| Basis of Presentation and Summary of Significant Accounting Policies | 2. Basis of Presentation and Summary of Significant Accounting Policies Basis of presentation The condensed consolidated interim financial statements of the Company are unaudited and have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial reporting and in accordance with Regulation S-X, Rule 10-01. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. 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 Update (“ASU”), of the Financial Accounting Standards Board (“FASB”). All intercompany accounts and transactions between the Company and its subsidiaries have been eliminated upon consolidation. The accompanying unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2022 (the “Annual Report”). The condensed consolidated balance sheet as of December 31, 2021 was derived from audited consolidated financial statements included in the Company’s Annual Report but does not include all disclosures required by U.S. GAAP. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from these interim financial statements. However, these interim financial statements include all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of the Company’s management, necessary to fairly state the results of the interim period. The interim results are not necessarily indicative of results to be expected for the full year. Amounts reported are computed based on thousands, except percentages, per share amounts or as otherwise noted. As a result, certain totals may not sum due to rounding. Use of estimates The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these condensed consolidated financial statements include, but are not limited to, the accrual for research and development expenses, the research and development tax credit receivable, share-based compensation, operating lease assets and liabilities, and income taxes. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. The future developments of the COVID-19 pandemic may also directly or indirectly impact the Company’s business, including impacts due to quarantines, border closures, increased border controls, travel restrictions, shelter-in-place orders and shutdowns, business closures, cancellations of public gatherings and other measures. Actual results could differ from the Company’s estimates. Foreign currency The financial statements of the Company’s subsidiaries with functional currencies other than the U.S. dollar are translated into U.S. dollars using period-end exchange rates for assets and liabilities, historical exchange rates for shareholders’ equity and weighted average exchange rates for operating results. Translation gains and losses are included in accumulated other comprehensive income (loss) in shareholders’ equity. Foreign currency transaction gains and losses are included in other income (expense), net in the results of operations. The Company recorded realized and unrealized foreign currency transaction losses of $6.1 million and gains of $1.4 million for the three months ended March 31, 2022 and 2021, respectively, which is included in other income (expense), net in the condensed consolidated statements of operations and comprehensive loss. Cash and cash equivalents The Company considers all highly liquid investments purchased with original maturities of 90 days or less at acquisition to be cash equivalents. Marketable securities Marketable securities consist of investments with original maturities greater than ninety days at the date of acquisition. The Company has classified its investments with maturities beyond one year as short term, based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. The Company considers its investment portfolio of investments as available-for-sale. Accordingly, these investments are recorded at fair value, which is based on quoted market prices or other observable inputs. Unrealized gains and losses are recorded as a component of other comprehensive income (loss). Realized gains and losses are determined on a specific identification basis and are included in other income (loss). Amortization and accretion of discounts and premiums is also recorded in other income (loss). When the fair value is below the amortized cost of the asset, an estimate of expected credit losses is made and is limited to the amount by which fair value is less than amortized cost. The credit-related impairment amount is recognized in the statement of operations; remaining impairment amount and unrealized gains are reported as a component of accumulated other comprehensive income (loss) in shareholders’ equity. Credit losses are recognized through the use of an allowance for credit losses account and subsequent improvements in expected credit losses are recognized as a reversal of the allowance account. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis the allowance for credit loss is written off and the excess of the amortized cost basis of the asset over its fair value is recorded in the condensed consolidated statements of operations. United Kingdom research and development tax credit As a company that carries out research and development activities, the Company is able to submit tax credit claims from two UK research and development tax relief programs, the Small and Medium-sized Enterprises research and development tax credit (“SME”) program and the Research and Development Expenditure Credit (“RDEC”) program depending on eligibility. Qualifying expenditures largely comprise employment costs for research staff, consumables and certain internal overhead costs incurred as part of research projects for which the Company does not receive income. Each reporting period, management evaluates which tax relief programs the Company is expected to be eligible for and records a reduction to research and development expense for the portion of the expense that it expects to qualify under the programs, that it plans to submit a claim for, and it has reasonable assurance that the amount will ultimately be realized. Based on criteria established by HM Revenue and Customs (“HMRC”), management of the Company expects a proportion of expenditures being undertaken in relation to its pipeline research, clinical trials management and manufacturing development activities to be eligible for the research and development tax relief programs for the year ended December 31, 2022. The Company expects when if files it claim for the years ended December 31, 2021 and 2022, it will qualify under the SME regime. The RDEC and SME credits are not dependent on the Company generating future taxable income or on the ongoing tax status or tax position of the Company. The Company has assessed its research and development activities and expenditures to determine whether the nature of the activities and expenditures will qualify for credit under the tax relief programs and whether the claims will ultimately be realized based on the allowable reimbursable expense criteria established by the UK government which are subject to interpretation. At each period end, the Company estimates the reimbursement available to the Company based on available information at the time. The Company recognizes credits from the research and development incentives when the relevant expenditure has been incurred and there is reasonable assurance that the reimbursement will be received. Such credits are accounted for as reductions in research and development expense in the condensed consolidated statement of operations and comprehensive loss. The following table below outlines the changes to the research and development tax credit receivable, including amounts recognized as an offset to research and development expense during the periods. (amounts in thousands):
Three Months Ended March 31,
2022
2021
Balance at beginning of period
$
30,723
$
17,344
Recognition of credit claims as offset to research and development expense
3,337
3,554
Receipt of credit claims
(16,474
)
—
Foreign currency translation
(937
)
147
Balance at end of period
$
16,649
$
21,045
As of March 31, 2022, the Company’s tax incentive receivable from the UK government was $16.7 million, of which $13.4 million was classified as current. Restricted cash and construction deposits Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded as restricted cash on the Company’s condensed consolidated balance sheet. The Company has an outstanding letter of credit for $3.0 million associated with a lease and is required to hold this amount in a standalone bank account, as of March 31, 2022 and December 31, 2021. The Company is also contractually required to maintain cash collateral accounts associated with corporate credit cards and other leases in the amount of $1.3 million at March 31, 2022 and December 31, 2021. The Company includes the restricted cash balance in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the condensed consolidated statements of cash flows. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported in the condensed consolidated balance sheet that sum to the total of the amounts reported in the unaudited condensed consolidated statement of cash flows (amounts in thousands):
March 31,
December 31,
2022
2021
Cash and cash equivalents
$
60,775
$
55,912
Restricted cash
4,266
4,266
Total cash, cash equivalents and restricted cash shown in the statement of cash flows
$
65,041
$
60,178
The Company has $7.9 million in an escrow account associated with construction on the Fremont facility, for which the Company has ceased construction and build-out and subleased to a third-party. Subject to the terms of the lease and reduction provisions, this amount will be returned to the Company upon qualifying construction expenditure or will be returned in late 2022 to the extent construction expenses have not been incurred. The Company deposited $10.0 million into the account in the first quarter of 2020 and has received $2.1 million in receipts from the escrow funds for costs incurred to date. Of the $7.9 million remaining in the escrow account, the entire balance is classified within prepaid expenses condensed consolidated balance sheet based on the timing of when the Company expects funds to be returned from the escrow agent. Accounts receivable Accounts receivable arise from product revenues and amounts due from the Company's collaboration partners and have standard payment terms that generally require payment within 30 to 90 days. The amount from product revenues represents amounts due from distributors in Europe, which are recorded net of reserves for trade discounts and allowances, and other incentives to the extent such amounts are payable to the customer by the Company. The Company monitors economic conditions to identify facts or circumstances that may indicate that its receivables are at risk of collection. The Company provides reserves against accounts receivable for estimated losses, if any, that may result from a customer's inability to pay based on the composition of its accounts receivable, current economic conditions, and historical credit loss activity. Amounts determined to be uncollectible are charged or written-off against the reserve. During the three months ended March 31, 2022, the Company did not record any expected credit losses related to outstanding accounts receivable. Product revenues, net Libmeldy In January 2022, the Company began generating product revenue from sales of Libmeldy in Europe following the approval of Libmeldy by the European Commission in December 2020 for the treatment of early onset metachromatic leukodystrophy (“MLD”), characterized by biallelic mutations in the arylsulfatase-A (ARSA) gene leading to a reduction of the ARSA enzymatic activity in children with (i) late infantile or early juvenile forms, without clinical manifestations of the disease, or (ii) the early juvenile form, with early clinical manifestations of the disease, who still have the ability to walk independently and before the onset of cognitive decline. The Company recognizes revenue when control of promised goods is transferred to a customer at an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods. Control of the product transfers upon infusion of the product. To determine revenue recognition, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies the performance obligations. The Company only applies the five-step model to contracts when collectability of the consideration to which we are entitled in exchange for the goods the Company transfers to the customer is determined to be probable. Amounts are recorded as accounts receivable when the right to the consideration is unconditional. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that would have been recognized is one year or less or the amount is immaterial. As of March 31, 2022, the Company has not capitalized any costs to obtain any of contracts. The Company recognizes product revenues, net of variable consideration related to certain allowances and accruals, when the customer takes control of the product, which is at a point in time once the patient has been infused. Product revenue is recorded at the net sales price, or transaction price. The Company records product revenue reserves, which are classified as a reduction in product revenues, to account for the components of variable consideration. Variable consideration includes the following components: government rebates, including performance-based rebates, trade discounts and allowances, and other incentives, which are described below. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as a liability. The Company's estimates of reserves established for variable consideration are calculated based upon an application of the expected value method, which is the sum of probability-weighted amounts in a range of possible consideration amounts. These estimates reflect the Company's historical experience, current contractual and statutory requirements, specific known market events and trends, industry data, and current expectations around final pricing. The amount of variable consideration that is included in the transaction price may be subject to constraint and is included in net product revenues only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration received may ultimately differ from the Company's estimates. If actual results vary, the Company adjusts these estimates, which could have an effect on earnings in the period of adjustment. The following is a summary of the types of variable consideration the Company records: Government rebates: The Company is subject to statutory government rebates on sales in certain European countries as well as estimated rebates in certain European countries because final pricing has not yet been negotiated. The Company records reserves for rebates in the same period the related product revenue is recognized, resulting in a reduction of product revenues and a current liability that is included in accrued expenses on the Company’s condensed consolidated balance sheet. The Company is also subject to potential rebates in connection with performance criteria agreed upon with certain payors. The estimate for rebates is based on statutory discount rates, industry pricing data, current expectations around final pricing to be obtained, and historical experience of the performance of the Company’s products during clinical trials The Company classifies rebates within accrued expenses in the accompanying condensed consolidated balance sheets. Trade discounts and allowances: The Company may offer customers discounts, such as prompt pay discounts to remit payment in accordance with the stated terms of the invoice and fees for distribution services. These discounts are explicitly stated in the contracts and recorded in the period the related product revenue is recognized. The Company estimates which customers will earn these discounts and fees and deducts these discounts and fees in full from gross product revenues and accounts receivable at the time the Company recognizes the related revenues. The Company classifies trade discounts and allowances as a reduction of accounts receivable within the accompanying condensed consolidated balance sheets. Product returns: Based on the timing of revenue recognition upon treatment with the patient, the Company does not expect any returns of the Company’s products. Other incentives: While the Company does not currently have any other incentives that have been recorded to date, the Company may enter into future arrangements that have other incentives that will be recorded as a reduction of revenue. Strimvelis The Company’s product sales of Strimvelis are currently distributed exclusively at the San Raffaele Hospital in Milan, Italy. The hospital will purchase and pay for the products and submit a claim to the payer. The Company’s contracted sales with the hospital contains a single performance obligation and the Company recognizes revenue from product sales when the Company has satisfied its performance obligation, which is upon transferring control of the products to the hospital. The Company evaluated the variable consideration under ASC 606 and there is currently no variable consideration included in the transaction price for the products. Costs to manufacture and deliver the product and those associated with administering the therapy are included in cost of product sales. As the product is sold in direct relation to a scheduled treatment, the Company estimates there is limited risk of product return, including the risk of product expiration. Disaggregated Product Revenue Disclosures During the quarter ended March 31, 2022, the Company recognized $5.1 million of product revenues related to Libmeldy, all related to sales in Europe, which is net of $1.4 million of product revenue reserves primarily related to governmental rebates, that have been recognized in accrued expenses in the accompanying condensed consolidated balance sheet. There were no Strimvelis sales during the three months ended March 31, 2022 or 2021. Strimvelis loss provision As part of its transaction with Glaxo Group Limited and GlaxoSmithKline Intellectual Property Development LTD (together, “GSK”) The Company recognizes the amortization of the loss provision on a diminishing balance basis based on the actual net loss incurred associated with Strimvelis and the expected future net losses to be generated until such time as Strimvelis is no longer commercially available. The amortization of the provision is recorded as a reduction in research and development expense. The Company has made an estimate of the expected future losses associated with Strimvelis and adjust this estimate as facts and circumstances change regarding the commercial availability and costs of maintaining and selling Strimvelis. The Company does not update the accrued loss provision for any subsequent adjustment of the future losses, however, the timing of recognizing the amortization of what was originally recorded is adjusted for updates to estimates of potential future losses The following table below outlines the changes to the Strimvelis loss provision for the periods ended March 31, 2022 and 2021 (amounts in thousands):
Three Months Ended March 31,
2022
2021
Balance at beginning of period
$
3,419
$
4,482
Amortization of loss provision
(276
)
(446
)
Foreign currency translation
(86
)
40
Balance at end of period
$
3,057
$
4,076
Of the balance as of March 31, 2022 noted in the table above, $0.9 million is classified as current, and $2.1 million is classified as non-current. Net loss per share Basic net loss per share is computed by dividing the net loss by the weighted average number of voting and non-voting ordinary shares outstanding for the period. Diluted net loss is computed by adjusting net loss based on the potential impact of dilutive securities. Diluted net loss per share is computed by dividing the diluted net loss by the weighted average number of ordinary shares outstanding for the period, including potential dilutive ordinary shares. For purpose of this calculation, outstanding options and unvested restricted shares are considered potential dilutive ordinary shares. Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all potential ordinary share equivalents outstanding would have been anti-dilutive. The following securities, presented based on amounts outstanding at each period end, are considered to be ordinary share equivalents, but were not included in the computation of diluted net loss per ordinary share because to do so would have been anti-dilutive:
Three Months Ended March 31,
2022
2021
Share options
13,113,339
12,935,554
Unvested performance-based restricted share units
500,989
717,167
13,614,328
13,652,721
Recently adopted accounting pronouncements In November 2021, the FASB issued ASU No. 2020-10, Government Assistance (Topic 832): |
