Item 1. Financial Statements (Unaudited)
Notes to Unaudited Condensed Financial Statements
(unaudited)
1.
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Organization and Description of Business
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Adaptive Biotechnologies Corporation (“we,” “us” or “our”) is a commercial-stage company advancing the field of immune-driven medicine by harnessing the inherent biology of the adaptive immune system to transform the diagnosis and treatment of disease. We believe the adaptive immune system is nature’s most finely tuned diagnostic and therapeutic for most diseases, but the inability to decode it has prevented the medical community from fully leveraging its capabilities. Our immune medicine platform is the foundation for our expanding suite of products and services. The cornerstone of our immune medicine platform and core immunosequencing product, immunoSEQ, serves as our underlying research and development engine and generates revenue from academic and biopharmaceutical customers. Our first clinical diagnostic product, clonoSEQ, is the first test authorized by the Food and Drug Administration (“FDA”) for the detection and monitoring of minimal residual disease (“MRD”) in patients with select blood cancers.
We were incorporated in the State of Washington on September 8, 2009 under the name Adaptive TCR Corporation. On December 21, 2011, we changed our name to Adaptive Biotechnologies Corporation. We are headquartered in Seattle, Washington.
Initial Public Offering
Our registration statement on Form S-1 related to our initial public offering was declared effective on June 26, 2019 and our common stock began trading on the Nasdaq Global Select Market on June 27, 2019. On July 1, 2019, we completed our initial public offering in which we issued and sold 17,250,000 shares of common stock, including shares issued upon the exercise in full of the underwriters’ over-allotment option, at a public offering price of $20.00 per share.
Follow-On Offering
In July 2020, we completed an underwritten public offering of our common stock in which we issued and sold 7,200,000 shares of common stock at a public offering price of $40.00 per share, including shares issued upon the exercise in full of the underwriters’ over-allotment option. We received $271.8 million in net proceeds, after deducting underwriting discounts and net offering expenses payable by us.
2.
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Significant Accounting Policies
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Basis of Presentation and Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. We base our estimates on historical experience and other relevant assumptions that we believe to be reasonable under the circumstances. Estimates are used in several areas including, but not limited to, estimates of progress to date for certain performance obligations and the transaction price for certain contracts with customers, share-based compensation, including the fair value of stock, the provision for income taxes, including related reserves, and goodwill, among others. These estimates generally involve complex issues and require judgments, involve the analysis of historical results and prediction of future trends, can require extended periods of time to resolve and are subject to change from period to period. Actual results may differ materially from management’s estimates.
Unaudited Interim Condensed Financial Statements
In our opinion, the accompanying unaudited condensed financial statements have been prepared in accordance with GAAP for interim financial information. These unaudited condensed financial statements include all adjustments necessary to fairly state the financial position and the results of our operations and cash flows for interim periods in accordance with GAAP. All such adjustments are of a normal, recurring nature. Interim-period results are not necessarily indicative of results of operations or cash flows for a full year or any subsequent interim period.
The accompanying unaudited condensed financial statements should be read in conjunction with our audited financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 26, 2020.
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Adaptive Biotechnologies Corporation
Reclassifications
In the accompanying unaudited condensed statements of cash flows, certain prior year amounts have been reclassified to conform to the current period presentation. Specifically, the gain on equipment disposals line item and other line item were previously separately stated and are now presented together in the other line item. There was no change to net cash provided by operating activities as a result of the reclassification.
Restricted Cash
We are required to maintain certain balances under lease arrangements for our property and facility leases. We had restricted cash of $2.1 million as of September 30, 2020 and December 31, 2019.
Leases
We determine if an arrangement contains a lease at inception. We have operating lease agreements for the laboratory and office facilities that we occupy, as well as server space. Operating lease right-of-use (“ROU”) assets and operating lease liabilities are recognized at the date the underlying asset becomes available for our use and are based on the present value of the future minimum lease payments over the lease term. ROU assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received. As our leases generally do not provide an implicit interest rate, the present value of our future minimum lease payments is determined using our incremental borrowing rate. This rate is an estimate of the collateralized borrowing rate we would incur on our future lease payments over a similar term and is based on the information available to us at the lease commencement date, or as of January 1, 2020 for commenced leases that existed as of our adoption of the new lease standard, discussed in more detail below.
Certain of our leases contain options to extend or terminate the lease; lease terms are adjusted for these options only when it is reasonably certain we will exercise these options. Our lease agreements do not contain residual value guarantees or covenants.
We have made a policy election regarding our real estate leases not to separate nonlease components from lease components, to the extent they are fixed. Nonlease components that are not fixed are expensed as incurred as variable lease expense. Our leases for laboratory and office facilities typically include variable nonlease components, such as common-area maintenance costs. We have also elected not to record on the balance sheet a lease that has a lease term of twelve months or less and does not contain a purchase option that we are reasonably certain to exercise.
Lease expense is recognized on a straight-line basis over the terms of the leases. Incentives granted under our facilities leases, including rent holidays, are recognized as adjustments to lease expense on a straight-line basis over the terms of the leases.
Concentrations of Risk
We are subject to a concentration of risk from a limited number of suppliers, or in some cases, single suppliers for some of our laboratory instruments and materials. This risk is managed by targeting a quantity of surplus stock.
Cash, cash equivalents and marketable securities are financial instruments that potentially subject us to concentrations of credit risk. We invest in money market funds, United States (“U.S.”) government debt securities, U.S. government agency securities, commercial paper and corporate bonds with high-quality accredited financial institutions.
Significant customers are those that represent more than 10% of our total revenue or accounts receivable, net balances for the periods and as of each balance sheet date presented, respectively. Revenue from these customers reflects their purchase of our products and services and our collaboration efforts with Genentech.
For each significant customer, revenue as a percentage of total revenue for the periods presented and accounts receivable, net as a percentage of total accounts receivable, net as of the periods presented were as follows:
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Revenue
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Accounts Receivable, Net
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Three Months Ended September 30,
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Nine Months Ended September 30,
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September 30,
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December 31,
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2020
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2019
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2020
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2019
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2020
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2019
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Customer A
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*%
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16.0%
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*%
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11.8%
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16.4%
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41.8%
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Customer B
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*
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10.7
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*
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*
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*
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*
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Customer C
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10.3
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*
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*
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*
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21.4
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*
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Genentech, Inc.
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48.1
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43.9
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55.1
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43.7
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*
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*
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* less than 10%
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11
Adaptive Biotechnologies Corporation
Revenue Recognition
We recognize revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606 (“ASC 606”), Revenue from Contracts with Customers. Under ASC 606, for all revenue-generating contracts, we perform the following steps to determine the amount of revenue to be recognized: (1) identify the contract or contracts; (2) determine whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (3) measure the transaction price, including the constraint on variable consideration; (4) allocate the transaction price to the performance obligations based on estimated selling prices; and (5) recognize revenue when (or as) we satisfy each performance obligation. The following is a summary of the application of the respective model to each of our revenue classifications.
Overview
Our revenue is generated from immunosequencing (“sequencing”) products and services (“sequencing revenue”) and from regulatory or development support services leveraging our immune medicine platform (“development revenue”). When revenue generating contracts have elements of both sequencing revenue and development revenue, we classify revenue based on the nature of the performance obligation and the allocated transaction price.
Sequencing Revenue
Sequencing revenue reflects the amounts generated from providing sequencing services and testing through our clonoSEQ and immunoSEQ products and services to our clinical and research customers, respectively.
For clinical customers, we derive revenues from providing our clonoSEQ test report to ordering physicians, and we bill and receive payments from medical institutions and commercial and government third-party payors. In these transactions, we have identified one performance obligation: the delivery of a clonoSEQ report. As payment from the respective payors may vary based on the various reimbursement rates and patient responsibilities, we consider the transaction price to be variable and record an estimate of the transaction price, subject to the constraint for variable consideration, as revenue at the time of delivery. The estimate of transaction price is based on historical and expected reimbursement rates with the various payors, which are monitored in subsequent periods and adjusted as necessary based on actual collection experience.
For our clonoSEQ coverage under Medicare, we bill an episode of treatment when we deliver the first eligible test results. This billing contemplates all necessary tests required during a patient’s treatment cycle, which is currently estimated at approximately four tests per patient, including the initial sequence identification test. Revenue recognition commences at the time the initial billable test result is delivered and is based upon cumulative tests delivered to date. We estimate the number of tests we expect to deliver over a patient’s treatment cycle based on historical testing frequencies for patients by indication. These estimates are subject to change as we develop more information about utilization over time. Any unrecognized revenue from the initial billable test is recorded as deferred revenue and is recognized as we deliver the remaining tests in a patient’s treatment cycle.
For research customers, contracts typically include an amount billed in advance of services (“upfront”) and subsequent billings as sample results are delivered to the customer. Upfront amounts received are recorded as deferred revenue, which we recognize as revenue upon satisfaction of performance obligations. We have identified two typical performance obligations under the terms of our research service contracts: sequencing services and related data analysis. We recognize revenue for both identified performance obligations as sample results are delivered to the customer.
Development Revenue
We derive revenue by providing services through development agreements to biopharmaceutical customers who seek access to our immune medicine platform technologies. We generate revenues from the delivery of professional support activities pertaining to the use of our proprietary immunoSEQ and clonoSEQ services in the development of the respective customers’ initiatives. The transaction price for these contracts may consist of a combination of non-refundable upfront fees, separately priced sequencing fees, progress-based milestones and regulatory milestones. The development agreements may include single or multiple performance obligations, depending on the contract. For certain contracts, we may perform services to support the biopharmaceutical customers’ regulatory submissions as part of their registrational trials. These services include regulatory support pertaining to our technology intended to be utilized as part of the submission, development of analytical plans for our sequencing data, participation on joint research committees and assistance in completing a regulatory submission. Generally, these services are not distinct within the context of the contract, and they are accounted for as a single performance obligation.
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Adaptive Biotechnologies Corporation
When sequencing services are separately priced customer options, we assess if a material right exists and, if not, the customer option to purchase additional sequencing services is not considered part of the contract. Except for any non-refundable upfront fees, the other forms of compensation represent variable consideration. Variable consideration related to progress-based and regulatory milestones is estimated using the most likely amount method, where variable consideration is constrained until it is probable that a significant reversal of cumulative revenue recognized will not occur. Progress milestones, such as the first sample result delivered or final patient enrollment in a customer trial, are customer dependent and are included in the transaction price when the respective milestone is probable of occurring. Milestone payments that are not within our customers’ control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. Determining whether regulatory milestone payments are probable is an area that requires significant judgment. In making this assessment, we evaluate scientific, clinical, regulatory and other risks, as well as the level of effort and investment required to achieve the respective milestone.
The primary method used to estimate standalone selling price for performance obligations is the adjusted market assessment approach. Using this approach, we evaluate the market in which we sell our services and estimate the price that a customer in that market would be willing to pay for our services. We recognize revenue using either an input or output measure of progress that faithfully depicts performance on a contract, depending on the contract. The measure used is dependent on the nature of the service to be provided in each contract. Selecting the measure of progress and estimating progress to date requires significant judgment.
Net Loss Per Share Attributable to Common Shareholders
We calculate basic net loss per share attributable to common shareholders by dividing the net loss attributable to common shareholders by the weighted-average number of shares of common stock outstanding for the period. The diluted net loss per share attributable to common shareholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, common stock warrants, stock options and restricted stock units are considered common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common shareholders, as their effect is anti-dilutive.
Prior to the closing of our initial public offering in July 2019 and the related conversion of our convertible preferred stock into common stock, we calculated our basic and diluted net loss per share attributable to common shareholders in conformity with the two-class method required for companies with participating securities. We considered our convertible preferred stock to be participating securities. In the event a dividend had been declared or paid on common stock, holders of convertible preferred stock would have been entitled to a share of such dividend in proportion to the holders of common stock on an as-if converted basis. Under the two-class method, basic net loss per share attributable to common shareholders is calculated by dividing the net loss attributable to common shareholders by the weighted-average number of shares of common stock outstanding for the period. Net loss attributable to common shareholders is determined by allocating undistributed earnings between common and preferred shareholders. The net loss attributable to common shareholders was not allocated to the convertible preferred stock under the two-class method, as the convertible preferred stock did not have a contractual obligation to share in our losses. The diluted net loss per share attributable to common shareholders was computed by giving effect to all potential dilutive common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, convertible preferred stock, convertible preferred stock warrants, common stock warrants, stock options and restricted stock units were considered common stock equivalents but were excluded from the calculation of diluted net loss per share attributable to common shareholders, as their effect was anti-dilutive.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASC 842”), intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheets and disclosing key information about leasing arrangements. We adopted the guidance effective January 1, 2020 using the optional transition method described in ASU 2018-11, Leases (Topic 842) Targeted Improvements. Under the optional transition method, we recognized a cumulative-effect adjustment in the period of adoption. Prior period amounts were not adjusted and continue to be reported in accordance with the previous accounting under ASC 840, Leases (“ASC 840”).
In adopting the new standard, we utilized certain practical expedients available. These practical expedients include waiving reassessment of (1) whether any expired or existing contracts are or contain leases; (2) lease classification of expired or existing leases; and (3) initial direct costs for existing leases. We also elected to use hindsight in determining the lease term and in assessing impairment of our ROU assets. Furthermore, we have made a policy decision regarding our real estate leases not to separate nonlease components from lease components, to the extent they are fixed. We have also elected not to record on the balance sheet a lease that has a lease term of twelve months or less and does not contain a purchase option that we are reasonably certain to exercise.
13
Adaptive Biotechnologies Corporation
The standard had a material impact on our unaudited condensed balance sheets but did not have a material impact on our unaudited condensed statements of operations or unaudited condensed statements of cash flows. The most significant impact was the recognition of $33.0 million and $39.7 million of operating lease ROU assets and liabilities, respectively, and the derecognition of a $36.6 million asset and corresponding liability previously recorded pursuant to build-to-suit lease accounting guidance under ASC 840, which resulted in an increase to retained earnings of $0.1 million. The operating lease ROU assets and liabilities recorded at adoption included the derecognition of $7.3 million of deferred rent recognized as of December 31, 2019, as well as a $0.5 million reclassification of tenant incentive receivables previously recognized in the prepaid expenses and other current assets line item on our balance sheet. Refer to Note 8 of the accompanying notes to our unaudited condensed financial statements for additional information regarding leases.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. The expected credit losses are recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, and the net carrying value of the financial asset is presented on the balance sheet. The guidance also amends the previous other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account, limited to the difference between a security’s amortized cost basis and its fair value. Furthermore, the standard update removes the distinction between whether an impairment is temporary or other-than temporary. We adopted the guidance effective January 1, 2020. Given the short-term nature of our accounts receivable, the adoption as it relates to trade receivables did not have a significant impact on our unaudited condensed financial statements. Furthermore, impairment of available-for-sale debt securities as of the adoption date was determined to be due to factors other than credit loss; therefore, a credit allowance was not recognized.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other: Internal-Use Software (Subtopic 350-40) to provide additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement. We adopted this guidance effective January 1, 2020 on a prospective basis, and the adoption did not have any impact on our unaudited condensed financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which eliminates certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. Among other things, this guidance also clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. This guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, and the guidance is to be applied prospectively, except for certain amendments. We early adopted the guidance on January 1, 2020 and the adoption did not have a material impact on our unaudited condensed financial statements.
MRD Development Agreements
We have entered into agreements with biopharmaceutical customers to further develop and commercialize clonoSEQ and the biopharmaceutical customers’ therapeutics. Under each of the agreements, we received or will receive non-refundable upfront payments and could receive substantial additional payments upon reaching certain progress milestones or achievement of certain regulatory milestones pertaining to the customers’ therapeutics and our clonoSEQ test.
Under the contracts, we identify performance obligations, which may include: (1) obligations to provide services supporting the customer’s regulatory submission activities as they relate to our clonoSEQ test; and (2) sequencing services related to customer-provided samples for their regulatory submissions. The transaction price allocated to the respective performance obligations is estimated using an adjusted market assessment approach for the regulatory support services and a standalone selling price for the estimated immunosequencing services. At contract inception, we fully constrain any consideration related to the regulatory milestones, as the achievement of such milestones is subject to third-party regulatory approval and the customers’ own submission decision-making. We recognize revenue relating to the sequencing services as sequencing revenue over time using an output method based on the proportion of sample results delivered relative to the total amount of sample results expected to be delivered and when expected to be a faithful depiction of progress. We use the same method to recognize the regulatory support services. When an output method based on the proportion of sample results delivered is not expected to be a faithful depiction of progress, we utilize an input method based on estimates of effort completed using a cost-based model.
14
Adaptive Biotechnologies Corporation
In the three and nine months ended September 30, 2020 and in the three and nine months ended September 30, 2019, we earned $2.5 million and $2.0 million, respectively, upon the achievement of certain regulatory milestones by us and our respective customers’ therapeutics. All $2.5 million and $2.0 million was recognized as revenue within the respective periods, as we determined these amounts were consistent with our estimated standalone selling price and the respective performance obligations were complete. In total, we recognized $2.6 million and $3.1 million in development revenue related to these contracts during the three and nine months ended September 30, 2020, respectively, and $2.3 million and $3.1 million during the three and nine months ended September 30, 2019, respectively.
As of September 30, 2020, in future periods we could receive up to an additional $313.5 million in milestone payments if certain regulatory approvals are obtained by our customers’ therapeutics in connection with MRD data generated from our clonoSEQ test.
Genentech Collaboration Agreement
In December 2018, we entered into a worldwide collaboration and license agreement (“Genentech Agreement”) with Genentech to leverage our capability to develop cellular therapies in oncology. Subsequent to receipt of regulatory approval in January 2019, we received a non-refundable, upfront payment of $300.0 million in February 2019 and may be eligible to receive more than $1.8 billion over time, including payments of up to $75.0 million upon the achievement of specified regulatory milestones, up to $300.0 million upon the achievement of specified development milestones and up to $1,430.0 million upon the achievement of specified commercial milestones. In addition, we are separately able to receive tiered royalties at a rate ranging from the mid-single digits to the mid-teens on aggregate worldwide net sales of products arising from the strategic collaboration, subject to certain reductions, with aggregate minimum floors. Under the agreement, we are pursuing two product development pathways for novel T cell immunotherapies in which Genentech intends to use T cell receptors (“TCRs”) screened by our immune medicine platform to engineer and manufacture cellular medicines:
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•
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Shared Products. The shared products will use “off-the-shelf” TCRs identified against cancer antigens shared among patients (“Shared Products”).
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•
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Personalized Product. The personalized product will use patient-specific TCRs identified by real-time screening of TCRs against cancer antigens in each patient (“Personalized Product”).
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Under the terms of the agreement, we granted Genentech exclusive worldwide licenses to develop and commercialize TCR-based cellular therapies in the field of oncology, including licenses to existing shared antigen data packages. Additionally, Genentech has the right to determine which product candidates to further develop for commercialization purposes. We determined that this arrangement meets the criteria set forth in ASC Topic 808, Collaborative Arrangements (“ASC 808”), because both parties are active participants in the activity and are exposed to significant risks and rewards depending on the activity’s commercial failure or success. Because ASC 808 does not provide guidance on how to account for the activities under a collaborative arrangement, we applied the guidance in ASC 606 to account for the activities related to the Genentech Agreement.
In applying ASC 606, we identified the following performance obligations at the inception of the agreement:
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1.
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License to utilize on an exclusive basis all TCR-specific platform intellectual property to develop and commercialize any licensed products in the field of oncology.
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2.
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License to utilize all data and information within each shared antigen data package and any other know-how disclosed by us to Genentech in oncology.
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3.
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License to utilize all private antigen TCR product data in connection with research and development activities in the field of use.
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4.
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License to existing shared antigen data packages.
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5.
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Research and development services for shared product development, including expansion of shared antigen data packages.
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6.
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Research and development services for private product development.
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7.
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Obligations to participate on various joint research, development and project committees.
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Adaptive Biotechnologies Corporation
We determined that none of the licenses, research and development services or obligations to participate on various committees were distinct within the context of the contract, given such rights and activities were highly interrelated and there was substantial additional research and development to further develop the licenses. We considered factors such as the stage of development of the respective existing antigen data packages, the subsequent development that would be required to both identify and submit a potential target for investigational new drug acceptance under both product pathways and the variability in research and development pathways given Genentech’s control of product commercialization. Specifically, under the agreement, Genentech is not required to pursue development or commercialization activities pertaining to both product pathways and may choose to proceed with one or the other, as opposed to both. Accordingly, we determined that all of the identified performance obligations were attributable to one general performance obligation, which is to further the development of our TCR-specific platform, including data packages, and continue to make our TCR identification process available to Genentech to pursue either product pathway.
Separately, we have a responsibility to Genentech to enter into a supply and manufacturing agreement for patient-specific TCRs as it pertains to any Personalized Product therapeutic. We determined this was an option right of Genentech should they pursue commercialization of a Personalized Product therapy. Because of the uncertainty resulting from the early stage of development, the novel approach of our collaboration with Genentech and our rights to future commercial milestones and royalty payments, we determined that this option right was not a material right that should be accounted for at inception. As such, we will account for the supply and manufacturing agreement when entered into between the parties.
We determined the initial transaction price shall be made up of only the $300.0 million upfront, non-refundable payment, as all potential regulatory and development milestone payments were probable of significant revenue reversal given their achievement was highly dependent on factors outside our control. As a result, these payments were fully constrained and were not included in the transaction price as of September 30, 2020. We excluded the commercial milestones and potential royalties from the transaction price, as those items relate predominantly to the license rights granted to Genentech and will be assessed when and if such events occur.
As there are potential substantive developments necessary, which Genentech may be able to direct, we determined that we would apply a proportional performance model to recognize revenue for our performance obligation. We measure proportional performance using an input method based on costs incurred relative to the total estimated costs of research and development efforts to pursue both the Shared Product and Personalized Product pathways. We currently expect to recognize the revenue over a period of approximately seven to eight years from the effective date. This estimate of the research and development period considers pursuit options of development activities supporting both the Shared Product and the Personalized Product, but may be reduced or increased based on the various activities as directed by the joint committees, decisions made by Genentech, regulatory feedback or other factors not currently known.
We recognized revenue of $12.3 million and $11.4 million during the three months ended September 30, 2020 and 2019, respectively, and $35.9 million and $26.2 million during the nine months ended September 30, 2020 and 2019, respectively, related to the Genentech Agreement. Costs related to the Genentech Agreement are included in research and development expenses.
16
Adaptive Biotechnologies Corporation
4.
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Fair Value Measurements
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The following tables set forth the fair value of financial assets as of September 30, 2020 and December 31, 2019 that were measured at fair value on a recurring basis (in thousands):
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September 30, 2020
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Level 1
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Level 2
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|
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Level 3
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Total
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Financial assets
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
495,115
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
495,115
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|
U.S. government debt and agency securities
|
|
|
—
|
|
|
|
340,836
|
|
|
|
—
|
|
|
|
340,836
|
|
Corporate bonds
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|
|
—
|
|
|
|
13,634
|
|
|
|
—
|
|
|
|
13,634
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|
Total financial assets
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|
$
|
495,115
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|
|
$
|
354,470
|
|
|
$
|
—
|
|
|
$
|
849,585
|
|
|
|
December 31, 2019
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|
|
|
Level 1
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|
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Level 2
|
|
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Level 3
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|
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Total
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Financial assets
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
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|
$
|
88,683
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|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
88,683
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|
Commercial paper
|
|
|
—
|
|
|
|
121,867
|
|
|
|
—
|
|
|
|
121,867
|
|
U.S. government debt and agency securities
|
|
|
—
|
|
|
|
377,243
|
|
|
|
—
|
|
|
|
377,243
|
|
Corporate bonds
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|
|
—
|
|
|
|
86,615
|
|
|
|
—
|
|
|
|
86,615
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|
Total financial assets
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|
$
|
88,683
|
|
|
$
|
585,725
|
|
|
$
|
—
|
|
|
$
|
674,408
|
|
Level 1 securities include highly liquid money market funds, for which we measure the fair value based on quoted prices in active markets for identical assets or liabilities. Level 2 securities consist of U.S. government debt securities, commercial paper and corporate bonds, and are valued based on recent trades of securities in inactive markets or based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data.
Available-for-sale investments consisted of the following as of September 30, 2020 and December 31, 2019 (in thousands):
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September 30, 2020
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Amortized
Cost
|
|
|
Unrealized
Gain
|
|
|
Unrealized
Loss
|
|
|
Estimated
Fair Value
|
|
Short-term marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government debt and agency securities
|
|
$
|
323,338
|
|
|
$
|
1,034
|
|
|
$
|
(2
|
)
|
|
$
|
324,370
|
|
Corporate bonds
|
|
|
13,502
|
|
|
|
134
|
|
|
|
(2
|
)
|
|
|
13,634
|
|
Total short-term marketable securities
|
|
$
|
336,840
|
|
|
$
|
1,168
|
|
|
$
|
(4
|
)
|
|
$
|
338,004
|
|
Long-term marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government debt and agency securities
|
|
$
|
16,203
|
|
|
$
|
263
|
|
|
$
|
—
|
|
|
$
|
16,466
|
|
Total long-term marketable securities
|
|
$
|
16,203
|
|
|
$
|
263
|
|
|
$
|
—
|
|
|
$
|
16,466
|
|
|
|
December 31, 2019
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gain
|
|
|
Unrealized
Loss
|
|
|
Estimated
Fair Value
|
|
Short-term marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
121,866
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
121,866
|
|
U.S. government debt and agency securities
|
|
|
285,963
|
|
|
|
394
|
|
|
|
(1
|
)
|
|
|
286,356
|
|
Corporate bonds
|
|
|
71,962
|
|
|
|
109
|
|
|
|
(3
|
)
|
|
|
72,068
|
|
Total short-term marketable securities
|
|
$
|
479,791
|
|
|
$
|
503
|
|
|
$
|
(4
|
)
|
|
$
|
480,290
|
|
Long-term marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government debt and agency securities
|
|
$
|
90,750
|
|
|
$
|
146
|
|
|
$
|
(9
|
)
|
|
$
|
90,887
|
|
Corporate bonds
|
|
|
14,513
|
|
|
|
35
|
|
|
|
—
|
|
|
|
14,548
|
|
Total long-term marketable securities
|
|
$
|
105,263
|
|
|
$
|
181
|
|
|
$
|
(9
|
)
|
|
$
|
105,435
|
|
17
Adaptive Biotechnologies Corporation
All the commercial paper, U.S. government debt and agency securities and corporate bonds designated as short-term marketable securities have an effective maturity date that is equal to or less than one year from the respective balance sheet date. Those that are designated as long-term marketable securities have an effective maturity date that is more than one year from the respective balance sheet date.
Accrued interest receivable is excluded from the amortized cost and estimated fair value of our marketable securities. Accrued interest receivables of $1.4 million and $2.2 million were presented separately within the prepaid expenses and other current assets line item on our unaudited condensed balance sheet as of September 30, 2020 and on our balance sheet as of December 31, 2019, respectively. We have made an accounting policy election to not measure an allowance for credit losses for accrued interest receivables.
The following table presents the gross unrealized holding losses and fair value for investments in an unrealized loss position, and the length of time that individual securities have been in a continuous loss position, as of September 30, 2020 (in thousands):
|
|
Less Than 12 Months
|
|
|
12 Months Or Greater
|
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
U.S. government debt and agency securities
|
|
$
|
75,564
|
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate bonds
|
|
|
1,522
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
—
|
|
Total available-for-sale securities
|
|
$
|
77,086
|
|
|
$
|
(4
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
We periodically review our available-for-sale securities to assess for credit impairment. Some of the factors considered in assessing impairment include the extent to which the fair value is less than the amortized cost basis, adverse conditions related to the security, an industry or geographic area, changes to security ratings or sector credit ratings and other relevant market data.
As of September 30, 2020, we did not intend, nor were we more likely than not to be required, to sell our available-for-sale investments before the recovery of their amortized cost basis, which may be maturity. Based on our assessment, we concluded all impairment as of September 30, 2020 to be due to factors other than credit loss, such as changes in interest rates. A credit allowance was not recognized and the impairment of our available-for-sale securities was recorded in other comprehensive loss.
6.
|
Goodwill and Intangible Assets
|
There have been no changes in the carrying amount of goodwill since its recognition in 2015.
Intangible assets subject to amortization as of September 30, 2020 and December 31, 2019 consisted of the following (in thousands):
|
|
September 30, 2020
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
Acquired developed technology
|
|
$
|
20,000
|
|
|
$
|
(9,552
|
)
|
|
$
|
10,448
|
|
Purchased intellectual property
|
|
|
325
|
|
|
|
(120
|
)
|
|
|
205
|
|
Balance at September 30, 2020
|
|
$
|
20,325
|
|
|
$
|
(9,672
|
)
|
|
$
|
10,653
|
|
|
|
December 31, 2019
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
Acquired developed technology
|
|
$
|
20,000
|
|
|
$
|
(8,301
|
)
|
|
$
|
11,699
|
|
Purchased intellectual property
|
|
|
325
|
|
|
|
(96
|
)
|
|
|
229
|
|
Balance at December 31, 2019
|
|
$
|
20,325
|
|
|
$
|
(8,397
|
)
|
|
$
|
11,928
|
|
The developed technology was acquired in connection with our acquisition of Sequenta, Inc. (“Sequenta”) in 2015. The remaining balance of the acquired technology and the purchased intellectual property is expected to be amortized over the next 6.3 years.
18
Adaptive Biotechnologies Corporation
As of September 30, 2020, expected future amortization expense for intangible assets was as follows (in thousands):
2020 (excluding the nine months ended September 30, 2020)
|
|
$
|
428
|
|
2021
|
|
|
1,699
|
|
2022
|
|
|
1,699
|
|
2023
|
|
|
1,699
|
|
2024
|
|
|
1,703
|
|
Thereafter
|
|
|
3,425
|
|
Total future amortization expense
|
|
$
|
10,653
|
|
Deferred revenue by revenue classification as of September 30, 2020 and December 31, 2019 was as follows (in thousands):
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Current deferred revenue
|
|
|
|
|
|
|
|
|
Sequencing
|
|
$
|
16,040
|
|
|
$
|
12,482
|
|
Development
|
|
|
62,152
|
|
|
|
48,512
|
|
Total current deferred revenue
|
|
|
78,192
|
|
|
|
60,994
|
|
Non-current deferred revenue
|
|
|
|
|
|
|
|
|
Sequencing
|
|
|
637
|
|
|
|
1,459
|
|
Development
|
|
|
174,216
|
|
|
|
217,873
|
|
Total non-current deferred revenue
|
|
|
174,853
|
|
|
|
219,332
|
|
Total current and non-current deferred revenue
|
|
$
|
253,045
|
|
|
$
|
280,326
|
|
Deferred revenue from our Genentech Agreement represents $59.9 million and $169.1 million of the current and non-current development deferred revenue balances, respectively, at September 30, 2020 and $48.1 million and $216.8 million of the current and non-current development deferred revenue balances, respectively, at December 31, 2019. In general, we expect that the current amounts will be recognized as revenue within 12 months and the non-current amounts will be recognized as revenue over a period of approximately six to seven years. This period of time represents an estimate of the research and development period to develop cellular therapies in oncology, which may be reduced or increased based on the various development activities.
Changes in deferred revenue during the nine months ended September 30, 2020 were as follows (in thousands):
Deferred revenue balance at December 31, 2019
|
|
$
|
280,326
|
|
Additions to deferred revenue during the period
|
|
|
19,859
|
|
Revenue recognized during the period
|
|
|
(47,140
|
)
|
Deferred revenue balance at September 30, 2020
|
|
$
|
253,045
|
|
As of September 30, 2020, $41.9 million was recognized as revenue that was included in the deferred revenue balance at December 31, 2019. As a result of cancelled customer sequencing contracts, we recognized $0.5 million and $0.9 million of sequencing revenue during the three and nine months ended September 30, 2020, respectively.
We have operating lease agreements for the laboratory and office facilities that we occupy in Seattle, Washington and South San Francisco, California, as well as server space. Our leases include an amendment to our previous lease in South San Francisco, California to rent 19,867 additional square feet, which commenced during the nine months ended September 30, 2020 and provides for a $0.6 million tenant improvement allowance. As of September 30, 2020, we were not party to any finance leases. Our leases have remaining terms of 1.6 years to 11.8 years, and include options to extend certain of the leases up to 10.0 years and terminate certain of the leases after 3.0 years. We adjust lease terms for these options only when it is reasonably certain we will exercise these options. As of September 30, 2020, it was reasonably certain that we would exercise our option to terminate two of our leases after 3.0 years.
Other information related to our operating leases as of September 30, 2020 was as follows:
Weighted-average remaining lease term (in years)
|
|
|
9.66
|
|
Weighted-average discount rate
|
|
|
4.6
|
%
|
19
Adaptive Biotechnologies Corporation
The following table reconciles our undiscounted operating lease cash flows to our operating lease liabilities as of September 30, 2020 (in thousands):
2020 (excluding the nine months ended September 30, 2020)
|
|
$
|
1,532
|
|
2021
|
|
|
6,887
|
|
2022
|
|
|
6,886
|
|
2023
|
|
|
6,450
|
|
2024
|
|
|
5,956
|
|
Thereafter
|
|
|
30,979
|
|
Total undiscounted lease payments
|
|
|
58,690
|
|
Less:
|
|
|
|
|
Imputed interest rate
|
|
|
(11,682
|
)
|
Tenant improvement receivables
|
|
|
(673
|
)
|
Total operating lease liabilities
|
|
$
|
46,335
|
|
Less: current portion
|
|
|
(3,969
|
)
|
Operating lease liabilities, less current portion
|
|
$
|
42,366
|
|
Operating lease expense was $1.4 million and $3.7 million for the three and nine months ended September 30, 2020, respectively. Variable lease expense for operating leases was $0.7 million and $1.8 million for the three and nine months ended September 30, 2020, respectively. Rent expense recognized under ASC 840, inclusive of operating and maintenance costs, was $1.3 million and $3.6 million for the three and nine months ended September 30, 2019, respectively.
Cash paid for amounts included in the measurement of lease liabilities for the nine months ended September 30, 2020 was $1.8 million, net of $1.8 million of cash received for tenant improvement allowances.
Lease Not Yet Commenced
In August 2019, we entered into an agreement to rent 100,000 square feet in a to-be-constructed building in Seattle, Washington. In connection with the lease, we entered into a $2.1 million letter of credit with one of our existing financial institutions. Due to our significant involvement during the construction process of the leased building, we qualified as the deemed owner of the building under build-to-suit lease accounting guidance that proceeded ASC 842. The resulting asset and long-term financing obligation recorded on our balance sheet for the cost of the building was derecognized upon adoption of ASC 842. As of September 30, 2020, we have incurred $2.4 million in certain tenant improvement costs relating to the to-be-constructed building, which are presented within the other long-term liabilities line item on our unaudited condensed balance sheet as of September 30, 2020. These costs will be reimbursed by the landlord. The related receivable of $2.4 million is presented within the prepaid expenses and other current assets line item on our unaudited condensed balance sheet as of September 30, 2020.
This lease will be assessed for classification and a lease liability and corresponding ROU asset will be recorded upon lease commencement. Future non-cancellable undiscounted lease payments total $89.8 million, payable over the lease term of 12.7 years.
9.
|
Commitments and Contingencies
|
Legal Proceedings
We are subject to claims and assessments from time to time in the ordinary course of business. We will accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. We are not currently party to any material legal proceedings.
Indemnification Agreements
In the ordinary course of business, we may provide indemnification of varying scope and terms to vendors, lessors, customers and other parties with respect to certain matters including, but not limited to, losses arising out of breach of our agreements with them or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with members of our board of directors and certain of our executive officers that will require us to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments that we could be required to make under these indemnification agreements is, in many cases, unlimited. We have not incurred any material costs as a result of such indemnifications and are not currently aware of any indemnification claims.
20
Adaptive Biotechnologies Corporation
Convertible Preferred Stock
Immediately prior to the completion of our initial public offering on July 1, 2019, 93,039,737 shares of convertible preferred stock then outstanding converted into an equivalent number of shares of common stock. As of September 30, 2020, no shares of convertible preferred stock were outstanding.
Preferred Stock
We are authorized to issue 10,000,000 shares of preferred stock, par value $0.0001 per share. As of September 30, 2020, no shares of preferred stock were outstanding.
Common Stock
We are authorized to issue 340,000,000 shares of common stock. Our common stock has a par value of $0.0001, no preferences or privileges and is not redeemable. Holders of our common stock are entitled to one vote for each share of common stock held. The holders of record of outstanding shares of common stock shall be entitled to receive, when, as and if declared, out of funds legally available, such cash and other dividends as may be declared from time to time. As of September 30, 2020, we had 136,392,256 shares of common stock outstanding.
As of September 30, 2020, we have reserved shares of common stock for the following:
Shares issuable upon the exercise of outstanding common stock options and
the vesting of outstanding common restricted stock units granted
|
|
|
15,567,900
|
|
Shares available for future grant under the 2019 Equity Incentive Plan
|
|
|
18,787,301
|
|
Shares available for future grant under the Employee Stock Purchase Plan
|
|
|
2,804,298
|
|
Shares to be issued upon exercise of a common stock warrant
|
|
|
56,875
|
|
Total shares of common stock reserved for future issuance
|
|
|
37,216,374
|
|
Our 2019 Equity Incentive Plan (“2019 Plan”) provides for annual increases in the number of shares that may be issued under the 2019 Plan on January 1, 2020 and on each subsequent January 1, thereafter, by a number of shares equal to the lesser of (a) 5% of the number of shares of common stock issued and outstanding on the immediately preceding December 31, or (b) an amount determined by our board of directors.
Furthermore, our Employee Stock Purchase Plan (“ESPP”) provides for annual increases in the number of shares available for issuance under our ESPP on January 1, 2020 and on each January 1, thereafter, by a number of shares equal to the smallest of (a) 1% of the number of shares of common stock issued and outstanding on the immediately preceding December 31, or (b) an amount determined by our board of directors.
On January 1, 2020, our 2019 Plan and ESPP reserves automatically increased by 6,261,907 shares and 1,252,381 shares, respectively.
Common Stock Warrant
In 2014, we issued a warrant to purchase 56,875 shares of Series C convertible preferred stock at an exercise price of $2.64. The warrant is exercisable for a period of seven years from the date of issuance. Immediately prior to and in connection with the completion of our initial public offering on July 1, 2019, this convertible preferred stock warrant, which was previously recorded as a financial liability, was converted to a warrant to purchase the same number of shares of common stock. Upon conversion, the financial liability was reclassified to the additional paid-in capital line item on our unaudited condensed balance sheet. The warrant to purchase 56,875 shares of common stock remains outstanding as of September 30, 2020.
21
Adaptive Biotechnologies Corporation
11.
|
Equity Incentive Plans
|
Sequenta 2008 Stock Plan, as amended
In connection with our acquisition of Sequenta in January 2015, we assumed Sequenta’s Equity Incentive Plan (“2008 Plan”), including all outstanding options and shares available for future issuance under the 2008 Plan, which, prior to the completion of our initial public offering, were all exercisable for Series E-1 convertible preferred stock. Upon completion of our initial public offering in July 2019, the outstanding options were exercisable for common stock. No shares are available for future issuance under this plan and no equity awards are outstanding under this plan as of September 30, 2020.
Adaptive 2009 Equity Incentive Plan
We adopted an equity incentive plan in 2009 (“2009 Plan”) that provided for the issuance of incentive and nonqualified common stock options and other share-based awards for employees, directors and consultants. Under the 2009 Plan, the option exercise price for incentive and nonqualified stock options were not to be less than the fair market value of our common stock at the date of grant. Options granted under this plan expire no later than ten years from the grant date and vesting was established at the time of grant. Pursuant to the terms of the 2019 Plan, any shares subject to outstanding options originally granted under the 2009 Plan that terminate, expire or lapse for any reason without the delivery of shares to the holder thereof shall become available for issuance pursuant to awards granted under the 2019 Plan. While no shares are available for future issuance under the 2009 Plan, it continues to govern outstanding equity awards granted thereunder.
2019 Equity Incentive Plan
The 2019 Plan was approved by our shareholders on June 13, 2019 and, pursuant to the resolutions adopted by our board of directors, became effective immediately prior to the closing of our initial public offering. The 2019 Plan provides for the issuance of awards in the form of options and other share-based awards for employees, directors and consultants. Under the 2019 Plan, the option exercise price per share shall not be less than the fair market value of a share of stock on the grant date of the option, as defined by the 2019 Plan, unless explicitly qualified under the provisions of Section 409A or Section 424(a) of the Internal Revenue Code of 1986. Additionally, unless otherwise specified, options granted under this plan expire no later than ten years from the grant date and vesting is established at the time of grant. Except for certain option grants made to non-employee directors, stock options granted under the 2019 Plan generally vest over a four-year period, subject to continuous service through each applicable vesting date. As of September 30, 2020, we have authorized 22,102,754 shares of common stock for issuance under the 2019 Plan.
Changes in shares available for grant during the nine months ended September 30, 2020 were as follows:
|
|
Shares Available for Grant
|
|
Shares available for grant at December 31, 2019
|
|
|
15,396,254
|
|
2019 Plan reserve increase on January 1, 2020
|
|
|
6,261,907
|
|
Options and restricted stock units granted
|
|
|
(3,070,331
|
)
|
Options and restricted stock units forfeited, cancelled or expired
|
|
|
199,471
|
|
Shares available for grant at September 30, 2020
|
|
|
18,787,301
|
|
Stock option activity under the 2008 Plan, 2009 Plan and 2019 Plan during the nine months ended September 30, 2020 was as follows:
|
|
Shares
Subject to
Outstanding
Options
|
|
|
Weighted-
Average
Exercise Price
per Share
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Options outstanding at December 31, 2019
|
|
|
16,646,654
|
|
|
$
|
6.14
|
|
|
$
|
398,379
|
|
Options granted
|
|
|
3,020,331
|
|
|
|
31.98
|
|
|
|
|
|
Options forfeited or cancelled
|
|
|
(184,471
|
)
|
|
|
14.19
|
|
|
|
|
|
Options expired
|
|
|
(15,000
|
)
|
|
|
0.16
|
|
|
|
|
|
Options exercised
|
|
|
(3,949,614
|
)
|
|
|
3.91
|
|
|
|
|
|
Options outstanding at September 30, 2020
|
|
|
15,517,900
|
|
|
$
|
11.65
|
|
|
$
|
573,922
|
|
Options vested and exercisable at September 30, 2020
|
|
|
8,604,883
|
|
|
$
|
5.97
|
|
|
$
|
367,072
|
|
The weighted-average remaining contractual life for options outstanding at September 30, 2020 was 7.1 years. The weighted-average remaining contractual life for vested and exercisable options outstanding at September 30, 2020 was 5.9 years.
22
Adaptive Biotechnologies Corporation
Of the $15.5 million proceeds from exercise of stock options included on our unaudited condensed statements of cash flows for the nine months ended September 30, 2020, $0.5 million related to options exercised prior to but settled during the nine months ended September 30, 2020. As of September 30, 2020, $0.4 million was included in the prepaid expenses and other current assets line item on our unaudited condensed balance sheet for unsettled cash proceeds related to options exercised.
As of December 31, 2019, 4,500 shares of restricted stock units (“RSUs”), with a weighted-average grant date fair value per share of $41.63, were nonvested and outstanding. We granted 50,000 shares of RSUs, with a weighted-average grant date fair value per share of $28.10, during the nine months ended September 30, 2020. During the nine months ended September 30, 2020, 4,500 shares of RSUs, with a weighted-average grant date fair value per share of $41.63, vested. As of September 30, 2020, 50,000 shares of RSUs, with a weighted-average grant date fair value per share of $28.10, remained nonvested and outstanding.
Fair Value of Options and Grant Date Fair Value of Restricted Stock Units
The estimated fair value of options granted during the nine months ended September 30, 2020 and 2019 was estimated using the Black-Scholes option-pricing model with the following assumptions:
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Grant date fair value
|
|
$17.68 - $48.54
|
|
|
$7.80 - $47.81
|
|
Expected term (in years)
|
|
5.27 - 6.08
|
|
|
5.27 - 6.08
|
|
Risk-free interest rate
|
|
0.4% - 1.7%
|
|
|
1.4% - 2.5%
|
|
Expected volatility
|
|
70.5% - 73.0%
|
|
|
64.3% - 72.9%
|
|
Expected dividend yield
|
|
|
—
|
|
|
|
—
|
|
The weighted-average volatility used in the fair value calculations of options granted during the nine months ended September 30, 2020 and 2019 was 71.2% and 68.0%, respectively.
The determination of the fair value of stock options on the date of grant using a Black-Scholes option-pricing model is affected by the estimated fair value of our common stock, as well as assumptions regarding a number of variables that are complex, subjective and generally require significant judgment to determine. The valuation assumptions were determined as follows:
Fair value of common stock—Prior to the closing of our initial public offering, the grant date fair value of our common stock was determined with input from management using valuation methodologies which utilized certain assumptions, including probability weighting of events, volatility, time to liquidation, a risk-free interest rate and an assumption for a discount for lack of marketability (Level 3 inputs). In determining the fair value of our common stock, the methodologies used to estimate the enterprise value were performed using methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. For valuations of grants made after the closing of our initial public offering, the fair value of each share of common stock is based on the closing price of our common stock on the date of grant, or other relevant determination date, as reported on The Nasdaq Global Select Market.
Expected term—The expected term of options granted to employees and non-employee directors is determined using the “simplified” method, as illustrated in ASC Topic 718, Compensation—Stock Compensation, as we do not have sufficient exercise history to determine a better estimate of expected term. Under this approach, the expected term is based on the midpoint between the vesting date and the end of the contractual term of the option.
Risk-free interest rate—We utilize a risk-free interest rate in the option valuation model based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected terms of the options.
Expected volatility—As we do not have sufficient trading history for our common stock, the expected volatility is based on the historical volatility of our publicly traded industry peers utilizing a period of time consistent with our estimate of the expected term.
Expected dividend yield—We do not anticipate paying any cash dividends in the foreseeable future and, therefore, use an expected dividend yield of zero in the option valuation model.
The grant date fair value of RSUs granted after the closing of our initial public offering is based on the closing price of our common stock on the date of grant, or other relevant determination date, as reported on The Nasdaq Global Select Market.
Share-based compensation expense of $6.5 million and $3.3 million was recognized during the three months ended September 30, 2020 and 2019, respectively, and $17.5 million and $9.7 million was recognized during the nine months ended September 30, 2020 and 2019, respectively.
23
Adaptive Biotechnologies Corporation
The compensation costs related to stock options and RSUs for the three and nine months ended September 30, 2020 and 2019, respectively, are included on our statements of operations as follows (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Cost of revenue
|
|
$
|
206
|
|
|
$
|
133
|
|
|
$
|
587
|
|
|
$
|
376
|
|
Research and development
|
|
|
2,216
|
|
|
|
943
|
|
|
|
5,912
|
|
|
|
2,838
|
|
Sales and marketing
|
|
|
1,759
|
|
|
|
798
|
|
|
|
4,583
|
|
|
|
2,647
|
|
General and administration
|
|
|
2,289
|
|
|
|
1,461
|
|
|
|
6,436
|
|
|
|
3,852
|
|
Total share-based compensation expense
|
|
$
|
6,470
|
|
|
$
|
3,335
|
|
|
$
|
17,518
|
|
|
$
|
9,713
|
|
At September 30, 2020, unrecognized share-based compensation expense related to unvested stock options was $75.5 million, which is expected to be recognized over a remaining weighted-average period of 3.1 years. Additionally, at September 30, 2020, unrecognized share-based compensation expense related to unvested RSUs was $1.2 million, which is expected to be recognized over a remaining weighted-average period of 3.5 years.
The effective tax expense was $0.7 million and the effective tax benefit was $1.1 million for the three and nine months ended September 30, 2020, respectively. There was no effective tax benefit for the year ended December 31, 2019.
We calculate our tax provision by applying a forecasted annual effective tax rate (“AETR”) against year-to-date pre-tax loss, and taking into account certain discrete items, primarily related to the exercise activity of stock options, in the quarter in which they occur. We recorded an income tax expense for the three months ended September 30, 2020 and an income tax benefit for the nine months ended September 30, 2020 because the discrete benefit from option exercises was greater than the year-to-date AETR tax expense. We do not expect to recognize any tax expense or benefit on a full year basis, inclusive of discrete items.
We file income tax returns in the U.S. federal jurisdiction and various U.S. state jurisdictions. Significant disputes may arise with authorities involving issues of the timing and amount of deductions, the use of tax credits and allocations of income and expenses among various tax jurisdictions because of differing interpretations of tax laws, regulations and the relevant facts. We believe our accrual for income tax liabilities is appropriate based on past experience, interpretations of tax law and judgments about potential actions by tax authorities; however, due to the complexity of the provision for income taxes, the ultimate resolution of any tax matters may result in payments greater or less than amounts accrued. Because of net operating loss carryforwards, substantially all tax years since inception remain open to federal and state tax examination.
On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) to provide emergency economic stimulus in light of the effects of COVID-19. While the CARES Act provides extensive tax changes, some of the more significant provisions include removing certain limitations on utilization of net operating losses, increasing the loss carryback period for certain losses to five years and increasing the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act of 2017 (“TCJA”). We are still evaluating the CARES Act, but do not anticipate a significant impact to our income tax provision.
24
Adaptive Biotechnologies Corporation
13.
|
Net Loss Per Share Attributable to Common Shareholders
|
Net Loss Per Share
The following table sets forth the computation of the basic and diluted net loss per share attributable to common shareholders for the three and nine months ended September 30, 2020 and 2019, respectively (in thousands, except share and per share amounts):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net loss
|
|
$
|
(36,719
|
)
|
|
$
|
(13,950
|
)
|
|
$
|
(101,657
|
)
|
|
$
|
(47,995
|
)
|
Fair value adjustments to redemption value for Series E-1
convertible preferred stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(964
|
)
|
Net loss attributable to common shareholders, basic and diluted
|
|
$
|
(36,719
|
)
|
|
$
|
(13,950
|
)
|
|
$
|
(101,657
|
)
|
|
$
|
(48,959
|
)
|
Weighted-average shares used in computing net loss per share
|
|
|
134,372,026
|
|
|
|
124,285,686
|
|
|
|
129,289,948
|
|
|
|
50,552,389
|
|
Net loss per share attributable to common shareholders, basic and
diluted
|
|
$
|
(0.27
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(0.97
|
)
|
Since we were in a loss position for all periods presented, basic net loss per share attributable to common shareholders is the same as diluted net loss per share attributable to common shareholders, as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive. The following weighted-average common stock equivalents were excluded from the calculation of diluted net loss per share attributable to common shareholders for the three and nine months ended September 30, 2020 and 2019, respectively, as they had an anti-dilutive effect:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Convertible preferred stock (on as if converted basis)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
61,641,506
|
|
Stock options issued and outstanding
|
|
|
15,718,821
|
|
|
|
17,466,409
|
|
|
|
16,484,334
|
|
|
|
17,096,516
|
|
Unvested restricted stock units
|
|
|
50,000
|
|
|
|
7,380
|
|
|
|
34,138
|
|
|
|
2,487
|
|
Common stock warrants
|
|
|
56,875
|
|
|
|
56,875
|
|
|
|
56,875
|
|
|
|
55,653
|
|
Convertible preferred stock warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
37,708
|
|
Total
|
|
|
15,825,696
|
|
|
|
17,530,664
|
|
|
|
16,575,347
|
|
|
|
78,833,870
|
|
25
Adaptive Biotechnologies Corporation