| Summary of Significant Accounting Policies | Summary of Significant Accounting Policies The significant accounting policies adopted by the Company in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Certain prior period amounts within the consolidated statements of operations and comprehensive (loss) income have been reclassified to conform to the current period presentation. Specifically, foreign currency losses of $1.3 million during the eleven months ending December 31, 2019 and foreign currency gains of $0.6 million during the year ending January 31, 2019, were included within general and administrative expenses and have now been reclassified to be presented as part of other income (expense), net in conformity with the current period presentation. Revision and Immaterial Correction of an Error in Previously Issued Financial Statements During the quarter ended December 31, 2020, the Company identified a deferred tax asset relating to the acquired carried forward tax losses arising from the acquisition of Discuva Limited in December 2017 that was not included as part of the business combination accounting. Furthermore, the Company identified deferred tax assets relating to available carried forward group tax losses arising as a result of the acquisition of Discuva Limited in December 2017 that were not included in the Company's subsequent balances sheets. As a result, in the Company's previously issued December 31, 2019, January 31, 2019 and January 31, 2018 financial statements, the Company incorrectly recognized $0.4 million of goodwill and omitted the inclusion of deferred tax assets of $2.0 million, $2.2 million and $1.3 million in the balance sheets as of December 31, 2019, January 31, 2019 and January 31, 2018 respectively. Since the Company's deferred tax liabilities and deferred tax assets both arise in the U.K. tax jurisdiction, accordingly these are offset on the consolidated balance sheet. The Company has recorded a full valuation allowance against the deferred tax assets in excess of the deferred tax liabilities, as the deferred tax liability represents future reversals of existing taxable temporary differences. The impact of these errors on net (loss) income was a deferred tax charge of $0.1 million for the eleven months ended December 31, 2019, and a deferred tax benefit of $1.0 million and $0.8 million for the years ended January 31, 2019 and January 31, 2018, respectively. The misstatement had no net impact on the Company’s consolidated statements of cash flows. Management concluded that the correction was not material to previously issued consolidated financial statements. Since these errors were not material to any previously issued annual or interim financial statements, no amendments to previously filed financial statements were required. Consequently, the Company has corrected for these errors by revising the December 31, 2019, January 31, 2019 and January 31, 2018 balances herein. Principles of consolidation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. The consolidated financial statements include the accounts of Summit Therapeutics Inc and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In December 2019, the Board of Directors adopted a resolution to change the Company’s fiscal year end from January 31 to December 31, commencing December 31, 2019. Use of estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Foreign currency translation The financial results of the Company's activities are reported in U.S. dollars (“USD”). The statement of comprehensive income of the Company's foreign subsidiaries which have a functional currency other than USD are translated into USD using average exchange rates for the period. The net assets of foreign subsidiaries whose functional currencies are other than USD are translated into USD using exchange rates as of the balance sheet date. The effects that arise from translating these subsidiaries at changing rates are recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity (deficit). Revenue recognition Effective February 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers (“ASC 606”), using the full retrospective method. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards. The Company enters into out-licensing agreements within the scope of ASC 606 under which it licenses certain rights to its product candidates to third parties. Such agreements may include the transfer of intellectual property rights in the form of licenses, transfer of technological know-how, delivery of drug substances, research and development services, and participation on certain committees with the counterparty. Payments made by the customers may include one or more of the following: non-refundable, up-front license fees; development, regulatory, and commercial milestone payments; payments for manufacturing supply services the Company provides through its contract manufacturers; and royalties on net sales of licensed products if they are successfully approved and commercialized. Each of these payments may result in license, collaboration, or other revenue, except revenue from royalties on net sales of licensed products, which would be classified as royalty revenue. In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under each of its out-licensing agreements, the following steps are performed: (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. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. Revenue is then recognized in respect of the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. As part of the accounting for these arrangements, the Company must use significant judgment to determine: (a) the performance obligations based on the determination under step (ii) above; (b) the transaction price under step (iii) above; and (c) the standalone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above. The Company also uses judgment to determine whether milestone payments or other variable consideration, except for royalties and sales-based milestones, should be included in the transaction price, as described below. The transaction price is allocated to each performance obligation based on the relative standalone selling price of each performance obligation in the contract, and the Company recognizes revenue based on those amounts when, or as, the performance obligations under the contract are satisfied. Exclusive Licenses If the license to the Company’s intellectual property is determined to be distinct from the other promises or performance obligations identified in the arrangement, the Company recognizes revenue from nonrefundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. In assessing whether a promise or performance obligation is distinct from the other promises, the Company considers factors such as the research, development, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. In addition, the Company considers whether the collaboration partner can benefit from a promise for its intended purpose without the receipt of the remaining promises, whether the value of the promise is dependent on the unsatisfied promises, whether there are other vendors that could provide the remaining promises, and whether it is separately identifiable from the remaining promises. For licenses that are combined with 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 for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of progress and related revenue recognition. The measure of progress, and the resulting periods over which revenue should be recognized, are subject to estimates by management and may change over the course of the research, development and licensing arrangement. Such a change could have a material impact on the amount of revenue the Company records in future periods. Under the Company’s existing license and collaboration agreements, the Company has concluded that the transfer of control to the customer occurs over the time period that the research and development services are to be provided by the Company, and this output method is, in management’s judgment, the best measure of progress towards satisfying the performance obligation. Milestone Payments At the inception of each arrangement that includes potential research, development or regulatory milestone payments, the Company evaluates whether the milestones are considered likely to be met and estimates the amount to be considered for inclusion in the transaction price using the most-likely-amount method. If it is probable that a significant reversal in the amount of cumulative revenue recognized would not occur, the associated milestone payment value is included in the transaction price. For milestone payments due upon events that are not within the control of the Company or the licensee, such as regulatory approvals, the Company is not able to assert that it is likely that the regulatory approval will be granted and that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur until those approvals are received. In making this assessment, the Company evaluates factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the particular milestone. There is considerable judgment involved in determining whether it is probable that a significant reversal in the amount of cumulative revenue recognized would not occur. At the end of each subsequent reporting period, the Company reevaluates the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the overall transaction price of the arrangement. Any such adjustments are recorded on a cumulative catch-up basis, which would affect the amounts of revenue and earnings in the period of adjustment. Royalties For arrangements that include sales-based royalties, including milestone payments due upon first commercial sales or based on a level of sales, that are the result of a customer-vendor relationship and for which the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) the occurrence of the related sales or (ii) the date upon which 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 from any of its licensing arrangements. Manufacturing Supply Services Arrangements that include a promise for future supply of drug substance or drug product for either clinical development or commercial supply at the customer’s discretion are generally considered options. The Company assesses if these options provide a material right to the licensee and, if so, they are accounted for as separate performance obligations. If the Company is entitled to additional payments when the customer exercises these options, any additional payments are recorded when the customer obtains control of the goods, which is upon delivery. To date, the Company has not yet entered into any manufacturing supply arrangements Other operating income The Company generates income from government contracts that reimburse the Company for certain allowable costs for funded projects. For contracts with government agencies where the funding arrangement is considered central to the Company’s ongoing operations, the Company classifies the recognized funding received as other operating income. Income from government grants is recognized as the qualifying expenses related to the contracts are incurred, provided that there is reasonable assurance of recoverability. If the government agency approves the project proposed by the Company, the government agency funds the project upon receipt of the support for the costs incurred up to the contract limit. Income recognized upon incurring qualifying expenses in advance of billing is recorded as accrued income, a component of other current assets, in the consolidated balance sheet. Grant income is not recognized as deductions of research and development costs because the Company acts as the principal in conducting the research and development activities and these contracts are central to its ongoing operations. The funds received through these means are held as deferred income in the consolidated balance sheets and are released to the consolidated statement of operations and comprehensive (loss) income as the underlying expenditure is incurred and to the extent the conditions of the grant are met. The related costs incurred by the Company are included in research and development expense in the Company’s consolidated statements of operations and comprehensive (loss) income. The Company benefits from two U.K. R&D tax credit cash rebate regimes: Small and Medium Enterprise, or SME, Program and the Research and Development Expenditure Credit, or RDEC, Program. Qualifying expenditures largely comprise employment costs for research staff, consumables, a proportion of relevant, permitted sub-contract costs and certain internal overhead costs incurred as part of research projects for which the Company does not receive commercial or other funding income. Credits related to the SME Program and RDEC are recorded as other operating income in the consolidated statements of operations and other comprehensive (loss)/income. Under both schemes, the Company receives cash rebate payments ranging from 9.7% to 33.4% of eligible research and development expenditure, these payments are not dependent on the Company’s pre-tax net income levels. Business combinations Business combinations are accounted for under the acquisition method. Acquired assets and assumed liabilities are measured at their fair values at the acquisition date. The excess of the purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Results of operations related to business combinations are included prospectively beginning with the date of acquisition and transaction costs related to business combinations are recorded within general and administrative expenses. Goodwill Goodwill represents the excess of the consideration transferred over the fair value of net assets of businesses acquired. Goodwill is assigned to reporting units and evaluated for impairment on at least an annual basis, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company concludes it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative fair value test is performed. If the carrying value of a reporting unit is greater than its fair value, a goodwill impairment charge will be recorded for the difference (up to the carrying value of goodwill). Intangible assets Intangibles assets include patents, licenses, an option over non-financial assets and a research and development discovery platform ("Discuva Platform"). Patents, licenses, and the option over non-financial assets are initially recorded at fair value, assigned an estimated useful life, and amortized primarily on a straight-line basis over their estimated useful lives (see below). The Company periodically evaluates whether current facts or circumstances indicate that the carrying values of its acquired intangibles may not be recoverable. If such circumstances are determined to exist, an estimate of the undiscounted future cash flows of these assets, or appropriate asset groupings, is compared to the carrying value to determine whether an impairment exists. If the asset is determined to be impaired, the loss is measured based on the difference between the carrying value of the intangible asset and its fair value, which is determined based on the net present value of estimated future cash flows. The intangible asset relating to the Discuva Platform capitalized as part of the acquisition of Discuva Limited in December 2017 is a software based platform and is available for alternative use. As such, it is subject to amortization over the period of the relevant associated patents. Other intangible assets are amortized in equal installments over their useful estimated lives as follows: Software licenses 3-5 years Option over non-financial assets Over the period of the relevant agreement Amortization of intangible assets is included as part of the research and development expense line shown on the face of the consolidated statement of operations and comprehensive (loss) income. Property and equipment Property and equipment are stated at cost less accumulated depreciation. Cost comprises the purchase price plus any incidental costs of acquisition and commissioning. Depreciation is calculated based on cost, less residual value, in equal annual installments over the estimated useful lives of the assets. The residual value, if not insignificant, is reassessed annually. Leasehold improvements Over the shorter of the asset's useful life or the remaining lease term Laboratory equipment 2-10 years Office and IT equipment 3-5 years Depreciation is recognized as part of the general and administrative and research and development expense lines shown on the face of the consolidated statement of operations and comprehensive (loss) income depending on the nature of the underlying assets. Expenditures for repairs and maintenance are expensed as incurred. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in loss from operations. Leases The Company determines if an arrangement is a lease at inception. At the lease commencement date, the Company measures and recognizes a lease liability and a right of use ("ROU") asset in the financial statements. ROU assets represent the Company's right to use an underlying asset for the lease term, and the lease liabilities represent the Company's obligation to make lease payments arising from the lease. Lease liabilities are recognized based on the present value of the future lease payments over the lease term at commencement date. As most of the Company's leases do not provide an implicit rate, the Company uses its estimated incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. ROU asset is measured at the initial measurement of the lease liability, plus any lease payments made prior to the commencement date and any initial direct costs incurred, less any lease incentives received. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term, with variable lease payments recognized in the periods in which they are incurred. The Company has lease agreements with lease and non-lease components. For all leases with non-lease components the Company accounts for the lease and non-lease components as a single lease component. Leases with an initial lease term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for its short-term leases on a straight-line basis over the lease term. Financial liabilities on funding arrangements When entering into funding agreements with charitable and not for profit organizations, management is required to assess whether, based on the terms of the agreement, it can avoid a transfer of cash by settlement using a non-financial obligation. Under U.S. GAAP, when such arrangements also give the counterparties rights over unexploited intellectual property, all or part of the funding agreement should be accounted for as a financial liability recognized in the balance sheet rather than as a charitable grant. Financial liabilities are initially recognized at fair value using a discounted cash flow model with the difference between the fair value of the liability and the cash received considered to represent a charitable grant. The financial liabilities are subsequently measured at amortized cost using discounted cash flow models which calculate the risk adjusted net present values of estimated potential future cash flows for the relevant project. The financial liabilities are remeasured when there is a specific significant event that provides evidence of a significant change in the probability of successful development such as the completion of a phase of research or public reporting of significant interim data and changes in use or market for a product. The model is updated for changes in the clinical probability of success and other associated assumptions with the discount factor remaining unchanged within the model. Research and development costs Research and development costs are expensed as incurred. Research and development expenses consist of costs incurred to discover, research and develop drug candidates, including personnel expenses, stock-based compensation expense, allocated facility-related and depreciation expenses, third-party license fees and external costs of outside vendors engaged to conduct preclinical and clinical development activities and clinical trials as well as to manufacture clinical trial materials. Non - refundable prepayments for goods or services that will be used or rendered for future research and development activities are recorded as prepaid expenses. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered, or the services rendered. Milestone and other payments made to third-parties with respect to in-process research and development, in accordance with the Company’s license, acquisition and other similar agreements are expensed when determined to be probable and estimable. The Company has entered into various research and development contracts with other companies. These agreements are generally cancellable, and related payments are recorded as research and development expenses as incurred. The Company records accruals for estimated ongoing research and development costs or prepaid expenses where the payments made exceeds the estimated costs. When evaluating the adequacy of these balances, the Company analyzes progress of the studies, including the estimated costs to complete each study or activity, the estimation of the current stage of completion and the invoices received, as well as predetermined milestones which are not reflective of the current stage of development for prepaid expenses. Actual results could differ from the Company’s estimates. In all cases, the full cost of each study or activity is expensed by the time the final report or where applicable, product, has been received. The Company’s historical estimates have not been materially different from the actual costs. Stock-Based Compensation The Company measures and recognizes compensation expense for all stock option and restricted stock unit awards based on the estimated fair value of the award on the grant date. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option awards. The fair value is recognized as expense, over the requisite service period, which is generally the vesting period of the respective award, on a straight-line basis for each separately vesting portion of the award when the only condition to vesting is continued service. If vesting is subject to a market or performance condition, recognition is based on the derived service period of the award. Expense for awards with performance conditions is estimated and adjusted on a quarterly basis based upon the assessment of the probability that the performance condition will be met. Use of the Black-Scholes option-pricing model requires management to apply judgment under highly subjective assumptions. These assumptions include: • Expected term—The expected term represents the average period that the stock-based awards are expected to be outstanding and is based on a method that considers historical information of stock option exercise patterns and post-vesting termination behavior. • Expected volatility—The expected volatility was calculated based on historical volatility of the Company's share price. • Risk-free interest rate—The risk-free interest rate is based on the United States Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option. • Expected dividend—The Company has no plans to pay dividends on its common stock. Therefore, the Company used an expected dividend yield of zero. The Company accounts for estimated expected forfeitures as compensation cost for stock-based awards is recognized. Stock option and restricted stock unit awards have been granted at fair value to nonemployees, in connection with research and consulting services provided to the Company, and to employees, in connection with Stock Purchase and Restriction Agreements. Equity awards generally vest over terms of three Income Taxes The provision for income taxes is determined using the asset and liability approach. Tax laws may require items to be included in tax filings at different times than the items are reflected in the financial statements. A current asset or liability is recognized for the estimated taxes receivable or payable for the current year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. Deferred taxes are initially recognized at enacted tax rates in force at the time of initial recognition and are subsequently adjusted for any enacted changes in tax rates and tax laws. Subsequent changes to deferred taxes originally recognized in equity are recognized in income. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The Company has recorded a full valuation allowance against the deferred tax assets in excess of its deferred tax liabilities, as the deferred tax liability represents future reversals of existing taxable temporary differences. These deferred tax balances both arise in the U.K. tax jurisdiction, accordingly these are offset in the consolidated balance sheet. The Company records interest and penalties related to income tax matters as part of income tax expense. Concentration of credit risk and of significant supplier Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of short-term cash deposits and accounts and other receivables. The Company's cash and cash equivalents are comprised of short-term cash deposits at a variety of financial institutions with strong credit ratings in amounts that may exceed federally insured limits and has not experienced any losses on such accounts. Cash balances maintained during the year have been principally held with reputable U.K.-based and U.S.-based banks and building societies. The Company does not believe it is exposed to any unusual credit risk beyond the normal credit risk associated with commercial banking relationships. As of December 31, 2020 and December 31, 2019 the majority of cash and cash equivalents were placed with HSBC Bank plc. The credit risk with respect to customers and funding bodies is limited as the Company has only a small number of these arrangements, including with Eurofarma, BARDA and Carb-X. The Company relies, and expects to continue to rely, on a number of vendors to conduct its clinical trials and preclinical studies, manufacture drug product and supply clinical trial and preclinical study materials for its development programs. These programs could be adversely affected by a significant interruption in these services or the availability of materials. Financial instruments Pursuant to ASC 820, Fair Value Measurements and Disclosures and ASC 825, Financial Instruments, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 and 825 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 and 825 prioritizes the inputs into three levels that may be used to measure fair value: Level 1 Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. Level 2 Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets: quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. Level 3 Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. Assumed Contingent Liabilities As part of the acquisition of Discuva Limited in December 2017, the Company assumed certain contingent liabilities as certain employees, former employees and former directors of Discuva Limited are eligible for payments from Discuva Limited based on specified development and clinical milestones related to proprietary product candidates developed under the Discuva Platform. The timing of these potential payments is uncertain. The fair value of the assumed contingent liability was estimated using the expected value of the payments. The assumed contingent liabilities are subsequently measured at amortized cost using discounted cash flow models which calculate the risk adjusted net present values of estimated potential future cash flows of the payments. The assumed contingent liabilities are remeasured when there is a specific significant event that provides evidence of a significant change in the probability of successful development and clinical milestone |
