Quarterly report pursuant to Section 13 or 15(d)

Summary of Significant Accounting Policies

v3.21.2
Summary of Significant Accounting Policies
3 Months Ended
Jun. 30, 2021
Summary of Significant Accounting Policies  
Note 3 - Summary of Significant Accounting Policies

Note 3.  Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of 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 financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  Significant estimates include those relating to revenue recognition, share-based compensation, right-of-use assets and lease liabilities and assumptions that have been used historically to value warrants and warrant modifications.

 

Revenue Recognition

 

We generate revenue from collaborative research and development arrangements, licensing and technology transfer agreements, including strategic licenses or sublicenses, and government grants. Until such time as we commence commercial sales of any of our product candidates following successful development, clinical and regulatory approval, we expect that our primary source of revenue beginning from the quarter ended September 30, 2020 will be from the AffaMed Agreement involving clinical development and commercialization of PH94B for acute treatment of anxiety in adults with SAD, and potentially other anxiety-related disorders, in Greater China, South Korea, and Southeast Asia. The terms of the AffaMed Agreement include a $5.0 million non-refundable upfront license fee which we received in August 2020, potential payments based upon achievement of certain development and commercial milestones, and royalties on product sales. We also have the Bayer Agreement, pursuant to which we recorded sublicense revenue in the third quarter of our fiscal year ended March 31, 2017, as a potential revenue generating arrangement.

 

Under Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606), we recognize revenue when our customers obtain control of promised goods or services, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of Topic 606, we perform the following five steps: (i) identify the contract 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) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration to which we are entitled in exchange for the goods or services we transfer to a customer.

 

Performance Obligations

 

We assess whether each promised good or service is distinct for the purpose of identifying the performance obligations in the contract. This assessment involves subjective determinations and requires judgments about the individual promised goods or services and whether such components are separable from the other aspects of the contractual relationship. In assessing whether a promised good or service is distinct in the evaluation of a collaboration arrangement subject to Topic 606, we consider factors such as the research, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace.

 

Collaboration arrangements can have several promised goods or services including a license for our intellectual property, product supply and development and regulatory services. When the customer could not obtain the intended benefit of the contract from a promised good or service without one or more other promises in the contract, the promise is determined to be not distinct in the context of the contract and is combined with other promises until the combined promises are distinct to identify performance obligations. We have determined that the AffaMed Agreement includes a single combined performance obligation that includes both the license to intellectual property and development and regulatory services.

 

Arrangements can include promises for optional additional items, which are considered marketing offers and are accounted for as separate contracts when the customer elects such options. Arrangements that include a promise for future supply of product for either clinical development or commercial supply and optional research and development services at the customer’s or the Company’s discretion are generally considered as options. We assess whether these options provide a material right to the customer and if so, such material rights are accounted for as separate performance obligations. When the customer exercises an option, any additional payments related to the option are recorded in revenue when the customer obtains control of the goods or services.

 

Transaction Price

 

Arrangements may have both fixed and variable consideration. For collaboration agreements, the non-refundable upfront fees and product supply selling prices are considered fixed, while milestone payments are considered variable consideration when determining the transaction price. At the inception of each arrangement, we evaluate whether the development milestones are considered probable of being achieved and estimate an amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the value of the associated milestone is included in the transaction price. Milestone payments that are not within our control or the licensee’s control, such as approvals from regulators, are generally not considered probable of being achieved until such approvals are received.

 

For sales-based royalties, including commercial milestone payments based on the level of sales, for which the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of when (a) the related sales occur, or (b) the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

In determining the transaction price, we adjust consideration for the effects of the time value of money if the timing of payments provides us with a significant benefit of financing. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensee and the transfer of the promised goods or services to the licensee will be one year or less.

 

Allocation of Consideration

 

As part of the accounting for collaboration arrangements, we must develop assumptions that require judgment to determine the stand-alone selling price of each performance obligation identified in the contract. The transaction price is allocated to the identified performance obligations in proportion to their standalone selling prices (SSP) on a relative SSP basis. SSP is determined at contract inception and is not updated to reflect changes between contract inception and satisfaction of the performance obligations. In developing the SSP for a performance obligation, we consider applicable market conditions and relevant Company-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. We validate the SSP for performance obligations by evaluating whether changes in the key assumptions used to determine the SSP will have a significant effect on the allocation of arrangement consideration between multiple performance obligations. Since the AffaMed Agreement includes a single combined performance obligation that is not distinct, there is no allocation of consideration.  

 

Timing of Recognition

 

Significant management judgment is required to determine the level of effort required under collaboration arrangements and the period over which we expect to complete our performance obligations under the arrangement. The performance period or measure of progress is estimated at the inception of the arrangement and re-evaluated in each reporting period. This re-evaluation may shorten or lengthen the period over which revenue is recognized. Changes to these estimates are recorded on a cumulative catch up basis. Revenue is recognized for products at a point in time and for licenses of functional intellectual property at the point in time the customer can use and benefit from the license. For performance obligations that are services, revenue is recognized over time using an output or input method. For performance obligations that are a combination of licenses to intellectual property and interdependent services, the nature of the combined performance obligation is considered when determining the method and measure of progress that best represents the satisfaction of the performance obligation. For the single combined performance obligation of the AffaMed Agreement, the measure of progress is stand-ready straight-line over the period in which we expect to perform the services related to the license of PH94B.

 

The difference between revenue recognized to-date and the consideration invoiced or received to-date is recognized as either a contract asset/unbilled revenue (revenue earned exceeds cash received) or a contract liability/deferred revenue (cash received exceeds revenue earned). At June 30, 2021, we have recorded deferred revenue of $3,556,400. The following table presents changes in our contract liabilities for the three months ended June 30, 2021:

 

 

 

Balance at

 

 

 

 

 

 

 

 

Balance at

 

 

 

March 31, 2021

 

 

Additions

 

 

Deductions

 

 

June 30, 2021

 

Deferred Revenue - current portion

 

$ 1,420,200

 

 

$ -

 

 

$ -

 

 

$ 1,420,200

 

Deferred Revenue - non-current portion

 

 

2,490,300

 

 

 

-

 

 

 

(354,100 )

 

 

2,136,200

 

Total

 

$ 3,915,500

 

 

$ -

 

 

$ (354,100 )

 

$ 3,556,400

 

 

For the single combined performance obligation under the AffaMed Agreement, the measure of progress is stand-ready straight-line over the period in which we expect to perform the services related to the license of PH94B. Accordingly, deferred revenue is being recognized on a straight-line basis over the period in which we expect to perform the services.

 

During the three months ended June 30, 2021, we recognized $354,100 as revenue related to the AffaMed Agreement, compared to none for the three months ended June 30, 2020.

 

Contract Acquisition Costs

 

During the quarter ended September 30, 2020, we made cash payments aggregating $345,000 for sublicense fees, which we were obligated to make pursuant to our PH94B license from Pherin, and fees for consulting services exclusively related to the AffaMed Agreement. Additionally, on June 24, 2020, we issued 233,645 unregistered shares of our common stock, valued at $125,000, as partial compensation for consulting services related exclusively to the consummation of the AffaMed Agreement. These sublicense fees and consulting payments and the fair value of the common stock issued, aggregating $470,000, were incurred solely to obtain the AffaMed Agreement, and, accordingly, have been capitalized as deferred contract acquisition costs in our Condensed Consolidated Balance Sheet. Capitalized contract acquisition costs are amortized over the period in which we expect to satisfy the performance obligations under the AffaMed Agreement and the amortization expense has been included in general and administrative expenses in our Condensed Consolidated Statement of Operations and Comprehensive Loss. In the three months ended June 30, 2021, we amortized $33,300 to general and administrative expense in recognition of the services performed under the arrangement. We amortized no expense for the quarter ended June 30, 2020. There has been no impairment loss in relation to the costs capitalized.

The following table summarizes our contract acquisition costs for the three months ended June 30, 2021.

 

 

 

Balance at

 

 

 

 

 

 

 

 

Balance at

 

 

 

March 31, 2021

 

 

Additions

 

 

Deductions

 

 

June 30, 2021

 

Deferred Contract Acquisition Costs - current portion

 

$ 133,500

 

 

$ -

 

 

$ -

 

 

$ 133,500

 

Deferred Contract Acquisition Costs - non-current portion

 

 

234,100

 

 

 

 

 

 

 

(33,300 )

 

 

200,800

 

Total

 

$ 367,600

 

 

$ -

 

 

$ (33,300 )

 

$ 334,300

 

 

Research and Development Expenses

 

Research and development expenses are composed of both internal and external costs.  Internal costs include salaries and employment-related expenses, including stock-based compensation expense, of scientific personnel and direct project costs.  External research and development expenses consist primarily of costs associated with clinical and nonclinical development of PH94B, PH10, AV-101, and other research and development costs, and costs related to the application and prosecution of patents related to those product candidates and, to a lesser extent, our stem cell technology platform. All such costs are charged to expense as incurred. We also record accruals for estimated ongoing clinical trial costs. Clinical trial costs represent costs incurred by contract research organizations (CROs) and clinical trial sites. Progress payments are generally made to contract research and development organizations, clinical sites, investigators and other professional service providers. We analyze the progress of clinical trials, including levels of subject enrollment, invoices received and contracted costs, when evaluating the adequacy of accrued liabilities. Significant judgments and estimates must be made and used in determining the clinical trial accrual in any reporting period. Actual results could differ from those estimates under different assumptions. Revisions are charged to research and development expense in the period in which the facts that give rise to the revision become known. Costs incurred in obtaining product or technology licenses are charged immediately to research and development expense if the product or technology licensed has not achieved regulatory approval or reached technical feasibility and has no alternative future uses, as was the case with our acquisition of the exclusive worldwide licenses for PH94B and PH10 from Pherin during our fiscal year ended March 31, 2019.

 

Stock-Based Compensation

 

We recognize compensation cost for all stock-based awards to employees, independent directors and non-employee consultants based on the grant date fair value of the award.  We record non-cash, stock-based compensation expense over the period during which the employee or other grantee is required to perform services in exchange for the award, which generally represents the scheduled vesting period.  We have not granted restricted stock awards to employees or others nor do we have any awards with market or performance conditions. Non-cash expense attributable to compensatory grants of shares of our common stock to non-employees is determined by the quoted market price of the stock on the date of grant and is either recognized as fully-earned at the time of the grant or amortized ratably over the term of the related service agreement, depending on the terms of the specific agreement.

 

The table below summarizes stock-based compensation expense included in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss:

 

 

 

 Three Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 Research and development expense

 

$ 240,800

 

 

$ 226,600

 

 

 

 

 

 

 

 

 

 

 General and administrative expense

 

 

349,600

 

 

 

448,000

 

 

 

 

 

 

 

 

 

 

 Total stock-based compensation expense

 

$ 590,400

 

 

$ 674,600

 

 

Expense amounts reported above include $2,300 and $2,500 in research and development expense for the three months ended June 30, 2021 and 2020, respectively, and $2,700 and $1,500 in general and administrative expense for the three months ended June 30, 2021 and 2020, respectively, attributable to our 2019 Employee Stock Purchase Plan (the 2019 ESPP).

 

 
12

Table of Contents

 

During the three months ended June 30, 2021, we granted from our 2019 Omnibus Equity Incentive Plan (the 2019 Plan) options to purchase an aggregate of 575,000 shares of our common stock at exercise prices at or above the closing market price of our common stock on the date of grant primarily to newly-hired employees and to a new independent member of our Board. The options to newly hired employees vested 25% on the first anniversary of the grant date with the remaining shares vesting ratably monthly over the next three years. We valued the options granted during the three months ended June 30, 2021 using the Black-Scholes Option Pricing Model and the following assumptions:

 

Assumption:

 

Weighted Average

 

 

Range

 

Market price per share at grant date

 

$ 2.48

 

 

$ 2.04 to $ 2.60

 

Exercise price per share

 

$ 2.48

 

 

$ 2.04 to $ 2.60

 

Risk-free interest rate

 

 

1.08 %

 

0.98% to 1.12

Expected term in years

 

 

6.08

 

 

5.79 to 6.16

 

Volatility

 

 

82.76 %

 

82.64% to 83.48

%

Dividend rate

 

 

0.0 %

 

 

0.0 %

Shares

 

 

575,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value per share

 

$ 1.74

 

 

 

 

 

 

At June 30, 2021, there were stock options outstanding under our 2016 Equity Incentive Plan (the 2016 Plan) and our 2019 Plan to purchase 15,071,639 shares of our common stock at a weighted average exercise price of $1.39 per share. At that date, there were also 1,311,279 shares of our common stock available for future issuance under the 2019 Plan. There are no additional shares available for issuance under our 2016 Plan.  

 

Leases, Right-of-Use Assets and Lease Liabilities

 

We account for our leases in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Update No. 2016-02 – Leases (Topic 842) (ASC 842). We determine whether an arrangement is an operating or financing lease at contract inception. Operating lease assets represent our right to use an underlying asset for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date of the lease based upon the present value of lease payments over the lease term. When determining the lease term, we include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. In determining the present value of the lease payments, we use the interest rate implicit in the lease when it is readily determinable and we use our estimated incremental borrowing rate based upon information available at the commencement date when the implicit rate is not readily determinable.

 

The lease payments used to determine our operating lease assets include lease incentives and stated rent increases and may include escalation or other clauses linked to rates of inflation or other factors when determinable and are recognized in our operating lease assets in our condensed consolidated balance sheets.

 

Our operating leases are reflected in right of use asset – operating leases, other current liabilities and non-current operating lease liability in our condensed consolidated balance sheets. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Short-term leases, defined as leases that have a lease term of 12 months or less at the commencement date, are excluded from this treatment and are recognized on a straight-line basis over the term of the lease.

 

Our accounting for financing leases, previously referred to as “capital leases” under earlier guidance, remained substantially unchanged with our adoption of ASC 842. Financing leases are included in property and equipment, net and as current and non-current financing lease liabilities in our condensed consolidated balance sheets.  Refer to Note 10, Commitments and Contingencies, for additional information regarding ASC 842 and its impact on our condensed consolidated financial statements.

 

Comprehensive Loss

 

We have no components of other comprehensive loss other than net loss, and accordingly our comprehensive loss is equivalent to our net loss for the periods presented.

 

Loss per Common Share

 

Basic net loss attributable to common stockholders per share of common stock excludes the effect of dilution and is computed by dividing net loss increased by the accrual of dividends on outstanding shares of our Series B 10% Convertible Preferred Stock (Series B Preferred), by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss attributable to common stockholders per share of common stock reflects the potential dilution that could occur if securities or other contracts to issue shares of common stock were exercised or converted into shares of common stock. In calculating diluted net loss attributable to common stockholders per share, we have generally not increased the denominator to include the number of potentially dilutive common shares assumed to be outstanding during the period using the treasury stock method because the result is antidilutive.

As a result of our net loss for all periods presented, potentially dilutive securities were excluded from the computation of diluted net loss per share, as their effect would be antidilutive. Potentially dilutive securities excluded in determining diluted net loss attributable to common stockholders per common share are as follows:

 

 

 

At June 30,

 

 

At March 31,

 

 

 

2021

 

 

2021

 

 

 

 

 

 

 

 

Series A Preferred stock issued and outstanding (1)

 

 

750,000

 

 

 

750,000

 

 

 

 

 

 

 

 

 

 

Series B Preferred stock issued and outstanding (2)

 

 

1,131,669

 

 

 

1,131,669

 

 

 

 

 

 

 

 

 

 

Series C Preferred stock issued and outstanding (3)

 

 

2,318,012

 

 

 

2,318,012

 

 

 

 

 

 

 

 

 

 

Series D Preferred stock issued and outstanding (4)

 

 

-

 

 

 

9,249,427

 

 

 

 

 

 

 

 

 

 

Outstanding options under the Company's Amended and Restated 2016 (formerly 2008) Stock Incentive Plan and 2019 Omnibus Equity Incentive Plan

 

 

15,071,639

 

 

 

14,638,088

 

 

 

 

 

 

 

 

 

 

Outstanding warrants to purchase common stock

 

 

15,139,881

 

 

 

19,362,532

 

 

 

 

 

 

 

 

 

 

Total

 

 

34,411,201

 

 

 

47,449,728

 

__________

(1)

Assumes exchange under the terms of the October 11, 2012 Note Exchange and Purchase Agreement, as amended

 

 

(2)

Assumes exchange under the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series B 10% Convertible Preferred Stock, effective May 5, 2015; excludes shares of unregistered common stock issuable in payment of dividends on Series B Preferred upon conversion

 

 

(3)

Assumes exchange under the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series C Convertible Preferred Stock, effective January 25, 2016

 

 

(4)

Based on exchanges under the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series D Convertible Preferred Stock, effective December 21, 2020.

 
Fair Value Measurements

 

We do not use derivative instruments for hedging of market risks or for trading or speculative purposes. We carried no assets or liabilities that are measured on a recurring basis at fair value at June 30, 2021 or March 31, 2021.

 

Recent Accounting Pronouncements

 

We believe the following recent accounting pronouncement is of significance or potential significance to the Company.

 

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), to reduce complexity in applying GAAP to certain financial instruments with characteristics of liabilities and equity.

 

The guidance in ASU 2020-06 simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock. The guidance in ASC 470-20 applies to convertible instruments for which the embedded conversion features are not required to be bifurcated from the host contract and accounted for as derivatives.

 

In addition, the amendments revise the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification. These amendments are expected to result in more freestanding financial instruments qualifying for equity classification (and, therefore, not accounted for as derivatives), as well as fewer embedded features requiring separate accounting from the host contract.

The amendments in ASU 2020-06 further revise the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares.

 

The amendments in ASU 2020-06 are effective for our fiscal year beginning April 1, 2024. We are evaluating the impact of this new guidance, but do not believe that our adoption of ASU 2020-06 will have a material impact on our consolidated financial statements.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.