| The Company and Summary of Significant Accounting Policies | Note 1. The Company and Summary of Significant Accounting Policies The Company We are a late-stage pharmaceutical company focused on leveraging our extensive development and oncology expertise to identify and advance new therapies intended to meaningfully improve the treatment of cancer. Our portfolio of drug candidates contains four clinical-stage candidates, including one candidate in an ongoing Phase 3 global registration trial and another candidate in an ongoing Phase 2 clinical trial that we intend to submit to the U.S. Food and Drug Administration (“FDA”) to support accelerated approval of a marketing application. Our common stock is listed on the NASDAQ Capital Market under the symbol “MEIP”. Clinical Development Programs Our approach to building our pipeline is to license promising cancer agents and build value in programs partnerships, as appropriate. Our drug candidate pipeline includes: • ME-401, an oral phosphatidylinositol 3-kinase (“PI3K”) delta inhibitor; • Voruciclib, an oral cyclin-dependent kinase (“CDK”) inhibitor; • ME-344, a mitochondrial inhibitor targeting the oxidative phosphorylation (“OXPHOS”) complex; and • Pracinostat, an oral histone deacetylase (“HDAC”) inhibitor. The results of pre-clinical studies and completed clinical trials are not necessarily predictive of future results, and our current drug candidates may not have favorable results in later studies or trials. The commercial opportunity will be reduced or eliminated if competitors develop and market products that are more effective, have fewer side effects or are less expensive than our drug candidates. We will need substantial additional funds to progress the clinical trial programs for the drug candidates ME-401, voruciclib, ME-344 and pracinostat, and to develop new compounds. The actual amount of funds that will be needed are determined by a number of factors, some of which are beyond our control. Negative U.S. and global economic conditions may pose challenges to our business strategy, which relies on funding from the financial markets or collaborators. Use of Estimates The preparation of financial statements in conformity with equires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. We use estimates that affect the reported amounts (including assets, liabilities, revenues and expenses) and related disclosures. Actual results could materially differ from those estimates. Liquidity We have accumulated losses of $231.2 million since inception and expect to incur operating losses and generate negative cash flows from operations for the foreseeable future. As of June 30, 2019, we had $79.8 million in cash and cash equivalents, short-term investments, and common stock proceeds receivable, which we believe will be sufficient to meet obligations and fund our liquidity and capital expenditure requirements for at least the next 12 months from the issuance of these financial statements. Our current business operations are focused on continuing the clinical development of our drug candidates. Changes to our research and development plans or other changes affecting our operating expenses may affect actual future use of existing cash resources. Our research and development expenses are expected to increase in the foreseeable future. We cannot determine with certainty costs associated with ongoing and future clinical trials or the regulatory approval process. The duration, costs and timing associated with the development of our product candidates will depend on a variety of factors, including uncertainties associated with the results of our clinical trials. To date, we have obtained cash and funded our operations primarily through equity financings and license agreements. In order to continue the development of our drug candidates, at some point in the future we expect to pursue one or more capital transactions, whether through the sale of equity securities, license agreements or entry into strategic partnerships. There can be no assurance that we will be able to continue to raise additional capital in the future. Cash and Cash Equivalents Cash and cash equivalents consist of cash and highly liquid investments with original maturities of three months or less when purchased. Cash is maintained at financial institutions and, at times, balances may exceed federally insured limits. We have never experienced any losses related to these balances. Short-Term Investments Investments that have maturities of greater than three months but less than one year are classified as short-term investments. As of June 30, 2019 and 2018, our short-term investments consisted of $64.9 million and $89.4 million, respectively, in U.S. government securities. The short-term investments held as of June 30, 2019 and 2018 had maturity dates of less than one year, are considered to be “held to maturity” and are carried at amortized cost. As of June 30, 2019 and 2018, the gross holding gains and losses were immaterial. Fair Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value is as follows: • Level 1 — Observable inputs such as quoted prices in active markets for identical assets or liabilities. • Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. We measure the following financial instruments at fair value on a recurring basis. The fair values of these financial instruments were as follows (in thousands): June 30, 2019 June 30, 2018 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Warrant liability $ — $ — $ (17,613 ) $ — $ — $ (46,313 ) Total $ — $ — $ (17,613 ) $ — $ — $ (46,313 ) The carrying amounts of financial instruments such as cash equivalents, short-term investments and accounts payable approximate the related fair values due to the short-term maturities of these instruments. We invest our excess cash in financial instruments which are readily convertible into cash, such as money market funds and U.S. government securities. Cash equivalents, where applicable, and short-term investments are classified as Level 1 as defined by the fair value hierarchy. In May 2018, we issued warrants in connection with our private placement of shares of common stock. Pursuant to the terms of the warrants, we could be required to settle the warrants in cash in the event of an acquisition of the Company and, as a result, the warrants are required to be measured at fair value and reported as a liability in the Balance Sheet. We recorded the fair value of the warrants upon issuance using the Black-Scholes valuation model and are required to revalue the warrants at each reporting date with any changes in fair value recorded on our Statement of Operations. The valuation of the warrants is considered under Level 3 of the fair value hierarchy due to the need to use assumptions in the valuation that are both significant to the fair value measurement and unobservable. Inputs used to determine estimated fair value of the warrant liabilities include the estimated fair value of the underlying stock at the valuation date, the estimated term of the warrants, risk-free interest rates, expected dividends and the expected volatility of the underlying stock. The significant unobservable inputs used in the fair value measurement of the warrant liabilities were the volatility rate and the estimated term of the warrants. Generally, increases (decreases) in the fair value of the underlying stock and estimated term would result in a directionally similar impact to the fair value measurement. The change in the fair value of the Level 3 warrant liability is reflected in the Statement of Operations for . To calculate the fair value of the warrant liability, the following assumptions were used: June 30, 2019 June 30, 2018 Risk-free interest rate 1.7 % 2.7 % Expected life (years) 3.8 4.8 Expected volatility 56.8 % 77.3 % Dividend yield 0.0 % 0.0 % Black-Scholes Fair Value $ 1.10 $ 2.81 The following table sets forth a summary of changes in the estimated fair value of our Level 3 warrant liability for the year ended June 30, 2019 and 2018 (in thousands): Fair Value of Warrants Using Significant 2019 2018 Balance at July 1, $ 46,313 $ — Issuance of liability classified warrants — 36,608 Reclassification of derivative liability to equity upon exercise of warrants (1,068 ) — Change in estimated fair value of liability classified warrants (27,632 ) 9,705 Balance at June 30, $ 17,613 $ 46,313 Intangible Assets Intangible assets consist of patents acquired from S*Bio in August 2012, relating to a family of heterocyclic compounds that inhibit HDACs. Capitalized amounts are amortized on a straight-line basis over the expected life of the intellectual property of 14 years from the date of acquisition. The carrying values of intangible assets are periodically reviewed to determine if the facts and circumstances suggest that a potential impairment may have occurred. Results of operations for the years ended June 30, 2019, 2018 and 2017 do not reflect any write-downs associated with the potential impairment of intangible assets. Property and Equipment Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets (generally three to seven years) using the straight-line method. Leasehold improvements are stated at cost and are amortized over the shorter of the estimated useful lives of the assets or the lease term. Revenue Recognition ASC Topic 606, Revenue from Contracts with Customers (“Topic 606” or the “new revenue standard”) Beginning July 1, 2018, we recognize revenue when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. For enforceable contracts with our customers, we first identify the distinct performance obligations – or accounting units – within the contract. Performance obligations are commitments in a contract to transfer a distinct good or service to the customer. Payments received under commercial arrangements, such as licensing technology rights, may include non-refundable fees at the inception of the arrangements, milestone payments for specific achievements designated in the agreements, and royalties on the sale of products. At the inception of arrangements that include milestone payments, we use judgment to evaluate whether the milestones are probable of being achieved and we estimate the amount to include in the transaction price using the most likely method. If it is probable that a significant revenue reversal will not occur, the estimated amount is included in the transaction price. Milestone payments that are not within our or the licensee’s control, such as regulatory approvals, are not included in the transaction price until those approvals are received. At the end of each reporting period, we re-evaluate the probability of achievement of development milestones and any related constraint and, as necessary, we adjust our estimate of the overall transaction price. Any adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment. To date, we have not recognized any material cumulative catch-up adjustments from changes in our estimate of the transaction price. We develop estimates of the stand-alone selling price for each distinct performance obligation and allocate the overall transaction price to each accounting unit based on a relative stand-alone selling price approach. We develop assumptions that require judgment to determine the stand-alone selling price for license-related performance obligations, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical, regulatory and commercial success. We estimate stand-alone selling price for research and development performance obligations by forecasting the expected costs of satisfying a performance obligation plus an appropriate margin. In the case of a license that is a distinct performance obligation, we recognize revenue from non-refundable, up-front fees at the point in time when the license is transferred to the licensee and the licensee can use and benefit from the license. For licenses that are bundled with other obligations, we use 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 for purposes of recognizing revenue. If the performance obligation is satisfied over time, we evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. Revenue is recorded proportionally as costs are incurred. We generally use the cost-to-cost measure of progress because it best depicts the transfer of control to the customer which occurs as we incur costs. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation (an “input method” under Topic 606). We use judgment to estimate the total cost expected to complete the research and development performance obligations, which include subcontractors’ costs, labor, materials, other direct costs and an allocation of indirect costs. We evaluate these cost estimates and the progress each reporting period and, as necessary, we adjust the measure of progress and related revenue recognition. To date, we have not recognized any material cumulative catch-up adjustments from changes in our estimate of the measure of progress. For arrangements that include sales-based or usage-based royalties, we recognize 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, we have not recognized any sales-based royalty revenue from license agreements. We recognized revenue associated with the following license agreements (in thousands): Years Ended June 30, 2019 2018 2017 KKC License Agreement $ 2,557 $ — $ — Helsinn License Agreement 2,358 1,622 23,249 $ 4,915 $ 1,622 $ 23,249 Timing of Revenue Recognition: License transferred at a point in time $ 879 $ — $ 20,880 Services performed over time 4,036 1,622 2,369 $ 4,915 $ 1,622 $ 23,249 Revenue for the year ended June 30, 2019 included revenue related to the KKC License Agreement (Note 2). Based on the characteristics of the KKC License Agreement, delivery of the license is a distinct performance obligation, and we recognized related revenue of $0.9 million during the year ended June 30, 2019 when the license was transferred to the licensee and the licensee could use and benefit from the license. The license agreement included other distinct performance obligations that will be satisfied over time, and accordingly we recognized $1.7 million related to our progress toward satisfying those obligations during the year ended June 30, 2019. Revenue for the years ended June 30, 2019, 2018 and 2017 included revenue related to the Helsinn License Agreement (Note 2). Based on the characteristics of the Helsinn License Agreement, control of the remaining deliverables occurs over time and therefore we recognize revenue based on the extent of progress towards completion of the performance obligations. As of June 30, 2019, we had $7.8 million of deferred revenue associated with our remaining performance obligations under the KKC and Helsinn license agreements. We expect to recognize approximately $5.0 million of deferred revenue in the next 12 months, and an additional $2.8 million thereafter. Contract Balances The following table presents changes in contract assets and contract liabilities during the year ended June 30, 2019 (in thousands): As of July 1, Net As of June 30, Receivables $ 82 $ (82 ) $ — Contract Assets $ 312 $ 374 $ 686 Contract Liabilities $ 788 $ 6,986 $ 7,774 The timing of revenue recognition, invoicing and cash collections results in billed accounts receivable and unbilled receivables (contract assets), which are classified as “prepaid expenses and other current assets” on our Balance Sheet, and deferred revenue (contract liabilities). We invoice our customers in accordance with agreed-upon contractual terms, typically at periodic intervals or upon achievement of contractual milestones. Invoicing may occur subsequent to revenue recognition, resulting in contract assets. We may receive advance payments from our customers before revenue is recognized, resulting in contract liabilities. The contract assets and liabilities reported on the Balance Sheet relate to the KKC License Agreement and Helsinn License Agreement. Accounting Standard Codification (“ASC”) Topic 605, Revenue Recognition (“Topic 605”) Revenue Recognition Payments received under commercial arrangements, such as licensing technology rights, may include non-refundable fees at the inception of the arrangements, milestone payments for specific achievements designated in the agreements, and royalties on the sale of products. We consider a variety of factors in determining the appropriate method of accounting under our license agreements, including whether the various elements can be separated and accounted for individually as separate units of accounting. Multiple Element Arrangements Deliverables under an arrangement will be separate units of accounting, provided (i) a delivered item has value to the customer on a standalone basis; and (ii) the arrangement includes a general right of return relative to the delivered item, and delivery or performance of the undelivered item is considered probable and substantially in our control. We account for revenue arrangements with multiple elements by separating and allocating consideration according to the relative selling price of each deliverable. If an element can be separated, an amount is allocated based upon the relative selling price of each element. We determine the relative selling price of a separate deliverable using the price we charge other customers when we sell that element separately. If the element is not sold separately and third party pricing evidence is not available, we will use our best estimate of selling price. License Fee Revenue Non-refundable, up-front fees that are not contingent on any future performance by us and require no consequential continuing involvement on our part are recognized as revenue when the license term commences and the licensed data, technology or product is delivered. We defer recognition of non-refundable upfront license fees if we have continuing performance obligations, without which the licensed data, technology, or product has no utility to the licensee separate and independent of our performance under the other elements of the applicable arrangement. The specific methodology for the recognition of the revenue is determined on a case-by-case basis according to the facts and circumstances of the applicable agreement. Research and Development Revenue Research and development revenue represents ratable recognition of fees allocated to research and development activities. We defer recognition of research and development revenue until the performance of the related research and development activities has occurred. Research and development revenue for the year ended June 30, 2018 and 2017 related to services provided by third-party vendors related to research and development activities performed under the Helsinn License Agreement (Note 2). Cost of Revenue Cost of revenue primarily includes external costs paid to third-party contractors to perform research, conduct clinical trials and develop and manufacture drug materials, and internal compensation and related personnel expenses to support our research and development performance obligations associated with the Helsinn License Agreement. Research and Development Costs Research and development costs are expensed as incurred and include costs paid to third-party contractors to perform research, conduct clinical trials and develop and manufacture drug materials. Clinical trial costs, including costs associated with third-party contractors, are a significant component of research and development expenses. We expense research and development costs based on work performed. In determining the amount to expense, management relies on estimates of total costs based on contract components completed, the enrollment of subjects, the completion of trials, and other events. Costs incurred related to the purchase or licensing of in-process Share-based Compensation Share-based compensation expense for employees and directors is recognized in the Statement of Operations based on estimated amounts, including the grant date fair value and the expected service period. For stock options, we estimate the grant date fair value using a Black-Scholes valuation model, which requires the use of multiple subjective inputs including estimated future volatility, expected forfeitures and the expected term of the awards. We estimate the expected future volatility based on the stock’s historical price volatility. The stock’s future volatility may differ from the estimated volatility at the grant date. For restricted stock unit (“RSU”) equity awards, we estimate the grant date fair value using our closing stock price on the date of grant. We recognize the effect of forfeitures in compensation expense when the forfeitures occur. The estimated forfeiture rates may differ from actual forfeiture rates which would affect the amount of expense recognized during the period. We recognize the value of the awards over the awards’ requisite service or performance periods. The requisite service period is generally the time over which our share-based awards vest. Interest and Dividend Income Interest on cash balances is recognized when earned. Dividend income is recognized when the right to receive the payment is established. Income Taxes Our income tax expense consists of current and deferred income tax expense or benefit. Current income tax expense or benefit is the amount of income taxes expected to be payable or refundable for the current year. A deferred income tax asset or liability is recognized for the future tax consequences attributable to tax credits and loss carryforwards and to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of June 30, 2019 and 2018, we have established a valuation allowance to fully reserve our net deferred tax assets. Tax rate changes are reflected in income during the period such changes are enacted. Changes in our ownership may limit the amount of net operating loss carryforwards that can be utilized in the future to offset taxable income. In December 2017, the U.S government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act reduced the corporate tax rate from 34% to 21%, effective for tax years beginning January 1, 2018. We are subject to the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 740-10, Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), given the amount and complexity of the changes in tax law resulting from the Tax Act, the Company had not finalized the accounting for the income tax effects of the Tax Act as of June 30, 2018. In connection with our initial analysis of the impact of the Tax Act, the Company recorded a non-cash tax expense of $15.9 million during the year ended June 30, 2018, due to the re-measurement of our deferred tax assets and liabilities at the new U.S. federal tax rate, offset by a corresponding change to the Company’s valuation allowance. December 22, 2018 marked the end of the measurement period for purposes of SAB 118. As such, the Company completed our analysis based on legislative updates relating to the Tax Act currently available, and no material adjustments have been recorded as of June 30, 2019. The FASB Topic on Income Taxes prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Net (Loss) Income Per Share Basic and diluted net (loss) income per share are computed using the weighted-average number of shares of common stock outstanding during the period, less any shares subject to repurchase or forfeiture. There were no shares of common stock subject to repurchase or forfeiture for the years ended June 30, 2019, 2018 and 2017. Our potentially dilutive shares, which include outstanding stock options, restricted stock units, and warrants, are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive. The assessment of dilution is made on a quarterly basis and therefore the annual determination of diluted net loss per share only includes those quarters in which the potential common stock equivalents were determined to be dilutive. For the years ended June 30, 2019, 2018 and 2017, we did not have any items that would be classified as other comprehensive income or losses. The following table presents the calculation of net loss (income) used to calculate basic and diluted loss (income) per share (in thousands): Years Ended June 30, 2019 2018 2017 Net (loss) income—basic $ (16,819 ) $ (40,068 ) $ 2,670 Change in fair value of warrant liability (37,794 ) — — Net (loss) income—diluted $ (54,613 ) $ (40,068 ) $ 2,670 Shares used in calculating net (loss) income per share was determined as follows (in thousands): Years Ended June 30, 2019 2018 2017 Weighted average shares outstanding 71,139 41,064 36,435 Effect of vested restricted stock units — 367 378 Weighted average shares used in calculating basic (loss) income per share 71,139 41,431 36,813 Effect of potentially dilutive common shares from equity awards and liability-classified warrants 1,246 — 125 Weighted average shares used in calculating diluted (loss) income per share 72,385 41,431 36,938 The following potentially dilutive shares (in thousands) that have been excluded from the calculation of net (loss) income per share because of their anti-dilutive effect: Years Ended June 30, 2019 2018 2017 Stock options 8,057 5,606 3,749 Restricted stock units 32 336 — Warrants 8,062 3,532 3,582 Total anti-dilutive shares 16,151 9,474 7,331 Recent Accounting Pronouncements Adopted Accounting Standards In May 2014, the FASB issued Accounting Standards Update No. 2014-09 Revenue Recognition Accounting Standards Not Yet Adopted In February 2016, the FASB issued ASU 2016-02 right-of-use A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. We will adopt the new lease standard effective July 1, 2019 and use the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before July 1, 2019. The new standard provides a number of optional practical expedients in transition. We plan to elect the package of practical expedients, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We expect that this standard will not have a material effect on our financial statements. The most significant effects relate to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our real property operating lease; and (2) providing new disclosures about our leasing activities. On adoption, we currently expect to recognize an additional operating lease liability with a corresponding ROU asset of approximately $ 0.7 |
