PRECISION BIOSCIENCES INC 10-Q

Item 1. Financial Statements. Precision Biosciences, Inc. Condensed Consolidated Balance Sheets (In thousands, except share and per share amounts) (Unaudited) June 30, 2020 December 31, 2019 Assets Current assets: Cash and cash equivalents $ 126,886 $ 180,886 Accounts receivable 83 965 Prepaid expenses 10,184 9,497 Other current assets 240 2,324 Total current assets 137,393 193,672 Property, equipment, and software—net 37,541 39,571 Intangible assets—net 1,402 1,432 Right-of-use assets 6,495 — Other assets 1,361 558 Total assets $ 184,192 $ 235,233 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 1,587 $ 2,037 Accrued compensation 3,343 4,425 Accrued clinical and research and development expenses 3,118 2,400 Accrued other expenses and other current liabilities 1,403 1,584 Deferred revenue 23,060 16,486 Lease liabilities 1,800 — Total current liabilities 34,311 26,932 Deferred revenue—noncurrent 55,161 65,895 Deferred rent—noncurrent — 4,092 Lease liabilities—noncurrent 9,121 — Total liabilities 98,593 96,919 Commitments and contingencies (Note 4) Stockholders’ equity: Preferred stock, $0.0001 par value— 10,000,000 shares authorized as of June 30, 2020 and December 31, 2019; no shares issued and outstanding as of June 30, 2020 and December 31, 2019 — — Common stock; $0.000005 par value— 200,000,000 shares authorized as of June 30, 2020 and December 31, 2019; 52,978,901 shares issued and 52,168,429 shares outstanding as of June 30, 2020; 51,965,708 shares issued and 51,155,236 shares outstanding as of December 31, 2019 — — Additional paid-in capital 323,155 316,333 Accumulated deficit (236,604 ) (177,067 ) Treasury stock (952 ) (952 ) Total stockholders’ equity 85,599 138,314 Total liabilities and stockholders’ equity $ 184,192 $ 235,233 See notes to condensed consolidated financial statements 6 Precision Biosciences, Inc. Condensed Consolidated Statements of Operations (In thousands, except share and per share amounts) (Unaudited) For the Three Months Ended June 30, For the Six Months Ended June 30, 2020 2019 2020 2019 Revenue $ 1,078 $ 5,389 $ 8,076 $ 10,851 Operating expenses Research and development 25,183 22,760 50,062 42,721 General and administrative 8,703 6,500 18,318 11,495 Total operating expenses 33,886 29,260 68,380 54,216 Loss from operations (32,808 ) (23,871 ) (60,304 ) (43,365 ) Other income (expense), net: Change in fair value of convertible notes payable — 2,950 — (9,758 ) Interest expense — — — (182 ) Interest income 107 1,485 767 2,086 Total other income (expense), net 107 4,435 767 (7,854 ) Net loss and net loss attributable to common stockholders $ (32,701 ) $ (19,436 ) $ (59,537 ) $ (51,219 ) Net loss per share attributable to common stockholders- basic and diluted $ (0.63 ) $ (0.39 ) $ (1.15 ) $ (1.55 ) Weighted average shares of common stock outstanding- basic and diluted 51,909,240 50,035,370 51,611,005 33,095,314 See notes to condensed consolidated financial statements 7 Precision Biosciences, Inc. Condensed Consolidated Statements of Changes in Stockholders’ Equity (In thousands, except share amounts) (Unaudited) Series A Convertible Preferred Stock Series B Convertible Preferred Stock Common Stock Additional Paid-In Accumulated Treasury Total Stockholder's Shares Amount Shares Amount Shares Amount Capital Deficit Stock Equity Balance- January 1, 2019 25,650,000 $ 3 21,956,095 $ 2 16,717,117 $ — $ 126,094 $ (85,187 ) $ (952 ) $ 39,960 Adjustment to beginning accumulated deficit from adoption of ASU 2014-09 — — — — — — — 997 — 997 Stock option exercises — — — — 145,975 — 107 — — 107 Share-based compensation expense — — — — — — 1,549 — — 1,549 Net loss — — — — — — — (31,783 ) — (31,783 ) Balance- March 31, 2019 25,650,000 $ 3 21,956,095 $ 2 16,863,092 $ — $ 127,750 $ (115,973 ) $ (952 ) $ 10,830 Conversion of convertible preferred stock into common stock upon initial public offering (25,650,000 ) (3 ) (21,956,095 ) (2 ) 22,301,190 — 5 — — — Issuance of common stock upon conversion of convertible notes — — — — 2,921,461 — 49,490 — — 49,490 Issuance of common stock in initial public offering, net of discounts and issuance costs — — — — 9,085,000 — 130,543 — — 130,543 Stock option exercises — — — — 230,272 — 272 272 Share-based compensation — — — — — — 2,279 — — 2,279 Net loss — — — — — — — (19,436 ) — (19,436 ) Balance- June 30, 2019 — — — — 51,401,015 — 310,339 (135,409 ) (952 ) 173,978 Balance- January 1, 2020 — $ — — $ — 51,965,708 $ — $ 316,333 $ (177,067 ) $ (952 ) $ 138,314 Stock option exercises — — — — 244,999 — 212 — — 212 Issuance of common stock under employee stock purchase plan — — — — 42,620 — 239 — — 239 Share-based compensation expense — — — — — — 3,105 — — 3,105 Net loss — — — — — — — (26,836 ) — (26,836 ) Balance- March 31, 2020 — $ — — $ — 52,253,327 $ — $ 319,889 $ (203,903 ) $ (952 ) $ 115,034 Stock option exercises — — — — 725,574 — 148 — — 148 Share-based compensation expense — — — — — — 3,118 — — 3,118 Net loss — — — — — — — (32,701 ) — (32,701 ) Balance- June 30, 2020 — $ — — $ — 52,978,901 $ — $ 323,155 $ (236,604 ) $ (952 ) $ 85,599 See notes to condensed consolidated financial statements 8 Precision Biosciences, Inc. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) For the Six Months Ended June 30, 2020 2019 Cash flows from operating activities: Net loss $ (59,537 ) $ (51,219 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 4,358 2,107 Share-based compensation 6,223 3,828 Loss on disposal of assets — 22 Non-cash interest expense — 182 Change in fair value of convertible notes payable — 9,758 Amortization of right-of-use assets 485 — Changes in operating assets and liabilities: Prepaid expenses (687 ) 648 Accounts receivable 882 273 Other assets and other current assets 1,913 (852 ) Accounts payable (121 ) 207 Accrued other expenses and other current liabilities (226 ) 2,436 Deferred revenue (4,160 ) (3,872 ) Lease liabilities and right-of-use assets (841 ) — Net cash used in operating activities (51,711 ) (36,482 ) Cash flows from investing activities: Purchases of property, equipment and software (2,888 ) (13,219 ) Net cash used in investing activities (2,888 ) (13,219 ) Cash flows from financing activities: Proceeds from stock option exercises 360 379 Proceeds from employee stock purchase plan 239 — Deferred offering costs — (2,507 ) Issuance of convertible notes — 39,550 Proceeds from IPO, net of underwriting discounts and commissions — 135,185 Net cash provided by financing activities 599 172,607 Net increase (decrease) in cash and cash equivalents (54,000 ) 122,906 Cash and cash equivalents—beginning of period 180,886 103,193 Cash and cash equivalents —end of period $ 126,886 $ 226,099 Supplemental disclosures of noncash financing and investing activities: Common stock issued on conversion of convertible notes $ — $ 49,490 Property, equipment and software additions included in accounts payable, accrued expenses and other current liabilities $ 471 $ 2,052 See notes to condensed consolidated financial statements 9 Precision BioSciences, Inc. Notes to Condensed C onsolidated Financial Statements (Unaudited) NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Precision BioSciences, Inc. (the “Company”) was incorporated on January 26, 2006 under the laws of the State of Delaware and is based in Durham, North Carolina. The Company is dedicated to improving life through the application of its pioneering, proprietary ARCUS genome editing platform to treat human diseases and create healthy and sustainable food and agricultural solutions. The Company is actively developing product candidates through two reportable segments: Therapeutics and Food. The Therapeutics segment is focused on allogeneic CAR T cell immunotherapy and in vivo gene correction. The Food segment focuses on applying ARCUS to develop food and nutrition products through collaboration agreements with consumer-facing companies. The Company’s wholly (100%) owned subsidiary, Precision PlantSciences, Inc., was incorporated on January 4, 2012. Precision PlantSciences, Inc. amended its certificate of incorporation on January 16, 2018 to change its name to Elo Life Systems, Inc. Elo Life Systems Australia Pty Ltd was incorporated on May 29, 2018 as a 100% owned subsidiary of Elo Life Systems, Inc. Additionally, the Company’s 100% owned subsidiary Precision BioSciences UK Limited was incorporated on June 17, 2019. The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. Since its inception, the Company has devoted substantially all of its efforts to research and development activities, recruiting skilled personnel, developing manufacturing processes, establishing its intellectual property portfolio and providing general and administrative support for these operations. The Company is subject to a number of risks similar to those of other companies conducting high-risk, early-stage research and development of product candidates. Principal among these risks are dependence on key individuals and intellectual property, competition from other products and companies, and the technical risks associated with the successful research, development and clinical manufacturing of its product candidates. The Company’s success is dependent upon its ability to continue to raise additional capital in order to fund ongoing research and development, obtain regulatory approval of its products, successfully commercialize its products, generate revenue, meet its obligations, and, ultimately, attain profitable operations. On April 1, 2019, the Company completed its initial public offering (“IPO”) in which the Company issued and sold 9,085,000 shares of its common stock at a public offering price of $16.00 per share and received approximately $130.5 million in net proceeds, after deducting underwriting discounts and commission of approximately $10.2 million and issuance costs of approximately $4.6 million. In connection with the IPO, on March 15, 2019 the Company effected a reverse split of shares of the Company’s common stock on a 1-for-2.134686 basis (the “Reverse Stock Split”) of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for the Company’s Series A and Series B preferred stock. Accordingly, all common shares, stock option shares, and per share amounts for all periods presented in the accompanying financial statements and notes thereto have been retroactively adjusted, where applicable, to reflect this Reverse Stock Split and adjustment of the preferred stock conversion ratios. Authorized common shares were not affected by the Reverse Stock Split. Upon the closing of the IPO, all of the outstanding shares of convertible preferred stock automatically converted into 22,301,190 shares of common stock at the applicable ratio then in effect and the outstanding convertible notes payable including accrued interest were settled into 2,921,461 shares of common stock (see Note 5). Subsequent to the closing of the IPO, there were no shares of Series A or Series B convertible preferred stock or convertible notes payable outstanding. Management believes that existing cash, cash equivalents and available credit will allow the Company to continue its operations into 2022. In the absence of a significant source of recurring revenue, the continued viability of the Company beyond that point is dependent on its ability to continue to raise additional capital to finance its operations. There can be no assurance that the Company will be able to obtain sufficient capital to cover its costs on acceptable terms, if at all. 10 Unaudite d Interim Financial Information The accompanying unaudited condensed consolidated financial statements and notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in the annual financial statements, prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”), have been condensed or omitted pursuant to those rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on March 10, 2020. The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the Company’s consolidated financial position as of June 30, 2020 and consolidated results of operations for the three and six months ended June 30, 2020 and 2019 and the consolidated cash flows for the six months ended June 30, 2020 and 2019, have been made. The Company’s consolidated results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2020. Summary of Significant Accounting Policies Leases In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (“ASC 842”), to enhance the transparency and comparability of financial reporting related to leasing arrangements. In November 2019, the FASB issued ASU 2019-10, Financial Instruments — Credit losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which provided a one-year deferral of the effective dates of ASC 842. The Company adopted ASC 842 on January 1, 2020, or the effective date, and used the effective date as its date of initial application. At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and lease liabilities. The Company has elected not to recognize on the balance sheet leases with terms of one year or less. Lease liabilities and corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. However, certain adjustments to the right-of-use asset may be required for items such as prepaid and deferred rent. In calculating the present value of the lease payments, the Company has elected to apply the discount rate based on the remaining lease term as of the transition date, January 1, 2020. However, as the rate implicit in the lease is not readily determinable, the Company utilizes its incremental borrowing rates, which are the rates incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company has elected to account for the lease and non-lease components of each of its operating leases as a single lease component. The operating right-of-use asset recorded on the balance sheet is amortized on a straight-line basis as lease expense. Revenue Recognition for Contracts with Customers The Company’s revenues are generated primarily through collaborative research, license, development and commercialization agreements. Effective January 1, 2019, the Company adopted ASU No. 2014-09, Revenue: Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective transition method. Under this method, results for reporting periods beginning on January 1, 2019 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with ASC Topic 605, Revenue Recognition (“ASC 605”). The Company applied the modified retrospective transition method to contracts that were not completed as of January 1, 2019. ASC 606 applies to all contracts with customers, except for contracts that are within the scope of other standards. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. 11 At contract inception, once the contr act is determined to be within the scope of ASC 606, the Company evaluates the performance obligations promised in the contract that are based on goods and services that will be transferred to the customer and determines whether those obligations are both (i) capable of being distinct and (ii) distinct in the context of the contract. Goods or services that meet these criteria are considered distinct performance obligations. If both these criteria are not met, the goods and services are combined into a singl e performance obligation. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Arrangements that include rights to additi onal goods or services that are exercisable at a customer’s discretion are generally considered options. The Company assess es if these options provide a material right to the customer and if so, the se options are considered performance obligations. The exe rcise of a material right is accounted for as a contract modification for accounting purposes. The Company recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) each performance obligation is satisfied at a point in time or over time, and if over time this is based on the use of an output or input method. For the six months ended June 30, 2020, the Company recorded cumulative catch up adjustments that reduced revenue recognition by $6.6 million, in addition to a contract liability adjustment, for changes in total estimated effort to be incurred in the future to satisfy the performance obligation. Amounts received prior to revenue recognition are recorded as deferred revenue. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue within current liabilities in the accompanying condensed consolidated balance sheets. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue – noncurrent. Amounts recognized as revenue, but not yet received or invoiced are generally recognized as contract assets in the Other current assets line item in the condensed consolidated balance sheets. Milestone Payments – If an arrangement includes development and regulatory milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price 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 control or the licensee’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received. Royalties – For arrangements that include sales-based royalties, including milestone payments based on a level of sales, which are the result of a customer-vendor relationship and for which the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements. Significant Financing Component – In determining the transaction price, the Company adjusts consideration for the effects of the time value of money if the timing of payments provides the Company with a significant benefit of financing. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensees and the transfer of the promised goods or services to the licensees will be one year or less. The Company assessed each of its revenue arrangements in order to determine whether a significant financing component exists and concluded that a significant financing component does not exist in any of its arrangements. Collaborative Arrangements – The Company has entered into collaboration agreements, which are within the scope of ASC 606, to discover, develop, manufacture and commercialize product candidates. The terms of these agreements typically contain multiple promises or obligations, which may include: (1) licenses, or options to obtain licenses, to use the Company’s technology, (2) research and development activities to be performed on behalf of the collaboration partner, and (3) in certain cases, services in connection with the manufacturing of preclinical and clinical material. Payments the Company receives under these arrangements typically include one or more of the following: non-refundable, upfront license fees; option exercise fees; funding of research and/or development efforts; clinical and development, regulatory, and sales milestone payments; and royalties on future product sales. The Company analyzes its collaboration arrangements to assess whether they are within the scope of ASC 808, Collaborative Arrangements (“ASC 808”) to determine whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. For collaboration arrangements within the scope of ASC 808 that contain multiple elements, the Company first determines which elements of the collaboration are deemed to be within the scope of ASC 808 and those that are more reflective of a vendor-customer relationship and, therefore, are within the scope of ASC 606. For elements of collaboration arrangements that are accounted for pursuant to ASC 808, an appropriate recognition method is determined and applied consistently, generally by analogy to ASC 606. For those elements of the arrangement that are accounted for pursuant to ASC 606, the Company applies the five-step model described above. For a complete discussion of accounting for collaboration revenues, see Note 8, “Collaboration and license agreements.” 12 Accounting Standards Updates In February 2016, the FASB issued ASU 2016-02, Leases (“ASC 842”). In November 2019, the FASB issued ASU 2019-10, Financial Instruments — Credit losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which provided a one-year deferral of the effective dates of ASC 842. This standard was issued in order to improve comparability among organizations by recognizing lease assets and liabilities for all leases, with certain exceptions, on the balance sheet. The Company elected to early adopt ASC 842 on January 1, 2020, or the effective date, and used the effective date as its date of initial application. As such, the Company did not adjust prior period amounts. The Company also elected to adopt the package of practical expedients upon transition, which permits companies to not reassess lease identification, classification, and initial direct costs under ASC 842 for leases that commenced prior to the effective date. Upon adoption, the Company recorded lease liabilities of $11.6 million, right-of-use assets of $6.8 million, and a reduction of existing deferred rent balances of $4.8 million on the balance sheet as of January 1, 2020. In May 2014, the Financial Accounting Standards Board, or FASB, issued ASC 606, which superseded the revenue requirements in ASC 605. In 2015 and 2016, the FASB issued additional ASUs related to ASC 606 that delayed the effective date of the guidance and clarified various aspects of the new revenue guidance, including principal versus agent considerations, identifying performance obligations, and licensing, and they include other improvements and practical expedients. Effective January 1, 2019, the Company adopted ASC 606 using the modified retrospective transition method. As a result of adopting ASC 606, the Company recorded a $1.0 million transition adjustment in the first quarter of 2019 to reduce the opening balance of accumulated deficit as of January 1, 2019 primarily as a result of the treatment of the up-front consideration received from the Company’s collaboration agreements under prior revenue recognition guidance. During the six months ended June 30, 2020, the Company recognized $4.2 million in revenue that was included in the deferred revenue balance as of December 31, 2019. The most significant change to the Company’s revenue recognition as a result of the adoption of ASC 606 relates to the accounting for certain option fees and milestone payments in determining the transaction price (step (iii)), and the revenue recognition pattern (step (v)) related to the Company’s development and commercial license agreement with Servier. Under ASC 605, the option fees payable by the Company to exercise the 50/50 co-development and co-promotion option was accounted for as a reduction in the arrangement consideration, and certain development milestones that may be earned for early-stage pre-IND development milestones were included in the arrangement consideration as the early-stage pre-IND development milestones were deemed to be non-substan tive. Under ASC 606, the option fees were not accounted for as a reduction in the transaction price as the option fees are contingent upon Servier’s exercise of its commercial (customer) options on licensed product candidates, and the milestone payments were excluded from the transaction price based on the assessment of the most likely amount and application of the variable consideration constraint, since the milestones relate to successful achievement of certain developmental goals, which may not be achieved. In addition, under ASC 605, the Company recognized revenue on a straight‑line basis over the period the Company expected to complete its obligations. Under ASC 606, the Company recognizes revenue based on the proportional performance of the services related to the performance obligation expected. In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measuremen t (“ASU 2018-13”). ASU 2018-13 is intended to improve the effectiveness of disclosures in the notes to financial statements related to fair value measurements in Topic 820. This ASU will become effective for annual periods beginning after December 15, 2019, including interim periods within that period, and early adoption is permitted. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures. In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808)—Clarifying the Interaction between Topic 808 and ASC 606 (“ASU 2018-18”). The amendments in ASU 2018-18 make targeted improvements to GAAP for collaborative arrangements by clarifying that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the 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. In addition, unit-of-account guidance in ASU 2018-18 was aligned 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. ASU 2018-18 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The amendments should be applied retrospectively to the date of initial application of ASC 606. The Company adopted this guidance effective January 1, 2019 with its initial application of ASC 606. The adoption of the standard did not have an impact on the Company’s condensed consolidated financial statements. 13 NOTE 2 : STOCKHOLDERS’ EQUITY Capital Structure Upon the closing of the IPO, all of the Company’s outstanding shares of the Series A and Series B convertible preferred stock automatically converted into 22,301,190 shares of common stock and the Company’s outstanding convertible notes payable including accrued interest converted into 2,921,461 shares of common stock at the applicable conversion ratio. Subsequent to the closing of the IPO, there were no shares of preferred stock outstanding. On April 1, 2019, the Company filed an amendment to its amended and restated certificate of incorporation pursuant to which, among other things, the Company increased its authorized shares to 210,000,000 shares of capital stock, of which 200,000,000 shares were designated as $0.000005 par value common stock and 10,000,000 shares were designated as $0.0001 par value preferred stock. NOTE 3 : SHARE-BASED COMPENSATION Under the terms of its equity incentive award plans, the Company’s board of directors may grant equity or equity-based awards to employees, directors and service providers. The Company granted stock options under the 2006 Stock Incentive Plan (“2006 Plan”) until April 2015 when the 2015 Stock Incentive Plan (“2015 Plan”) was adopted. The 2006 Plan expired in 2016 and there are no remaining shares available to be granted under the 2006 Plan. There were 758,080 stock options outstanding under the 2006 Plan as of June 30, 2020. Upon adoption of the 2015 Plan, there were 5,270,095 shares of common stock reserved for issuance. In May 2018, the Company amended the 2015 Plan to increase the number of shares reserved for issuance to 8,211,980. The 2015 Plan had 4,921,312 stock options outstanding as of June 30, 2020. The Company’s board of directors determines the terms of stock options granted under the 2015 Plan, including option exercise prices and vesting. On March 12, 2019, the Company’s board of directors adopted, and the Company’s stockholders approved the Precision BioSciences, Inc. 2019 Incentive Award Plan (“2019 Plan”) and the 2019 Employee Stock Purchase Plan (“2019 ESPP”), both of which became effective on March 27, 2019. On March 27, 2019, the Company ceased granting new awards under the 2015 Plan. The 2019 Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and other share-based awards initially equal to 4,750,000 shares of common stock. The 2019 Plan provides for an annual increase to the number of shares of common stock available for issuance on the first day of each calendar year beginning January 1, 2020 and ending on and including January 1, 2029 by an amount equal to the lesser of (i) 4% of the aggregate number of shares of common stock outstanding on the final day of the immediately preceding calendar year and (ii) such smaller number of shares of common stock as determined by the board of directors. The number of shares available for issuance under the 2019 Plan was increased by 2,046,209 on January 1, 2020 pursuant to this provision. Any shares that are subject to awards outstanding under the Company’s 2006 Plan and 2015 Plan as of the effective date of the 2019 Plan that expire, lapse, or are terminated, exchanged for cash, surrendered, repurchased, or canceled without having been fully exercised or forfeited, to the extent so unused, will become available for award grants under the 2019 Plan. The 2019 Plan had 4,296,545 stock options outstanding as of June 30, 2020. Up to 525,000 shares of the Company’s common stock were initially reserved for issuance under the 2019 ESPP. The 2019 ESPP provides for an annual increase to the number of shares available for issuance on the first day of each calendar year beginning January 1, 2020 and ending on and including January 1, 2029 by an amount equal to the lesser of (i) 1% of the shares outstanding on the final day of the immediately preceding calendar year and (ii) such smaller number of shares as is determined by our board of directors. The number of shares available for issuance under the 2019 ESPP was increased by 511,552 shares on January 1, 2020 pursuant to this provision. No more than 5,250,000 shares of our common stock may be issued under our 2019 ESPP. The purchase price of the shares, in the absence of a contrary designation, will be 85% of the lower of the fair market value of our common stock on the first trading day of the offering period or on the purchase date. The first ESPP offering period commenced on October 21, 2019 and ended on February 29, 2020; 42,620 shares were issued with respect to this offering period. The next ESPP offering period commenced on March 1, 2020 and will end on August 31, 2020. The Company recorded employee and nonemployee share-based compensation expense as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Employee $ 2,850 $ 2,138 $ 5,779 $ 3,577 Nonemployee 268 141 444 251 $ 3,118 $ 2,279 $ 6,223 $ 3,828 14 S hare -based compensation expense related to stock options is included in the following line items in the condensed consolidated statements of operations (in thous ands): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Research and development $ 1,953 $ 1,510 $ 3,808 $ 2,516 General and administrative 1,165 769 2,415 1,312 $ 3,118 $ 2,279 $ 6,223 $ 3,828 Determining the appropriate fair value model to measure the fair value of the stock option grants on the date of grant and the related assumptions requires judgment. The fair value of each stock option grant is estimated using a Black-Scholes option-pricing model on the date of grant as follows: Three Months Ended June 30, Six Months Ended June 30, 2020 2020 Estimated dividend yield 0.00 % 0.00 % Weighted-average expected stock price volatility 74.09 % 73.82 % Weighted-average risk-free interest rate 0.54 % 0.69 % Expected life of options (in years) 6.56 6.57 Weighted-average fair value per option $ 4.54 $ 5.12 The expected volatility rates are estimated based on the actual volatility of comparable public companies over the expected term. The expected term represents the average time that stock options that vest are expected to be outstanding. The Company does not have sufficient history of exercising stock options to estimate the expected term of employee stock options and thus utilizes a weighted value considering actual history and estimated expected term based on the midpoint of final vest date and expiration date. The risk-free rate is based on the United States Treasury yield curve during the expected life of the option. The following table summarizes activity in the Company’s stock option plans for the six months ended June 30, 2020: Outstanding Option Shares Weighted-Average Exercise Price Balance as of January 1, 2020 8,919,116 $ 7.02 Granted 2,576,567 7.71 Exercised (970,573 ) 0.37 Forfeited/canceled (549,173 ) 7.76 Balance as of June 30, 2020 9,975,937 $ 7.81 The intrinsic value of stock options exercised was $6.7 million and $4.6 million during the six months ended June 30, 2020 and 2019, respectively. There was approximately $33.6 million of total unrecognized compensation cost related to unvested stock options as of June 30, 2020, which is expected to be recognized over a weighted-average period of 2.8 years. NOTE 4 : COMMITMENTS AND CONTINGENCIES Litigation The Company is not subject to any material legal proceedings. 15 COVID-19 Pandemic In March 2020, the World Health Organization designated the outbreak of the novel strain of coronavirus known as COVID-19 as a global pandemic. The Company has taken steps in line with guidance from the U.S. Centers for Disease Control and Prevention (“ CDC”) and the State of North Carolina to protect the health and safety of its employees and the community. In particular, the Company has implemented a work-from-home policy and has restricted on-site activities, including certain manufacturing functions and limited laboratory and support activities. The Company is working closely with its clinical sites, physician partners and the patient community to monitor and manage the impact of the COVID-19 pande mic. The Company remains committed to its clinical programs and development plans, however, disruptions, competing resource demands and safety concerns caused by the COVID-19 pandemic have caused delays in the Company’s clinical trial site activation and impacted its ability to enroll patients. The Company may also experience other difficulties, disruptions or delays in conducting preclinical studies or initiating, enrolling, conducting or completing its planned and ongoing clinical trials, and the Company may incur other unforeseen costs as a result . While the extent to which COVID-19 may continue to impact the Company’s future results will depend on future developments, the pandemic and associated economic impacts could result in a material impact to the C ompany’s future financial condition, results of operations and cash flows. The Company is continuing to assess the impact of the COVID-19 pandemic to best mitigate risk and continue the operations of its business. Leases The Company has operating leases for real estate in North Carolina and does not have any finance leases. During the six months ended June 30, 2020, the Company entered into three related amendments to an existing real estate lease for additional space. The Company is involved in the constru ction and design of the space and anticipates that it will incur construction costs, subject to an allowance for tenant improvements of up to $0.9 million. The lease expires on August 31, 2027. The base rent is $0.5 million per year, subject to an annual u pward adjustment of 3.0%, and the Company is subject to a two month free-rent period . Variable lease payments include the Company’s allocated share of costs incurred and expenditures made by the landlord in the operation and management of the building. The lease commencement date, for accounting purposes, was not reached as of June 30, 2020 and therefore the lease is not included in the Company’s operating lease right-of-use asset or operating lease liabilities as of June 30, 2020. As part of the amendments, upon construction completion, the term of the existing space will be extended by one year, through August 31, 2027. Many of the Company’s leases contain options to renew and extend lease terms and options to terminate leases early. Reflected in the right-of-use asset and lease liability on the Company’s balance sheet are the periods provided by renewal and extension options that the Company is reasonably certain to exercise, as well as the periods provided by termination options that the Company is reasonably certain to not exercise. The Company has existing leases that include variable lease payments that are not included in the right-of-use asset and lease liability and are reflected as an expense in the period incurred. Such payments primarily include common area maintenance charges and fluctuations in rent payments that are driven by factors such as future changes in an index (e.g. the Consumer Price Index). The Company has existing net leases in which the non-lease components (e.g., common area maintenance, consumables, etc.) are paid separately from rent based on actual costs incurred and therefore are not included in the right-of-use asset and lease liability but rather reflected as an expense in the period incurred. As of June 30, 2020, right-of-use assets of $6.5 million, current lease liabilities of $1.8 million, and non-current lease liabilities of $9.1 million are reflected on the balance sheet. The elements of lease expense were as follows: 16 Six Months Ended June 30, (in thousands) 2020 Lease Cost Operating lease cost $ 942 Short-term lease cost 237 Variable lease cost 466 Total Lease Cost $ 1,645 Other Information Operating cash flows used for operating leases 1,276 Operating lease liabilities arising from obtaining right-of-use assets 157 Operating Leases Weighted average remaining lease term (in years) 4.9 Operating Leases Weighted average discount rate 8.3 % Future lease payments under non-cancelable leases with terms of greater than one year as of June 30, 2020, were as follows: (in thousands) June 30, 2020 2020 (excluding the 6 months ended June 30, 2020) $ 1,292 2021 2,674 2022 2,758 2023 2,836 2024 2,128 2025 and beyond 1,639 Total lease payments 13,327 Less: imputed interest 2,406 Total operating lease liabilities $ 10,921 Minimum lease payments under operating leases as of December 31, 2019 under superseded ASC 840 Leases accounting guidance were as follows: (in thousands) December 31, 2019 2020 $ 2,706 2021 3,099 2022 3,196 2023 3,288 2024 2,611 2025 and beyond 3,066 Total minimum lease payments $ 17,966 Supply Agreements The Company enters into contracts in the normal course of business with contract manufacturing organizations (“CMOs”) for the manufacture of clinical trial materials and contract research organizations (“CROs”) for clinical trial services. These agreements provide for termination at the request of either party with less than one-year notice and are, therefore, cancelable contracts and, if canceled, are not anticipated to have a material effect on the condensed consolidated financial condition, results of operations, or cash flows of the Company. NOTE 5 : DEBT In March 2019, the Company entered into a note purchase agreement pursuant to which it sold and issued an aggregate of $39.6 million of convertible notes payable (the “2019 Notes”). The 2019 Notes accrued interest at a rate of 6% per annum. The 2019 Notes were settled in 2,921,461 shares of common stock in 17 connection with the closing of the Company’s IPO (see Note 1) at a settlement price of $13.60 per share ( equal to 85% of the IPO price per share ) . On issuance, the Company elected to account for the 2019 Notes at fair value with any changes in fair value being recognized through the condensed consolidated statements of operations until the 2019 Notes are settled. The fair value of the 2019 Notes was determined to be $39.6 million on issuance and $49.4 million as of April 1, 2019, the settlement date. Revolving Line On June 23, 2020, the Company and Pacific Western Bank (“Bank”) entered into the Third Amendment to Loan and Security Agreement to the revolving line of credit agreement dated as of May 15, 2019 (as amended, the “Pacific Western Loan”). The aggregate principal amount under the Pacific Western Loan is $30.0 million. The Pacific Western Loan matures on June 23, 2022, provided that, if the Company receives aggregate cash proceeds of at least $125.0 million from the issuance of the Company’s equity securities and/or upfront cash proceeds from strategic partnerships on terms and conditions reasonably satisfactory to the Bank, the maturity date shall then instead be June 23, 2023. All outstanding principal amounts are due on the maturity date. The Company must also maintain an aggregate balance of unrestricted cash at Bank (not including amounts in certain specified accounts) equal to or greater than $10.0 million. The interest rate under the Pacific Western Loan is a variable annual rate equal to the greater of (a) 2.75% above the Prime Rate (as defined in the Pacific Western Loan), or (b) 6.00%. There were no borrowings, and the Company was in compliance with its financial covenants, under the Pacific Western Loan as of June 30, 2020. NOTE 6 : Income Taxes The Company estimates an annual effective tax rate of 0% for the year ending December 31, 2020 as the Company incurred losses for the six months ended June 30, 2020 and is forecasting additional losses through the remainder of fiscal year ending December 31, 2020, resulting in an estimated net loss for both financial statement and tax purposes for the year ending December 31, 2020. Therefore, no federal or state income taxes are expected and none have been recorded at this time. Income taxes have been accounted for using the liability method. Due to the Company's history of losses since inception, there is not enough evidence at this time to support that the Company will generate future income of a sufficient amount and nature to utilize the benefits of its net deferred tax assets. Accordingly, the deferred tax assets have been reduced by a full valuation allowance, since the Company does not currently believe that realization of its deferred tax assets is more likely than not. As of June 30, 2020, the Company had no unrecognized income tax benefits that would reduce the Company’s effective tax rate if recognized. NOTE 7 : FAIR VALUE MEASUREMENTS The carrying amounts of the Company’s financial instruments, including accounts receivable, accounts payable, and accrued expenses and other current liabilities, approximate their respective fair values due to their short-term nature. The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis and to minimize the use of unobservable inputs when determining their fair value. The three tiers are defined as follows: Level 1—Observable inputs based on unadjusted quoted prices in active markets for identical assets or liabilities Level 2—Inputs, other than quoted prices in active markets, that are observable either directly or indirectly Level 3—Unobservable inputs for which there is little or no market date, which require the Company to develop its own assumptions The Company classifies investments in money market funds within Level 1 as the prices are available from quoted prices in active markets. Investments in repurchase agreements are classified within Level 2 as these instruments are valued using observable market inputs including reported trades, broker/dealer quotes, bids and/or offers. As of June 30, 2020 and December 31, 2019, the Company held cash equivalents which are composed of money market funds and repurchase agreements that were purchased through repurchase intermediary banks and collateralized by deposits in the form of government securities and obligations. 18 The following represents assets measured at fair value on a recurring basis by the Company (in thousands): June 30, 2020 Fair Value Level 1 Level 2 Level 3 Assets: Money market funds $ 103,356 $ 103,356 $ — $ — Repurchase agreements 20,000 — 20,000 — $ 123,356 $ 103,356 $ 20,000 $ — December 31, 2019 Fair Value Level 1 Level 2 Level 3 Assets: Money market funds $ 3,395 $ 3,395 $ — $ — Repurchase agreements 173,000 — 173,000 — $ 176,395 $ 3,395 $ 173,000 $ — 19 NOTE 8 : COLLABORATION AND LICENSE AGREEMENTS Development and Commercial License Agreement with Servier On February 24, 2016, the Company entered into a development and commercial license agreement, as subsequently amended, with predecessor entities to Servier. This agreement establishes a collaboration between the Company and Servier to develop allogeneic chimeric antigen receptor T (“CAR T”) cell therapies for up to six unique antigen targets selected by Servier. Servier selected one target at the agreement’s inception. The Company granted Servier a development license and will perform early-stage R&D on the selected targets and develop the resulting therapeutic product candidates through Phase 1 clinical trials and manufacture clinical trial material for use in Phase 2 clinical trials. Also, the Company and Servier have formed a joint steering committee (“JSC”) to provide high-level oversight and decision making regarding the activities covered under the agreement. The Company recognizes revenue from the upfront payment of $105.0 million based on an input method in the form of research effort relative to expected research effort at the completion of the performance obligation, which is based on the actual time of R&D activities performed relative to expected time to be incurred in the future to satisfy the performance obligation. Management evaluates and adjusts the total expected research effort for the performance obligation on a quarterly basis based upon actual research accomplishments, changes in research approach as determined by the JSC, Servier’s selection and direction on antigen targets, and the probability of continuing research efforts in the future. The transfer of control occurs over this time period and, in management’s judgment, is the best measure of progress towards satisfying the performance obligation. The remaining performance obligation associated with the $105.0 million upfront payment is expected to be satisfied over an approximate 5 year period as of June 30, 2020. During the six months ended June 30, 2020 and 2019, the Company recognized revenue under the agreement with Servier of approximately $2.6 million and $3.0 million, respectively. Deferred revenue related to the agreement with Servier amounted to $78.2 million and $80.9 million as of June 30, 2020 and December 31, 2019, respectively, of which $23.1 million and $15.0 million, respectively is included in current liabilities. No development or sales-based milestone payments were received during the six months ended June 30, 2020 and 2019. Collaboration and License Agreement with Gilead On July 6, 2020 (the “Termination Notice Date”), Gilead Sciences (“Gilead”) notified the Com pany of its termination of the Collaboration and License Agreement between Gilead and the Company, dated September 10, 2018, as subsequently amended by Amendment No. 1 to the Collaboration and License Agreement, dated March 10, 2020 (as amended, the “Gilead Agreement”). Pursuant to the termination notice, the Gilead Agreement will terminate effective September 4, 2020. Upon termination, the Company will regain full rights and all data it generated for the in vivo chronic hepatitis B virus (“HBV”) program d eveloped under the Gilead Agreement. The Company is exploring partnership or alternative opportunities to enable the continued development of ARCUS-based HBV therapies, the progression toward the submission of an IND for this product candidate and the reassessment of the timing of such IND submission. Revenue associated with the combined performance obligation was recognized on a straight-line basis as the R&D services were provided through the Termination Notice Date. During the six months ended June 30, 2020 and 2019, the Company recognized revenue under the Gilead Agreement of approximately $3.9 million and $6.7 million, respectively. The Company did not have deferred revenue related to the Gilead Agreement as of June 30, 2020. Deferred revenue amounted to $1.5 million as of December 31, 2019. No development or sales-based milestone payments were received during the six months ended June 30, 2020. NOTE 9 : SEGMENT REPORTING The Company has developed a genome editing platform and performed related research for human therapeutic and agricultural applications. The Company’s Chief Operating Decision Maker (“CODM”) evaluates the Company’s financial performance based on two reportable segments: Therapeutics and Food. The Therapeutics segment is focused on the development of products in the field of immuno-oncology and of novel products outside immuno-oncology to treat human diseases. The Food segment is focused on applying ARCUS to develop food and nutrition products through collaboration agreements with consumer-facing companies. The CODM reviews segment performance and allocates resources based upon segment revenue and segment operating loss of the Therapeutics and Food reportable segments. Segment operating loss is derived by deducting operational cash expenditures, net, from GAAP revenue. Operational cash expenditures are cash disbursements made that are directly attributable to the reportable segment (including directly attributable research and development and property, equipment, and software expenditures). The Company previously allocated centralized research and development expenditures for early stage research, nuclease development and the purchase of general laboratory supplies to the Therapeutics and Food segments based on headcount and presented such allocated expenditures separately from segment operational cash expenditures. Beginning January 1, 2020, such allocated expenditures are included within segment operational cash expenditures. Prior period information was presented consistent with the current period presentation. In January 2019, the Food 20 segment moved into a new leased facility at Research Triangle Park, North Carolina . The Company determined that the Food seg ment is no longer deriving benefit from the Company’s centralized research and development expenditure s for early stage research, nuclease development and the purchase of general laboratory supplies and , as such , all these expenditures are allocated to the Therapeutics segment . Certain reclassifications have been made to the presentation of reportable segments as centralized research and development expenditures are no longer reported separately. T he reportable se gment operational cash expenditures include cash disbursements for compensation, lab oratory supplies, purchases of property, equipment and software and procuring services from CROs, CMOs and research organizations . Certain cost items are not allocated to the Company’s reportable segments. These cost items primarily consist of compensation and general operational expenses associated with the Company’s executive, business development, finance, operations, human resources and legal functions. The Company does not allocate non-cash income statement amounts to its reportable segments, such as share based compensation, depreciation and amortization, intangible asset impairment charges, non-cash interest expense and losses on the disposal of assets. When reconciling segment operating loss to consolidated loss from operations, the Company makes an adjustment to convert the cash expenditures to the accrual basis to reflect GAAP. All segment revenue is earned in the United States and there are no intersegment revenues. Additionally, the Company reports assets on a consolidated basis and does not allocate assets to its reportable segments for purposes of assessing segment performance or allocating resources. Presented below is the financial information with respect to the Company’s reportable segments: Three Months Ended June 30, (in thousands) 2020 2019 Change Revenue: Therapeutics $ 1,020 $ 4,819 $ (3,799 ) Food 58 570 (512 ) Total segment revenue 1,078 5,389 (4,311 ) Segment operational cash expenditures: Therapeutics 19,117 17,990 1,127 Food 1,588 2,077 (489 ) Total segment operational cash expenditures 20,705 20,067 638 Segment operating loss: Therapeutics (18,097 ) (13,171 ) (4,926 ) Food (1,530 ) (1,507 ) (23 ) Total segment operating loss (19,627 ) (14,678 ) (4,949 ) Adjustments to reconcile segment operating loss to consolidated loss from operations: Corporate general and administrative cash expenditures (10,714 ) (11,123 ) 409 Interest income received (107 ) (1,485 ) 1,378 Depreciation and amortization (2,203 ) (1,168 ) (1,035 ) Amortization of right-of-use asset (250 ) — (250 ) Share-based compensation (3,118 ) (2,279 ) (839 ) Loss on disposal of assets — (22 ) 22 Changes in prepaid expenses, accounts payable and accrued expenses 3,211 6,884 (3,673 ) Total consolidated loss from operations $ (32,808 ) $ (23,871 ) $ (8,937 ) 21 Six Months Ended June 30, (in thousands) 2020 2019 Change Revenue: Therapeutics $ 6,493 $ 9,638 $ (3,145 ) Food 1,583 1,213 370 Total segment revenue 8,076 10,851 (2,775 ) Segment operational cash expenditures: Therapeutics $ 38,374 $ 34,653 $ 3,721 Food 4,406 4,184 222 Total segment operational cash expenditures 42,780 38,837 3,943 Segment operating loss: Therapeutics $ (31,881 ) $ (25,015 ) $ (6,866 ) Food (2,823 ) (2,971 ) 148 Total segment operating loss (34,704 ) (27,986 ) (6,718 ) Adjustments to reconcile segment operating loss to consolidated loss from operations: Corporate general and administrative cash expenditures $ (16,617 ) $ (18,145 ) $ 1,528 Interest income received (767 ) (2,086 ) 1,319 Depreciation and amortization (4,358 ) (2,107 ) (2,251 ) Amortization of right-of-use asset (485 ) — (485 ) Share-based compensation (6,223 ) (3,828 ) (2,395 ) Loss on disposal of assets — (22 ) 22 Changes in prepaid expenses, accounts payable and accrued expenses 2,850 10,809 (7,959 ) Total consolidated loss from operations $ (60,304 ) $ (43,365 ) $ (16,939 ) 22