| Summary of Significant Accounting Policies | Note 2 — Summary of Significant Accounting Policies
(a) Basis of presentation
The consolidated financial statements of Adaptimmune Therapeutics plc and its subsidiaries and other financial information included in this Annual Report have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) and are presented in U.S. dollars. All significant intercompany accounts and transactions between the Company and its subsidiaries have been eliminated on consolidation.
(b) Use of estimates in financial statements
The preparation of financial statements, in conformity with U.S. GAAP and SEC regulations, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are primarily made in relation to the valuation of share options, valuation allowances relating to deferred tax assets, revenue recognition, estimating clinical trial expenses and estimating R&D tax and expenditure credits. If actual results differ from the Company’s estimates, or to the extent these estimates are adjusted in future periods, the Company’s results of operations could either benefit from, or be adversely affected by, any such change in estimate.
(c) Going concern
Management considers that there are no conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern for a period of at least one year from the date the financial statements are issued. This evaluation is based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued, including:
a.
The Company’s current financial condition, including its liquidity sources;
b.
The Company’s conditional and unconditional obligations due or anticipated within one year;
c.
The funds necessary to maintain the Company’s operations considering its current financial condition, obligations, and other expected cash flows; and
d.
Other conditions and events, when considered in conjunction with the above that may adversely affect the Company’s ability to meet its obligations.
(d) Foreign currency
The reporting currency of the Company is the U.S. dollar. The Company has determined the functional currency of the ultimate parent company, Adaptimmune Therapeutics plc, is U.S. dollars because it predominately raises finance and expends cash in U.S. dollars. The functional currency of subsidiary operations is the applicable local currency. Transactions in foreign currencies are translated into the functional currency of the subsidiary in which they occur at the foreign exchange rate in effect on at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated into the functional currency of the relevant subsidiary at the foreign exchange rate in effect on the balance sheet date. Foreign exchange differences arising on translation are recognized within other income (expense) in the consolidated statement of operations.
The results of operations for subsidiaries, whose functional currency is not the U.S. dollar, are translated at an average rate for the period where this rate approximates to the foreign exchange rates ruling at the dates of the transactions and the balance sheet are translated at foreign exchange rates ruling at the balance sheet date. Exchange differences arising from this translation of foreign operations are reported as an item of other comprehensive income (loss).
Other income, net includes foreign exchange (losses) gains of $(15,257,000), $8,744,000 $1,002,000 for the years ended December 31, 2018, 2017 and 2016, respectively.
(e) Fair value measurements
The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. The fair value hierarchy prioritizes valuation inputs based on the observable nature of those inputs. The hierarchy defines three levels of valuation inputs:
Level 1 — Quoted prices in active markets for identical assets or liabilities
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly
Level 3 — Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability
The carrying amounts of the Company’s cash and cash equivalents, short-term deposits, restricted cash, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short-term nature of these instruments. The fair value of marketable securities, which are measured at fair value on a recurring basis is detailed in Note 4, Financial Instruments.
(f) Accumulated other comprehensive income (loss)
The following amounts were reclassified out of other comprehensive income during the year ended December 31, 2018 (in thousands):
Amount reclassified
Year ended
Year ended
Year ended
December 31,
December 31,
December 31,
Component of Accumulated Other Comprehensive Income
2018
2017
2016
Affected line item in the Statement of Operations
Unrealized gains (losses) on available-for-sale securities
Reclassification adjustment for losses on available-for-sale debt securities
$
2,473
$
646
$
—
Other (expense) income, net
(g) Cash, cash equivalents and restricted cash
The Company considers all highly-liquid investments with a maturity at acquisition date of three months or less to be cash equivalents. Cash and cash equivalents comprise cash balances, commercial paper and corporate debt securities with maturities of three months or less at acquisition and short deposits with maturities of three months or less.
The Company’s restricted cash consists of cash providing security for letters of credit in respect of lease agreements.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the balance sheet that sum to the total of the same such amounts shown in the statement of cash flows (in thousands).
December 31,
December 31,
2018
2017
Cash and cash equivalents
$
68,379
$
84,043
Restricted cash
4,097
4,253
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
$
72,476
$
88,296
(h) Available-for-sale debt securities
As of December 31, 2018, the Company has the following investments in available-for-sale debt securities, which are categorized as cash equivalents or marketable securities – available-for-sale debt securities on the balance sheet depending on their maturity at acquisition (in thousands):
Gross
Gross
Aggregate
Amortized
Unrealized
Unrealized
Estimated
Maturity
cost
Gains
Losses
Fair Value
Marketable securities:
Corporate debt securities
3 months to 1 year
$
102,818
$
5
$
(120)
$
102,703
Corporate debt securities
1 to 2 years
23,153
—
(43)
23,110
Agency bond
3 months to 1 year
3,963
2
—
3,965
Treasury bills
3 months to 1 year
1,980
—
—
1,980
Certificate of deposit
3 months to 1 year
3,002
—
—
3,002
Commercial paper
3 months to 1 year
1,995
—
—
1,995
$
136,911
$
7
$
(163)
$
136,755
As of December 31, 2017, the Company has the following investments in available-for-sale debt securities, which are categorized as cash equivalents or marketable securities — available-for-sale debt securities on the balance sheet depending on their maturity at acquisition (in thousands):
Foreign
Gross
Gross
currency
Aggregate
Amortized
Unrealized
Unrealized
translation
Estimated
Maturity
cost
Gains
Losses
adjustment
Fair Value
Cash equivalents:
Corporate debt securities
Less than 3 months
$
1,610
$
—
$
(22)
$
22
$
1,610
$
1,610
$
—
$
(22)
$
22
$
1,610
Marketable securities:
Corporate debt securities
3 months to 1 year
$
124,406
$
—
$
(3,723)
$
3,535
$
124,218
Commercial paper
3 months to 1 year
—
—
—
—
—
$
124,406
$
—
$
(3,723)
$
3,535
$
124,218
Management determines the appropriate classification of its investments in available-for-sale debt securities at the time of purchase and reevaluates such designation as of each reporting date. The securities are classified as current or non-current based on the maturity dates and management’s intentions.
At December 31, 2018, the Company has classified all of its available-for-sale debt securities, including those with maturities beyond one year, as current assets on the accompanying consolidated balance sheets based on the highly-liquid nature of these investment securities and because these investment securities are considered available for use in current operations.
The investment in available-for-sale debt securities is measured at fair value at each reporting date. Unrealized gains and losses are excluded from earnings and are reported as a component of comprehensive loss. Realized gains and losses, interest income and amortization of premiums and discounts at acquisition are included in other income (expense), net. In the year ended December 31, 2018 and 2017, proceeds from the maturity or redemption of available-for-sale debt securities were $138,038,000 and $29,090,000. There were realized losses of $2,473,000 and $646,000 recognized on the maturity of available-for-sale debt securities during the year ended December 31, 2018 and 2017, respectively, primarily arising due to foreign exchange movements, and, as a result, the Company reclassified this amount out of accumulated other comprehensive loss for the same period.
At each reporting date, the Company assesses whether each individual investment is impaired, which occurs if the fair value is less than the amortized cost, adjusted for amortization of premiums and discounts at acquisition. If the investment is impaired, the impairment is assessed to determine if it is other than temporary. Impairments judged to be other than temporary are included in other income (expense), net when they are identified.
The aggregate fair value (in thousands) and number of securities held by the Company in an unrealized loss position as of December 31, 2018 and 2017 are as follows:
December 31, 2018
December 31, 2017
Fair market value of investments in an unrealized loss position
Number of investments in an unrealized loss position
Unrealized losses
Fair market value of investments in an unrealized loss position
Number of investments in an unrealized loss position
Unrealized losses
Marketable securities:
Corporate debt securities
$
117,179
37
$
(163)
$
125,828
54
$
(3,745)
As of December 31, 2018 and 2017, these securities are not considered to be other than temporarily impaired because the impairments are not severe, have been for a short duration and are due to normal market and exchange rate fluctuations. No securities have been in an unrealized loss position for more than one year. Furthermore, the Company does not intend to sell the debt securities in an unrealized loss position and it is unlikely that the Company will be required to sell these securities before the recovery of the amortized cost.
The cost of securities sold is based on the specific-identification method. Interest on debt securities is included in interest income.
Our investment in available-for-sale debt securities is subject to credit risk. The Company’s investment policy limits investments to certain types of instruments, such as money market instruments and corporate debt securities, places restrictions on maturities and concentration by type and issuer and specifies the minimum credit ratings for all investments and the average credit quality of the portfolio.
(i) Accounts receivable
Accounts receivable are amounts due from customers. As of December 31, 2018 and 2017, the Company had one customer, which was GlaxoSmithKline, or GSK.
Management analyses current and past due accounts and determines if an allowance for uncollectible accounts is required based on collection experience and other relevant information. As of December 31, 2018 and 2017, the allowance for doubtful accounts is $nil. The process of estimating the uncollectible accounts involves assumptions and judgments and the ultimate amounts of uncollectible accounts receivable could be in excess of the amounts provided.
(j) Clinical materials
Clinical materials for use in research and development with alternative future use are capitalized as either other current assets or other non-current assets, depending on the timing of their expected consumption.
(k) Property, plant and equipment
Property, plant and equipment is stated at cost, less any impairment losses, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. The following table provides the range of estimated useful lives used for each asset type:
Computer equipment
3 to 5 years
Laboratory equipment
5 years
Office equipment
5 years
Leasehold improvements
the expected duration of the lease
Assets under construction are not depreciated until the asset is available and ready for its intended use.
The Company assesses property, plant and equipment for impairment whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable.
(l) Intangibles
Intangibles includes intellectual property (“IP”) rights for licensed technology used in research and development with an alternative future use, which are recorded at cost and amortized over the estimated useful life of the related product.
The weighted-average amortization period for IP rights for licensed technology as of December 31, 2018 is seven years.
Intangibles also include acquired computer software licenses, which are recorded at cost and amortized over the estimated useful lives of approximately three years.
Intangibles are assessed for impairment whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable.
(m) Segmental reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company’s chief operating decision maker (the “CODM”), its Chief Executive Officer, manages the Company’s operations on an integrated basis for the purposes of allocating resources. When evaluating the Company’s financial performance, the CODM reviews total revenues, total expenses and expenses by function and the CODM makes decisions using this information on a global basis. Accordingly, the Company has determined that it operates in one operating segment.
(n) Revenue after adoption of ASC 606 on January 1, 2018
On January 1, 2018, the Company adopted new guidance on revenue recognition, which has been codified within ASC 606. The accounting policy applicable from January 1, 2018 is described below and further details on the transition are available in Note 2(x). The comparative financial information for the years ended December 31, 2017 and 2016 and as of December 31, 2017 has not been restated and is prepared in accordance with the accounting policies that are described in Note 2(o).
The Company has one contract with a customer, which is the GSK Collaboration and License Agreement. The GSK Collaboration and License Agreement consists of multiple performance obligations, including the transition of the NY-ESO SPEAR T-cell program to GSK, the development of a second target, PRAME, and an exclusive license (the “NY-ESO License”) to research, develop, and commercialize the Company’s NY-ESO SPEAR T-cell therapy program.
In September 2017, GSK exercised its option to obtain the NY-ESO License and the first tranche ($26.6 million or £20 million) of the option exercise payment became payable to the Company. In connection with the option exercise, in September 2017, the GSK Agreement was amended to, among other things, include a detailed transition plan identifying the steps needed to complete transition of the IND process with the Food and Drug Administration (FDA) for the NY-ESO SPEAR T-cell program to GSK. On July 23, 2018, the transition activities were substantially completed and the IND for the NY-ESO SPEAR T-cell program transferred to GSK.
GSK nominated a second target program for the PRAME target antigen, which was announced on 9 January 2017. We have since completed all work under this collaboration program. The program led to the development of a final lead candidate SPEAR T-cell directed to a specific peptide from the PRAME antigen. GSK and Adaptimmune agreed that the collaboration should not continue due to the peptide, to which the lead candidate was directed, not reaching GSK criteria.
The aggregate transaction price consists of an upfront payment of $42,123,000 received in June 2014, development milestones achieved of $66,404,000, an option exercise fee of $39,785,000. There was no variable consideration at December 31, 2018.
The Company determines the variable consideration to be included in the transaction price by estimating the most-likely amount that will be received and then applies a constraint to reduce the consideration to the amount which is probable of being received. The determination of whether a milestone is probable includes consideration of the following factors:
Whether achievement of a development milestone is highly susceptible to factors outside the entity’s influence, such as milestones involving the judgment or actions of third parties, including regulatory bodies or the customer;
Whether the uncertainty about the achievement of the milestone is not expected to be resolved for a long period of time;
Whether the Company can reasonably predict that a milestone will be achieved based on previous experience; and.
The complexity and inherent uncertainty underlying the achievement of the milestone.
Under the terms of the GSK Collaboration and License Agreement, the Company may also be entitled to development milestones. The development and regulatory milestones are per product milestones and are dependent on achievement of certain obligations, the nature of the product being developed, stage of development of product, territory in which an obligation is achieved and type of indication or indications in relation to which the product is being developed. In addition, for any program multiple products may be developed to address different HLA-types. These amounts have not been included within the transaction price as of December 31, 2018 because they are not considered probable.
The Company may also receive commercialization milestones upon the first commercial sale of a product based on the indication and the territory and mid-single to low double-digit royalties on worldwide net sales. These amounts have not been included within the transaction price as of December 31, 2018 because they are sales or usage-based royalties promised in exchange for a license of intellectual property, which will be recognized when the subsequent sale or usage occurs.
The payments to the Company under the contract are typically due upon achievement of milestones and within standard payment terms (approximating to 45 days). The contract does not include a significant financing component.
The upfront payment of $42,123,000 was allocated between the performance obligations using the Company’s best estimate of the relative selling price. In determining the best estimate, the Company considered internal pricing objectives it used in negotiating the contract, together with internal data regarding the cost and margin of providing services for each deliverable taking into account the different stage of development of each development program included in the contract. The variable consideration is allocated to the performance obligation to which it relates.
The amount of the transaction price allocated to the performance obligation is recognized as or when the Company satisfies the performance obligation. The Company satisfies the performance obligations relating to the transition of the NY-ESO SPEAR T-cell program and the development of a second target, PRAME, over time and recognizes revenue based on an estimate of the percentage of completion of the project determined based on the costs incurred on the project as a percentage of the total expected costs. The Company considers that this depicts the progress of the project, where the significant inputs are internal project resource and third-party clinical and manufacturing costs. The determination of the percentage of completion requires the Company to estimate the costs-to-complete the project. The Company makes a detailed estimate of the costs-to-complete on an annual basis as part of the Company’s budgeting process, which is re-assessed every reporting period based on the latest project plan and discussions with project teams. If a change in facts or circumstances occurs, the estimate is adjusted and the revenue is recognized based on the revised estimate. The difference between the cumulative revenue recognized based on the previous estimate and the revenue recognized based on the revised estimate is recognized as an adjustment to revenue in the period in which the change in estimate occurs.
The Company has determined that the performance obligation relating to the NY-ESO License is recognized at a point-in-time, upon commencement of the license, which occurred in September 2018.
The Company recognizes a contract asset, when the value of satisfied (or part satisfied) performance obligations is in excess of the payment due to the Company, and deferred revenue (contract liability) when the amount of unconditional consideration is in excess of the value of satisfied (or part satisfied) performance obligations. Once a right to receive consideration is unconditional, that amount is presented as a receivable.
The timing and amount of milestone payments for the development and transition of the NY-ESO SPEAR T-cell program are intended to be commensurate with the cost and effort involved in achieving the milestones and therefore a contract asset would typically arise. The Company received $26,610,000 of the option exercise fee in September 2017, which was included in deferred revenue at January 1, 2018 and this amount was recognized as revenue, along with a further option exercise fee of $13,175,000, in September 2018 upon commencement of the license.
Changes in deferred revenue typically arise due to:
adjustments arising from a change in the estimate of the cost to complete the project, which results in a cumulative catch-up adjustment to revenue that affects the corresponding contract asset or deferred revenue;
a change in the estimate of the transaction price due to changes in the assessment of whether variable consideration is constrained because it is not considered probable of being received;
the recognition of revenue arising from deferred revenue; and
the reclassification of amounts to receivables when a right to consideration to becomes unconditional.
A change in the estimate of variable consideration constrained (for example, if a development milestone becomes probable of being received) could result in a significant change in the revenue recognized and deferred revenue.
Revenue is recognized when earned and realized or realizable, which is generally when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectability is reasonably assured. Where applicable, all revenues are stated net of value added and similar taxes.
(o) Revenue prior to the adoption of ASC 606 on January 1, 2018
Prior to the adoption of ASC 606, the Company recognized revenue for arrangements with multiple deliverables by identifying the separable deliverables within the arrangement, whereby a deliverable is considered separable if it has value to the customer on a standalone basis. Contingent deliverables, such as the right to nominate further development targets, which represent a substantive option (i.e. the customer is not required or compelled to purchase the optional products or services) and not priced at a significant and incremental discount were not considered to be a deliverable at inception of the arrangement.
When the contract was amended, the amendment was assessed to determine if it should be accounted for as a separate contract or a modification to the existing arrangement. If the amendment was a modification, the modified arrangement was assessed to identify the deliverables at the time of the modification and the non-contingent arrangement consideration was allocated between the separate deliverables using the Company’s best estimate of the relative selling price at the time of the modification. The amendments to the GSK Collaboration and License Agreement in February 2016 and September 2017 were both accounted for as modifications to an existing arrangement.
The non-contingent arrangement consideration was allocated between the separate deliverables using the relative selling price. The relative selling price was determined using vendor-specific objective evidence (“VSOE”), if available, third party evidence if VSOE is not available, or a best estimate of the standalone selling price if neither VSOE nor third party evidence was available. The best estimate of the selling price was estimated after considering all reasonably available information, including market data and conditions, entity-specific factors such as the cost structure of the deliverable, internal profit and pricing objectives and the stage of development, if appropriate. Revenue allocated to each deliverable was recognized as it was delivered. Where delivery occurred over time, revenue was systematically recognized over the period which the Company would be providing services.
Amounts received prior to satisfying the revenue recognition criteria were recorded as deferred revenue in the Company’s consolidated balance sheet. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date were classified as deferred revenue in current liabilities. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date were classified as deferred revenue, non-current.
Milestone payments which were non-refundable, non-creditable and contingent on achieving clinical milestones are recognized as revenues either on achievement of such milestones if the milestones are considered substantive or over the period the Company has continuing performance obligations, if the milestones were not considered substantive. When determining if a milestone was substantive, the Company considers the following factors:
·
The degree of certainty in achieving the milestone,
·
The frequency of milestone payments,
·
The Company’s efforts, which result in achievement of the milestone,
·
The amount of the milestone payment relative to the other deliverables and payment terms, and
·
Whether the milestone payment is related to future performance or deliverables.
(p) Research and development expenditures
Research and development expenditures are expensed as incurred.
Expenses related to clinical trials are recognized as services are received. Nonrefundable advance payments for services are deferred and recognized in the consolidated statement of operations as the services are rendered. This determination is based on an estimate of the services received and there may be instances when the payments to vendors exceed the level of services provided resulting in a prepayment of the clinical expense. If the actual timing of the performance of services varies from our estimate, the accrual or prepaid expense is adjusted accordingly.
Upfront and milestone payments to third parties for in-licensed products or technology which has not yet received regulatory approval and which does not have alternative future use in R&D projects or otherwise are expensed as incurred. The Company expensed acquired in-process R&D of $210,000, $1,003,000, and $3,000,000 in the years ended December 31, 2018, 2017 and 2016, respectively.
Milestone payments made to third parties either on or subsequent to regulatory approval are capitalized as an intangible asset and amortized over the remaining useful life of the product.
Research and development expenditure is presented net of reimbursements from grants and R&D tax and expenditure credits from the U.K. government, which are recognized over the period necessary to match the reimbursement with the related costs when it is probable that the Company has complied with any conditions attached and will receive the reimbursement. Grant income was $—, $150,000, and $414,000 in the years ended December 31, 2018, 2017 and 2016, respectively. Reimbursable R&D tax and expenditure credits were $17,299,000, $10,576,000, and $6,891,000 in the years ended December 31, 2018, 2017 and 2016, respectively.
(q) Operating leases
Costs in respect of operating leases are charged to the consolidated statement of operations on a straight line basis over the lease term. Rent holidays are recognized on a straight-line basis over the lease term (including any rent holiday period). Lease incentives, including leasehold improvement incentives or allowances, are recorded as deferred rent and amortized as reductions to lease expense over the lease term. Leasehold improvements made by a lessee that are funded by landlord incentives or allowances are recorded as leasehold improvement assets and amortized over the shorter of the useful life of the asset and the non-cancellable lease term.
In May 2017, the Company entered into an agreement for the lease of a building at Milton Park, Oxfordshire, U.K. The term of the lease expires on October 23, 2041, with termination options exercisable by the Company on the fifth anniversary of the lease commencement date and at approximately five yearly intervals thereafter.
In September 2015, the Company entered into an agreement for a 25-year lease, with early termination options, for a research and development facility in Oxfordshire, U.K. In October 2016, the Company entered into the lease for that facility following the completion of construction.
In July 2015, the Company entered into a 15 year lease agreement, with an early termination option at 123 months, for offices and research facilities in Philadelphia, U.S. The lease commenced upon completion of construction in October 2016.
(r) Share-based compensation
The Company awards certain employees and non-employees options over the ordinary shares of the parent company. The cost of share-based awards issued to employees are measured at the grant-date fair value of the award and recognized as an expense over the requisite service period. The fair value of the options is determined using the Black-Scholes option-pricing model. Share options with graded-vesting schedules are recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. The Company has elected to account for forfeitures of stock options when they occur by reversing compensation cost previously recognized, in the period the award is forfeited, for an award that is forfeited before completion of the requisite service period.
Prior to January 1, 2018, non-employee share options were measured at the fair value of the goods/services received or the fair value of the equity instrument issued, whichever was more reliably measured, and then remeasured at the then-current fair values at each reporting date until the share options have vested and recognized as an expense over the requisite service period. The Company has adopted new guidance with effect from January 1, 2018, which requires that non-employee share-based payment transactions are measured at the grant-date fair value and are no longer remeasured at the then-current fair values at each reporting date until the share options have vested. Further details on the transition are available in Note 2(x).
(s) Retirement benefits
The Company operates defined contribution pension schemes for its directors and employees. The contributions to this scheme are expensed to the consolidated statement of operations as they fall due. The pension contributions for the years ended December 31, 2018, 2017 and 2016 were $1,847,000, $1,264,000, and $976,000, respectively.
(t) Income taxes
Income |
