| Summary of Significant Accounting Policies | Note 2—Summary of significant accounting policies [A] Basis of presentation: The Company’s fiscal year ends on March 31. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) . Any reference in these notes to applicable guidance is meant to refer to the authoritative U.S. GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”). [B] Use of estimates: The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company regularly evaluates estimates and assumptions related to assets, liabilities, costs, and expenses including the evaluation of the Company’s ability to continue as a going concern, as well as share-based compensation expenses, research and development expenses and accruals, and income taxes. The Company bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and such differences may be material. [C] Risks and uncertainties: The Company is subject to risks common to early stage companies in the biopharmaceutical industry including, but not limited to, uncertainties related to commercialization of products, including the need to successfully commercialize and gain market acceptance of its product candidates, the need to obtain marketing approval for its product candidates risks of failure or unsatisfactory results of nonclinical studies and clinical trials, the need to obtain additional financing to fund the future development and commercialization of its product candidates, compliance with government regulations, In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. Through June 19, 2020, the date of issuance of this Annual Report on Form 10-K, the Company’s results of operations and cash flows have not been significantly impacted by the COVID-19 outbreak. The Company is not aware of any specific event or circumstance that would require an update to its estimates, judgments and assumptions or a revision of the carrying value of the Company’s assets or liabilities as of June 19, 2020. [D] : Cash includes cash deposits in banks. The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company maintains cash deposits in highly-rated, federally-insured financial institutions in excess of federally insured limits. The Company has established guidelines relative to diversification and maturities to maintain liquidity and preservation of capital. The Company has not experienced any credit losses related to these financial instruments and does not believe that it is exposed to any significant credit risk related to these instruments. Restricted cash consists of legally restricted non-interest-bearing deposit accounts held as compensating balances against the Company’s corporate credit card program and irrevocable standby letters of credit connected to its office leases (see Note 12) Restricted cash classified as a current asset consists of the restricted deposit account relating to the Company’s corporate credit card agreement. Restricted cash classified as a long-term asset consists of the restricted deposit account related to the irrevocable standby letters of credit. Cash as reported in the consolidated statements of cash flows includes the aggregate amounts of cash and restricted cash as presented on the consolidated balance sheets. Cash as reported in the consolidated statements of cash flows consists of (in thousands):
March 31, 2020
March 31, 2019
Cash
$
51,414
$
85,353
Restricted cash
866
843
Cash and restricted cash
$
52,280
$
86,196
[E] Property and equipment: Property and equipment, consisting of computers, office equipment, furniture and fixtures and leasehold improvements, is recorded at cost. Maintenance and repairs that do not improve or extend the lives of the respective assets are expensed to operations as incurred. Upon disposal, retirement or sale, the related cost and accumulated depreciation is removed from the accounts and any resulting gain or loss is included in the consolidated results of operations. Depreciation is recorded for property and equipment using the straight-line method over the estimated useful lives of three to seven years, once the asset is installed and placed in service. Leasehold improvements are amortized using the straight-line method over the estimated useful life or remaining lease term, whichever is shorter. The Company reviews the recoverability of all long-lived assets, including the related useful lives, whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset might not be recoverable. Recoverability is measured by comparison of the book values of the assets to future net undiscounted cash flows that the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the book value of the assets exceed their fair value, which is measured based on the projected discounted future net cash flows arising from the assets. [F] : Deferred offering costs consist of qualified legal, accounting, and other direct costs related to the Company’s efforts to raise capital through a public or private sale of the Company’s capital stock. These costs are deferred until the completion of the applicable offering, at which time such costs are reclassified to additional paid-in-capital as a reduction of the proceeds. The Company’s initial public offering costs were reclassified to additional paid-in capital upon the closing of the Company’s initial public offering on October 1, 2018. [G] Debt issuance costs and debt discount: Debt issuance costs include the costs of debt financings undertaken by the Company, including legal fees, accounting fees, and other direct costs of the financing. Debt issuance costs related to a recognized debt liability are presented in the consolidated balance sheets as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts, and are amortized to interest expense over the term of the related debt using the effective interest method. Further, debt discounts created as a result of the allocation of proceeds received from a debt issuance to warrants issued in conjunction with the debt issuance are amortized to interest expense under the effective interest method over the life of the recognized debt liability. [H] Fair value of financial instruments: The Company applies a fair value framework in order to measure and disclose its financial assets and liabilities. 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. The fair value hierarchy requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
•
Level 1 - Quoted prices in active markets for identical assets or liabilities.
•
Level 2 - Observable inputs other than Level 1 prices, 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. Fair values are determined by utilizing quoted prices for similar assets and liabilities in active markets or other market observable inputs such as interest rates and yield curves.
•
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. To the extent the valuation is based on models or inputs that are less observable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The Company’s financial instruments consist of cash, restricted cash, accounts payable, accrued expenses, amounts due to and from RSL and Sumitovant [I] Contingencies: The Company may be, from time to time, a party to various disputes and claims arising from normal business activities. The Company continually assesses litigation to determine if an unfavorable outcome would lead to a probable loss or reasonably possible loss which could be estimated. In accordance with the guidance of the FASB on accounting for contingencies, the Company accrues for all contingencies at the earliest date at which the Company deems it probable that a liability has been incurred and the amount of such liability can be reasonably estimated. If the estimate of a probable loss is a range and no amount within the range is more likely than another, the Company accrues the minimum of the range. In the cases where the Company believes that a reasonably possible loss exists, the Company discloses the facts and circumstances of the litigation, including an estimable range, if possible, unless the Company has determined that any such reasonably possible losses will not have a material impact on the Company’s results of operations, financial condition or cash flows. [J] Research and development expense and accruals: Research and development costs are expensed as incurred. Research and development expenses primarily consist of employee-related expenses, such as salaries, share-based compensation, benefits and travel expenses for research and development personnel, expenses from third parties who conduct research and development activities on behalf of the Company, the intellectual property and research and development materials acquired from Merck and ICI (see Note 3) and certain costs charged by RSI and RSG under their services agreements with the Company (see Note 6[G]). The estimated costs of research and development activities conducted by third-party service providers, which primarily include the conduct of clinical trials and contract manufacturing activities, are accrued over the service periods specified in the contracts and adjusted as necessary based upon an ongoing review of the level of effort and costs actually incurred. The estimate of the work completed is developed through discussions with internal personnel and external service providers as to the progress of stage of completion of the services and the agreed-upon fee to be paid for such services. As actual costs become known, the accrued estimates are adjusted. Such estimates are not expected to be materially different from amounts actually incurred, however the Company’s understanding of the status and timing of services performed, the number of subjects enrolled, and the rate of subject enrollment may vary from estimates and could result in reporting amounts that are higher or lower than incurred in any particular period. The estimate of accrued research and development expense is dependent, in part, upon the receipt of timely and accurate reporting from clinical research organizations and other third-party service providers. The Company considers regulatory approval of product candidates to be uncertain and products manufactured prior to regulatory approval may not be sold unless regulatory approval is obtained. As such, the manufacturing costs for product candidates incurred prior to regulatory approval are not capitalized, but rather expensed as research and development expenses when incurred. Payments for a product license prior to regulatory approval of the product and payments for milestones achieved prior to regulatory approval of the product are expensed in the period incurred as research and development. Milestone payments made in connection with regulatory approvals are capitalized and amortized to cost of product sales over the remaining useful life of the asset. [K] Leases: In accordance with ASC 842, as adopted by the Company on April 1, 2019, the Company determines if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset during the lease term, and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating leases are included in ROU assets, current operating lease liabilities, and long-term operating lease liabilities on our consolidated balance sheet. Operating lease ROU assets and lease liabilities are initially recognized based on the present value of the future minimum lease payments over the lease term at commencement date calculated using the Company’s incremental borrowing rate applicable to the lease asset, unless the implicit rate is readily determinable. Operating lease ROU assets also include any lease payments made at or before lease commencement and exclude any lease incentives received. The Company determines the lease term as the noncancellable period of the lease, and may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of 12 months or less are not recognized on the consolidated balance sheet. The Company’s leases do not contain any residual value guarantees. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company accounts for lease and non-lease components as a single lease component for all its facilities leases. Prior to April 1, 2019, at the inception of a lease, the Company evaluated the lease agreement to determine whether the lease was an operating or capital lease. For operating leases, the Company recognized rent expense on a straight-line basis over the lease term and recorded the difference between cash rent payments and the recognition of rent expense as a deferred liability. Where lease agreements contained rent escalation clauses, rent abatements and/or concessions, such as rent holidays and tenant improvement allowances, the Company applied them in the determination of straight-line rent expense over the lease term. Certain lease agreements also required the Company to make additional payments for taxes, insurance, and other operating expenses incurred during the lease period, which were expensed as incurred. [L] Pushdown accounting: In November 2014, the FASB issued ASU No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting [M] Income taxes: The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the consolidated financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company recognizes deferred tax assets to the extent that it believes these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. [N] Share-based compensation: The Company records share-based compensation expenses for awards of stock options, stock appreciation rights (“SARs”) and restricted stock units (“RSUs”) under ASC 718, Share-based compensation Compensation-Stock Compensation: Improvements to Non-employee Share-Based Payment Accounting, Equity – Equity-based payments to non-employees The Company recognizes share-based compensation expense related to stock options and SARs granted to employees, directors and consultants based on the estimated fair value of the awards on the date of grant. The Company estimates the grant date fair value, and the resulting share-based compensation expense, for stock options that only have service vesting requirements or performance-based vesting requirements without market conditions using the Black-Scholes option-pricing model. For SARs, the Company estimates fair value using a binominal lattice model (see Note 10 for assumptions utilized). The grant date fair value of the share-based awards with service vesting requirements is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. Determining the appropriate amount to expense for performance-based awards based on the achievement of stated goals requires judgment. The estimate of expense is revised periodically based on the probability of achieving the required performance targets and adjustments are made as appropriate. The cumulative impact of any revisions is reflected in the period of change. If any applicable financial performance goals are not met, no compensation cost is recognized and any previously recognized compensation cost is reversed. For performance-based awards with market conditions, the Company determines the fair value of awards as of the grant date using a Monte Carlo simulation model. The Black-Scholes option-pricing model requires the use of subjective assumptions, which determine the fair value of share-based awards. These assumptions include: Expected term . The Company’s expected term represents the period that the share-based awards are expected to be outstanding. Since the Company has limited option exercise history, it has generally elected to estimate the expected life of an award based upon the Securities and Exchange Commission (“SEC”) approved “simplified method” (based on the mid-point between the vesting date and the end of the contractual term) noted under the provisions of Staff Accounting Bulletin (“SAB”) No. 107 with the continued use of this method extended under the provisions of SAB No. 110. For share-based awards granted to non-employees, the expected term represents the contractual term of the award. Expected volatility . Because the Company does not have an extended trading history for its common shares, the expected volatility was estimated using weighted-average measures of implied volatility and the historical volatility of its peer group of companies for a period equal to the expected life of the stock options. The Company’s peer group of publicly traded biopharmaceutical companies was chosen based on their similar size, stage in the life cycle or area of specialty. Beginning in the third quarter of the year ended March 31, 2020, the Company began including its own historical volatility with the historical volatility of its peer group of companies as part of the weighted-average measure of expected volatility. Risk-free interest rate . The risk-free interest rate is based on the rates paid on securities issued by the United States Treasury with a term approximating the expected life of the stock options. Expected dividend . The Company has never paid, and does not anticipate paying, cash dividends on its common shares. Therefore, the expected dividend yield was assumed to be zero. As part of the valuation of share-based compensation under the Black-Scholes option-pricing model, it is necessary for the Company to estimate the fair value of its common shares. Prior to the Company’s initial public offering, it was required to periodically estimate the fair value of its common shares when issuing options and in computing its estimated share-based compensation expense. Valuation of Privately-Held-Company Equity Securities Issued as Compensation In connection with the Company’s initial public offering, the Company reassessed the fair value of its options. Subsequent to the Company’s initial public offering, the Company utilizes the closing market price of its common shares on the grant date when estimating the fair value of share-based payment awards under the Black-Scholes option-pricing model. Share-based compensation expense associated with time-vesting restricted stock units is based on the fair value of the Company’s common shares on the grant date, which equals the closing market price of the Company’s common shares on the grant date. The Company recognizes the share-based compensation expense related to these awards on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. The Company has made an entity-wide accounting policy election to account for pre-vesting award forfeitures when they occur. [O] : The Company has operations in the United States, the United Kingdom and Switzerland. The results of its non-U.S. dollar based functional currency operations are translated to U.S. dollars at the average exchange rates during the period. The Company’s assets and liabilities are translated using the current exchange rate as of the consolidated balance sheet date and shareholders’ equity (deficit) is translated using historical rates. Adjustments resulting from the translation of the consolidated financial statements of the Company’s foreign functional currency subsidiaries into U.S. dollars are excluded from the determination of net loss and are accumulated in a separate component of shareholders’ equity (deficit). Foreign exchange transaction gains and losses realized and unrealized are included in other income (expense) in the Company’s consolidated results of operations. [P] : Basic net loss per common share is computed by dividing net loss applicable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing the net loss applicable to common shareholders by the diluted weighted-average number of common shares outstanding during the period calculated in accordance with the treasury stock method. In periods in which the Company reports a net loss, all common share equivalents are deemed anti-dilutive such that basic net loss per common share and diluted net loss per common share are equivalent. Potentially dilutive common shares have been excluded from the diluted net loss per common share computations in all periods presented because such securities have an anti-dilutive effect on net loss per common share due to the Company’s net loss. There are no reconciling items used to calculate the weighted-average number of total common shares outstanding for basic and diluted net loss per common share data. At March 31, 2020 and 2019, potentially dilutive securities were as follows:
March 31,
2020
2019
Options
4,134,100
4,058,866
Restricted stock units (unvested)
751,927
5,000
Stock appreciation rights
845,732
—
Warrants
99,777
33,259
Total
5,831,536
4,097,125
[Q] Recently adopted accounting standards : In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), ASU No. 2016-02 provided a number of optional practical expedients in transition. For leases that commenced prior to April 1, 2019, the Company elected the following package of practical expedients when assessing the transition impact: (1) not to reassess whether any expired or existing contracts are or contain leases; (2) not to reassess the lease classification for any expired or existing leases; and (3) not to reassess initial direct costs for any existing leases. The Company also elected to: (1) use the total lease term in its initial incremental borrowing rate calculation; (2) combine its lease and non-lease components and account for them as a single lease component for its facilities leases; and (3) not apply the use of hindsight in determining the lease term when considering lessee options to extend or terminate the lease and to purchase the underlying asset. For additional information regarding the Company’s leases, see Note 12. In June 2018, the FASB issued ASU No. 2018-07, C ompensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements [R] Recently issued accounting standards : In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement The Company does not expect the adoption to have a material impact on the Company’s consolidated financial position, results of operations, and related disclosures. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new standard also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill The guidance is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. consolidated financial position, results of operations, and related disclosures. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting London Inter-bank Offered Rate (“LIBOR”) The Company will continue to assess the impact the adoption of this standard will have on its consolidated financial position, results of operations, and related disclosures when its contract impacted by reference rate reform is modified . Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not, or are not believed by management to, have a material impact on the Company’s present or future consolidated financial position, results of operations or cash flows. |
