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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 September 30, 2019
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 001-36819 

 
Spark Therapeutics, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
 
46-2654405
(State or Other Jurisdiction of
Incorporation or Organization)
 
 
(IRS Employer
Identification No.)
 
 
 
 
3737 Market Street                         
Suite 1300                            
Philadelphia, PA                             19104
(Address of Principal Executive Offices)                         (Zip Code)

(888) 772-7560
(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 Stock, $0.001 par value per share
 
ONCE
 
Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    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 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. (Check one):


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Large accelerated filer
 
Accelerated filer
 
 
 
 
 
Non-accelerated filer
(Do not check if a smaller reporting company)
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  x

As of November 1, 2019 there were 38,523,294 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.
 


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TABLE OF CONTENTS

 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
Item 1.
Item 1A.
Item 6.
 
 
SIGNATURES
 
 
 



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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 fact, contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
The forward-looking statements in this Quarterly Report on Form 10-Q include, among other things, statements about:
the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement that we entered into with Roche Holdings, Inc., or Roche, and its wholly owned acquisition subsidiary on February 22, 2019, pursuant to which we expect to become a wholly owned subsidiary of Roche;
the failure to satisfy required closing conditions under the merger agreement, including, but not limited to, the tender of a minimum number of our outstanding shares of common stock in the related tender offer and the receipt of required regulatory approvals, or the failure to complete the merger in a timely manner;
risks related to disruption of management’s attention from our ongoing business operations due to the pendency of the transaction with Roche;
the effect of the announcement of the transaction with Roche on our operating results and business generally, including, but not limited to, our ability to retain and hire key personnel and maintain our relationships with customers, strategic partners, suppliers, regulatory authorities and others with whom we do business;
the impact of the pending transaction with Roche on our strategic plans and operations and our ability to respond effectively to competitive pressures, industry developments and future opportunities;
the outcome of any legal proceedings that may be instituted against us and others relating to the merger agreement with Roche;
our expectations regarding our commercial launch of LUXTURNA® (voretigene neparvovec-rzyl) and our plans to develop and commercialize our other product candidates;
our estimates regarding the potential market opportunity for LUXTURNA and our product candidates;
our ability to maintain our current, and enter into additional, agreements involving outcomes-based rebates and innovative contracting models with payers for LUXTURNA or any future products;
the timing, progress and results of clinical trials for SPK-7001SPK-9001, SPK-8011, SPK-8016, SPK-3006 and our other product candidates, including statements regarding the timing of initiation and completion of clinical trials, dosing of subjects and the period during which the results of the trials will become available;
the initiation, timing, progress and results of future preclinical studies and clinical trials, and our research and development programs for our other product candidates;
our ability to achieve milestones and receive payments under our collaborations;
our commercialization, medical affairs, marketing and manufacturing capabilities and strategy;
the implementation of our business model, strategic plans for our business, product candidates and technology;
the scalability and commercial viability of our proprietary manufacturing processes;
our expectations about the rate and degree of market acceptance and clinical utility of LUXTURNA and our product candidates, in particular, and gene therapy in general;
our competitive position;
our intellectual property position;
developments and projections relating to our competitors and our industry;
our ability to maintain and establish collaborations or obtain additional funding;
our expectations related to the use of our capital resources;


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our estimates regarding expenses, future revenue, capital requirements and needs for additional financing; and
the impact of government laws and regulations.
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make and do not assume the consummation of our proposed transaction with Roche unless specifically stated otherwise.
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 may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
Spark Therapeutics, Inc.
Consolidated balance sheets (unaudited)
(in thousands, except share and per share data)

December 31,
2018

September 30,
2019
Assets



Current assets:



Cash and cash equivalents
$
95,247


$
207,137

Marketable securities
358,359

 
182,775

Trade and other receivables
47,385


35,482

Inventory, net
25,637

 
31,853

Prepaid expenses and other current assets
40,512


10,700

Total current assets
567,140

 
467,947

Restricted cash
53,000

 
51,500

Marketable securities
94,678

 
39,879

Property and equipment, net
95,998


72,001

Right of use asset

 
67,318

Goodwill
1,198

 
1,143

Other assets
2,338


3,712

Total assets
$
814,352

 
$
703,500

Liabilities and Stockholders’ Equity



Current liabilities:



Accounts payable
$
19,492


$
18,129

Accrued expenses
34,790


41,695

Current portion of long-term debt
4,822

 
7,830

Current portion of deferred rent
1,365

 

Current portion of deferred revenue


22,120

Current portion of lease liability

 
8,367

Current other liabilities
1,885

 
2,158

Total current liabilities
62,354

 
100,299

Long-term debt
46,090

 
41,341

Long-term deferred rent
10,885



Long-term deferred revenue
160,000

 
132,719

Long-term lease liability

 
79,408

Other liabilities
38,510

 
3,724

Total liabilities
317,839

 
357,491

Stockholders’ equity:



Preferred stock, $0.001 par value. Authorized, 5,000,000 shares; no shares issued or outstanding



Common stock, $0.001 par value. Authorized, 150,000,000 shares; 37,764,213 shares issued and 37,686,301 shares outstanding as of December 31, 2018; 38,940,860 shares issued and 38,519,183 shares outstanding as of September 30, 2019
38


39

Additional paid-in capital
1,091,873


1,162,314

Accumulated other comprehensive loss
(1,050
)
 
(1,281
)
Treasury stock, at cost, 77,912 shares as of December 31, 2018 and 421,677 shares as of September 30, 2019
(4,661
)
 
(39,878
)
Accumulated deficit
(589,687
)

(775,185
)
Total stockholders’ equity
496,513

 
346,009

Total liabilities and stockholders’ equity
$
814,352

 
$
703,500

See accompanying notes to the unaudited consolidated financial statements.


2


Spark Therapeutics, Inc.
Consolidated statements of operations and comprehensive income (loss)
(unaudited)
(in thousands, except share and per share data)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2019
 
2018

2019
Revenues:
 
 
 
 
 
 
 
Product sales, net
$
8,866

 
$
6,918

 
$
15,599

 
$
28,160

Contract revenue
1,841

 
15,529

 
35,969

 
28,561

Total revenues
10,707

 
22,447

 
51,568

 
56,721

Operating expenses:
 
 
 
 
 
 
 
Cost of product sales
318

 
1,010

 
708

 
3,052

Cost of contract revenue

 
4,033

 
5,111

 
6,783

Research and development
32,829

 
44,655

 
88,462

 
122,730

Selling, general and administrative
29,305

 
41,407

 
92,543

 
116,105

Total operating expenses
62,452

 
91,105

 
186,824

 
248,670

Loss from operations
(51,745
)
 
(68,658
)
 
(135,256
)
 
(191,949
)
Unrealized gain (loss) on equity investments
1,672

 
(13
)
 
4,291

 
(646
)
Interest income, net
2,714

 
2,095

 
7,420

 
7,467

Other income

 

 
110,000

 

Loss before income taxes
(47,359
)
 
(66,576
)
 
(13,545
)
 
(185,128
)
Income tax benefit (expense)
2

 
(26
)
 
(20
)
 
(62
)
Net loss
$
(47,357
)
 
$
(66,602
)
 
$
(13,565
)
 
$
(185,190
)
Basic and diluted net loss per common share
$
(1.26
)
 
$
(1.72
)
 
$
(0.36
)
 
$
(4.82
)
Weighted average basic and diluted common shares outstanding
37,498,616

 
38,747,658

 
37,267,942

 
38,450,255

 
 
 
 
 
 
 
 
Net loss
$
(47,357
)
 
$
(66,602
)
 
$
(13,565
)
 
$
(185,190
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on available-for-sale securities
308

 
(210
)
 
614

 
1,172

Unrealized gain (loss) on interest rate swap
122

 
(265
)
 
122

 
(1,269
)
Foreign exchange translation adjustment
(12
)
 
(115
)
 
(49
)
 
(134
)
Total comprehensive loss
$
(46,939
)
 
$
(67,192
)
 
$
(12,878
)
 
$
(185,421
)

See accompanying notes to the unaudited consolidated financial statements.


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Table of Contents

Spark Therapeutics, Inc.
Consolidated statement of stockholders’ equity (unaudited)
For the three months ended September 30, 2019
(in thousands, except share data)
 
 
Common stock
 
Additional
paid-in
capital
 
Accumulated other comprehensive loss
 
Common stock in treasury
 
Accumulated
deficit
 
Total
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2019
 
38,893,404

 
$
39

 
$
1,149,906

 
$
(691
)
 
413,490

 
$
(39,068
)
 
$
(708,582
)
 
$
401,604

Adjustment related to removal of built-to-suit asset and liability balances
 

 

 

 

 

 

 
(1
)
 
(1
)
Issuance of restricted stock
 
23,025

 

 

 

 

 

 

 

Purchase of common stock in treasury
 

 

 

 

 
8,187

 
(810
)
 

 
(810
)
Exercise of stock options
 
24,431

 

 
1,374

 

 

 

 

 
1,374

Unrealized loss on investments
 

 

 

 
(210
)
 

 

 

 
(210
)
Unrealized loss on interest rate swap
 

 

 

 
(265
)
 

 

 

 
(265
)
Unrealized loss on foreign currency translation
 

 

 

 
(115
)
 

 

 

 
(115
)
Stock-based compensation expense
 

 

 
11,034

 

 

 

 

 
11,034

Net loss
 

 

 

 

 

 

 
(66,602
)
 
(66,602
)
Balance, September 30, 2019
 
38,940,860

 
$
39

 
$
1,162,314

 
$
(1,281
)
 
421,677

 
$
(39,878
)
 
$
(775,185
)
 
$
346,009


See accompanying notes to the unaudited consolidated financial statements.


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Table of Contents

Spark Therapeutics, Inc.
Consolidated statement of stockholders’ equity (unaudited)
For the nine months ended September 30, 2019
(in thousands, except share data)
 
 
Common stock
 
Additional
paid-in
capital
 
Accumulated other comprehensive loss
 
Common stock in treasury
 
Accumulated
deficit
 
Total
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
 
37,764,213

 
$
38

 
$
1,091,873

 
$
(1,050
)
 
77,912

 
$
(4,661
)
 
$
(589,687
)
 
$
496,513

Adjustment related to removal of built-to-suit asset and liability balances
 

 

 

 

 

 

 
(308
)
 
(308
)
Issuance of restricted stock
 
252,886

 

 

 

 

 

 

 

Purchase of common stock in treasury
 

 

 

 

 
82,273

 
(5,583
)
 

 
(5,583
)
Purchase of common stock under ESPP
 
15,829

 

 
563

 

 

 

 

 
563

Exercise of stock options
 
907,932

 
1

 
35,331

 

 
261,492

 
(29,634
)
 

 
5,698

Unrealized gain on investments
 

 

 

 
1,172

 

 

 

 
1,172

Unrealized loss on interest rate swap
 

 

 

 
(1,269
)
 

 

 

 
(1,269
)
Unrealized loss on foreign currency translation
 

 

 

 
(134
)
 

 

 

 
(134
)
Stock-based compensation expense
 

 

 
34,547

 

 

 

 

 
34,547

Net loss
 

 

 

 

 

 

 
(185,190
)
 
(185,190
)
Balance, September 30, 2019
 
38,940,860

 
$
39

 
$
1,162,314

 
$
(1,281
)
 
421,677

 
$
(39,878
)
 
$
(775,185
)
 
$
346,009


See accompanying notes to the unaudited consolidated financial statements.



5

Table of Contents

Spark Therapeutics, Inc.
Consolidated statement of stockholders’ equity (unaudited)
For the three months ended September 30, 2018
(in thousands, except share data)

 
 
Common stock
 
Additional
paid-in
capital
 
Accumulated other comprehensive loss
 
Common stock in treasury
 
Accumulated
deficit
 
Total
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2018
 
37,543,411

 
$
38

 
$
1,065,438

 
$
(643
)
 
66,433

 
$
(4,020
)
 
$
(477,073
)
 
$
583,740

Issuance of restricted stock
 
22,350

 

 

 

 

 

 

 

Purchase of common stock in treasury
 

 

 

 

 
7,527

 
(478
)
 

 
(478
)
Purchase of common stock under ESPP
 
17,351

 

 
804

 

 

 

 

 
804

Exercise of stock options
 
101,143

 

 
1,383

 

 

 

 

 
1,383

Unrealized gain on investments
 

 

 

 
308

 

 

 

 
308

Unrealized gain on interest rate swap
 

 

 

 
122

 

 

 

 
122

Unrealized loss on foreign currency translation
 

 

 

 
(12
)
 

 

 

 
(12
)
Stock-based compensation expense
 

 

 
11,364

 

 

 

 

 
11,364

Net loss
 

 

 

 

 

 

 
(47,357
)
 
(47,357
)
Balance, September 30, 2018
 
37,684,255

 
$
38

 
$
1,078,989

 
$
(225
)
 
73,960

 
$
(4,498
)
 
$
(524,430
)
 
$
549,874


See accompanying notes to the unaudited consolidated financial statements.



6

Table of Contents

Spark Therapeutics, Inc.
Consolidated statement of stockholders’ equity (unaudited)
For the nine months ended September 30, 2018
(in thousands, except share data)

 
 
Common stock
 
Additional
paid-in
capital
 
Accumulated other comprehensive loss
 
Common stock in treasury
 
Accumulated
deficit
 
Total
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
 
37,131,626

 
$
37

 
$
1,026,590

 
$
(5,914
)
 
20,222

 
$
(1,226
)
 
$
(505,863
)
 
$
513,624

Reclassification of unrealized loss on equity investment to accumulated deficit
 

 

 

 
5,002

 

 

 
(5,002
)
 

Issuance of restricted stock
 
161,218

 

 

 

 

 

 

 

Restricted stock canceled
 
(25,000
)
 

 

 

 

 

 

 

Purchase of common stock in treasury
 

 

 

 

 
53,738

 
(3,272
)
 

 
(3,272
)
Purchase of common stock under ESPP
 
30,814

 

 
1,566

 

 

 

 

 
1,566

Exercise of stock options
 
385,597

 
1

 
13,129

 

 

 

 

 
13,130

Unrealized gain on investments
 

 

 

 
614

 

 

 

 
614

Unrealized gain on interest rate swap
 

 

 

 
122

 

 

 

 
122

Unrealized loss on foreign currency translation
 

 

 

 
(49
)
 

 

 

 
(49
)
Stock-based compensation expense
 

 

 
37,704

 

 

 

 

 
37,704

Net loss
 

 

 

 

 

 

 
(13,565
)
 
(13,565
)
Balance, September 30, 2018
 
37,684,255

 
$
38

 
$
1,078,989

 
$
(225
)
 
73,960

 
$
(4,498
)
 
$
(524,430
)
 
$
549,874


See accompanying notes to the unaudited consolidated financial statements.




7


Spark Therapeutics, Inc.
Consolidated statements of cash flows (unaudited)
(in thousands)
 
Nine months ended September 30,
 
2018
 
2019
Cash flows from operating activities:
 
 
 
Net loss
$
(13,565
)
 
$
(185,190
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Non-cash income
(1,686
)
 
(738
)
Depreciation and amortization expense
4,820

 
7,540

Loss on disposal of property and equipment
123

 
1,626

Stock-based compensation expense
37,704

 
34,547

Unrealized (gain) loss on equity investments
(4,291
)
 
646

Gain from sale of priority review voucher
(110,000
)
 

Non-cash interest (income) expense
(1,407
)
 
269

Changes in operating assets and liabilities:
 
 
 
Inventory
(20,738
)
 
(6,216
)
Prepaid expenses and other assets
(5,564
)
 
28,061

Trade and other receivables
(5,690
)
 
19,226

Accounts payable and accrued expenses
(877
)
 
3,669

Deferred revenue
93,031

 
(5,161
)
Other liabilities
104

 
1,273

Net cash used in operating activities
(28,036
)
 
(100,448
)
Cash flows from investing activities:
 
 
 
Gain from sale of priority review voucher
110,000

 

Payment for license agreement
(2,000
)
 

Purchases of marketable securities
(360,569
)
 
(76,023
)
Proceeds from maturities of marketable securities
352,167

 
305,664

Purchases of property and equipment
(14,920
)
 
(17,677
)
Net cash provided by investing activities
84,678

 
211,964

Cash flows from financing activities:
 
 
 
Proceeds from exercise of options
13,129

 
17,910

Purchase of treasury stock
(3,272
)
 
(17,795
)
Proceeds from issuance of common stock under ESPP
1,567

 
563

Proceeds from long-term debt
50,000

 

Payments on long-term debt
(233
)
 
(1,741
)
Net cash provided by (used in) financing activities
61,191

 
(1,063
)
Effect of exchange rate changes on cash and cash equivalents and restricted cash
(24
)
 
(63
)
Net increase in cash and cash equivalents and restricted cash
117,809

 
110,390

Cash and cash equivalents and restricted cash, beginning of period
96,748

 
148,247

Cash and cash equivalents and restricted cash, end of period
$
214,557

 
$
258,637

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Property and equipment purchases included in accounts payable and accrued expenses
$
17,946

 
$
11,409

One Drexel Plaza lease cost included in other liabilities
$
1,077

 
$


See accompanying notes to the unaudited consolidated financial statements.


8

Table of Contents

Spark Therapeutics, Inc.
Notes to consolidated financial statements
(unaudited)

(1) The Company
Spark Therapeutics, Inc. was formed on March 13, 2013, in the state of Delaware as AAVenue Therapeutics, LLC and amended its Certificate of Formation in October 2013 to change its name to Spark Therapeutics LLC. In May 2014, it converted from a limited liability company (LLC) to a C corporation, Spark Therapeutics, Inc. (the Company). The Company is a gene therapy company, seeking to transform the lives of patients suffering from debilitating genetic diseases by developing potentially one-time, life-altering treatments. The Company operates in one segment and has its principal offices in Philadelphia, Pennsylvania.

On February 22, 2019, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Roche Holdings, Inc. (Roche) and 022019 Merger Subsidiary, Inc. (Merger Sub). Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, Merger Sub has commenced a cash tender offer (the Tender Offer) to acquire all of the issued and outstanding shares of the Company's common stock at a price per share of $114.50, net to the seller of such shares in cash, without interest, subject to any withholding of taxes required by applicable law. The completion of the Tender Offer is conditioned on at least a majority of the shares of the Company's outstanding common stock having been validly tendered into and not withdrawn from the offer, receipt of certain regulatory approvals, and other customary conditions. Following the completion of the Tender Offer, Merger Sub will merge with and into the Company, with the Company surviving as a wholly owned subsidiary of Roche. The merger will be governed by Section 251(h) of the General Corporation Law of the State of Delaware, with no stockholder vote required to consummate the merger. In the merger, each outstanding share of the Company's common stock (other than shares of common stock held by the Company as treasury stock, or owned by Roche or Merger Sub or held by stockholders who are entitled to demand, and who properly demand, appraisal rights under Delaware law) will be converted into the right to receive $114.50 per share in cash, without interest, subject to any withholding of taxes required by applicable law. The transaction is expected to close in 2019.
 
(2) Development-stage risks
The Company has incurred net losses since inception and expects to incur net losses for the foreseeable future. The Company had an accumulated deficit of $775.2 million as of September 30, 2019. The Company anticipates incurring additional losses until such time, if ever, that it can generate significant sales of LUXTURNA and its other product candidates in development. Additional financing may be needed by the Company to fund its operations and to commercially develop its other product candidates.
The Company’s future operations are highly dependent on a combination of factors, including: (i) the success of its research and development; (ii) regulatory approval of the Company’s proposed future products; (iii) the continued success of the commercialization of LUXTURNA; (iv) the timely and successful completion of additional financing; and (v) the development of competitive therapies by other biotechnology and pharmaceutical companies.

(3) Summary of significant accounting policies
(a) Basis of presentation
The accompanying unaudited interim consolidated financial statements of the Company and its wholly owned subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information. In the opinion of management, the accompanying consolidated financial statements include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the financial statements) considered necessary to present fairly the Company’s financial position as of September 30, 2019, its results of operations for the three and nine months ended September 30, 2018 and 2019, its stockholders' equity for the three and nine months ended September 30, 2018 and 2019, and cash flows for the nine months ended September 30, 2018 and 2019. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or any other period. The interim consolidated financial statements presented herein do not contain the required disclosures under U.S. GAAP for annual consolidated financial statements.
The accompanying unaudited interim consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and related notes as of and for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.


9

Table of Contents


(b) Use of estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates.

(c ) Trade and other receivables
Trade accounts receivable are recorded at gross value, and reserves for other sales-related allowances, such as discounts, rebates, services and insurance co-pay assistance, are included in accrued expenses on the Company's consolidated balance sheets.

(d ) Inventory
Inventory is stated at the lower of cost or net realizable value and consists of those costs realized following the U.S. Food and Drug Administration (FDA) approval of LUXTURNA. Cost is determined using the first-expired, first-out (FEFO) method. The Company reserves for potentially excess, dated or obsolete inventories based on an analysis of inventory on hand compared to forecasts of future sales. Based on management's assessment, no such inventory reserve was necessary as of December 31, 2018. As of September 30, 2019, the Company has recorded an inventory obsolescence reserve of $4.0 million against work in process.
Inventory consisted of the following (in thousands):
 
December 31,
2018
 
September 30,
2019
Raw materials
$
3,843

 
$
3,427

Work in process
19,843

 
27,716

Finished goods
1,951

 
710

 
$
25,637

 
$
31,853



(e) Fair value of financial instruments
Management believes that the carrying amounts of the Company’s financial instruments, including cash equivalents, trade and other receivables, accounts payable and accrued expenses, approximate fair value due to the short-term nature of those instruments. Management believes the carrying value of debt approximates fair value as the interest rates are reflective of the rate the Company could obtain on debt with similar terms and conditions.

(f) Net product sales
LUXTURNA is distributed in the United States through two distribution models: (1) the traditional buy-and-bill model where the treatment center purchases and pays for the product and then submits a claim to the payer; and (2) the Company's innovative contracting and distribution model, branded Spark PATH (Pioneering Access to Healthcare), which includes options for direct-to-payer contracting and outcomes-based rebates.
The Company’s net product sales represent total gross product sales in the United States less allowances for estimated prompt-payment discounts, service fees, rebates and insurance co-payment assistance. Allowances are established based on contractual terms and management’s reasonable estimates, as well as the expectation that 100% of the prompt-payment discounts will be earned. Product shipping and handling costs and distributor reporting fees are included in cost of product sales. The Company evaluated the variable consideration under Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC 606), as it relates to the outcomes-based method and determined that based on historical clinical data, no rebate reserves were required for the nine months ended September 30, 2018 and 2019. All sales are recognized when control is transferred, which follows the Company’s verification of a scheduled LUXTURNA treatment.


10

Table of Contents

The Company’s product return policy is to provide non-monetary credit or product replacement. As the product is sold in direct relation to a scheduled treatment, Company management estimates that there is minimal risk of product return, including the risk of product expiration.

(g) Contract revenue
Under certain of the Company’s licensing, supply and collaboration agreements, it is entitled to receive payment upon the achievement of contingent milestone events or the performance of obligations. The Company recognizes revenue based on guidance in ASC 606.
ASC 606 applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Amounts received prior to satisfying the revenue recognition criteria are recorded as deferred revenue on the Company’s consolidated balance sheet. Amounts expected to be recognized as revenue in the next 12 months following the balance sheet date are classified as current liabilities.

(h) Net loss per common share
Basic and diluted net loss per common share is determined by dividing net loss by the weighted average number of common shares outstanding during the period. For all periods presented, unvested restricted shares and common stock options have been excluded from the calculation because their effect would be anti-dilutive. Therefore, the weighted average shares outstanding used to calculate both basic and diluted loss per share are the same.
The following potentially dilutive securities have been excluded from the computations of diluted weighted average shares outstanding as of September 30, 2018 and 2019 as they would be anti-dilutive:
 
September 30, 2018
 
September 30, 2019
Unvested restricted common shares
949,925

 
1,151,331

Stock options issued and outstanding
3,623,311

 
3,253,241



(i) Other comprehensive loss
The Company follows the provisions of ASC 220, Comprehensive Income, which establishes standards for the reporting and display of comprehensive income and its components. Comprehensive income (loss) is defined to include all changes in equity during a period except those resulting from investments by owners and distributions to owners. Comprehensive income (loss) includes gains and losses related to changes in the fair value of available-for-sale securities, changes in fair value of an interest rate swap and foreign currency translation.
The accumulated balances related to each component of other comprehensive income (loss) are summarized as follows (in thousands):
 
Net unrealized (loss) gain on available-for-sale securities
 
Unrealized loss on interest rate swap
 
Foreign currency translation adjustments
 
Accumulated other comprehensive loss
Balance as of December 31, 2018
$
(376
)
 
$
(641
)
 
$
(33
)
 
$
(1,050
)
Current period other comprehensive income (loss)
1,172

 
(1,269
)
 
(134
)
 
(231
)
Balance as of September 30, 2019
$
796

 
$
(1,910
)
 
$
(167
)
 
$
(1,281
)



11

Table of Contents



(j) Recent accounting pronouncements
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases. ASU 2016-02 requires lessees to apply a two-method approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase. 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, respectively. Lessees are also required to record a right-of-use (ROU) asset and a lease liability for all leases with a term greater than 12 months. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018. The Company adopted this standard on January 1, 2019, the effective date, using the effective date method under the modified retrospective transition approach and elected to apply the package of practical expediants. The adoption of the standard had a material impact on the consolidated balance sheet, which resulted in the derecognition of the Company’s built-to-suit asset of $34.8 million and corresponding liability of $34.5 million, and an adjustment to beginning accumulated deficit of $0.3 million in the first quarter of 2019. Upon adoption, the Company also recognized ROU assets and lease liabilities of $31.7 million and $43.9 million, respectively, as of January 1, 2019.

(4) Marketable securities
The following table summarizes the available-for-sale securities held at December 31, 2018 and September 30, 2019 (in thousands):
Description
 
Amortized cost
 
Unrealized gains
 
Unrealized losses
 
Fair value
December 31, 2018
 
 
 
 
 
 
 
 
     U.S. government agency
 
$
223,553

 
$
54

 
$
(123
)
 
$
223,484

     Corporate securities
 
$
239,940

 
$
34

 
$
(10,421
)
 
$
229,553

September 30, 2019
 
 
 
 
 
 
 
 
     U.S. government agency
 
$
117,915

 
$
452

 

 
$
118,367

     Corporate securities
 
$
114,684

 
$
344

 
$
(10,741
)
 
$
104,287


No available-for-sale securities held as of September 30, 2019 had remaining maturities greater than two years.

(5) Fair value of financial instruments
The Company follows FASB accounting guidance on fair value measurements for financial assets and liabilities measured on a recurring basis. The guidance requires fair value measurements to maximize the use of “observable inputs.” The three-level hierarchy of inputs to measure fair value are as follows: 
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity)
The Company has classified assets and liabilities measured at fair value on a recurring basis as follows (in thousands):


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Fair value measurements at reporting
date using
 
Quoted prices
in active
markets for
identical
assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
At December 31, 2018:
 
 
 
 
 
Assets:
 
 
 
 
 
Money market funds (included in cash and cash equivalents)
$
94,216

 

 

Certificates of deposit - restricted cash
$
53,000

 

 

Marketable securities - U.S. government agencies
$
223,484

 

 

Marketable securities - corporate securities
$
229,553

 

 

Liabilities:
 
 
 
 
 
Interest rate swap

 
$
641

 

At September 30, 2019:
 
 
 
 
 
Assets:
 
 
 
 
 
Money market funds (included in cash and cash equivalents)
$
205,710

 

 

Certificates of deposit - restricted cash
$
51,500

 

 

Marketable securities - U.S. government agencies
$
118,367

 

 

Marketable securities - corporate securities
$
104,287

 

 

Liabilities:
 
 
 
 
 
Interest rate swap

 
$
1,910

 



(a) Cash and cash equivalents
The Company considers all highly liquid investments that have maturities of three months or less when acquired to be cash equivalents. Cash equivalents as of September 30, 2019 consisted of money market funds.

(b) Marketable securities
The Company classifies its marketable security investments as available-for-sale securities and the securities are stated at fair value. There were no material realized gains or losses recognized on the maturity of available-for-sale securities during the nine months ended September 30, 2019 and, as a result, the Company did not reclassify any amount out of accumulated other comprehensive loss for the same period. In addition, as part of the license and stock purchase agreements entered into with Selecta Biosciences, Inc. (Selecta) (note 13), the Company purchased restricted common shares of Selecta. The investment is classified as available-for-sale and is stated at fair value, and changes in fair value are recognized in the consolidated statements of operations and comprehensive income (loss).

(6) Sale of priority review voucher
In May 2018, the Company sold the rare pediatric disease priority review voucher (PRV) it received from FDA in connection with the U.S. approval of LUXTURNA to Jazz Pharmaceuticals Ireland Limited for consideration of $110.0 million. The proceeds from the sale of the PRV were recognized as a gain on the sale of an intangible asset, within other income on the consolidated statements of operations and comprehensive income (loss), as the PRV did not have a carrying value on the Company’s consolidated balance sheet at the time of sale.







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(7) Accrued expenses
Accrued expenses consist of the following (in thousands):
 
December 31,
2018

September 30,
2019
Compensation and benefits
$
15,575

 
$
14,740

Consulting and professional fees
11,499

 
17,233

Commercial costs
2,405

 
2,909

Research and development
2,706

 
3,788

Other
2,605

 
3,025

 
$
34,790

 
$
41,695



(8) Debt
The Company's debt consists of the following (in thousands):
 
December 31,
2018
 
September 30,
2019
Term loan outstanding
$
50,000

 
$
48,500

MELF loan outstanding
912

 
671

Less: current portion of long-term debt
(4,822
)
 
(7,830
)
Total long-term debt due after one year
$
46,090

 
$
41,341



In July 2018, the Company entered into a credit agreement with Wells Fargo Bank, National Association (Wells Fargo) as lender (the Credit Agreement), pursuant to which Wells Fargo extended a $50.0 million term loan to the Company, which bears interest at one-month LIBOR plus 0.65%, which rate is converted to a fixed rate per annum of 3.463% under the swap agreement discussed below. The term loan was fully drawn on the date of the Credit Agreement and matures on July 3, 2023 (Maturity Date). Through June 2019, the Company was only obligated to make monthly interest payments with respect to the term loan. Thereafter, the term loan will amortize in equal monthly installments through the maturity date. For the three and nine months ended September 30, 2019, the Company recorded interest expense of $0.4 million and $1.1 million, respectively, related to the Credit Agreement. For the three and nine months ended September 30, 2018, the Company recorded interest expense of $0.3 million related to the Credit Agreement.

In order to manage the interest risk associated with the term loan, the Company entered into an interest rate swap with Wells Fargo on an initial notional amount of $50.0 million. Under this interest rate swap agreement, which expires on July 3, 2023, the Company receives a floating rate based on 1-month LIBOR plus 0.65% and pays a fixed rate of 3.463%. The Company designated this interest rate swap as a cash flow hedge of the forecasted interest payments related to the debt issuance. To maintain this rate, the Company entered into a cash collateral agreement with Wells Fargo that requires the Company to maintain a restricted cash balance equal to at least the principal balance of the term loan.

At September 30, 2019, the fair value of the derivative liability was $1.9 million, of which $0.5 million was recognized within other current liabilities and $1.4 million was recognized within other long-term liabilities. The effective portion of the swap is reported as a component of accumulated other comprehensive loss. There was no hedge ineffectiveness as of September 30, 2019. Changes in the fair value are reclassified from accumulated other comprehensive loss into operations in the same period that the hedged item affects earnings. During the nine months ended September 30, 2019, the Company reclassified $0.2 million from accumulated other comprehensive loss into interest expense related to the effective portion of the swap. Over the next 12 months, $1.3 million of the effective portion of the interest rate swap is expected to be reclassified from accumulated other comprehensive loss into interest expense. If, at any time, the interest rate swap is determined to be ineffective, in whole or in part, due to changes in the interest rate swap or underlying debt agreements, the fair value of the portion of the interest rate swap determined to be ineffective will be recognized as a gain or loss in the statement of operations and comprehensive income (loss) for the applicable period.

In August 2016, the Company executed an agreement with the Commonwealth of Pennsylvania to fund machinery and equipment and other assets purchased (MELF loan) in the amount of $1.6 million. Borrowings under the MELF loan are secured by equipment, as defined in the loan agreement. Under the terms of the MELF loan, the Company has a five-year period of monthly payments of $29 thousand of principal and interest at an annual interest rate of 3.25%. For the three and nine months ended September 30, 2019, the Company recorded interest expense of $6 thousand and $19 thousand, respectively, related to the MELF loan. For the three and nine months ended September 30, 2018, the Company recorded interest expense of $8 thousand and $27 thousand, respectively, related to the MELF loan.

(9) Stock-based compensation
The Company's 2015 Stock Incentive Plan (the 2015 Plan) provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock units and other stock-based awards to employees, officers, directors, consultants and advisors. In January 2019, the number of shares of common stock authorized for issuance under the 2015 Plan automatically increased, pursuant to the terms of the 2015 Plan, by 1,510,533 shares. As of September 30, 2019, 2,137,500