| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Critical estimates include inputs used to determine stock-based compensation expenses. Cyclacel reviews its estimates on an ongoing basis. The estimates are based on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ from these estimates. Cyclacel believes the judgments and estimates required by the following accounting policies to be significant in the preparation of the Company’s consolidated financial statements. Risks and Uncertainties Drug candidates developed by the Company typically will require approvals or clearances from the FDA, EMA or other international regulatory agencies prior to commercial sales. There can be no assurance that the Company’s drug candidates will receive any of the required approvals or clearances. If the Company was denied approval or clearance or such approval was delayed, or is unable to obtain the necessary financing to complete development and approval, there will be a material adverse impact on the Company’s financial condition and results of operations. The Company has relied upon government grants to fund its earlier stage programs and does not expect to be able to continue to be successful in obtaining government grants to fund the Company’s research and development activities. Foreign Currency and Currency Translation Transactions that are denominated in a foreign currency are remeasured into the functional currency at the current exchange rate on the date of the transaction. Any foreign currency-denominated monetary assets and liabilities are subsequently remeasured at current exchange rates, with gains or losses recognized as foreign exchange (losses) gains in the statement of operations. The assets and liabilities of the Company’s international subsidiary are translated from its functional currency into United States dollars at exchange rates prevailing at the balance sheet date. Average rates of exchange during the period are used to translate the statement of operations, while historical rates of exchange are used to translate any equity transactions. Translation adjustments arising on consolidation due to differences between average rates and balance sheet rates, as well as unrealized foreign exchange gains or losses arising from translation of intercompany loans that are of a long-term-investment nature, are recorded in other comprehensive loss. Segments After considering its business activities and geographic reach, the Company has concluded that it operates in just one operating segment: the discovery, development and commercialization of novel, mechanism-targeted drugs to treat cancer and other serious disorders, with development operations in two geographic areas, namely the United States and the United Kingdom. Cash and Cash Equivalents Cash equivalents are stated at cost, which is substantially the same as fair value. The Company considers all highly liquid investments with an original maturity of three months or less at the time of initial purchase to be cash equivalents and categorizes such investments as held to maturity. The objectives of the Company’s cash management policy are to safeguard and preserve funds, to maintain liquidity sufficient to meet Cyclacel’s cash flow requirements and to attain a market rate of return. The Company maintains its cash and cash equivalents in bank deposits and other interest bearing accounts, the balances of which exceeded federally insured limits. Fair Value of Financial Instruments Financial instruments consist of cash and cash equivalents, accounts payable, accrued liabilities, financial instruments associated with stock purchase agreements and other arrangements. The carrying amounts of cash and cash equivalents, accounts payable and accrued liabilities approximate their respective fair values due to the nature of the accounts, notably their short maturities. The financial instruments associated with stock purchase agreements are measured at fair value using applicable inputs as described in Note 3 — Fair Value Revenue Recognition Collaboration, supply and licensing agreements Consideration received is allocated to each of the separable elements in an arrangement using the relative selling price method. An element is separable if it has value to the customer on a stand-alone basis. The selling price used for each separable element will be based on vendor-specific objective evidence (“VSOE”) if available, third party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third party evidence is available. Revenue is recognized for each separate element when persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the fee is fixed or determinable; and collectability is reasonably assured. Grant revenue Grant revenues from government agencies and private research foundations are recognized as the related qualified research and development costs are incurred, up to the limit of the prior approval funding amounts. Grant revenues are not refundable. Clinical Trial Accounting Data management and monitoring of the Company’s clinical trials are performed with the assistance of contract research organizations (“CROs”) or clinical research associates (“CRAs”) in accordance with the Company’s standard operating procedures. CROs and CRAs typically bill monthly for services performed, although some bill based upon milestones achieved. For outstanding amounts, the Company accrues unbilled clinical trial expenses based on estimates of the level of services performed each period. Costs of setting up clinical trial sites for participation in the trials are recognized upon execution of the clinical trial agreement and expensed immediately as research and development expenses. Clinical trial costs related to patient enrollment are accrued as patients are entered into and progress through the trial. Research and Development Expenditures Research and development expenses consist primarily of costs associated with the Company’s product candidates, upfront fees, milestones, compensation and other expenses for research and development personnel, supplies and development materials, costs for consultants and related contract research, facility costs and depreciation. Expenditures relating to research and development are expensed as incurred. Income Taxes The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Company applies the accounting guidance codified in ASC 740 “Income taxes” (“ASC 740”) related to accounting for uncertainty in income taxes. ASC 740 specifies the accounting for uncertainty in income taxes recognized in a company’s financial statements by prescribing a minimum probability threshold that a tax position is required to meet before being recognized in the financial statements. Credit is taken in the accounting period for research and development tax credits, which will be claimed from H.M. Revenue & Customs (“HMRC”), the United Kingdom’s taxation and customs authority, in respect of qualifying research and development costs incurred in the same accounting period. Stock-based Compensation The Company grants stock options, restricted stock units and restricted stock to officers, employees and directors under the 2015 Equity Incentive Plan (“2015 Plan”), which was approved on May 22, 2015 and which replaced the Amended and Restated Equity Incentive Plan (“2006 Plan”), which was approved on March 16, 2006, amended on May 21, 2007, amended again and restated on April 14, 2008 and later amended on May 23, 2012. Under both plans, the Company has granted various types of awards, which are described more fully in Note 6 — Stock-Based Compensation Arrangements. ASC 718 requires measurement of compensation cost for all stock-based awards at fair value on the date of grant and recognition of compensation over the requisite service period for awards expected to vest. The fair value of restricted stock and restricted stock units is determined based on the number of shares granted and the quoted price of the Company’s common stock on the date of grant. The determination of grant-date fair value for stock option awards is estimated using the Black-Scholes model, which includes variables such as the expected volatility of the Company’s share price, the anticipated exercise behavior of employees, interest rates, and dividend yields. These variables are projected based on historical data, experience, and other factors. Changes in any of these variables could result in material adjustments to the expense recognized for share-based payments. Such value is recognized as expense over the requisite service period, net of forfeitures, using the straight-line attribution method. Effective January 1, 2016, the Company has elected to account for forfeitures as they occur, as permitted by Accounting Standards Update (“ASU”) 2016-09, Compensation — Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. See the Accounting Standards Adopted in the Period Prior to the adoption of ASU 2016-09, the Company estimated the number of stock-based awards that were expected to vest, and only recognized compensation expense for such awards. The estimation of stock awards that will ultimately vest required judgment, and to the extent actual results or updated estimates differed from current estimates, such amounts were recorded as a cumulative adjustment in the period estimates were revised. The Company considered many factors when estimating expected forfeitures, including type of awards granted, employee class, and historical experience. Net Loss Per Common Share The Company calculates net loss per common share in accordance with ASC 260 “Earnings Per Share” (“ASC 260”). Basic and diluted net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. The following potentially dilutive shares of common stock have not been included in the computation of diluted net loss per share for the three months ended March 31, 2015 and 2016, as the result would be anti-dilutive:
March 31, March 31,
Stock options 1,231,954 4,521,298
Convertible preferred stock 20,381 20,381
Common stock warrants 1,138,630 544,116
Total shares excluded from calculation 2,390,965 5,085,795 Comprehensive Income (Loss) In accordance with ASC 220 “Comprehensive Income” (“ASC 220”), all components of comprehensive income (loss), including net income (loss), are reported in the financial statements in the period in which they are recognized. Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income (loss) and other comprehensive income (loss), including foreign currency translation adjustments, are reported, net of any related tax effect, to arrive at comprehensive income (loss). No taxes were recorded on items of other comprehensive income (loss). Recent Events The NASDAQ Stock Market Delisting Hearing On February 2, 2016, the Company received a letter from the Listing Qualifications Staff (the “Staff”) of The NASDAQ Stock Market LLC (“NASDAQ”) indicating that the Company had not regained compliance with the $1.00 minimum bid price requirement for continued listing on The NASDAQ Capital Market, as set forth in NASDAQ Listing Rule 5450(a)(1), by the end of the previously granted compliance period that expired on February 2, 2016. As a result, the Staff indicated that the Company would be subject to delisting unless it timely requested a hearing before a NASDAQ Listing Qualifications Panel (the “Panel”). The Company had a hearing before the Panel on March 31, 2016, at which it presented its plan to regain compliance with the minimum bid price requirement, and requested a further extension of time to do so. On April 4, 2016, the Company received a written ruling from the NASDAQ Hearings Panel (the “Panel”) stating that the Panel has granted the Company’s request to remain listed on The NASDAQ Capital Market. The Company’s continued listing on NASDAQ is conditional upon the Company demonstrating compliance with the minimum bid price requirement, as set forth in Listing Rule 5550(a)(2), by June 14, 2016, and also remaining in compliance on that date with NASDAQ’s other continued listing requirements. Specifically, the Company must evidence a closing bid price for its common stock of at least $1.00 per share for a minimum of 10 consecutive business days by the close of business on June 14, 2016. In light of the factors mentioned above, at the 2016 Annual Meeting of Stockholders, to be held at 10:00 a.m., EDT, on May 26, 2016, holders of the Company’s common stock will be asked to approve a proposed amendment to the Company’s amended and restated certificate of incorporation, by way of a certificate of amendment, to effectuate a reverse stock split, at a ratio of up to and including one-for-twenty, such ratio to be determined by the Board of Directors (“the Board”) of the company. Accounting Standards Adopted in the Period In April 2016, the Financial Accounting Standards Boards (“FASB”) issued ASU 2016-09, which simplified several aspects of employee share-based payment accounting. In particular, the ASU permits entities to make an accounting policy election to either estimate forfeitures on share-based payment awards, as previously required, or to recognize forfeitures as they occur. Effective January 1, 2016, the Company elected to recognize forfeitures as they occur. The impact of that change in accounting policy has been recorded as a $89,000 cumulative effect adjustment to accumulated deficit, as of January 1, 2016. The Company expects that it will recognize slightly higher share-based payment expense for the remainder of 2016, relative to prior periods, as the effects of forfeitures will not be recognized until they occur, rather than being estimated at the time of grant and subsequently adjusted as and when necessary. The effects of adopting the remaining provisions in ASU 2016-09 affecting The Company has adopted guidance issued by the FASB in April 2015 which clarifies a customer’s accounting for fees paid in a cloud computing arrangement (ASU 2015-05, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement). The guidance provides a customer with guidance on whether a cloud computing arrangement includes a software license and clarifies that the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance has been adopted prospectively to all arrangements entered into or materially modified after January 1, 2016. The adoption of this guidance did not have any impact on the financial position, results of operations or cash flows. The Company has adopted guidance issued by the FASB in June 2014 which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition (ASU 2014-12, Compensation — Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force)). The guidance has been adopted prospectively to all awards granted or modified after January 1, 2016. The adoption of this guidance did not have any impact on the consolidated financial position, results of operations or cash flows. Recent Accounting Pronouncements Not Yet Effective In February 2016, the FASB issued guidance on accounting for leases. The guidance requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases along with additional qualitative and quantitative guidance. The guidance is effective for fiscal years beginning after December 15, 2018. The impact of the adoption of this guidance has not yet been evaluated. In January 2016, the FASB issued guidance requiring all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee) and amended certain fair value disclosures requirements. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements. In November 2015, the FASB issued guidance on the classification of deferred taxes on the balance sheet. The guidance is effective for fiscal periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements. In July 2015, the FASB issued guidance to simplify the measurement of inventory. Effective for periods beginning after December 15, 2016, inventory measured using the first-in-first-out or average costs methods will be reported at the lower of cost or realizable value. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements. In August 2014, the FASB issued guidance on management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and the provision of related footnote disclosures. This guidance is effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements. In May 2014, the FASB issued new guidance on accounting for revenue from contracts with customers. This new guidance will replace existing revenue guidelines with a new model, in which revenue is recognized upon transfer of control over goods or services to a customer. In August 2015, the FASB deferred the effective date of the guidance, which will now be effective for the Company on January 1, 2018, for both interim and annual periods. Early adoption is permitted for both interim and annual periods commencing on January 1, 2017. The guidance can be adopted using either a full retrospective (with certain practical expedients) or a modified retrospective method of transition. Under the modified retrospective approach, financial statements will be prepared for the year of adoption using the new standard, but prior periods will not be adjusted. Instead, companies will recognize a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for contracts that still require performance by the company, and disclose all line items in the year of adoption as if they were prepared under current revenue requirements. In March 2016 the FASB issued further clarification on the principal versus agent considerations (reporting revenue gross versus net) included within the new revenue recognition guidance. This guidance will be effective upon the adoption of the new revenue recognition guidance. In April 2016 the FASB issued further clarification on identifying performance obligations in a contract with a customer and provided implementation guidance on whether licenses are satisfied at a point in time or over time. This guidance will be effective upon the adoption of the new revenue recognition guidance. At this time, the Company has not decided on which method it will use to adopt the new standard, nor has it determined the effects of the new guidelines on its results of operations and financial position. For the foreseeable future, the Company’s revenues will be limited to grants received from government agencies or nonprofit organizations and revenues from collaboration, supply and licensing agreements, and the Company is evaluating the effects of the new standard on these types of revenue streams. |
