UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 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: 001-38997

 

RAPT Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

47-3313701

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

561 Eccles Avenue

South San Francisco, California 94080

(Address of principal executive offices and zip code)

(650) 489-9000 

(Registrant’s telephone number, including area code)

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

 

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock $0.0001 par value per share

RAPT

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

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

 

As of August 7, 2020, there were 24,468,910 shares of the registrants common stock outstanding.

 

 


RAPT THERAPEUTICS, INC.

TABLE OF CONTENTS

 

 

 

 

Page No.

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

3

 

Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019

 

3

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2020 and 2019

 

4

 

Condensed Consolidated Statement of Stockholders’ Equity for the Three and Six Months Ended June 30, 2020 and Condensed Consolidated Statement of Convertible Preferred Stock and Stockholders’ Deficit for the Three and Six Months Ended June 30, 2019

 

5

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019

 

7

 

Notes to Condensed Consolidated Financial Statements

 

8

Item 2.

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

 

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

23

Item 4.

Controls and Procedures

 

23

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

24

Item 1A.

Risk Factors

 

24

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

61

Item 3.

Defaults Upon Senior Securities

 

62

Item 4.

Mine Safety Disclosures

 

62

Item 5.

Other Information

 

62

Item 6.

Exhibits

 

63

Signatures

 

64

 

 


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

 

RAPT THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

 

 

June 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

(Note 2)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

28,957

 

 

$

77,383

 

Marketable securities

 

 

103,993

 

 

 

 

Prepaid expenses and other current assets

 

 

3,127

 

 

 

3,123

 

Total current assets

 

 

136,077

 

 

 

80,506

 

Property and equipment, net

 

 

3,210

 

 

 

3,707

 

Other assets

 

 

389

 

 

 

389

 

Total assets

 

$

139,676

 

 

$

84,602

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,381

 

 

$

1,143

 

Accrued expenses

 

 

4,256

 

 

 

3,642

 

Deferred revenue, current

 

 

6,013

 

 

 

4,000

 

Other current liabilities

 

 

430

 

 

 

471

 

Total current liabilities

 

 

13,080

 

 

 

9,256

 

Deferred rent, net of current portion

 

 

2,210

 

 

 

2,225

 

Deferred revenue, non-current

 

 

1,775

 

 

 

 

Commitments

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

 

Common stock

 

 

2

 

 

 

2

 

Additional paid-in capital

 

 

309,908

 

 

 

235,049

 

Accumulated other comprehensive income

 

 

177

 

 

 

20

 

Accumulated deficit

 

 

(187,476

)

 

 

(161,950

)

Total stockholders' equity

 

 

122,611

 

 

 

73,121

 

Total liabilities and stockholders' equity

 

$

139,676

 

 

$

84,602

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

3


RAPT THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenue

 

$

1,277

 

 

$

 

 

$

2,212

 

 

$

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

10,986

 

 

 

8,267

 

 

 

21,669

 

 

 

16,137

 

General and administrative

 

 

2,802

 

 

 

2,692

 

 

 

6,091

 

 

 

4,366

 

Total operating expenses

 

 

13,788

 

 

 

10,959

 

 

 

27,760

 

 

 

20,503

 

Loss from operations

 

 

(12,511

)

 

 

(10,959

)

 

 

(25,548

)

 

 

(20,503

)

Other income, net

 

 

391

 

 

 

333

 

 

 

526

 

 

 

689

 

Net loss before taxes

 

 

(12,120

)

 

 

(10,626

)

 

 

(25,022

)

 

 

(19,814

)

Provision for income taxes

 

 

267

 

 

 

 

 

 

504

 

 

 

 

Net loss

 

$

(12,387

)

 

$

(10,626

)

 

$

(25,526

)

 

$

(19,814

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(199

)

 

 

2

 

 

 

5

 

 

 

2

 

Unrealized gain on marketable securities

 

 

369

 

 

 

 

 

 

152

 

 

 

 

Total comprehensive loss

 

$

(12,217

)

 

$

(10,624

)

 

$

(25,369

)

 

$

(19,812

)

Net loss per share, basic and diluted

 

$

(0.51

)

 

$

(14.78

)

 

$

(1.08

)

 

$

(28.80

)

Weighted average number of shares used in computing net loss

   per share, basic and diluted

 

 

24,336,102

 

 

 

719,026

 

 

 

23,743,058

 

 

 

687,870

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


RAPT THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

Preferred Stock

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders'

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income

 

 

Equity

 

Balance at December 31, 2019

 

 

 

$

 

 

 

21,833,037

 

 

$

2

 

 

$

235,049

 

 

$

(161,950

)

 

$

20

 

 

$

73,121

 

     Issuance of common stock, net of issuance costs

 

 

 

 

 

 

 

2,500,000

 

 

 

 

 

 

69,842

 

 

 

 

 

 

 

 

 

69,842

 

Issuance of common stock upon exercise of stock

   options, net of repurchase

 

 

 

 

 

 

 

970

 

 

 

 

 

 

30

 

 

 

 

 

 

 

 

 

30

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

2,088

 

 

 

 

 

 

 

 

 

2,088

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

204

 

 

 

204

 

Unrealized loss on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(217

)

 

 

(217

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,139

)

 

 

 

 

 

(13,139

)

Balance at March 31, 2020

 

 

 

$

 

 

 

24,334,007

 

 

$

2

 

 

$

307,009

 

 

$

(175,089

)

 

$

7

 

 

$

131,929

 

Issuance of common stock upon exercise of stock

   options, net of repurchase

 

 

 

 

 

 

 

68,485

 

 

 

 

 

 

453

 

 

 

 

 

 

 

 

 

453

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

2,035

 

 

 

 

 

 

 

 

 

2,035

 

Issuance of common stock under

   the employee stock purchase plan

 

 

 

 

 

 

 

40,350

 

 

 

 

 

 

411

 

 

 

 

 

 

 

 

 

411

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(199

)

 

 

(199

)

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

369

 

 

 

369

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,387

)

 

 

 

 

 

(12,387

)

Balance at June 30, 2020

 

 

 

$

 

 

 

24,442,842

 

 

$

2

 

 

$

309,908

 

 

$

(187,476

)

 

$

177

 

 

$

122,611

 

5


CONDENSED CONSOLIDATED STATEMENT OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

(In thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Related Party

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Promissory Notes

 

 

 

 

 

 

Other

 

 

Total

 

 

Convertible Preferred Stock

 

 

Common Stock

 

 

Paid-In

 

 

for the Purchase

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders'

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

of Common Stock

 

 

Deficit

 

 

Income (Loss)

 

 

Deficit

 

Balance at December 31, 2018

 

98,491,880

 

 

$

161,111

 

 

$

878,413

 

 

$

1

 

 

$

22,441

 

 

$

(598

)

 

$

(118,953

)

 

$

(4

)

 

$

(97,113

)

Issuance of Series C-2 convertible preferred stock,

   net of issuance costs

 

3,039,908

 

 

 

6,947

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon exercise of stock

   options, net of repurchase

 

 

 

 

 

 

 

3,685

 

 

 

 

 

 

66

 

 

 

 

 

 

 

 

 

 

 

 

66

 

Repurchase of common stock from related party

 

 

 

 

 

 

 

(53,649

)

 

 

 

 

 

 

 

 

109

 

 

 

 

 

 

 

 

 

109

 

Interest on promissory notes from related parties

   for purchase of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

(2

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

377

 

 

 

 

 

 

 

 

 

 

 

 

377

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,188

)

 

 

 

 

 

(9,188

)

Balance at March 31, 2019

 

101,531,788

 

 

 

168,058

 

 

 

828,449

 

 

 

1

 

 

 

22,884

 

 

 

(491

)

 

 

(128,141

)

 

 

(4

)

 

 

(105,751

)

Issuance of Series C-2 convertible preferred stock,

   net of issuance costs

 

3,271,537

 

 

 

7,451

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon exercise of stock

   options, net of repurchase

 

 

 

 

 

 

 

13,996

 

 

 

 

 

 

34

 

 

 

 

 

 

 

 

 

 

 

 

34

 

Repurchase of common stock from related party

 

 

 

 

 

 

 

(29,686

)

 

 

 

 

 

 

 

 

65

 

 

 

 

 

 

 

 

 

65

 

Paydown of promissory notes from related parties

   for purchase of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

73

 

 

 

 

 

 

 

 

 

73

 

Forgiveness of promissory notes from related parties

   for purchase of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

353

 

 

 

 

 

 

 

 

 

 

 

353

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

347

 

 

 

 

 

 

 

 

 

 

 

 

347

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

2

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,626

)

 

 

 

 

 

(10,626

)

Balance at June 30, 2019

 

104,803,325

 

 

$

175,509

 

 

$

812,759

 

 

$

1

 

 

$

23,265

 

 

$

 

 

$

(138,767

)

 

$

(2

)

 

$

(115,503

)

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

6


RAPT THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2020

 

 

2019

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(25,526

)

 

$

(19,814

)

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

 

 

 

 

 

 

 

 

Amortization of premium on marketable securities

 

 

51

 

 

 

 

Depreciation and amortization

 

 

595

 

 

 

669

 

Stock-based compensation expense

 

 

4,123

 

 

 

724

 

Gain on foreign currency translation

 

 

5

 

 

 

2

 

Noncash interest income (loss), net

 

 

 

 

 

(2

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other long-term assets

 

 

(4

)

 

 

(2,317

)

Accounts payable and accrued liabilities

 

 

1,811

 

 

 

3,091

 

Deferred revenue

 

 

3,788

 

 

 

 

Deferred rent

 

 

(15

)

 

 

 

Net cash used in operating activities

 

 

(15,172

)

 

 

(17,647

)

Investing activities

 

 

 

 

 

 

 

 

Purchase of marketable securities

 

 

(111,892

)

 

 

 

Proceeds from maturities of marketable securities

 

 

8,000

 

 

 

 

Purchase of property and equipment

 

 

(98

)

 

 

(787

)

Net cash used in investing activities

 

 

(103,990

)

 

 

(787

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from public offering, net of issuance costs

 

 

69,842

 

 

 

 

Proceeds from the sale of convertible preferred stock, net of issuance costs

 

 

 

 

 

14,398

 

Proceeds from issuance of common stock under

     the employee stock purchase plan

 

 

411

 

 

 

 

Proceeds from issuance of common stock, net of repurchases

 

 

483

 

 

 

100

 

Net cash provided by financing activities

 

 

70,736

 

 

 

14,498

 

Net decrease in cash and cash equivalents

 

 

(48,426

)

 

 

(3,936

)

Cash and cash equivalents at beginning of period

 

 

77,383

 

 

 

63,798

 

Cash and cash equivalents at end of period

 

$

28,957

 

 

$

59,862

 

Supplemental disclosures of non-cash investing and financing information

 

 

 

 

 

 

 

 

Property and equipment purchases included in accounts payable

 

$

 

 

$

61

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

7


RAPT THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

Description of the Business

RAPT Therapeutics, Inc. (“RAPT” or the “Company”) is a clinical-stage, immunology-based biopharmaceutical company focused on discovering, developing and commercializing oral small molecule therapies for patients with significant unmet needs in oncology and inflammatory diseases. Utilizing its proprietary drug discovery and development engine, the Company develops highly selective small molecules that are designed to modulate the critical immune responses underlying these diseases. In May 2019, the Company changed its name from FLX Bio, Inc. to RAPT Therapeutics, Inc.

The Company is located in South San Francisco, California.

Equity Financing

In February 2020, the Company completed an underwritten public offering (the “Follow‑on Offering”) of 2,500,000 shares of common stock at an offering price of $30.00 per share. The Company received approximately $69.8 million in net proceeds from the Follow-on Offering, after deducting underwriting discounts and other offering-related costs.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and pursuant to Article 10 of Regulation S‑X of the Securities Act of 1933, as amended (the “Securities Act”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. These unaudited condensed consolidated financial statements include only normal and recurring adjustments that the Company believes are necessary to fairly state the Companys financial position and the results of its operations and cash flows. Interim-period results are not necessarily indicative of results of operations or cash flows for a full year or any subsequent interim period. The condensed balance sheet at December 31, 2019 has been derived from the audited financial statements at that date but does not include all disclosures required by U.S. GAAP for complete financial statements. Because all of the disclosures required by U.S. GAAP for complete financial statements are not included herein, these unaudited condensed consolidated financial statements and the notes accompanying them should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2019 filed on March 30, 2020 with the Securities and Exchange Commission.

The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP and include the consolidated accounts of the Company and its wholly-owned subsidiary, RAPT Therapeutics Australia Pty Ltd., which was established in 2018. All intercompany balances and transactions have been eliminated in consolidation.

Revenue

License and collaborative agreement revenue consists of license, milestone and royalty payments generated through agreements with strategic partners for the development and commercialization of certain product candidates. The terms of an agreement may include a non-refundable upfront fee, payments based upon achievement of milestones and royalties on net product sales. If a portion of the nonrefundable upfront fee or other payments received is allocated to continuing performance obligations under the terms of an agreement, such portion is recorded as deferred revenue and recognized as revenue when (or as) the underlying performance obligation is satisfied.

The Company recognizes revenue when it transfers promised goods or services to customers or counterparties in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. In determining the appropriate amount of revenue to be recognized, the Company performs the following steps: (i) identification of the promised goods or services in the agreement; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the agreement; (iii) measurement of the transaction price, including any constraint on variable consideration; (iv) allocation of the transaction price to performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

8


Licenses: If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in an agreement, the Company will recognize revenue from the nonrefundable, upfront fee allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. If a license is bundled with other performance obligations, the Company utilizes judgment to assess the nature of the combined performance obligations to determine whether the combined performance obligations are satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Milestone payments: If an agreement includes event-based or milestone payments, the Company evaluates whether the events or milestones are considered likely to be achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is unlikely that a significant revenue reversal would occur, the value of the associated event-based or milestone payments is included in the transaction price. Event-based or milestone payments that are not within the control of the Company are not included in the transaction price until they become likely to be achieved.

Royalties: If an agreement includes sales-based royalties and the license is deemed to be the predominant item to which the royalties relate, the Company will recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

Stock-Based Compensation

The Company measures stock-based compensation expense for all employee and non-employee stock-based awards based on their grant date fair value using the Black-Scholes option-pricing model. Subsequent to the adoption of ASU 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, stock-based compensation expense for non-employee stock-based awards is also measured based on the grant date fair value with the estimated fair value expensed over the period for which the non-employee is required to provide service in exchange for the award. For stock-based awards with service conditions only, stock-based compensation expense is recognized over the requisite service period using the straight-line method. For awards with performance conditions, the Company evaluates the probability of achieving performance conditions at each reporting date. The Company recognizes stock-based compensation expense using an accelerated attribution method when it is deemed probable that the performance condition will be met. Forfeitures are recognized as they occur.

Stock-based compensation expense related to restricted stock awards is determined using the estimated fair value of the Company’s common stock on the date of grant for the period prior to the Company’s initial public offering (“IPO”) in November 2019. The fair value of restricted stock awards granted after the IPO is determined based on the stock price on the date of grant. The estimated fair value is amortized as compensation expense over the service period of the award.

Stock-based compensation expense related to the Company’s employee stock purchase plan is recognized based on the fair value of each award estimated on the first day of the offering period using the Black‑Scholes option-pricing model and recorded as expense over the service period using the straight‑line method.

Net Loss Per Share

Basic net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period, without consideration of potential dilutive securities. Diluted net loss per share is computed by dividing the net loss by the sum of the weighted average number of common shares outstanding during the period plus the number of potential dilutive securities outstanding during the period calculated in accordance with the treasury stock method. Diluted net loss per share is the same as basic net loss per share for all periods presented since the effect of including potential dilutive securities is anti-dilutive.

Marketable securities

Marketable securities primarily consist of commercial paper, corporate bonds and U.S. government agency securities. The Company has classified its marketable securities as available-for-sale and may sell these securities prior to their stated maturities. The Company views these marketable securities as available to support current operations and classifies marketable securities with maturities beyond 12 months as current assets. The Company’s marketable securities are carried at estimated fair value, which is derived from independent pricing sources based on quoted prices in active markets for similar securities. Unrealized gains and losses are reported as a component of accumulated other comprehensive loss, net of tax. The amortized cost of marketable securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in interest income on the condensed consolidated statements of operations.

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Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the “FASB”) or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on our condensed consolidated financial statements upon adoption. Under the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”), the Company meets the definition of an emerging growth company and has elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

Adopted Accounting Pronouncements

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Non-Employee Share-Based Payment Accounting as part of the FASB’s simplification initiative. ASU 2018‑07 expands the scope of Topic 718 and allows the application of the requirements of Topic 718 to certain non-employee awards to acquire goods and services from non‑employees. The Company adopted ASU 2018‑07 in the first quarter of 2020 using a modified retrospective method and there was an insignificant impact to the Company’s financial position and results of operations related to this adoption.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement as part of the FASB’s disclosure framework project. ASU 2018-13 removes certain disclosure requirements, including the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation process for Level 3 fair value measurements. This ASU also modifies existing disclosure requirements by clarifying that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date, and adds disclosure requirements over Level 3 fair value measurements. The Company adopted ASU 2018-13 in the first quarter of 2020 and there was no impact to the Company’s financial position or results of operations related to this adoption.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. ASU 2019-12 also improves the consistent application, and the simplification, of other areas of Topic 740 by clarifying and amending existing guidance. The Company adopted ASU 2019-12 in the fourth quarter of 2019 and there was no impact to the financial position or results of operations related to this adoption.

Recently Issued Accounting Pronouncement Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases. ASU 2016-02 requires lessees to record most leases on their balance sheet while recognizing expense in a manner similar to the accounting under the original lease guidance (Topic 840). ASU 2016‑02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. ASU 2016-02 is effective for the Company’s fiscal year beginning after December 15, 2021 and early adoption is permitted. The Company is currently assessing the timing of adoption of ASU 2016-02 and the impact that adoption will have on its consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amended guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. For available-for-sale debt securities, credit losses will be presented as an allowance rather than as a write-down. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, to increase awareness of the amendments and to expedite improvements to Topic 326. In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments—Credit Losses, Topic 326, providing companies with an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. These ASUs do not change the core principle of the guidance in ASU 2016-13; instead, these amendments are intended to clarify and improve operability of certain topics. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates and ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which defer the effective date of the new credit loss standard. ASU 2016-13 and its related amendments are effective for the Company’s fiscal year beginning after December 15, 2022 and early adoption is permitted. The Company is currently assessing the timing of adoption of ASU 2016-13 and the impact that adoption will have on its consolidated financial statements and related disclosures.

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3. Fair Value Measurements

Fair value accounting is applied for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Financial instruments such as cash and cash equivalents, accounts payable and accrued liabilities approximate fair value due to their relatively short maturities.

Assets and liabilities recorded at fair value on a recurring basis in the balance sheet are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

Level 1Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level 3Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

To date, the Company has not recorded any impairment charges on marketable securities due to other-than-temporary declines in market value. In determining whether a decline is other than temporary, the Company considers various factors, including the length of time and extent to which the market value has been less than amortized cost, the financial condition and near-term prospects of the issuer and the Company’s intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.

The Company estimates the fair values of investments in corporate debt securities, commercial paper and U.S. government agency securities using 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.

Cash equivalents and marketable securities, all of which are classified as available-for-sale securities and measured at fair value on a recurring basis, consisted of the following (in thousands):

 

 

 

 

 

As of June 30, 2020

 

 

 

Fair Value

Hierarchy

Level

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair

Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds—classified

   as cash equivalents

 

Level 1

 

$

26,711

 

 

$

 

 

$

 

 

$

26,711

 

Corporate debt

 

Level 2

 

 

47,818

 

 

 

151

 

 

 

(1

)

 

 

47,968

 

Commercial paper

 

Level 2

 

 

23,438

 

 

 

 

 

 

 

 

 

23,438

 

U.S. government agency securities

 

Level 2

 

 

32,585

 

 

 

2

 

 

 

 

 

 

32,587

 

Total

 

 

 

$

130,552

 

 

$

153

 

 

$

(1

)

 

$

130,704

 

 

As of December 31, 2019, the financial assets subject to fair value measurement on a recurring basis consisted of money market funds with a fair value of $77.4 million.

As of June 30, 2020, the Company’s marketable securities had remaining contractual maturities of less than two years. The Company does not intend to sell the securities that are in an unrealized loss position, and the Company believes it is more likely than not that the investments will be held until recovery of the amortized cost bases. The Company has determined that the gross unrealized losses on marketable securities as of June 30, 2020 were temporary in nature.

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4. Property and Equipment

Property and equipment consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Laboratory equipment

 

$

5,763

 

 

$

5,752

 

Leasehold improvements

 

 

3,294