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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-35839

 

ENANTA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

DELAWARE

2834

04-3205099

(State or other jurisdiction of

incorporation or organization)

(Primary Standard Industrial

Classification Code Number)

(I.R.S. Employer

Identification Number)

500 Arsenal Street

Watertown, Massachusetts 02472

(617) 607-0800

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

ENTA

NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

☐  

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of April 30, 2020, the registrant had 20,004,258 shares of common stock, $0.01 par value per share, outstanding.

 

 

 


 

ENANTA PHARMACEUTICALS, INC.

FORM 10-Q — Quarterly Report

For the Quarterly Period Ended March 31, 2020

TABLE OF CONTENTS

 

 

 

 

Page

PART I—FINANCIAL INFORMATION

 

 

Item 1.

Consolidated Financial Statements

  

3

 

Unaudited Consolidated Balance Sheets

 

3

 

Unaudited Consolidated Statements of Operations

 

4

 

Unaudited Consolidated Statements of Comprehensive Income (Loss)

 

5

 

Unaudited Consolidated Statements of Stockholders’ Equity

 

6

 

Unaudited Consolidated Statements of Cash Flows

 

7

 

Unaudited Notes to Consolidated Financial Statements

 

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

29

Item 4.

Controls and Procedures

 

29

PART II—OTHER INFORMATION

 

 

Item 1A.

Risk Factors

 

30

Item 6.

Exhibits

 

54

Signatures

 

55

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, or Form 10-Q, contains forward-looking statements concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would,” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about overall trends, royalty revenue trends, research and clinical development plans, liquidity and capital needs and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions. These forward-looking statements are based on our management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate and our management’s beliefs and assumptions. These forward-looking statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Form 10-Q may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and discussed elsewhere in this Form 10-Q. These forward-looking statements speak only as of the date of this Form 10-Q. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this Form 10-Q.

2


 

PART I—FINANCIAL INFORMATION

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

ENANTA PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except per share amounts)

 

 

 

March 31,

 

 

September 30,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

74,338

 

 

$

51,230

 

Short-term marketable securities

 

 

280,917

 

 

 

284,006

 

Accounts receivable

 

 

27,619

 

 

 

51,313

 

Prepaid expenses and other current assets

 

 

19,835

 

 

 

15,299

 

Total current assets

 

 

402,709

 

 

 

401,848

 

Long-term marketable securities

 

 

80,099

 

 

 

65,013

 

Property and equipment, net

 

 

9,738

 

 

 

10,927

 

Deferred tax assets

 

 

12,418

 

 

 

11,341

 

Operating lease, right-of-use assets

 

 

7,837

 

 

 

 

Restricted cash

 

 

608

 

 

 

608

 

Other long-term assets

 

 

92

 

 

 

92

 

Total assets

 

$

513,501

 

 

$

489,829

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,945

 

 

$

6,689

 

Accrued expenses and other current liabilities

 

 

9,807

 

 

 

15,920

 

Operating lease liabilities

 

 

3,764

 

 

 

 

Total current liabilities

 

 

19,516

 

 

 

22,609

 

Operating lease liabilities, net of current portion

 

 

5,330

 

 

 

 

Series 1 nonconvertible preferred stock

 

 

1,628

 

 

 

1,628

 

Other long-term liabilities

 

 

1,036

 

 

 

3,100

 

Total liabilities

 

 

27,510

 

 

 

27,337

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock; $0.01 par value per share, 100,000 shares authorized; 19,986 and

   19,703 shares issued and outstanding at March 31, 2020 and

   September 30, 2019, respectively

 

 

200

 

 

 

197

 

Additional paid-in capital

 

 

314,005

 

 

 

298,409

 

Accumulated other comprehensive income

 

 

608

 

 

 

146

 

Retained earnings

 

 

171,178

 

 

 

163,740

 

Total stockholders' equity

 

 

485,991

 

 

 

462,492

 

Total liabilities and stockholders' equity

 

$

513,501

 

 

$

489,829

 

 

The accompanying notes are an integral part of these consolidated financial statements.

3


 

ENANTA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Royalty revenue

 

$

27,619

 

 

$

39,631

 

 

$

80,189

 

 

$

109,517

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

32,610

 

 

 

34,155

 

 

 

65,388

 

 

 

69,033

 

General and administrative

 

 

6,884

 

 

 

6,780

 

 

 

13,805

 

 

 

13,932

 

Total operating expenses

 

 

39,494

 

 

 

40,935

 

 

 

79,193

 

 

 

82,965

 

Income (loss) from operations

 

 

(11,875

)

 

 

(1,304

)

 

 

996

 

 

 

26,552

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

1,950

 

 

 

2,245

 

 

 

4,026

 

 

 

4,130

 

Total other income (expense), net

 

 

1,950

 

 

 

2,245

 

 

 

4,026

 

 

 

4,130

 

Income (loss) before income taxes

 

 

(9,925

)

 

 

941

 

 

 

5,022

 

 

 

30,682

 

Income tax (expense) benefit

 

 

3,920

 

 

 

3,204

 

 

 

2,416

 

 

 

(526

)

Net income (loss)

 

$

(6,005

)

 

$

4,145

 

 

$

7,438

 

 

$

30,156

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.30

)

 

$

0.21

 

 

$

0.37

 

 

$

1.55

 

Diluted

 

$

(0.30

)

 

$

0.20

 

 

$

0.36

 

 

$

1.44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

19,922

 

 

 

19,549

 

 

 

19,836

 

 

 

19,487

 

Diluted

 

 

19,922

 

 

 

21,084

 

 

 

20,692

 

 

 

20,946

 

 

The accompanying notes are an integral part of these consolidated financial statements.

4


 

ENANTA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

(in thousands)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income (loss)

 

$

(6,005

)

 

$

4,145

 

 

$

7,438

 

 

$

30,156

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains on marketable securities, net of tax of

   $119 and $78, $147 and $123

 

 

374

 

 

 

245

 

 

$

462

 

 

$

386

 

Total other comprehensive income, net of tax

 

 

374

 

 

 

245

 

 

 

462

 

 

 

386

 

Comprehensive income (loss)

 

$

(5,631

)

 

$

4,390

 

 

$

7,900

 

 

$

30,542

 

 

The accompanying notes are an integral part of these consolidated financial statements.

5


 

ENANTA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Retained

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Earnings

 

 

Equity

 

Balances at September 30, 2018

 

 

19,395

 

 

$

194

 

 

$

276,526

 

 

$

(398

)

 

$

117,357

 

 

$

393,679

 

Exercise of stock options

 

 

40

 

 

 

 

 

 

1,161

 

 

 

 

 

 

 

 

 

1,161

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

5,843

 

 

 

 

 

 

 

 

 

5,843

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

141

 

 

 

 

 

 

141

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26,011

 

 

 

26,011

 

Balances at December 31, 2018

 

 

19,435

 

 

$

194

 

 

$

283,530

 

 

$

(257

)

 

$

143,368

 

 

$

426,835

 

Exercise of stock options

 

 

157

 

 

 

2

 

 

 

4,464

 

 

 

 

 

 

 

 

 

4,466

 

Vesting of restricted stock units, net of

   withholding

 

 

77

 

 

 

1

 

 

 

(4,189

)

 

 

 

 

 

 

 

 

 

 

(4,188

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

4,707

 

 

 

 

 

 

 

 

 

4,707

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

245

 

 

 

 

 

 

245

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,145

 

 

 

4,145

 

Balances at March 31, 2019

 

 

19,669

 

 

$

197

 

 

$

288,512

 

 

$

(12

)

 

$

147,513

 

 

$

436,210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Retained

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Earnings

 

 

Equity

 

Balances at September 30, 2019

 

 

19,703

 

 

$

197

 

 

$

298,409

 

 

$

146

 

 

$

163,740

 

 

$

462,492

 

Exercise of stock options

 

 

76

 

 

 

1

 

 

 

2,305

 

 

 

 

 

 

 

 

 

2,306

 

Vesting of restricted stock units, net of

   withholding

 

 

31

 

 

 

 

 

 

(1,140

)

 

 

 

 

 

 

 

 

(1,140

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

5,098

 

 

 

 

 

 

 

 

 

5,098

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

88

 

 

 

 

 

 

88

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,443

 

 

 

13,443

 

Balances at December 31, 2019

 

 

19,810

 

 

$

198

 

 

$

304,672

 

 

$

234

 

 

$

177,183

 

 

$

482,287

 

Exercise of stock options

 

 

160

 

 

 

2

 

 

 

4,714

 

 

 

 

 

 

 

 

 

4,716

 

Vesting of restricted stock units, net of

   withholding

 

 

16

 

 

 

 

 

 

(358

)

 

 

 

 

 

 

 

 

(358

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

4,977

 

 

 

 

 

 

 

 

 

4,977

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

374

 

 

 

 

 

 

374

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,005

)

 

 

(6,005

)

Balances at March 31, 2020

 

 

19,986

 

 

$

200

 

 

$

314,005

 

 

$

608

 

 

$

171,178

 

 

$

485,991

 

 

The accompanying notes are an integral part of these consolidated financial statements

6


 

ENANTA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

 

 

 

Six Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

7,438

 

 

$

30,156

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

10,076

 

 

 

10,550

 

Depreciation and amortization expense

 

 

1,819

 

 

 

1,482

 

Deferred income taxes

 

 

(1,224

)

 

 

(800

)

Premium paid on marketable securities

 

 

(2,398

)

 

 

(1

)

Accretion of discount on marketable securities

 

 

(379

)

 

 

(2,213

)

Other non-cash items

 

 

 

 

 

37

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

23,694

 

 

 

27,574

 

Prepaid expenses and other current assets

 

 

(4,536

)

 

 

(9,598

)

Operating lease, right-of-use assets

 

 

1,311

 

 

 

 

Accounts payable

 

 

(731

)

 

 

2,886

 

Accrued expenses

 

 

(5,585

)

 

 

1,259

 

Income taxes payable

 

 

 

 

 

(1,388

)

Operating lease liabilities

 

 

(1,484

)

 

 

 

Other long-term liabilities

 

 

(964

)

 

 

396

 

Net cash provided by operating activities

 

 

27,037

 

 

 

60,340

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchase of marketable securities

 

 

(171,884

)

 

 

(271,712

)

Proceeds from maturities and sale of marketable securities

 

 

163,273

 

 

 

254,994

 

Purchase of property and equipment

 

 

(842

)

 

 

(2,891

)

Net cash used in investing activities

 

 

(9,453

)

 

 

(19,609

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

7,022

 

 

 

5,627

 

Payments for settlement of share-based awards

 

 

(1,498

)

 

 

(4,188

)

Payments of capital lease obligations

 

 

 

 

 

(42

)

Net cash provided by financing activities

 

 

5,524

 

 

 

1,397

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

23,108

 

 

 

42,128

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

51,838

 

 

 

64,510

 

Cash, cash equivalents and restricted cash at end of period

 

$

74,946

 

 

$

106,638

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

50

 

 

$

9,955

 

Supplemental disclosure of non-cash investing information:

 

 

 

 

 

 

 

 

Purchases of fixed assets included in accounts payable and accrued expenses

 

$

109

 

 

$

1,598

 

Operating lease liabilities arising from obtaining right-of-use assets

 

$

1,997

 

 

$

 

The accompanying notes are an integral part of these consolidated financial statements.

7


 

ENANTA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(Amounts in thousands, except per share data)

1.

Nature of the Business and Basis of Presentation

Enanta Pharmaceuticals, Inc. (the “Company”), incorporated in Delaware in 1995, is a biotechnology company that uses its robust, chemistry-driven approach and drug discovery capabilities to create small molecule drugs for the treatment of viral infections and liver diseases. The Company discovered glecaprevir, the second protease inhibitor discovered and developed through its collaboration with AbbVie for the treatment of chronic hepatitis C virus, or HCV. Glecaprevir is co-formulated as part of AbbVie’s leading brand of direct-acting antiviral (DAA) combination treatment for HCV, which is marketed under the tradenames MAVYRET® (U.S.) and MAVIRET® (ex-U.S.) (glecaprevir/pibrentasvir). Royalties from the Company’s AbbVie collaboration and its existing financial resources provide funding to support the Company’s wholly-owned research and development programs, which are primarily focused on the following disease targets: respiratory syncytial virus (“RSV”), non-alcoholic steatohepatitis (“NASH”), hepatitis B virus (“HBV”), human metapneumovirus (hMPV), and SARS-CoV-2 (COVID-19).

The Company is subject to many of the risks common to companies in the biotechnology industry including, but not limited to, the uncertainties of research and development, competition from technological innovations of others, dependence on collaborative arrangements, protection of proprietary technology, dependence on key personnel and compliance with government regulation. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approvals, prior to commercialization. These efforts require significant amounts of capital, adequate personnel infrastructure, and extensive compliance reporting capabilities.

COVID-19

In March 2020, the World Health Organization declared COVID-19 a global pandemic and countries worldwide implemented various measures to contain the spread of the virus. National, state and local governments in affected regions have implemented and may continue to implement safety precautions, including quarantines, border closures, increased border controls, travel restrictions, shelter-in-place orders and shutdowns, business closures, cancellations of public gatherings and other measures. The extent and severity of the impact on the Company’s business and clinical trials will be determined largely by the extent there are disruptions in the supply chains for its research and product candidates, delays in the conduct of current and future clinical trials, or reductions in the number of patients accessing AbbVie’s HCV regimens, or any combination of those events. In the three months ended March 31, 2020 and through the date of issuance of these financial statements, the Company’s consolidated financial position, results of operations and cash flows have not been materially impacted by the COVID-19 pandemic.

The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19 and public health actions taken to contain it, as well as the cumulative economic impact of both of those factors.

Unaudited Interim Financial Information

The consolidated balance sheet at September 30, 2019 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The accompanying unaudited consolidated financial statements as of March 31, 2020 and for the six months ended March 31, 2020 and 2019 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2019.

In the opinion of management, all adjustments, consisting of normal recurring adjustments necessary for a fair statement of the Company’s financial position as of March 31, 2020 and results of operations for the three and six months ended March 31, 2020 and 2019 and cash flows for the six months ended March 31, 2020 and 2019, have been made. The results of operations for the three and six months ended March 31, 2020 are not necessarily indicative of the results of operations that may be expected for subsequent quarters or the year ending September 30, 2020.

8


 

The accompanying consolidated financial statements have been prepared in conformity with GAAP. All amounts in the consolidated financial statements and in the notes to the consolidated financial statements, except per share amounts, are in thousands unless otherwise indicated.

2.

Summary of Significant Accounting Policies

For the Company’s Significant Accounting Policies, please refer to its Annual Report on Form 10-K for the fiscal year ended September 30, 2019. Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”). Other than the adoption of ASC 842 as of October 1, 2019, there were no other significant changes to the Company’s Significant Accounting Policies during the quarter.

Use of Estimates

The preparation of consolidated financial statements in conformity with 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 consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, management’s judgments with respect to its revenue arrangements; valuation of Series 1 nonconvertible preferred stock and stock-based awards; the accrual of research and development expenses, and the accounting for income taxes, including uncertain tax positions and the valuation of net deferred tax assets. Estimates are periodically reviewed in light of changes in circumstances and other facts. The future developments of the COVID-19 pandemic which may directly or indirectly impact the Company’s business include quarantines, border closures, increased border controls, travel restrictions, shelter-in-place orders and shutdowns, business closures, cancellations of public gatherings and other measures. The Company has made estimates of the impact of COVID-19 in the Company’s consolidated financial statements as of March 31, 2020. Actual results could differ from the Company’s estimates.

Recently Adopted Accounting Pronouncements

The Company adopted ASU No. 2016-02, Leases (Topic 842), as of October 1, 2019, using the modified retrospective method under ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. The transition method allows entities to apply the transition requirements at the effective date rather than at the beginning of the earliest comparative period presented. The Company’s reporting for comparative periods is presented in accordance with ASC 840, Leases. Adoption of the new standard resulted in the recording of right of use (“ROU”) assets and lease liabilities of $7,151 and $8,622, respectively. The adoption of the standard did not have a material impact on the Company’s results of operations or cash flows. The Company elected to use the transition package of three practical expedients, which among other things, allowed the Company to carry forward the historical lease classification. The Company has elected, under Topic 842, the further practical expedient not to separate non-lease components from the lease components to which they relate and instead to combine them and account for them as a single lease component. The Company also elected the accounting policy election to keep leases with a term of twelve months or less off the balance sheet and to recognize payments for those leases on a straight-line basis over the lease term.

ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. At the inception of the arrangement, the Company determines if an arrangement is a lease based on an assessment of the terms and conditions of the contract. Operating lease ROU assets and lease liabilities are recognized at the commencement date, and thereafter, if modified, based on the present value of lease payments over the lease term. The lease term includes any renewal or early-termination options that the Company is reasonably assured to exercise. The present value of lease payments is determined by using the interest rate implicit in the lease, if that rate is readily determinable; otherwise, the Company uses its estimated secured incremental borrowing rate for that lease term. The underlying assets of the Company’s leases as of the adoption date consisted of office and laboratory space.

In March 2017, the FASB issued ASU No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”) which requires companies to amend the amortization period for premiums on debt securities with explicit call features to be the period through the earliest call date rather than through the contractual life of the debt instrument. This amendment aims to more closely align the recognition of interest income with the manner in which market participants price such instruments. The Company adopted the new standard on the effective date of October 1, 2019. The adoption of the standard did not have a material impact on the Company’s financial position and results of operations.

9


 

Recently Issued Accounting Pronouncements 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326) (“ASU 2016-13”), which introduces a new methodology for accounting for credit losses on financial instruments, including available-for-sale debt securities. The guidance establishes a new “expected loss model” that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. This amendment is effective for the Company in the fiscal year beginning October 1, 2020. The Company is currently evaluating the potential impact that ASU 2016-13 may have on its financial position and results of operations.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). This standard simplifies various aspects of the income tax accounting guidance in ASC 740, including requirements related to hybrid tax regimes, the tax basis step-up in goodwill obtained in a transaction that is not a business combination, separate financial statements of entities not subject to tax, the intra-period tax allocation exception to the incremental approach, ownership changes in investments, changes from a subsidiary to an equity method investment, interim-period accounting for enacted changes in tax law, and the year-to-date loss limitation in interim-period tax accounting. This amendment is effective for the Company in the fiscal year beginning October 1, 2021; however, early adoption is permitted. The Company is currently in the process of evaluating the impact that ASU 2019-12 may have on its 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 the Company’s consolidated financial statements upon adoption.

3.

Fair Value of Financial Assets and Liabilities

The following tables present information about the Company’s financial assets and liabilities that were subject to fair value measurement on a recurring basis as of March 31, 2020 and September 30, 2019, and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value:

 

 

 

Fair Value Measurements at March 31, 2020 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

69,304

 

 

$

 

 

$

 

 

$

69,304

 

Marketable securities: