Summary of significant accounting policies

9 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

Summary of significant accounting policies

2. Summary of significant accounting policies 

(a) Basis of presentation

The accompanying unaudited condensed consolidated financial statements are presented in United States (“U.S.”) dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, these consolidated financial statements do not include all of the information and footnotes required for complete consolidated financial statements and 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 for the year ended December 31, 2018, filed with the Securities and Exchange Commission on March 7, 2019.

In management’s opinion, the unaudited condensed consolidated financial statements reflect all adjustments (including reclassifications and normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2019, and results of operations and cash flows for all periods presented. The interim results presented are not necessarily indicative of results that can be expected for a full year.

(b) Use of estimates and assumptions

The preparation of 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 and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting period. Significant areas requiring management estimates include valuation of stock options and restricted stock units, amortization and depreciation, determination of the fair values of assets and liabilities acquired in the acquisition of net assets of Former Neoleukin, accrual of expenses, valuation allowance for deferred income taxes, and contingencies. Actual results could differ from those estimates.

(c) Leases

At contract inception, the Company determines if the contract is a lease or contains a lease. Operating leases are recorded as operating lease right-of-use assets, operating lease liabilities and non-current operating lease liabilities. Finance leases are recorded as finance lease right-of-use assets, finance lease liabilities and non-current finance lease liabilities.

Right-of-use assets and lease liabilities are recognized on the lease commencement date based on the estimated present value of lease payments over the lease term. To determine the present value of the lease payments, the Company utilizes its estimated incremental borrowing rate based on information available at the lease commencement date as the rate implicit in the lease is not readily determinable. The right-of-use assets are recorded net of any lease incentives received.

For leases of office space with a lease term of less than 12 months and which do not include an option to purchase the underlying asset, the Company has elected to recognize the lease payments in the statement of operations on a straight-line basis over the lease term.

For leases of office space, the Company has elected to not separate the lease components from the non-lease components.

(d) Asset acquisitions

At the time of acquisition, the Company determines if a transaction should be accounted for as a business combination or acquisition of assets. The Company accounted for its transaction with Neoleukin as an asset acquisition as substantially all the value of the acquisition is concentrated in one identifiable intangible asset.

For an acquisition of assets, the cost of acquiring the asset group, including transaction costs, is allocated to the acquired assets and assumed liabilities based on their relative fair values without giving rise to goodwill. Acquired in-process research and development assets are expensed if management determines that the assets do not have an alternative future use. Other long-lived intangible assets are recorded at the acquired cost and amortized using the straight-line method over their estimated useful life.

The intangible asset is tested for impairment when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. The Company recognizes an impairment loss when carrying amount is not recoverable and the estimated fair value of the intangible asset is less than its carrying value.

(e) Accounting for stock-based compensation

The Company has issued stock options and restricted stock units (“RSUs”). The Company measures the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of such award will be recognized over the period during which services are provided in exchange for the award, generally the vesting period. The Company accounts for forfeitures as they occur. All share-based payments to employees are recognized in the consolidated financial statements based upon their respective grant date fair values.

The Company initially measures the compensation expense of stock-based awards granted to consultants using the grant date fair value of the award. Compensation expense is recognized over the period during which services are rendered by such consultants. At the end of each financial reporting period prior to completion of services being rendered, the compensation expense related to these awards is remeasured using the then current fair value of the Company’s common stock for RSUs, or based upon updated assumptions in the Black-Scholes option pricing model for stock option awards.

The Company estimates the fair value of options granted using the Black-Scholes option pricing model. This approximation uses assumptions regarding a number of inputs that requires management to make significant estimates and judgments. The expected volatility assumption is based on industry peer information and the Company expects to continue to do so until it has adequate historical volatility of its common stock. Additionally, because the Company has no significant history to calculate the expected term, the simplified method calculation is used.

The fair value of each RSU is measured using the closing price of the Company’s common stock on the date of grant.

(f) Restructuring costs

The Company accounts for restructuring costs in accordance with ASC 420, Exit or Disposal Cost Obligations. ASC 420 specifies that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, except for a liability where employees are required to render service until they are terminated in order to receive termination benefits and will be retained to render service beyond the minimum retention period. A liability for such one-time termination benefits shall be measured initially at the communication date based on the fair value of the liability as of the termination date and recognized ratably over the future service period.

The charges that the Company expects to incur in connection with the restructuring are subject to a number of assumptions, and actual results may differ materially. The Company may also incur additional costs not currently contemplated due to events that may occur as a result of, or that are associated with, the restructuring plan.

(g) Revenue recognition

The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements subject to the scope of Topic 606, 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; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and identifies performance obligations that are distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to each performance obligation when (or as) the performance obligation is satisfied.

The Company’s only source of revenue was amounts earned under a license and collaboration agreement entered into and subsequently terminated in 2018.

(h) Segment reporting

The Company operates in one segment, the research and development of de novo protein therapeutics using sophisticated computational algorithms and methods to address unmet medical needs in oncology, inflammation, and autoimmunity. The Company’s operations and its assets are mostly held in the United States with an immaterial amount of long-lived assets in Canada.

(i) Net loss per common stock

Basic net loss per common stock is computed by dividing net loss by the weighted-average number of common stock outstanding during the period. Diluted net loss per common stock is determined using the weighted-average number of common stock outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options, restricted stock units and the conversion of the non-voting convertible preferred stock. In periods where losses are reported, the weighted-average number of common stock outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.

(j) Recently issued and recently adopted accounting standards

The Company adopted ASU 2016-02 “Leases (Topic 842)” effective January 1, 2019. ASU 2016-02 requires lessees to recognize right-of-use assets and lease liabilities for those leases with a lease term of greater than 12 months. The Company used a modified retrospective approach and elected to use the optional transition method to recognize a cumulative-effect adjustment to the opening balance of retained deficit on January 1, 2019. Consequently, comparative periods will continue to be accounted for in accordance with the current lease standard (Topic 840) and the disclosures will be in accordance with ASC 840. The Company elected to apply the “package of practical expedients”, which permits it not to reassess under ASU 2016-02 its previous conclusions about lease identification, lease classification and initial direct costs and the practical expedient to not separate non-lease components from the associated lease component for the lease of office space. The adoption of ASU 2016-02 resulted in the recognition of right-of-use assets of $0.2 million and lease liabilities of $0.5 million and derecognition of the deferred rent liability of $0.3 million for the Company’s operating leases in the consolidated balance sheets and did not have a material impact to the Company’s consolidated statements of operations or cash flows.

The Company adopted ASU 2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” on January 1, 2019. ASU 2018-13 eliminated, added and modified certain disclosure requirements for fair value measurements. The disclosure of the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy were eliminated, but disclosures for Level 3 fair value measurements were modified and added to. The adoption of ASU 2018-13 did not have a material impact on the Company’s consolidated financial statements.