PART I. FINANCIAL INFORMATION This section details the company's unaudited financial statements, management's analysis, and market risk Item 1. Condensed Consolidated Financial Statements (unaudited) The unaudited financial statements show increased assets due to a stock offering and wider net losses from higher R&D expenses Condensed Consolidated Balance Sheets Total assets increased to $340.2 million by September 30, 2019, driven by a public stock offering, while equity grew to $268.0 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2019 (unaudited) | Dec 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $249,588 | $190,514 | | Total current assets | $305,633 | $205,196 | | Total assets | $340,207 | $213,032 | | Liabilities & Equity | | | | Total current liabilities | $40,595 | $27,263 | | Total liabilities | $72,165 | $62,563 | | Total stockholders' equity | $268,042 | $160,469 | | Total liabilities and stockholders' equity | $340,207 | $213,032 | Condensed Consolidated Statements of Operations and Comprehensive Loss Net loss widened to $26.6 million for Q3 2019 and $69.8 million for the nine months, primarily due to increased R&D expenses Statement of Operations Highlights (in thousands, except per share data) | Metric | Q3 2019 (unaudited) | Q3 2018 (unaudited) | Nine Months 2019 (unaudited) | Nine Months 2018 (unaudited) | | :--- | :--- | :--- | :--- | :--- | | Collaboration revenue | $2,429 | $1,026 | $7,878 | $3,079 | | Research and development | $23,202 | $13,637 | $62,561 | $41,929 | | General and administrative | $6,346 | $4,081 | $16,966 | $11,501 | | Loss from operations | ($27,119) | ($16,692) | ($71,649) | ($50,351) | | Net loss | ($26,609) | ($16,782) | ($69,847) | ($50,571) | | Net loss per share | ($0.40) | ($0.31) | ($1.06) | ($0.95) | Condensed Consolidated Statements of Cash Flows Net cash used in operations increased to $57.6 million, while financing activities provided $163.7 million from a public stock offering Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2019 (unaudited) | Nine Months Ended Sep 30, 2018 (unaudited) | | :--- | :--- | :--- | | Net cash used in operating activities | ($57,640) | ($27,630) | | Net cash used in investing activities | ($46,937) | ($16,846) | | Net cash provided by financing activities | $163,651 | $138,876 | | Net change in cash, cash equivalents and restricted cash | $59,074 | $94,400 | - Financing activities were primarily driven by net proceeds of $162.5 million from a public offering of common stock in 2019, compared to $134.8 million in 201819 Notes to Condensed Consolidated Financial Statements (unaudited) Notes detail accounting policies, a $173.1 million public offering, $6.5 million Ono revenue, and ASC 842 lease adoption - In September 2019, the company completed a public offering of 9,890,000 shares of common stock at $17.50 per share, generating gross proceeds of $173.1 million and net proceeds of $162.4 million22 - The company adopted the new lease standard ASC 842 on January 1, 2019, increasing operating right-of-use assets by $16.6 million and total liabilities by $18.2 million43 - Under the Ono Agreement, the company recognized revenue of $2.4 million and $6.5 million for the three and nine months ended September 30, 2019, respectively, with $7.9 million in deferred revenue49 - On November 1, 2019, the company elected to prepay its $14.1 million outstanding debt to Silicon Valley Bank86 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses increased Ono collaboration revenue, higher operating expenses from R&D, and the sufficiency of $162.4 million public offering proceeds - The company is a clinical-stage biopharmaceutical company developing programmed cellular immunotherapies for cancer and immune disorders using iPSCs for off-the-shelf product candidates89 - Management expects substantial expense increases due to ongoing clinical trials (ProTmune, FT500, FT516, FT596), GMP manufacturing scale-up, and headquarters expansion90 Comparison of Operating Results (in thousands) | Period | Revenue | R&D Expense | G&A Expense | | :--- | :--- | :--- | :--- | | Q3 2019 | $2,429 | $23,202 | $6,346 | | Q3 2018 | $1,026 | $13,637 | $4,081 | | Nine Months 2019 | $7,878 | $62,561 | $16,966 | | Nine Months 2018 | $3,079 | $41,929 | $11,501 | - The company believes its $302.8 million in cash, cash equivalents, and short-term investments as of September 30, 2019, will fund operations for at least the next twelve months116126 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's market risk exposure to interest rate changes is limited by low-risk investments and debt interest rate floors and ceilings - The company's primary market risk is interest income sensitivity, but a 10% change in interest rates is not expected to have a material impact131 - Floating-rate debt has an interest rate floor of 7.25% and a ceiling of 8.25%, limiting the impact of interest rate fluctuations on expense131 Item 4. Controls and Procedures Management concluded disclosure controls were effective as of September 30, 2019, with no material changes to internal controls except for ASC 842 enhancements - The company's principal executive and financial officer concluded that disclosure controls and procedures were effective as of September 30, 2019133 - No material changes were made to internal controls over financial reporting during the quarter, except for enhancements related to the adoption of the new lease guidance, ASC 842134 PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, and other required disclosures Item 1. Legal Proceedings The company is not currently a party to any material legal proceedings and does not expect current litigation to have a material adverse effect - As of the reporting date, the company is not a party to any material legal proceedings136 Item 1A. Risk Factors The company faces significant risks related to product development, regulatory approval, third-party reliance, intellectual property, commercialization, and financial condition Risks Related to the Discovery, Development and Regulation of Our Product Candidates Risks include clinical trial delays, complex iPSC manufacturing, uncertain regulatory approval for novel therapies, and the need for substantial additional funding - The company faces risks of delays in initiating, conducting, or completing clinical trials for its product candidates due to factors like patient enrollment difficulties, manufacturing challenges, and regulatory hurdles138 - Manufacturing iPSC-derived cell product candidates is a complex, novel, and costly process with risks related to scalability, reproducibility, and regulatory compliance, which could limit supply and delay development144 - As the company's product candidates are based on novel technologies like iPSCs, the regulatory approval process is difficult to predict in terms of time, cost, and requirements, and there are no iPSC-derived cell products currently approved for commercial sale159 - The company requires substantial additional funding to complete the development and obtain regulatory approval for its product candidates151 Risks Related to Our Reliance on Third Parties The company heavily relies on third parties for manufacturing, clinical trials, strategic partnerships, and critical material supply, posing significant operational risks - The company depends on third parties, including clinical trial sites, to manufacture its product candidates, which creates risks related to regulatory compliance, quality assurance, and supply continuity169 - Strategic partnerships, such as the one with Ono, are crucial for developing and commercializing certain product candidates, and unsuccessful collaborations could lead to delays and harm operating results172 - Manufacturing relies on third-party suppliers for reagents, specialized materials, and equipment, some of which are sole-sourced, creating vulnerability to supply disruptions175 - Product candidates like ProTmune and FATE-NK100 depend on the availability and quality of human donor material, which is subject to factors outside the company's control176 Risks Related to Our Intellectual Property Success depends on obtaining and maintaining strong intellectual property, facing risks of patent uncertainty, validity challenges, infringement, and reliance on licensors - The company's commercial success is dependent on obtaining and maintaining patent protection for its technology and product candidates, which is uncertain in the complex biotechnology field182 - The company depends on its licensors to prosecute and maintain patents material to its business, and any failure on their part could adversely affect operations183 - The company may become involved in costly litigation to enforce or defend its patent rights or could be sued for infringing the intellectual property rights of others186187 Risks Related to the Commercialization of Our Product Candidates Commercialization risks include lack of marketing experience, uncertain market acceptance, pricing and reimbursement challenges, and potential negative impacts from healthcare reforms - The company has no experience in marketing or sales and will need to build these capabilities or partner with third parties to commercialize any approved products194 - Commercial success depends on market acceptance by the medical community, patients, and third-party payers, which is uncertain196197 - The company faces significant uncertainty regarding pricing and the availability of adequate insurance coverage and reimbursement for its novel cell therapies198199 - Healthcare legislative and regulatory reforms, such as the Affordable Care Act (ACA) and other cost-containment measures, could negatively impact the business and its ability to profitably sell products202 Risks Related to Our Business and Industry Business and industry risks include intense competition, challenges in retaining key personnel, product liability, hazardous material handling, and compliance with complex healthcare laws - The company faces intense competition from larger, better-funded biotechnology and pharmaceutical companies209 - The business is exposed to potential product liability claims that could exceed its insurance coverage216 - The company must comply with numerous complex laws, including healthcare fraud and abuse laws (e.g., FCPA, Sunshine Act) and data privacy regulations (e.g., GDPR), with non-compliance carrying significant penalties220 Risks Related to Our Financial Condition and the Ownership of Our Common Stock Financial risks include a history of significant losses, stock price volatility, principal stockholder control, potential dilution from future financing, and NOL carryforward limitations - The company has a limited operating history, has incurred significant losses since inception (accumulated deficit of $355.2 million as of Sep 30, 2019), and expects to incur significant losses for the foreseeable future223 - The market price of the company's common stock is subject to wide fluctuation and volatility224 - As of November 4, 2019, executive officers, directors, and 5% stockholders beneficially own approximately 41.2% of the outstanding voting stock, giving them significant influence over the company228 - The company's ability to use its net operating loss (NOL) carryforwards of $136.8 million (federal) and $137.5 million (California) may be limited due to past and potential future 'ownership changes' under tax law234 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds All information regarding unregistered sales of equity securities has been previously reported in a Current Report on Form 8-K - All information regarding unregistered sales of equity securities has been previously reported on a Form 8-K236 Item 3. Defaults Upon Senior Securities The company reports no defaults upon senior securities - None237 Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable237 Item 5. Other Information The company reports no other information for this item - None238 Item 6. Exhibits This section lists exhibits filed with the quarterly report, including CEO/CFO certifications and XBRL data files - Exhibits filed include certifications from the Principal Executive Officer and Principal Financial Officer as required by Sections 302 and 906 of the Sarbanes-Oxley Act240241
Fate Therapeutics(FATE) - 2019 Q3 - Quarterly Report