What changed in this filing

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Item 1. Financial Statements

2020-08-05 compared with 2020-05-06 · 137 added, 113 removed, 431 unchanged (37% of the section changed)

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

March 31, 2020

June 30, 2020

December 31, 2019

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Common stock, $ 0.0001 par value, 198,000,000 shares authorized;

and 75,184,863 issued and outstanding at March 31, 2020, and

and 75,184,863 issued and outstanding at June 30, 2020 and

December 31, 2019, respectively

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For the Three Months Ended

For the Six Months Ended

Products, net

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Selling, general and administrative

Acquired in-process research and development

Amortization of in-licensed rights

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Other expense, net

Total other income (loss)

Total other (loss) income

Loss before income tax expense

Income tax expense

Other comprehensive income:

Unrealized gains on investments, net of tax

Total other comprehensive income

Other comprehensive (loss) income:

Unrealized (losses) gains on investments, net of tax

Total other comprehensive (loss) income

Comprehensive loss

8 unchanged sentences

Stockholders'

Income (Loss)

Balance at December 31, 2019

1 unchanged sentence

Vest of restricted stock units

Issuance of common stock to Roche, net of issuance costs

Issuance of common stock to Roche, net of

issuance costs

Issuance of common stock under employee

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Stock-based compensation

Unrealized gains from available-for-sale securities, net of tax

Unrealized gains from available-for-sale

securities, net of tax

Balance at March 31, 2020

Exercise of options for common stock

Vest of restricted stock units, net of

cancellations

Stock-based compensation

Unrealized losses from available-for-sale

securities, net of tax

Balance at June 30, 2020

Comprehensive

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Shares withheld for taxes

Issuance of common stock for cash, net of offering costs

Issuance of common stock under employee stock purchase plan

Issuance of common stock for cash, net of

offering costs

Issuance of common stock under employee

stock purchase plan

Stock-based compensation

Unrealized gains from available-for-sale securities

Unrealized gains from available-for-sale

Balance at March 31, 2019

Exercise of options for common stock

Grant of restricted stock awards and vest of

restricted stock units, net of cancellations

Issuance of common stock for cash, net of

offering costs

Stock-based compensation

Unrealized gains from available-for-sale

Balance at June 30, 2019

SAREPTA THERAPEUTICS, INC.

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(unaudited, in thousands)

For the Three Months Ended March 31,

For the Six Months Ended June 30,

Cash flows from operating activities:

Adjustments to reconcile net loss to cash flows from operating activities:

Gain from sale of Priority Review Voucher

Gain from sale of Priority Review Voucher, net of commission

Acquired in-process research and development

Depreciation and amortization

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Maturity and sale of available-for-sale securities

Acquisition of Myonexus Therapeutics, Inc., net of cash acquired

Net cash (used in) provided by investing activities

Cash flows from financing activities:

Proceeds from issuance of common stock to Roche

Proceeds from issuance of common stock to Roche, net of offering costs

Proceeds from sale of common stock, net of offering costs

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Supplemental schedule of non-cash investing activities and financing activities:

Issuance costs related to the Roche Collaboration in accrued expenses

Manufacturing right of use asset additions

Manufacturing lease liability additions

Right of use asset and lease liability additions

Sale of available-for-sale securities included in investment receivable

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(together with its wholly-owned subsidiaries, “Sarepta” or the “Company”) is a commercial-stage biopharmaceutical company focused on helping patients through the discovery and development of unique RNA-targeted therapeutics, gene therapy and other genetic therapeutic modalities for the treatment of rare diseases.

Applying its proprietary, highly-differentiated and innovative technologies, and through collaborations with its strategic partners, the Company is developing potential therapeutic candidates for a broad range of diseases and disorders, including Duchenne muscular dystrophy (“DMD”), Limb-girdle muscular dystrophies (“LGMDs”), Mucopolysaccharidosis type IIIA (“MPS IIIA”) and other neuromuscular and central nervous system (“CNS”) disorders.

Its first and second commercial products in the U.S., EXONDYS 51 (eteplirsen) Injection (“EXONDYS 51”) and VYONDYS 53 (golodirsen) Injection (“VYONDYS 53”) were granted accelerated approval by the U.S.

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Exon skipping is intended to promote the production of an internally truncated but functional dystrophin protein.

As of March 31, 2020, the Company had approximately $ 2,180.7 million of cash, cash equivalents and investments, consisting of $ 1,764.2 million of cash and cash equivalents, $ 406.9 million of short-term investments, and $ 9.6 million of restricted cash and investments.

As of June 30, 2020, the Company had approximately $ 2,070.9 million of cash, cash equivalents and investments, consisting of $ 1,640.0 million of cash and cash equivalents, $ 421.3 million of short-term investments, and $ 9.6 million of restricted cash and investments.

The Company believes that its balance of cash, cash equivalents and investments as of the date of the issuance of this report is sufficient to fund its current operational plan for at least the next twelve months, though it may pursue raising additional cash resources through public or private debt and equity financings, seek additional government contracts and establish collaborations with or license its technology to other companies.

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discovering, developing, manufacturing and delivering therapies to patients with rare diseases.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2019 which are contained in the Company’s Annual Report on Form 10-K filed with the U.S.

Securities and Exchange Commission on February 26, 2020.

The results for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year.

The results for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the full year.

Estimates and Uncertainties

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Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist of accounts receivable from customers, cash held at financial institutions and cash equivalents and investments.

As of March 31, 2020, the majority of the Company’s accounts receivable arose from product sales in the U.S.

and all customers have standard payment terms which generally require payment within 60 to 91 days .

Financial instruments that potentially subject the Company to concentrations of credit risk consist of accounts receivable from customers, cash held at financial institutions and cash equivalents and investments.

As of June 30, 2020, the majority of the Company’s accounts receivable arose from product sales in the U.S.

and all customers have standard payment terms that generally require payment within 60 to 91 days .

Outside of the U.S., the majority of the Company’s customers have payment terms ranging between 45 and 150 days .

Three individual customers accounted for 44 %, 40 % and 12 % of net product revenues for the three months ended March 31, 2020 and 41 %, 40 % and 15 % of net product revenues for the three months ended March 31, 2019.

Three individual customers accounted for 49 %, 37 % and 11 % of accounts receivable from product sales as of March 31, 2020 and 57 %, 26 % and 8 % of accounts receivable from product sales as of March 31, 2019.

Three individual customers accounted for 50 %, 39 % and 10 % of net product revenues for the three months ended June 30, 2020 and 47 %, 40 % and 11 % of net product revenues for the six

months ended June 30, 2020 .

Three individual customers accounted for 43 %, 43 % and 12 % of net product revenues for the three months ended June 30, 2019 and 42 %, 41 % and 14 % of net product revenues for the six months ended June 30, 2019 .

Three individual customers accounted for 46 %, 41 % and 9 % of accounts receivable from product sales as of June 30, 2020 and 45 %, 37 % and 11 % of accounts receivable from product sales as of December 31, 2019 .

The Company monitors the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in its customers’ credit profile.

As of March 31, 2020, the Company believes that such customers are of high credit quality.

As of March 31, 2020 , the Company’s cash w as concentrated at three financial institution s in the U.S.

, which potentially exposes the Company to credit risks.

However, the Company does not believe that there is significant risk of non-performance by the financial institution s .

As of June 30, 2020 , the Company believes that such customers are of high credit quality.

As of June 30, 2020, the Company’s cash was concentrated at three financial institutions in the U.S., which potentially exposes the Company to credit risks.

However, the Company does not believe that there is significant risk of non-performance by the financial institutions.

Significant Accounting Policies

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However, ASC 842 provides entities with a practical expedient that allows them to make an accounting policy election to not separate lease and non-lease components by class of underlying asset.

In using this expedient, entities would account for each lease component and the related non-lease component together as a single

In using this expedient, entities would account for each lease component and the related non-lease component together as a single component.

For new and amended real estate leases beginning after January 1, 2019, the Company has elected to account for the lease and non-lease components together for existing classes of underlying assets and allocates the contract consideration to the lease component only.

In contrast, the Company does not apply the practical expedient for embedded leases in manufacturing and supply agreements with certain of its contract manufacturing organizations and has instead allocated contract consideration between the lease and non-lease components based on their relative standalone price.

There have not been any other material changes to the Company’s accounting policies through March 31, 2020.

There have not been any other material changes to the Company’s accounting policies through June 30, 2020.

Recent Accounting Pronouncements

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The new standard will be effective beginning January 1, 2021.

As of March 31, 2020, the Company is continuing to evaluate the potential impact this ASU may have on its financial position and results of operations upon adoption.

As of June 30, 2020, the Company is continuing to evaluate the potential impact this ASU may have on its financial position and results of operations upon adoption.

Recently adopted

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(1) the changes in unrealized gains and losses for the period included in other comprehensive income and loss for recurring Level 3 fair value measurements held at the end of the reporting period;

(2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.

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This ASU requires a customer in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance contained in ASC Subtopic 350-40 to determine which implementation costs to capitalize as assets or expense as incurred.

Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrange is ready for its intended use.

2018-15 was effective beginning January 1, 2020.

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The Company monitors the creditworthiness of its customers and payments such that it can properly assess and respond to changes in the customers’ credit profile or any specific issues.

Upon adoption and as of March 31, 2020, the Company believes that such customers are of high credit quality and the expected credit losses are insignificant.

Upon adoption and as of June 30, 2020, the Company believes that such customers are of high credit quality and the expected credit losses are insignificant.

In November 2018, the FASB issued ASU 2018-18, “ Collaborative Arrangements (Topic 808):

Clarifying the Interaction between Topic 808 and Topic 60 6” .

(i) clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement participant is a customer, (ii) provides guidance specifying that a distinct good or service is the unit of account for evaluating whether a transaction is with a customer, and (iii) precludes a company from presenting transactions with a collaborative arrangement participant that are not in the scope of ASC 606 together with revenue from contracts with customers.

(i) clarif ies that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement participant is a customer , (ii) provides guidance specifying that a distinct good or service is the unit of account for evaluating whether a transaction is with a customer, and (iii) precludes a company from presenting transactions with a collaborative arrangement participant that are not in the scope of ASC 606 together with revenue from contracts with customers .

The new standard was effective beginning January 1, 2020.

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(i) the license of IP relating to SRP-9001 transferred to Roche, (ii) the related research and development services provided under the joint global development plan, (iii) the services provided to manufacture clinical supplies of SRP-9001, and (iv) the Company’s participation in the JSC, because the Company determined that the license of IP and related activities were not capable of being distinct from one another.

The Company recorded $ 312.1 million of common shares issued to Roche, based on the closing price of the Company’s stock on the date such shares were issued, less direct transaction fees incurred of $ 4.3 million.

The Company recorded $ 312.1 million of common shares issued to Roche, based on the closing price of the Company’s stock on the date such shares were issued, net of direct transaction fees incurred of $ 4.3 million.

This net amount is reflected as an increase to common stock and additional paid-in-capital in the accompanying unaudited condensed consolidated balance sheets.

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If expired, the related transaction price will be recognized immediately.

Through March 31, 2020, no options have been exercised or expired.

Through June 30, 2020, no options have been exercised or expired.

The $ 34 8 .7 million allocated to the Combined Performance Obligation was determined using the residual approach because the standalone selling price is uncertain.

The Company recognizes revenue related to the Combined Performance Obligation on a straight-line basis over the expected performance period of the joint global development plan, which is expected to extend through the

fourth quarter of 2023 .

The Company believes this method represents the best depiction of the transfer of services to Roche, as the estimated full-time equivalent employees dedicated to the services is not expected to materially vary over the expected service period.

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Accordingly, any revenues associated with the supply of commercial product in the future will be recognized in the period earned.

The Company classifies all revenues recognized under the Roche Agreement as collaboration revenues within the unaudited condensed consolidated statements of operations.

For the three months ended March 31, 2020, the Company recognized $ 13.2 million of collaboration revenue, all of which relates to the Combined Performance Obligation.

As of March 31, 2020, the Company has total deferred revenue of $ 820.4 million associated with the Roche Agreement, of which $ 87.8 million is classified as current.

The portion of deferred revenue related to the separate material rights for the Options was $ 491.0 million as of March 31, 2020.

The Company classifies all revenues recognized under the Roche Agreement as collaboration revenues within the unaudited condensed consolidated statements of operations and comprehensive loss.

For the three and six months ended June 30, 2020, the Company recognized $ 26.0 million and $ 39.2 million of collaboration revenue, respectively, the majority of which relates to the Combined Performance Obligation.

As of June 30, 2020, the Company has total deferred revenue of $ 797.7 million associated with the Roche Agreement, of which $ 89.2 million is classified as current.

The portion of deferred revenue related to the separate material rights for the Options was $ 485.0 million as of June 30, 2020.

The costs associated with co-development activities performed under the Roche Agreement are included in research and development expenses, with any reimbursement of costs by Roche reflected as a reduction of such expenses when the related expense is incurred.

For the three months ended March 31, 2020, costs reimbursable by Roche and reflected as a reduction to research and development expenses were $ 16.4 million and is included in accounts receivable as of March 31, 2020.

For the three and six months ended June 30, 2020, costs reimbursable by Roche and reflected as a reduction to research and development expenses were $ 8.9 million and $ 25.4 million, respectively, and $ 8.9 million is included in accounts receivable as of June 30, 2020.

Research and Option Agreements

During the three months ended June 30, 2020, the Company entered into multiple research and option agreements with third parties in order to develop various technologies and biologics that may be used in the administration of the Company’s genetic therapeutics, with aggregate up-front payments made by the Company of $ 12.0 million, which were recorded as research and development expense in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss for the three months ended June 30, 2020 .

The agreements generally provide for research services related to preclinical development programs, and options to license the technology for clinical development.

Prior to the options under these agreements being executed, the Company may be required to make up to $ 14.0 million in research milestone payments.

Under these agreements, there are $ 129.0 million in potential option payments to be made by the Company upon the determination to exercise the options.

Additionally, if the options for each agreement are executed, the Company would incur additional contingent obligations and may be required to make development, regulatory, and sales milestone payments and low-single-digit royalty payments based on the sales of the developed products upon commercialization.

As of June 30, 2020, the Company has not exercised any options nor have any research milestone payments become probable of occurring.

Milestone Obligations

The Company has license and collaboration agreements in place for which it could be obligated to pay, in addition to the payment of up-front fees upon execution of the agreements, certain milestone payments as a product candidate proceeds from the submission of an investigational new drug application through approval for commercial sale and beyond.

As of March 31, 2020, the Company may be obligated to make up to $ 3.2 billion in future development, regulatory, commercial, royalty and up-front milestone payments associated with its license and collaboration agreements.

For the three months ended March 31, 2020 and 2019, the Company recognized up-front, milestone, and other expenses of $ 8.5 million and $ 1.1 million, respectively, as research and development expense in the accompanying unaudited condensed consolidated statement of operations and comprehensive loss.

As of June 30, 2020, the Company may be obligated to make up to $ 3.2 billion in future development, regulatory, commercial and up-front royalty milestone payments associated with its license and collaboration agreements.

These obligations exclude potential future option and milestone payments for options that have yet to be exercised within agreements entered into by the Company as of June 30, 2020, which are discussed above.

For the three and six months ended June 30, 2020, the Company recognized up-front, development milestone, and other expenses of $ 12.8 million and $ 21.3 million, respectively, as research and development expense in the accompanying unaudited condensed consolidated statement of operations and comprehensive loss.

For the three and six months ended June 30, 2019, the Company recognized up-front, development milestone, and other expenses of $ 14.4 million and $ 15.5 million, respectively, as research and development expense in the accompanying unaudited condensed consolidated statement of operations and comprehensive loss.

GAIN FROM SALE OF PRIORITY REVIEW VOUCHER

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to sell the rare pediatric disease Priority Review Voucher (“PRV”) it received from the FDA in connection with the approval of VYONDYS 53.

Following the early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, in March 2020, the Company completed its sale of the PRV and received proceeds of $ 108.1 million, net of commission, which was recorded as a gain from sale of the PRV as it did not have a carrying value at the time of the sale.

Following the early

termination of the applicable waiting period under the Hart -Scott-Rodino Antitrust Improvements Act of 1976, as amended, in March 20 20 , the Company completed its sale of the PR V and received proceeds of $ 108.1 million , net of commission , which was recorded as a gain from sale of the PRV as it did not have a carrying value at the time of the sale .

FAIR VALUE MEASUREMENTS

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The tables below present information about the Company’s financial assets and liabilities that are measured and carried at fair value and indicate the level within the fair value hierarchy of valuation techniques it utilizes to determine such fair value:

Fair Value Measurement as of March 31, 2020

Fair Value Measurement as of June 30, 2020

(in thousands)

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and certificates of deposit.

Certain of the government and government agency bonds are traded fixed income securities and are presented as cash equivalents on the unaudited condensed consolidated balance sheets as of March 31, 2020.

Certain of the government and government agency bonds are publicly traded fixed income securities and are presented as cash equivalents on the unaudited condensed consolidated balance sheets as of June 30, 2020.

The Company’s asset with fair value categorized as Level 3 within the fair value hierarchy consists of a strategic investment in Series A preferred stock of Lacerta Therapeutics , Inc.

(“Lacerta”) .

For more information related to Lacerta, please read Note 3, License and Collaboration Agreements of the Company’s Annual Report on Form 10-K for the year ended December 31, 201 9 .

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At the end of each reporting period, the fair value will be adjusted if Lacerta issues similar or identical equity securities or when there is a triggering event for impairment .

There were no changes in the fair value of the Lacerta strategic investment during the three months ended March 31, 2020.

The Company’s contingent consideration liability with fair value categorized as Level 3 within the fair value hierarchy relate to the regulatory-related contingent payments to Myonexus selling shareholders as well as to an academic institution under a separate license agreement that meet the definition on a derivative.

There were no changes in the fair value of the Lacerta strategic investment during the six months ended June 30, 2020 .

(“Myonexus”) selling shareholders as well as to an academic institution under a separate license agreement that meet the definition on a derivative.

For more information related to Myonexus, please read Note 3, License and Collaboration Agreements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 .

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At the end of each reporting period, the fair value is adjusted to reflect the most current assumptions through earnings.

There were no changes in the fair value of the contingent consideration during the three months ended March 31, 2020.

As of March 31, 2020, the contingent consideration was recorded as a non-current liability on the Company’s unaudited condensed consolidated balance sheets.

There were no changes in the fair value of the contingent consideration during the six months ended June 30, 2020.

As of June 30, 2020, the contingent consideration was recorded as a non-current liability on the Company’s unaudited condensed consolidated balance sheets.

The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximated fair value because of the short-term maturity of these financial instruments.

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It is the Company’s policy to mitigate credit risk in its financial assets by maintaining a well-diversified portfolio that limits the amount of exposure as to maturity and investment type.

The weighted average maturity of the Company’s available-for-sale securities as of March 31, 2020 and December 31, 2019 was approximately one and two months , respectively.

The weighted average maturity of the Company’s available-for-sale securities as of June 30, 2020 and December 31, 2019 was approximately two months .

The following tables summarize the Company’s cash, cash equivalents and short-term investments for each of the periods indicated:

As of March 31, 2020

As of June 30, 2020

(in thousands)

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Payments/credits

Balance, as of March 31, 2020

Balance, as of June 30, 2020

Other Accruals

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Payments/credits

Balance, as of March 31, 2019

Balance, as of June 30, 2019

The following table summarizes the total reserves included in the Company’s unaudited condensed consolidated balance sheets for the periods indicated:

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Total reserves

The following table summarizes the components of the Company’s inventory for the period indicated:

The following table summarizes the components of the Company’s inventory for the periods indicated:

(in thousands)

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Prepaid clinical and pre-clinical expenses

Prepaid maintenance services

Prepaid income tax

Prepaid maintenance services

Prepaid research expenses

Leasehold improvement receivable

Prepaid insurance

Prepaid research expenses

Total other current assets

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Product revenue related reserves

Accrued employee compensation costs

Accrued contract manufacturing costs

Accrued clinical and pre-clinical costs

Accrued employee compensation costs

Accrued Roche transaction costs

Accrued professional fees

Accrued milestone expense

Accrued royalties

Accrued professional fees

Accrued property and equipment

Accrued royalties

Accrued collaboration cost sharing

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The following table summarizes the Company’s stock awards granted for each of the periods indicated:

For the Three Months Ended March 31,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

Stock options

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Stock-based Compensation Expense

For the three months ended March 31, 2020 and 2019, total stock-based compensation expense was $ 24.0 million and $ 16.1 million, respectively.

For the three months ended June 30, 2020 and 2019, total stock-based compensation expense was $ 27.6 million and $ 19.8 million, respectively.

For the six months ended June 30, 2020 and 2019, total stock-based compensation expense was $ 51.6 million and $ 35.9 million, respectively.

The following table summarizes stock-based compensation expense by function included within the unaudited condensed consolidated statements of operations and comprehensive loss:

For the Three Months Ended

For the Six Months Ended

(in thousands)

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For the Three Months Ended

For the Six Months Ended

(in thousands)

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Total stock-based compensation expense

OTHER INCOME (LOSS)

The following table summarizes other income (loss) for the periods indicated:

OTHER (LOSS) INCOME

The following table summarizes other (loss) income for the periods indicated:

For the Three Months Ended

For the Six Months Ended

(in thousands)

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Gain from sale of Priority Review Voucher

Total other income (loss), net

Other (expense) income

Total other (loss) income, net

The Company has real estate operating leases in Cambridge, Andover and Burlington, Massachusetts and Dublin and Columbus, Ohio that provide for scheduled annual rent increases throughout each lease’s term.

There have been no significant changes to the real estate leases in the three months ended March 31, 2020.

There have been no significant changes to the real estate leases in the six months ended June 30, 2020.

The Company has also identified embedded leases in its manufacturing and supply agreements with Catalent, Inc.

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For additional details relating to these two agreements, please read Note 21, Commitments and Contingencies of the Annual Report on Form 10-K for the year ended December 31, 2019.

Catalent, Inc.

In October 2018 and February 2019, the Company entered into a manufacturing collaboration agreement and a manufacturing and supply agreement, respectively, (collectively, the “Catalent Agreements”) with Catalent, Inc., formerly Paragon Bioservices, Inc.

(“Catalent”).

Pursuant to the terms of the Catalent Agreements, Catalent agreed to provide the Company with two dedicated clean room suites and an option to gain access to two additional dedicated clean room suites for its gene therapy programs.

In September 2019, the Company exercised the option to gain access to the two additional dedicated clean room suites.

The Catalent Agreements will expire on December 31, 2024 , unless the Company and Catalent mutually agree to extend the term.

The Company has the ability to terminate the Catalent Agreements prior to expiration, subject to potential additional financial consideration.

The Company concluded that the Catalent Agreements contain an embedded lease as the Company controls the use of the dedicated clean room suites and related equipment therein.

The Company also determined that it did not control the facility or related equipment during construction and, thus, the lease did not fall in the scope of “build-to-suit” accounting.

The lease on two of the four dedicated clean room suites commenced during the quarter ended March 31, 2020, which is when the dedicated clean room suites became available for use by the Company.

Accordingly, the fixed and in-substance fixed contract consideration associated with the two dedicated clean room suites was allocated to the lease and non-lease components.

The Company determined that both the Catalent and Thermo agreements contain an embedded lease because the Company controls the use of the facilities and related equipment therein.

The Company also determined that it does not control the facilities or related equipment during construction and, thus, the lease does not fall in the scope of “build-to-suit” accounting.

The lease on two of the four dedicated clean room suites at Catalent and four of the eight dedicated clean room suites at Thermo commenced during the first and second quarter of fiscal 2020, respectively, which is when the dedicated clean room suites became available for use by the Company.

Accordingly, the fixed and in-substance fixed contract consideration associated with the dedicated clean room suites was allocated to the lease and non-lease components.

The lease component was determined based on the estimated standalone price of the leased clean rooms and the associated equipment based on available market and specific cost information.

The non-lease component was determined using the residual estimation approach as the standalone price of the gene therapy manufacturing and supply services provided by Catalent is highly variable.

Consequently, as of March 31, 2020, the Company recorded a right of use (“ROU”) asset of $ 27.0 million and a lease liability of $ 24.3 million relating to these two dedicated clean room suites.

The ROU asset and lease liability were based on the present value of estimated future payments associated with the lease component of the clean room suites at a discount rate of 8 %, representing the rate at which the Company could borrow on a collateralized basis the amount of the lease payments in a similar term.

The difference between the ROU asset and the lease liability results from certain prepayments made to Catalent by the Company prior to the commencement of the leases.

The weighted average remaining lease term on the leases for the two dedicated clean room suites is approximately 4.8 years.

During the first quarter of 2020, the Company recorded operating lease costs of $ 0.8 million and variable lease costs of $ 0.9 million, relating to these two dedicated clean room suits which was included in the research and development expense in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.

The total lease liability payment is expected to be paid in equal installments through the five-year term of the agreement.

The lease on the remaining two clean room suites has not commenced as of March 31, 2020 because the clean room suites at the Catalent facility are not yet available for use by the Company.

Accordingly, cumulative payments totaling $ 18.0 million made to Catalent relating to the remaining two clean room suites have been recorded as an other asset in the accompanying consolidated balance sheets, a portion of which will be considered in the initial measurement of the cost of the ROU asset at the lease commencement date, currently anticipated to occur in the fourth quarter of 2020.

Thermo Fisher Scientific, Inc.

The Company entered into a development, commercial manufacturing and supply agreement and, subsequently, entered into the first amendment (collectively, the “Thermo Agreements”) with Thermo Fisher Scientific, Inc., formerly Brammer Bio MA, LLC (“Thermo”) in June 2018 and May 2019, respectively.

Pursuant to the terms of the Thermo Agreements, Thermo agreed to provide the Company with access to clinical and commercial manufacturing capacity for its gene therapy programs.

The Thermo Agreements will continue for a period of six years following the first regulatory approval of a product manufactured under the agreements.

The Company has the ability to terminate the Thermo Agreements prior to expiration but would be required to continue remitting capacity access fees to Thermo for up to eight additional quarters.

The Company determined that the Thermo Agreements contain an embedded lease because the Company controls the use of the facility and related equipment therein.

The Company also determined that it does not control the facility or related equipment during construction and, thus, the lease does not fall in the scope of “build-to-suit” accounting.

As of March 31, 2020, the embedded lease in the Thermo Agreements has not commenced as the clean room suites and related equipment therein at the Thermo facility have not been available for use by the Company.

Accordingly, total cumulative payments made to Thermo of $ 86.3 million have been recorded as other assets in the accompanying unaudited condensed consolidated balance sheets and the lease portion of these

prepayments will be considered in the initial measurement of the cost of the ROU asset at the lease commencement date, currently anticipated to occur in the second quarter of 2020.

The non-lease component was determined using the residual estimation approach as the standalone price of the gene therapy manufacturing and supply services provided by both Catalent and Thermo is highly variable.

Consequently, during the six months ended June 30, 2020, the Company recorded aggregate right of use (“ROU”) assets of $ 39.8 million and aggregate lease liabilities of $ 35.5 million relating to the dedicated clean room suites at both Catalent and Thermo.

The ROU assets and lease liabilities were based on the present value of estimated future payments associated with the lease component of the Catalent and Thermo clean room suites at discount rates of 8.0 % and 7.5 %, respectively, representing the rate at which the Company could borrow on a collateralized basis the amount of the lease payments in a similar term.

The difference between the ROU assets and the lease liabilities results from certain prepayments made to Catalent and Thermo by the Company prior to the commencement of the leases.

The weighted average remaining lease term on the leases for the dedicated clean room suites range between 4.5 and 7.4 years.

The total lease liability payments are expected to be paid in equal installments through the five-year and eight-year terms of the Catalent and Thermo agreements, respectively.

The leases on the remaining two clean room suites at Catalent and four clean room suites at Thermo have not commenced as of June 30, 2020 because these clean room suites are not yet available for use by the Company.

Accordingly, cumulative payments totaling $ 18.0 million and $ 43.1 million made to Catalent and Thermo, respectively, relating to the remaining clean room suites which have not become available to the Company have been recorded as other assets in the accompanying unaudited condensed consolidated balance sheets, a portion of which will be considered in the initial measurement of the cost of the ROU asset at the lease commencement date, currently anticipated to occur in the fourth quarter of 2020.

For the three and six months ended June 30, 2020, the Company recorded aggregate operating lease costs of $ 2.0 million and $ 2.8 million related to the Catalent and Thermo embedded leases, respectively.

For the three and six months ended June 30, 2020, the Company recorded aggregate variable lease costs of $ 3.6 million and $ 4.5 million, respectively.

The operating lease costs and variable lease costs of the Thermo and Catalent embedded leases were included in research and development expense in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.

NET LOSS PER SHARE

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Diluted net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock and dilutive common stock equivalents outstanding.

For the three months ended March 31, 2020 and 2019, there were no differences between basic and diluted net loss per share since the effect of common stock equivalents would be anti-dilutive due to the net loss position and, therefore, would be excluded from the diluted net loss per share calculation.

For the three and six months ended June 30, 2020 and 2019, there were no differences between basic and diluted net loss per share since the effect of common stock equivalents would be anti-dilutive due to the net loss position and, therefore, would be excluded from the diluted net loss per share calculation.

For the Three Months Ended

For the Six Months Ended

(in thousands, except per share amounts)

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Net loss per share - basic and diluted

For the three months ended March 31, 2020 and 2019, stock options, RSAs, RSUs, and ESPP to purchase 10.5 million and 9.8 million shares of the Company’s common stock, respectively, were excluded from the diluted net loss per share calculation as their effect would have been anti-dilutive.

For the three and six months ended June 30, 2020 and 2019, stock options, RSAs, RSUs, and ESPP to purchase 10.0 million and 9.7 million shares of the Company’s common stock, respectively, were excluded from the diluted net loss per share calculation as their effect would have been anti-dilutive.

The Company accounts for the effect of the 2024 Notes on diluted net earnings per share using the if-converted method as they may be settled in cash or shares at the Company’s option.

While the closing price on March 31, 2020 exceeded the conversion price of $ 73.42 , the potential shares issuable under the 2024 Notes were excluded from the calculation of diluted loss per share as they were anti-dilutive using the if-converted method.

In the period of conversion, the 2024 Notes will have no impact on diluted net earnings (loss) if they are settled in cash and will have an impact on diluted earnings per share if the Notes are settled in shares upon conversion and when the Company in an income position.

While the closing price on June 30, 2020 exceeded the conversion price of $ 73.42 , the potential shares issuable under the 2024 Notes were excluded from the calculation of diluted loss per share as they were anti-dilutive using the if-converted method.

COMMITMENTS AND CONTINGENCIES

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The following table summarizes the aggregate non-cancelable contractual obligations arising from the Company’s manufacturing obligations:

March 31, 2020

June 30, 2020

(in thousands)

2020 (April - December)

2020 (July - December)

Total manufacturing commitments*

Total manufacturing commitments include both Catalent and Thermo Agreements.

Related to the embedded lease for the two clean room suites at Catalent that have commenced as of March 31, 2020, the Company recorded an ROU asset and a lease liability.

Related to the embedded leases at Catalent and Thermo that have commenced during the six months ended June 30, 2020, the Company recorded an ROU asset and a lease liability.

Please see Note 13.

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In the normal course of business, the Company may from time to time be named as a party to various legal claims, actions and complaints, including matters involving securities, employment, intellectual property, effects from the use of therapeutics utilizing its technology, or others.

For example, on August 30, 2019, Plaintiff Andrew Salinger filed a putative class action complaint against

the Company and two of its current officers, Douglas S.

For example, on August 30, 2019, Plaintiff Andrew Salinger filed a putative class action complaint against the Company and two of its current officers, Douglas S.

Ingram and Sandesh Mahatme (collectively, the “Defendants”), in the United States District Court for the Southern District of New York.

The complaint allege d that the Defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and SEC Rule 10b-5 promulgated thereunder, as well as Section 20(a) of the Exchange Act, in connection with the Company’s disclosures related to golodirsen.

The proposed class consist ed of all persons or entities who acquired Company securities between September 6, 2017 and August 19, 2019.

The complaint alleged that the Defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and SEC Rule 10b-5 promulgated thereunder, as well as Section 20(a) of the Exchange Act, in connection with the Company’s disclosures related to golodirsen.

The proposed class consisted of all persons or entities who acquired Company securities between September 6, 2017 and August 19, 2019.

On December 17, 2019, the district court appointed Bernard Portnoy as lead plaintiff, and set a briefing schedule requiring the amended complaint to be filed on February 18, 2020 and requiring Defendants to answer or otherwise respond to the amended complaint on April 17, 2020.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements