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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-37368

ADAPTIMMUNE THERAPEUTICS PLC

(Exact name of Registrant as specified in its charter)

60 Jubilee Avenue, Milton Park

Abingdon, Oxfordshire OX14 4RX

United Kingdom

(44) 1235 430000

(Address of principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x Yes  o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes  o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act.  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes  x No

As of July 31, 2018 the number of outstanding ordinary shares par value £0.001 per share of the Registrant is 566,496,400.

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General information

In this Quarterly Report on Form 10-Q (“Quarterly Report”), “Adaptimmune,” the “Group,” the “Company,” “we,” “us” and “our” refer to Adaptimmune Therapeutics plc and its consolidated subsidiaries, except where the context otherwise requires.

Information Regarding Forward-Looking Statements

This Quarterly Report contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about us and our industry. All statements other than statements of historical fact in this Quarterly Report are forward-looking statements.

These forward-looking statements are subject to known and unknown risks, uncertainties, assumptions and other factors that could cause our actual results of operations, financial condition, liquidity, performance, prospects, opportunities, achievements or industry results, as well as those of the markets we serve or intend to serve, to differ materially from those expressed in, or suggested by, these forward-looking statements. These forward-looking statements are based on assumptions regarding our present and future business strategies and the environment in which we expect to operate in the future. Important factors that could cause those differences include, but are not limited to:

·      our ability to successfully advance our MAGE-A10, MAGE-A4 and AFP SPEAR T-cells through clinical development and the timing within which we can recruit patients and treat patients in our clinical trials;

·      our ability to successfully and reproducibly manufacture SPEAR T-cells in order to meet patient demand;

·      our ability to further develop our commercial manufacturing process for our SPEAR T-cells, transfer such commercial process to third party contract manufacturers, if required, and for such third party contract manufacturers or ourselves to manufacture SPEAR T-cells to the quality and on the timescales we require;

·      the scope and timing of performance of our ongoing collaboration with GlaxoSmithKline (“GSK”) including nomination of further targets by GSK under the collaboration;

·      our ability to successfully advance our SPEAR T-cell technology platform to improve the safety and effectiveness of our existing SPEAR T-cell candidates and to submit Investigational New Drug Applications, or INDs, for new SPEAR T-cell candidates;

·      the rate and degree of market acceptance of T-cell therapy generally, and of SPEAR T-cells;

·      government regulation and approval, including, but not limited to, the expected regulatory approval timelines for SPEAR T-cells and the level of pricing and reimbursement for SPEAR T-cells, if approved for marketing;

·      the existence of any third party patents preventing further development of any SPEAR T-cells, including, any inability to obtain appropriate third party licenses, or enforcement of patents against us or our collaborators;

·      our ability to obtain granted patents covering any SPEAR T-cells and to enforce such patents against third parties;

·      volatility in equity markets in general and in the biopharmaceutical sector in particular;

·      fluctuations in the price of materials and bought-in components;

·      our relationships with suppliers, contract manufacturing organizations or CROs and other third-party providers including fluctuations in the price of materials and services, ability to obtain reagents particularly where such reagents are only available from a single source, and performance of third party providers;

·      increased competition from other companies in the biotechnology and pharmaceutical industries including where such competition impacts ability to recruit patients in to clinical trials;

·      claims for personal injury or death arising from the use of SPEAR T-cell candidates;

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·      our ability to attract and retain qualified personnel;

·      a change in our status as an emerging growth company under the Jumpstart Our Business Start-ups Act of 2012, or JOBS Act; and

·      additional factors that are not known to us at this time.

Additional factors that could cause actual results, financial condition, liquidity, performance, prospects, opportunities, achievements or industry results to differ materially include, but are not limited to, those discussed under “Risk Factors” in Part II, Item 1A in this Quarterly Report and in our other filings with the Securities and Exchange Commission (the “SEC”). Additional risks that we may currently deem immaterial or that are not presently known to us could also cause the forward-looking events discussed in this Quarterly Report not to occur. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar words are intended to identify estimates and forward-looking statements. Estimates and forward-looking statements speak only at the date they were made, and we undertake no obligation to update or to review any estimate and/or forward-looking statement because of new information, future events or other factors. Estimates and forward-looking statements involve risks and uncertainties and are not guarantees of future performance. Our future results may differ materially from those expressed in these estimates and forward-looking statements. In light of the risks and uncertainties described above, the estimates and forward-looking statements discussed in this Quarterly Report might not occur, and our future results and our performance may differ materially from those expressed in these forward-looking statements due to, inclusive of, but not limited to, the factors mentioned above. Because of these uncertainties, you should not make any investment decision based on these estimates and forward-looking statements.

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

ADAPTIMMUNE THERAPEUTICS PLC

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

See accompanying notes to unaudited condensed consolidated financial statements.

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ADAPTIMMUNE THERAPEUTICS PLC

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

See accompanying notes to unaudited condensed consolidated financial statements.

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ADAPTIMMUNE THERAPEUTICS PLC

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

See accompanying notes to unaudited condensed consolidated financial statements.

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ADAPTIMMUNE THERAPEUTICS PLC

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGE IN EQUITY

(In thousands, except share data)

See accompanying notes to unaudited condensed consolidated financial statements.

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ADAPTIMMUNE THERAPEUTICS PLC

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

See accompanying notes to unaudited condensed consolidated financial statements.

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ADAPTIMMUNE THERAPEUTICS PLC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - General

Adaptimmune Therapeutics plc is registered in England and Wales. Its registered office is 60 Jubilee Avenue, Milton Park, Abingdon, Oxfordshire, OX14 4RX, United Kingdom.  Adaptimmune Therapeutics plc and its subsidiaries (collectively “Adaptimmune” or the “Company”) is a clinical-stage biopharmaceutical company focused on providing novel cell therapies to patients, particularly in solid tumors. The Company’s comprehensive and proprietary SPEAR (Specific Peptide Enhanced Affinity Receptor) T-cell platform enables it to identify cancer targets, find and genetically engineer T-cell receptors (“TCRs”), and produce therapeutic candidates for administration to patients. Using its affinity engineered TCRs, the Company aims to become a fully integrated cell therapy company and to have the first TCR T-cell approved.

The Company is subject to a number of risks similar to other biopharmaceutical companies in the early stage of clinical development including, but not limited to, the need to obtain adequate additional funding, possible failure of preclinical programs or clinical programs, the need to obtain marketing approval for its SPEAR T-cells, competitors developing new technological innovations, the need to successfully commercialize and gain market acceptance of the Company’s SPEAR T-cells, the need to develop a suitable commercial manufacturing process and protection of proprietary technology. If the Company does not successfully commercialize any of its SPEAR T-cells, it will be unable to generate product revenue or achieve profitability.  The Company had an accumulated deficit of $287.6 million as of June 30, 2018.

Note 2 - 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 15, 2018 (the “Annual Report”).  The balance sheet as of December 31, 2017 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.

On January 1, 2018, the Company adopted new guidance on revenue recognition, which has been codified within Accounting Standard Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”).  The comparative financial information for the three and six months ended June 30, 2017 and as of December 31, 2017 has not been restated.

(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.

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(c)                       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, 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 6, Fair value measurements.

(d)                      Revenue from contracts with customers

On January 1, 2018, the Company adopted new guidance on revenue recognition, which has been codified within ASC 606.  The accounting policy applicable from January 1, 2018 is described below and further details on the transition are available in Note 2(f).  The comparative financial information for the three and six months ended June 30, 2017 and as of December 31, 2017 has not been restated and is prepared in accordance with the accounting policies that are described in Note 2 to the consolidated financial statements included in the Annual Report.

The Company has one contract with a customer, which is the GSK Collaboration and License Agreement.  The GSK Collaboration and License Agreement consists of multiple performance obligations, including the transition of the NY-ESO SPEAR T-cell program to GSK, the development of a second target, PRAME, and an exclusive license to research, develop, and commercialize the Company’s NY-ESO SPEAR T-cell therapy program.

The aggregate transaction price consists of an upfront payment of $42,123,000 received in June 2014, development milestones achieved of $53,691,000, an option exercise fee of $26,610,000, which was received in September 2017, and an estimate of variable consideration of $25,544,000.  The variable consideration relates to further milestone payments and the remaining option exercise fee of approximately $13,198,000, which are expected to be received following transition of the NY-ESO program to GSK in July 2018 (see Note 3 for further details).

The Company determines the variable consideration to be included in the transaction price by estimating the most-likely amount that will be received and then applies a constraint to reduce the consideration to the amount which is probable of being received.   The determination of whether a milestone is probable includes consideration of the following factors:

·                  Whether achievement of a development milestone is highly susceptible to factors outside the entity’s influence, such as milestones involving the judgment or actions of third parties, including regulatory bodies or the customer;

·                  Whether the uncertainty about the achievement of the milestone is not expected to be resolved for a long period of time;

·                  Whether the Company can reasonably predict that a milestone will be achieved based on previous experience; and.

·                  The complexity and inherent uncertainty underlying the achievement of the milestone.

The payments to the Company under the contract are typically due upon achievement of milestones and within standard payment terms (approximating to 45 days).  The contract does not include a significant financing component.

The upfront payment of $42,123,000 was allocated between the performance obligations using the Company’s best estimate of the relative selling price. In determining the best estimate, the Company considered internal pricing objectives it used in negotiating the contract, together with internal data regarding the cost and margin of providing services for each deliverable taking into account the different stage of development of each development program included in the contract. The variable consideration is allocated to the performance obligation to which it relates.

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The amount of the transaction price allocated to the performance obligation is recognized as or when the Company satisfies the performance obligation.  The Company satisfies the performance obligations relating to the transition of the NY-ESO SPEAR T-cell program and the development of a second target, PRAME, over time and recognizes revenue based on an estimate of the percentage of completion of the project determined based on the costs incurred on the project as a percentage of the total expected costs.  The Company considers that this depicts the progress of the project, where the significant inputs are internal project resource and third-party clinical and manufacturing costs.  The determination of the percentage of completion requires the Company to estimate the costs-to-complete the project.  The Company makes a detailed estimate of the costs-to-complete on an annual basis as part of the Company’s budgeting process, which is re-assessed every reporting period based on the latest project plan and discussions with project teams.  If a change in facts or circumstances occurs, the estimate is adjusted and the revenue is recognized based on the revised estimate. The difference between the cumulative revenue recognized based on the previous estimate and the revenue recognized based on the revised estimate is recognized as an adjustment to revenue in the period in which the change in estimate occurs.

The Company has determined that the performance obligation relating to the exclusive license to research, develop, and commercialize the Company’s NY-ESO SPEAR T-cell therapy program is recognized at a point-in-time, upon commencement of the license, which occurs once transition of the NY-ESO program is completed and all amounts due under the agreement are paid.

The Company recognizes a contract asset, when the value of satisfied (or part satisfied) performance obligations is in excess of the payment due to the Company, and deferred revenue (contract liability) when the amount of unconditional consideration is in excess of the value of satisfied (or part satisfied) performance obligations.  Once a right to receive consideration is unconditional, that amount is presented as a receivable.

The timing and amount of milestone payments for the development and transition of the NY-ESO SPEAR T-cell program are intended to be commensurate with the cost and effort involved in achieving the milestones and therefore a contract asset would typically arise.  However, the Company received $26,610,000 of the option exercise fee in September 2017, which will not be recognized as revenue until the commencement of the licenses, with the remaining amount of approximately $13,198,000 payable following transition of the program to GSK in July 2018. The associated revenue will be recognized upon commencement of the license, which occurs later resulting in deferred revenue.

Changes in deferred revenue typically arise due to:

·                  adjustments arising from a change in the estimate of the cost to complete the project, which results in a cumulative catch-up adjustment to revenue that affects the corresponding contract asset or deferred revenue;

·                  a change in the estimate of the transaction price due to changes in the assessment of whether variable consideration is constrained because it is not considered probable of being received;

·                  the recognition of revenue arising from deferred revenue; and

·                  the reclassification of amounts to receivables when a right to consideration to becomes unconditional.

A change in the estimate of variable consideration constrained (for example, if a development milestone becomes probable of being received) could result in a significant change in the revenue recognized and deferred revenue.

(e)                        Share-based compensation

The Company has awarded share options to nonemployees for consultancy services.  Prior to January 1, 2018, these share options were measured at the fair value of the goods/services received or the fair value of the equity instrument issued, whichever was more reliably measured, and then remeasured at the then-current fair values at each reporting date until the share options have vested and recognized as an expense over the requisite service period.  The Company has adopted new guidance with effect from January 1, 2018, which requires that nonemployee share-based payment transactions are measured at the grant-date fair value and are no longer remeasured at the then-current fair values at each reporting date until the share options have vested. Further details on the transition are available in Note 2(f).

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(f)                         New accounting pronouncements

Adopted in the period

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. This guidance has been codified within ASC 606. 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 Company has adopted the guidance using the modified retrospective approach, with the cumulative effect of initially applying the guidance recognized as an adjustment to the opening balance of equity at January 1, 2018. Therefore, the comparative information has not been adjusted and continues to be reported under previous guidance. The quantitative impacts of the changes on the statement of operations for the three months ended June 30, 2018 are set out below (in thousands):

The quantitative impacts of the changes on the statement of operations for the six months ended June 30, 2018 are set out below (in thousands):

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The quantitative impacts of the changes on the balance sheet as of June 30, 2018 are set out below (in thousands):

The quantitative impacts of the changes on the statement of cash flows for the six months ended June 30, 2018 are set out below (in thousands):

The cumulative effect of adopting the guidance on our financial statements at January 1, 2018 is a credit to opening accumulated losses and corresponding decrease in deferred revenue of $8,645,000.

The adoption of ASC 606 has had a material impact on the Company’s financial statements due to the following:

·                  Under the GSK Collaboration and License Agreement, the Company will receive non-substantive milestone payments in the future upon achievement of specified development milestones. Non-substantive milestones are currently included within the transaction price upon achievement of the milestone and recognized over the period during which the Company is delivering services to GSK.  ASC 606 requires an entity to estimate the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer.  This includes an estimate of variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.  This results in certain milestone payments being recognized earlier under ASC 606 than under existing guidance, if it is considered probable that the milestone will be achieved.

·                  Upfront payments and non-refundable milestone payments were previously recognized in revenue using the proportional performance model ratably over the period that services are rendered, unless another attribution method more closely approximates the delivery of the goods or services to the customer. ASC 606 requires an entity to recognize revenue using a measure of progress that depicts the transfer of control of the goods or services to the customer.  The Company considers that an input measure, such as costs incurred, relative to the total expected inputs is the appropriate measure to depict the transfer of control of the services under the GSK Collaboration and License Agreement, which impacts the timing of its revenue from the GSK Collaboration and License Agreement.

The Company has applied the practical expedient for contracts that were modified before the adoption of ASU 2014-09, which permits entities to not retrospectively restate the contract for those contract modifications. Instead, the aggregate effect of all modifications that occurred before the adoption date has been reflected when:

a. Identifying the satisfied and unsatisfied performance obligations

b. Determining the transaction price

c. Allocating the transaction price to the satisfied and unsatisfied performance obligations.

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ASC 606 requires an entity to provide financial statement users with sufficient information to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. To help achieve this objective, ASC 606 requires certain quantitative and qualitative disclosures included within Note 2(d) and Note 3, which are more extensive than the previously required revenue disclosures.

Recognition and Measurement of Financial Assets and Financial Liabilities

The Company has adopted 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 did not have a material impact on the Company’s consolidated financial statements.

Improvements to Nonemployee Share-Based Payment Accounting

The Company has adopted ASU 2018-07 — Compensation — Stock Compensation  — Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for nonemployee share-based payment transactions by expanding the scope of existing guidance on employee share-based payment transactions to include nonemployee transactions.  Under the simplified guidance, nonemployee share-based payment transactions are measured at the grant-date fair value and are no longer remeasured at the then-current fair values at each reporting date until the share options have vested. The guidance has been adopted using a modified-retrospective approach, which requires that unsettled equity-classified awards for which a measurement date has not been established are measured at the adoption date fair value. The guidance did not have a material impact on the Company’s consolidated financial statements.

To be adopted in future periods

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 FASB has also proposed another transition method, which is anticipated to be issued in an ASU shortly, which, in addition to the existing requirements to transition, permits an entity to transition to the new guidance by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without restating prior periods.  The Company’s assessment of the impact of the guidance on its consolidated financial statements is ongoing.  We anticipate that the adoption of the guidance will have a material impact on the Company’s consolidated balance sheet due to the recognition of a lease liability and corresponding right-of-use asset.  We have not finalized the assessment of the amount of the lease liability and right-of-use asset but we anticipate that it will result in the recording of lease assets of approximately $25 million and a corresponding lease liability of approximately $25 million.

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU 2016-13 — Financial Instruments — Credit losses, which replaces the incurred loss impairment methodology for financial instruments in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance is effective for the fiscal year beginning January 1, 2020, including interim periods within that fiscal year.  Early application is permitted for the fiscal year beginning January 1, 2019, including interim periods within that fiscal year. The guidance must be adopted using a modified-retrospective approach and a prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The Company is currently evaluating the impact of the guidance on its consolidated financial statements.

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(g)                                 Related parties

In the three and six months ended June 30, 2017, research and development expenses includes purchases of $178,000 and $780,000 from Immunocore Ltd (“Immunocore”).  As described in Note 2(w) to the consolidated financial statements included in the Annual Report, the Company no longer considered Immunocore to be a related party with effect from January 1, 2018.

Note 3 — Revenue

Revenue from contracts with customers arises from one customer, which is GSK, in one geographic location, which is the United Kingdom.

Revenue comprises the following categories (in thousands):

The following table shows movements in deferred revenue for the six months ended June 30, 2018 (in thousands):

The aggregate amount of the transaction price, excluding variable consideration which is constrained to reduce the consideration to the amount which is probable of being received, allocated to the performance obligations that are unsatisfied (or partially satisfied) as of the end of the reporting period was $42,653,000 at June 30, 2018.  This amount comprises $946,000 of revenue allocated to partially satisfied performance obligations for the NY-ESO program, $39,593,000 of revenue allocated to the exclusive license to research, develop, and commercialize the Company’s NY-ESO SPEAR T-cell therapy program and a further $2,114,000 of revenue allocated to the remaining performance obligations for the PRAME program.

The IND for the NY-ESO program and the responsibility for the NY-ESO program transferred to GSK on July 23, 2018.  Therefore, management anticipates that the revenue allocated to NY-ESO program and the exclusive license to research, develop, and commercialize the Company’s NY-ESO SPEAR T-cell therapy program will be recognized in the third quarter of 2018.

The revenue allocated to the PRAME program will be recognized over the next twelve months as the development of the second target, PRAME, progresses.

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Note 4 — Other income (expense), net

Other income (expense), net consisted of the following (in thousands):

Note 5 — Loss per share

The dilutive effect of 87,434,329 and 67,082,914 stock options outstanding as of June 30, 2018 and 2017, respectively, have been excluded from the diluted loss per share calculation, because they would have an antidilutive effect on the loss per share for the period.

Note 6 — Fair value measurements

Assets and liabilities measured at fair value on a recurring basis based on Level 1, Level 2, and Level 3 fair value measurement criteria as of June 30, 2018 are as follows (in thousands):

The Company estimates the fair value of available-for-sale debt securities with the aid of a third party valuation service, which uses actual trade and indicative prices sourced from third-party providers on a daily basis to estimate the fair value.  If observed market prices are not available (for example securities with short maturities and infrequent secondary market trades), the securities are priced using a valuation model maximizing observable inputs, including market interest rates.

Note 7 — Available-for-sale debt securities

As of June 30, 2018, the Company has the following investments in available-for-sale debt securities (in thousands):

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In the three and six months ended June 30, 2018, realized losses recognized on the maturity of available-for-sale debt securities of $1,310,000 and $2,473,000, respectively, primarily arising due to foreign exchange movements, were reclassified out of accumulated other comprehensive loss.

As of June 30, 2018 and December 31, 2017, the aggregate fair value of securities held by the Company in an unrealized loss position was $81,714,000 and $125,828,000, respectively, which consisted of 33 and 54 securities, respectively.  One security, with a fair value of $1,400,000 with an unrealized loss of $2,000 has been in an unrealized loss position for more than one year. As of June 30, 2018, the securities in an unrealized loss position 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 fluctuations. Furthermore, the Company does not intend to sell the debt securities in an unrealized loss position and it is unlikely that the Company will be required to sell these securities before the recovery of the amortized cost.

Note 8 —Other current assets

Other current assets consisted of the following (in thousands):

Note 9 — Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

The Company typically has a receivable for VAT.  As of December 31, 2017, there was a VAT payable due to VAT arising on the milestone payments invoiced to GSK in 2017.

Note 10 — Share-based compensation

The following table shows the total share-based compensation expense included in the unaudited consolidated statements of operations (thousands):

There were 1,435,685 and 1,252,176 options over ordinary shares granted in the three months ended June 30, 2018 and 11,430,341 and 20,203,152 options over ordinary shares granted in the six months ended June 30, 2018 and 2017, respectively, with a weighted average fair value of $1.18, $0.42, $0.80 and $0.35, respectively. Additionally, in the three and six months ended June 30, 2018, 151,056 and 6,703,692 options were granted, which have a nominal exercise price (similar to a restricted stock unit (RSU)), with a weighted average fair value of $1.88 and $1.35, respectively.

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The RSU-style options over ordinary shares in Adaptimmune Therapeutics plc were granted under the Adaptimmune Therapeutics plc Employee Share Option Scheme (adopted on January 14, 2016).  These options have an exercise price equal to the nominal value of an ordinary share, of £0.001, and generally vest over four years, with 25% on the first, and each subsequent, anniversary of the grant date.  The RSU-style options are not subject to performance conditions and the contractual term is ten years.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors” and “Forward-Looking Statements” in this Quarterly Report. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

The following discussion should be read in conjunction with the unaudited consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report and our consolidated financial statements and accompanying notes included within our Annual Report.

We are a clinical-stage biopharmaceutical company focused on novel cancer immunotherapy products based on our proprietary SPEAR T-cell platform. We have developed a comprehensive proprietary platform that enables us to identify cancer targets, find and genetically engineer TCRs, and produce TCR therapeutic candidates for administration to patients. We engineer TCRs to increase their affinity to cancer specific peptides in order to destroy cancer cells in patients.

Update on Clinical Pipeline Progress

Wholly owned SPEAR T-cells

We have Phase 1/2 clinical trials ongoing with our wholly owned MAGE-A10, MAGE-A4 and AFP SPEAR T-cells in a total of ten solid tumor types including non-small cell lung cancer (“NSCLC”), head and neck cancer, ovarian, urothelial, melanoma, hepatocellular, esophageal, gastric, synovial sarcoma and myxoid round cell lyposarcoma (“MRCLS”) cancers.

·                  MAGE-A10 SPEAR T-cell

Phase 1 clinical trials are ongoing with our MAGE-A10 SPEAR T-cell in NSCLC, urothelial, melanoma and head and neck cancers in the United States, Canada, the United Kingdom and Spain. These trials are first-in-human, open-label studies utilizing a modified 3+3 design in up to 28 patients with escalating doses of 100 million (Cohort 1), 1 billion (Cohort 2), and 1.2-6 billion (Cohort 3) transduced SPEAR T-cells to evaluate safety, including dose limiting toxicities (DLTs) followed by a possible expansion phase with doses of up to 10 billion SPEAR T-cells.

The MAGE-A10 SPEAR T-cell has continued to show a favorable safety profile and on July 18, 2018 it was announced that the Safety Review Committee endorsed escalation to the third dose cohort (1.2-6 billion transduced SPEAR T-cells) in both the NSCLC and the triple tumor study (urothelial, melanoma and head and neck cancers).

As of July 18, 2018, eight patients have received 100 million transduced MAGE-A10 SPEART Tcells in the first dose cohorts across both studies, and three patients have received one billion cells in the second cohort of the NSCLC study. No evidence of toxicity related to off-target binding or alloreactivity has been reported. Most adverse events were consistent with those typically experienced by cancer patients undergoing cytotoxic chemotherapy or other cancer immonutherapies. Additional safety data from the two ongoing MAGE A-10 SPEAR T-cell studies was presented at the American Society of Clinical Oncology (ASCO) annual meeting in June 2018.

Further preliminary data from the MAGE-A10 trials are anticipated during the second half of 2018.

·                  MAGE-A4 SPEAR T-cell

A Phase 1 clinical trial is ongoing in nine tumor indications namely urothelial, melanoma, head and neck, ovarian, NSCLC, esophageal and gastric cancers, synovial sarcoma and MRCLS. The addition of the synovial sarcoma and MRCLS indications was announced on June 4, 2018.

The primary objective of the study is to evaluate the safety and tolerability of MAGE-A4 SPEAR T-cell therapy. Additional objectives include anti-tumor activity, persistence of genetically modified cells in the body and evaluation of the phenotype and functionality of genetically modified cells isolated from peripheral blood or tumor post infusion. Multiple sites in the United States are now active and recruiting.

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Patients were initially treated with a target dose of 100 million T-cells (safety dose). On June 4, 2018, it was announced that the Safety Review Committee had endorsed dose escalation to treatment with 1 billion MAGE A-4 SPEAR T-cells and treatment of patients at this dose is now ongoing.

Preliminary data is anticipated during 2018.

·                  AFP SPEAR T-cell

We are dosing in a Phase 1, open label, dose escalation study designed to evaluate the safety and anti-tumor activity of our alpha fetoprotein (“AFP”) therapeutic candidate in hepatocellular carcinoma (“HCC”). The trial is open in the United States, United Kingdom and Spain. The Phase 1 clinical trial will include a dose escalation to evaluate safety, including dose limiting toxicities (DLTs), followed by expansion of a tolerable dose to further explore safety and initial evidence of anti-tumor activity.

The NY-ESO SPEAR T-cell Program (now transitioned to GSK)

Transition of Program to GSK

The NY-ESO SPEAR T-cell program transitioned to GSK as of July 23, 2018. As a result of the transition, GSK has assumed full responsibility for future research, development, and potential commercialization of the NY-ESO SPEAR T-cell (referred to as GSK3377794  or GSK ‘794 by GSK). Certain transition completion activities remain ongoing and are subject to a further amendment to the GSK Collaboration and License Agreement. Successful continuation of development and subsequent commercialization of GSK ‘794 by GSK will trigger additional payments for development milestones, tiered sales milestones, and mid-single to low double-digit royalties on worldwide net sales.

Background to the NY-ESO SPEAR T-cell program

99 patients were enrolled and treated with the NY-ESO SPEAR T-cell across multiple indications, namely synovial sarcoma, MRCLS, NSCLC, melanoma, multiple myeloma (including in combination with Pembrolizumab) and ovarian cancer prior to transition of the program to GSK.

·                  Synovial Sarcoma and MRCLS:

Enrollment in both the synovial sarcoma and MRCLS trials was completed as of the date of transition of the program to GSK. As of June 2018, data in the synovial sarcoma and MRCLS studies continued to suggest a favorable benefit:risk profile for the NY-ESO SPEAR T-cells. Initial anti-tumor activity was observed across all cohorts, including synovial sarcoma patients with low NY-ESO expression levels. NY-ESO SPEAR T-cells continue to be well-tolerated with myelosuppression and cytokine release syndrome being common adverse events. In both studies, the preliminary data suggests that SPEAR T-cell expansion and persistence correlates with response.

MRCLS

As of transition to GSK, the MRCLS trial was fully enrolled.

Initial data for the MRCLS trial was presented at ASCO in June 2018. As of June 2, 2018 and with eight patients treated, best overall responses as assessed by investigator included three confirmed partial responses, one unconfirmed partial response, three stable disease and one patient awaiting assessment. An overall trend in tumor burden decrease was observed in a majority of patients with the tumor burden decrease across target lesions ranging from 16.9% to 50%. There was one event of cytokine release syndrome (CRS) > Grade 3, which was characterized by fever, hypotension, rash, headache, and supraventricular tachycardia. The CRS resolved six days post-infusion of SPEAR T-cells. There were four serious adverse events reported for three patients including the CRS, two further grade 2 CRS events (both of which resolved) and a grade 2 pleural effusion.

Synovial Sarcoma

As of transition to GSK, all synovial sarcoma cohorts were fully enrolled.

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An update on all cohorts from the pilot study of NY-ESO SPEAR T-cells in synovial sarcoma was presented during an oral presentation session at CTOS in November 2017. At that time, of the twelve patients treated in Cohort 1, five were alive with a median predicted overall survival of 120 weeks (~28 months). Confirmed responses were observed across all cohorts as follows:

·                  Cohort 1 (follow-up only; High Flu/Cy, High NY-ESO): 6 /12 (50%) patients

·                  Cohort 2 (ongoing; High Flu/Cy, Low NY-ESO): 3/10 (33%) patients

·                  Cohort 3 (follow-up only; Cy alone, High NY-ESO): 1/5 (20%) patients

·                  Cohort 4 (ongoing; Lower Flu/Cy, High NY-ESO): 4/11 (36%) patients; overall survival was not assessed at the time of this update as the data were not mature enough; progression free survival was 23 weeks at the time

Further data from cohort 1 of the synovial sarcoma trials was presented in Cancer Discovery, an American Association of Cancer Research publication, and announced in June 2018. The paper reported data from cohort 1 of the synovial sarcoma study including a median duration of response of 30.9 weeks (range 13 — 72 weeks), an overall response rate of 50% (6/12 patients) and 60% among the ten patients who received the target dose of at least 1 billion transduced cells. As previously reported there was one confirmed response and five confirmed partial responses seen with the first infusion of SPEAR T-cells. Median progression-free survival (PFS) was 15 weeks (range 8 — 38 weeks) and the estimate of median overall survival was reported to be approximately 120 weeks among the patients in cohort 1.

In addition, at ASCO initial results seen with recent second infusions of SPEAR T-cells in patients were reported. It was reported that of these five recent patients, one patient had a confirmed complete response.

·                  Multiple Myeloma program:

NY-ESO SPEAR T-cells have also been evaluated in multiple myeloma in the context of autologous stem cell transplant (ASCT), and an update in all 25 patients treated in this study was presented during an oral presentation at ASH in December 2017. The NY-ESO SPEAR T-cell therapy demonstrated promising efficacy and acceptable safety in patients. The overall response rate (ORR) at 100 days and one year were 76% and 44% respectively, using International Myeloma Working Group criteria. Three patients remain disease-progression free at 3, 4.5, and 5 years post-treatment. Five of eighteen patients tested were minimal residual disease negative at day 100, and the median duration of response was greater than 12 months. Of the twenty-five patients treated in this study, eleven were alive at data cut-off; the median predicted overall survival was reported as approximately three years.

Enrollment of patients is ongoing in a multiple myeloma combination study with Merck’s anti-programmed death-1 (“PD-1”) inhibitor, KEYTRUDA® (pembrolizumab). GSK will assume responsibility for the continuation of this combination study.

·                  NSCLC program:

In the NSCLC study enrollment has now completed and dosing is ongoing. GSK will assume responsibility for any further development for this indication.

Significant Events in the Three Months Ended June 30, 2018

·                  On April 12, 2018, it was announced that in a planned transition, John Furey would be appointed as an independent Non-Executive Director, and Peter Thompson, M.D., Ph.D., would be stepping down from the Board. Both changes were effective from July 5, 2018.

·                  Updated clinical data were also announced and are covered in the Update on the Clinical Pipeline Progress.

Financial Operations Overview

On January 1, 2018, the Company adopted new accounting guidance on revenue recognition, which has been codified within Accounting Standard Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”).  The comparative financial information for the three and six months ended June 30, 2017 and as of December 31, 2017 has not been restated and is prepared in accordance with the previous accounting guidance.

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Revenue

Revenue arises from the GSK Collaboration and License Agreement. The contract consists of multiple performance obligations, including the transition of the NY-ESO SPEAR T-cell program to GSK, the development of a second target, PRAME, and an exclusive license to research, develop, and commercialize the Company’s NY-ESO SPEAR T-cell therapy program.

The aggregate transaction price consists of an upfront payment of $42.1 million in June 2014, development milestones achieved of $53.7 million, an option exercise fee of $26.6 million, which was received in September 2017 and an estimate of variable consideration of $25.6 million.  The contract includes a significant amount of variable consideration due to the milestone payments, which the Company is entitled to upon achievement of development milestones and the remaining option exercise fee of approximately $13.2 million which will be received following successful transition of the NY-ESO program to GSK, which are expected to be received following transition of the NY-ESO program to GSK in July 2018.

The transaction price is allocated to the performance obligation and recognized as or when the Company satisfies the performance obligation.  The Company satisfies the performance obligations relating to the transition of the NY-ESO SPEAR T-cell program and the development of a second target, PRAME, over time and recognizes revenue based on an estimate of the percentage of completion of the project determined based on the costs incurred on the project as a percentage of the total expected costs.

Research and Development Expenses

Research and development expenses consist principally of the following:

·                  salaries for research and development staff and related expenses, including benefits;

·                  costs for production of preclinical compounds and drug substances by contract manufacturers;

·                  fees and other costs paid to contract research organizations in connection with additional preclinical testing and the performance of clinical trials;

·                  costs associated with the development of a process to manufacture and supply our lentiviral vector and SPEAR T-cells for use in clinical trials;

·                  costs to develop manufacturing capability at our U.S. facility for manufacture of SPEAR T-cells for use in clinical trials;

·                  costs relating to facilities, materials and equipment used in research and development;

·                  costs of acquired or in-licensed research and development which does not have alternative future use;

·                  amortization and depreciation of property, plant and equipment and intangible assets used to develop our SPEAR T-cells; and

·                  share-based compensation expenses;

offset by:

·                  reimbursements from government grants; and

·                  reimbursable tax and expenditure credits from the U.K. government.

Research and development expenditures are expensed as incurred.

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Research and development expenditure is presented net of reimbursements from reimbursable tax and expenditure credits from the U.K. government.  As a company that carries out extensive research and development activities, we benefit from the U.K. research and development tax credit regime for small and medium sized companies (“SME R&D Tax Credit Scheme”), whereby our principal research subsidiary company, Adaptimmune Limited, is able to surrender the trading losses that arise from its research and development activities for a payable tax credit of up to approximately 33.4% of eligible research and development expenditures. Qualifying expenditures largely comprise employment costs for research staff, consumables and certain internal overhead costs incurred as part of research projects for which we do not receive income. Subcontracted research expenditures are eligible for a cash rebate of up to approximately 21.7%. A large proportion of costs in relation to our pipeline research, clinical trials management and manufacturing development activities, all of which are being carried out by Adaptimmune Limited, are eligible for inclusion within these tax credit cash rebate claims.

Expenditures incurred in conjunction with the GSK Collaboration and License Agreement are not qualifying expenditures under the SME R&D Tax Credit Scheme but certain of these expenditures can be reimbursed through the U.K. research and development expenditure credit scheme (the “RDEC Scheme”).  Under the RDEC Scheme tax relief is given at 12% of allowable R&D costs.

Our research and development expenses may vary substantially from period to period based on the timing of our research and development activities, which depends upon the timing of initiation of clinical trials and the rate of enrollment of patients in clinical trials.  The duration, costs, and timing of clinical trials and development of our SPEAR T-cells will depend on a variety of factors, including:

·                  the scope, rate of progress, and expense of our ongoing as well as any additional clinical trials and other research and development activities;

·                  uncertainties in clinical trial enrollment rates;

·                  future clinical trial results;

·                  significant and changing government regulation;

·                  the timing and receipt of any regulatory approvals; and

·                  supply and manufacture of lentiviral vector and SPEAR T-cells for clinical trials.

For further detail please see Part II — Item 1A Risk Factors — Risks Related to the Development of our SPEAR T-cells of our Quarterly Report

A change in the outcome of any of these variables may significantly change the costs and timing associated with the development of that SPEAR T cell. For example, if the FDA, or another regulatory authority, requires us to conduct clinical trials beyond those that we currently anticipate will be required for regulatory approval, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

General and Administrative Expenses

Our general and administrative expenses consist principally of:

·                  salaries for employees other than research and development staff, including benefits;

·                  business development expenses, including travel expenses;

·                  professional fees for auditors, lawyers and other consulting expenses;

·                  costs of facilities, communication, and office expenses;

·                  information technology expenses;

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·                  amortization and depreciation of property, plant and equipment and intangible assets not related to research and development activities; and

·                  share-based compensation expenses.

Other (Expense) Income, net

Other (expense) income, net comprises foreign exchange gains (losses). We are exposed to foreign exchange rate risk because we currently operate in the United Kingdom and United States. Our revenue from the GSK Collaboration and License Agreement is denominated in pounds sterling and is generated by our U.K.-based subsidiary, which has a pounds sterling functional currency. As a result, these sales are subject to translation into U.S. dollars when we consolidate our financial statements. Our expenses are generally denominated in the currency in which our operations are located, which are the United Kingdom and United States. However, our U.K.-based subsidiary incurs significant research and development costs in U.S. dollars and, to a lesser extent, Euros.  Our U.K. subsidiary with a pound sterling functional currency holds our investment in marketable securities, which are predominately denominated in U.S. dollars.  The entire change in the fair value of a foreign currency-denominated security, including the change due to foreign exchange, is included in other comprehensive income.

Our results of operations and cash flows will be subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. We seek to minimize this exposure by maintaining currency cash balances at levels appropriate to meet foreseeable expenses in U.S. dollars and pounds sterling. To date, we have not used hedging contracts to manage exchange rate exposure, although we may do so in the future.

Taxation

We are subject to corporate taxation in the United Kingdom and the United States.  We incur tax losses and tax credit carryforwards in the United Kingdom.  No deferred tax assets are recognized on our U.K. losses and tax credit carryforwards because there is currently no indication that we will make sufficient taxable profits to utilize these tax losses and tax credit carryforwards.

We benefit from reimbursable tax credits in the United Kingdom through the SME R&D Tax Credit Scheme as well as the RDEC Scheme which are presented as a deduction to research and development expenditure.

Our subsidiary in the United States has generated taxable profits due to a Service Agreement between our U.S. and U.K. operating subsidiaries and is subject to U.S. federal corporate income tax of 21% for the year ended December 31, 2018.  Due to its activity in the United States, and the sourcing of its revenue, the U.S. subsidiary is not currently subject to any state or local income taxes.  The Company also benefits from the U.S Research Tax Credit and Orphan Drug Credit.

In the future, if we generate taxable income in the United Kingdom, we may benefit from the United Kingdom’s “patent box” regime, which would allow certain profits attributable to revenues from patented products to be taxed at a rate of 10%. As we have many different patents covering our products, future upfront fees, milestone fees, product revenues, and royalties may be taxed at this favorably low tax rate.

U.K. Value Added Tax (“VAT”) is charged on all qualifying goods and services by VAT-registered businesses. An amount of 20% of the value of the goods or services is added to all relevant sales invoices and is payable to the U.K. tax authorities. Similarly, VAT paid on purchase invoices paid by Adaptimmune Limited and Adaptimmune Therapeutics plc is reclaimable from the U.K. tax authorities.

Critical Accounting Policies and Significant Judgments and Estimates

The preparation of our unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the revenues and expenses incurred during the reported periods. We base our estimates on historical experience and on various other factors that we believe are relevant under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies considered to be critical to the judgments and estimates used in the preparation of our financial statements are disclosed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report.  There has been no change in the accounting policies considered to be critical accounting judgments and estimates other than the accounting judgments and estimates relating to revenue recognition, which have been changed from January 1, 2018 due to the adoption of ASC 606.

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Revenue Recognition

The Company has one contract with a customer, which is the GSK Collaboration and License Agreement.  The GSK Collaboration and License Agreement consists of multiple performance obligations, including the transition of the NY-ESO SPEAR T-cell program to GSK, post-transition activities to finalize the transfer of the NY-ESO SPEAR T-cell program to GSK, the development of a second target, PRAME, and an exclusive license to research, develop, and commercialize the Company’s NY-ESO SPEAR T-cell therapy program.

The aggregate transaction price consists of an upfront payment, development milestones achieved, an option exercise fee and an estimate of variable consideration. The Company determines the variable consideration to be included in the transaction price by estimating the most-likely amount that will be received and then applies a constraint to reduce the consideration to the amount which is probable of being received.  In estimating the amount of variable consideration to be included in the transaction price, the Company considers the latest project plan and other available information.  The determination of whether a milestone is probable includes consideration of the following factors:

·                  Whether achievement of a development milestone is highly susceptible to factors outside the entity’s influence, such as milestones involving the judgment or actions of third parties, including regulatory bodies or the customer;

·                  Whether the uncertainty about the achievement of the milestone is not expected to be resolved for a long period of time;

·                  Whether the Company can reasonably predict that a milestone will be achieved based on previous experience; and

·                  The complexity and inherent uncertainty underlying the achievement of the milestone.

The determination of whether future milestones are probable requires significant judgment and the impact of a change in the determination of whether a milestone is probable is recognized in the period the judgment is revised.  This can significantly impact the revenue recognized.  In the three and six months ended June 30, 2018, revenue of $7.1 million and $10.3 million, respectively, was recognized due to development milestones becoming probable in the period.  As the development program progresses and the uncertainties underlying the milestones resolve, it is likely that further milestones will become probable.

The upfront payment of $42.1 million was allocated between the performance obligations using the Company’s best estimate of the relative selling price of each performance obligation. The best estimate of the selling price is determined after considering all reasonably available information, including internal pricing objectives used in negotiating the contract, together with internal data regarding the cost and margin of providing services for each deliverable taking into account the different stage of development of each development program. The variable consideration is allocated to the performance obligation to which it relates.

The amount of the transaction price allocated to the performance obligation is recognized as or when the Company satisfies the performance obligation.  The Company satisfies the performance obligations relating to the transition of the NY-ESO SPEAR T-cell program and the development of a second target, PRAME, over time and recognizes revenue based on an estimate of the percentage of completion of the project determined based on the costs incurred on the project as a percentage of the total expected costs.  The determination of the percentage of completion requires the Company to estimate the costs-to-complete the project.  The Company makes a detailed estimate of the costs-to-complete on an annual basis as part of the Company’s budgeting process, which is re-assessed every reporting period based on the latest project plan and discussions with project teams, when a change in facts or circumstances occurs, the estimated is adjusted and the revenue is recognized based on the revised estimate. The difference between the cumulative revenue recognized based on the previous estimate and the revenue recognized based on the revised estimate is recognized as an adjustment to revenue in the period in which the change in estimate occurs.  In the three and six months ended June 30, 2018, the estimate of the cost to complete for the performance obligation relating to the development and transition of the NY-ESO SPEAR T-cell program was revised, which resulted in a cumulative adjustment to reduce revenue of $2.1 million and $5.1 million for the three and six months ended June 30, 2018.  Due to the inherent difficulties in determining the cost of completion for development programs, small changes in the cost to complete are likely to occur.

The Company has determined that the performance obligation relating to the exclusive license to research, develop, and commercialize the Company’s NY-ESO SPEAR T-cell therapy program is recognized at a point-in-time, upon commencement of the license, which occurs once transition of the NY-ESO program is completed and all amounts due under the agreement in relation to the NY-ESO program transition are paid.

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Results of Operations

Comparison of Three Months Ended June 30, 2018 and 2017

The following table summarizes the results of our operations for the three months ended June 30, 2018 and 2017, together with the changes to those items (in thousands).