(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 reimbursements from research and development (“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.

 

(d)Reclassifications

 

Property and insurance costs relating to research and development facilities of $1,377,000 and $1,162,000 in the six months ended December 31, 2015 and the year ended June 30, 2015, respectively, were misclassified as general and administrative expenses in prior periods.  These costs have been presented within research and development in the current period and the Company has reclassified prior period expenses to conform the presentation to the current period.

 

Legal expenses for patent applications of $149,000, $303,000 and $171,000 in the six months ended December 31, 2015 and the years ended June 30, 2015 and 2014, respectively, were misclassified as research and development expenditure in prior periods.  These expenses have been presented within general administrative expenses in the current period and the Company has reclassified prior period expenses to conform the presentation to the current period.

 

The Company has assessed the materiality of the classification errors in prior periods in accordance with the SEC’s guidance on assessing materiality, Staff Accounting Bulletin No. 99, Materiality, and determined that the errors are quantitatively and qualitatively not material.

 

The operating expenses for comparative periods as previously reported and as presented after the reclassifications are as follows (in thousands):

 

 

(f)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 Company’s financial instruments consist primarily of cash and cash equivalents, short-term deposits, restricted cash, accounts receivable, accounts payable and accrued expenses. The carrying amounts of the Company’s financial instruments approximate fair value because of the short-term nature of these instruments.

 

(h)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 and 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).

 

(j)Accounts receivable

 

Accounts receivable are amounts due from customers.  At December 31, 2016, 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.  At December 31, 2016, 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.

 

(l)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:

 

 

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.

 

(n)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.

 

(p)Research and development expenditure

 

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 $3.0 million, $2.5 million, $- and $- in the year ended December 31, 2016, the six months ended December 31, 2015 and the years ended June 30, 2015 and 2014, 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 $414,000, $905,000, $613,000 and $241,000 in the year ended December 31, 2016, the six months ended December 31, 2015 and the years ended June 30, 2015 and 2014, respectively.  Reimbursable R&D tax and expenditure credits were $6,891,000, $1,506,000, $1,497,000 and $1,027,000 in the year ended December 31, 2016, the six months ended December 31, 2015 and the years ended June 30, 2015 and 2014, respectively.

 

(r)Share-based compensation

 

The Company awards certain employees and nonemployees 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.

 

The Company has awarded share options to nonemployees for consultancy services.  These share options are measured at the fair value of the goods/services received or the fair value of the equity instrument issued, whichever is 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.

 

(t)Income taxes

 

Income taxes for the period comprise current and deferred tax.  Income tax is recognized in the consolidated statement of operations except to the extent that it relates to items recognized either in other comprehensive income or directly in equity, in which case it is recognized in other comprehensive income or equity.

 

Current tax is the expected tax payable or receivable on the taxable income or loss for the current or prior periods using tax rates enacted at the balance sheet date.

 

Deferred tax is accounted for using the asset and liability method that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amount and the tax bases of assets and liabilities at the applicable tax rates. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company evaluates the realizability of its deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization include the Company’s forecast of future taxable income, carryback availability, reversing taxable temporary differences and available tax planning strategies that could be implemented to realize the deferred tax assets.

 

Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met. Recognized income tax positions are measured at the largest amount that is greater than 50 percent likely of being realized.  We recognize potential accrued interest and penalties related to unrecognized tax benefits within the consolidated statement of operations as income tax expense.

 

In interim periods, the income tax expense (benefit) related to income (loss) from continuing operations before income tax expense (benefit) excluding significant unusual or infrequently occurring items is computed at an estimated annual effective tax rate and the tax expense (benefit) related to all other items is individually computed and recognized when the items occur.

 

(v)Loss per share

 

Basic loss per share is determined by dividing net loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.  Diluted loss per share is determined by dividing net loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period, adjusted for the dilutive effect of all potential ordinary shares that were outstanding during the period.  Potentially dilutive shares are excluded when the effect would be to increase diluted earnings per share or reduce diluted loss per share.

 

The following table reconciles the numerator and denominator in the basic and diluted loss per share computation (in thousands):

 

 

The effects of the following potentially dilutive equity instruments have been excluded from the diluted loss per share calculation because they would have an antidilutive effect on the loss per share for the period:

 

 

 

 

 

New accounting pronouncements

 

Adopted in the period

 

Restricted Cash

 

The Company has adopted Accounting Standards Update (“ASU”) 2016-18 - Statement of Cash Flows: Restricted Cash issued by the Financial Accounting Standards Board (“FASB”) in November 2016, which amends the presentation of restricted cash within the statement of cash flows. The guidance requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents rather than only cash and cash equivalents, as previously required.  The guidance has been adopted retrospectively to all periods presented, which has resulted in a decrease in net cash used in investing activities of $4,666,000 in the six months ended December 31, 2015.  The total of cash, cash equivalents and restricted cash is described in Note 2(h).  The adoption of the guidance did not have any impact on the Company’s financial position or result of operations.

 

Classification of certain cash receipts and cash payments

 

The Company has adopted ASU 2016-15 - Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, issued by the FASB in August 2016, which provides clarification on the classification of certain cash receipts and cash payments where current U.S. GAAP either is unclear or does not include specific guidance. The guidance has been adopted using a retrospective transition method to all periods presented. The adoption of the guidance did not have any impact on the Company’s financial position, result of operations or cash flows.

 

Customer’s accounting for fees paid in a cloud computing arrangement

 

The Company has adopted Accounting Standards Update 2015-05 - Internal-Use Software: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement issued by the FASB in April 2015, which clarifies a customer’s accounting for fees paid in a cloud computing arrangement.  The guidance considers whether a cloud computing arrangement includes a software license and clarifies that the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses.  If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract.  The guidance has been adopted prospectively to all arrangements entered into or materially modified after January 1, 2016.  The adoption of this guidance did not have any impact on the Company’s financial position, results of operations or cash flows.

 

To be adopted in future periods

 

Intra-Entity Transfers of Assets Other Than Inventory

 

In October 2016, the FASB issued ASU 2016-16 - Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory, which requires that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.  The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. The guidance should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company does not believe the adoption of the guidance will have a material impact on the consolidated financial statements.

 

Accounting for leases

 

In February 2016, the FASB issued ASU 2016-02 - Leases.  The guidance requires that lessees recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term at the commencement date.  The guidance also makes targeted improvements to align lessor accounting with the lessee accounting model and guidance on revenue from contracts with customers.  The guidance is effective for the fiscal year beginning January 1, 2019, including interim periods within that fiscal year. Early application is permitted.  The guidance must be adopted on a modified retrospective transition approach for leases existing, or entered into after, the beginning of the earliest comparative period presented in the financial statements.  The Company is currently evaluating the impact of the guidance on the consolidated financial statements.

 

Recognition and measurement of financial assets and financial liabilities

 

In January 2016, the FASB issued ASU 2016-01 - Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which amended the guidance on the recognition and measurement of financial assets and financial liabilities.  The new guidance requires that equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) are measured at fair value with changes in fair value recognized in net income.  The guidance also requires the use of an exit price when measuring the fair value of financial instruments for disclosure purposes, eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset.  The guidance is effective for the fiscal year beginning January 1, 2018, including interim periods within that fiscal year.  The Company does not believe the adoption of the guidance will have a material impact on the consolidated financial statements.

 

Revenue from contracts with customers

 

In May 2014, the FASB issued ASU 2014-09 - Revenue from Contracts with Customers which requires a new approach to revenue recognition and in March, April, May and December 2016, the FASB issued additional clarification related to this guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

 

Step 1: Identify the contract(s) with a customer.

 

Step 2: Identify the performance obligations in the contract.

 

Step 3: Determine the transaction price.

 

Step 4: Allocate the transaction price to the performance obligations in the contract.

 

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

 

The guidance is effective for the fiscal year beginning January 1, 2018, including interim reporting periods within that reporting period. Earlier application is permitted. The Company intends to adopt the guidance with effect from January 1, 2018.  The guidance can be adopted retrospectively to each prior reporting period presented, subject to certain practical expedients, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application.

 

The Company is in the process of assessing the impact of the guidance as it relates to the GSK Collaboration and License Arrangement.  The Company’s preliminary assessment is substantially complete but there are several complex issues that are being considered.  Once these issues are resolved, the Company will determine the transition method which will be applied and evaluate the disclosure requirements. The adoption of ASU 2014-09 may have a material effect on the Company’s financial statements but the quantitative effect cannot be reasonably estimated at this time. The Company continues to monitor additional changes, modifications, clarifications or interpretations undertaken by the FASB, which may impact its assessment.