CRISPR Therapeutics AG - Quarter Report: 2018 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2018

OR

For the transition period from                       to                      .

Commission file number: 001-37923

CRISPR THERAPEUTICS AG

(Exact name of Registrant as specified in its charter)

+41 (0)41 561 32 77

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ☒    NO  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES  ☒    NO  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

    Emerging growth company          ☒

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

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

As of November 1, 2018, there were 51,896,995 shares of registrant’s common shares outstanding.

Index

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

CRISPR Therapeutics AG

Condensed Consolidated Balance Sheets

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

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

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CRISPR Therapeutics AG

Condensed Consolidated Statements of Operations and Comprehensive Loss

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

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

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CRISPR Therapeutics AG

Condensed Consolidated Statements of Cash Flows

(unaudited, in thousands)

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

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CRISPR Therapeutics AG

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Organization and Operations

The Company

CRISPR Therapeutics AG (“CRISPR” or the “Company”) was formed on October 28, 2013 in Basel, Switzerland. The Company was established to translate CRISPR/Cas9, a genome editing technology, into transformative gene-based medicines for the treatment of serious human diseases. The foundational intellectual property underlying the Company’s operations was licensed to the Company and its subsidiaries in April 2014. The Company devotes substantially all of its efforts to product research and development activities, initial market development and raising capital. The Company’s principal offices are in Zug, Switzerland and operations are in Cambridge, Massachusetts.

The Company is subject to risks common to companies in the biotechnology industry, including but not limited to, risks of failure of preclinical studies and clinical trials, the need to obtain marketing approval for any drug product candidate that it may identify and develop, the need to successfully commercialize and gain market acceptance of its product candidates, dependence on key personnel, protection of proprietary technology, compliance with government regulations, development by competitors of technological innovations and ability to transition from pilot-scale manufacturing to large-scale production of products.

The Company had an accumulated deficit of $244.0 million as of September 30, 2018 and has financed its operations to date from proceeds obtained from its IPO, subsequent offerings of its common shares in January 2018 and September 2018, a series of preferred shares and convertible loan issuances, and upfront fees received under its collaboration and joint venture arrangements. The Company will require substantial additional capital to fund its research and development and ongoing operating expenses.

Liquidity

In January 2018, the Company completed an offering of 5,750,000 common shares, which were sold at a price to the public of $22.75 per share. This offering resulted in $122.6 million of net proceeds to the Company. In September 2018, the Company completed an offering of 4,210,526 common shares, which were sold at a price to the public of $47.50 per share. This offering resulted in $187.6 million of net proceeds to the Company. In addition, $3.1 million of stamp taxes on the issuance proceeds from the January and September offerings were recorded as an offset to additional paid in capital. The Company expects its cash of $487.3 million at September 30, 2018 to be sufficient to fund its current operating plan through at least the next 24 months. Thereafter, the Company will be required to obtain additional funding. There can be no assurances, however, that the current operating plan will be achieved or that additional funding will be available on terms acceptable to the Company, or at all.

In August 2018, the Company entered into an At-The-Market (“ATM”) sales agreement with Jefferies LLC (“Jefferies”), under which it may offer and sell from time to time common shares having aggregate gross proceeds of up to $125.0 million. We have not yet issued or sold any securities under this sales agreement. We have incurred $0.2M in costs related to this sales agreement, which are included in other current assets as of September 30, 2018 and will be offset against future offering proceeds.

Unaudited Interim Financial Information

The condensed consolidated financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted from this report, as is permitted by such rules and regulations. Accordingly, these condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the “Annual Report”).

2. Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies”, in the Annual Report. Significant changes to the Company’s accounting policies are discussed below:

Revenue Recognition

In May 2014, the Financing Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes existing revenue recognition guidance. The Company adopted ASU 2014-09 and its related amendments (collectively known as “ASC 606”) on January 1, 2018 using the modified

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retrospective method, by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of equity at January 1, 2018. The reported results for 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of Accounting Standards Codification (“ASC”) 605, Revenue Recognition (“ASC 605”). The Company has elected a practical expedient and applied ASC 606 only to contracts that are not completed at the date of initial application.

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. The Company’s revenue is from collaboration agreements. Within collaboration agreements, a counterparty may be a collaborator or partner that shares in the risks and benefits of developing a product to be marketed. These arrangements generally are in the scope of ASC 808, Collaborative Arrangements (“ASC 808”) yet may also contain vendor-customer aspects. Therefore, the Company considers all of the facts and circumstances to determine which transactions have a vendor-customer relationship that is subject to ASC 606. At the inception of each agreement the Company must determine which promised goods and services are under the scope of ASC 606 versus ASC 808 (discussed in the Collaborative Arrangements note below).

In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods and services. To achieve this core principle, the Company applies the following five steps:

1) Identify the contract with the customer

A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the related payment terms, (ii) the contract has commercial substance, and (iii) the Company determines that collection of substantially all consideration for goods and services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration.

2) Identify the performance obligations in the contract

Performance obligations promised in a contract are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other available resources, and are distinct in the context of the contract, whereby the transfer of the good or service is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods and services, the Company must apply judgment to determine whether promised goods and services are capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised goods and services are accounted for as a combined performance obligation.

3) Determine the transaction price

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods and services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Any estimates, including the effect of the constraint on variable consideration, are evaluated at each reporting period for any changes. Determining the transaction price requires significant judgment, which is discussed in further detail for each of the Company’s contracts with customers in Note 6.

4) Allocate the transaction price to performance obligations in the contract

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The consideration to be received is allocated among the separate performance obligations based on relative standalone selling prices.

5) Recognize revenue when or as the Company satisfies a performance obligation

The Company satisfies performance obligations either over time or at a point in time. Revenue is recognized over time if either 1) the customer simultaneously receives and consumes the benefits provided by the entity’s performance, 2) the entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or 3) the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. If the entity does not satisfy a performance obligation over time, the related performance obligation is satisfied at a point in time by transferring the control of a promised good or service to a customer. Examples of control are using the asset to produce goods or services, enhance the value of other assets, settle liabilities, and holding or selling the asset.  ASC 606 requires the Company to select

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a single revenue recognition method for the performance obligation that faithfully depicts the Company’s performance in transferring control of the goods and services. The guidance allows entities to choose between two methods to measure progress toward complete satisfaction of a performance obligation:

The Company has the right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date (i.e. R&D services), as such the Company has elected a practical expedient to recognize revenue in the amount to which the entity has a right to invoice for such services.

The terms of the Company’s collaboration and license agreements contain multiple promised goods and services, which include options to license CRISPR/Cas9-based therapeutic products directed to specific targets, referred to as co-exclusive or exclusive licenses, joint steering committee participation, as well as research and development activities to be performed by the Company on behalf of the collaboration partner related to the licensed targets. Payments that the Company may receive under these agreements include nonrefundable upfront fees, payments for research activities, payments based upon the achievement of specified milestones and royalties on any resulting net product sales.

To date, the Company’s only source of revenue has been the collaboration and license and joint development and commercialization agreement with Vertex Pharmaceuticals, Incorporated (“Vertex”) as well as research and development services provided to Casebia Therapeutics LLP (“Casebia”) under the joint venture with Bayer HealthCare LLC (“Bayer”). Please refer to Note 6 for the specific accounting treatment and revenue recognized during the period for each of these arrangements.

Licenses of intellectual property: If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company must consider the nature of the intellectual property to which the customer will have rights (i.e. access at a point in time or benefit of intellectual property enhancements over time). The Company recognizes revenue from non-refundable, up-front fees allocated to the license at a point in time/over the period the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Milestone payments: At the inception of each arrangement that includes development, regulatory or commercial milestone payments for promised goods and services, the Company evaluates the circumstances of whether the milestones will be reached and estimates the amount to be included in the transaction price that will not cause a significant revenue reversal. The Company will evaluate these types of payments for customer options once those options have been exercised. ASC 606 suggests two alternatives to use when estimating the amount of variable consideration: the expected value method and the most likely amount method. Under the expected value method, an entity considers the sum of probability-weighted amounts in a range of possible consideration amounts. Under the most likely amount method, an entity considers the single most likely amount in a range of possible consideration amounts. The Company will use the most likely amount method for development and regulatory milestone payments. Management believes the most likely amount method is the better predictor as the Company expects to be entitled to only one of two possible amounts.  Additionally, management believes that the most likely amount of milestone consideration is its stated amount. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. The transaction price is then allocated to performance obligations on a specific basis or on a relative stand-alone selling price basis. The Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates whether it is probable that a significant revenue reversal will not occur in future periods, and if necessary, adjusts its estimates of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.

Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes 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).

Up-front payments and fees are recorded as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a future period until the Company performs its obligations under these arrangements. Amounts payable to the Company are recorded as accounts receivable when the Company’s right to consideration is unconditional. The Company does not assess

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whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.

Contract Balances

The Company recognizes a contract asset when the Company transfers goods or services to a customer before the customer pays consideration or before payment is due, excluding any amounts presented as a receivable (i.e. accounts receivable). A contract asset is an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer. The contract liabilities (i.e. deferred revenue) primarily relate to contracts where we have received payment but we have not yet satisfied the related performance obligations. The advance consideration received from customers for R&D services or licenses bundled with other promises is a contract liability, recorded as deferred revenue, until the underlying performance obligations are transferred to the customer. The change in deferred revenue from December 31, 2017 to September 30, 2018 is primarily related to the transition adjustment upon the adoption of ASC 606.

Costs to Obtain and Fulfill a Contract with Customer

The Company recognizes an asset related to incremental costs of obtaining a contract with a customer if the Company expects to recover those costs. The Company will recognize an asset from costs incurred to fulfill a contract only if such costs relate directly to a contract that the entity can specifically identify, the costs generate or enhance resources of the Company that will be used in satisfying performance obligations in the future, and the costs are expected to be recovered. Any assets recognized related to costs to obtain or fulfill a contract are amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates.

Income Taxes

The adoption of ASC 606 resulted in a reduction of cumulative revenue as of January 1, 2018, which in turn generated additional deferred tax assets. As the Company fully reserves its net deferred tax assets in the jurisdictions impacted by the adoption of ASC 606, this impact was offset by a corresponding change to the valuation allowance.

Impact of Adopting ASC 606 on the Financial Statements

The Company adopted ASC 606 using the modified retrospective method. The cumulative effect of applying the new guidance to all contracts with customers that were not completed as of January 1, 2018 was recorded as an adjustment to accumulated deficit as of the adoption date. The Company elected to apply a practical expedient to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations. As a result of applying the modified retrospective method to adopt the new revenue guidance, the following adjustments were made to the consolidated balance sheet as of January 1, 2018:

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Impact of New Revenue Guidance on Financial Statement Line Items

The following table compares the reported condensed consolidated balance sheet, statement of operations and cash flows, as of and for the three and nine months ended September 30, 2018, to the pro-forma amounts had the previous guidance been in effect:

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Collaboration Arrangements

The Company records the elements of its collaboration agreements that represent joint operating activities in accordance with ASC 808. Accordingly, the elements of the collaboration agreements that represent activities in which both parties are active participants and to which both parties are exposed to the significant risks and rewards that are dependent on the commercial success of the activities, are recorded as collaborative arrangements. The Company considers the guidance in ASC 606 in determining the appropriate treatment for the transactions between the Company and its collaborative partner and the transactions between the Company and third parties. Generally, the classification of transactions under the collaborative arrangements is determined based on the nature and contractual terms of the arrangement along with the nature of the operations of the participants.  

The Company evaluates the proper presentation of the commercial activities and the profit and loss sharing associated with the collaboration agreements. ASC 808 states that when payments between parties in a collaborative arrangement are not within the scope of other authoritative accounting literature, the income statement classification should be based on the nature of the arrangement, the nature of its business operations and the contractual terms of the arrangement. To the extent that these payments are not within the scope of other authoritative accounting literature, the income statement classification for the payments shall be based on an analogy to authoritative accounting literature or if there is no appropriate analogy, a reasonable, rational, and consistently applied accounting policy election.

New Accounting Pronouncements - Recently Adopted

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that the Company adopts as of the specified effective date.

Financial Instrument Accounting

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). The new standard amends certain aspects of accounting and disclosure requirements of financial instruments, including the requirement that equity investments with readily determinable fair values be measured at fair value with changes in fair value recognized in the results of operations. The new standard was effective January 1, 2018. The Company adopted ASU 2016-01 in the first quarter of 2018. The adoption of this guidance did not have a material impact on the Company's financial position and results of operations.

Income Taxes

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (“ASU 2016-16”): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current guidance prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party, which is an exception to the principle of comprehensive recognition of current and deferred income taxes. The amendments in this update eliminate the exception for an intra-entity transfer of an asset other than inventory. The Company adopted ASU 2016-16 in the first quarter of 2018. The adoption of this guidance did not have a material impact on the Company's financial position and results of operations.

Statement of Cash Flows

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending balances

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shown on the statement of cash flows. The Company adopted ASU 2016-18 retrospectively in the first quarter of 2018 and the change in accounting principle is reflected in the statements of cash flows for the nine months ended September 30, 2018 and 2017 accordingly. The adoption of this guidance did not have a material impact on the Company's financial position and results of operations.

Business Combinations

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805) (“ASU 2017-01”). ASU 2017-01 clarifies whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The purpose of the guidance is to narrow the definition of a business at it relates to recording transactions as business acquisitions or asset acquisitions. The Company adopted ASU No. 2017-01 in the first quarter of 2018. The adoption of this guidance did not have a material impact on the Company's financial position and results of operations.

Stock Compensation

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (“ASU 2017-09”): Scope Modification Accounting.  The new standard is intended to reduce the diversity in practice and cost and complexity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award.  The Company adopted ASU No. 2017-09 in the first quarter of 2018. The adoption of this guidance did not have a material impact on the Company's financial position and results of operations.

In June 2018, the FASB issued ASU No. 2018-07, Stock Compensation (“ASU 2018-07”) which provides improvements to nonemployee share-based payment accounting. ASU 2018-07 is intended to reduce the cost and complexity and to improve financial reporting for nonemployee share-based payments. The scope of ASC 718, Compensation-Stock Compensation (which currently only includes share-based payments to employees) is expanded to include share-based payments issued to nonemployees for goods or services. ASC 505-50, Equity-Equity-Based payments to Non-Employees is superseded and consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The Company early adopted this standard on a prospective basis on July 1, 2018. As a result of adopting this standard, the fair value of outstanding nonemployee awards as of June 30, 2018 will no longer be remeasured each reporting period. All future expense related to these awards will be recorded based on the fair value measured as of June 30, 2018, the last period prior to the adoption of ASU 2018-07. The adoption of this guidance did not have a material impact of the Company’s consolidated financial statements.

New Accounting Pronouncements - to be adopted in future periods

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which applies to all leases and will require lessees to record most leases on the balance sheet but recognize expense in a manner similar to the current standard. In July 2018, the FASB also issued ASU No. 2018-11, Codification Improvements to Topic 842, Leases (“ASU 2018-11”), which clarifies and corrects narrow aspects of the guidance issued in ASU 2016-02. ASU 2016-02 and 2018-11 are effective for fiscal years beginning after December 15, 2018 and interim periods within those years, first of which is the year ending December 31, 2019 for the Company. Entities are required to use a modified retrospective approach of adoption for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited. The Company’s project team has reviewed its portfolio of existing leases and current accounting policies to identify and assess the potential differences that would result from applying the requirements of the new standard. The Company anticipates that the amended guidance will result in the recognition of additional right of use assets and corresponding liabilities on its condensed consolidated balance sheets.  The Company is also in the process of implementing appropriate changes to its controls to support lease accounting and related disclosures under the new standard.

Net Loss Per Share Attributable to Common Shareholders

Basic net loss per share is calculated by dividing net loss attributable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated by dividing the net income attributable to common shareholders by the weighted-average number of common equivalent shares outstanding for the period, including any dilutive effect from outstanding stock options and warrants using the treasury stock method.

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The following common share equivalents, presented on an as converted basis, were excluded from the calculation of net loss per share for the periods presented, due to their anti-dilutive effect (in common stock equivalent shares):

Basis of Presentation and Use of Estimates

The accompanying condensed consolidated financial statements have been prepared in conformity with GAAP, and include the accounts of (i) the Company, and (ii) its wholly-owned subsidiaries, CRISPR Therapeutics Ltd., CRISPR Therapeutics Inc., and TRACR Hematology Inc. All intercompany accounts and transactions have been eliminated. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the ASC and ASUs of the FASB. The Company accounts for its 50% interest in Casebia under the equity method of accounting. See Note 6 for further details.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company’s management evaluates its estimates, which include, but are not limited to, equity-based compensation expense, revenue recognition, equity method investments, fair value of intangible assets, the provision for or benefit from income taxes and reported amounts of research and development expenses during the period. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. The consolidated statements reflect all adjustments which are of a normal recurring nature necessary for presentation. Actual results may differ from those estimates or assumptions.

3. Property and Equipment, net

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

Depreciation expense for the three and nine months ended September 30, 2018 was $0.8 million and $2.5 million, respectively. Depreciation expense for the three and nine months ended September 30, 2017 was $0.8 million and $2.2 million, respectively.

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4. Accrued Expenses

Accrued expenses consist of the following (in thousands):

5. Commitments and Contingencies

Research Agreements and Manufacturing Agreements

The Company has engaged several research institutions and companies to identify new delivery strategies and applications of the CRISPR/Cas9 technology and has sponsored research programs. In association with these arrangements, the Company has remaining commitments for related research and development services of $0.8 million through 2020.

The Company is also a party to a number of research license agreements which require significant upfront payments, future royalty payments and potential milestone payments from time to time. In association with these agreements, the Company has committed to making payments for related research and development services of $1.0 million through 2020. In connection with these agreements, during the three and nine months ended September 30, 2018, the Company has made payments of $0.3 million and of $1.4 million, respectively. In connection with these agreements, during the three and nine months ended September 30, 2017, the Company has made payments of $0.4 million and of $2.1 million, respectively.

The Company is a party to a number of manufacturing agreements that require upfront payments for the future performance of services.  In connection with these agreements, the Company has made upfront payments and recorded $2.4 million as prepaid expenses on the condensed consolidated balance sheet as of September 30, 2018. The Company will amortize the prepaid balance as services are performed.

Litigation

The Company licenses a U.S. patent application from Emmanuelle Charpentier (as described in more detail in this Quarterly Report on Form 10-Q) that is currently subject to interference proceedings declared by the Patent Trial and Appeal Board (“PTAB”) of the U.S. Patent and Trademark Office. Following motions by the parties and other procedural matters, the PTAB concluded in February 2017 that the declared interference should be dismissed because the claim sets of the two parties were not directed to the same patentable invention in accordance with the PTAB’s two-way test for patent interferences. In April 2017, Dr. Charpentier, the regents of the University of California (“UC”), and the University of Vienna (collectively “UC”) appealed the PTAB decision to the U.S. Court of Appeals for the Federal Circuit (“Federal Circuit”). In the appeal, UC asked the court to review and reverse of the PTAB’s February 2017 decision, which terminated the interference without determining which inventors actually invented the use of the CRISPR/Cas9 genome editing technology in eukaryotic cells. The Federal Circuit conducted a hearing on the appeal on April 30, 2018. On September 10, 2018, the Federal Circuit affirmed the PTAB’s decision to terminate the interference proceeding.

In February 2018, several parties filed oppositions in the European Patent Office to the grant of the Company’s in-licensed European patent.  Opposition proceedings can lead to the revocation of a patent in its entirety; the maintenance of the patent as granted, or the maintenance of a patent in amended form.  Opposition proceedings typically take years to resolve, including the time taken by appeals that can be filed by any of the parties.  The Company cannot guarantee the outcome of the oppositions to its in-licensed European patent, and an adverse result could preclude the Company from enforcing its rights in Europe against third parties.

On December 15, 2016, the Company entered into a Consent to Assignments, Licensing and Common Ownership and Invention Management Agreement (the “Invention Management Agreement”) with the University of California, University of Vienna, Dr. Emmanuelle Charpentier, Intellia Therapeutics, Inc. Caribou Biosciences, Inc., ERS Genomics Ltd. and TRACR Hematology Ltd.  Under the Invention Management Agreement, the Company is obligated to share costs related to patent maintenance, defense and

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prosecution. During the three and nine months ended September 30, 2018, the Company incurred $0.5 million and $1.6 million, respectively, in shared costs. During the three and nine months ended September 30, 2017, the Company incurred $0.1 million, and $1.1 million, respectively, in shared costs.  The Company recorded accrued legal costs from the cost sharing of $1.4 million and $0.4 million as of September 30, 2018 and December 31, 2017, respectively. The Company is unable to predict the outcome of these matters and is unable to make a meaningful estimate of the amount or range of loss, if any, that could result from an unfavorable outcome.

6. Significant Contracts

Collaboration Agreement with and Joint Development Agreement with Vertex Pharmaceuticals, Incorporated

Summary of Agreement

On October 26, 2015, the Company entered into a strategic collaboration, option, and license agreement (as may be amended from time to time, “Collaboration Agreement”) with Vertex, focused on the use of CRISPR’s gene editing technology, known as CRISPR/Cas9, to discover and develop potential new treatments aimed at the underlying genetic causes of human disease. On December 12, 2017, the Company and Vertex entered into Amendment No. 1 to the Collaboration Agreement (the “Amendment”) and the Joint Development Agreement (the “JDA”). The Amendment, among other things, modified certain definitions and provisions of the Collaboration Agreement to make them consistent with the JDA and clarified how many options are exercised (or deemed exercised) in connection with certain targets specified under the Collaboration Agreement. The Amendment also amended other provisions of the Collaboration Agreement, including the expiration terms of the Collaboration Agreement.

In connection with the Collaboration Agreement, Vertex made a nonrefundable upfront payment of $75.0 million. Under the Collaboration Agreement, Vertex will fund all of the discovery activities conducted pursuant to the agreement while retaining options to co-exclusive and exclusive licenses. In December 2017, upon execution of the JDA and Amendment, Vertex exercised its option to obtain a co-exclusive license to develop and commercialize hemoglobinopathy and beta-globin targets. As such, for potential hemoglobinopathy treatments, including treatments for sickle cell disease, the Company and Vertex will share equally all research and development costs and worldwide revenues. For other targets that Vertex elects to license, Vertex will lead all development and global commercialization activities. For each of up to four remaining targets that Vertex elects to license, the Company has the potential to receive up to $420.0 million in development, regulatory and commercial milestones and royalties on net product sale.

In connection with entering into the JDA, the Company received a $7.0 million up-front payment from Vertex and is eligible for a one-time low seven-digit milestone payment upon the dosing of the second patient in a clinical trial with the initial product candidate. The net profits and net losses, as applicable, incurred under the JDA will be shared equally between the Company and Vertex.

Accounting for the Collaboration Agreement, Amendment and JDA

As the overall arrangement was modified in December 2017, the Company applied the practical expedient in ASC 606-10-65-1 in identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price under the practical expedient in ASC 606.

The arrangement includes components of a customer-vendor relationship and a collaborative arrangement as defined under ASC 808. The Company will apply the guidance of ASC 606 by analogy to the vendor-customer performance obligations of the Collaboration Agreement and the performance obligations of the JDA subject to ASC 606 as outlined below. The Company will apply the guidance of ASC 808 to those elements in which there is a collaboration relationship in which both parties share equally in the risks and rewards of the research and development which include (i) development and commercialization services for currently identified shared products; (ii) R&D services for any follow-on products subject to the JDA; and (iii) committee participation.

The Company evaluated the Collaboration Agreement, Amendment and JDA in accordance with the provisions of ASC 606. The Company identified the following performance obligations: (i) the non-exclusive research license; (ii) four material rights representing the option for up to four exclusive licenses to develop and commercialize the collaboration targets; (iii) a combined performance obligation representing the co-exclusive research license, and a development and commercialization license to develop and commercialize hemoglobinopathies and beta-globin targets; and (iv) the performance of R&D Services.

The selling price of each performance obligation was determined based on the Company’s estimated standalone selling price (the “ESSP”). The Company developed the ESSP for all the performance obligations included in the Collaboration Agreement and JDA with the objective of determining the price at which it would sell such an item if it were to be sold regularly on a standalone basis. The ESSP for material rights was determined based on the incremental discount given to Vertex based on the ESSP of the four remaining exclusive licenses and the exercise price paid at the time of exercise.

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

The Company’s ESSP for each of the remaining material rights to obtain an exclusive license to develop and commercialize a single collaboration target are $45.6 million, $38.4 million, $17.3 million and $17.3 million for a total of $118.6 million. ESSPs for these items were determined based on probability and present value adjusted cash flows from the milestones payments owed for exclusive licenses outlined in the Collaboration Agreement less the price paid to exercise the material right option. ESSP reflects the level of risk and expected probability of success inherent in the nature of the associated research area.

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

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

As the Company has a right to consideration from Vertex in an amount that corresponds directly with the value of the Company’s performance completed to date for the R&D services, thus the Company will recognize revenue related to the R&D services as invoiced, in line with the practical expedient in ASC 606-10-55-18.

The transaction price is comprised of: (i) original upfront payment of $75.0 million, (ii) an upfront payment of $7.0 million under the JDA, and (iii) $19.3 million of variable consideration associated with the R&D services. The R&D services revenue will be recognized as invoiced and specifically allocated to the R&D services performance obligation.  The remaining transaction price of $82.0 million was allocated among the performance obligations using the relative selling price method as follows: (i) a non-exclusive research license: $0.5 million; (ii) a material right to discounts for exclusive licenses for up to four Collaboration Targets: $22.2 million, $18.7 million, $8.4 million and $8.4 million for a total of $57.7 million; and (iii) co-exclusive development and commercialization licenses for hemoglobinopathy and beta-globin targets identified in the JDA and co-exclusive research license for the follow-on products: $23.8 million.

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

Milestones under the Collaboration Agreement

The Company has evaluated all of the milestones that may be received in connection with the Collaboration Agreement and JDA. The first potential milestone the Company will be entitled to receive is the milestone in the JDA to receive a one-time low seven-digit milestone payment in any clinical trial in the initial shared product and is currently fully constrained. The remaining milestones are predominately related to the development and commercialization of a product resulting from the arrangement and are payable with respect to each selected exclusive license which have yet to be exercised and are not currently included in the determination of the transaction price. Each milestone is payable only once per collaboration target, regardless of the number of products directed to such collaboration target that achieve the relevant milestone event. There are nine remaining clinical development and regulatory approval milestones which may trigger proceeds of up to $90.0 million and $235.0 million, respectively, for each selected exclusive license, and two commercial milestones which may trigger proceeds of up to $75.0 million for each selected exclusive license (which, when combined with the $10.0 million due upon exercise of the exclusive option and the $10.0 million development milestone associated with an Investigational New Drug- enabling application, total $420.0 million for each selected Exclusive License), as follows:

Developmental Milestone Events

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Commercial Milestone Events

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

Collaborative elements

The Company evaluated the Collaboration Agreement, Amendment and JDA in accordance with the provisions of ASC 808. The Company identified the following elements of ASC 808: (i) development and commercialization services for shared products; (ii) R&D services for follow-on products; and (iii) committee participation.

The Company evaluated that the nature of the arrangement and determined the arrangement is a cost/profit sharing arrangement and not a revenue arrangement. Therefore, the related impact of the cost sharing associated with research and development will be included in R&D expense. Expenses related to services performed by the Company will be classified as R&D expense. Payments received from Vertex for partial reimbursement of expenses are recorded as a reduction of R&D expense.

During the three and nine months ended September 30, 2018, the Company recognized $0.1 million and $0.5 million of revenue related to the collaboration with Vertex, respectively. During the three and nine months ended September 30, 2017, the Company recognized $1.2 million and $4.8 million of revenue related to the collaboration with Vertex, respectively. Research and development expense incurred by the Company in relation to its performance under the Collaboration Agreement for the three and nine months ended September 30, 2018 was $0.1 million and $0.5 million, respectively. Research and development expense incurred by the Company in relation to its performance under the Collaboration Agreement for the three and nine months ended September 30, 2017 was $2.1 million and $8.0 million, respectively. Research and development expense incurred by the Company in relation to its performance under the JDA for the three and nine months ended September 30, 2018 was $8.7 million and $24.9 million, respectively. Reimbursements from Vertex under the JDA for the three and nine months ended September 30, 2018 was $3.7 million and $10.4 million, respectively. As of September 30, 2018, and December 31, 2017, there was $57.8 million and $56.8 million of non-current deferred revenue related to the Collaboration Agreement, respectively. The transaction price allocated to the remaining performance obligations is $57.9 million.  The remaining performance obligations will be recognized as follows: four material rights to obtain an exclusive commercialization and development license at a point in time, upon exercise; and the non-exclusive research license ratably over/within the remaining two-and-a-half-year research term. As of September 30, 2018, the remaining amount to be recognized for the non-exclusive research license is not significant. R&D services will be recognized as invoiced under the practical expedient and are not disclosed within the remaining performance obligation balance. Reported amounts for 2018 are reflective of accounting under ASC 606 and amounts for 2017 are reflective of accounting under ASC 605 and therefore may not be comparable.

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Joint Venture with Bayer Healthcare LLC

On December 19, 2015, the Company entered into an agreement with Bayer, to establish a joint venture (“Bayer Joint Venture”) to focus on the research the development of new therapeutics to cure blood disorders, blindness, and congenital heart disease. On February 12, 2016, the Company and Bayer completed the formation of the joint venture entity, Casebia, a limited liability partnership formed in the United Kingdom. Bayer and the Company each received a 50% equity interest in the entity in exchange for their respective contributions to the entity. The Company contributed $0.1 million in cash and licensed its proprietary CRISPR/Cas9 gene editing technology and intellectual property for selected disease indications. Bayer contributed its protein engineering expertise and relevant disease know-how.

Under the agreement, Casebia has paid the Company $35.0 million in exchange for a worldwide, exclusive license to commercialize the Company’s CRISPR/Cas9 technology specifically for the indications covered by the license. There are no milestone, royalties or other payments due to the Company under this aspect of the agreement. The Company determined that the contribution of the CRISRP/Cas9 technology by license to Casebia did not meet the definition of a business under ASC 805.

The Company also entered into a separate services agreement with Casebia, under which the Company agreed to provide compensated research and development services.

Concurrent with the execution of the Bayer Joint Venture agreement, the Company also issued a convertible note to Bayer BV (the “Bayer Convertible Loan”) for gross proceeds of $35.0 million which was immediately converted to the Company’s Series B Preferred Shares  at a conversion price of $13.43 per share. Concurrent with the Company’s initial public offering in October 2016, the Company issued and sold 2,500,000 common shares to Bayer BV, at the public offering price of $14.00 per share, resulting in aggregate net proceeds of $35.0 million.

As the agreements relating to the Bayer Joint Venture (including the CRISPR/Cas9 technology license and the research and development services) and the Bayer Convertible Loan were executed at the same time, the Company determined that the contracts should be combined and evaluated as a single arrangement. Additionally, the Company also determined that ASC 845, Nonmonetary Transactions (“ASC 845”) did not apply to this arrangement given the Company’s significant continuing involvement with Casebia and the amount of cash involved in the arrangement. As a result, the Company analogized to the guidance within ASC 606 regarding the allocation of arrangement consideration, however elements under transaction that were not in the scope of ASC 606 were accounted for under accounting literature based on the allocated arrangement consideration.  

The Company determined the total consideration to be allocated to various elements of the transaction includes (i) the total cash payment by Casebia for the technology access fee, net of the Company’s $0.1 million contribution, of $34.9 million, (ii) the fair value of the equity interest in the Joint Venture of $36.4 million, (iii) the $35.0 million received from the issuance of the Bayer Convertible Loan, and (iv) $6.3 million of estimated cash consideration to be received under the research and development service arrangement, accumulating to $112.6 million.  

The Company identified the following performance obligations in the combined transaction:

(i) Combined element of an exclusive, worldwide, royalty free, license to the CRISPR/Cas9 technology specifically for the indications designated by Casebia, and delivery of the consents of the assignors of the underlying patents to the technology to develop, manufacture, and commercialize licensed products under that license

(ii)Research and development services, and

The Company also identified the issuance of the Bayer Convertible Loan as another element to be accounted for under ASC 470, Debt.

The Company allocated consideration to the performance obligations and other elements based on the relative proportion of their standalone selling prices. The Company determined the standalone selling price of the license was $71.4 million based on the consideration paid and the fair value of the 50% interest in Casebia, which was determined utilizing discounted cash flows based on reasonable estimates and assumptions of cash flows expected from Casebia. The standalone selling prices of the separate research and development services was determined to be $6.3 million and of the fair value of the Bayer Convertible Loan was determined to be $24.5 million, based on the fair value of the underlying preferred shares that were exchanged as part of the immediate conversion. Using a relative standalone selling price allocation, the Company allocated the aggregate arrangement consideration paid as follows:

(i) $79.1 million was allocated to the license and patent holder consent combined element;

(ii)$27.2 million was allocated to the Bayer Convertible Loan.

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The difference between combined above amounts of $106.3 million and the total transaction price of $112.6 million is due to variable consideration of $6.3 million associated with the research and development service arrangement. The amount of the transaction price related to the research and development services ($6.3 million) will be allocated specifically to the research and development performance obligation under the right to invoice practical expedient in ASC 606-10-55-18.

The combined amount attributed to the license and patent holder consent element of $79.1 million was recognized as other income for the year ended December 31, 2016.

During 2016, the Company recorded an equity method investment of $36.5 million equal to the fair value of the Company’s interest in Casebia (which was included in the allocable arrangement consideration described above). During 2016, the Company recorded unrealized equity method losses of up to the remaining amount of the $36.5 million investment.

The R&D services are the only remaining performance obligations as of September 30, 2018.

At September 30, 2018 and December 31, 2017, the value of the Company’s equity method investment in Casebia was zero.

Collaborative elements

The Company also participates in cost sharing activities with Casebia with respect to shared research and technology licenses with other vendors. The Company evaluated that the nature of the activity and determined the arrangement is a cost/profit sharing arrangement and not a revenue arrangement. Therefore, the related impact of the cost sharing is included in R&D expense. The Company received reimbursements of $0.0 and $0.9 million for both research and license agreements during the three and nine months ended September 30, 2018, respectively, which was recorded as a reduction of R&D expense in the income statement. The Company received reimbursements of $0.4 million and $2.1 million for both research and license agreements during the three and nine months ended September 30, 2017, respectively.

Collaboration Revenue

During the three and nine months ended September 30, 2018, the Company recognized $0.4 million and $2.4 million of revenue, respectively, related to the collaboration with Casebia. During the three and nine months ended September 30, 2017, the Company recognized $1.2 million and $3.9 million of revenue, respectively, related to the collaboration with Casebia. Amounts for 2018 are reflective of accounting under ASC 606 and amounts for 2017 are reflective of accounting under ASC 605 and therefore may not be comparable. During the three and nine months ended September 30, 2018, the Company recognized $0.4 million and $2.8 million of research and development expense, respectively, in relation to its performance under the agreement. During the three and nine months ended September 30, 2017, the Company recognized $1.2 million and $3.7 million of research and development expense, respectively, in relation to its performance under the agreement. During the three and nine months ended September 30, 2018, the Company recognized $1.0 million and $3.3 million, respectively, of stock-based compensation expense related to Casebia employees. During the three and nine months ended September 30, 2017, the Company recognized $0.4 million and $1.3 million, respectively, of stock-based compensation expense related to Casebia employees. Deferred revenue related to the Company’s collaboration with Casebia was zero and $0.1 million as of September 30, 2018 and December 31, 2017, respectively. Unrecognized equity method losses in excess of the Company’s equity investment in Casebia was $38.8 million and $21.2 million as of September 30, 2018 and December 31, 2017, respectively.

Total operating expenses of Casebia for the three and nine months ended September 30, 2018 was $12.8 million and $39.1 million, respectively. Total net loss of Casebia for the three and nine months ended September 30, 2018 was $12.6 million and $38.4 million, respectively. Total operating expenses, and net loss of Casebia for the three and nine months ended September 30, 2017 was $10.2 million and $24.7 million, respectively.

Collaboration Agreement with ViaCyte, Inc.

On September 17, 2018, the Company entered into a research collaboration agreement ("ViaCyte Collaboration Agreement") with ViaCyte, Inc. (“ViaCyte”) focused on the discovery, development, and commercialization of gene-edited allogeneic stem cell therapies for the treatment of diabetes. Under the terms of the ViaCyte Collaboration Agreement, the Company and ViaCyte will jointly seek to develop an immune-evasive stem cell line as a first step on the path to an allogeneic stem-cell derived product.  Upon successful completion of these studies and identification of a product candidate, the parties will jointly assume responsibility for further development and commercialization worldwide.  

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Upon execution of the agreement, ViaCyte was entitled to receive $15.0 million from the Company that will be paid in two installments in either cash or in common shares at the Company’s election.  On September 24, 2018, the Company issued 165,636 common shares to ViaCyte which had a fair value of $7.5 million. The remaining amount will be paid in common shares or cash upon the close of market on the first business day after the Company files this Quarterly Report on Form 10-Q for the three and nine months ending September 30, 2018. The agreement includes certain provisions such that in the event ViaCyte sells shares received from the Company for less than $15.0 million in combined net proceeds, the Company will pay ViaCyte the deficient amount. In the event ViaCyte sells shares received from the Company for greater than $15.0 million in combined net proceeds, ViaCyte will pay the Company the surplus amount. Each party is responsible for certain research and development activities under the agreement and will be responsible for the respective costs of those activities. ViaCyte has the option, under certain circumstances, to receive an additional $10.0 million from the Company in the form of a convertible promissory note at fair value. The ViaCyte Collaboration Agreement may remain in force for up to six years.

The Company determined that the upfront payment of $15.0 million was for intellectual property which did not have an alternative future use, and as a result, the Company recorded the full amount as research and development expense upon execution of the agreement. The Company determined that upon issuing the 165,636 shares on September 24, 2018, there was an outstanding embedded derivative due to the provisions which require the Company and ViaCyte to settle the deficient or surplus amount. As of September 30, 2018, there was an outstanding derivative liability with a fair value of $0.1 million. The fair value of the derivative is determined based on the price of the Company’s common stock and is considered a level 2 fair value instrument. The change in fair value of $0.1 million is included in other expense for the period ended September 30, 2018. The Company’s total liability to ViaCyte was $7.6 million as of September 30, 2018 which is recorded in accrued expenses on the balance sheet.

Subsequent to September 30, 2018, ViaCyte sold the remainder of the shares issued September 24, 2018. The aggregate net proceeds from all shares issued September 24, 2018 was $6.9 million. As a result, the fair value of the remaining amount due to ViaCyte is $8.1 million, which will be paid in either cash or shares. Subsequent to September 30, 2018, the Company will recognize an additional loss of $0.5 million resulting from the change in fair value of the derivative liability ascribed to the shares issued September 24, 2018.

7. Share Capital

The Company had 51,893,132 registered common shares as of September 30, 2018, with a par value of CHF 0.03 per share, which includes 30,717 shares of unvested unissued restricted common shares and 307,936 treasury shares which are legally outstanding but not considered outstanding for accounting purposes.

Conditional Capital Reserved for Future Issuance

The Company had the following conditional capital reserved for future issuance:

8. Equity-based Compensation

The Company uses the straight-line attribution method to recognize stock-based compensation expense for stock options and restricted stock awards. Stock options and restricted stock awards generally vest over four years with 25% vesting on the first anniversary of

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service commencement and the remaining 75% vesting monthly thereafter. The following table presents stock-based compensation expense included in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss:

Grant-Date Fair Value

The Company estimated the fair value of each employee and non-employee stock option award using the Black-Scholes option-pricing model based on the following assumptions:

The fair value of the restricted stock awards was determined based on the fair value of the common shares on the grant date. Non-employee stock option and restricted stock awards, including those granted to employees of Casebia, were marked-to-market at each reporting period through June 30, 2018, the last period prior to the adoption of ASU 2018-07. All future expense related to these awards will be recorded based on the fair value measured as of June 30, 2018.

Share Based Payment Activity

Stock Option Awards

The following table summarizes stock option activity for employees and non-employees (intrinsic value in thousands):

As of September 30, 2018, total unrecognized compensation expense related to stock options was $90.6 million which the Company expects to recognize over a remaining weighted-average period of 3.1 years.

During the nine months ended September 30, 2018 and 2017, the Company granted options to purchase 0 and 60,000 common shares, respectively, subject to performance-based vesting conditions.

During 2017, the Company also granted 150,000 stock options with market-based vesting conditions in which the recipient is eligible to receive between zero and 150,000 options to purchase common shares at the end of a four-year service period based upon achieving

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a specified average stock price.  As of September 30, 2018, no options to purchase common shares subject to market-based vesting conditions were vested; however 150,000 options were earned as the specified average stock price limits were achieved.

In May 2018, the Company modified the terms of certain options held by a departing employee. The modification resulted in $2.2 million in stock-based compensation expense recorded during the nine months ended September 30, 2018.  

Restricted Stock Awards

The following table summarizes restricted stock activity for employees and non-employees during the nine months ended September 30, 2018:

During the nine months ended September 30, 2018, the total fair value of vested restricted common shares was $10.9 million. As of September 30, 2018, total unrecognized compensation expense related to unvested restricted common shares was $5.3 million which the Company expects to recognize over a remaining weighted-average period of 1.7 years.

9. Income Taxes

During the three and nine months ended September 30, 2018, the Company recorded an income tax provision of $0.1 million and $0.3 million, respectively, representing an effective tax rate of -0.3% and -0.3%, respectively. During the three and nine months ended September 30, 2017, the Company recorded an income tax provision of $0.7 million and $1.3 million, respectively, representing an effective tax rate of -2.9%, and -2.0%, respectively. The income tax provision is primarily attributable to the year-to-date pre-tax income earned by the Company’s U.S. subsidiary. The difference in the statutory tax rate and effective tax rate is primarily a result of the jurisdictional mix of earnings and losses that are not benefited. The Company maintains a valuation allowance against certain deferred tax assets that are not more-likely-than-not realizable. As a result, the Company has not recognized a tax benefit related to losses generated in Switzerland in the current periods.

As disclosed in the Company’s Annual Report, the Company recorded provisional amounts in its 2017 financial statements to reflect the federal, state and foreign impacts of the Tax Cuts and Jobs Act of 2017 (the “Act”).  These amounts remain provisional and subject to Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” (“SAB 118”) as of September 30, 2018.  There have been no changes to the provisional amounts recorded in the 2017 financial statements during the three and nine months ended September 30, 2018. 

10. Related Party Transactions

The Company is a party to intellectual property license agreements with Dr. Charpentier. During the three and nine months ended September 30, 2018 and 2017, the Company did not record any sublicensing fees due to Dr. Charpentier in research and development expense related to the Bayer Joint Venture Agreement.

Refer to Note 6, “Joint Venture with Bayer Healthcare LLC”, for discussion of transactions with Casebia, a related party.

11. Subsequent Events

Refer to Note 6 for discussion of changes in the fair value of the liability arising from the ViaCyte Collaboration Agreement.  

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (i) our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (ii) our audited consolidated financial statements and related notes and management’s discussion and analysis of financial condition and results of operations included in our annual report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission on March 8, 2018. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors”, set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q, if any, and in our other SEC filings. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

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

Overview

We are a leading gene editing company focused on the development of CRISPR/Cas9-based therapeutics. CRISPR/Cas9 stands for Clustered, Regularly Interspaced Short Palindromic Repeats (CRISPR) Associated Protein 9 and is a revolutionary gene editing technology that allows for precise, directed changes to genomic DNA. The application of CRISPR/Cas9 for gene editing was co-invented by one of our scientific founders, Dr. Charpentier, who, along with her collaborators, published work elucidating how CRISPR/Cas9, a naturally occurring viral defense mechanism found in bacteria, can be adapted for use in gene editing. We are applying this technology to potentially treat a broad set of rare and common diseases by disrupting, correcting or regulating the genes related to the disease. We believe that our scientific expertise, together with our approach, may enable an entirely new class of highly active and potentially curative treatments for patients for whom current biopharmaceutical approaches have had limited success.

Since our inception in October 2013, we have devoted substantially all of our resources to our research and development efforts, identifying potential product candidates, undertaking drug discovery and preclinical development activities, building and protecting our intellectual property portfolio, organizing and staffing our company, business planning, raising capital, and providing general and administrative support for these operations. To date, we have primarily financed our operations through public offering of our equity securities, private placements of our preferred shares, convertible loans and collaboration agreements with strategic partners.

In January 2018, we completed an offering of 5,750,000 common shares, which were sold at a price to the public of $22.75 per share. This offering resulted in $122.6 million of net proceeds to us. The underwriting discount of $7.8 million and other expenses of $0.4 million related to the equity offering were recorded as an offset to additional paid-in capital.

In September 2018, we completed an offering of 4,210,526 common shares, which were sold at a price to the public of $47.50 per share. This offering resulted in $187.6 million of net proceeds to us. The underwriting discount of $12.0 million and other expenses of $0.4 million related to the equity offering were recorded as an offset to additional paid-in capital.

In addition, $3.1 million of stamp taxes on the issuance proceeds from the January and September offerings were recorded as an offset to additional paid in capital.

In August 2018, the Company repurchased 64,211 shares of restricted common stock from former employees for less than $0.1 million.

All of our revenue to date has been collaboration revenue. We have incurred significant net operating losses in every year since our inception and expect to continue to incur net operating losses for the foreseeable future. As of September 30, 2018, we had $487.3 million in cash and an accumulated deficit of $244.0 million. We expect to continue to incur significant expenses and

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increasing operating losses for the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase significantly as we continue our current research programs and development activities; seek to identify additional research programs and additional product candidates; conduct preclinical studies enabling clinical trial applications and initiate clinical trials for our most advanced product candidates which are from our hemoglobinopathy program targeting both beta thalassemia and sickle cell disease; initiate preclinical testing and clinical trials for any other product candidates we identify and develop; maintain, expand and protect our intellectual property portfolio, further develop our gene editing platform; hire additional research, clinical and scientific personnel; acquire or in license other technologies; and incur additional costs associated with operating as a public company.

Collaboration Agreement, Joint Development and Commercialization Agreement- Vertex

In October 2015, we entered into a strategic research collaboration agreement with Vertex focused on the development of CRISPR/Cas9-based therapies. Under the terms of our agreement, we received an upfront, nonrefundable payment of $75.0 million and $30.0 million in convertible loan proceeds.

In December 2017, we and Vertex entered into an amendment to the collaboration agreement (“Amendment”). The Amendment, among other things, modified certain definitions and provisions of the Collaboration Agreement to make them consistent with the Joint Development Agreement (“JDA”) and clarified how many options are exercised (or deemed exercised) in connection with certain targets specified under the collaboration agreement. The Amendment also amended other provisions of the collaboration agreement, including the expiration terms of the collaboration agreement.

In December 2017, we entered into the JDA with Vertex for the development and commercialization of CTX001. The initial focus of the JDA centers on developing CTX001 for beta-thalassemia and SCD. The net profits and net losses, as applicable, incurred under the JDA will be shared equally between us and Vertex.

We obtained Clinical Trial Application, or CTA, approvals in multiple countries for both beta-thalassemia and sickle cell disease (SCD) trials and we and Vertex continue to work closely with various global regulatory authorities in these and other countries. In April 2018, we and Vertex submitted an Investigational New Drug application (“IND”) for CTX001 to the U.S. Food and Drug Administration (the “FDA”) to support the planned initiation of a Phase 1/2 trial in the U.S. in adult patients with SCD.  In May 2018, the FDA placed a clinical hold on the IND for CTX001 for the treatment of SCD pending the resolution of certain questions as part of its review of the IND.  On October 10, 2018, we and Vertex announced that the FDA has lifted the clinical hold and accepted the IND for CTX001 for the treatment of sickle cell disease. We and Vertex are currently enrolling patients with transfusion dependent β-thalassemia in a Phase 1/2 trial in β-thalassemia in Europe. CTX001 is an investigational autologous gene-edited hematopoietic stem cell therapy for patients suffering from severe hemoglobinopathies.

Joint Venture Agreement- Casebia

In December 2015, we entered into an agreement, (the “JV Agreement”), with Bayer to create a joint venture, Casebia Therapeutics LLP, (“Casebia” or the “JV”), to discover, develop and commercialize CRISPR/Cas9 gene-editing therapeutics to treat the genetic causes of bleeding disorders, autoimmune disease, blindness, hearing loss and heart disease. We and Bayer each have a 50% interest in the JV. Under the JV Agreement, Bayer is making available its protein engineering expertise and relevant disease know-how and we are contributing our proprietary CRISPR/Cas9 gene editing technology and intellectual property. Bayer will also provide up to $300.0 million in research and development investments to the JV over the first five years, subject to specified conditions.

In connection with the JV Agreement, the JV was required to pay us an aggregate amount of $35.0 million technology access fee, consisting of an upfront payment of $20.0 million, which was paid at the closing of the JV Agreement in March 2016, and another payment of $15.0 million for specified intellectual property rights relating to our CRISPR/Cas9 technology outside of the United States, which was paid in December 2016. In January 2016, we also issued the Bayer Convertible Loan to Bayer BV for gross proceeds of $35.0 million which was immediately converted to Series B Preferred Shares at a conversion price of $13.43 per share. Concurrent with our initial public offering in October 2016, we issued and sold 2,500,000 common shares to Bayer BV, at the public offering price of $14.00 per share resulting in aggregate net proceeds of $35.0 million.

Collaboration Agreement- ViaCyte

On September 17, 2018, we entered into a research collaboration agreement ("ViaCyte Collaboration Agreement") with ViaCyte, Inc. (“ViaCyte”) focused on the discovery, development, and commercialization of gene-edited allogeneic stem cell therapies for the treatment of diabetes. Under the terms of the ViaCyte Collaboration Agreement, we and ViaCyte will jointly seek to

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develop an immune-evasive stem cell line as a first step on the path to an allogeneic stem-cell derived product.  Upon successful completion of these studies and identification of a product candidate, we and ViaCyte will jointly assume responsibility for further development and commercialization worldwide.  

Upon execution of the agreement, ViaCyte was entitled to receive $15.0 million from us that will be paid in two installments either in cash or in common shares at the Company’s option. On September 24, 2018, we issued 165,636 common shares to ViaCyte which had a fair value of $7.5 million. The remaining amount will be paid in common shares or cash upon the close of market on the first business day after we file our Quarterly Report on Form 10-Q for the three months ending September 30, 2018. The agreement includes certain provisions such that in the event ViaCyte sells shares received from us for less than $15.0 million in combined net proceeds, we will owe ViaCyte the deficient amount. In the event ViaCyte sells shares received from us for greater than $15.0 million in combined net proceeds, ViaCyte will owe us the surplus amount. ViaCyte has the option, under certain circumstances, to receive an additional $10.0 million from us in the form of a convertible promissory note at fair value. The ViaCyte Collaboration Agreement may remain in force for up to six years.

Financial Overview

Revenue

We have not generated any revenue to date from product sales and do not expect to do so in the near future. During the three and nine months ended September 30, 2018, we recognized $0.6 million and $3.0 million, respectively, of revenue related to our collaboration arrangement with Vertex and Casebia. During the three and nine months ended September 30, 2017, we recognized $2.4 million and $8.7 million, respectively, of revenue related to our collaboration agreements with Vertex and Casebia. As of September 30, 2018, we had not received any milestone or royalty payments under the Vertex collaboration agreement. For additional information about our revenue recognition policy, see Note 2 “Summary of Significant Accounting Policies”.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including our product discovery efforts and the development of our product candidates, which include:

Research and development costs are expensed as incurred. Research and development expenses include amounts incurred under the cost sharing agreement with Vertex, net of reimbursements from Vertex for such costs. Nonrefundable advance payments for research and development goods or services to be received in the future are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed. At this time, we cannot reasonably estimate or know the nature, timing or estimated costs of the efforts that will be necessary to complete the development of any product candidates we may develop. This is due to the numerous risks and uncertainties associated with developing such product candidates, including the uncertainty of:

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A change in the outcome of any of these variables with respect to the development of any product candidates or the subsequent commercialization of any product candidates we may successfully develop could significantly change the costs, timing and viability associated with the development of that product candidate.

Except for activities we perform in connection with our collaborations with Vertex and Casebia, we do not track research and development costs on a program-by-program basis. We plan to track research and development costs for individual development programs when we identify a product candidate from the program that we believe we can advance into clinical trials.

Research and development activities are central to our business model. We expect research and development costs to increase significantly for the foreseeable future as our current development programs progress and new programs are added.

General and Administrative Expenses

General and administrative expenses consist primarily of employee related expenses, including salaries, benefits, and equity-based compensation for personnel in executive, finance, accounting, business development and human resources functions. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to patent and corporate matters, and fees for accounting and consulting services.

We anticipate that our general and administrative expenses will increase in the future to support continued research and development activities, potential commercialization of our product candidates and increased costs of operating as a public company. We anticipate increased costs associated with being a public company, including expenses related to services associated with maintaining compliance with exchange listing and SEC requirements, insurance costs and investor relations costs, the hiring of additional personnel and fees to outside consultants, lawyers and accountants, among other expenses. We also anticipate increased expenses related to the reimbursements of third-party patent related expenses with respect to certain of our in-licensed intellectual property.

Results of Operations

Comparison of three Months Ended September 30, 2018 and 2017

The following table summarizes our results of operations for the three months ended September 30, 2018 and 2017, together with the dollar change in those items:

Collaboration Revenue

Collaboration revenue for the three months ended September 30, 2018, was $0.6 million, compared to $2.4 million for the three months ended September 30, 2017. The decrease of approximately $1.8 million was due to us entering into the JDA with Vertex in December 2017. This resulted in more research being conducted under the cost sharing arrangement included within the JDA. Please refer to Note 2 for further information.

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Research and Development Expenses

Research and development expenses were $39.8 million for the three months ended September 30, 2018, compared to $17.8 million for the three months ended September 30, 2017. The increase of approximately $22.0 million was primarily attributable to the following increases: $15.0 million of expenses related to the ViaCyte Collaboration Agreement, $2.6 million of variable research and development costs and license fees, $1.6 million of employee stock based compensation costs and $2.4 million of employee-related costs. Total research and development expenses include $0.1 million related to the collaboration agreement with Vertex and $5.0 million associated with the JDA, which is net of $3.7 million for costs reimbursed by Vertex, for the three months ended September 30, 2018.

General and Administrative Expenses

General and administrative expenses were $10.2 million for the three months ended September 30, 2018, compared to $8.1 million for the three months ended September 30, 2017. The increase of approximately $2.1 million was primarily attributable to an increase of $1.6 million of employee stock based compensation costs.

Other Expense, Net

Other expense, net, was $1.1 million of expense for the three months ended September 30, 2018, compared to $0.4 million of expense for the three months ended September 30, 2017.  The increase was primarily due to an increase in the loss from equity method investment from stock based compensation awards granted to employees of Casebia. Other expense for the three months ended September 30, 2018 includes $0.1 million of expense related to the change in fair value of the derivative liability issued under the ViaCyte Collaboration Agreement.

Comparison of nine Months Ended September 30, 2018 and 2017

The following table summarizes our results of operations for the nine months ended September 30, 2018 and 2017, together with the dollar change in those items:

Collaboration Revenue

Collaboration revenue for the nine months ended September 30, 2018 was $3.0 million, compared to $8.7 million for the nine months ended September 30, 2017. The decrease of $5.7 million was due to us entering into the JDA with Vertex in December 2017. This resulted in more research being conducted under the cost sharing arrangement included within the JDA. Please refer to Note 2 for further information.

Research and Development Expenses

Research and development expenses were $85.0 million for the nine months ended September 30, 2018, compared to $49.8 million for the nine months ended September 30, 2017. The increase of approximately $35.2 million was primarily attributable to the following increases: $15.0 million of expenses related to the Viacyte Collaboration Agreement, $7.4 million of variable research and development costs and license fees, $5.8 million of employee stock based compensation costs, $6.0 million of employee-related costs, and $0.5 million of facility-related costs. Total research and development expenses include $0.5 million related to the collaboration agreement with Vertex and $14.5 million associated with the JDA, which is net of $10.4 million for costs reimbursed by Vertex, for the nine months ended September 30, 2018.

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General and Administrative Expenses

General and administrative expenses were $31.8 million for the nine months ended September 30, 2018, compared to $24.5 million for the nine months ended September 30, 2017. The increase of $7.2 million was primarily due to the following increases: $4.1 million of employee stock based compensation costs, $2.4 million in intellectual property costs, $1.4 million in employee-related costs. The increases were offset by a reduction of $0.3 million in professional and consulting expenses and $0.3 million of facility-related costs.

Other (Expense) Income, Net

Other (expense) income, net was $3.4 million of expense for the nine months ended September 30, 2018, compared to $1.5 million of expense for the nine months ended September 30, 2017. The increase was primarily due to an increase in the loss from equity method investment from stock based compensation awards granted to employees of Casebia. Other expense for the nine months ended September 30, 2018 includes $0.1 million of expense related to the change in fair value of the derivative liability issued under the ViaCyte Collaboration Agreement.

Liquidity and Capital Resources

As of September 30, 2018, we had cash of approximately $487.3 million of which approximately $481.7 million was held outside of the United States. In January 2018, we completed an offering of 5,750,000 common shares, which were sold at a price to the public of $22.75 per share. This offering resulted in $122.6 million of net proceeds to us. The underwriting discount of $7.8 million and other expenses of $0.4 million related to the equity offering were recorded as an offset to additional paid-in capital. In September 2018, we completed an offering of 4,210,526 common shares, which were sold at a price to the public of $47.50 per share. This offering resulted in $187.6 million of net proceeds to us. The underwriting discount of $12.0 million and other expenses of $0.4 million related to the equity offering were recorded as an offset to additional paid-in capital. In addition, $3.1 million of stamp taxes on the issuance proceeds from the January and September offerings were recorded as an offset to additional paid in capital. With our cash on hand as of September 30, 2018, we expect cash and cash equivalents to be sufficient to fund its current operating plan through at least the next 24 months. As of September 30, 2018, our funds were held in non-interest-bearing deposit accounts.

In August 2018, the Company entered into an At-The-Market (“ATM”) sales agreement with Jefferies, under which it may offer and sell from time to time common shares having aggregate gross proceeds of up to $125.0 million. We have not yet issued or sold any securities under this sales agreement. We have incurred $0.2M in costs related to this sales agreement, which are included in other current assets as of September 30, 2018 and will be offset against future offering proceeds.

Funding Requirements

Our primary uses of capital are, and we expect will continue to be, research and development activities, compensation and related expenses, laboratory and related supplies, legal and other regulatory expenses, patent prosecution filing and maintenance costs for our licensed intellectual property and general overhead costs. We expect our expenses to increase compared to prior periods in connection with our ongoing activities, particularly as we continue research and development and preclinical activities, and initiate preclinical studies to support initial drug applications.

Because our research programs are still in preclinical development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of any current or future product candidates, if approved, or whether, or when, we may achieve profitability. Until such time as we can generate substantial product revenues, if ever, we expect to finance our cash needs through a combination of equity, debt financings and payments received in connection with our collaboration agreements. We are entitled to research payments under our collaboration with Vertex. Additionally, we are eligible to earn payments, in each case, on a per-product basis under the JV Agreement with Bayer for Casebia and our collaboration with Vertex. Except for these sources of funding, we do not have any committed external source of liquidity. We intend to consider opportunities to raise additional funds through the sale of equity or debt securities when market conditions are favorable to us to do so. To the extent that we raise additional capital through the future sale of equity or debt securities, the ownership interests of our shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing shareholders. If we raise additional funds through collaboration arrangements in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

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Outlook

Based on our research and development plans and our timing expectations related to the progress of our programs, we expect our existing cash, will enable us to fund our operating expenses and capital expenditures for at least the next 24 months, without giving effect to any additional proceeds we may receive under our Collaboration Agreement and JDA with Vertex and the agreements related to Casebia and any other capital raising transactions we may complete. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect. Given our need for additional financing to support the long term clinical development of our programs, we intend to consider additional financing opportunities when market terms are favorable to us.

Our ability to generate revenue and achieve profitability depends significantly on our success in many areas, including: developing our delivery technologies and our CRISPR/Cas9 technology platform; selecting appropriate product candidates to develop; completing research and preclinical and clinical development of selected product candidates; obtaining regulatory approvals and marketing authorizations for product candidates for which we complete clinical trials; developing a sustainable and scalable manufacturing process for product candidates; launching and commercializing product candidates for which we obtain regulatory approvals and marketing authorizations, either directly or with a collaborator or distributor; obtaining market acceptance of our product candidates, if approved; addressing any competing technological and market developments; negotiating favorable terms in any collaboration, licensing or other arrangements into which we may enter; maintaining good relationships with our collaborators and licensors; maintaining, protecting and expanding our portfolio of intellectual property rights, including patents, trade secrets and know-how; and attracting, hiring and retaining qualified personnel.

Cash Flows

The following table provides information regarding our cash flows for each of the period below:

Net Cash Used in Operating Activities

Net cash used in operating activities was $67.9 million for the nine months ended September 30, 2018 as compared to $55.3 million for the nine months ended September 30, 2017. The net cash used in operating activities for the nine months ended September 30, 2018 primarily consisted of a net loss of $117.4 million adjusted for non-cash items (including equity-based compensation expense of $22.0 million, depreciation and amortization expense of $2.6 million, a loss from an equity method investment of $3.3 million, expense of $15.1 million under the ViaCyte Collaboration Agreement, $7.5 million of which was paid through the issuance of common shares during the period ended September 30, 2018, and $7.6 million of which is accrued as of September 30, 2018), a decrease in accounts receivable of $2.1 million, an increase in prepaid expenses and other assets of $2.5 million, an increase in accounts payable and accrued expenses of $8.0 million, a decrease of $0.5 million in deferred rent and a decrease in deferred revenue of $0.3 million.

Net Cash (Used in) Provided by Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2018 was $1.8 million as compared to $8.1 million for the nine months ended September 30, 2017. The net cash used in investing activities for the nine months ended September 30, 2018 consisted primarily of purchases of property and equipment for use in research and development activities.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2018 was $317.2 million, compared with $1.3 million for the nine months ended September 30, 2017. The net cash provided by financing activities for the nine months ended September 30, 2018 consisted of proceeds from the issuance of common shares in an offering in January of 2018 which resulted in $122.6 million of net proceeds to the Company, proceeds from the issuance of common shares in an offering in September of 2018 which resulted in $187.6 million of net proceeds to the Company, as well as exercises of stock options. In addition, $3.1 million of

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stamp taxes on the issuance proceeds from the January and September offerings were recorded as an offset to additional paid in capital.

Contractual Obligations

The disclosure of our contractual obligations and commitments was reported in our Annual Report on Form 10-K for the year ended December 31, 2017. There have been no material changes from the contractual commitments and obligations previously disclosed in our Annual Report on Form 10-K other than the changes described in Note 6 to the accompanying financial statements.

Off-Balance Sheet Arrangements

As of September 30, 2018, we do not have any off-balance sheet arrangements as defined under applicable SEC rules.

Critical Accounting Policies and Significant Judgments and Estimates

This discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with U.S. GAAP. We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as critical because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have been reasonable—could have been used. On an ongoing basis, we evaluate our estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe that our most critical accounting policies are those relating to revenue recognition, variable interest entities and equity-based compensation, and there have been significant changes to our revenue recognition, multiple-element and milestone and royalty accounting policies discussed in the Annual Report.  Please refer to Note 2, “Significant Accounting Policies”, for the updated revenue recognition policy that encompasses the changes to the historical revenue recognition, multiple-element and milestone and royalty accounting policies.  

Recent Accounting Pronouncements

Refer to Note 2, “Summary of Significant Accounting Policies,” in the accompanying notes to the consolidated financial statements for a discussion of recent accounting pronouncements.

Item 3. Qualitative and Quantitative Disclosures about Market Risk

Foreign Exchange Market Risk

As a result of our foreign operations, we face exposure to movements in foreign currency exchange rates, primarily the Swiss Franc and British Pound, against the U.S. dollar. The current exposures arise primarily from cash, accounts payable, and intercompany receivables and payables. Changes in foreign exchange rates affect our consolidated statement of operations and distort comparisons between periods. We do not engage in any foreign exchange rate hedging activities and therefore we are subject to foreign currency impacts. Based on our foreign currency exchange rate exposures at September 30, 2018, a hypothetical 10% adverse fluctuation in exchange rates would not have a material impact on the consolidated financial statements.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2018. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure

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that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2018, our Principal Executive Officer and Principal Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we may become involved in litigation or other legal proceedings relating to claims arising from the ordinary course of business. Except as described below, there are currently no claims or actions pending against us that, in the opinion of our management, are likely to have a material adverse effect on our business.

In January 2016, the U.S. Patent and Trademark Office, or USPTO, declared an interference between one of the pending U.S. patent applications we have in-licensed from Dr. Charpentier and twelve issued U.S. patents owned jointly by the Broad Institute and Massachusetts Institute of Technology and, in some instances, the President and Fellows of Harvard College, which we refer to individually and collectively as Broad. The interference was redeclared in March 2016 to add a U.S. patent application owned by Broad. An interference is a proceeding conducted at the USPTO by the Patent Trial and Appeal Board, or PTAB, to determine which party was the first to invent subject matter claimed by at least two parties. There were two parties to this interference being Dr. Charpentier, the regents of the University of California, and the University of Vienna (collectively, “UC”) and Broad.

Following motions by the parties and other procedural matters, in February 2017, the PTAB concluded that the declared interference should be dismissed. In its decision, the PTAB concluded that, although the claims overlap, the respective scope of UC and Broad’s claim sets as presented did not define the same patentable invention and, accordingly, terminated the interference.

In April 2017, UC appealed the PTAB decision to the U.S. Court of Appeals for the Federal Circuit, or the Federal Circuit. In the appeal, UC asked the court to review and reverse the PTAB’s February 2017 decision, which terminated the interference without determining which inventors actually invented the use of the CRISPR/Cas9 genome editing technology in eukaryotic cells. The Federal Circuit conducted a hearing on the appeal on April 30, 2018. On September 10, 2018, the Federal Circuit affirmed the PTAB’s decision to terminate the interference proceeding.

Either party can pursue existing or new patent applications in the U.S. and elsewhere. Going forward, either party and other parties could seek a new interference related to the uses of the technology in eukaryotic cells or other aspects of the technology, and any existing or new patents could be the subject of other challenges to their validity of enforceability. If there is a second interference, either party could again appeal an adverse decision to the Federal Circuit.

In any case, it may be years before there is a final determination on priority. Pursuant to the terms of the license agreement with Dr. Charpentier, we are responsible for covering or reimbursing Dr. Charpentier’s patent prosecution, defense and related costs associated with our in-licensed technology.

In February 2018, several parties filed oppositions in the European Patent Office to the grant of our in-licensed European patent.  Opposition proceedings can lead to the revocation of a patent in its entirety; the maintenance of the patent as granted, or the maintenance of a patent in amended form.  Opposition proceedings typically take years to resolve, including the time taken by appeals that can be filed by any of the parties.  We cannot guarantee the outcome of the oppositions to our in-licensed European patent, and an adverse result could preclude us from enforcing our rights in Europe against third parties.

We are unable to predict the outcome of these matters and are unable to make a meaningful estimate of the amount or range of loss, if

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any, that could result from an unfavorable outcome.  In the future, we may become party to legal matters and claims arising in the ordinary course of business, the resolution of which we do not anticipate would have a material adverse impact on our financial position, results of operations or cash flows. We devote considerable effort in building, maintaining and protecting a broad, worldwide portfolio of intellectual property related to the use of CRISPR/Cas9 genome editing systems to develop therapeutic products.  In this regard, we have amassed a portfolio of patents, patent applications and other intellectual property covering, among other things:

Our intellectual property portfolio for our CRISPR/Cas9 technologies and therapeutics includes over 45 active patent families and more than 15 granted or allowed patents in the United States, United Kingdom, Europe, Japan, China, Ukraine, New Zealand, Singapore, Australia,  Mexico, Tunisia and South Africa, and pending patent applications in the United States, Europe, China, Japan, Canada, Mexico, Australia and other selected countries in Central America, South America, Asia and Africa.  The granted patents and any other patents that may ultimately issue in this patent family are expected to expire starting in 2033, not including any applicable patent term extensions.

As both our platform and development pipeline mature, we intend to continue expanding our intellectual property portfolio through new patent filings that claim aspects of our proprietary technologies and development candidates.  Furthermore, as the field of CRISPR/Cas9 technologies and therapeutics is maturing, patent applications are being examined by national patent offices around the world. There is uncertainty about which patents will issue, and, if they do, as to when, to whom and with what claims.

It is likely that there will be significant litigation and other proceedings, such as interference, reexamination, inter partes review, post-grant review and opposition proceedings, in various patent offices relating to patent rights in the CRISPR/Cas9 field.  For example, the European patent we in-licensed from Dr. Charpentier has been opposed by several third parties. On September 16, 2012, the America Invents Act went into effect and expanded the opportunities to challenge issued U.S. patents, creating proceedings including inter partes reviews and post-grant reviews. These provide additional opportunities for third parties to challenge patents within our intellectual property portfolio. Given the importance of our intellectual property portfolio to our business operations, we intend to vigorously enforce our rights and defend against challenges that have arisen or may arise in this area, as deemed appropriate.

Item 1A. Risk Factors.

There have been no material changes from the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017.

Item 2. Unregistered Sales of Equity Securities.

During the period between January 1, 2018 and September 30, 2018, we issued to Casebia employees options to purchase an aggregate of 6,000 common shares at a weighted-average exercise price of $50.14 per share. We deemed these issuances to be exempt from registration under the Securities Act either in reliance on Rule 701 of the Securities Act as sales and offers under compensatory benefit plans and contracts relating to compensation in compliance with Rule 701, or in reliance on Section 4(a)(2), as transactions by an issuer not involving a public offering. All recipients either received adequate information about our Company or had access, through employment or other relationships, to such information. No underwriters were involved in the foregoing issuances of securities.

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Item 6. Exhibits

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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