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Restatement of Previously Issued Financial Statements | 9 Months Ended
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Mar. 31, 2022
Restatement of Previously Issued Financial Statements | Note 1. Restatement of Previously Issued Financial Statements MEI Pharma, Inc. (the "Company") has restated our previously issued financial statements and related disclosures as of and for the three and nine months ended March 31, 2021 included in our original Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission (the "SEC") on May 6, 2021 (the "Original Quarterly Report"), in order to correct errors resulting from the incorrect application of generally accepted accounting principles relating to revenue recognition as it pertains to the application of the cost-to-cost method for revenue recognition. The applicable Notes to Condensed Financial Statements were also updated to reflect the restatement. Our revised accounting for revenue recognition did not have any effect on our previously reported operating expenses or cash and short-term investments. Impact of Restatement We identified and corrected certain errors in the manner in which we recognized revenue from our License, Development and Commercialization Agreement with Kyowa Kirin Company ("KKC") (the "KKC Commercialization Agreement") with the result that revenue was overstated in some quarters and understated in other quarters in our financial statements during 2020 and 2021. The errors relate to the appropriate timing and amounts of revenue recognized at a point in time, including revenue from a historical cumulative catch-up adjustment and pass through services, and over time under the cost-to-cost method associated with the KKC Commercialization Agreement (Note 3), including correction of the allocation of variable consideration between the various development service performance obligations. As a result, we determined that a material error in the financial statements had occurred which required a restatement of the March 31, 2021 financial statements included in the Original Quarterly Report. The cumulative effect of these errors as of December 31, 2021 was a misstatement of deferred revenue and accumulated deficit of $3.9 million. The following tables reflect the impact of the restatement adjustments to the specific line items presented in our previously reporte d financial statements for the periods indicated. The amounts originally reported were derived from our Original Quarterly Report (in thousands, except per share amounts):
|  | March 31, 2021 |
|  | As Originally Reported |  |  | Adjustments |  |  | As Restated |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |  |
Deferred revenue |  | $ | 19,143 |  |  | $ | (15,064 | ) |  | $ | 4,079 |
Total current liabilities |  |  | 33,376 |  |  |  | (15,064 | ) |  |  | 18,312 |
Deferred revenue, long-term |  |  | 70,734 |  |  |  | 4,298 |  |  |  | 75,032 |
Total liabilities |  |  | 141,160 |  |  |  | (10,766 | ) |  |  | 130,394 |
Stockholders’ equity: |  |  |  |  |  |  |  |  |
Accumulated deficit |  |  | (322,093 | ) |  |  | 10,766 |  |  |  | (311,327 | )
Total stockholders’ equity |  |  | 44,962 |  |  |  | 10,766 |  |  |  | 55,728 |
|  | Three Months Ended March 31, 2021 |
|  | As Originally Reported |  |  | Adjustments |  |  | As Restated |
Revenue |  | $ | 2,418 |  |  | $ | 5,691 |  |  | $ | 8,109 |
Loss from operations |  |  | (22,086 | ) |  |  | 5,691 |  |  |  | (16,395 | )
Net loss |  |  | (31,313 | ) |  |  | 5,691 |  |  |  | (25,622 | )
Net loss: |  |  |  |  |  |  |  |  |
Basic |  |  | (31,313 | ) |  |  | 5,691 |  |  |  | (25,622 | )
Diluted |  |  | (31,313 | ) |  |  | 5,691 |  |  |  | (25,622 | )
Net loss per share: |  |  |  |  |  |  |  |  |
Basic |  |  | (0.28 | ) |  |  | 0.05 |  |  |  | (0.23 | )
Diluted |  |  | (0.28 | ) |  |  | 0.05 |  |  |  | (0.23 | )
|  | Nine Months Ended March 31, 2021 |
|  | As Originally Reported |  |  | Adjustments |  |  | As Restated |
Revenue |  | $ | 15,419 |  |  | $ | 11,923 |  |  | $ | 27,342 |
Loss from operations |  |  | (56,873 | ) |  |  | 11,923 |  |  |  | (44,950 | )
Net loss |  |  | (44,859 | ) |  |  | 11,923 |  |  |  | (32,936 | )
Net loss: |  |  |  |  |  |  |  |  |
Basic |  |  | (44,859 | ) |  |  | 11,923 |  |  |  | (32,936 | )
Diluted |  |  | (65,166 | ) |  |  | 11,923 |  |  |  | (53,243 | )
Net loss per share: |  |  |  |  |  |  |  |  |
Basic |  |  | (0.40 | ) |  |  | 0.11 |  |  |  | (0.29 | )
Diluted |  |  | (0.57 | ) |  |  | 0.10 |  |  |  | (0.47 | )
|  | Nine Months Ended March 31, 2021 |
|  | As Originally Reported |  |  | Adjustments |  |  | As Restated |
Statement of Stockholders' Equity |  |  |  |  |  |  |  |  |
Accumulated deficit |  | $ | (322,093 | ) |  | $ | 10,766 |  |  | $ | (311,327 | )
Total stockholders' equity |  |  | 44,962 |  |  |  | 10,766 |  |  |  | 55,728 |
|  | Nine Months Ended March 31, 2021 |
|  | As Originally Reported |  |  | Adjustments |  |  | As Restated |
Statement of Cash Flows |  |  |  |  |  |  |  |  |
Cash flows from operating activities: |  |  |  |  |  |  |  |  |
Net loss |  | $ | (44,859 | ) |  | $ | 11,923 |  |  | $ | (32,936 | )
Changes in operating assets and liabilities: |  |  |  |  |  |  |  |  |
Deferred revenue |  |  | 7,377 |  |  |  | (11,923 | ) |  |  | (4,546 | )
Net cash used in operating activities |  |  | (20,707 | ) |  |  | — |  |  |  | (20,707 | )
Note 1A. The Company and Summary of Significant Accounting Policies The Company We are a late-stage pharmaceutical company committed to the development and commercialization of novel cancer therapies intended to improve outcomes for patients. Our portfolio of drug candidates includes three clinical-stage assets, including zandelisib (f/k/a ME-401), currently in multiple ongoing clinical studies intended to support marketing applications with the U.S. Food and Drug Administration (“FDA”) and other regulatory authorities globally. Our common stock is listed on the Nasdaq Capital Market under the symbol “MEIP.” Clinical Development Programs We build our pipeline by licensing or acquiring promising cancer agents and creating value in programs through development, commercialization and strategic partnerships, as appropriate. Our objective is to leverage the mechanisms and properties of our pipeline drug candidates to optimize the balance between efficacy and tolerability to meet the needs of patients with cancer. Our drug candidate pipeline includes: • Zandelisib (formerly known as ME-401), an oral phosphatidylinositol 3-kinase (“PI3K”) delta inhibitor; • Voruciclib, an oral cyclin-dependent kinase (“CDK”) inhibitor; and • ME-344, a mitochondrial inhibitor targeting the oxidative phosphorylation (“OXPHOS”) complex. The results of pre-clinical studies and completed clinical trials are not necessarily predictive of future results, and our current drug candidates may not have favorable results in later studies or trials. The commercial opportunity will be reduced or eliminated if competitors develop and market products that are more effective, have fewer side effects or are less expensive than our drug candidates. We will need substantial additional funds to progress the clinical trial programs for the drug candidates zandelisib, voruciclib, and ME-344, and to develop new compounds. The actual amount of funds that will be needed are determined by a number of factors, some of which are beyond our control. Negative U.S. and global economic conditions may pose challenges to our business strategy, which relies on funding from the financial markets or collaborators. Liquidity We have accumulated losses of $358.1 million since inception and expect to incur operating losses and generate negative cash flows from operations for the foreseeable future. As of March 31, 2022, we had $169.0 million in cash and cash equivalents and short-term investments. We believe that these resources will be sufficient to meet our obligations and fund our liquidity and capital expenditure requirements for at least the next 12 months from the issuance of these financial statements. Our current business operations are focused on continuing the clinical development of our drug candidates. Changes to our research and development plans or other changes affecting our operating expenses may affect actual future use of existing cash resources. Our research and development expenses are expected to increase in the foreseeable future. We cannot determine with certainty costs associated with ongoing and future clinical trials or the regulatory approval process. The duration, costs and timing associated with the development of our product candidates will depend on a variety of factors, including uncertainties associated with the results of our clinical trials. To date, we have obtained cash and funded our operations primarily through equity financings and license agreements. In order to continue the development of our drug candidates, at some point in the future we expect to pursue one or more capital transactions, whether through the sale of equity securities, debt financing, license agreements or entry into strategic partnerships. There can be no assurance that we will be able to continue to raise additional capital in the future. Basis of Presentation The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the accompanying financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying financial statements reflect all adjustments (consisting of normal recurring adjustments) that are necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented. The accompanying unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto as of and for the fiscal year ended June 30, 2021, included in our Amended Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on May 23, 2022 (the "2021 Amended Annual Report"). Interim results are not necessarily indicative of results for a full year. Reclassifications Certain reclassifications have been made to the prior year financial statements to conform to the current year financial statement presentation of unbilled receivables and cash flows from financing activities. These changes did not impact previously reported net loss, loss per share, stockholders’ equity, total assets or cash flows. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. We use estimates that affect the reported amounts (including assets, liabilities, revenues and expenses) and related disclosures. Actual results could materially differ from those estimates. Revenue Recognition Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers (“Topic 606”) We recognize revenue when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. For enforceable contracts with our customers, we first identify the distinct performance obligations – or accounting units – within the contract. Performance obligations are commitments in a contract to transfer a distinct good or service to the customer. Payments received under commercial arrangements, such as licensing technology rights, may include non-refundable fees at the inception of the arrangements, milestone payments for specific achievements designated in the agreements, and royalties on the sale of products. At the inception of arrangements that include milestone payments, we use judgment to evaluate whether the milestones are probable of being achieved and we estimate the amount to include in the transaction price using the most likely method. If it is probable that a significant revenue reversal will not occur, the estimated amount is included in the transaction price. Milestone payments that are not within our or the licensee’s control, such as regulatory approvals, are not included in the transaction price until those approvals are received. At the end of each reporting period, we re-evaluate the probability of achievement of development milestones and any related constraint and, as necessary, we adjust our estimate of the overall transaction price. Any adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment. We develop estimates of the stand-alone selling price for each distinct performance obligation. Variable consideration that relates specifically to our efforts to satisfy specific performance obligations is allocated entirely to those performance obligations. Other components of the transaction price are allocated based on the relative stand-alone selling price, over which management has applied significant judgment. We develop assumptions that require judgment to determine the stand-alone selling price for license-related performance obligations, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical, regulatory and commercial success. We estimate stand-alone selling price for research and development performance obligations by forecasting the expected costs of satisfying a performance obligation plus an appropriate margin. In the case of a license that is a distinct performance obligation, we recognize revenue allocated to the license from non-refundable, up-front fees at the point in time when the license is transferred to the licensee and the licensee can use and benefit from the license. For licenses that are bundled with other distinct or combined obligations, we use judgment to assess the nature of the performance obligation to determine whether the performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. If the performance obligation is satisfied over time, we evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. From time to time, we perform additional services for KKC at their request, the costs of which are fully reimbursed to us. We record the reimbursement of such pass through services as revenue at 100% of reimbursed costs as control of the additional services for KKC is transferred at the time we incur such costs. The costs we incur for these additional services are incurred solely for the benefit of KKC and have no alternative use to us. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. Revenue is recorded proportionally as costs are incurred. We generally use the cost-to-cost measure of progress because it best depicts the transfer of control to the customer which occurs as we incur costs. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation (an “input method” under Topic 606). We use judgment to estimate the total cost expected to complete the research and development performance obligations, which include subcontractors’ costs, labor, materials, other direct costs and an allocation of indirect costs. We evaluate these cost estimates and the progress each reporting period and, as necessary, we adjust the measure of progress and related revenue recognition. For arrangements that include sales-based or usage-based royalties, we recognize revenue at the later of (i) when the related sales occur or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, we have not recognized any sales-based or usage-based royalty revenue from license agreements. We recognized revenue associated with the following license agreements (in thousands):
|  | Three Months Ended March 31, |  |  | Nine Months Ended March 31, |
|  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
|  |  |  |  | (As Restated) |  |  |  |  |  | (As Restated) |
KKC License Agreements |  | $ | 9,694 |  |  | $ | 8,012 |  |  | $ | 29,283 |  |  | $ | 26,902 |
Helsinn License Agreement |  |  | — |  |  |  | 97 |  |  |  | — |  |  |  | 440 |
|  | $ | 9,694 |  |  | $ | 8,109 |  |  | $ | 29,283 |  |  | $ | 27,342 |
Timing of Revenue Recognition: |  |  |  |  |  |  |  |  |  |  |  |
Development services performed over time |  | $ | 9,694 |  |  | $ | 7,556 |  |  | $ | 26,970 |  |  | $ | 25,559 |
Pass through services at a point in time |  |  | — |  |  |  | 553 |  |  |  | 2,313 |  |  |  | 1,783 |
|  | $ | 9,694 |  |  | $ | 8,109 |  |  | $ | 29,283 |  |  | $ | 27,342 |
The KKC Commercialization Agreement (Note 3) included other distinct performance obligations satisfied over time, and accord ingly we recognized $29.3 million and $26.9 million related to our progress toward satisfying those obligations during the nine months ended March 31, 2022 and 2021, respectively. Based on the characteristics of the Helsinn License Agreement (Note 3), we recognized revenue based on the extent of progress towards completion of the performance obligations. The Helsinn License Agreement was terminated in November 2021. Contract Balances Contract liabilities are included in “Deferred revenue” and “Defer red revenue long-term”. The following table presents changes in accounts receivable, unbilled receivables, and contract liabilities accounted for under Topic 606 during the nine months ended March 31, 2022 and 2021 (in thousands):
|  | Nine Months Ended March 31, |
|  | 2022 |  |  | 2021 |
|  |  |  |  | (As Restated) |
Accounts receivable |  |  |  |  |  |
Accounts receivable, beginning of period |  | $ | — |  |  | $ | 83 |
Amounts billed |  |  | 45,927 |  |  |  | 18,267 |
Payments received |  |  | (45,927 | ) |  |  | (18,350 | )
Accounts receivable, end of period |  | $ | — |  |  | $ | — |
Unbilled receivables |  |  |  |  |  |
Unbilled receivables, beginning of period |  | $ | 7,582 |  |  | $ | 2,858 |
Billable amounts |  |  | 46,791 |  |  |  | 22,841 |
Amounts billed |  |  | (45,927 | ) |  |  | (18,267 | )
Unbilled receivables, end of period |  | $ | 8,446 |  |  | $ | 7,432 |
Contract liabilities |  |  |  |  |  |
Contract liabilities, beginning of period |  | $ | 14,677 |  |  | $ | 19,108 |
Revenue recognized |  |  | (2,513 | ) |  |  | (4,908 | )
Payments received |  |  | 20,000 |  |  |  | 366 |
Contract liabilities, end of period |  | $ | 32,164 |  |  | $ | 14,566 |
The timing of revenue recognition, invoicing and cash collections results in billed accounts receivable and unbilled receivables and deferred revenue (contract liabilities). We invoice our customers in accordance with agreed-upon contractual terms, typically at periodic intervals or upon achievement of contractual milestones. Invoicing may occur subsequent to revenue recognition, resulting in unbilled receivables. We may receive advance payments from our customers before revenue is recognized, resulting in contract liabilities. The unbilled receivables and deferred revenue reported on the Condensed Balance Sheets relate to the KKC Commercialization Agreement. As of March 31, 2022, we had $96.7 million of deferred revenue associated with the KKC Commercialization Agreement, of which $64.5 million relates to the U.S. license which is a unit of account under the scope of Topic 808 and is not a deliverable under Topic 606, and $32.2 million relates to the development services performance obligations which are under the scope of Topic 606. Our contract liabilities accounted for under Topic 606 relate to the amount of initial upfront consideration that was allocated to the development services performance obligations. Contract liabilities are recognized over the duration of the performance obligations based on the costs incurred relative to total expected costs. Revenues from Collaborators We earn revenue in connection with collaboration agreements, which are described in Note 3, License Agreements. At contract inception, we assess whether the collaboration arrangements are within the scope of ASC Topic 808, Collaborative Arrangements (“Topic 808”), to determine whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities. This assessment is performed based on the responsibilities of all parties in the arrangement. For collaboration arrangements within the scope of Topic 808 that contain multiple units of account, we first determine which units of account within the arrangement are within the scope of Topic 808 and which elements are within the scope of Topic 606. For units of account within collaboration arrangements that are accounted for pursuant to Topic 808, an appropriate recognition method is determined and applied consistently, by analogy to authoritative accounting literature. For elements of collaboration arrangements that are accounted for pursuant to Topic 606, we recognize revenue as discussed above. Consideration received that does not meet the requirements to satisfy Topic 606 revenue recognition criteria is recorded as deferred revenue in the accompanying Condensed Balance Sheets, classified as either short-term or long-term deferred revenue based on our best estimate of when such amounts will be recognized. Research and Development Costs Research and development costs are expensed as incurred and include costs paid to third-party contractors to perform research, conduct clinical trials and develop and manufacture drug materials. Clinical trial costs, including costs associated with third-party contractors, are a significant component of research and development expenses. We expense research and development costs based on work performed. In determining the amount to expense, management relies on estimates of total costs based on contract components completed, the enrollment of subjects, the completion of trials, and other events. Costs incurred related to the purchase or licensing of in-process research and development for early-stage products or products that are not commercially viable and ready for use, or have no alternative future use, are charged to expense in the period incurred. Share-based Compensation Share-based compensation expense for employees and directors is recognized in the Condensed Statement of Operations based on estimated amounts, including the grant date fair value and the expected service period. For stock options, we estimate the grant date fair value using a Black-Scholes valuation model, which requires the use of multiple subjective inputs including estimated future volatility, expected forfeitures and the expected term of the awards. We estimate the expected future volatility based on the stock’s historical price volatility. The stock’s future volatility may differ from the estimated volatility at the grant date. For restricted stock unit (“RSU”) equity awards, we estimate the grant date fair value using our closing stock price on the date of grant. We recognize the effect of forfeitures in compensation expense when the forfeitures occur. The estimated forfeiture rates may differ from actual forfeiture rates which would affect the amount of expense recognized during the period. We recognize the value of the awards over the awards’ requisite service or performance periods. The requisite service period is generally the time over which our share-based awards vest. Income Taxes Our income tax expense consists of current and deferred income tax expense or benefit. Current income tax expense or benefit is the amount of income taxes expected to be payable or refundable for the current year. A deferred income tax asset or liability is recognized for the future tax consequences attributable to tax credits and loss carryforwards and to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of March 31, 2022, we have established a valuation allowance to fully reserve our net deferred tax assets. Tax rate changes are reflected in income during the period such changes are enacted. Changes in our ownership may limit the amount of net operating loss carryforwards that can be utilized in the future to offset taxable income. There have been no material changes in our unrecognized tax benefits since June 30, 2021, and, as such, the disclosures included in our 2021 Amended Annual Report continue to be relevant for the nine months ended March 31, 2022. Leases We account for our leases under FASB ASC Topic 842, Leases (“ASC 842”). Leases which are identified within the scope of ASC 842 and which have a term greater than one year are recognized on our Condensed Balance Sheet as ROU assets and lease liabilities. Operating lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the expected remaining lease term. The lease term includes any renewal options and termination options that we are reasonably certain to exercise. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received. The present value of lease payments is determined by using the interest rate implicit in the lease, if that rate is readily determinable; otherwise, we use our incremental borrowing rate. The incremental borrowing rate is determined based on the rate of interest that we would pay to borrow on a collateralized basis an amount equal to the lease payments for a similar term and in a similar economic environment. The interest rate implicit in lease contracts to calculate the present value is typically not readily determinable. As such, significant management judgment is required to estimate the incremental borrowing rate. Rent expense for operating leases is recognized on a straight-line basis over the lease term based on the total lease payments. We have elected the practical expedient to not separate lease and non-lease components for our real estate leases. Our non-lease components are primarily related to property maintenance, which varies based on future outcomes, and thus is recognized in rent expense when incurred.

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- Definition The entire disclosure for the organization, consolidation and basis of presentation of financial statements disclosure, and significant accounting policies of the reporting entity. May be provided in more than one note to the financial statements, as long as users are provided with an understanding of (1) the significant judgments and assumptions made by an enterprise in determining whether it must consolidate a VIE and/or disclose information about its involvement with a VIE, (2) the nature of restrictions on a consolidated VIE's assets reported by an enterprise in its statement of financial position, including the carrying amounts of such assets, (3) the nature of, and changes in, the risks associated with an enterprise's involvement with the VIE, and (4) how an enterprise's involvement with the VIE affects the enterprise's financial position, financial performance, and cash flows. Describes procedure if disclosures are provided in more than one note to the financial statements. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 205 -URI http://asc.fasb.org/topic&trid=2122149 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -URI http://asc.fasb.org/topic&trid=2197479 Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -URI http://asc.fasb.org/topic&trid=2122369 Reference 4: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 275 -URI http://asc.fasb.org/topic&trid=2134479 + Details
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