Editas Medicine, Inc. - Quarter Report: 2019 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2019

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

For the transition period from ____________ to ________

Commission File Number 001-37687

EDITAS MEDICINE, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		46‑4097528 (I.R.S. Employer Identification No.)

11 Hurley Street Cambridge, Massachusetts (Address of principal executive offices)		02141 (Zip Code)

(617) 401‑9000

(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 an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐

Non‑accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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

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

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



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value per share	EDIT	The Nasdaq Stock Market LLC

The number of shares of Common Stock outstanding as of May 3, 2019 was 49,222,986.

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Editas Medicine, Inc.

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		Page

PART I. FINANCIAL INFORMATION		3

Item 1.	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018	3
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018	4
	Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2019 and 2018	5
	Condensed Consolidated Statements of Stockholders’ Equity as of March 31, 2019 and 2018	6
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	44

PART II. OTHER INFORMATION		45

Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 6.	Exhibits	98

Signatures		99

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Editas Medicine, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

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


	March 31,		December 31,
	2019		2018
ASSETS
Current assets:
Cash and cash equivalents	$	157,932	$	134,776
Marketable securities		184,133		234,179
Accounts receivable		—		30
Prepaid expenses and other current assets		5,002		5,791
Total current assets		347,067		374,776
Property and equipment, net		7,991		40,232
Right-of-use asset		18,480		—
Restricted cash and other non-current assets		5,378		5,378
Total assets	$	378,916	$	420,386
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	6,557	$	5,327
Accrued expenses		5,642		12,813
Deferred revenue, current		23,400		15,712
Operating lease liability		3,519		—
Other current liabilities		1,911		2,048
Total current liabilities		41,029		35,900
Operating lease liability, net of current portion		14,859		—
Deferred revenue, net of current portion		105,865		115,614
Construction financing lease obligation, net of current portion		—		32,417
Other non-current liabilities		1		293
Total liabilities		161,754		184,224
Commitments and contingencies (see note 7)
Stockholders’ equity
Preferred stock, $0.0001 par value per share: 5,000,000 shares authorized; no shares issued or outstanding		—		—
Common stock, $0.0001 par value per share: 195,000,000 shares authorized; 49,175,122 and 49,028,907 shares issued, and 48,923,122 and 48,758,951 shares outstanding at March 31, 2019 and December 31, 2018, respectively		5		5
Additional paid-in capital		661,852		652,464
Accumulated other comprehensive income (loss)		29		(29)
Accumulated deficit		(444,724)		(416,278)
Total stockholders’ equity		217,162		236,162
Total liabilities and stockholders’ equity	$	378,916	$	420,386

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

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Editas Medicine, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

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


	Three Months Ended
	March 31,
	2019		2018
Collaboration and other research and development revenues	$	2,069	$	3,927
Operating expenses:
Research and development		15,842		21,300
General and administrative		17,489		14,186
Total operating expenses		33,331		35,486
Operating loss		(31,262)		(31,559)
Other income, net:
Other (expense) income, net		(44)		182
Interest income, net		2,057		438
Total other income, net		2,013		620
Net loss	$	(29,249)	$	(30,939)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.60)	$	(0.67)
Weighted-average common shares outstanding, basic and diluted		48,838,229		45,992,008

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

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Editas Medicine, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(unaudited)

(amounts in thousands)


	Three Months Ended
	March 31,
	2019		2018
Net loss	$	(29,249)	$	(30,939)
Other comprehensive income (loss):
Unrealized gain (loss) on marketable debt securities		58		24
Comprehensive loss	$	(29,191)	$	(30,915)

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

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Editas Medicine, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited)

(amounts in thousands)


						Accumulated
				Additional		Other		Other		Total
	Common Stock			Paid-In		Comprehensive		Accumulated		Stockholders’
	Shares	Amount		Capital		(Loss) Income		Deficit		Equity
Balance at December 31, 2018	48,758,951	$	5	$	652,464	$	(29)	$	(416,278)	$	236,162
Cumulative effect adjustment for adoption of new accounting guidance	—		—		—		—		803		803
Exercise of stock options	146,171		—		1,533		—		—		1,533
Vesting of founder shares	18,000		—		410		—		—		410
Stock-based compensation expense	—		—		7,445		—		—		7,445
Unrealized gain on marketable securities	—		—		—		58		—		58
Net loss	—		—		—		—		(29,249)		(29,249)
Balance at March 31, 2019	48,923,122	$	5	$	661,852	$	29	$	(444,724)	$	217,162


						Accumulated
				Additional		Other		Other		Total
	Common Stock			Paid-In		Comprehensive		Accumulated		Stockholders’
	Shares	Amount		Capital		(Loss)		Deficit		Equity
Balance at December 31, 2017	44,507,960	$	4	$	514,002	$	(76)	$	(305,850)	$	208,080
Cumulative effect adjustment for adoption of new accounting guidance	—		—		—		—		(474)		(474)
Issuance of common stock for repayment of notes payable	1,735,114		—		58,023		—		—		58,023
Issuance of common stock for asset purchase agreement	56,099		—		1,942		—		—		1,942
Exercise of stock options	305,408		—		4,328		—		—		4,328
Vesting of restricted common stock and common stock subject to repurchase	89,114		—		2		—		—		2
Vesting of founder shares	18,000		—		650		—		—		650
Stock-based compensation expense	—		—		5,878		—		—		5,878
Unrealized gain on marketable securities	—		—		—		24		—		24
Net loss	—		—		—		—		(30,939)		(30,939)
Balance at March 31, 2018	46,711,695	$	4	$	584,825	$	(52)	$	(337,263)	$	247,514

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Editas Medicine, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(amounts in thousands)


	Three Months Ended
	March 31,
	2019		2018
Cash flow from operating activities
Net loss	$	(29,249)	$	(30,939)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		7,855		6,528
Depreciation		628		751
Non-cash research and development expense		—		1,942
Other non-cash items, net		(1,181)		(430)
Changes in operating assets and liabilities:
Accounts receivable		30		(252)
Prepaid expenses and other current assets		789		(761)
Right-of-use asset		981		—
Accounts payable		626		5,095
Accrued expenses		(6,923)		(1,252)
Deferred revenue		(2,061)		(3,142)
Operating lease liability		(1,379)		—
Other current and non-current liabilities		881		—
Net cash used in operating activities		(29,003)		(22,460)
Cash flow from investing activities
Purchases of property and equipment		(718)		(1,011)
Proceeds from the sale of equipment		36		5
Purchases of marketable securities		(74,692)		(52,674)
Proceeds from maturities of marketable securities		126,000		94,500
Net cash provided by investing activities		50,626		40,820
Cash flow from financing activities
Proceeds from offering of common stock, net of issuance costs		—		48,474
Proceeds from exercise of stock options		1,533		4,410
Payments on construction financing lease obligation		—		(203)
Net cash provided by financing activities		1,533		52,681
Net increase in cash and cash equivalents		23,156		71,041
Cash, cash equivalents and restricted cash, beginning of period		136,395		148,249
Cash, cash equivalents and restricted cash, end of period	$	159,551	$	219,290
Supplemental disclosure of cash and non-cash activities:
Fixed asset additions included in accounts payable and accrued expenses	$	356	$	129
Cash paid in connection with operating lease liabilities		1,724		—
Right-of-use assets obtained in exchange of operating lease obligations		19,461		—
Reclassification of liability for common stock subject to repurchase		—		3
Issuance of common stock for settlement of success payments (see note 7)		—		9,530
Adjustment to deferred revenue for revenue adoption		—		474
Offering costs included in accounts payable and accrued expenses		—		19

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

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Editas Medicine, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Nature of Business

Editas Medicine, Inc. (the “Company”) is a leading, clinical stage genome editing company dedicated to developing potentially transformative genomic medicines to treat a broad range of serious diseases. The Company was incorporated in the state of Delaware in September 2013. Its principal offices are in Cambridge, Massachusetts.

Since its inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, and raising capital. The Company has primarily financed its operations through various equity financings, payments received under a research collaboration with Juno Therapeutics, Inc., a Celgene company that is a wholly-owned subsidiary of Celgene Corporation (“Juno Therapeutics”), and payments received under a strategic alliance and option agreement with Allergan Pharmaceuticals International Limited (“Allergan”).

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.

Liquidity

As of March 31, 2019, the Company has raised an aggregate of $328.3 million in net proceeds through the sale of shares of its common stock in public offerings. The Company has incurred annual net operating losses in every year since its inception. The Company expects that its existing cash, cash equivalents and marketable securities at March 31, 2019 and anticipated interest income will enable it to fund its operating expenses and capital expenditure requirements for at least the next 24 months following the date of this Quarterly Report on Form 10-Q. The Company had an accumulated deficit of $444.7 million at March 31, 2019, and will require substantial additional capital to fund its operations. The Company has never generated any product revenue. There can be no assurance that the Company will be able to obtain additional debt or equity financing or generate product revenue or revenues from collaborative partners, on terms acceptable to the Company, on a timely basis or at all. The failure of the Company to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the Company’s business, results of operations, and financial condition.

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2. Summary of Significant Accounting Policies

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 (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“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, 2018 (the “Annual Report”).

The unaudited condensed consolidated financial statements include the accounts of Editas Medicine, Inc. and its wholly owned subsidiary, Editas Securities Corporation. All intercompany transactions and balances of the subsidiary have been eliminated in consolidation. In the opinion of management, the information furnished reflects all adjustments, all of which are of a normal and recurring nature, necessary for a fair presentation of the results for the reported interim periods. 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. The three months ended March 31, 2019 and 2018 are referred to as the first quarter of 2019 and 2018, respectively. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year or any other interim period.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. On an ongoing basis, the Company’s management evaluates its estimates, which include, but are not limited to, estimates related to revenue recognition, accrued expenses, stock-based compensation expense and deferred tax valuation allowances. The Company bases its estimates on historical experience and other market-specific or relevant assumptions that it believes to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2, “Summary of significant accounting policies,” to the consolidated financial statements included in the Annual Report. There have been no material changes to the significant accounting policies previously disclosed in the Annual Report other than as noted below.

Recent Accounting Pronouncements –Adopted

Leases

During the first quarter of 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASC 842”), which amends a number of aspects of lease accounting and requires entities to recognize right-of-use assets and liabilities on the balance sheet.

At the inception of an arrangement the Company determines whether the arrangement contains a lease. If a lease is identified in an arrangement, the Company recognizes a right-of-use asset and liability on its balance sheet and determines whether the lease should be classified as a finance or operating lease. The Company does not recognize assets or liabilities for leases with lease terms of less than 12 months. Lease payments for short-term leases are recorded to operating expense on a straight-line basis over the lease term and variable lease payments are recorded in the period in which the obligation for those payments is incurred.

A lease qualifies as a finance lease if any of the following criteria are met at the inception of the lease: (i) there

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is a transfer of ownership of the leased asset to the Company by the end of the lease term, (ii) the Company holds an option to purchase the leased asset that it is reasonably certain to exercise, (iii) the lease term is for a major part of the remaining economic life of the leased asset, (iv) the present value of the sum of lease payments equals or exceeds substantially all of the fair value of the leased asset, and (v) the nature of the leased asset is specialized to the point that it is expected to provide the lessor no alternative use at the end of the lease term. All other leases are recorded as operating leases.

Finance and operating lease assets and liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term using the discount rate implicit in the lease. If the rate is not readily determinable, the Company utilizes its incremental borrowing rate at the lease commencement date. Operating lease assets are further adjusted for prepaid or accrued lease payments. Operating lease payments are expensed using the straight-line method as an operating expense over the lease term. Finance lease assets are amortized to depreciation expense using the straight-line method over the shorter of the useful life of the related asset or the lease term. Finance lease payments are bifurcated into (i) a portion that is recorded as imputed interest expense and (ii) a portion that reduces the finance liability associated with the lease.

The Company does not separate lease and non-lease components when determining which lease payments to include in the calculation of its lease assets and liabilities. Variable lease payments are expensed as incurred. If a lease includes an option to extend or terminate the lease, the Company reflects the option in the lease term if it is reasonably certain it will exercise the option.

The Company elected the modified-retrospective transition method, pursuant to which the Company recognized a cumulative-effect adjustment of $0.8 million to the opening balance of accumulated deficit on January 1, 2019 associated with de-recognizing the net asset balance recorded in property and equipment, net and the offsetting construction financing lease liability related to the Company’s headquarters which was previously accounted for under the built-to-suit guidance in Accounting Standards Codification (“ASC”) 840, Leases (“ASC 840”). This resulted in a reversal of $32.6 million from total assets and $33.4 million from total liabilities. All prior period balances are presented in accordance with ASC 840. As of January 1, 2019, the Company recorded a right-of-use asset of $19.5 million and lease liability of $19.7 million associated with the adoption of ASC 842. In addition, the Company elected to adopt the package of three practical expedients for leases that commenced prior to January 1, 2019, allowing it not to reassess (i) whether any expired or existing contracts contain leases, (ii) the lease classification for any expired or existing leases and (iii) the initial indirect costs for any existing leases. The Company did not elect the hindsight practical expedient which allows the Company to reassess the lease term as it was not relevant to the Company’s leases.

As of March 31, 2019, the Company had only operating leases and has recorded the $18.4 million asset balance and $18.5 million liability balance in right-of-use assets and operating lease liabilities, respectively, in the condensed consolidated balance sheet as of March 31, 2019. The Company has finalized changes to its controls to support lease accounting and related disclosures under the new standard.

Stock-Based Compensation

During the first quarter of 2019, the Company adopted ASU No. 2018-07, Compensation – Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which simplified the accounting for share-based payments to non-employees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The new guidance expands the scope of ASC 718, Compensation – Stock Compensation (“ASC 718”), which supersedes the guidance in ASC 505-50, Equity-Based Payments to Non-Employees (“ASC 505-50”). In accordance with the new guidance, the Company will account for share-based payments to non-employees by recognizing stock-based compensation expense equal to the grant date fair value of the share-based payment ratably over the requisite service period. The Company estimates the grant date fair value for each stock option using the Black-Scholes option-pricing model. For restricted stock awards and restricted stock unit awards, the Company estimates the value of each award using intrinsic value, which is based on the value of the underlying common stock less any purchase price. On the date of adoption, the Company estimated the fair value for all unvested non-employee stock options and restricted shares. The unvested stock-based compensation will be recorded over the remaining requisite service period.

Recent Accounting Pronouncements – Issued But Not Yet Adopted

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In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies certain disclosure requirements on fair value measurements. The amendments regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty are required to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments are required to be applied retrospectively to all periods presented upon their effective date. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those years. The Company does not anticipate a material impact to disclosures as a result of the adoption of ASU 2018-13.

3. Cash Equivalents, Marketable Securities and Equity Securities

Cash equivalents, marketable securities and equity securities consisted of the following at March 31, 2019 (in thousands):


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
March 31, 2019	Cost		Gains		Losses		Value
Cash equivalents and marketable securities:
Money market funds	$	157,711	$	—	$	—	$	157,711
U.S. Treasuries		149,296		24		—		149,320
Government agency securities		34,808		5		—		34,813
Equity securities included in other non-current assets:
Corporate equity securities		3,667		—		—		3,667
Total	$	345,482	$	29	$	—	$	345,511

Cash equivalents, marketable securities and equity securities consisted of the following at December 31, 2018 (in thousands):


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2018	Cost		Gains		Losses		Value
Cash equivalents and marketable securities:
Money market funds	$	130,049	$	—	$	—	$	130,049
U.S. Treasuries		208,754		—		(24)		208,730
Government agency securities		29,940		—		(5)		29,935
Equity securities included in other non-current assets:
Corporate equity securities		3,667		—		—		3,667
Total	$	372,410	$	—	$	(29)	$	372,381

At March 31, 2019, the Company held 2 securities that were in an unrealized loss position. The aggregate fair value of securities held by the Company in an unrealized loss position for less than 12 months at March 31, 2019 was $11.0 million, and there were no securities held by the Company in an unrealized loss position for more than 12 months. Pursuant to the adoption of ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, the Company records changes in the fair value of its investments in corporate equity securities to “Other income (expense), net” in the Company’s condensed consolidated statements of operations. The Company records unrealized gains (losses) on available-for-sale debt securities as a component of accumulated other comprehensive income (loss) until such gains and losses are realized.

As of March 31, 2019, the Company did not intend to sell, and was not more likely than not required to sell, the debt securities in an unrealized loss position before recovery of their amortized cost bases. Furthermore, the Company has determined that there were no material changes in the credit risk of the debt securities. As a result, the Company determined it did not hold any marketable securities with any other-than-temporary impairment as of March 31, 2019.

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There were no realized gains or losses on available-for-sale securities during the three months ended March 31, 2019 or 2018.

4. Fair Value Measurements

Assets measured at fair value on a recurring basis as of March 31, 2019 were as follows (in thousands):


			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	March 31,		Identical Assets		Inputs		Inputs
Financial Assets	2019		(Level 1)		(Level 2)		(Level 3)
Cash equivalents:
Money market funds	$	157,711	$	157,711	$	—	$	—
Marketable securities:
U.S. Treasuries		149,320		149,320		—		—
Government agency securities		34,813		34,813		—		—
Restricted cash and other non-current assets:
Corporate equity securities		3,667		—		3,667		—
Money market funds		1,619		1,619		—		—
Total financial assets	$	347,130	$	343,463	$	3,667	$	—

Assets measured at fair value on a recurring basis as of December 31, 2018 were as follows (in thousands):


			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	December 31,		Identical Assets		Inputs		Inputs
Financial Assets	2018		(Level 1)		(Level 2)		(Level 3)
Cash equivalents:
Money market funds	$	130,049	$	130,049	$	—	$	—
U.S. Treasuries		4,487		4,487		—		—
Marketable securities:
U.S. Treasuries		204,243		204,243		—		—
Government agency securities		29,935		29,935		—		—
Restricted cash and other non-current assets:
Corporate equity securities		3,667		—		3,667		—
Money market funds		1,619		1,619		—		—
Total financial assets	$	374,000	$	370,333	$	3,667	$	—

There were no transfers between fair value measurement levels during the three months ended March 31, 2019.

5. Accrued Expenses

Accrued expenses consisted of the following (in thousands):


	As of
	March 31,		December 31,
	2019		2018
Intellectual property and patent related fees	$	1,697	$	1,939
Employee related expenses		1,558		5,201
Professional service expenses		1,469		1,044
Process and platform development expenses		498		475
Other expenses		420		404
Sublicensing and success payment expenses		—		3,750
Total	$	5,642	$	12,813

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6. Property and Equipment, net

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


	As of
	March 31,		December 31,
	2019		2018
Laboratory equipment	$	11,768	$	10,892
Computer equipment		733		733
Leasehold improvements		323		289
Furniture and office equipment		166		166
Software		118		118
Building		—		35,167
Total property and equipment		13,108		47,365
Less: accumulated depreciation		(5,117)		(7,133)
Property and equipment, net	$	7,991	$	40,232

For additional information related to the removal of the building asset in the first quarter of 2019, refer to Footnote 7.

7. Commitments and Contingencies

Leases

In 2016, the Company entered into a lease agreement for 59,783 square feet of office and laboratory space located on Hurley Street in Cambridge, Massachusetts. The term of the lease began on October 1, 2016 and continues until October 2023. The Company has the option to extend the lease for an additional five-year term at market-based rates. The base rent payments commenced in November 2016 and continue through the term of the lease and are subject to increases over the term of the lease. The Company subleased approximately 10,000 square feet of the Hurley Street premises pursuant to a sublease, which commenced in February 2017 and terminated in June 2018.

In accordance with ASC 840, for accounting purposes, the Company was deemed the owner of the building during the construction period due to the fact that the Company was involved in the construction project, including having responsibilities for cost overruns for planned tenant improvements that did not qualify as “normal tenant improvements” under the lease accounting guidance. Throughout the construction period, the Company recorded the project construction costs incurred as an asset, along with a corresponding construction financing lease obligation, on its balance sheet for the total amount of the project costs incurred whether funded by the Company or the landlord. Construction was completed in October 2016, and the Company considered the requirements for sale-leaseback accounting treatment, which included an evaluation of whether all risks of ownership had transferred back to the landlord, as evidenced by a lack of continuing involvement in the leased property. The Company determined that the arrangement did not qualify for sale-leaseback accounting treatment, the building asset would remain on the Company’s balance sheet at its historical cost, and such asset would be depreciated over its estimated useful life of 30 years. The Company bifurcates its future lease payments pursuant to the Hurley Street lease into (i) a portion that is allocated to the building and (ii) a portion that is allocated to the land on which the building is located, which is recorded as rental expense. Although the Company did not begin making lease payments pursuant to the Hurley Street lease until November 2016, the portion of the lease obligation allocated to the land is treated for accounting purposes as an operating lease that commenced upon execution of the Hurley Street lease in February 2016.

In the first quarter of 2019, the Company adopted ASC 842 and derecognized the balances relating to the building, accumulated depreciation and the corresponding construction financing lease as summarized in the table below (in thousands). In applying the ASC 842 transition guidance, the Company determined that the lease should be classified as an operating lease and recorded a right-of-use asset and lease liability on the effective date, accordingly.

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	As of
	January 1, 2019
Property and equipment, net	$	32,627
Other current liabilities	$	(1,014)
Construction financing lease obligation, net of current portion	$	(32,417)
Accumulated deficit	$	803

The Company has two other operating leases for laboratory space. One of those leases commenced in April 2017, was amended in April 2018 and continues until March 2021. The second lease commenced in January 2018 and continues until June 2021. Base rent payments commenced at the beginning of each lease term and continues through the term of the respective lease. Base rent is also subject to increases over the term of the lease. In prior periods, the Company accounted for these leases as operating leases under ASC 840 and recognized straight-line rent expense over the remaining non-cancellable lease terms. As part of its adoption of ASC 842, effective January 1, 2019, the Company elected to apply the package of practical expedients which, among other things, allowed the Company to carry forward its existing lease classification under ASC 840. Additionally, the Company recorded right-of-use assets and lease liabilities for these operating leases on the effective date.

The Company’s leases are included on its condensed consolidated balance sheet as follows (in thousands):


	As of
	March 31,		January 1,
	2019		2019
Right-of-use asset	$	18,480	$	19,461
Lease liability, current	$	(3,519)	$	(3,848)
Lease liability, noncurrent	$	(14,859)	$	(15,909)

The following table contains a summary of the operating lease costs recognized under ASC 842 and other information pertaining to the Company’s operating leases during the three months ended March 31, 2019 (in thousands):


		Three Months Ended
		March 31, 2019
Operating lease costs	$	1,421
Variable lease costs	$	267
Total lease costs	$	1,688

Maturities of the Company’s lease liabilities in accordance with ASC 842 as of March 31, 2019 were as follows (in thousands):


		Three Months Ended
Maturity of lease liabilities:		March 31, 2019
2019	$	3,658
2020	$	5,620
2021	$	4,761
2022	$	4,470
2023	$	3,802
Thereafter	$	—
Total minimum lease payments	$	22,311
Less: imputed interest	$	(3,933)
Total operating lease liabilities at March 31, 2019	$	18,378

The above table excludes $0.6 million of legally binding minimum lease payments for leases executed but not yet commenced as of March 31, 2019. Commencement is expected in the second quarter of 2019.

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The weighted-average remaining lease terms are 4.2 years and the weighted-average discount rate is 9.27%

Licensor Expense Reimbursement

The Company is obligated to reimburse The Broad Institute, Inc. (“Broad”) and the President and Fellows of Harvard College (“Harvard”) for expenses incurred by each of them associated with the prosecution and maintenance of the patent rights that the Company licenses from them pursuant to the license agreement by and among the Company, Broad and Harvard, including the interference and opposition proceedings involving patents licensed to the Company under the license agreement, and other license agreements between the Company and Broad. As such, the Company anticipates that it has a substantial commitment in connection with these proceedings until such time as these proceedings have been resolved, but the amount of such commitment is not determinable. During the three months ended March 31, 2019 and 2018, the Company recognized $3.4 million and $4.6 million in expense for such reimbursement, respectively.

Success Payments

In 2016, the Company entered into patent license agreements with each of The General Hospital Corporation, d/b/a Massachusetts General Hospital (“MGH”), and Broad (collectively, the “2016 License Agreements”). Pursuant to the terms of the 2016 License Agreements, the Company is required to make certain success payments to MGH, Broad and Wageningen University (“Wageningen” and such payments, collectively, the “Success Payments”), payable in cash or, at the Company’s election, common stock in the case of MGH or, in the case of Broad and Wageningen, promissory notes payable in cash or, at the Company’s election subject to certain conditions, common stock of the Company. The Success Payments are payable, if and when, the Company’s market capitalization reaches specified thresholds for a specific period of time or upon a sale of the Company for consideration in excess of those thresholds, as discussed more fully in Note 8 (collectively, the “Payment Conditions”).

The Success Payments were historically accounted for under the provisions of ASC 505-50. During the first quarter of 2019, the Company adopted ASU 2018-07, which expands the scope of ASC 718 and superseded ASC 505-50. In accordance with ASC 718, the Company will recognize a Success Payment when it becomes probable that the Payment Conditions will be met. However, the Company has the right to terminate any of the 2016 License Agreements at will upon written notice. Absent any of the Payment Conditions being achieved prior to termination, the Company would not be obligated to pay any Success Payments. As such, the Company will recognize the expense and liability associated with each Success Payment when it is probable that the amounts will become due. The Company records this expense as a research and development expense in its statements of operations.

The Company triggered the first Success Payment under one of the 2016 License Agreements during the first quarter of 2017 when the Company’s average market capitalization over a specified period of time reached $750.0 million. In March 2017, the Company issued promissory notes for an aggregate principal amount of $5.0 million to Broad and Wageningen and the Company settled such notes in August 2017. The Company triggered another Success Payment under one of the 2016 License Agreements during the fourth quarter of 2017 when the Company’s average market capitalization over a specified period of time reached $1.0 billion. In December 2017, the Company issued promissory notes for an aggregate principal amount of $7.5 million to Broad and settled such notes in January 2018.

The Company triggered a Success Payment under the MGH license agreement during the fourth quarter of 2017 when the Company’s market capitalization reached $1.0 billion. In January 2018, the Company settled this liability through the issuance of 80,000 shares of its common stock to MGH.

The Success Payments issued to Broad and Wageningen are discussed more fully within the Notes Payable section below.

Research Funding Payments

In June 2018, the Company entered into a sponsored research agreement (the “Sponsored Research

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Agreement”) with Broad, which is described more fully in Note 8. Pursuant to the terms of the Sponsored Research Agreement, the Company is required to make certain research funding payments to Broad, payable by promissory note, cash or common stock. Under the Sponsored Research Agreement, the Company is obligated to make payments of research funding to Broad in the event the Company’s market capitalization reaches specified thresholds ranging from a mid-nine digit dollar amount to a low-eleven digit dollar amount (“Market Cap Research Funding”) or a Company sale for consideration ranging from a mid-nine digit dollar amount to a low-eleven digit dollar amount (“Company Sale Research Funding” and, collectively with the Market Cap Research Funding, the “Research Funding Payments”). In connection with entering into the Sponsored Research Agreement, the Company confirmed that the first two Research Funding Payments of $5.0 million and $7.5 million were due and payable to Broad (the “Initial Research Payments”). In June 2018, the Company issued promissory notes for an aggregate principal balance of $12.5 million to Broad, which were settled by the issuance of shares of common stock, and are described more fully in the Notes Payable section.

Other than the Initial Research Payments, the Company is not required to make additional Research Funding Payments if the Company, whether directly or through its affiliates or sublicensees, is not researching, developing, or commercializing products based on or incorporating inventions developed under the Sponsored Research Agreement and exclusively licensed to the Company from Broad or based on or incorporating CRISPR technology owned, co-owned, or controlled by Broad and otherwise licensed to the Company, subject to certain exclusions. The Research Funding Payments were historically accounted for under the provisions of ASC Topic 505-50. During the first quarter of 2019, the Company adopted ASU 2018-07, which expands the scope of ASC 718 and superseded ASC 505-50. Under ASC 718, the Company will recognize the expenses and liability associated with each Research Funding Payment when it is probable that the amounts will become due. The Company records this expense as a research and development expense in its statements of operations.

Notes Payable

In December 2016, in connection with the Company’s entry into the Cpf1 license agreement with Broad (the “Cpf1 License Agreement”), one of the 2016 License Agreements, the Company issued promissory notes in an aggregate principal amount of $10.0 million to Broad and Wageningen (the “Initial Notes”). Outstanding principal and accrued interest on the Initial Notes were due and payable on the earlier of December 2017 or a specified period of time following a Company sale or change of control event. The Initial Notes accrued interest at a rate of 4.8% per annum. The Company fully settled the outstanding principal and accrued interest on the Initial Notes by paying $0.2 million in cash to Wageningen in August 2017 and issuing 108,104 shares and 371,166 shares of common stock to Broad in August 2017 and September 2017, respectively.

In March 2017, a $5.0 million Success Payment under the Cpf1 License Agreement became due upon the market capitalization of the Company’s common stock reaching $750 million. The Company issued a promissory note to each of Broad and Wageningen in an aggregate original principal amount of $5.0 million (collectively, the “March Success Payment Notes”). Outstanding principal and accrued interest on the March Success Payment Notes were due and payable in August 2017. The March Success Payment Notes were subject to the same interest and terms as the Initial Notes, other than the maturity date. The Company settled the outstanding principal and accrued interest on the March Success Payment Notes in August 2017 by paying $0.4 million in cash to Wageningen and issuing 271,347 shares of common stock to Broad in August 2017. In September 2017, Wageningen designated Broad as the recipient of any future promissory notes that are owed to Wageningen pursuant to the Cpf1 License Agreement.

In December 2017, $7.5 million in Success Payments under the Cpf1 License Agreement and the Cas9-II license agreement with Broad (the “Cas9-II License Agreement”), one of the 2016 License Agreements, became due upon the Company’s market capitalization reaching $1.0 billion. The Company issued promissory notes to Broad in an aggregate original principal amount of $7.5 million (collectively, the “December Success Payment Notes”). Outstanding principal and accrued interest on the December Success Payment Notes were due and payable in May 2018. The December Success Payment Notes were subject to the same interest and terms as the Initial Notes, other than the maturity date. The Company fully settled the outstanding principal and accrued interest on the December Success Payment Notes by issuing 225,909 shares of common stock to Broad in January 2018.

In June 2018, in connection with the Company’s entry into the Sponsored Research Agreement and the trigger

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of the Initial Research Payments, the Company issued promissory notes in an aggregate principal amount of $12.5 million to Broad (the “Initial Research Notes”) bearing interest at a rate of 4.8% annum, except with respect to $7.5 million of the principal, which would not start accruing interest until November 2018. The Company fully settled the outstanding principal and accrued interest on the Initial Research Notes by issuing 330,617 shares of common stock to Broad in June 2018.

Litigation

The Company is not a party to any litigation and did not have contingency reserves established for any litigation liabilities as of March 31, 2019 or December 31, 2018.

8. Significant Agreements

Revenue

As of March 31, 2019, the Company’s contract liabilities were primarily related to the Company’s collaboration with Juno Therapeutics and strategic alliance with Allergan. The following table presents changes in the Company’s accounts receivable and contract liabilities for the three months ended March 31, 2019 (in thousands):


	Balance at December 31, 2018		Additions		Deductions		Balance at March 31, 2019
Accounts receivable	$	30	$	—	$	(30)	$	—
Contract liabilities:
Deferred revenue	$	(131,326)	$	—	$	2,061	$	(129,265)

During the three months ended March 31, 2019, the Company recognized revenue as a result of the following (in thousands):


		Three Months Ended
Revenue recognized in the period from:		March 31, 2019
Amounts included in deferred revenue at the beginning of the period	$	2,061
Performance obligations satisfied in previous periods	$	—

Juno Therapeutics Collaboration Agreement

Summary of Agreement

In May 2015, the Company entered into a collaboration and license agreement (the “Collaboration Agreement”) with Juno Therapeutics and in May 2018 the Company and Juno Therapeutics entered into an amended and restated collaboration and license agreement (the Collaboration Agreement, as amended and restated, the “Amended Collaboration Agreement”). The collaboration is focused on the research and development of engineered T cells with chimeric antigen receptors (“CARs”) and T cell receptors (“TCRs”) that have been genetically modified to recognize and kill other cells. Pursuant to the Collaboration Agreement, the parties were pursuing the research and development of CAR and TCR engineered T cell products utilizing the Company’s genome editing technologies with Juno Therapeutics’ CAR and TCR technologies across three research areas, which was increased to four research areas under the Amended Collaboration Agreement.

The collaborative program of research to be undertaken by the parties pursuant to the Amended Collaboration Agreement will be conducted in accordance with a mutually agreed upon research plan which outlines each party’s research and development responsibilities across the four research areas. The Company’s research and development responsibilities under the research plan are related to generating genome editing reagents that modify gene targets selected by Juno Therapeutics. Juno Therapeutics is responsible for evaluating and selecting for further research and development CAR and TCR engineered T cell products modified with the Company’s genome editing reagents. Except with respect to the Company’s obligations under the mutually agreed upon research plan, Juno Therapeutics has sole responsibility, at its own cost, for the worldwide research, development, manufacturing and commercialization of

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products within each of the four research areas for the diagnosis, treatment or prevention of any cancer in humans through the use of engineered T cells, excluding the diagnosis, treatment or prevention of medullary cystic kidney disease 1 (the “Exclusive Field”).

The initial term of the research program commenced on May 26, 2015 and continues for five years ending on May 26, 2020 (the “Initial Research Program Term”). Juno Therapeutics may extend the Initial Research Program Term for up to two additional one year periods upon the payment of extension fees for each one year extension period, assuming the Company has agreed to the extension request(s) (together, the initial term and any extension period(s) are referred to as the “Research Program Term”). The Research Program Term and the optional extensions were not changed by the Amended Collaboration Agreement.

Under the terms of the Collaboration Agreement, the Company granted to Juno Therapeutics during the Research Program Term a nonexclusive, worldwide, royalty free, non-sublicensable license under certain of the intellectual property controlled by the Company solely for the purpose of conducting the following activities required under the specified research under the Collaboration Agreement: (i) conduct activities assigned to Juno Therapeutics under the research plan, (ii) conduct activities assigned to the Company under the research plan that the Company fails or refuses to conduct in a timely manner, (iii) research, evaluate and conduct preclinical testing and development of certain engineered T cells relating to the three research areas that were originally the subject of the arrangement and (iv) evaluate the data developed in the conduct of activities under the research plan. Pursuant to the terms of the Amended Collaboration Agreement, the license rights granted to Juno Therapeutics were expanded to include, during the Research Program Term, a nonexclusive, worldwide, royalty free, non-sublicensable license under certain of the intellectual property controlled by the Company to: (i) research, evaluate and conduct preclinical testing and development of certain engineered T cells relating to the fourth research area and (ii) research, develop and use certain research tools (together, the initial research license granted per the terms of the Collaboration Agreement and the incremental research license granted per the terms of the Amended Collaboration Agreement, the “Research License”).

As it relates to two of the three research areas that were originally the subject of the arrangement, under the terms of the Collaboration Agreement, the Company granted to Juno Therapeutics an exclusive, milestone and royalty bearing, sublicensable license under certain of the intellectual property controlled by the Company to research, develop, make and have made, use, offer for sale, sell, import and export selected CAR and TCR engineered T cell products in the Exclusive Field on a worldwide basis, specifically as it relates to certain targets selected by Juno Therapeutics pursuant to the research program. Furthermore, as it relates to the same two research areas, under the terms of the Collaboration Agreement, the Company granted to Juno Therapeutics a non‑exclusive, milestone and royalty bearing, sublicensable license under certain of the intellectual property controlled by the Company to use genome editing reagents generated under the research program that are used in the creation of certain CAR or TCR engineered T cell products on which Juno Therapeutics has filed an investigational new drug (“IND”) application in the Exclusive Field for the treatment or prevention of a cancer in humans to research, develop, make and have made, use, offer for sale, sell, import and export those CAR or TCR engineered T cell products in all fields outside of the Exclusive Field (the “Non‑Exclusive Field”) on a worldwide basis, specifically as it relates to certain targets selected by Juno Therapeutics pursuant to the research program (together, the license in the Exclusive Field and the license in the Non‑Exclusive Field are referred to as the “Development and Commercialization License” for each particular research area). Additionally, as it relates to the third research area that was originally the subject of the arrangement, under the terms of the Collaboration Agreement, the Company granted to Juno Therapeutics a milestone and royalty bearing, sublicensable license under certain of the intellectual property controlled by the Company to research, develop, make and have made, use, offer for sale, sell, import or export selected CAR and TCR engineered T cell products that utilize the genome editing reagents generated under the research program associated with those CAR and TCR engineered T cell products in the Exclusive Field on a worldwide basis, specifically as it relates to certain products selected by Juno Therapeutics pursuant to the research program. The license associated with the third research area is exclusive as it relates to CAR or TCR engineered T cell products directed to certain targets as selected by Juno Therapeutics, but is otherwise non‑exclusive (referred to as the “Development and Commercialization License” for the third research area). Pursuant to the terms of the Amended Collaboration Agreement, as it relates to the fourth area of research that was added to the collaboration, the Company granted to Juno Therapeutics a milestone and royalty bearing, sublicensable license under certain of the intellectual property controlled by the Company to research, develop, make and have made, use, offer for sale, sell, import or export selected CAR and TCR engineered T cell products that utilize the genome editing reagents

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generated under the research program associated with those CAR and TCR engineered T cell products in the Exclusive Field on a worldwide basis, specifically as it relates to certain products selected by Juno Therapeutics pursuant to the research program. The license associated with the fourth research area is exclusive as it relates to CAR or TCR engineered T cell products directed to certain targets as selected by Juno Therapeutics, but is otherwise non‑exclusive (referred to as the “Development and Commercialization License” for the fourth research area).

The Amended Collaboration Agreement is being managed on an overall basis by a project leader from each of the Company and Juno Therapeutics. The project leaders serve as the contact point between the parties with respect to the research program and are primarily responsible for facilitating the flow of information, interaction, and collaboration between the parties. In addition, the research and development activities under the Amended Collaboration Agreement during the Research Program Term are governed by a joint research committee (“JRC”) formed by an equal number of representatives from the Company and Juno Therapeutics. The JRC oversees, reviews and recommends the direction of the research program. Among other responsibilities, the JRC monitors and reports research progress and ensures open and frequent exchange between the parties regarding research program activities. The Amended Collaboration Agreement did not alter the governance provisions in the Collaboration Agreement.

Under the terms of the Collaboration Agreement, the Company received a $25.0 million up-front, non‑refundable, non‑creditable cash payment. In connection with the entry into the Amended Collaboration Agreement, the Company received an additional $5.0 million up-front, non-refundable, non-creditable cash payment. Moreover, the Company became entitled to receive two $2.5 million milestones related to technical progress in one of the research areas upon the execution of the Amended Collaboration Agreement. In addition, Juno Therapeutics is obligated to pay to the Company an aggregate of up to $22.0 million in research and development funding over the Initial Research Program Term across the four research areas consisting primarily of funding for up to a specified maximum number of full time equivalents personnel each year over the Initial Research Program Term across four research areas. Consistent with the terms of the Collaboration Agreement, under the terms of the Amended Collaboration Agreement, there is no incremental compensation due to the Company with respect to the Development and Commercialization License granted to Juno Therapeutics associated with the first target or product, as applicable, designated by Juno Therapeutics within each of the four research areas. However, for two of the three research areas that were originally the subject of the arrangement, Juno Therapeutics continues to have the option to purchase up to three additional Development and Commercialization Licenses associated with other gene targets for an additional fee of approximately $2.5 million per target. In addition, Juno Therapeutics is required to make certain milestone payments to the Company upon the achievement of specified development, regulatory and commercial events. More specifically, for the first product to achieve the associated event in each of the three research areas that were originally the subject of the arrangement, the Company is eligible to receive up to $77.5 million in development milestone payments and up to $80.0 million in regulatory milestone payments, while the Company is eligible to receive up to $80.0 million in development milestone payments and up to $80.0 million in regulatory milestone payments for the first product to achieve the associated event in the fourth area of research that was added to the collaboration. In addition, the Company is eligible to receive additional development and regulatory milestone payments for subsequent products developed within each of the four research areas. Moreover, the Company is eligible for up to $75.0 million in commercial milestone payments associated with aggregate sales of all products within each of the four research areas. Development milestone payments are generally triggered upon the achievement of certain specified development criteria or upon initiation of a defined phase of clinical research for a product candidate. Regulatory milestone payments are triggered upon approval to market a product candidate by the United States Food and Drug Administration (“FDA”) or other global regulatory authorities. Commercial milestone payments are triggered when an approved pharmaceutical product reaches certain defined levels of net sales by the licensee. The milestone payments and related triggering events associated with the three research areas that were originally the subject of the Collaboration Agreement were not modified in the Amended Collaboration Agreement.

In addition, to the extent any of the product candidates covered by the licenses conveyed to Juno Therapeutics under the Amended Collaboration Agreement are commercialized, the Company would be entitled to receive tiered royalty payments of low double digits based on a percentage of net sales. Similar to the milestones, pursuant to the Amended Collaboration Agreement, the Company is eligible to receive an independent royalty stream associated with the fourth area of research that was added to the collaboration. Royalty payments are subject to certain reductions, including for any royalty payments required to be made by Juno Therapeutics related to a third‑party’s intellectual

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property rights, subject to an aggregate minimum floor. Royalties are due on a licensed product‑by‑licensed product and country‑by‑country basis from the date of the first commercial sale of each product in a country until the later of: (i) the tenth anniversary of the first commercial sale of such licensed product in such country and (ii) the expiration date in such country of the last to expire valid claim within the licensed intellectual property covering the manufacture, use or sale of such licensed product in such country. The Company achieved $2.5 million development milestones under the Collaboration Agreement resulting from technical progress in a research program in each of May 2016 and July 2017 (the “July 2017 Juno Milestone Payment”). The Company achieved two additional $2.5 million development milestones under the Amended Collaboration Agreement resulting from technical progress in a research program in May 2018. Due to the uncertainty of pharmaceutical development and the high historical failure rates generally associated with drug development, no additional milestone or royalty payments may ever be received from Juno Therapeutics. As of March 31, 2019, the next potential milestone payment that the Company may be entitled to receive under the Amended Collaboration Agreement is a milestone payment of $2.5 million for the achievement of certain development criteria. There are no cancellation, termination or refund provisions in the Amended Collaboration Agreement that contain material financial consequences to the Company.

Unless earlier terminated, the Amended Collaboration Agreement will continue in full force and effect, on a licensed product‑by‑licensed product and country‑by‑country basis until the date no further payments are due to the Company from Juno Therapeutics. Either party may terminate the Amended Collaboration Agreement if the other party has materially breached or defaulted in the performance of any of its material obligations and such breach or default continues after the specified cure period. Either party may terminate the Amended Collaboration Agreement in the event of the commencement of any proceeding in or for bankruptcy, insolvency, dissolution or winding up by or against the other party that is not dismissed or otherwise disposed of within a specified time period. Juno Therapeutics may terminate the Amended Collaboration Agreement for convenience upon no less than six months prior written notice to the Company. The Company may terminate the Amended Collaboration Agreement in the event that Juno Therapeutics brings, assumes, or participates in, or knowingly, willfully or recklessly assists in bringing a dispute or challenge against the Company related to its intellectual property.

Termination of the Amended Collaboration Agreement for any reason does not release either party from any liability which, at the time of such termination, has already accrued to the other party or which is attributable to a period prior to such termination nor preclude either party from pursuing any rights and remedies it may have under the agreement or at law or in equity with respect to any breach of the Amended Collaboration Agreement. If Juno Therapeutics terminates the Amended Collaboration Agreement as a result of the Company’s uncured material breach or default, then: (i) the licenses and rights conveyed to Juno Therapeutics will continue as set forth in the agreement, (ii) Juno Therapeutics’ obligations related to milestones and royalties will continue as set forth in the agreement and (iii) Juno Therapeutics’ rights to prosecute, maintain and enforce certain intellectual property rights will continue as set forth in the agreement. If Juno Therapeutics terminates the Amended Collaboration Agreement for convenience or if the Company terminates the Amended Collaboration Agreement as a result of Juno Therapeutics’ uncured material breach or default, then the licenses conveyed to Juno Therapeutics will terminate. The Amended Collaboration Agreement did not modify the termination provisions in the Collaboration Agreement.

Accounting Analysis

The Company evaluated the Amended Collaboration Agreement in accordance with the provisions of ASC 606. The Company has accounted for the amendment resulting from the Amended Collaboration Agreement as a modification to the original contract and not as a separate contract. The Company combined the Amended Collaboration Agreement with the Collaboration Agreement because the scope of the arrangement did not solely increase due to the addition of distinct promised goods or services with pricing that reflects the associated standalone selling prices. For the remaining goods and services that are distinct from the goods and services that were transferred on or before the date of the effectiveness of the Amended Collaboration Agreement, the Company has accounted for the modification on a prospective basis as if it were a termination of the existing contract and the creation of a new contract. Conversely, the remaining goods and services that are not distinct from the goods and services that were transferred on or before the date of the effectiveness of the Amended Collaboration Agreement were deemed to form part of a single performance obligation that is partially satisfied so they have been accounted for as part of the existing contract for which an adjustment was recorded on a cumulative catch-up basis at the date of the modification.

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The Company has identified the following performance obligations under the combined arrangement: (i) Research License and the related research and development services during the Initial Research Program Term (the “Research License and Related Services”), (ii) four material rights related to the first Development and Commercialization Licenses related to each of the four research areas (each, a “First Development and Commercialization License Material Right”) and (iii) six material rights related to the option to purchase up to three additional Development and Commercialization Licenses for two of the research areas (each, an “Additional Development and Commercialization License Material Right”). Upon exercise of the option to obtain a Development and Commercialization License under any of the four research areas, the Company will provide Juno Therapeutics with a license covering the further development and potential commercialization of the underlying target or product, as applicable. The Company has determined that the ability to obtain Development and Commercialization Licenses under the arrangement represents a material right because Juno Therapeutics is entitled to incremental licenses for additional consideration that represents a significant discount from amounts that would otherwise be offered for the related goods to comparable customers outside of the contract.

The Company has concluded that the Research License is not distinct from the research and development services during the Initial Research Program Term as Juno Therapeutics cannot obtain the benefit of the Research License without the Company performing the research and development services. The services incorporate proprietary technology, unique skills and specialized expertise, particularly as it relates to genome editing technology that is not available in the marketplace. As a result, the Research License, inclusive of the incremental license granted in connection with the Amended Collaboration Agreement, has been combined with the research and development services into a bundled performance obligation. The Company has concluded that the First Development and Commercialization License Material Rights for each respective research area and the Additional Development and Commercialization License Material Rights for the two research areas to which they relate are each a separate performance obligation. These material rights, of which there are ten in total, are distinct from the other performance obligations in the arrangement as they are options in the contract that are not required for Juno Therapeutics to obtain the benefit of the other promised goods and services in the arrangement. Accordingly, in accounting for the modification resulting from the Amended Collaboration Agreement, the Research License and Related Services performance obligation was treated as part of the existing contract, whereas the material right performance obligations were treated as a termination of the existing contract and the creation of a new contract.

As of March 31, 2019, the total transaction price associated with the remaining consideration based on the Amended Collaboration Agreement was determined to be $40.7 million, consisting of: (i) $25.0 million upfront non-refundable, non-creditable cash payment associated with the Collaboration Agreement, (ii) $5.0 million upfront non-refundable, non-creditable cash payment associated with the Amended Collaboration Agreement, (iii) $2.9 million of remaining research and development funding, (iv) $2.7 million of milestone payments received by the Company under the Collaboration Agreement that were not yet recognized as revenue and (v) $5.0 million of milestone payments associated with the execution of the Amended Collaboration Agreement. The research and development funding is being paid by Juno Therapeutics to the Company based on the number of the Company’s full time equivalents of its personnel conducting the research under the Amended Collaboration Agreement. The Company utilizes the most likely amount method to determine the amount of research and development funding to be received. The Company also utilizes the most likely amount method to estimate any development and regulatory milestone payments to be received. As of March 31, 2019, the only milestones that were included in the transaction price were milestones that had been contractually earned and received. The Company considers the stage of development and the risks associated with the remaining development required to achieve the milestone, as well as whether the achievement of the milestone is outside the control of the Company or Juno Therapeutics. The outstanding milestone payments were fully constrained as of March 31, 2019, as a result of the uncertainty whether any of the milestones will be achieved. The Company has determined that any commercial milestones and sales-based royalties will be recognized when the related sales occur as they were determined to relate predominantly to the license(s) to be granted and therefore have also been excluded from the transaction price. The Company reevaluates the transaction price at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur. Through the date of the Amended Collaboration Agreement, the Company had recognized approximately $12.3 million of revenue associated with the Research License and Related Services which was excluded from the modification date transaction price.

The transaction price was allocated to the performance obligations based on the relative estimated standalone

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selling prices of each performance obligation or, in the case of certain variable consideration, to one or more performance obligations. The estimated standalone selling price for the Research License and Related Services is primarily based on the nature of the services to be performed and estimates of the associated effort and costs of the services, adjusted for a reasonable profit margin that would be expected to be realized under similar contracts. The Company developed the estimated standalone selling price for the material rights based on the difference between the value of the license granted and any additional consideration to be received upon exercise of the underlying option, adjusted for the probability of exercise. The value of the license granted was determined based on the probability-weighted present value of expected future cash flows associated with each license related to each specific research area. In developing such estimate, the Company also considered applicable market conditions and relevant entity-specific factors, including those factors contemplated in negotiating the agreement, probability of success and the time needed to commercialize a product candidate pursuant to the associated license.

The transaction price allocated to each performance obligation as of March 31, 2019 was as follows: (i) Research License and Related Services: $10.7 million, (ii) First Development and Commercialization License Material Right related to the first research area: $3.6 million, (iii) First Development and Commercialization License Material Right related to the second research area: $6.0 million, (iv) First Development and Commercialization License Material Right related to the third research area: $0.1 million, (v) First Development and Commercialization License Material Right related to the fourth research area: $18.3 million, (vi) the first Additional Development and Commercialization License Material Right for the first research area: $0.3 million, (vii) the second Additional Development and Commercialization License Material Right for the first research area: $0.2 million, (viii) the third Additional Development and Commercialization License Material Right for the first research area: $0.1 million, (ix) the first Additional Development and Commercialization License Material Right for the second research area: $0.8 million, (x) the second Additional Development and Commercialization License Material Right for the second research area: $0.5 million, and (xi) the third Additional Development and Commercialization License Material Right for the second research area: $0.3 million.

The Company recognizes revenue related to amounts allocated to the Research License and Related Services as the underlying services are performed using a proportional performance model. The Company measures proportional performance based on full time employee hours relative to projected full time employee hours to complete the research services which best reflects the progress towards satisfaction of the performance obligation. Revenue related to each of the material rights will be recognized upon the earlier of when the respective options are exercised and the Company transfers control of the related license or when the respective options lapse. The rights to be conveyed to Juno Therapeutics pursuant to each of the Development and Commercialization Licenses extend exclusively to an individual target or product, as applicable; therefore, control is deemed to be transferred upon the designation by Juno Therapeutics of the specific target or product, as applicable, whereupon the license becomes effective upon Juno Therapeutics exercising their option. None of the options associated with the material rights had been exercised or had lapsed as of March 31, 2019.

During the three months ended March 31, 2018, the Company recognized revenue under the Collaboration Agreement totaling approximately $1.0 million. The Company did not recognize revenue under the Amended Collaboration Agreement during the three months ended March 31, 2019. No revenue had been recognized through the date of the Amended Collaboration Agreement for the material rights performance obligations and there were no cumulative catch-up adjustments recorded for such performance obligations as a result of the Amended Collaboration Agreement. Amounts allocated to each of the material rights will be recognized as revenue prospectively when the material right has been exercised or when the respective option has lapsed.

The revenue is classified as collaboration and other research and development revenue in the accompanying condensed consolidated statements of operations. As of March 31, 2019 and December 31, 2018, there was approximately $32.0 million of deferred revenue related to the Amended Collaboration Agreement, of which $28.3 million and $29.2 million were classified as long term, respectively, in the accompanying condensed consolidated balance sheets. In addition, there was no receivable balance related to reimbursable research and development costs under the Collaboration Agreement for activities as of March 31, 2019 or December 31, 2018.

Allergan Pharmaceuticals Strategic Alliance and Option Agreement

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Summary of Agreement

In March 2017, the Company entered into a Strategic Alliance and Option Agreement with Allergan to discover, develop, and commercialize new gene editing medicines for a range of ocular disorders (the “Allergan Agreement”). Over a seven-year research term, Allergan will have an exclusive option to exclusively license from the Company up to five collaboration development programs for the treatment of ocular disorders (each a “CDP”), including the Company’s Leber congenital amaurosis 10 program (the “LCA10 Program”).

Under the Allergan Agreement, the Company will use commercially reasonable efforts to develop at least five CDPs and deliver preclinical results and data meeting specified criteria with respect to each CDP (each, an “Option Package” and such criteria, the “Option Package Criteria”) to Allergan. The list of proposed targets that may be subject to a CDP may be amended from time to time by mutual agreement of the Company and Allergan. The Company is responsible for the preparation and delivery of a written development plan for each particular CDP setting forth the discovery and research activities to be conducted which is subject to the approval of the alliance steering committee that was formed under the Allergan Agreement, comprised of three members from each of the Company and Allergan (the “Steering Committee”). The Company will maintain primary responsibility for the development efforts under each CDP. The Company is responsible for all research and development costs prior to the achievement of the Option Package Criteria. Allergan will have the ability for a defined period of time (“Initial Option Period”) to exercise an option (each, an “Option”) to obtain a worldwide right and license to the Company’s background intellectual property and the Company’s interest in the CDP intellectual property to develop, commercialize, make, have made, use, offer for sale, sell, and import any gene editing therapy product that results from such CDP during the term of the Allergan Agreement (a “Licensed Product”) in any category of human diseases and conditions other than the diagnosis, treatment or prevention of any cancer in humans through the use of engineered T-cells and subject to specified other limitations. Allergan has the option to extend the Initial Option Period and require the Company to perform additional research and development services, subject to the payment of additional consideration. After exercise of an Option with respect to a CDP, with the exception of any CDP’s where the Company has exercised its profit-sharing option, Allergan will be responsible for all development, manufacturing, and commercialization activities in connection with licensed products arising from such CDP, other than with respect to the LCA10 Program, if LCA10 is designated as a CDP. In July 2018, Allergan exercised its Option with respect to the LCA10 Program. In connection with such exercise, Allergan paid the Company $15.0 million. Following such exercise, the Company exercised its Profit-Share Election, as defined below, with respect to the LCA10 Program. Following such election, the LCA10 Program became subject to a Profit-Sharing Arrangement, as defined below, and the Company and an affiliate of Allergan entered into a separate profit-sharing agreement with respect to the Profit-Sharing Arrangement for the LCA10 Program in February 2019.

The initial term of the Allergan Agreement commenced on March 14, 2017 and continues for seven years ending on March 14, 2024 (the “Research Term”). If the Company has not delivered an Option Package, which includes the results and data from the CDP, for five CDPs that satisfy the Option Package Criteria, then the Research Term will automatically extend by one-year increments until such obligation is satisfied, up to a maximum of ten years from March 2017.

The activities under the Allergan Agreement during the Research Term will be governed by the Steering Committee. The Steering Committee will review and monitor the direction of the development plan, evaluate and determine which targets are selected to become CDP, establish the Option Package Criteria for each CDP and evaluate the achievement of such criteria as well as oversee the development and commercialization activities after Allergan has licensed a CDP.

Under the terms of the Allergan Agreement, the Company received a $90.0 million up-front, non‑refundable, non‑creditable cash payment related to the Company’s research and development costs for Option Packages for at least five CDPs and for reimbursement of the Company’s past out of pocket costs with respect to the prosecution and defense of patents that it owns and in-licenses. Allergan has the option to purchase at least five development and commercialization licenses associated with CDPs that have satisfied the Option Package Criteria. The option exercise fee during the Initial Option Period is $15.0 million per CDP. If Allergan elects to extend the Initial Option Period, Allergan is required to pay an additional fee of $5.0 million to extend the option, at which point the Company is required

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to perform additional research services. If Allergan elects to exercise its option to a development and commercialization license after extending the Initial Option Period, Allergan must pay the Company the option exercise fee of $22.5 million, plus specified costs incurred by the Company in connection with the additional development work.

Following the exercise by Allergan of an Option with respect to a CDP, Allergan would be required to make certain milestone payments to the Company upon the achievement of specified development, product approval and launch and commercial events, on a CDP by CDP basis. On a CDP by CDP basis, for the first product in the first field to achieve the associated event, the Company is eligible to receive up to an aggregate of $42.0 million for development milestone payments and $75.0 million for product approval and launch milestone payments, in each case, for an indication in the field per CDP. In addition, the Company is eligible to receive additional development and product approval and launch milestone payments for subsequent products developed within two additional fields. The Company is also eligible for up to $90.0 million in sales milestone payments on a CDP by CDP basis, associated with aggregate worldwide sales. Certain product approval milestones are subject to certain reductions under specified circumstances, including for payments required to be made by Allergan to obtain certain third party intellectual property rights. In December 2018, the Company received a $25.0 million payment from Allergan in connection with the acceptance of the IND for the LCA10 Program, the Company’s experimental therapeutic generated under the LCA10 Program (the “LCA10 Program Milestone Payment”).

With respect to the LCA10 Program, and up to one other CDP of the Company’s choosing, following the exercise by Allergan of its Option to such programs the Company will have the right to elect to participate in a profit-sharing arrangement with Allergan in the United States, on terms mutually agreed by the Company and Allergan and subject to a right of Allergan to reject such election under certain circumstances, under which the Company and Allergan would share equally in net profits and losses on specific terms to be agreed between the Company and Allergan, in lieu of Allergan paying royalties on net sales of any applicable Licensed Products in the United States, and in such event Allergan’s milestone payment obligations would be reduced, with the Company being eligible to receive development and product approval and launch milestone payments up to a low nine-digit amount in the aggregate and further sales milestone payments up to a high-eight digit amount in the aggregate, subject to reduction under certain circumstances (such right, the “Profit-Share Election,” and such arrangement, a “Profit-Sharing Arrangement”). If the Company elects to participate in a Profit-Sharing Arrangement, which it has for the LCA10 Program, the Company is obligated to reimburse Allergan for half of the United States development costs incurred by Allergan with respect to the applicable CDP, and Allergan will retain control of all development and commercialization activities for the applicable Licensed Products.

In addition, to the extent there is any Licensed Product, the Company would be entitled to receive tiered royalty payments of high single digits based on a percentage of net sales of such Licensed Product, subject to certain reductions under specified circumstances, and the Company will remain obligated to pay all license fees, milestone payments, and royalties due to its upstream licensors based on Allergan’s exercise of its license rights with respect to Licensed Products. However, if a Licensed Product is subject to a Profit-Sharing Arrangement the royalties will only be paid on ex-U.S. net sales. Royalties are due on a Licensed Product‑by‑Licensed Product and country‑by‑country basis from the date of the first commercial sale of each Licensed Product in a country until the later of: (i) the tenth anniversary of the first commercial sale of such Licensed Product in such country, (ii) the expiration date in such country of the last to expire valid claim within the licensed intellectual property covering the manufacture, use or sale of such Licensed Product in such country and (iii) the expiration of an exclusive legal right granted by the regulatory authority in such country to market and sell such Licensed Product.

Unless earlier terminated, the Allergan Agreement will terminate upon (i) the expiration of the Research Term, if Allergan does not exercise an Option, (ii) on a Licensed Product-by-Licensed Product and country-by-country basis, on the date of the expiration of all payment obligations under the Allergan Agreement with respect to such Licensed Product in such country or (iii) in its entirety upon the expiration of all payment obligations with respect to the last Licensed Product in all countries, unless terminated earlier due to the early termination provisions. Either party may terminate the Allergan Agreement if the other party has materially breached or defaulted in the performance of any of its material obligations and such breach or default continues after the specified cure period. During the Research Term, Allergan will have the right to terminate the Allergan Agreement on a CDP by CDP basis in the event of a change in control of the Company or for all CDPs, provided that Allergan will not have any right to exercise an Option for any

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CDPs following such termination. After the exercise of an Option, Allergan will have the right, at its sole discretion, to terminate the Allergan Agreement, on a CDP by CDP basis, upon 90 days’ written notice. The Company may terminate the Allergan Agreement in the event that Allergan brings, assumes, or participates in, or knowingly, willfully or recklessly assists in bringing a dispute or challenge against the Company related to its intellectual property. Lastly, Allergan may terminate the Allergan Agreement with respect to a CDP if a safety concern, as specified in the Allergan Agreement, arises.

Termination of the Allergan Agreement for any reason will not release either party from any liability which, at the time of such termination, has already accrued to the other party or which is attributable to a period prior to such termination. In addition, termination of the Allergan Agreement will not preclude either party from pursuing any rights and remedies it may have under the agreement or at law or in equity with respect to any breach of the Allergan Agreement. If Allergan terminates the Allergan Agreement as a result of the Company’s uncured material breach or default, then: (i) the licenses and rights conveyed to Allergan will continue as set forth in the agreement for any CDP Allergan has already licensed and (ii) Allergan’s obligations related to milestones and royalties will continue as set forth in the agreement. If the Allergan Agreement is terminated for any other reason, then the options and licenses conveyed to Allergan under the agreement will terminate.

Accounting Analysis

Under the Allergan Agreement, the Company has identified a single performance obligation that includes (i) the research and development services during the Research Term (the “Allergan R&D Services”), and (ii) Steering Committee services during the Research Term (the “ASC Services”). The Company has concluded that the Allergan R&D Services is not distinct from the ASC Services during the Research Term. The Steering Committee provides oversight and management of the overall Allergan Agreement, and the members of the Steering Committee from the Company have specialized industry knowledge, particularly as it relates to genome editing technology. The Steering Committee is meant to facilitate the early stage research being performed and coordinate the activities of both the Company and Allergan. Further, the Steering Committee services are critical to the selection of a CDP, the ongoing evaluation of a CDP and the development and evaluation of the Option Package Criteria. Accordingly, the Company’s participation on the Steering Committee is essential to Allergan receiving value from the Allergan R&D Services and as such, the ASC Services along with the Allergan R&D Services are considered one performance obligation (the “CDP Services”). In addition, the Company has concluded that the option to purchase five development and commercialization licenses is considered a marketing offer as the options did not provide any discounts or other rights that would be considered a material right in the arrangement.

As of March 31, 2019, the total transaction price is $115.0 million, which includes the $90.0 million upfront non-refundable, non-creditable cash payment and the $25.0 million LCA10 Program Milestone Payment, which was added to the transaction price in December 2018. The remaining milestone payments were fully constrained, as a result of the uncertainty as to whether any of the milestones would be achieved, as of March 31, 2019. The Company has determined that any commercial milestones and sales-based royalties will be recognized when the related sales occur and therefore have also been excluded from the transaction price. The Company re-evaluates the transaction price at the end of each reporting period and as currently uncertain events are resolved or other changes in circumstances occur.

The Company recognizes revenue related to the CDP Services as the underlying services are performed using a proportional performance model. The Company measures proportional performance based on full time employee hours relative to projected full time employee hours to complete the research service.

During the three months ended March 31, 2019 and 2018, the Company recognized revenue under the Allergan Agreement of approximately $2.0 million and $2.9 million, respectively. As of March 31, 2019 and December 31, 2018, there was $97.2 million and $99.2 million of deferred revenue related to the Allergan Agreement, respectively, of which $77.6 million and $86.4 million is classified as long-term on the condensed consolidated balance sheet, respectively.

As part of the Profit-Sharing Arrangement, the Company and an affiliate of Allergan (together with Allergan, the “Allergan Entities”) will equally split U.S. profits and losses for the LCA10 Program in the United States and will

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co-develop the LCA10 Program in the United States. The Company accounts for the Profit-Sharing Arrangement with respect to the LCA10 Program within the scope of ASC Topic 808, Collaborative Arrangements, given that the Company and the Allergan Entities are active participants in future research and development activities and all parties are exposed to significant risks and rewards dependent on the commercial success of such activities. During the three months ended March 31, 2019, the Company and the Allergan Entities incurred $5.3 million in expense associated with the LCA10 Program, of which the Company recognized 50% in research and development expenses during such period.

Broad Sponsored Research Agreement

Summary of Agreement

The Sponsored Research Agreement provides for Broad to conduct research useful or relevant to genome editing in the field of genomic medicines for the prevention or treatment of human disease with funding from the Company. Under the Sponsored Research Agreement, Broad granted to the Company an exclusive right of first negotiation for licenses from Broad with respect to patentable inventions developed by Broad in the course of the sponsored research, subject to certain limitations and retained rights (“Sponsored Invention Licenses”).

Under the Sponsored Research Agreement, the Company is obligated to make Market Cap Research Funding payments in the event the Company’s market capitalization reaches specified thresholds ranging from a mid-nine digit dollar amount to a low-eleven digit dollar amount or Company Sale Research Funding payments in the event of a Company sale for consideration ranging from a mid-nine digit dollar amount to a low-eleven digit dollar amount. In connection with entering into the Sponsored Research Agreement, the Company confirmed that the first two research payments of $5.0 million and $7.5 million, respectively, were due and payable to Broad. In connection with the Initial Research Payments, the Company issued promissory notes to Broad that it settled in common stock in June 2018 as discussed more fully in Note 7. The $12.5 million in research funding expense was recorded to research and development expenses during the three months ended June 30, 2018. Other than the Initial Research Payments, the Company is not required to make additional Research Funding Payments if the Company, whether directly or through its affiliates or sublicensees, is not researching, developing, or commercializing products based on or incorporating inventions exclusively licensed to the Company from Broad under Sponsored Invention Licenses or based on or incorporating CRISPR technology owned, co-owned, or controlled by Broad and otherwise licensed to the Company, subject to certain exclusions (an “Applicable Product” and such exemption from payment, the “Funding Exemption”). In the event that the Company, whether directly or through its affiliates or sublicensees, later resumes research, development, or commercialization of an Applicable Product within a specified period of time, any Research Funding Payment that was not paid to Broad as a result of the Funding Exemption shall become payable. Under the Sponsored Research Agreement, the Company is obligated to pay up to $125.0 million to Broad in Research Funding, inclusive of the Initial Research Payments, and in no event shall the aggregate amount of all Research Funding Payments exceed such amount.

Unless the Company has undergone a change in control, Market Cap Research Funding is payable by the Company in cash, common stock, or in the form of promissory notes, which may be settled in shares of common stock at the election of the Company, as discussed more fully in Note 7. Following a change in control of the Company, Company Sale Research Funding is required to be made in cash. The Sponsored Research Agreement is terminable by each party upon the occurrence of specified bankruptcy events of the other party and otherwise will continue in effect until the later of the expenditure of all Research Funding Payments by Broad and such time as the Company has no further rights of first negotiation for Sponsored Invention Licenses, unless otherwise mutually agreed between the parties.

Beam Therapeutics License Agreement

Summary of Agreement

In May 2018, the Company entered into a license agreement with Beam (the “Beam License Agreement”). Beam is a biotechnology company focused on developing precision genetic medicines using technology that converts a single nucleobase into a different nucleobase (“Base Editing”). Pursuant to the Beam License Agreement, the Company granted

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to Beam licenses and options to acquire licenses to certain intellectual property rights owned or controlled by the Company, for specified uses. More specifically, the Company granted to Beam a worldwide, exclusive (subject to certain exceptions), sublicensable (subject to certain conditions), license under certain intellectual property controlled by the Company for the use of Base Editing therapies for the treatment of any field of human diseases and conditions, subject to certain exceptions (the “Beam Field,” and the licenses granted or to be granted under the Beam License Agreement, the “Beam Development and Commercialization License”). Additionally, the Company granted to Beam a royalty free, non-exclusive license under certain intellectual property owned or controlled by the Company to perform research activities in the Beam Field (the “Beam Research License”). The Company provided Beam with an exclusive option to obtain a Beam Development and Commercialization License to three additional groups of intellectual property owned or controlled by the Company, on a group by group basis, during the specified option period, subject to certain exceptions. Pursuant to the Beam License Agreement, Beam will use commercially reasonable efforts to develop a product that includes the rights licensed to Beam within a specified period of time and to commercialize any such product that have received regulatory approval in certain specified countries.

As consideration for the license and option rights granted to Beam, the Company received a nominal one-time, non-refundable, non-creditable upfront cash payment. The Company also received non-cash consideration, consisting of a low to mid-single digit million number of shares of Beam Series A-1 and A-2 preferred stock, having an aggregate fair value of approximately $3.6 million. The Company is eligible to receive additional consideration if Beam elects to exercise its option to obtain a Beam Development and Commercialization License to the three categories of intellectual property underlying the Research License, for a fee ranging from a mid-teen million dollar amount to a low to mid-eight digit dollar amount per group, depending on the timing of the option exercise. Additionally, Beam is required to reimburse the Company for certain payments the Company may be obligated to make under the Company’s existing license agreements related to the intellectual property being licensed to Beam, including (i) development, regulatory and commercial milestone payments and certain sublicense income payments due as a result of the Beam License Agreement and (ii) a percentage of the annual maintenance fees and patent fees due to certain of the Company’s licensors. In addition, to the extent any products are commercialized under a Beam Development and Commercialization License, the Company would be entitled to receive royalty payments equivalent to the royalties that would be due from the Company to any applicable licensors of the Company related to the sales of such licensed products, plus an additional low single-digit percentage royalty. Additionally, if Beam exercises its right to obtain a Beam Development and Commercialization License to one of the categories of optioned intellectual property comprising Company-owned intellectual property and any related licensed products that are commercialized, the Company would be entitled to tiered low single-digit royalty payments related to sales of such licensed products.

The license rights and option rights granted to Beam are subject to the terms and conditions of the underlying license agreements that the Company is a party to and under which the Company licensed rights or option rights to Beam and the termination of such in-licenses, as applicable. Unless earlier terminated by either party pursuant to the terms of the agreement, the Beam License Agreement will continue in full force and effect and will expire on a licensed product-by-licensed product and country-by-country basis upon the expiration of the royalty term with respect to such licensed product in such country. Beam has the right, at its sole discretion, at any time to terminate the Beam License Agreement in its entirety or on a group-by-group of intellectual property basis, upon ninety days written notice to the Company. Upon termination of the Beam License Agreement, all rights and licenses granted by the Company to Beam (including the rights to exercise options and obtain such licenses) will immediately terminate and patents within a group of patents will no longer be deemed licensed patents. Expiration or termination of the Beam License Agreement for any reason does not release either party of any obligation or liability which had accrued or which is attributable to a period prior to such expiration or termination.

Accounting Analysis

The Company has identified the following performance obligations (i) the Beam Development and Commercialization License and (ii) the Beam Research License. In addition, the Company has concluded the option to obtain additional Beam Development and Commercialization Licenses to up to three additional groups of patents in the future is considered a marketing offer as the options did not provide any discounts or other rights that would be considered a material right in the arrangement.

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The total transaction price at the inception of the arrangement was determined to be approximately $3.8 million, consisting of the upfront cash payment and non-cash consideration related to the shares of Beam preferred stock. The Company determined the fair value based on the price paid by other unrelated investors for such shares. The consideration associated with the exercise of the option(s) will be accounted for if and when Beam elects to purchase the additional licenses. The other forms of consideration, including the development and regulatory milestone reimbursement, the sublicense income reimbursement, the maintenance fee reimbursement and the patent costs reimbursement were estimated based on the most-likely amount and were excluded from the initial transaction price as the most-likely amount was estimated to be zero or the amount was otherwise fully constrained due to the significant uncertainties surrounding such payments. The commercial-based milestone reimbursement and the sales-based royalty payments will be recognized when the related sales occur as they were determined to relate predominantly to the licenses granted and therefore have also been excluded from the transaction price.

The total transaction price at the inception of the arrangement was allocated to the performance obligations in the aggregate, as the Beam Development and Commercialization License and the Beam Research License were delivered simultaneously with one another, at inception of the arrangement, when the licenses were made available for Beam’s use and benefit. Accordingly, the satisfaction of each performance obligation occurs at inception of the arrangement and the transaction price at the inception of the arrangement is recognized in its entirety at such time. The Company will re-evaluate the transaction price at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur. There were no changes to the transaction price during the three months ended March 31, 2019.

During the three months ended March 31, 2019, the Company recognized revenue under the Beam License Agreement of approximately $0.1 million. The revenue is classified as collaboration and other research and development revenue in the accompanying condensed consolidated statement of operations and the Beam preferred stock is classified in restricted cash and other non-current assets.

Other Agreements

Licensing Agreements

The Company is a party to a number of license agreements under which the Company licenses patents, patent applications and other intellectual property from third parties. The following is a summary of such in-license agreements that are significant to the Company’s business.

Cas9-I License Agreement

In October 2014, the Company entered into an agreement (the “Cas9-I License Agreement”) with Broad and Harvard to license certain patent rights owned or co‑owned by, or among, Broad, the Massachusetts Institute of Technology (“MIT”), and Harvard (collectively, the “Institutions”). Consideration for the granting of the license included the payment of an upfront license issuance fee of $0.2 million and the issuance of 561,531 shares of the Company’s common stock. The Institutions are collectively entitled to receive clinical and regulatory milestone payments totaling up to $14.8 million in the aggregate per licensed product approved in the United States, European Union, and Japan for the treatment of a human disease that afflicts at least a specified number of patients in the aggregate in the United States. If the Company undergoes a change of control during the term of the license agreement, the clinical and regulatory milestone payments will be increased by a certain percentage in the mid‑double digits. The Company is also obligated to make additional payments to the Institutions, collectively, of up to an aggregate of $54.0 million upon the occurrence of certain sales milestones per licensed product for the treatment of a human disease that afflicts at least a specified number of patients in the aggregate in the United States. The Institutions are collectively entitled to receive clinical and regulatory milestone payments totaling up to $4.1 million in the aggregate per licensed product approved in the U.S. and at least one jurisdiction outside the U.S. for the treatment of a human disease based on certain criteria. The Company is also obligated to make additional payments to the Institutions, collectively, of up to an aggregate of $36.0 million upon the occurrence of certain sales milestones per licensed product for the treatment of a rare disease meeting certain criteria. The Institutions are entitled to receive from the Company nominal annual license fees and a mid‑single digit percentage royalties on net sales of products for the prevention or treatment of human disease and ranging from low single digit to high single digit percentage royalties on net sales of other products and services,

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made by the Company, its affiliates, or its sublicensees. The royalty percentage depends on the product and service, and whether such licensed product or licensed service is covered by a valid claim within the certain patent rights that the Company licenses from the Institutions.

In December 2016, the Company entered into the Cpf1 License Agreement with Broad, for specified patent rights (the “Cpf1 Patent Rights”) related primarily to Cpf1 compositions of matter and their use for gene editing. Concurrently with entering into the Cpf1 License Agreement, the Company, Broad, and Harvard amended and restated the Cas9-I License Agreement as described below and the Company and Broad entered into the Cas9‑II License Agreement for specified patent rights (the “Cas9-II Patent Rights”) related primarily to certain Cas9 compositions of matter and their use for genome editing. The Company paid an upfront fee in aggregate of $16.5 million, which included the Initial Notes, under these agreements which was recorded in research and development expenses during 2016.

Cpf1 License Agreement

Pursuant to the Cpf1 License Agreement, Broad, on behalf of itself, Harvard, MIT, Wageningen, and the University of Tokyo (“UTokyo” and, together with Broad, Harvard, MIT, and Wageningen, the “Cpf1 Institutions”) granted the Company an exclusive, worldwide, royalty bearing, sublicensable license to the Cpf1 Patent Rights, to make, have made, use, have used, sell, offer for sale, have sold, export and import products in the field of the prevention or treatment of human disease using gene therapy, editing of genetic material, or targeting of genetic material, subject to certain limitations and retained rights (collectively, the “Cpf1 Exclusive Field”), as well as a non‑exclusive, worldwide, royalty bearing sublicensable license to the Cpf1 Patent Rights for all other purposes, subject to certain limitations and retained rights. The Company is obligated to use commercially reasonable efforts to research, develop, and commercialize products in the Cpf1 Exclusive Field. The Company is also required to achieve certain development milestones within specified time periods for products covered by the Cpf1 Patent Rights, with Broad having the right to terminate the Cpf1 License Agreement if the Company fails to achieve these milestones within the required time periods.

Broad and Wageningen are collectively entitled to receive clinical and regulatory milestone payments totaling up to $20.0 million in the aggregate per licensed product approved in the United States, European Union, and Japan for the prevention or treatment of a human disease that afflicts at least a specified number of patients in the aggregate in the United States. The Company is also obligated to make additional payments to Broad and Wageningen, collectively, of up to an aggregate of $54.0 million upon the occurrence of certain sales milestones per licensed product for the prevention or treatment of a human disease that afflicts at least a specified number of patients in the aggregate in the United States. Broad and Wageningen are collectively entitled to receive clinical and regulatory milestone payments totaling up to $6.0 million in the aggregate per licensed product approved in the United States, European Union and Japan for the prevention or treatment of a human disease that afflicts fewer than a specified number of patients in the aggregate in the United States or a specified number of patients per year in the United States (an “Ultra‑Orphan Disease”). The Company is also obligated to make additional payments to Broad and Wageningen, collectively, of up to an aggregate of $36.0 million upon the occurrence of certain sales milestones per licensed product for the prevention or treatment of an Ultra‑Orphan Disease.

Broad and Wageningen, collectively, are entitled to receive, on a product‑by‑product and country‑by‑country basis, mid single‑digit percentage royalty on net sales of licensed products for the prevention or treatment of human disease, and royalties on net sales of other licensed products and licensed services, made by the Company, its affiliates, or its sublicensees. The royalty percentage depends on the product and service, and whether such licensed product or licensed service is covered by a valid claim within the Cpf1 Patent Rights. If the Company is legally required to pay royalties to a third party on net sales of the Company’s products because such third party holds patent rights that cover such licensed product, then the Company can credit up to a specified percentage of the amount paid to such third party against the royalties due to Broad and Wageningen in the same period. Such credit may not exceed 50% of the applicable royalties paid by the Company to the applicable third party. The Company’s obligation to pay royalties will expire on a product‑by‑product and country‑by‑country basis upon the later of the expiration of the last to expire valid claim of the Cpf1 Patent Rights that covers each licensed product or service in each country or the tenth anniversary of the date of the first commercial sale of the licensed product or licensed service. If the Company sublicenses any of the Cpf1 Patent Rights to a third party, Broad and Wageningen, collectively, have the right to receive sublicense income, depending on the stage of development of the products or services in question at the time of the sublicense.

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Under the Cpf1 License Agreement, Broad and Wageningen are also entitled, collectively, to receive success payments in the event the Company’s market capitalization reaches specified thresholds (the “Cpf1 Market Cap Success Payments”) or a Company sale for consideration in excess of those thresholds (the “Cpf1 Company Sale Success Payments” and, collectively with the Cpf1 Market Cap Success Payments, the “Cpf1 Success Payments”). The Cpf1 Success Payments payable to Broad and Wageningen are triggered when the Company’s market capitalization reaches certain amounts ranging from $750.0 million to $10.0 billion for a specified period of time, and collectively the Cpf1 Success Payments will not exceed, in aggregate, $125.0 million, which maximum amount would be payable only if the Company reaches a market capitalization threshold of $10.0 billion and has at least one product candidate covered by a claim of a patent right licensed to the Company under either the Cpf1 License Agreement or the Cas9‑I License Agreement that is or was the subject of a clinical trial pursuant to development efforts by the Company or any Company affiliate or sublicensee. The Cpf1 Market Cap Success Payments are payable by the Company in cash or in the form of promissory notes on substantially the same terms and conditions as the Initial Notes, as described more fully in Note 7, except that the maturity date of such notes will, subject to certain exceptions, be 150 days following issuance. Following a change in control of the Company, Cpf1 Market Cap Success Payments are required to be made in cash. Cpf1 Company Sale Success Payments are payable solely in cash. The Company triggered the first and second Cpf1 Success Payments during 2017 when the Company’s market capitalization reached $750 million and $1.0 billion, respectively, as described more fully in Note 7.

Unless terminated earlier, the term of the Cpf1 License Agreement will expire on a country‑by‑country basis, upon the expiration of the last to expire valid claim of the Cpf1 Patent Rights in such country. The Company has the right to terminate the Cpf1 License Agreement at will upon four months’ written notice to Broad. Either party may terminate the Cpf1 License Agreement upon a specified period of notice in the event of the other party’s uncured material breach of a material obligation, such notice period varying depending on the nature of the breach. Broad may terminate the Cpf1 License Agreement immediately if the Company challenges the enforceability, validity, or scope of any Cpf1 Patent Right or assist a third party to do so, or in the event of the Company’s bankruptcy or insolvency.

Amendment and Restatement of Cas9-I License Agreement

In December 2016, the Company amended and restated the Cas9‑I License Agreement (such agreement, as amended, the “Amended and Restated Cas9-I License Agreement”) to exclude additional fields from the scope of the exclusive license previously granted to the Company, to make the exclusive license to three targets become non‑exclusive, subject to the limitation that each of Broad and Harvard would only be permitted to grant a license to only one third party at a time with respect to each such target within the field of the exclusive license, and to revise certain provisions relating to the rights of Harvard and Broad to grant further licenses under specified circumstances to third parties that wish to develop and commercialize products that target a particular gene and that otherwise would fall within the scope of the exclusive license under this agreement, so that Harvard and Broad together would have rights substantially similar to the equivalent rights possessed by Broad under the Cpf1 License Agreement to designate gene targets for which the designating institution, whether alone or together with an affiliate or third party, has an interest in researching and developing products that would otherwise be covered by rights licensed by Harvard and/or Broad to the Company under this agreement, the Cpf1 License Agreement or the Cas9‑II License Agreement. In March 2017, the Company and Harvard and Broad further amended the Amended and Restated Cas9-I License Agreement to (i) grant an exclusive license from Broad to the Company with respect to certain patent rights that The Rockefeller University (“Rockefeller”) has or may have rights in and to and for which Rockefeller has, under a certain inter-institutional agreement that Broad and Rockefeller entered into in February 2017, appointed Broad as sole and exclusive agent for the purposes of licensing and (ii) provide to Rockefeller certain rights, including with respect to patent enforcement, indemnification, insurance, confidentiality, reservation of certain rights, and publicity, that are generally consistent with those granted to Broad, Harvard, MIT and the Howard Hughes Medical Institute under the Amended and Restated Cas9-I License Agreement.

Cas9‑II License Agreement

Pursuant to the Cas9‑II License Agreement, Broad, on behalf of itself, MIT, Harvard, and the University of Iowa Research Foundation, granted the Company an exclusive, worldwide, royalty bearing sublicensable license to certain of the Cas9‑II Patent Rights as well as a non‑exclusive, worldwide, royalty bearing sublicensable license to all of

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the Cas9‑II Patent Rights, in each case on terms substantially similar to the licenses granted to the Company under the Cpf1 License Agreement except, among other things, for the following commitment amounts. Under the Cas9‑II License Agreement, the Company will pay an upfront license fee in a low seven digit dollar amount and will have to pay an annual license maintenance fee. The Company is obligated to pay clinical and regulatory milestone payments per licensed product approved in the United States, European Union and Japan for the prevention or treatment of a human disease that afflicts at least a specified number of patients in the aggregate in the United States totaling up to $3.7 million in the aggregate, and sales milestone payments for any such licensed product totaling up to $13.5 million in the aggregate. In addition, the Company is obligated to pay clinical and regulatory milestone payments totaling up to $1.1 million in the aggregate per licensed product approved in the United States and the European Union or Japan for the prevention or treatment of a human disease that afflicts fewer than a specified number of patients in the United States, plus sales milestone payments of up to $9.0 million for any such licensed product. Consistent with the Cpf1 License Agreement, the licensors are entitled to royalties on net sales of products for the prevention or treatment of human disease and other products and services made by the Company, its affiliates, or its sublicensees. Royalties due under other license agreements are creditable against these royalties up to a specified amount in the same period. Lastly, Broad is entitled to receive success payments if the Company’s market capitalization reaches specified thresholds ascending from $1.0 billion to $9.0 billion or upon a sale of the Company for consideration in excess of those thresholds. The potential success payments range from a low seven digit dollar amount to a low eight digit dollar amount and will not exceed, in aggregate, $30.0 million, which maximum amount would be owed only if the Company reaches a market capitalization threshold of $9.0 billion and has at least one product candidate covered by a claim of a patent right licensed to the Company under either the Cas9-I License Agreement or the Cas9-II License Agreement that is or was the subject of a clinical trial pursuant to development efforts by the Company or any Company affiliate or sublicensee. The Company triggered the first Success Payment under the Cas9-II License Agreement during the fourth quarter of 2017 when the Company’s market capitalization reached $1.0 billion, which the Company settled in January 2018, as more fully described in Note 7.

9. Stock‑based Compensation

Stock-based compensation expense by classification included in the condensed consolidated statements of operations and comprehensive loss was as follows (in thousands):


	Three Months Ended
	March 31,
	2019		2018
Research and development	$	3,382	$	3,910
General and administrative		4,473		2,618
Total stock-based compensation expense	$	7,855	$	6,528

Restricted Stock and Restricted Stock Unit Awards

Restricted stock awards are subject to repurchase rights. Accordingly, the Company has recorded the proceeds from the issuance of restricted stock awards as a liability in the condensed consolidated balance sheets. The restricted stock liability is reclassified into stockholders’ equity as the restricted stock award vests.

During the first quarter of 2019, the Company issued restricted stock unit awards that primarily vest over a period of four years subject to continued service.

The following table summarizes restricted stock and restricted stock unit awards activity for the instruments discussed above as of December 31, 2018 and March 31, 2019:

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		Weighted
		Average
		Grant Date
		Fair Value
	Shares	Per Share
Unvested restricted stock and restricted stock unit awards as of December 31, 2018	270,000	$	28.05
Issued	390,650	$	21.45
Vested	(18,000)	$	28.05
Forfeited	(4,596)	$	21.10
Unvested restricted stock and restricted stock unit awards as of March 31, 2019	638,054	$	24.06

As of March 31, 2019, the Company had $13.1 million in unrecognized stock‑based compensation expense related to unvested restricted stock and unvested restricted stock unit awards.

Stock Options

The following is a summary of stock option activity for the three months ended March 31, 2019:


		Weighted Average		Remaining	Aggregate Intrinsic
	Shares	Exercise Price		Contractual Life (years)	Value (in thousands)
Outstanding at December 31, 2018	4,689,786	$	23.80	7.9	$	20,686
Granted	540,520	$	21.20
Exercised	(146,171)	$	10.49
Cancelled	(221,188)	$	28.38
Outstanding at March 31, 2019	4,862,947	$	23.71	7.7	$	22,994
Exercisable at March 31, 2019	2,267,041	$	19.77	6.5	$	17,195

The fair value of each option issued was estimated at the date of grant using the Black‑Scholes option pricing model with the following weighted‑average assumptions:


	Three Months Ended
	March 31,
	2019		2018
Risk free interest rate	2.5	%	2.6	%
Expected dividend yield	—		—
Expected term (in years)	6.25		6.25
Expected volatility	75.5	%	80.0	%

As of March 31, 2019, the Company had unrecognized stock‑based compensation expense related to its employee and director stock options of $38.2 million which the Company expects to recognize over the remaining weighted average vesting period of 2.54 years. As of March 31, 2019, the Company had unrecognized stock-based compensation expense related to its non-employee stock options of $1.7 million which the Company expects to recognize over the remaining weighted average vesting period of 0.87 years.

10. Net Loss per Share

Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury stock and if converted methods. Contingently issuable shares are included in the calculation of basic loss per share as of the beginning of the period in which all the necessary conditions have been satisfied. Contingently issuable shares are included in diluted loss per share based on the number of shares, if any, that would be issuable under the terms of the arrangement if the end of the reporting period was the end of the contingency period, if the results are dilutive.

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For purposes of the diluted net loss per share calculation, stock options are considered to be common stock equivalents, but they were excluded from the Company’s calculation of diluted net loss per share allocable to common stockholders because their inclusion would have been anti-dilutive. Therefore, basic and diluted net loss per share applicable to common stockholders was the same for all periods presented.

In connection with at-the-market offerings consummated by the Company during 2018, the Company sold a total of 2,536,205 shares of common stock. The issuance of these shares resulted in a significant increase in the Company’s weighted-average shares outstanding and is expected to continue to impact the year-over-year comparability of the Company’s net loss per share calculations for the remainder of 2019.

The following common stock equivalents were excluded from the calculation of diluted net loss per share allocable to common stockholders because their inclusion would have been anti-dilutive:


	As of March 31,
	2019	2018
Unvested restricted stock and restricted stock unit awards	638,054	409,200
Outstanding stock options	4,862,947	5,303,575
Total	5,501,001	5,712,775

11. Related‑Party Transactions

The Company received $0.2 million in rent and facility-related fees from a related party in the three months ended March 31, 2018 in connection with the Company’s Hurley Street sublease and no rent or facility-related payments were received from this related party during the three months ended March 31, 2019.

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 together with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission (“SEC”) on March 1, 2019 (the “2018 Annual Report”).

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by forward-looking statements. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the section entitled “Risk Factors” in Part II, Item 1A that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q, and we do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

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Overview

We are a leading, clinical stage genome editing company dedicated to developing potentially transformative genomic medicines to treat a broad range of serious diseases. We have developed a proprietary genome editing platform based on CRISPR technology and we continue to expand its capabilities. Our product development strategy is to target genetically addressable diseases where gene editing can be used to enable or enhance therapeutic outcomes for patients. Genetically addressable diseases include genetically defined diseases that may be treated by correcting a disease-causing gene and genetically treatable diseases that do not necessarily have a single, disease causing gene, but which nonetheless may be treated by editing the genome to ameliorate or eliminate the signs or symptoms of the disease. We are advancing both in vivo CRISPR medicines, in which the medicine is injected or infused into the patient to edit the cells inside their body, and engineered cell medicines, in which cells are edited with our technology and then administered to the patient. While our discovery efforts have ranged across several different genetically addressable diseases and therapeutic areas, the two areas where our programs are more mature are ocular diseases and engineered cell medicines to treat blood diseases and cancer.

In ocular diseases, our most advanced program is designed to address a specific genetic form of retinal degeneration called Leber congenital amaurosis 10 (“LCA10”), a disease for which we are not aware of any available therapies and only one other potential treatment in clinical trials in the United States and Europe. In October 2018, we filed an investigational new drug application (“IND”) for a Phase 1/2 clinical trial for EDIT-101 (also known as AGN-151587), an experimental medicine to treat LCA10, which was accepted by the United States Food and Drug Administration (“FDA”) in November 2018. We and our partner Allergan Pharmaceuticals International Limited (“Allergan”) plan to initiate patient screening in mid-2019 and begin patient dosing in the second half of 2019, enrolling approximately 10 to 20 patients in the United States and Europe.

As part of our long term strategy, we have developed and articulated goals for our pipeline of experimental medicines and our company that we are working to achieve by the end of 2022. These goals, which we call “EM22,” include having at least three experimental medicines in early stage clinical trials and at least two additional experimental medicines in or ready for late stage clinical trials. In addition, we aim to have a pipeline characterized by potential best-in-class medicines and to be a company with the leading genome editing platform and organizational culture.

In May 2015, we entered into a collaboration with Juno Therapeutics, Inc., a Celgene company that is a wholly-owned subsidiary of Celgene Corporation (“Juno Therapeutics”), a leader in the emerging field of immuno-oncology, to develop novel engineered T cell therapies for cancer, which was amended and restated in May 2018. In March 2017, we entered into a strategic alliance and option agreement with Allergan to discover, develop, and commercialize new gene editing medicines for a range of ocular disorders. In July 2018, Allergan exercised its option to develop and commercialize EDIT-101 and paid us $15.0 million in connection with such exercise (the “EDIT-101 Option Exercise Payment”). We and an affiliate of Allergan subsequently entered into a co-development and commercialization agreement under which we will co-develop and equally split profits and losses for EDIT-101 in the United States. In December 2018, we also received a $25.0 million payment from Allergan in connection with the acceptance of the IND for EDIT-101 (the “EDIT-101 Milestone Payment”).

Since our inception in September 2013, our operations have focused on organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio, assembling our core capabilities in genome editing, seeking to identify potential product candidates, and undertaking preclinical studies. Except for EDIT-101, all of our research programs are still in the preclinical or research stage of development and the risk of failure of all of our research programs is high. We have not generated any revenue from product sales. We have funded our operations primarily through the initial public offering of our common stock (the “IPO”), follow-on public offerings of our common stock including through at-the-market offerings, private placements of our preferred stock, payments received under our collaboration with Juno Therapeutics and payments received under our strategic alliance and co-development and commercialization agreements with Allergan and its affiliate. From inception through March 31, 2019, we raised an aggregate of $676.5 million to fund our operations.

Since inception, we have incurred significant operating losses. Our net losses were $29.2 million and $30.9 million for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, we had an

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accumulated deficit of $444.7 million. We expect to continue to incur significant expenses and operating losses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and from year to year. We anticipate that our expenses will increase substantially as we continue our current research programs and our preclinical development activities; prepare for and initiate clinical development of EDIT-101; seek to identify additional research programs and additional product candidates; initiate preclinical testing and clinical trials for other product candidates we identify and develop; maintain, expand, and protect our intellectual property portfolio, including reimbursing our licensors for such expenses related to the intellectual property that we in-license from such licensors; further develop our genome editing platform; hire additional clinical, quality control, and scientific personnel; and incur additional costs associated with operating as a public company. We do not expect to be profitable for the year ending December 31, 2019 or the foreseeable future.

Financial Operations Overview

Revenue

To date, we have not generated any revenue from product sales and we do not expect to generate any revenue from product sales for the foreseeable future. In connection with entering into our collaboration with Juno Therapeutics in May 2015, we received an upfront payment of $25.0 million, and, in each of May 2016 and July 2017, we received a milestone payment of $2.5 million. In May 2018, in connection with the amendment and restatement of our collaboration agreement with Juno Therapeutics to expand our collaboration to add an additional research program, we received $5.0 million for amending the agreement and two $2.5 million milestone payments for technical progress in a research program. In addition, we will receive up to $22.0 million in research support over the five years of the collaboration and across the four programs under the collaboration, subject to adjustment in accordance with the terms of the agreement. Through March 31, 2019, we had recognized an aggregate of $17.7 million of research support from Juno Therapeutics since entering into the collaboration. During the three months ended March 31, 2019, we did not recognize any research support from Juno Therapeutics. As of March 31, 2019, we recorded $32.0 million of deferred revenue, $28.3 million of which is classified as long-term on our condensed consolidated balance sheet, related to the collaboration. In connection with entering into our strategic alliance with Allergan, we received an upfront payment of $90.0 million from Allergan. In addition, we received $15.0 million related to Allergan exercising its option to develop and commercialize EDIT-101 (the “EDIT-101 Option Exercise Payment”) in July 2018 and $25.0 million related to the acceptance of the IND for EDIT-101 (the “EDIT-101 Milestone Payment”) in December 2018. Through March 31, 2019, we had recognized an aggregate of $32.8 million in revenue related to our strategic alliance with Allergan, which includes all of the EDIT-101 Option Exercise Payment and a portion of the EDIT-101 Milestone Payment. During the three months ended March 31, 2019, we recognized $2.0 million in revenue related to our strategic alliance with Allergan. As of March 31, 2019, we recorded $97.2 million of deferred revenue, $77.6 million of which is classified as long-term on the condensed consolidated balance sheet, related to the upfront payment from Allergan. For additional information about our revenue recognition policy related to the Juno Therapeutics collaboration or the Allergan agreement, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Revenue Recognition” in the Annual Report.

For the foreseeable future, we expect substantially all of our revenue will be generated from our collaboration with Juno Therapeutics, our strategic alliance with Allergan, any other collaborations or agreements we may enter into and anticipated interest income.

Expenses

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research and development activities, including our drug discovery efforts and preclinical studies under our research programs, which include:

employee‑related expenses including salaries, benefits, and stock‑based compensation expense;

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costs of funding research performed by third parties that conduct research and development and preclinical activities on our behalf;

costs of purchasing lab supplies and non‑capital equipment used in our preclinical activities and in manufacturing preclinical study materials;

consultant fees;

facility costs including rent, depreciation, and maintenance expenses; and

fees for acquiring and maintaining licenses under our third‑party licensing agreements, including any sublicensing or success payments made to our licensors.

Research and development costs are expensed as incurred. At this time, we cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete the development of any product candidates we may identify and develop. This is due to the numerous risks and uncertainties associated with developing such product candidates, including the uncertainty of:

successful completion of preclinical studies, IND‑enabling studies and natural history studies;

successful enrollment in, and completion of, clinical trials;

receipt of marketing approvals from applicable regulatory authorities;

establishing commercial manufacturing capabilities or making arrangements with third‑party manufacturers;

obtaining and maintaining patent and trade secret protection and non‑patent exclusivity;

launching commercial sales of a product, if and when approved, whether alone or in collaboration with others;

acceptance of a product, if and when approved, by patients, the medical community, and third‑party payors;

effectively competing with other therapies and treatment options;

a continued acceptable safety profile following approval;

enforcing and defending intellectual property and proprietary rights and claims; and

achieving desirable medicinal properties for the intended indications.

A change in the outcome of any of these variables with respect to the development of any product candidates we may develop would significantly change the costs, timing, and viability associated with the development of that product candidate. As a result of Allergan’s exercise of its option to license EDIT-101 and our entry into a profit-sharing arrangement with an affiliate of Allergan in the United States for EDIT-101, our obligations to fund such program in the United States will represent 50% of the total costs related to developing and commercializing the program in the United States.

We do not track research and development costs on a program‑by‑program basis except for reimbursable amounts that relate to third-party agreements.

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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 development programs progress, including as we continue to prepare for and initiate the clinical development and trials for EDIT-101 as well as supporting preclinical studies for our other research programs.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and other related costs, including stock‑based compensation for personnel in executive, finance, investor relations, business development, legal, corporate affairs, information technology, facilities and human resource functions. Other significant costs include corporate facility costs not otherwise included in research and development expenses, legal fees related to intellectual property 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 and potential commercialization of any product candidates we identify and develop. These increases will include increased costs related to the hiring of additional personnel and fees to outside consultants. We also anticipate increased expenses related to reimbursement of third‑party patent‑related expenses and expenses associated with operating as a public company, including costs for audit, legal, regulatory, and tax‑related services, director and officer insurance premiums, and investor relations costs. With respect to reimbursement of third-party intellectual property related expenses specifically, given the ongoing nature of the opposition proceedings involving the patents licensed to us under our license agreement with The Broad Institute, Inc. (“Broad”) and the President and Fellows of Harvard College (“Harvard”), we anticipate general and administrative expenses will continue to be significant. Some of our in‑licensed patents and patent applications under our license agreement with Broad and Harvard are subject to priority disputes, and we anticipate that our obligation to reimburse Broad and Harvard for expenses related to these disputes during future periods will be substantial until such proceedings are resolved.

Other Income (Expense), Net

For the three months ended March 31, 2019, other income, net consisted primarily of interest income and accretion of discounts associated with marketable securities, partially offset by loss on disposal of property and equipment.

For the three months ended March 31, 2018, other income, net consisted primarily of interest income, accretion of discounts associated with marketable securities, and rental income from our subtenant, partially offset by interest expense on our construction financing lease obligation.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of our condensed consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. We base our estimates on historical experience, known trends and events, and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts, and experience. The effects of material revisions in estimates, if any, will be reflected in the condensed consolidated financial statements prospectively from the date of change in estimates.

There have been no material changes to our critical accounting policies from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2018 Annual Report.

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Results of Operations

Comparison of the Three Months ended March 31, 2019 and 2018

The following table summarizes our results of operations for the three months ended March 31, 2019 and 2018, together with the changes in those items in dollars (in thousands) and the respective percentages of change:


	Three Months Ended
	March 31,
	2019		2018		Dollar Change		Percentage Change
Collaboration and other research and development revenues	$	2,069	$	3,927	$	(1,858)	(47)	%
Operating expenses:
Research and development		15,842		21,300		(5,458)	(26)	%
General and administrative		17,489		14,186		3,303	23	%
Total operating expenses		33,331		35,486		(2,155)	(6)	%
Other income, net:
Other (expense) income, net		(44)		182		(226)	n/m
Interest income, net		2,057		438		1,619	n/m
Total other income, net		2,013		620		1,393	n/m
Net loss	$	(29,249)	$	(30,939)	$	1,690	(5)	%

For our results of operations, we have included the respective percentage of changes, unless greater than 100% or less than (100)%, in which case we have denoted such changes as not meaningful (n/m).

Collaboration and other research and development revenues

Collaboration and other research and development revenues decreased by $1.9 million, to $2.1 million for the three months ended March 31, 2019 from $3.9 million for three months ended March 31, 2018. This decrease was primarily attributable to a $1.0 million decrease in revenue recognized pursuant to our collaboration agreement with Juno Therapeutics and a $0.9 million decrease in revenue recognized pursuant to our strategic alliance with Allergan, partially offset by $0.1 million in revenue recognized in the first quarter of 2019 pursuant to an out-license agreement.

Research and development expenses

Research and development expenses decreased by $5.5 million, to $15.8 million for the three months ended March 31, 2019 from $21.3 million for the three months ended March 31, 2018. The following table summarizes our

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research and development expenses for the three months ended March 31, 2019 and 2018, together with the changes in those items in dollars (in thousands) and the respective percentages of change:


	Three Months Ended
	March 31,
	2019		2018		Dollar Change		Percentage Change
Employee related expenses	$	5,184	$	4,865	$	319	7	%
Process and platform development expenses		4,394		10,238		(5,844)	(57)	%
Stock-based compensation expenses		3,382		3,910		(528)	(14)	%
Facility expenses		1,721		1,394		327	23	%
Other expenses		1,161		893		268	30	%
Total research and development expenses	$	15,842	$	21,300	$	(5,458)	(26)	%

The decrease in research and development expenses for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 was primarily attributable to:

approximately $5.8 million in decreased process and platform development expenses, mostly relating to the acquisition of certain non-capitalized intangible assets during the first quarter of 2018; and

approximately $0.5 million in decreased stock-based compensation expenses.

These decreases were partially offset by approximately $0.3 million in increased facility related expenses, approximately $0.3 million in increased employee related expenses due to an increase in the size of our workforce, and approximately $0.3 million in increased other expenses.

General and administrative expenses

General and administrative expenses increased by $3.3 million, to $17.5 million for the three months ended March 31, 2019 from $14.2 million for the three months ended March 31, 2018. The following table summarizes our general and administrative expenses for the three months ended March 31, 2019 and 2018, together with the changes in those items in dollars (in thousands) and the respective percentages of change:


	Three Months Ended
	March 31,
	2019		2018		Dollar Change		Percentage Change
Intellectual property and patent related fees	$	4,991	$	6,407	$	(1,416)	(22)	%
Stock-based compensation expenses		4,473		2,618		1,855	71	%
Employee related expenses		3,500		2,776		724	26	%
Professional service expenses		3,394		1,293		2,101	n/m
Other expenses		1,131		1,092		39	4	%
Total general and administrative expenses	$	17,489	$	14,186	$	3,303	23	%

The increase in general and administrative expenses for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 was primarily attributable to:

approximately $1.9 million in increased stock-based compensation expenses due to an increase in employee stock option expense;

approximately $2.1 million in increased professional service expenses due to an increase in the use of consultants; and

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approximately $0.7 million in increased employee related expenses due to an increase in the size of our workforce.

These increases were partially offset by approximately $1.4 million in decreased intellectual property and patent related fees.

Other income, net

For the three months ended March 31, 2019, other income, net was $2.0 million, which was primarily attributable to interest income and accretion of discounts associated with marketable securities, partially offset by a loss on disposal of property and equipment.

For the three months ended March 31, 2018, other income, net was $0.6 million, which was primarily attributable to interest income, accretion of discounts associated with marketable securities, and rental income from our subtenant, partially offset by interest expense on our construction financing lease obligation.

Liquidity and Capital Resources

Sources of Liquidity

From inception through March 31, 2019, we funded our operations primarily through proceeds from private placements of our preferred stock of $163.3 million, net proceeds of $328.3 million from our public offerings of our common stock, and payments from Allergan and Juno Therapeutics. As of March 31, 2019, we had cash, cash equivalents and marketable securities of $342.1 million.

In addition to our existing cash, cash equivalents and marketable securities we are eligible to earn milestone payments and are entitled to cost reimbursement under our collaboration agreement with Juno Therapeutics. Additionally, under our strategic alliance with Allergan, we are eligible to earn milestone payments, certain reimbursement for EDIT-101 costs in the United States and certain option exercise or extension payments. Our ability to earn and the timing of the milestone payments are dependent upon the timing and outcome of our development, regulatory and commercial activities and, as such, are uncertain at this time. As of March 31, 2019, our right to contingent payments under our collaboration agreement with Juno Therapeutics and our strategic alliance with Allergan are our only significant committed potential external sources of funds.

Indebtedness

Under the terms of certain of our license agreements and a sponsored research agreement, we may be required to issue additional promissory notes in connection with the achievement of success payment criteria. See Notes 7 and 8 to our condensed consolidated financial statements for more information regarding these obligations.

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Cash Flows

The following table provides information regarding our cash flows for the three months ended March 31, 2019 and 2018 (in thousands):


	Three Months Ended
	March 31,
	2019		2018
Net cash provided by (used in):
Operating activities	$	(29,003)	$	(22,460)
Investing activities		50,626		40,820
Financing activities		1,533		52,681
Net increase in cash and cash equivalents	$	23,156	$	71,041

Net Cash Used in Operating Activities

The use of cash in all periods resulted primarily from our net losses adjusted for non‑cash charges and changes in components of working capital.

Net cash used in operating activities was approximately $29.0 million for the three months ended March 31, 2019 and consisted primarily of a net loss of $29.2 million adjusted for non-cash items, including stock-based compensation expenses of $7.9 million, depreciation expense of $0.6 million, other non-cash items expense of $1.2 million, and a net change in operating assets and liabilities of $7.1 million. The change in operating assets and liabilities was primarily related to a decrease in accrued expenses of $6.9 million, a decrease in deferred revenue of $2.1 million and a decrease in operating lease liabilities of $1.4 million, partially offset by an increase in right-of-use assets of $0.9 million, an increase in other current and non-current liabilities of $0.9 million, an increase of prepaid expenses and other current assets of $0.8 million and an increase in accounts payable of $0.6 million.

Net cash used in operating activities was approximately $22.5 million for the three months ended March 31, 2018, and consisted primarily of a net loss of $30.9 million adjusted for non-cash items, including stock-based compensation expenses of $6.5 million, non-cash research and development expenses of $1.9 million, depreciation expense of $0.8 million, other non-cash income of $0.4 million, and a net decrease in operating assets and liabilities of $0.3 million. The change in operating assets and liabilities was related to a decrease of $3.1 million in deferred revenue, a decrease of $1.3 million in accrued expenses, an increase of $0.8 million in prepaid expenses and other current assets, and an increase of $0.3 million in accounts receivable, partially offset by an increase of $5.1 million in accounts payable.

Net Cash Provided by Investing Activities

Net cash provided by investing activities was approximately $50.6 million for the three months ended March 31, 2019 and consisted primarily of proceeds from maturities of marketable securities of $126.0 million, partially offset by costs to acquire marketable securities of $74.7 million and costs to acquire property and equipment of $0.7 million.

Net cash provided by investing activities was approximately $40.8 million for the three months ended March 31, 2018 and consisted primarily of proceeds from maturities of marketable securities of $94.5 million, partially offset by costs to purchase marketable securities of $52.7 million and costs to acquire property and equipment of $1.0 million.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was approximately $1.5 million for the three months ended March 31, 2019 and consisted of $1.5 million in proceeds from exercises of options for our common stock.

Net cash provided by financing activities was approximately $52.7 million for the three months ended March 31, 2018 and consisted primarily of $48.5 million in proceeds received from our at-the-market offering in January 2018, net of issuance costs that were paid as of March 31, 2018, and $4.4 million in proceeds from exercises of options for our

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common stock, partially offset by $0.2 million in payments made on the construction financing lease obligation.

Funding Requirements

We expect our expenses to increase in connection with our ongoing activities, particularly as we further advance our current research programs and our preclinical development activities; prepare for and initiate the clinical development and trials for EDIT-101; seek to identify product candidates and additional research programs; initiate preclinical testing and clinical trials for other product candidates we identify and develop; maintain, expand, and protect our intellectual property portfolio, including reimbursing our licensors for expenses related to the intellectual property that we in-license from such licensors; hire additional clinical, quality control, and scientific personnel; and incur additional costs associated with operating as a public company. In addition, if we obtain marketing approval for any product candidate that we identify and develop, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing, and distribution to the extent that such sales, marketing, and distribution are not the responsibility of a collaborator. We do not expect to generate significant recurring revenue unless and until we obtain regulatory approval for and commercialize a product candidate. Furthermore, since 2016 we have incurred, and in future years we expect to continue to incur, significant costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce, or eliminate our research and development programs or future commercialization efforts.

We expect that our existing cash, cash equivalents, and marketable securities at March 31, 2019 and anticipated interest income will enable us to fund our operating expenses and capital expenditure requirements for at least the next 24 months following the date of this Quarterly Report on Form 10-Q. We have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Our future capital requirements will depend on many factors, including:

the scope, progress, results, and costs of drug discovery, preclinical development, laboratory testing, and clinical trials for the product candidates we may develop;

the costs of preparing, filing, and prosecuting patent applications, maintaining and enforcing our intellectual property and proprietary rights, and defending intellectual property‑related claims;

the costs, timing, and outcome of regulatory review of the product candidates we may develop;

the costs of future activities, including product sales, medical affairs, marketing, manufacturing, and distribution, for any product candidates for which we receive regulatory approval;

the success of our collaboration with Juno Therapeutics and our strategic alliance with Allergan;

whether Juno Therapeutics exercises either or both of its options to extend the research program term under our collaboration (each of which would trigger an extension payment to us);

whether Allergan exercises any additional options under our strategic alliance;

our ability to establish and maintain additional collaborations on favorable terms, if at all;

the extent to which we acquire or in‑license other medicines and technologies;

the costs of reimbursing our licensors for the prosecution and maintenance of the patent rights in-licensed by us; and

the costs of operating as a public company.

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Identifying potential product candidates and conducting preclinical studies and clinical trials is a time‑consuming, expensive, and uncertain process that takes many years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, any product candidate that we identify and develop, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of genomic medicines that we do not expect to be commercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interests will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends.

If we raise funds through additional collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, or product candidates or to 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.

Contractual Obligations

The following table summarizes our significant contractual obligations as of payment due date by period at March 31, 2019 (in thousands):


			Less Than						More than
	Total		1 Year		1 to 3 Years		3 to 5 Years		5 Years
Operating lease obligations (1)	$	22,887	$	5,632	$	14,851	$	2,404	$	—
Total	$	22,887	$	5,632	$	14,851	$	2,404	$	—

(1)

Represents future minimum lease payments under our non-cancelable operating leases. The minimum lease payments above exclude our share of the facility operating expenses and other costs that are reimbursable to the landlord under the leases.

During the three months ended March 31, 2019, our costs related to operating lease obligations increased as

compared to such obligations as of December 31, 2018. Other than as described above, during the three months ended March 31, 2019, there were no other material changes to our contractual obligations and commitments described under Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Annual Report.

Off‑Balance Sheet Arrangements

We did not have, during the periods presented, and we do not currently have, any off‑balance sheet arrangements, as defined under applicable SEC rules.

Effects of Inflation

Inflation would generally affect us by increasing our cost of labor and clinical trial costs. We do not believe that inflation had a material effect on our business, financial condition or results of operations during the three months ended March 31, 2019 or 2018.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk related to changes in interest rates. As of March 31, 2019, we had cash and cash equivalents of $157.9 million, primarily held in money market mutual funds, and marketable securities of $184.1 million, primarily consisting of U.S. government-backed securities. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments, including cash equivalents, are in the form, or may be in the form of, money market funds or marketable securities and are or may be invested in U.S. Treasury and U.S. government agency obligations. Due to the short‑term maturities and low risk profiles of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our investments.

While we contract with certain vendors and institutions internationally, substantially all of our total liabilities as of March 31, 2019 were denominated in the United States dollar and we believe that we do not have any material exposure to foreign currency exchange rate risk.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our interim Chief Executive Officer and interim Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure 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 March 31, 2019, our interim Chief Executive Officer and interim Chief 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

We regularly review our system of internal control over financial reporting to ensure we maintain an effective internal control environment. We continue to create new processes and controls as well as improve our existing environment to increase efficiencies. Improvements may include such activities as implementing new, more efficient systems, and consolidating activities. During the quarter ended March 31, 2019, we implemented certain internal controls in connection with our adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842). There were no other changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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. There can be no assurance that any proceedings that result from these third‑party actions will be resolved in our favor. In addition, if they are not resolved in our favor, there can be no assurance that the result will not have a material adverse effect on our business, financial condition, results of operations, or prospects. Certain of our intellectual property rights, including ones licensed to us under our licensing agreements, are subject to, and from time to time may be subject to, priority and validity disputes. For additional information regarding these matters, see “Item 1A. Risk Factors—Risks Related to Our Intellectual Property.” Regardless of outcome, litigation or other legal proceedings can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

Item 1A. Risk Factors.

Our business is subject to numerous risks. The following important factors, among others, could cause our actual results to differ materially from those expressed in forward-looking statements made by us or on our behalf in this Quarterly Report on Form 10-Q and other filings with the Securities and Exchange Commission (the “SEC”), press releases, communications with investors, and oral statements. Actual future results may differ materially from those anticipated in our forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

Risks Related to Our Financial Position and Need for Additional Capital

We have incurred significant losses since inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.

Since inception, we have incurred significant operating losses. Our net losses were $110.0 million, $120.3 million, $97.2 million, and $72.9 million for the years ended December 31, 2018, 2017, 2016 and 2015, respectively. As of March 31, 2019, we had an accumulated deficit of $444.7 million. We have financed our operations primarily through public offerings of our common stock, private placements of our preferred stock, our collaboration with Juno Therapeutics, Inc., a Celgene company that is a wholly-owned subsidiary of Celgene Corporation (“Juno Therapeutics”), and payments under our strategic alliance with Allergan Pharmaceuticals International Limited (“Allergan”). We have devoted substantially all of our efforts to research and development. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. The net losses we incur may fluctuate significantly from quarter to quarter. We anticipate that our expenses will increase substantially if and as we:

continue our current research programs and our preclinical development of product candidates from our current research programs;

seek to identify additional research programs and additional product candidates;

initiate preclinical testing and clinical trials for any product candidates we identify and develop;

prepare for and initiate clinical development with Allergan of EDIT-101 to treat Leber congenital amaurosis (“LCA”) 10 (“LCA10”);

maintain, expand, and protect our intellectual property portfolio and provide reimbursement of third‑party expenses related to our patent portfolio;

seek marketing approvals for any of our product candidates that successfully complete clinical trials;

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ultimately establish a sales, marketing, and distribution infrastructure to commercialize any medicines for which we may obtain marketing approval;

further develop our genome editing platform;

hire additional clinical, quality control, and scientific personnel;

add operational, financial, and management information systems and personnel, including personnel to support our product development;

acquire or in‑license other medicines and technologies;

validate a commercial‑scale current Good Manufacturing Practices (“cGMP”) manufacturing facility; and

continue to operate as a public company.

We have only recently begun preparing for the initiation of clinical development with Allergan of EDIT-101 and expect that it will be many years, if ever, before we have a product candidate ready for commercialization. To become and remain profitable, we must develop and eventually commercialize a medicine or medicines with significant market potential. This will require us to be successful in a range of challenging activities, including identifying product candidates, completing preclinical testing and clinical trials of product candidates, obtaining marketing approval for these product candidates, manufacturing, marketing, and selling those medicines for which we may obtain marketing approval, and satisfying any post‑marketing requirements. We may never succeed in these activities and, even if we do, may never generate revenues that are significant or large enough to achieve profitability. Other than EDIT-101, we are currently only in the preclinical testing stages for our most advanced research programs. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, maintain our research and development efforts, expand our business, or continue our operations. A decline in the value of our company could cause our stockholders to lose all or part of their investments in us.

We will need substantial additional funding. If we are unable to raise capital when needed, we would be forced to delay, reduce, or eliminate our research and product development programs or commercialization efforts.

We expect our expenses to increase in connection with our ongoing activities, particularly as we identify, continue the research and development of, initiate clinical trials of, and seek marketing approval for, product candidates. In addition, if we obtain marketing approval for any product candidates we may develop, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing, and distribution to the extent that such sales, marketing, manufacturing, and distribution are not the responsibility of a collaborator. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce, or eliminate our research and product development programs or future commercialization efforts.

We expect that our existing cash, cash equivalents, and marketable securities at March 31, 2019 and anticipated interest income will enable us to fund our operating expenses and capital expenditure requirements for at least the next 24 months following the date of this Quarterly Report on Form 10-Q. Our future capital requirements will depend on many factors, including:

the scope, progress, results, and costs of drug discovery, preclinical development, laboratory testing, and clinical or natural history study trials for the product candidates we may develop;

the costs of preparing for and initiating the clinical development with Allergan of EDIT-101 to treat LCA10;