adro-10q_20190930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 001-37345

 

ADURO BIOTECH, INC.

(Exact name of Registrant as specified in its Charter)

 

 

Delaware

 

94-3348934

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

740 Heinz Avenue

Berkeley, California 94710

(Address of principal executive offices including zip code)

Registrant’s telephone number, including area code: (510) 848-4400

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

ADRO

The Nasdaq Global Select Market

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

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

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

 

Large accelerated filer

 

 

 

Accelerated filer

 

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES      NO  

The number of shares of Registrant’s Common Stock outstanding as of November 4, 2019 was 80,514,459.

 

 

 

 


 

Table of Contents

 

 

 

 

Page

 

 

PART I—FINANCIAL INFORMATION

 

Item 1.

 

Condensed Consolidated Financial Statements (unaudited)

3

 

 

Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018

3

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018

4

 

 

Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2019 and 2018

5

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018

6

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018

8

 

 

Notes to the Condensed Consolidated Financial Statements

9

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

33

Item 4.

 

Controls and Procedures

33

 

 

 

 

 

 

PART II—OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

34

Item 1A.

 

Risk Factors

34

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

65

Item 3.

 

Defaults Upon Senior Securities

65

Item 4.

 

Mine Safety Disclosures

65

Item 5.

 

Other Information

65

Item 6.

 

Exhibits

65

EXHIBIT INDEX

66

SIGNATURES

67

 

In this Quarterly Report on Form 10-Q, “we,” “our,” “us,” “Aduro” and the “Company” refer to Aduro Biotech, Inc. and its consolidated subsidiaries. Aduro, Aduro Biotech, the Aduro logo and other trade names, trademarks or service marks of Aduro are the property of Aduro Biotech, Inc. This report contains references to our trademarks and to trademarks belonging to other entities. Trade names, trademarks and service marks of other companies appearing in this report are the property of their respective holders. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

2


 

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (unaudited)

 

ADURO BIOTECH, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited) 

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

53,605

 

 

$

126,310

 

Short-term marketable securities

 

 

178,182

 

 

 

140,129

 

Accounts receivable

 

 

222

 

 

 

12,037

 

Prepaid expenses and other current assets

 

 

3,805

 

 

 

4,500

 

Total current assets

 

 

235,814

 

 

 

282,976

 

Long-term marketable securities

 

 

3,593

 

 

 

11,434

 

Property and equipment, net

 

 

25,534

 

 

 

29,157

 

Operating lease right-of-use assets

 

 

21,346

 

 

 

 

Goodwill

 

 

7,949

 

 

 

8,334

 

Intangible assets, net

 

 

18,608

 

 

 

25,135

 

Restricted cash

 

 

468

 

 

 

468

 

Total assets

 

$

313,312

 

 

$

357,504

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,643

 

 

$

1,457

 

Accrued clinical trial and manufacturing expenses

 

 

4,012

 

 

 

2,542

 

Accrued expenses and other liabilities

 

 

9,125

 

 

 

10,518

 

Operating lease liabilities

 

 

1,700

 

 

 

 

Deferred revenue

 

 

16,000

 

 

 

16,000

 

Total current liabilities

 

 

32,480

 

 

 

30,517

 

Deferred rent

 

 

 

 

 

11,063

 

Contingent consideration

 

 

975

 

 

 

998

 

Deferred revenue

 

 

161,203

 

 

 

172,671

 

Deferred tax liabilities

 

 

3,522

 

 

 

6,104

 

Operating lease liabilities

 

 

32,120

 

 

 

 

Other long-term liabilities

 

 

966

 

 

 

840

 

Total liabilities

 

 

231,266

 

 

 

222,193

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 10,000,000 shares authorized; no shares

   issued and outstanding at September 30, 2019 and December 31, 2018

 

 

 

 

 

 

Common stock, $0.0001 par value; 300,000,000 shares authorized; 80,514,459

   and 79,571,714 shares issued and outstanding at September 30, 2019 and

   December 31, 2018

 

 

8

 

 

 

8

 

Additional paid-in capital

 

 

549,705

 

 

 

538,895

 

Accumulated other comprehensive (loss) income

 

 

(178

)

 

 

940

 

Accumulated deficit

 

 

(467,489

)

 

 

(404,532

)

Total stockholders’ equity

 

 

82,046

 

 

 

135,311

 

Total liabilities and stockholders’ equity

 

$

313,312

 

 

$

357,504

 

 

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

3


 

ADURO BIOTECH, INC.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration and license revenue

 

$

4,799

 

 

$

3,063

 

 

$

13,625

 

 

$

12,329

 

Total revenue

 

 

4,799

 

 

 

3,063

 

 

 

13,625

 

 

 

12,329

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

15,510

 

 

 

18,675

 

 

 

51,916

 

 

 

58,223

 

General and administrative

 

 

8,683

 

 

 

9,149

 

 

 

25,845

 

 

 

27,021

 

Loss on impairment of intangible assets

 

 

5,006

 

 

 

 

 

 

5,006

 

 

 

 

Amortization of intangible assets

 

 

138

 

 

 

144

 

 

 

417

 

 

 

443

 

Total operating expenses

 

 

29,337

 

 

 

27,968

 

 

 

83,184

 

 

 

85,687

 

Loss from operations

 

 

(24,538

)

 

 

(24,905

)

 

 

(69,559

)

 

 

(73,358

)

Interest income

 

 

1,366

 

 

 

1,353

 

 

 

4,334

 

 

 

3,892

 

Other (loss) income, net

 

 

(32

)

 

 

21

 

 

 

(54

)

 

 

(15

)

Loss before income tax

 

 

(23,204

)

 

 

(23,531

)

 

 

(65,279

)

 

 

(69,481

)

Income tax benefit

 

 

2,252

 

 

 

385

 

 

 

2,322

 

 

 

444

 

Net loss

 

$

(20,952

)

 

$

(23,146

)

 

$

(62,957

)

 

$

(69,037

)

Net loss per common share, basic and diluted

 

$

(0.26

)

 

$

(0.29

)

 

$

(0.79

)

 

$

(0.88

)

Shares used in computing net loss per common

   share, basic and diluted

 

 

80,232,739

 

 

 

79,086,841

 

 

 

79,940,155

 

 

 

78,607,180

 

 

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

 

4


 

ADURO BIOTECH, INC.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net loss

 

$

(20,952

)

 

$

(23,146

)

 

$

(62,957

)

 

$

(69,037

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on marketable securities, net

   of tax of $0

 

 

(7

)

 

 

111

 

 

 

324

 

 

 

16

 

Foreign currency translation adjustments, net of

   tax of $0

 

 

(1,213

)

 

 

(24

)

 

 

(1,442

)

 

 

(642

)

Comprehensive loss

 

$

(22,172

)

 

$

(23,059

)

 

$

(64,075

)

 

$

(69,663

)

 

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

 

5


 

ADURO BIOTECH, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except share amounts)

(Unaudited)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2018

 

 

79,571,714

 

 

$

8

 

 

$

538,895

 

 

$

940

 

 

$

(404,532

)

 

$

135,311

 

Issuance of common stock upon exercise of stock options

 

 

254,481

 

 

 

 

 

 

251

 

 

 

 

 

 

 

 

 

251

 

Release of restricted stock units

 

 

25,850

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

3,703

 

 

 

 

 

 

 

 

 

3,703

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(449

)

 

 

 

 

 

(449

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,427

)

 

 

(23,427

)

Balance at March 31, 2019

 

 

79,852,045

 

 

 

8

 

 

 

542,849

 

 

 

491

 

 

 

(427,959

)

 

 

115,389

 

Issuance of common stock upon exercise

   of stock options

 

 

173,925

 

 

 

 

 

 

188

 

 

 

 

 

 

 

 

 

188

 

Issuance of common stock under

   Employee Stock Purchase Plan

 

 

58,748

 

 

 

 

 

 

164

 

 

 

 

 

 

 

 

 

164

 

Release of restricted stock units

 

 

45,556

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

3,336

 

 

 

 

 

 

 

 

 

3,336

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

551

 

 

 

 

 

 

551

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18,578

)

 

 

(18,578

)

Balance at June 30, 2019

 

 

80,130,274

 

 

 

8

 

 

 

546,537

 

 

 

1,042

 

 

 

(446,537

)

 

 

101,050

 

Issuance of common stock upon exercise

   of stock options

 

 

120,117

 

 

 

 

 

 

93

 

 

 

 

 

 

 

 

 

93

 

Release of restricted stock units

 

 

264,068

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

3,075

 

 

 

 

 

 

 

 

 

3,075

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(1,220

)

 

 

 

 

 

(1,220

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,952

)

 

 

(20,952

)

Balance at September 30, 2019

 

 

80,514,459

 

 

$

8

 

 

$

549,705

 

 

$

(178

)

 

$

(467,489

)

 

$

82,046

 

 

 

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

6


 

ADURO BIOTECH, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except share amounts)

(Unaudited)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2017

 

 

77,736,201

 

 

 

8

 

 

 

519,435

 

 

 

1,893

 

 

 

(283,863

)

 

 

237,473

 

Issuance of common stock upon exercise

   of stock options

 

 

712,973

 

 

 

 

 

 

638

 

 

 

 

 

 

 

 

 

638

 

Issuance of common stock upon exercise

   of warrants

 

 

3,317

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Release of restricted stock units

 

 

26,175

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

4,924

 

 

 

 

 

 

 

 

 

4,924

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

728

 

 

 

 

 

 

728

 

Cumulative effect of changes in accounting principles

    related to revenue recognition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25,312

)

 

 

(25,312

)

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

2

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21,494

)

 

 

(21,494

)

Balance at March 31, 2018

 

 

78,478,666

 

 

 

8

 

 

 

524,997

 

 

 

2,621

 

 

 

(330,667

)

 

 

196,959

 

Issuance of common stock upon exercise

   of stock options

 

 

528,320

 

 

 

 

 

 

622

 

 

 

 

 

 

 

 

 

622

 

Issuance of common stock under Employee

   Stock Purchase Plan

 

 

52,778

 

 

 

 

 

 

366

 

 

 

 

 

 

 

 

 

366

 

Stock-based compensation

 

 

 

 

 

 

 

 

4,327

 

 

 

 

 

 

 

 

 

4,327

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(1,442

)

 

 

 

 

 

(1,442

)

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

(1

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(24,397

)

 

 

(24,397

)

Balance at June 30, 2018

 

 

79,059,764

 

 

 

8

 

 

 

530,312

 

 

 

1,179

 

 

 

(355,065

)

 

 

176,434

 

Issuance of common stock upon exercise

   of stock options

 

 

73,446

 

 

 

 

 

 

99

 

 

 

 

 

 

 

 

 

99

 

Release of restricted stock units

 

 

236,681

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

4,221

 

 

 

 

 

 

 

 

 

4,221

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

87

 

 

 

 

 

 

87

 

Other

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

(1

)

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,146

)

 

 

(23,146

)

Balance at September 30, 2018

 

 

79,369,891

 

 

 

8

 

 

 

534,632

 

 

 

1,267

 

 

 

(378,212

)

 

 

157,695

 

 

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

 

7


 

ADURO BIOTECH, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(62,957

)

 

$

(69,037

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,260

 

 

 

3,268

 

Amortization of intangible assets

 

 

417

 

 

 

443

 

Impairment of property and equipment

 

 

1,177

 

 

 

 

Impairment of intangible assets

 

 

5,006

 

 

 

 

Non-cash lease expense

 

 

664

 

 

 

 

Accretion of discounts and amortization of premiums on marketable securities

 

 

(1,371

)

 

 

(800

)

Stock-based compensation

 

 

10,114

 

 

 

13,472

 

Loss from remeasurement of fair value of contingent consideration

 

 

25

 

 

 

570

 

(Gain) loss on disposal of property and equipment

 

 

(4

)

 

 

3

 

Deferred income tax

 

 

(2,320

)

 

 

(99

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Payment of contingent consideration

 

 

 

 

 

(3,322

)

Accounts receivable

 

 

11,815

 

 

 

989

 

Income tax receivable

 

 

 

 

 

(346

)

Prepaid expenses and other assets

 

 

671

 

 

 

1,631

 

Accounts payable

 

 

409

 

 

 

(26

)

Deferred revenue

 

 

(11,468

)

 

 

(9,246

)

Accrued clinical trial and manufacturing expenses

 

 

1,483

 

 

 

(2,076

)

Accrued expenses and other liabilities

 

 

(454

)

 

 

(3,090

)

Operating lease liabilities

 

 

94

 

 

 

 

Net cash used in operating activities

 

 

(43,439

)

 

 

(67,666

)

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Purchase of marketable securities

 

 

(224,927

)

 

 

(179,277

)

Proceeds from maturities of marketable securities

 

 

196,410

 

 

 

214,314

 

Purchase of property and equipment

 

 

(1,183

)

 

 

(2,007

)

Proceeds from sale of property and equipment

 

 

 

 

 

10

 

Net cash (used in) provided by investing activities

 

 

(29,700

)

 

 

33,040

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Payment of contingent consideration

 

 

 

 

 

(3,481

)

Proceeds from employee stock purchase plan

 

 

164

 

 

 

366

 

Proceeds from exercise of stock options and warrants

 

 

532

 

 

 

1,328

 

Net cash provided by (used in) financing activities

 

 

696

 

 

 

(1,787

)

Effect of exchange rate changes

 

 

(262

)

 

 

(450

)

Net decrease in cash, cash equivalents and restricted cash

 

 

(72,705

)

 

 

(36,863

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

126,778

 

 

 

158,082

 

Cash, cash equivalents and restricted cash at end of period

 

$

54,073

 

 

$

121,219

 

Supplemental Disclosure of Non-Cash Investing and Financing Activities

 

 

 

 

 

 

 

 

Purchase of property and equipment in accounts payable and accrued liabilities

 

$

31

 

 

$

363

 

Reconciliation of Cash, Cash Equivalents and Restricted Cash

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

53,605

 

 

$

120,751

 

Restricted cash

 

 

468

 

 

 

468

 

Total cash, cash equivalents and restricted cash

 

$

54,073

 

 

$

121,219

 

 

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

8


 

ADURO BIOTECH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

1. Organization and Nature of Business

Aduro Biotech, Inc., and its wholly owned subsidiaries, or the Company, is an immunotherapy company focused on the discovery, development and commercialization of therapies that are designed to harness the body's natural immune system for the treatment of patients with challenging diseases. The Company is located in Berkeley, California and its wholly-owned subsidiary, Aduro Biotech Holdings, Europe B.V., or Aduro Biotech Europe, is based in the Netherlands. The Company operates in one business segment. 

The Company’s product candidates in the Stimulator of Interferon Genes (STING) and A Proliferation Inducing Ligand (APRIL) pathways are being investigated in cancer, autoimmune and inflammatory diseases. The Company’s lead STING pathway activator product candidate, ADU-S100 (MIW815), is designed to selectively modulate innate and adaptive immune responses to enhance immune control in oncology. The Company’s anti-APRIL antibody product candidate, BION-1301, is designed to suppress the autoimmune response in patients with IgA nephropathy. The Company is collaborating with a number of leading global pharmaceutical companies to help expand and drive its product pipeline. The Company’s strategy is to rapidly advance best-in-class therapies from its STING and APRIL programs through clinical development and regulatory approval.

 

2. Basis of Presentation, Use of Estimates and Recent Accounting Pronouncements

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, and follow the requirements of the Securities and Exchange Commission, or the SEC, for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted, and accordingly the unaudited condensed consolidated financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements. These financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of the Company’s financial information. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any other interim period or for any other future year.

The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 27, 2019.

The condensed consolidated financial statements include the accounts of Aduro Biotech, Inc. and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and reported amounts of revenue and expenses in the financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, clinical trial accruals, contingent consideration, income taxes, right-of-use assets, lease obligations, stock-based compensation, and valuation of intangibles and goodwill. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results could differ from these estimates.

 

Leases

On January 1, 2019, the Company adopted the new standard on leases, Accounting Standard Codification 842, which establishes a comprehensive new lease accounting model. The following steps were taken to be consistent with the guidance in accounting for leases under the new standard. The Company determines if an arrangement is a lease at inception. The Company elected the practical expedient to adopt the policy to not separate lease and non-lease components. Operating leases are included in operating lease right-of-use (ROU) assets and operating lease liabilities on the Company’s consolidated balance sheets. Operating lease ROU assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the

9


 

Company uses its incremental borrowing rate in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options to extend or terminate the lease. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

 

 

Stock-Based Compensation

On January 1, 2019, the Company adopted Accounting Standard Update, or ASU, No. 2018-07, simplifying its accounting for share-based payments to non-employees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The Company measured its stock-based awards made to non-employees based on the estimated fair values of the awards as of the adoption date of January 1, 2019 using the Black-Scholes option-pricing model. Stock-based compensation expense is recognized over the remaining requisite service period using the straight-line method and is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. As such, the Company’s stock-based compensation is reduced for the estimated forfeitures and revised, if necessary, in subsequent periods if actual forfeitures differ from the original estimates.

 

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board, or FASB, issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The standard changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. The standard is effective for fiscal years and interim periods beginning after December 15, 2019. Early adoption is permitted for all periods beginning after December 15, 2018. The Company has evaluated the impact of this guidance and has concluded that adoption of the standard will not have a material impact on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13 – Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The standard eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information, and modifies some disclosure requirements. The new standard is effective for fiscal years and interim periods beginning after December 15, 2019. Early adoption is permitted upon issuance of this ASU. Entities making this election to early adopt are permitted to early adopt the eliminated or modified disclosure requirements and delay the adoption of the new disclosure requirements until their effective date. The Company is currently evaluating the impact that the standard will have on its condensed consolidated financial statements.

 

Recently Adopted Accounting Pronouncements 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASC 842), which establishes a comprehensive new lease accounting model. The new standard: (a) clarifies the definition of a lease; (b) requires a dual approach to lease classification similar to current lease classifications; and (c) causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding ROU asset for leases with a lease-term of more than twelve months. The new standard is effective for fiscal years and interim periods beginning after December 15, 2018, with early adoption permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, an update which provides another transition method, the prospective transition method, which allows entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted the new standard on January 1, 2019 using the prospective transition method.

The Company identified all leases and reviewed the leases to determine the impact of ASC 842 on its condensed consolidated financial statements. The Company has elected to apply all of the practical expedients as a package, which include not reassessing (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases, and (3) initial direct costs for any existing leases. The Company also elected the practical expedient to not separate lease and non-lease components for its real estate leases. Based on the Company’s assessment, the Company concluded that the adopti