierarchy has been established which gives precedence to fair value measurements calculated using observable inputs over those using unobservable inputs. This hierarchy prioritized the inputs into three broad levels as follows:

•

Level 1: Quoted prices in active markets for identical instruments

•

Level 2: Other significant observable inputs (including quoted prices in active markets for similar instruments)

•

Level 3: Significant unobservable inputs (including assumptions in determining the fair value of certain investments)

The carrying amounts of financial instruments such as cash and cash equivalents, restricted cash, prepaid expenses and other current assets, accounts payable, accrued compensation, accrued and other current liabilities approximate the related fair values due to the short maturities of these instruments.

The fair value of the Company’s cost method investment is measured when it is deemed to be other-than-temporarily impaired.

The Company’s financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used in such measurements were as follows (in thousands):

	March 31, 2019
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents:
Money market funds	$	29,239	$	29,239	$	—	$	—
Receivable from maturity of U.S. treasury security		4,000		4,000		—		—
Total cash equivalents		33,239		33,239		—		—
Short-term marketable securities:
U.S. treasuries		17,204		—		17,204		—
U.S. and foreign commercial paper		16,616		—		16,616		—
U.S. and foreign corporate debt securities		16,408		—		16,408		—
U.S. government debt securities		65,721		—		65,721		—
Total short-term marketable securities		115,949		—		115,949		—
Total assets subject to fair value measurements on a recurring basis	$	149,188	$	33,239	$	115,949	$	—
Liabilities:
Contingent consideration liability	$	1,238	$	—	$	—	$	1,238
Total liabilities subject to fair value measurements on a recurring basis	$	1,238	$	—	$	—	$	1,238

	December 31, 2018
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents:
Money market funds	$	14,131	$	14,131	$	—	$	—
Total cash equivalents		14,131		14,131		—		—
Short-term marketable securities:
U.S. treasuries		34,121		—		34,121		—
U.S. and foreign commercial paper		10,635		—		10,635		—
U.S. and foreign corporate debt securities		26,533		—		26,533		—
Asset-backed securities		2,748		—		2,748		—
U.S. government debt securities		81,699		—		81,699		—
Total short-term marketable securities		155,736		—		155,736		—
Total assets subject to fair value measurements on a recurring basis	$	169,867	$	14,131	$	155,736	$	—
Liabilities:
Contingent consideration liability	$	2,483	$	—	$	—	$	2,483
Total liabilities subject to fair value measurements on a recurring basis	$	2,483	$	—	$	—	$	2,483

The Company estimates the fair value of its money market funds, U.S. and foreign commercial paper, U.S. and foreign corporate debt securities, asset-backed securities, U.S. treasuries and U.S. government debt securities by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads; benchmark securities; prepayment/default projections based on historical data; and other observable inputs.

The fair value of the contingent consideration liability includes inputs not observable in the market and thus represents a Level 3 measurement. The Company has recorded a contingent consideration liability related to three agreements with a privately held clinical-stage biopharmaceutical company (see Note 5). As of March 31, 2019, these Commercial Agreements included contingent consideration of up to an aggregate of 533,336 additional shares of common stock to be issued in specified portions to the Licensor and an academic institution from which the Licensor had previously in-licensed the underlying technology based on achievement of certain specified preclinical and clinical development and sales milestone events. The probability of achieving the defined milestone events under the Commercial Agreements is estimated on a quarterly basis by the Company’s management using a probability-weighted valuation approach model which reflects the probability and timing of future issuances of shares. Total contingent consideration may change significantly as preclinical and clinical development related to the compounds covered by the Commercial Agreements progresses and additional data is obtained, impacting the Company’s assumptions regarding probabilities of and timing for successful achievement of the related milestone events. For example, significant increases in the estimated probability of achieving a milestone would result in a significantly higher fair value measurement while significant decreases in the estimated probability of achieving a milestone would result in a significantly lower fair value measurement. The potential outstanding contingent consideration value results in shares to be issued ranging from zero, if none of the milestones are achieved, to a maximum of $4.9 million (using the Company’s stock price as of March 31, 2019). As of March 31, 2019, and December 31, 2018, none of the commercial milestones had been achieved and no royalties were due from the sales of licensed products.

As of December 31, 2018, the Company determined that the net settlement criteria of the definition of a derivative had been met for 133,334 shares of common stock to the third parties. The Company issued 106,667 of these shares to the Licensor in January 2019 and the remaining 26,667 shares to the academic institution in March 2019. The settlement liability of $2.0 million recorded at December 31, 2018 was reclassified into stockholders’ equity upon the issuance of these shares. The Company recorded a contingent consideration liability of $1.2 million at March 31, 2019 related to additional potential shares subject to the achievement of certain specified clinical development and sales milestone events under the agreements. The following table provides a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):