GENOCEA BIOSCIENCES, INC. - 10-K filing on 2020-02-13

Summary of significant accounting policies (Policies)

12 Months Ended

Dec. 31, 2019

Basis of presentation and principles of consolidation

The accompanying consolidated financial statements include those accounts of the Company and a wholly-owned subsidiary after elimination of all intercompany accounts and transactions. The Company operates as one segment, which is discovering, researching, developing and commercializing novel cancer immunotherapies.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company’s management evaluates its estimates, which include, but are not limited to, estimates related to clinical trial accruals, estimates related to prepaid and accrued research and development expenses, stock-based compensation expense, and warrants to purchase redeemable securities. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.

Cash and cash equivalents

The Company considers only those investments which are highly liquid, readily convertible to cash and that mature within three months from date of purchase to be cash equivalents. The carrying values of money market funds approximate fair value due to their short-term maturities

Prepaid Research and Development

Prepaid research and development

Cash advances paid by the Company prior to receipt of preclinical or clinical material and preclinical and clinical trial services are recorded as prepaid research and development costs. The prepayments are applied against future research and development costs. The Company expects the carrying value of prepaid research and development costs to be fully realized.

Property and equipment

Property and equipment is stated at cost, less accumulated depreciation. Maintenance and repairs that do not improve or extend the lives of the respective assets are expensed to operations as incurred, while costs of major additions and betterments are capitalized. Upon disposal, the related cost and accumulated depreciation is removed from the accounts and any resulting gain or loss is included in the statements of operations and comprehensive loss. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets, which are as follows:



Asset		Estimated useful life
Laboratory equipment		5
Furniture and office equipment		5
Computer hardware and software		3-5 years
Leasehold improvements		Shorter of the useful life or remaining lease term

Development of Software for Internal Use

Development of software for internal use

The Company accounts for the costs of software developed or obtained for internal use in accordance with ASC 350-40, Internal-Use Software (“ASC 350-40”). Costs of materials, consultants, payroll, and payroll-related costs for employees incurred in developing internal-use software are capitalized as incurred. These costs are included in property and equipment, net on the consolidated balance sheet. Costs incurred during the preliminary project and post-implementation stages are charged to expense. Amortization is recorded using the straight-line method over the estimated useful lives of the respective asset which is three to five years.

Impairment of long-lived assets

The Company evaluates long-lived assets for potential impairment when events or changes in circumstances indicate the carrying value of the assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the asset, the assets are written down to their estimated fair values. Long-lived assets to be disposed are reported at the lower of the carrying amount or fair value less cost to sell. The Company recognized no asset impairment losses in the years ended December 31, 2019 and 2018.

Deferred financing costs

Offering costs primarily consist of direct and incremental expenses incurred related to debt and equity financing in accordance with ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The Company presents debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction of the carrying value of the debt liability, consistent with the accounting treatment of debt discounts in accordance with ASU 2015-03. The amortization of deferred debt financing costs follows the effective interest rate method.

Fair value of financial instruments

The Company has certain financial assets and liabilities recorded at fair value which have been classified as Level 1, 2 or 3 within the fair value hierarchy as described in the accounting standards for fair value measurements.


•	Level 1—Fair values are determined by utilizing quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access;


•	Level 2—Fair values are determined by utilizing quoted prices for similar assets and liabilities in active markets or other market observable inputs such as interest rates, yield curves and foreign currency spot rates; and


•	Level 3—Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

The Company's financial assets consist of cash equivalents and the Company's financial liabilities consist of a warrant liability.

The fair value of the Company’s cash equivalents is determined using quoted prices in active markets. The Company's cash equivalents consist of money market funds that are classified as Level 1.

The fair value of the Company’s warrant liability is determined using a Monte Carlo simulation. See Note 9. Warrants for assumptions used and methodologies utilized in calculating the estimated fair value. The Company’s warrant liability is classified as Level 3.

Leases

At the inception of the contract, the Company determines if an arrangement is a lease and has a lease term greater than 12 months. A lease qualifies as a finance lease if any of the following criteria are met at the inception of the lease: (i) there is a transfer of ownership of the leased asset to the Company by the end of the lease term, (ii) the Company holds an option to purchase the leased asset that it is reasonably certain to exercise, (iii) the lease term is for a major part of the remaining economic life of the leased asset, (iv) the present value of the sum of lease payments equals or exceeds substantially all of the fair value of the leased asset, or (v) the nature of the leased asset is specialized to the point that it is expected to provide the lessor no alternative use at the end of the lease term. All other leases are recorded as operating leases. All leases that are concluded to be in accordance with ASU No. 2018-11, Leases (Topic 842): Targeted Improvements are included in lease right-of-use (“ROU”) assets and lease liabilities in the consolidated balance sheets.

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. Lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses an estimate of its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The operating lease ROU asset is reduced by deferred lease payments and unamortized lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for fixed lease payments on operating leases are recognized over the expected term on a straight-line basis, while lease expense for fixed lease payments on financing leases are recognized using the effective interest method over the lease term. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. The non-lease components generally consist of common area maintenance that is expensed as incurred.

Research and development expenses

Research and development costs are expensed as incurred. The Company has entered into various research and development contracts with research institutions and other companies. Nonrefundable advanced payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed or when the goods have been received rather than when the payment is made. When evaluating the adequacy of the related accrued liabilities, the Company analyzes progress of the studies and/or services performed, including the phase or completion of events, invoices received and contracted costs.

Stock-based compensation expense

The Company accounts for its stock-based compensation to employees in accordance with ASC 718, Compensation-Stock Compensation and adjusts the amounts recorded each period to reflect actual forfeitures.

Effective January 1, 2019, the Company recognizes stock-based compensation expense for stock-based awards, including grants of stock options and restricted stock, made to non-employee consultants based on the estimated fair value on the date of grant, over the requisite service period. Through December 31, 2018, the Company recognized stock-based compensation expense for stock-based awards granted to non-employee consultants based on the fair value of the awards on each date on which the awards vest. Stock-based compensation expense was recognized over the vesting period, provided that services were rendered by such non-employee consultants during that time. At the end of each financial reporting period, the fair value of unvested options was re-measured using the then-current fair value of the common stock of the Company and updated assumptions in the Black-Scholes option-pricing model.

For awards that vest or begin vesting upon achievement of a performance condition, the Company recognizes stock-based compensation expense when achievement of the performance condition is deemed probable using an accelerated attribution model over the implicit service period. Certain of the Company’s awards that contain performance conditions also require the Company to estimate the number of awards that will vest, which the Company estimates when the performance condition is deemed probable of achievement.

Income taxes

The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates in effect for the year in which these temporary differences are expected to recovered or settled. Valuation allowances are provided if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Basic and diluted net loss per share

Basic net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding for the period. For periods in which the Company has reported net losses, diluted net loss per share is the same as basic net loss per share, because dilutive common shares are not assumed to have been issued if their effect is antidilutive. The Company reported a net loss for the years ended December 31, 2019 and 2018.

Recent accounting pronouncements

New Accounting Pronouncements

The following new accounting pronouncements were adopted by the Company on January 1, 2019:

In February 2016, the FASB issued ASU No. 2016-02, Leases, which replaced existing guidance in ASC 840, “Leases”, and in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. The new standard establishes a ROU that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The adoption of ASC 842 resulted in the Company recognizing ROU assets and related operating lease liabilities of $1.7 million and $1.8 million, respectively, in the consolidated balance sheet as of January 1, 2019. The Company used the modified retrospective method of adoption, with January 1, 2019 as the effective date of initial application. The Company elected the short-term lease recognition exemption for all leases that qualify. The Company also elected the package of practical expedients for leases that commenced prior to January 1, 2019, allowing it not to reassess (i) whether any expired or existing contracts contain leases, (ii) the lease classification for any expired or existing leases and (iii) the initial indirect costs for any existing leases.

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share Based Payment Accounting. The new standard largely aligns the accounting for share-based payment awards issued to employees and nonemployees by expanding the scope of ASC 718 to apply to nonemployee share-based transactions, as long as the transaction is not effectively a form of financing. The Company adopted the provisions of ASU No. 2018-17 effective January 1, 2019, which did not have a material impact on the Company's consolidated financial statements for the year ended December 31, 2019.

The following new accounting pronouncements have been issued but are not yet effective as of December 31, 2019:

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities. The new standard is effective beginning January 1, 2020. Based on the composition of the Company's investment portfolio, which includes only money market funds, and the insignificance of the Company's other financial assets, current market conditions, and historical credit loss activity, the Company does not expect the adoption of this standard to have a material impact on the consolidated financial position and results of operations and related disclosures.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The new standard requires public entities to disclose certain new information and modifies some disclosure requirements. The new standard is effective beginning January 1, 2020. The Company does not expect that the adoption of this standard will have a material impact on its disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to defer and recognize as an asset. The new standard is effective beginning January 1, 2020. The Company does not expect that the adoption of this standard will have a material impact on its consolidated financial position and results of operations and related disclosures.