NGM BIOPHARMACEUTICALS INC - Quarter Report: 2019 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2019

OR

For the transition period from _______ to _______

Commission File Number: 001-38853

NGM BIOPHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in its Charter)

Registrant’s telephone number, including area code: (650) 243-5555

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

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

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

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

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  ☒

As of May 10, 2019, the registrant had 66,021,863 shares of common stock, $0.001 par value per share, outstanding.

Table of Contents

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

NGM BIOPHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In Thousands, Except Share and Per Share Amounts)

*The condensed consolidated balance sheet as of December 31, 2018 has been derived from the audited financial statements as of that date.

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

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NGM BIOPHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In Thousands, Except Share and Per Share Amounts)

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

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NGM BIOPHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(In Thousands)

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

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NGM BIOPHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

(Unaudited)

(In Thousands)

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

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NGM BIOPHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In Thousands)

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

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NGM BIOPHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDSENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Description of Business

NGM Biopharmaceuticals, Inc. and its wholly owned subsidiary (collectively referred to as the “Company”) is a research-driven, clinical-stage biopharmaceutical company committed to discovering and developing first-in-class therapeutics for major diseases with an initial focus on cardio-metabolic and liver diseases. The Company’s current portfolio is composed of seven product candidates (NGM282, NGM313, NGM386, NGM395, NGM217, NGM120 and NGM621) focused on non-alcoholic steatohepatitis, or NASH, diabetes, obesity, oncology and age-related macular degeneration, or AMD.

The Company was incorporated in Delaware on December 20, 2007 and its headquarters are located at 333 Oyster Point Blvd., South San Francisco, California 94080. The Company operates in one business segment.  

2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and include the consolidated accounts of the Company and its subsidiary. During 2012, the Company established a wholly owned foreign subsidiary in Australia. All intercompany balances and transactions have been eliminated in consolidation.

The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2018, included in the Company’s final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on April 4, 2019 (the Prospectus).

Stock Split

On March 22, 2019, the Company filed an amendment to the Company’s amended and restated certificate of incorporation to effect a reverse split of shares of the Company’s common stock on a two-for-one basis (the Reverse Stock Split). In connection with the Reverse Stock Split, the conversion ratio for the Company’s outstanding convertible preferred stock was proportionately adjusted such that the common stock issuable upon conversion of such preferred stock was decreased in proportion to the Reverse Stock Split. The par value of the common stock was not adjusted as a result of the Reverse Stock Split. All references to common stock, options to purchase common stock, early exercised options, share data, per share data, convertible preferred stock (to the extent presented on an as-converted to common stock basis) and related information contained in these condensed consolidated financial statements have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented.

Initial Public Offering

The Company filed its S-1 on September 28, 2018 and the first amendment to the S-1 on March 25, 2019.  The Company disclosed 7,666,667 shares of its common stock would be registered, which included 1,000,000 shares of its common stock issued pursuant to the over-allotment option granted to the underwriters, at an estimated price range to the public of $14.00 to $16.00 per share. It also announced the Company had applied to list its stock on the Nasdaq Global Select Market under the ticker symbol “NGM”. Refer to Note 12 for more information on the Company’s initial public offering (“IPO”).

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses. Specific accounts that require management estimates include, but are not limited to, stock-based compensation, research and development periods under multiple element agreements, the valuation of convertible preferred stock warrants, the fair value of convertible preferred and common stock, contract manufacturing accruals, clinical trial accruals and revenue in accordance with Accounting Standards Codification 606 (“ASC 606”). Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates.

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Need for Additional Capital

Since inception, the Company has incurred net losses and negative cash flow from operations. During the three months ended March 31, 2019 and 2018, the Company incurred net losses of $8.3 million and $3.9 million, respectively. At March 31, 2019, the Company had an accumulated deficit of $161.6 million and does not expect to experience positive cash flows from operations in the near future. The Company had $193.4 million of cash, cash equivalents and marketable securities at March 31, 2019. To fully implement the Company’s business plan and fund its operations, the Company intends to raise capital through the issuance of equity securities or debt financings, collaborations, strategic alliances and licensing arrangements, government or other third-party funding or a combination of these.  However, if capital is not available at adequate levels, the Company will need to reevaluate its operating plan and may be required to delay the development of its product candidates.  The Company expects that its cash and cash equivalents and investments will be sufficient to fund its operations for a period of at least one year from the date the unaudited condensed financial statements are filed with the Securities and Exchange Commission (“SEC”).

Deferred Initial Public Offering Costs

Costs incurred in connection with the IPO primarily consist of direct incremental legal, printing and accounting fees. Initial public offering costs are capitalized as incurred and will be offset against proceeds upon consummation of this offering. As of March 31, 2019 and December 31, 2018, there were $3.7 million and $2.3 million, respectively, of deferred initial public offering costs included on the accompanying condensed consolidated balance sheets.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, receivables from collaborations, the related party receivables from collaboration, and other current assets and liabilities approximate their respective fair values because of the short-term nature of those instruments. Fair value accounting is applied to the convertible preferred stock warrant liabilities that are recorded at their estimated fair value in the condensed consolidated financial statements.

Cash and Cash Equivalents

Cash and cash equivalents are stated at fair value. Cash equivalents relate to securities having an original maturity of three months or less at the time of purchase. The Company limits its credit risk associated with cash and cash equivalents by placing its investments with a bank it believes is highly creditworthy and with highly rated money market funds. As of March 31, 2019 and December 31, 2018, cash and cash equivalents consisted of bank deposits and investments in money market funds.

Marketable Securities

The Company determines the appropriate classification of its marketable securities at the time of purchase and re-evaluates such designation at each balance sheet date. All of the Company’s securities are considered as available-for-sale and carried at estimated fair values and reported in cash equivalents, short-term marketable securities or long-term marketable securities. Unrealized gains and losses on available-for-sale securities are excluded from net loss and reported in accumulated other comprehensive loss as a separate component of stockholders’ deficit. Other income (expense), net, includes interest, amortization of purchase premiums and accretion of purchase discounts, realized gains and losses on sales of securities and other-than-temporary declines in the fair value of securities, if any. The cost of securities sold is based on the specific identification method.

The Company regularly reviews all of its investments for other-than-temporary declines in fair value. This review includes the consideration of the cause of the impairment, including the creditworthiness of the security issuers, the number of securities in an unrealized loss position, the severity and duration of the unrealized losses, whether the Company has the intent to sell the securities and whether it is more likely than not that the Company will be required to sell the securities before the recovery of their amortized cost basis. When the Company determines that the decline in fair value of an investment is below its carrying value and this decline is other-than-temporary, the Company reduces the carrying value of the security it holds and records a loss for the amount of such decline.  

Restricted Cash

As of March 31, 2019 and December 31, 2018, the Company had $2.2 million of restricted cash classified as a non-current asset. The restricted cash serves as collateral for a facility lease entered into in 2015 (Note 7). Restricted cash is classified as a current asset if the collateral will be returned in less than 12 months.

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Concentration of Credit and Other Risks

Cash and cash equivalents and marketable securities from the Company’s available-for-sale and marketable security portfolio potentially subject the Company to concentrations of credit risk. The Company invests in money market funds and marketable securities through custodial relationships with major U.S. and Australian banks. Under its investment policy, the Company limits amounts invested in such securities by credit rating, maturity, industry group, investment type and issuer, except for securities issued by the U.S. government.

Receivables and related party receivables from collaborations (Notes 5 and 6) are typically unsecured. Accordingly, the Company may be exposed to credit risk generally associated with its current collaboration agreement (“Collaboration Agreement”) with Merck Sharp & Dohme Corp. (“Merck”) and any future collaboration agreements with other collaboration partners. To date, the Company has not experienced any losses related to these receivables.

Merck accounted for 100% of the Company’s revenue for the three months ended March 31, 2019 and 2018.

Property and Equipment, Net

Property and equipment is recorded at cost and consists of computer equipment, laboratory equipment and office furniture and leasehold improvements. Maintenance and repairs, and training on the use of equipment, are charged to expense as incurred. Costs that improve assets or extend their economic lives are capitalized. Depreciation is recognized using the straight-line method based on an estimated useful life of the asset, which is as follows:

Leases

The Company’s lease agreement for its laboratory and office facilities are classified as operating leases. Rent expense is recognized on a straight-line basis over the term of the lease. Incentives granted under the Company’s facilities leases, including allowances to fund leasehold improvements and rent holidays, are capitalized and are recognized as reductions to rental expense on a straight-line basis over the term of the lease.

Impairment of Long-Lived Assets

Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. As of March 31, 2019 and December 31, 2018, no revision to the remaining useful lives or write-down of long-lived assets was required.

Income Taxes

Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and the operating loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Deferred tax assets and liabilities are measured at the balance sheet date using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period such tax rate changes are enacted.

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Convertible Preferred Stock Warrant

Freestanding warrants to purchase the Company’s convertible preferred stock are classified as a liability on the condensed consolidated balance sheet at December 31, 2018. The convertible preferred stock warrants are recorded as a liability and subject to remeasurement at each balance sheet date, with changes in estimated fair value recognized as a component of total other income (expense), net in the Company’s consolidated statements of operations, because the underlying shares of convertible preferred stock are contingently redeemable, which, therefore, may obligate the Company to transfer assets at some point in the future to settle these warrants. On February 3, 2019 all convertible preferred stock warrants were automatically exercised on a net basis into 16,380 shares of Series A convertible preferred stock at a fair value of $0.2 million.

Revenue Recognition

On January 1, 2019, the Company adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers, and subsequent amendments (ASC 606), using the modified retrospective transition method applied to those contracts that were not completed as of January 1, 2019. ASC 606 supersedes all prior revenue recognition guidance. Results for operating periods beginning after January 1, 2019 are presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with previous accounting rules under Accounting Standards Codification Topic 605, Revenue Recognition (“ASC 605”).

The core principle in ASC 606 requires an entity to recognize revenue upon the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company applies the following five-step revenue recognition model outlined in ASC 606 to adhere to this core principle: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the Company satisfies a performance obligation.

All of the Company’s revenue to date has been generated from its collaboration agreements. The terms of these agreements generally require the Company to provide (i) license options for its compounds, (ii) research and development services, and (iii) non-mandatory services in connection with participation in research or steering committees. Payments received under these arrangements may include non-refundable upfront license fees, partial or complete reimbursement of research and development costs, contingent consideration payments based on the achievement of defined collaboration objectives, and royalties on sales of commercialized products. In some agreements, the collaboration partner is solely responsible for meeting defined objectives that trigger contingent or royalty payments. Often the partner only pursues such objectives subsequent to exercising an optional license on compounds identified as a result of the research and development services performed under the Collaboration Agreement.

The Company assesses whether the promises in its arrangements, including any options provided to the customer, are considered distinct performance obligations that should be accounted for separately. Judgment is required to determine whether the license to a compound is distinct from research and development services or participation in steering committees, as well as whether options create material rights in the contract.

The transaction price in each arrangement is generally comprised of a non-refundable upfront fee and variable consideration related to the performance of research and development services. The Company typically submits a budget for the research and development services to the customer in advance of performing the services. The transaction price is allocated to the identified performance obligations based on the standalone selling price (“SSP”) of each distinct performance obligation. Judgment is required to determine SSP. In instances where SSP is not directly observable, such as when a license or service is not sold separately, SSP is determined using information that may include market conditions and other observable inputs. The Company utilizes judgment to assess the nature of its performance obligations to determine whether they are satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress toward completion. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

The Company’s collaboration agreements may include contingent payments related to specified development and regulatory milestones or contingent payments for royalties based on sales of a commercialized product. Milestones can be achieved for such activities in connection with progress in clinical trials, regulatory filings in various geographical markets and marketing approvals from regulatory authorities. Sales-based royalties are generally related to the volume of annual sales of a commercialized product. At the inception of each agreement that includes such payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in

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the transaction price by using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s or its customer’s control, such as those related to regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation based on a relative SSP basis. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of each such milestone and any related constraint and, if necessary, adjusts its estimate of the overall transaction price. Pursuant to the guidance in ASC 606, sales-based royalties are not included in the transaction price. Instead, royalties are recognized at the later of when the performance obligation is satisfied or partially satisfied, or when the sale that gives rise to the royalty occurs.

Prior to the adoption of ASC 606, the Company’s revenue from collaboration agreements was recognized when the Company determined that persuasive evidence of an arrangement exists, services had been rendered, the price was fixed or determinable, and collectability was reasonably assured. The Company would record amounts received prior to satisfying the above revenue recognition criteria as deferred revenue until all applicable revenue recognition criteria were met. Revenue allocated to research activities was generally recognized in the period the services were performed, and revenue allocated to licenses was generally recognized on a straight-line basis over the contractual term. Allocations to non-contingent elements were based on the relative selling price of each element using vendor-specific objective evidence or third-party evidence, where available. In the absence of either of these measures, the Company used the best estimate of selling price for that deliverable.

The most significant change to the Company’s policies upon the adoption of ASC 606 is the estimation of an arrangement’s total transaction price, which would include any variable consideration and the recognition of that transaction price based on a cost-based input method that requires significant estimates to determine, at each reporting period, the percentage of completion based on the estimated total effort required to complete the project and the total transaction price.  Given the differences in revenue recognition policies, the revenue recognized in prior years is not strictly comparable to revenue recorded in the quarter ending March 31, 2019 or in future periods (see Recently Adopted Accounting Pronouncements).

Research and Development

Research and development costs are expensed as incurred. Research and development expenses primarily include salaries and benefits for medical, clinical, quality, preclinical, manufacturing and research personnel, costs related to research activities, preclinical studies, clinical trials, drug manufacturing expenses and allocated overhead and facility occupancy costs. The Company accounts for non-refundable advance payments for goods or services that will be used in future research and development activities as expenses when the goods have been received or when the service has been performed rather than when the payment is made.

Clinical trial costs are a component of research and development expenses. The Company expenses costs for its clinical trial activities performed by third parties, including clinical research organizations and other service providers, as they are incurred, based upon estimates of the work completed over the life of the individual study in accordance with associated agreements. The Company uses information it receives from internal personnel and outside service providers to estimate the clinical trial costs incurred.

Stock-Based Compensation

The Company values stock-based payments to employees on the grant date of each award and recognizes the estimated fair value of such awards over the period during which the employee is required to provide service in exchange for the award, which is generally the vesting period of each award. Stock-based payments to consultants are subject to periodic remeasurement over their vesting terms. Stock-based payments are valued using the Black-Scholes option-pricing model. Because non-cash stock-based compensation expense is based on awards ultimately expected to vest, it is reduced by an estimate for future forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from estimates.

Foreign Currency Transactions

The functional currency of NGM Biopharmaceuticals Australia Pty Ltd., a wholly owned subsidiary, is the U.S. dollar. Accordingly, all monetary assets and liabilities of the subsidiary are remeasured into U.S. dollars at the current period-end exchange rates and non-monetary assets are remeasured using historical exchange rates. Income and expense elements

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are remeasured to U.S. dollars using the average exchange rates in effect during the period. Remeasurement gains and losses are recorded as other income (expense).

The Company is subject to foreign currency risk with respect to its clinical and manufacturing contracts denominated in currencies other than the U.S. dollar, primarily British Pounds, Swiss Francs and the Euro. Payments on contracts denominated in foreign currencies are made at the spot rate on the day of payment. Changes in the exchange rate between billing dates and payment dates are recorded to other income (expense), net on the condensed consolidated statements of operations.

Comprehensive Loss

Comprehensive loss is comprised of net loss and certain changes in equity that are excluded from net loss. For the three months ended March 31, 2019 and 2018, the difference between comprehensive loss and net loss consisted of changes in net unrealized gain on marketable securities of $0.2 million, and changes in net unrealized loss on marketable securities of $0.2 million, respectively.

Net Loss per Common Share

Basic net loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, less shares subject to repurchase, and excludes any dilutive effects of stock-based awards and warrants. Diluted net loss per common share is computed giving effect to all potentially dilutive common shares, including common stock issuable upon exercise of stock options, and unvested restricted common stock and stock units. As the Company had net losses for the three months ended March 31, 2019 and 2018, all potential common shares were determined to be anti-dilutive.

The following table sets forth the computation of net loss per common share (in thousands, except share and per share):

Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows:

Segment and Geographical Information

The Company operates in one segment. Substantially all of the Company’s long-lived assets are based in the United States. Long-lived assets are primarily comprised of property and equipment. For the three months ended March 31, 2019 and 2018, the Company’s revenues were entirely within the United States based upon the location of the customers.

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Recent Accounting Pronouncements

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

Recently Adopted Accounting Pronouncements

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230)—Restricted Cash, to clarify the presentation of the change in restricted cash on the statement of cash flows. The new standard clarifies the FASB’s position that changes to restricted cash are not reflective of an entity’s operating, investing or financing activities, and therefore should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2018. The Company elected to early adopt this ASU using the retrospective transition method to each period presented having no effect within the classification of its condensed consolidated statements of cash flows due to there being no changes in the Company’s restricted cash balances for any of the years presented.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (ASC 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 replaced existing revenue recognition guidance and permits the use of either the full retrospective or modified retrospective transition method. Additionally, in March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (ASC 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations in ASU No. 2014-09. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (ASC 606): Identifying Performance Obligations and Licensing, which clarifies certain aspects of identifying performance obligations and licensing implementation guidance. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (ASC 606): Narrow-Scope Improvements and Practical Expedients, which relates to disclosures of remaining performance obligations, as well as other amendments to guidance on collectability, non-cash consideration and the presentation of sales and other similar taxes collected from customers. For the Company, these standards (collectively ASC 606) have the same effective date and transition date of January 1, 2019.

The Company adopted ASC 606 on January 1, 2019, using the modified retrospective transition method and, therefore, evaluated its contract with Merck under ASC 606. The Company recorded adjustments upon the adoption of ASC 606 as a result of the Company concluding that licenses and research and development services promised in the agreement are a single combined performance obligation. This determination impacts the timing of recognition of both the non-refundable upfront fee and the payments related to the services. Under previous guidance, the upfront fee was recognized ratably over the contract term, and fees related to the services were recognized in the period the services were performed. Under ASC 606, revenue for the single performance obligation is recognized over time using a cost-based input method to measure progress toward completion of the single combined performance obligation. The adoption of ASC 606 impacted the Company’s contract liabilities and accumulated deficit balance as of January 1, 2019 as follows (in thousands):

The impact of the adoption of ASC 606 on the condensed consolidated balance sheet as of March 31, 2019, condensed consolidated statement of operations and cash flows for the three months ended March 31, 2019 was as follows (in thousands):

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Recent Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which increases lease transparency and comparability among organizations. Under the new standard, lessees will be required to recognize all assets and liabilities arising from leases on the balance sheet, with the exception of leases with a term of 12 months or less, which permits a lessee to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities. In March 2018, the FASB approved an alternative transition method to the modified retrospective approach, which eliminates the requirement to restate prior period financial statements and allows the cumulative effect of the retrospective allocation to be recorded as an adjustment to the opening balance of retained earnings at the date of adoption. The Company is currently assessing the timing of adoption and the impact that the adoption of ASU 2016-02 will have on its condensed consolidated financial statements and related disclosures.

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Non-Employee Share-Based Payment Accounting as part of the FASB simplification initiative. The new standard expands the scope of Topic 718, allowing the Company to apply the requirements of Topic 718 to certain non-employee awards to acquire goods and services from non-employees. This ASU will be effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is currently assessing the timing of adoption and the impact that the adoption of ASU 2018-07 will have on its condensed consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement as part of the FASB’s disclosure framework project. This ASU modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement by removing the requirement to disclose amounts of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation process for Level 3 fair value measurements. This ASU also modifies existing disclosure requirements by clarifying that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date, and it adds required disclosures for the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU will be effective for the Company for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently assessing the impact of this ASU on its condensed consolidated financial statements.

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (ASC 808): Clarifying the Interaction between ASC 808 and ASC 606, which clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when then collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all the guidance in ASC 606 should be applied, including recognition, measurement, presentation, and disclosure requirements. This ASU adds unit-of-account guidance in ASC 808 to align with the guidance in ASC 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of ASC 606, and requires that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction

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together with revenue recognized under ASC 606 is precluded if the collaborative arrangement participant is not a customer. This ASU will be effective for the Company for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The Company is currently assessing the impact of this ASU on its condensed consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The new guidance amended guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For available for sale debt securities, credit losses will be presented as an allowance rather than as a write-down. This standard is effective for the Company’s fiscal year beginning after December 31, 2020. Early adoption is permitted for all entities. The Company is currently assessing the timing of adoption and the impact that the adoption of ASU 2016-13 will have on its condensed consolidated financial statements and related disclosures.

3. Fair Value Measurements

Financial assets and liabilities are recorded at fair value. The carrying amount of certain financial instruments, including cash and cash equivalents, receivable from collaboration, related party receivable from collaboration and other current assets and liabilities approximate fair value due to their relatively short maturities. Assets and liabilities recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value accounting is applied to the convertible preferred stock warrant liabilities that are recorded at their estimated fair value in the condensed consolidated financial statements.

The FASB defined fair value as the exchange price that would be received for an asset or paid to transfer a liability, or an exit price, in the principal or most advantageous market for that asset or liability in an orderly transaction between market participants on the measurement date, and established a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. The FASB set forth three levels of inputs that may be used to measure fair value:

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

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

The Company estimates the fair values of investments in corporate agency bond securities, commercial paper and government agencies securities using level 2 inputs, by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities, prepayment/default projections based on historical data and other observable inputs.

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Cash equivalents and marketable securities, all of which are classified as available-for-sale securities consisted of the following (in thousands):

Cash and cash equivalents in the table above excludes cash on deposit with banks of $10.5 million and $21.9 million as of March 31, 2019 and December 31, 2018, respectively.

As of March 31, 2019 and December 31, 2018, the Company’s marketable securities had remaining contractual maturities less than one year.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table sets forth the estimated fair value of the Company’s financial assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018 (in thousands):

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There were no transfers of assets or liabilities between the fair value measurement levels during the three months ended March 31, 2019 and year ended December 31, 2018.

The following table provides a summary of changes in the fair value of the Company’s convertible preferred stock warrant liability (in thousands):

The original estimated fair value of the convertible preferred stock warrants of approximately $28,000, issued in February 2009 in conjunction with entering into a loan and security agreement with a lender, was measured upon issuance using the Black-Scholes option-pricing model. The Company recorded no expense for the change in estimated fair value of the warrant liabilities for the three months ended March 31, 2019 and 2018, respectively.  During the three months ended March 31, 2019 the warrant were automatically exercised on a net basis into shares of Series A preferred stock.

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4. Balance Sheet Components

Property and Equipment

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

Depreciation expense was approximately $2.0 million and $1.7 million for the three months ended March 31, 2019 and 2018, respectively.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

5. Research Collaboration and License Agreements

Merck

In February 2015, the Company entered into the Collaboration Agreement with Merck, covering the discovery, development and commercialization of novel therapies across a range of therapeutic areas. Pursuant to this agreement, the Company received an upfront payment of $94.0 million in April 2015. Concurrent with entry into the Collaboration Agreement, the parties entered into a Stock Purchase Agreement in which Merck agreed to purchase 8,833,333 shares of Series E convertible preferred stock at a price of $12.00 per share, resulting in net proceeds of approximately $106.0 million. The Company considered the ASC 606 criteria for combining contracts and determined that the Collaboration Agreement and Stock Purchase Agreement should be combined into a single contract. The Company accounted for the overall agreement based on the fair values of the assets and services exchanged, resulting in $106.0 million allocated to the equity component and $94.0 million allocated to the revenue components.

The Collaboration Agreement became effective in March 2015 and has a non-cancellable five-year term running through March 16, 2020. The agreement included an exclusive worldwide license to our GDF15 receptor agonist program. On March 1, 2019, Merck notified us of its intent to terminate its license to the GDF15 receptor agonist program, effective May 31, 2019. The collaboration also includes a broad, multiyear drug discovery and early development program financially supported by Merck but scientifically directed by the Company with input from Merck. The Company determines the scientific direction and areas of therapeutic interest, with input from Merck, and is primarily responsible for the conduct of all research, preclinical and early clinical development activities, through human proof of concept. The Company makes the final determinations as to which compounds to advance into and through initial clinical trials, which to progress into human proof-of-concept studies and the design of any such studies, with input from Merck through various governance committees. The Company may terminate its participation in any of the governance committees by providing written notice to Merck of its intention to disband and no longer participate. Merck will fund both the internal and external costs of the

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Company’s research and early development activities up to $75.0 million each year of the initial five-year term and during the extended two year research period.

Upon completion of a human proof-of-concept study for a particular compound, regardless of the results of such study, Merck has the one-time option, at a cost of $20.0 million, to obtain an exclusive, worldwide license, on specified terms, to that compound, as well as to other molecules that are directed against the same target in the same manner (“Optioned Program”). If Merck exercises its option, Merck will be responsible, at its own cost, for any further development and commercialization activities for compounds within that Optioned Program. Upon such exercise by Merck, the Company in turn has the right, at the start of the first Phase 3 clinical study for that compound, to elect to participate in a worldwide cost and profit share with Merck, as well as the option to co-detail the compound in the United States, or the Company can elect instead to receive milestones and royalties from Merck based on Merck’s further development and commercialization of the compound. If the Company elects to participate in the cost and profit share, subject to certain limitations, Merck will provide the Company with financial assistance in the form of interest bearing advances of the Company’s share of the overall development costs, which Merck will recoup from the Company’s share of any profit ultimately resulting from sales of the compound and other compounds that reach commercialization. If the Company does not opt in to the cost and profit sharing option, then the Company is eligible to receive development and regulatory milestone payments upon the achievement of specific clinical development or regulatory events with respect to the licensed compound indications in the United States, the European Union and Japan of up to an aggregate of $449.0 million. The Company may also receive commercial milestone payments up to $125.0 million and royalty payments of varying percentages based on the achievement of certain levels of net sales.

Under the Collaboration Agreement, the Company also granted Merck a worldwide, exclusive right to conduct research and development on small molecule compounds generated by Merck that have specified activity against any target that the Company is researching or developing under the research phase and about which the Company has generated unique biological insights (Small Molecule Program). If Merck ultimately does not exercise its license option to the compound the Company has taken through a human proof-of-concept study that is directed to any such target, Merck’s research license for its own small molecule program will become non-exclusive, but it will retain an exclusive license to any small molecule compounds that it has, as of that time, identified and developed. Merck has sole responsibility for the research and development of any of these small molecule compounds, at its own cost. The Company is eligible to receive milestone and royalty payments on small molecule compounds that are developed by Merck under the Company’s license, in some cases at the same rates as those the Company is eligible to receive from Merck for a licensed program originating from the Company’s own research and development efforts, provided that, but for use of the Company’s proprietary information, Merck would not have discovered such small molecule compounds. However, the Company will not have the option to cost and profit share or the option to co-detail those small molecule products.

The research and early development program has an initial term of five years, until March 17, 2020. On March 15, 2019, Merck exercised its option to extend the research phase of the collaboration through March 16, 2022.  In connection with this extension, Merck agreed to continue to fund the Company’s research and development efforts during the two-year extension period at the same levels as during the initial term and, in lieu of a $20.0 million extension fee that would have otherwise been payable to the Company, Merck will make additional payments totaling up to $20.0 million in support of the Company’s research and development program activities across 2021 and the first quarter of 2022. Under the terms of the agreement, Merck is required to pay a $20.0 million extension fee if it elects to exercise its second option to extend the research phase of the collaboration through March 16, 2024.

At the end of the research phase, Merck has the right to either require the Company to continue to conduct research and development activities with respect to certain of the then-existing programs for up to three years, which we call the tail period, by agreeing to pay all its internal and external costs for related work, or to take over such selected programs and conduct such research and development activities itself, at its own cost.

The Company evaluated the Collaboration Agreement with Merck under ASC 606 as of January 1, 2019 and March 31, 2019. The Company identified the following promised goods or services at the inception of the Collaboration Arrangement: (i) license to GDF15 receptor agonist program; (ii) license to pursue research and development (“R&D”) and commercialization of small molecule compounds; (iii) performance of R&D services for five years; (iv) two options to extend performance of the R&D services, each for two additional years.; and (v) options to obtain licenses to additional compounds after proof of concept trials. The Company determined the GDF15 receptor agonist program license and small molecule program license are not distinct from the R&D services, resulting in these items being combined into a single performance obligation.

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The Company considered whether the options created material rights in the contract and concluded that the fee attached to the exercise of such options approximated the standalone selling price of the promised goods or services included in the options. Therefore, the options do not give rise to material rights, are not performance obligations in the Collaboration Agreement and, if and when exercised, will be accounted for as separate arrangements under ASC 606.

The transaction price consists of the $94.0 million upfront fee and the potential funding amounts of up to $75.0 million per year for each of the first five years of the Collaboration Agreement. No milestones or other forms of consideration related to the GDF15 license are included in the transaction price as those amounts are contingent upon Merck exercising an option for licenses on additional compounds and would, therefore, be pursuant to separate arrangements and are not part of the Collaboration Agreement estimated transaction price.

Additionally, if a separate arrangement is created by the exercise of an option, such amounts would then be contingent on events outside of either party’s control, such as products proving to be commercially viable and governmental agencies granting regulatory approval. Such contingencies and uncertainties result in the amounts being constrained and withheld from inclusion in the estimated transaction price of a separate arrangement. Consequently, the estimated transaction price related to the Collaboration Agreement is comprised of the up-front payment and the ongoing R&D reimbursements.

Any fees associated with options, including upfront fees, funding fees, milestones, etc. are not included in the transaction price as they are associated with options that are not material rights and, thus, are not performance obligations within the Collaboration Agreement. This includes the $20.0 million license fee associated with Merck’s exercise of its option on NGM313. That amount was recognized in the period of exercise (i.e., Q4 2018) as the Company has no further obligations related to that license. Also, in November 2018, Merck exercised its option on the NGM313 compound and paid the Company the $20.0 million option exercise fee. The Phase 3 clinical study for NGM313 has not begun, and the Company has not made an election as to whether it will participate in cost and profit share or receive milestone and royalty payments. The amounts do not impact the estimated transaction price associated with the single performance obligation identified in the Collaboration Agreement.

As there is only one performance obligation in the Collaboration Agreement, the transaction price was allocated entirely to that performance obligation. The Company uses a cost-based input method to measure proportional performance and to calculate the corresponding amount of revenue to recognize. The Company believes this is the best measure of progress because other measures do not reflect how the Company transfers its performance obligation to Merck. In applying the cost-based input measure of revenue recognition, the Company measures actual costs incurred relative to budgeted costs to fulfill the combined performance obligation. These costs consist of full-time equivalent (“FTE”) hours plus allowable external (third-party) costs incurred. Revenue is recognized based on actual costs incurred as a percentage of total budgeted costs as the Company completes its performance obligation.

On March 1, 2019, Merck notified the Company of its intent to terminate the GDF15 license. The license termination is effective as of May 31, 2019. The Collaboration Agreement R&D services are not affected by the GDF15 receptor agonist program license termination and are expected to continue through the remainder of the initial research program term (through March 2020).

As of March 31, 2019 and December 31, 2018, deferred revenue related to the single performance obligation in the Collaboration Agreement was $22.0 million and $23.0 million, respectively. Additionally, of the amount recognized for the adoption of ASC 606 in the reporting period ended March 31, 2019, $6.2 million was in deferred revenue at the end of the prior reporting period. As of December 31, 2018, $3.7 million was due from Merck under the Collaboration Agreement. To date, the Company has recognized revenue of approximately $292.3 million related to the single performance obligation in the Collaboration Agreement.

In connection with the Series E convertible preferred stock purchase agreement, the Company and Merck entered into an agreement whereby Merck agreed to purchase 4,121,683 shares of our common stock in a separate private placement concurrent with the completion of the Company’s IPO at a price per share equal to the public offering price of $16.00, resulting in Merck owning approximately 19.9% of our outstanding shares of common stock following the completion of the IPO. In addition, during the period that ends on the earlier of the end of the initial five-year research term, termination of the Collaboration Agreement or the date on which Merck’s ownership of the Company’s securities drops below 5%, Merck has agreed to vote its shares in favor of the Company’s nominees to the board of directors, increases in the authorized capital stock of the company and amendments to the Company’s equity plans approved by the board of directors, in each case as recommended by the chairman of the Company’s board of directors. Merck has also

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agreed, during the period of the initial five-year research phase, not to sell any of its shares of the Company’s capital stock (subject to certain limited exceptions).

The Company is also eligible to receive additional payments specific to Merck opting into an Optioned Program. Except for the GDF15 program, each Optioned Program is eligible to receive a one-time payment of $20.0 million upon Merck’s exercise of its one-time option to obtain an exclusive, worldwide license to a compound following its completion of a human proof-of-concept study. In addition, if the Company does not opt in to the cost and profit sharing option, then the Company is eligible to receive an aggregate of $449.0 million in milestone payments, of which $77.7 million relates to the potential achievement of specific clinical development events and $371.3 million relates to the potential achievement of certain regulatory events with respect to the licensed compounds for the first three indications in the United States, the European Union and Japan.

A break out of the milestone payments in connection with the potential achievement of certain clinical development events is as follows (in thousands):

A breakout of the milestone payments in connection with the potential achievement of certain regulatory events for each of the three indications, for each of the three geographic areas, is as follows (in thousands):

Summary of Collaboration Revenue

The Company recognized revenue from its collaboration and license agreements as follows (in thousands):

The Company recognized collaboration and license revenue under the Collaboration Agreement of $25.6 million for the three months ended March 31, 2019, of which $5.7 million was recognized from the upfront license fee by applying the cost-based input measure of revenue recognition. The Company recognized collaboration and license revenue under the Collaboration Agreement of $18.6 million for the three months ended March 31, 2018, of which $4.7 million was amortization of upfront license fee and the balance was for research and development services reimbursed by Merck provided under the Collaboration Agreement.

The Company is also eligible to receive commercial milestone payments of up to $125.0 million payable for each licensed product. In addition, the Company is eligible to receive royalties at ascending low-double digit to mid-teen percentage rates, depending on the level of net sales Merck achieves worldwide for each licensed compound.

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Contract Assets and Liabilities

Changes in contract liabilities under ASC 606 were as follows (in thousands):

There were no contract assets for all the periods presented.

6. Related Party Transactions

Revenues from related parties refer to the Collaboration Agreement with Merck. The Company recognized related party revenue of $25.6 million and $18.6 million for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019 and December 31, 2018, the Company had deferred revenue from related party collaboration agreements of $22.0 million and $23.0 million, respectively.

7. Commitments and Contingencies

Operating Lease and Lease Guarantee

In September 2009, the Company entered into an operating lease for a corporate office space and laboratory facility at 630 Gateway Blvd, in South San Francisco, California (630 Gateway) for approximately 50,000 square feet, as amended in June 2014 (2014 Lease Amendment), which expires in November 2020. The 2014 Lease Amendment provided for tenant improvement allowances of $0.8 million. The 2014 Lease Amendment contains scheduled rent increases over the lease term and has an option for the Company to extend the lease for an additional three-year term.

In December 2015, the Company entered into a new operating lease for its corporate office space and laboratory facility at 333 Oyster Point Blvd, South San Francisco, California (333 Oyster Point) for approximately 122,000 square feet that expires in December 2023. The lease provided a tenant improvement allowance of $15.2 million that the Company used in 2016 towards $22.3 million in total leasehold improvements that are amortized over the lease term of seven years.

The 333 Oyster Point lease agreement requires a letter of credit in the amount of $2.3 million as a security deposit to the lease, which the Company has recorded as long-term restricted cash. The Company has the right to reduce the letter of credit amount by $0.4 million on each of the 3rd anniversary and 4th anniversary of the rent commencement date, respectively.

In July 2016, the Company assigned its operating lease of 630 Gateway to Merck, as part of the Company’s relocation to 333 Oyster Point. As part of the assignment of the lease, the Company is liable to the lessor if Merck defaults on its lease obligations. Therefore, in substance, the Company has guaranteed the lease payments for 630 Gateway, including lease-related expenses such as utilities, property tax, and common area maintenance without any limitations. The Company assessed the need for a potential guarantee liability on the assigned lease, and concluded that the value of the guarantee was insignificant as of March 31, 2019 because of the short duration of the remaining lease term through November 2020, and Merck’s credit rating of AA/A1 and subsequent investment in tenant improvements to the facility. As of March 31, 2019 and 2018, the remaining lease payment obligations that are due for 630 Gateway were approximately $3.5 million and $5.3 million, respectively, which are to be paid directly from Merck to the lessor.

The Company recognizes rent expense on a straight-line basis over the lease period with the difference recorded as deferred rent. In addition, tenant improvement allowances recorded are amortized as a reduction to rent expense on a straight-line basis over the lease term. Rent expense under these facility operating leases was approximately $0.5 million for the quarters ended March 31, 2019 and 2018, respectively.

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Future minimum payments under the unassigned lease obligations described above are as follows as of March 31, 2019 (in thousands):

Indemnification

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and may provide for indemnification of the counterparty. The Company’s exposure under these agreements is unknown because it involves claims that may be made against it in the future, but have not yet been made.

In accordance with the Company’s amended and restated certificate of incorporation and its amended and restated bylaws, the Company has indemnification obligations to its officers and directors, subject to some limits, with respect to their service in such capacities. The Company has also entered into indemnification agreements with its directors and certain of its officers. To date, the Company has not been subject to any claims, and it maintains director and officer insurance that may enable it to recover a portion of any amounts paid for future potential claims.

The Company’s exposure under these agreements is unknown because it involves claims that may be made against it in the future, but have not yet been made. The Company believes that the fair value of these indemnification obligations is minimal and, accordingly, it has not recognized any liabilities relating to these obligations for any period presented.

8. Convertible Preferred Stock

Convertible Preferred Stock

The Company has elected to follow the SEC staff’s guidance (included in ASC 480-10-S99, SEC Materials) when evaluating the classification of its shares within the consolidated balance sheets. A liquidation, winding up, change in control, or sale of substantially all assets of the Company could constitute a redemption event. Although the majority of the Company’s preferred stock is not mandatorily or currently redeemable, a liquidation or winding up of the Company could constitute an event outside its control. Therefore, all shares of convertible preferred stock have been presented outside the permanent equity for all periods presented due to being contingently redeemable.

Convertible preferred stock at March 31, 2019, consisted of the following (in thousands):

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Convertible preferred stock at December 31, 2018, consisted of the following (in thousands):

Amended and Restated Certificate of Incorporation

In March 2015, the Company amended and restated its certificate of incorporation in conjunction with the Series E convertible preferred stock offering. The significant rights and obligations of the Company’s convertible preferred stock as of March 31, 2019 are as follows:

Voting Rights:    Each holder of convertible preferred stock is entitled to the number of votes equal to the number of shares of common stock into which such shares of convertible preferred stock are convertible. In the event the preferred stockholders control a majority of the board of directors through direct representation on the board of directors or through other rights, the stockholders can approve redemption of the preferred stock.

Dividends:    Each holder of convertible preferred stock is entitled to receive non-cumulative dividends at the rate of 8% per annum for each share of convertible preferred stock outstanding, when, as and if declared by the board of directors. These dividends are payable in preference to common stock dividends. To date, the Company has not declared or paid any dividends.

Liquidation:    In the event of any liquidation, dissolution or winding-up of the Company, each holder of convertible preferred stock is entitled to receive payment out of the assets of the Company legally available for distribution for each share of convertible preferred stock held by the holder of an amount per share of preferred stock equal to the original issue price plus all declared and unpaid dividends on the convertible preferred stock, with the exception that the holder of the Series E convertible preferred stock will only be eligible to receive an amount equal to $10.00 per share plus all declared and unpaid dividends on the convertible preferred stock. In the event that the available funds and assets are insufficient for full payment to the holders of convertible preferred stock on a per-share basis as outlined above, the entire assets and funds of the Company legally available for distribution shall be distributed ratably among the holders of convertible preferred stock in proportion to the full amount to which they would otherwise be respectively entitled. Upon completion of the distribution of assets as set forth above, all of the remaining assets, if any, shall be distributed ratably among the holders of common stock.

Conversion:    Each share of convertible preferred stock was converted to shares of common stock at a ratio of 1:1 coincident with the Company’s IPO.  Refer to Note 12 for more information.

Conversion of each series of convertible preferred stock into common stock is automatic upon the earlier of: (a) the closing of an initial public offering of the Company’s common stock, registered under the Securities Act of 1933, which results in aggregate proceeds equal to or exceeding $30.0 million to the Company; or (b) at any time upon the affirmative election of the holders.

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9. Convertible Preferred Stock Warrant

During 2009, the Company entered into a $1.7 million loan and security agreement with one lender. On June 29, 2010, the Company paid off the loan. In conjunction with the debt facility, the Company issued to the lender a warrant to acquire a total of 19,637 shares of Series A convertible preferred stock exercisable at $2.00 per share and that automatically net exercises to Series A preferred stock on February 3, 2019. The warrant was valued at approximately $1.44 per share, as calculated using the Black-Scholes option-pricing model using a Series A preferred stock estimated fair value of $2.00 per share, a volatility of 60%, a risk-free interest rate of 3.59%, an expected life of ten years and no dividends. The estimated warrant fair value was initially calculated as approximately $28,000 and was recorded as a discount to the debt. At each subsequent reporting date, the estimated fair value of the warrant is remeasured (Note 3) to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the warrants, or the completion of a deemed liquidation event. At that time, the convertible preferred stock warrant liability will be reclassified to convertible preferred stock or additional paid-in-capital, as applicable.

On February 3, 2019, all warrants for preferred stock were automatically net exercised into 16,380 shares of Series A convertible preferred stock.

10. Stockholders’ Deficit

Common Stock

As of March 31, 2019 and December 31, 2018, the Company had 7,026,717 and 6,937,890 shares of common stock outstanding, respectively, which includes shares subject to repurchase of 171,832 and 205,108, respectively, as a result of early exercise of stock options not yet vested. As of March 31, 2019 and December 31, 2018, the Company reserved shares of common stock for issuance as follows:

Stock Option Plan

In 2018, the Company adopted the 2018 Equity Incentive Plan (the 2018 Plan) for eligible employees, officers, directors, advisors and consultants, which provides for the grant of incentive and non-statutory stock options, restricted stock awards and stock appreciation rights. The terms of the stock option agreements, including vesting requirements, are determined by the board of directors, subject to the provisions of the 2018 Plan. Options granted by the Company generally vest within four years and are exercisable from the grant date until ten years after the date of grant. Vesting of certain employee options may be accelerated in the event of a change in control of the Company. As of March 31, 2019, 12,681,305 shares of common stock have been authorized for issuance under the 2018 Plan. The Company’s 2008 Equity Incentive Plan (the 2008 Plan) expired at the beginning of 2018.

Stock options are governed by stock option agreements between the Company and recipients of stock options. The board of directors exercises reasonable judgment and considers a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including the Company’s stage of development; progress of its research and development efforts; the rights, preferences and privileges of its convertible preferred stock relative to those of its common stock; equity market conditions affecting comparable companies; and the lack of marketability of our common stock. The exercise price of each option shall not be less than 100% of the fair market value of the common stock subject to the option on the date the option is granted. A 10% or greater stockholder shall not be granted an incentive stock option unless the exercise price of such option is at least 110% of the fair value of the common stock on the date of grant and the option is not exercisable after the expiration of five years from the grant date. Options become exercisable and expire as determined by the Compensation Committee, provided that the term of incentive stock options may not exceed ten years from the date of grant for options granted to those other than 10% stockholders.

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Stock Option Activity

A summary of the outstanding stock options is as follows: