2. Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The condensed consolidated financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted from this report, as is permitted by such rules and regulations. Accordingly, these condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the “Annual Report”).

The unaudited condensed consolidated financial statements include the accounts of Editas Medicine, Inc. and its wholly owned subsidiary, Editas Securities Corporation. All intercompany transactions and balances of the subsidiary have been eliminated in consolidation. In the opinion of management, the information furnished reflects all adjustments, all of which are of a normal and recurring nature, necessary for a fair presentation of the results for the reported interim periods. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. The three months ended September 30, 2018 and 2017 are referred to as the third quarter of 2018 and 2017, respectively. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year or any other interim period.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. On an ongoing basis, the Company’s management evaluates its estimates, which include, but are not limited to, estimates related to revenue recognition, accrued expenses, stock-based compensation expense and deferred tax valuation allowances. The Company bases its estimates on historical experience and other market-specific or relevant assumptions that it believes to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements included in the Annual Report. There have been no material changes to the significant accounting policies previously disclosed in the Annual Report other than as noted below.

Revenue Recognition

Effective January 1, 2018, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective transition method. Under this method, the Company recorded the cumulative effect of initially applying the new standard to all contracts as of the date of adoption.

The Company enters into collaboration agreements and certain other agreements that are within the scope of ASC 606, under which the Company licenses, may license or grants an option to license rights to certain of the Company’s product candidates and performs research and development services in connection with such arrangements. The terms of these arrangements typically include payment of one or more of the following: non-refundable, up-front fees; reimbursement of research and development costs; development, clinical, regulatory and commercial sales milestone payments, and royalties on net sales of licensed products.

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 the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of ASC 606, the Company performs the following five steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect consideration it is entitled to in exchange for the goods or services it transfers to the customer.

The promised goods or services in the Company’s arrangements typically consist of a license, or option to license, rights to the Company’s intellectual property or research and development services. The Company provides options to additional items in such arrangements, which are accounted for as separate contracts when the customer elects to exercise such options, unless the option provides a material right to the customer. Performance obligations are promised goods or services in a contract to transfer a distinct good or service to the customer and are considered distinct when (i) the customer can benefit from the good or service on its own or together with other readily available resources and (ii) the promised good or service is separately identifiable from other promises in the contract. In assessing whether promised good or services are distinct, the Company considers factors such as the stage of development of the underlying intellectual property, the capabilities of the customer to develop the intellectual property on its own or whether the required expertise is readily available and whether the goods or services are integral or dependent to other goods or services in the contract.

The Company estimates the transaction price based on the amount expected to be received for transferring the promised goods or services in the contract. The consideration may include fixed consideration or variable consideration. At the inception of each arrangement that includes variable consideration, the Company evaluates the amount of potential payment and the likelihood that the payments will be received. The Company utilizes either the most likely amount method or expected value method to estimate the amount expected to be received based on which method best predicts the amount expected to be received. The amount of variable consideration that is included in the transaction price may be constrained and is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.

The Company’s contracts often include development and regulatory milestone payments that are as assessed under the most likely amount method and constrained if it is probable that a significant revenue reversal would occur. Milestone payments that are not within the Company’s control or the licensee’s control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. At the end of each reporting period, the Company re-evaluates the probability of achievement of such development and clinical milestones and any related constraint, and if necessary, adjust its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration and other research and development revenues in the period of adjustment.

For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and 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 the Company’s collaboration or strategic alliance arrangements.

The Company allocates the transaction price based on the estimated standalone selling price. The Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. The Company utilizes key assumptions to determine the stand-alone selling price, which may include other comparable transactions, pricing considered in negotiating the transaction and the estimated costs. Variable consideration is allocated specifically to one or more performance obligations in a contract when the terms of the variable consideration relate to the satisfaction of the performance obligation and the resulting amounts allocated are consistent with the amounts the Company would expect to receive for the satisfaction of each performance obligation.

The consideration allocated to each performance obligation is recognized as revenue when control is transferred for the related goods or services. For performance obligations which consist of licenses and other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

The Company receives payments from its customers based on billing schedules established in each contract. Up-front payments and fees are recorded as deferred revenue upon receipt or when due until the Company performs its obligations under these arrangements. Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional.

Equity Securities

The Company records investments in privately issued corporate equity securities that do not have readily determinable fair values, at cost, and adjusts for changes in observable prices minus impairment. Each reporting period the Company adjusts the carrying value of these investments if it observes that additional shares have been issued in an orderly transaction between market participants resulting in a price increase or decrease per share. Additionally, each reporting period the Company reviews these investments for impairment considering all available information to conclude whether an impairment exists. Changes in measurement for all corporate equity investments are recognized in “Other income (expense), net.”

Recent Accounting Pronouncements –Adopted

In October 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-18, Restricted Cash (“ASU 2016-18”), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash or restricted cash equivalents. Therefore, amounts described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 was effective for fiscal years beginning after December 15, 2017, and interim periods within those years. The guidance is effective on a retrospective basis. The Company adopted this guidance as of October 1, 2017. The Company reclassified restricted cash in the statements of cash flows to be included in the cash and cash equivalents balance. The reclassification was not material to the periods presented. The following table presents cash, cash equivalents and restricted cash as reported on the condensed consolidated balance sheets that equal the total amounts on the condensed consolidated statements of cash flows (in thousands):



	September 30,
	2018		2017
Cash and cash equivalents	$	111,701	$	86,542
Restricted cash included in "Restricted cash and other non-current assets"		1,619		1,619
Total	$	113,320	$	88,161

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in FASB ASC Topic 605, Revenue Recognition, and most industry-specific guidance. The Company adopted the new standard effective January 1, 2018 using the modified retrospective approach. As part of the adoption, the Company reviewed all contracts that were not yet completed as of the date of initial application in determining the cumulative-effect impact related to the adoption of ASC 606. The adoption of ASC 606 resulted in the changes to (i) the allocation of arrangement consideration, including the determination of estimated selling price and the allocation of variable consideration to specific performance obligations for the Company’s collaboration agreement with Juno Therapeutics, and (ii) the application of proportional performance as a measure of progress on service related deliverables for the Company’s strategic alliance with Allergan.

Effective January 1, 2018, the Company’s adoption of ASC 606 resulted in increases of $0.5 million in deferred revenue and accumulated deficit, which was primarily due to an adjustment for two milestone payments previously earned that will now be recognized over time, partially offset by acceleration of proportional performance revenue.

The following table presents changes in the Company’s deferred revenue balance as of January 1, 2018 resulting from adoption of ASC 606 (in thousands):


	Balance at December 31, 2017		Adjustments		Balance at January 1, 2018
Contract liabilities:
Deferred revenue	$	(107,963)	$	(474)	$	(108,437)

As of September 30, 2018, the Company’s accounts receivable and contract liabilities were primarily related to the Company’s agreements with Juno Therapeutics and Allergan. The following table presents changes in the Company’s accounts receivable and contract liabilities for the nine months ended September 30, 2018 (in thousands):


For the nine months ended September 30, 2018	Balance at December 31, 2017		Additions		Deductions		Balance at September 30, 2018
Accounts receivable	$	679	$	1,189	$	(1,825)	$	43
Contract liabilities:
Deferred revenue	$	(107,963)	$	(9,986)	$	5,124	$	(112,825)

During the three and nine months ended September 30, 2018, the Company recognized revenue as a result of the following (in thousands):


		Three Months Ended		Nine Months Ended
Revenue recognized in the period from:	September 30, 2018
Amounts included in deferred revenue at the beginning of the period	$	687	$	4,457
Performance obligations satisfied in previous periods	$	(1,255)	$	1,311

For additional information regarding revenue recognition from contracts with customers, refer to Note 8.

The Company has included the following financial statement line items for comparability purposes as of and for the three and nine months ended September 30, 2018 (in thousands):


		Three Months Ended September 30, 2018
	As reported under Topic 606		Balances without adoption of ASC 606		Effect of Change
Collaboration and other research and development revenues	$	14,519	$	18,974	$	(4,455)
Operating loss	$	(16,258)	$	(11,803)	$	(4,455)
Net loss attributable to common stockholders	$	(15,238)	$	(10,783)	$	(4,455)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.32)	$	(0.23)	$	(0.09)


		Nine Months Ended September 30, 2018
	As reported under Topic 606		Balances without adoption of ASC 606		Effect of Change
Collaboration and other research and development revenues	$	25,818	$	28,933	$	(3,115)
Operating loss	$	(87,474)	$	(84,359)	$	(3,115)
Net loss attributable to common stockholders	$	(84,899)	$	(81,784)	$	(3,115)
Net loss per share attributable to common stockholders, basic and diluted	$	(1.81)	$	(1.75)	$	(0.07)


		As of September 30, 2018
	As reported under Topic 606		Balances without adoption of ASC 606		Effect of Change
Deferred revenue, current	$	8,725	$	13,374	$	(4,649)
Deferred revenue, net of current portion	$	104,100	$	86,085	$	18,015
Accumulated deficit	$	(391,223)	$	(388,108)	$	(3,115)

In 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 amended guidance related to the recording of financial assets and liabilities. Under the amended guidance, equity investments that are not accounted for under the equity method or those that result in the consolidation of an investee, are to be measured at fair value with changes in fair value recognized in net income (loss). An entity has the option to measure equity investments without readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transaction for the identical or similar investments. The amended guidance became effective January 1, 2018. As of September 30, 2018, the Company held an equity investment in Beam Therapeutics Inc. (“Beam”), a privately held company, that it accounted for under the cost method. The equity investment does not have a readily determinable fair value. The Company measured the investment at cost adjusted for impairment or observable price changes. During the three and nine months ended September 30, 2018, the Company did not adjust the value of the Company’s investment in Beam as a result of impairment or based on observable price changes.

Recent Accounting Pronouncements – Issued But Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which applies to all leases and will require lessees to record most leases on the balance sheet, but recognize expense in a manner similar to the current standard. In July 2018, the FASB issued ASU 2018-10, "Codification Improvements to Topic 842, Leases," which provides narrow amendments to clarify how to apply certain aspects of ASU 2016-02, and ASU 2018-11, "Leases (Topic 842): Targeted Improvements," which provides adopters an additional transition method by allowing entities to initially apply ASU 2016-02, and subsequent related standards, at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those years. Entities are required to use a modified retrospective approach of adoption for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited. The Company is in the process of updating its systems, policies and internal controls over financial reporting in anticipation of adopting these standards on January 1, 2019. The Company is evaluating the potential impact that the adoption of ASU 2016-02 and the amendments will have on the Company’s consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”) to simplify the accounting for share-based payments to non-employees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The new guidance expands the scope of ASC 718, Compensation – Stock Compensation, to include share-based payments granted to non-employees in exchange for goods or services used or consumed in an entity’s own operations and supersedes the guidance in ASC Topic 505-50, Equity-Based Payments to Non-Employees. The guidance is effective for public business entities in annual periods beginning after December 15, 2018 and interim periods within those years. Early adoption is permitted. The Company is currently evaluating the effect of this guidance on the Company’s consolidated financial statements and disclosures.

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies certain disclosure requirements on fair value measurements. The amendments regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty are required to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments are required to be applied retrospectively to all periods presented upon their effective date. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those years. The Company does not anticipate a material impact to disclosures as a result of the adoption of ASU 2018-13.