Adaptimmune Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Summary of Significant Accounting Policies (Policies)

Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2017

Summary of Significant Accounting Policies

(a)Basis of presentation

The condensed consolidated interim financial statements of Adaptimmune Therapeutics plc and its subsidiaries and other financial information included in this Quarterly Report are unaudited and have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and are presented in U.S. dollars. All significant intercompany accounts and transactions between the Company and its subsidiaries have been eliminated on consolidation.

The unaudited condensed interim financial statements presented in this Quarterly Report should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K filed with the SEC on March 13, 2017 (the “Annual Report”). The balance sheet as of December 31, 2016 was derived from audited consolidated financial statements included in the Company’s Annual Report but does not include all disclosures required by U.S. GAAP. The Company’s significant accounting policies are described in Note 2 to those consolidated financial statements.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from these interim financial statements. However, these interim financial statements include all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary to fairly state the results of the interim period. The interim results are not necessarily indicative of results to be expected for the full year.

Use of estimates in interim financial statements

(b)Use of estimates in interim financial statements

The preparation of interim 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 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.

Going concern

(c)Going concern

Management considers that there are no conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern for a period of at least one year from the date the financial statements are issued. This evaluation is based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued, including:

The Company’s current financial condition, including its liquidity sources;

The Company’s conditional and unconditional obligations due or anticipated within one year;

The funds necessary to maintain the Company’s operations considering its current financial condition, obligations, and other expected cash flows; and

Other conditions and events, when considered in conjunction with the above that may adversely affect the Company’s ability to meet its obligations.

Reclassification

(d)Reclassification

The Company has reclassified certain amounts between research and development and general and administrative expenses in prior periods to conform the presentation to the current period due to misclassification errors. Specifically in the three and six months ended June 30, 2016, legal expenses relating to patents of $87,000 and $149,000 have been reclassified from research and development expenses to general administrative expenses, respectively, and certain property and insurance costs relating to research and development facilities of $724,000 and $1,374,000 have been reclassified from general and administrative expenses to research and development expenses, respectively.

The Company has assessed the materiality of the classification errors in the prior period 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):

	Three months ended June 30, 2016				Six months ended June 30, 2016
	As previously reported		After reclassification		As previously reported		After reclassification
Research and development	$	16,219	$	16,856	$	30,107	$	31,332
General and administrative	6,809		6,172		12,664		11,439

Total operating expenses	$	23,028	$	23,028	$	42,771	$	42,771

Cash, cash equivalents and restricted cash

(e)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 cash and cash equivalents and short-term deposits are held with multiple banks and we monitor the credit rating of those banks. The Company maintains cash balances in excess of amounts insured by the Federal Deposit Insurance Corporation in the U.S. and the UK Government Financial Services Compensation Scheme in the U.K.

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).

	June 30, 2017		December 31, 2016
Cash and cash equivalents	$	121,998	$	158,779
Restricted cash	4,156		4,017

Total cash, cash equivalents, and restricted cash shown in the statement of cash flows	$	126,154	$	162,796

Available-for-sale securities

(f)Available-for-sale securities

At June 30, 2017, the Company has the following investments in available-for-sale debt securities, which are categorized as cash equivalents or marketable securities – available-for-sale debt securities on the balance sheet depending on their maturity at acquisition (in thousands):

	Maturity	Amortized cost		Gross Unrealized Gains		Gross Unrealized Losses			Foreign currency translation adjustment		Aggregate Estimated Fair Value
Cash equivalents:
Corporate debt securities	Less than 3 months	$	2,052	$		$	(63	)	$	62	$	2,051

		$	2,052	$	—	$	(63	)	$	62	$	2,051


Marketable securities – available-for-sale debt securities:
Corporate debt securities	3 months to 1 year	$	73,601	$		$	(1,132	)	$	1,068	$	73,537
Corporate debt securities	1 to 2 years	6,495				(101		)	92		6,486

		$	80,096	$	—	$	(1,233	)	$	1,160	$	80,023

Management determines the appropriate classification of its investments in debt securities at the time of purchase and reevaluates such designation as of each reporting date. The securities are classified as current or non-current marketable securities – available-for-sale debt securities based on the maturity dates and management’s intentions.

At June 30, 2017, the Company has classified all of its available-for-sale debt securities, including those with maturities beyond one year, as current assets on the accompanying consolidated balance sheets based on the highly-liquid nature of these investment securities and because these investment securities are considered available for use in current operations.

The investment in available-for-sale debt securities are measured at fair value at each reporting date. Unrealized gains and losses are excluded from earnings and are reported as a component of comprehensive loss. Realized gains and losses, interest income and amortization of premiums and discounts at acquisition are included in other income (expense), net. There were no realized gains or losses recognized on the maturity of available-for-sale securities during the three and six months ended June 30, 2017 and, as a result, the Company did not reclassify any amount out of accumulated other comprehensive loss for the same period.

At each reporting date, the Company assesses whether each individual investment is impaired, which occurs if the fair value is less than the amortized cost, adjusted for amortization of premiums and discounts at acquisition. If the investment is impaired, the impairment is assessed to determine if it is other than temporary. Impairments judged to be other than temporary are included in other income (expense), net when they are identified. At June 30, 2017, the Company had 37 available-for-sale debt securities in an unrealized loss position with an aggregate fair value of $82,074,000 and an aggregate amount of unrealized losses of $1,296,000. No securities have been in an unrealized loss position for more than one year. At June 30, 2017, these securities are not considered to be other than temporarily impaired because the impairments are not severe, have been for a short duration and are due to normal market and exchange rate fluctuations. Furthermore, the Company does not intend to sell the debt securities and it is not more-likely-than-not that the Company will be required to sell the securities before the recovery of the amortized cost.

The cost of securities sold is based on the specific-identification method. Interest on debt securities is included in interest income.

Our investment in corporate debt securities are subject to credit risk. The Company’s investment policy limits investments to certain types of instruments, such as money market instruments and corporate debt securities, places restrictions on maturities and concentration by type and issuer and specifies the minimum credit ratings for all investments and the average credit quality of the portfolio.

Fair value measurements

(g)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 carrying amounts of the Company’s cash and cash equivalents, short-term deposits, restricted cash, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short-term nature of these instruments. The fair value of marketable securities, which are measured at fair value on a recurring basis is detailed in Note 5, Fair value measurements.

Related parties

(h)Related parties

The Company has historically entered into several agreements with Immunocore Limited (“Immunocore”). During the six months ended June 30, 2017 Immunocore has invoiced the Company in respect of: (i) services provided under a target collaboration agreement (which terminated on March 1, 2017); (ii) costs relating to prosecution of jointly owned patents; and (iii) property rents.

During the six months ended June 30, 2017, all of the Company’s U.K-based research and development and corporate staff moved into the Company’s new building at Milton Park, Oxfordshire (“Building 60”), which comprises laboratory and office space. Consequently, the Company’s lease from Immunocore of premises formerly used for research and development terminated on June 1, 2017 and the Company received $550,000 in relation to leasehold improvements as provided for under the lease. The lease of the Company’s former corporate office premises was assigned to Immunocore effective from July 1, 2017 in a transaction on arms-length terms.

As of the closing of the Company’s registered direct offering of its American Depositary Shares on April 10, 2017, Immunocore ceased to hold 5% or more of the Company’s shares.

New accounting pronouncements

(i)New accounting pronouncements

Adopted in the period

Intra-Entity Transfers of Assets Other Than Inventory

The Company has adopted Accounting Standards Update (“ASU”) ASU 2016-16 - Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory issued by the Financial Accounting Standards Board (“FASB”) in October 2016, 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 has been adopted on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption prospectively to all arrangements entered into or materially modified after January 1, 2017. The adoption of this guidance did not have any impact on the financial position, results of operations or cash flows.

To be adopted in future periods

Revenue from contracts with customers

In May 2014, the FASB issued ASU 2014-09 - Revenue from Contracts with Customers (“ASU 2014-09”) 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 its collaboration and license agreement with GSK (the “GSK Collaboration and License Agreement”). Based on our preliminary assessment, we have identified the performance obligations within the contract and determined the transaction price, which is allocated to the performance obligations and recognized over time. Several issues remain to be resolved, which may have a material effect on the Company’s financial statements therefore the quantitative effect of adopting ASU 2014-09 cannot be reasonably estimated at this time. Once our assessment is complete, the Company will determine the transition method which will be applied and evaluate the disclosure requirements. The Company continues to monitor additional changes, modifications, clarifications or interpretations undertaken by the FASB, which may impact its assessment.

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.