SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (Policies)

9 Months Ended

Sep. 30, 2016

The accompanying unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), reflect the accounts of Sarepta Therapeutics, Inc. and its wholly-owned subsidiaries. All inter-company transactions between and among its consolidated subsidiaries have been eliminated. Management has determined that the Company operates in one segment: the development of pharmaceutical products. The information included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Estimates and Uncertainties

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenue, expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the valuation of stock-based awards, research and development expenses and income taxes.

Revenue Recognition

The Company recognizes revenue when all of the following criteria are met:

persuasive evidence of an arrangement exists;

delivery has occurred or services have been rendered;

price to the customer is fixed or determinable; and

collectability is reasonably assured.

Revenue from product sales is recognized when title and risk of loss have passed to the customer and is recorded net of applicable reserves for discounts and allowances.

The Company establishes reserves for various government rebate programs and co-payment assistance. Reserves established for these discounts and allowances are classified as either reductions of accounts receivable or a liability. These reserves are based on estimates of the amounts earned or to be claimed on the related sales.

Additionally, the Company also expects to maintain certain customer service contracts with distributors and other customers in the distribution channel that will provide inventory management, data and distribution services, which generally will be reflected as a reduction of revenue. To the extent the Company can demonstrate a separable benefit and fair value for these services, the Company will classify these payments in selling, general and administrative expenses.

Inventory

Inventories are stated at the lower of cost and net realizable value with cost determined on a first-in, first-out basis. The Company capitalizes inventory costs associated with products upon regulatory approval when future commercialization is considered probable and the future economic benefit is expected to be realized. Drug products to be used in clinical development programs are included in inventory and charged to research and development expense when the product enters the research and development process and no longer can be used for commercial purposes.

The following table summarizes the components of the Company’s inventory for the period indicated:


	As of September 30, 2016
	(in thousands)
Raw materials	$	2,712
Finished goods		209
Total inventory	$	2,921

The Company periodically reviews its inventories for excess amounts or obsolescence and writes down obsolete or otherwise unmarketable inventory to its estimated net realizable value. Additionally, though the Company’s product is subject to strict quality control and monitoring which it performs throughout the manufacturing processes, certain batches or units of product may not meet quality specifications. As a result, the Company will record a charge to cost of sales to write down any unmarketable inventory to its estimated net realizable value.

Intangible Assets

The Company’s intangible assets consist of an in-licensed right and patent costs, which are stated in the Company’s consolidated balance sheets net of accumulated amortization and impairments, if applicable.

The in-licensed right relates to the license agreement with the University of Western Australia (“UWA”). As a result of the FDA approval and the subsequent commercial sale of EXONDYS 51, as defined in the Amended and Restated UWA License Agreement (defined in Note 3), the Company was obligated to pay a $1.0 million sales milestone to UWA and, accordingly, has recorded an in-licensed right. The in-licensed right will be amortized on a straight-line basis over the remaining life of the related patent because the life of the related patent reflects the expected time period that the Company will benefit from the in-licensed right. The amortization of the in-licensed right will be recorded as cost of goods sold in the Company’s consolidated statements of operations and comprehensive loss.

The following table summarizes the components of intangible assets for the period indicated:

	As of September 30, 2016
	(in thousands)
Patent costs	$	10,165
In-licensed right		1,000
Intangible assets, gross	$	11,165
Less: accumulated amortization		(3,054	)
Intangible assets, net	$	8,111

There have not been any other material changes to the Company’s accounting policies as of September 30, 2016.

Recent Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments”. The amendments in this update clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU No. 2016-15 will be effective for fiscal years beginning after December 15, 2017, with early adoption permitted. As of September 30, 2016, the Company has not elected to early adopt this guidance and does not expect the adoption of this guidance to have any impact on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting”. The amendments in this update simplify several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU No. 2016-09 will be effective for fiscal years beginning after December 15, 2016, with early adoption permitted. As of September 30, 2016, the Company has not elected to early adopt this guidance but determined that the adoption of this standard will not have any impact on the Company’s financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which supersedes Topic 840, “Leases”. Under the new guidance, a lessee should recognize assets and liabilities that arise from its leases and disclose qualitative and quantitative information about its leasing arrangements. ASU No. 2016-02 will be effective for fiscal years beginning after December 15, 2018, with early adoption permitted. As of September 30, 2016, the Company has not elected to early adopt this guidance or determined the effect that the adoption of this guidance will have on its consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”. The new standard applies only to inventory for which cost is determined by methods other than last-in, first-out and the retail inventory method, which includes inventory that is measured using first-in, first-out or average cost. Inventory within the scope of this standard is required to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard will be effective for fiscal years beginning after December 15, 2016. As of September 30, 2016, the Company has not elected to early adopt this guidance but determined that the adoption of this standard will not have any impact on the Company’s financial statements.

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. This update requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued and to provide related disclosures. ASU No. 2014-15 will be effective for the fiscal years beginning after December 15, 2016, with early adoption permitted. As of September 30, 2016, the Company has not elected to early adopt this guidance, and based on the Company's financial condition as of the date these financial statements were issued or available for issuance, the Company does not expect the adoption of this guidance to have any impact on the current period financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, “Revenue Recognition”. Under the new guidance, a company is required to recognize revenue when it transfers goods or renders services to customers at an amount that it expects to be entitled to in exchange for these goods or services. The new standard allows for either a full retrospective with or without practical expedients or a retrospective with a cumulative catch upon adoption transition method. This guidance is effective for the fiscal years beginning after December 15, 2016, with early adoption not permitted. In August 2015, the FASB issued ASU No. 2015-14, “Deferral of the Effective Date”, which states that the mandatory effective date of this new revenue standard will be delayed by one year, with early adoption only permitted in fiscal year 2017. During the second quarter of 2016, the FASB issued three amendments to the new revenue standard to address some application questions: ASU No. 2016-10, “Identifying Performance Obligations and Licensing”, ASU No. 2016-11, “Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09”, and ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients”. These three amendments will be effective upon adoption of Topic 606. As of September 30, 2016, the Company has not yet determined which adoption method it will utilize or the effect that the adoption of this guidance will have on its consolidated financial statements.