nk-10q_20150930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10‑Q

 

(Mark One)

x

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

For the quarterly period ended September 30, 2015

OR

o

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

For the Transition Period From                 to                

Commission file number: 001-37507

 

NANTKWEST, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

43-1979754

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

3530 John Hopkins Court

San Diego, California

 

92121

(Address of principal executive offices)

 

(Zip Code)

(858) 633-0300

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $0.0001 par value

 

NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

 

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.    Yes  o    No  x

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).    Yes  x    No  o

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

 

Large accelerated filer

¨

Accelerated filer

o

 

 

 

 

Non-accelerated filer

x  (Do not check if a smaller reporting company)

Smaller reporting company

¨

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

As of October 31, 2015, the registrant had 81,220,377 shares of common stock, par value $0.0001 per share, outstanding.

 

 

 

 


TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

 

 

Part I – Financial Information

 

 

 

 

 

 

Item 1.

  

Financial Statements

 

1

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

37

Item 4.

 

Controls and Procedures

 

37

 

 

 

 

 

Part II – Other Information

 

 

 

 

 

 

Item 1.

 

Legal   Proceedings

 

39

Item 1A.

 

Risk Factors

 

39

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

73

Item 3.

 

Defaults Upon Senior Securities

 

73

Item 4.

 

Mine Safety Disclosures

 

73

Item 5.

 

Other Information

 

74

Item 6.

 

Exhibits

 

75

 

 

 

-i-


NANTKWEST, INC.

PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

NantKwest, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except for share amounts)

 

 

 

September 30,

2015

(Unaudited)

 

 

December 31,

2014

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

358,616

 

 

$

59,104

 

Accounts receivable, net

 

 

 

 

 

145

 

Prepaid expenses and other current assets

 

 

1,671

 

 

 

124

 

Total current assets

 

 

360,287

 

 

 

59,373

 

Investment in Inex Bio, Inc.

 

 

 

 

 

249

 

Property and equipment, net

 

 

1,414

 

 

 

211

 

Intangible assets, net

 

 

7,164

 

 

 

835

 

Other assets

 

 

1,326

 

 

 

160

 

Total assets

 

$

370,191

 

 

$

60,828

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,947

 

 

$

1,131

 

Accrued expenses

 

 

1,126

 

 

 

311

 

Due to related parties (See Note 6)

 

 

610

 

 

 

 

Notes payable

 

 

 

 

 

265

 

Warrant derivative liability

 

 

 

 

 

177

 

Total current liabilities

 

 

6,683

 

 

 

1,884

 

Deferred rent

 

 

342

 

 

 

 

Deferred revenue

 

 

235

 

 

 

521

 

Total liabilities

 

 

7,260

 

 

 

2,405

 

Commitments and contingencies (See Note 5)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value; 500,000,000 and 80,000,000 shares authorized;

   81,212,662 and 0 issued and outstanding as of September 30, 2015 and December 31, 2014

 

 

8

 

 

 

Class A common stock, $0.0001 par value; 0 and 75,470,414 shares authorized;

   0 and 61,094,367 issued and outstanding as of September 30, 2015 and December 31, 2014

 

 

 

 

3

 

Additional paid-in capital

 

 

535,696

 

 

 

71,161

 

Accumulated other comprehensive loss

 

 

(50

)

 

 

Accumulated deficit

 

 

(172,723

)

 

 

(12,741

)

Total stockholders’ equity

 

 

362,931

 

 

 

58,423

 

Total liabilities and stockholders’ equity

 

$

370,191

 

 

$

60,828

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

1


NantKwest, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except for share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenue

 

$

10

 

 

$

133

 

 

$

222

 

 

$

543

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

3,950

 

 

 

328

 

 

 

6,328

 

 

 

691

 

Selling, general and administrative

 

 

38,854

 

 

 

702

 

 

 

152,847

 

 

 

2,815

 

Total operating expenses

 

 

42,804

 

 

 

1,030

 

 

 

159,175

 

 

 

3,506

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(42,794

)

 

 

(897

)

 

 

(158,953

)

 

 

(2,963

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

84

 

 

 

 

 

 

101

 

 

 

(470

)

Other income, net

 

 

61

 

 

 

 

 

 

164

 

 

 

 

Fair value adjustment

 

 

 

 

 

1

 

 

 

(1,366

)

 

 

(16

)

Total other income (expense)

 

 

145

 

 

 

1

 

 

 

(1,101

)

 

 

(486

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

 

(42,649

)

 

 

(896

)

 

 

(160,054

)

 

 

(3,449

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Net loss

 

$

(42,649

)

 

$

(896

)

 

$

(160,055

)

 

$

(3,450

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.55

)

 

$

(0.11

)

 

$

(2.34

)

 

$

(0.56

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares during the period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

77,837,586

 

 

 

7,903,941

 

 

 

68,316,004

 

 

 

6,127,742

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

2


NantKwest, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net loss

 

$

(42,649

)

 

$

(896

)

 

$

(160,055

)

 

$

(3,450

)

Changes in foreign currency translation adjustment

 

 

(50

)

 

 

 

 

 

(50

)

 

 

 

Other comprehensive loss

 

 

(50

)

 

 

 

 

 

(50

)

 

 

 

Comprehensive loss

 

$

(42,699

)

 

$

(896

)

 

$

(160,105

)

 

$

(3,450

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3


NantKwest, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except for share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Class A Common

 

 

Common

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Total

 

Balance at December 31, 2014

 

 

61,094,367

 

 

$

3

 

 

 

 

$

 

 

$

71,161

 

 

$

 

 

$

(12,741

)

 

$

58,423

 

Exercise of stock options

 

 

949,396

 

 

 

1

 

 

 

83,588

 

 

 

 

 

842

 

 

 

 

 

 

 

843

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

140,667

 

 

 

 

 

 

 

140,667

 

Vesting of restricted stock units

 

 

 

 

 

 

485,150

 

 

 

 

 

 

 

 

 

 

 

Employee payroll taxes withheld related to vesting of restricted stock units

 

 

 

 

 

 

(96,612

)

 

 

 

 

(2,415

)

 

 

 

 

 

 

(2,415

)

Adjustment for 1.8515:1 stock split

 

 

 

 

3

 

 

 

 

 

 

 

(3

)

 

 

 

 

 

 

Warrants issued in conjunction with Inex Bio acquisition

 

 

 

 

 

 

 

 

 

 

5,170

 

 

 

 

 

 

 

5,170

 

Exercise of warrants

 

 

4,106,492

 

 

 

 

 

565,700

 

 

 

 

 

7,340

 

 

 

 

 

 

 

7,340

 

Repurchase of common stock

 

 

(249,952

)

 

 

 

 

 

 

 

 

(4,798

)

 

 

 

 

 

 

(4,798

)

Reclassification of warrant liability due to exercise

 

 

 

 

 

 

 

 

 

 

1,544

 

 

 

 

 

 

 

1,544

 

Conversion of Class A common stock to common stock

 

 

(65,900,303

)

 

 

(7

)

 

 

65,900,303

 

 

 

7

 

 

 

 

 

 

 

 

 

Issuance of common stock less issuance costs of $28

 

 

 

 

 

 

4,063,333

 

 

 

 

 

77,975

 

 

 

 

 

 

 

77,975

 

Issuance of stock in initial public offering, net of $17,066 in offering costs

 

 

 

 

 

 

9,531,200

 

 

 

1

 

 

 

221,213

 

 

 

 

 

 

 

221,214

 

Issuance of common stock in a private placement concurrent with initial public offering

 

 

 

 

 

 

680,000

 

 

 

 

 

17,000

 

 

 

 

 

 

 

17,000

 

Spinout of Brink Biologics, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

73

 

 

 

73

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

(50

)

 

 

 

 

(50

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(160,055

)

 

 

(160,055

)

Balance at September 30, 2015

 

 

 

$

 

 

 

81,212,662

 

 

$

8

 

 

$

535,696

 

 

$

(50

)

 

$

(172,723

)

 

$

362,931

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

4


NantKwest, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

Cash flows used in operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(160,055

)

 

$

(3,450

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,067

 

 

 

145

 

Stock-based compensation expense

 

 

140,667

 

 

 

196

 

Change in fair value of warrant derivative liability

 

 

1,366

 

 

 

16

 

Change in value of note payable

 

 

 

 

 

377

 

Forgiveness of note receivable from related party

 

 

 

 

 

115

 

Bad debt expense

 

 

 

 

 

32

 

Loss incurred by Inex Bio

 

 

57

 

 

 

 

Gain on settlement of note payable

 

 

(133

)

 

 

 

Changes in operating assets and liabilities, net of effects of acquisition:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

75

 

 

 

151

 

Prepaid expenses and other current assets

 

 

(1,584

)

 

 

68

 

Other assets

 

 

(1,161

)

 

 

(19

)

Accounts payable

 

 

3,815

 

 

 

(449

)

Accrued expenses

 

 

820

 

 

 

126

 

Due to related parties

 

 

610

 

 

 

 

Deferred rent

 

 

342

 

 

 

 

Deferred revenue

 

 

(106

)

 

 

(106

)

Net cash used in operating activities

 

 

(14,220

)

 

 

(2,798

)

Cash flows used in investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,286

)

 

 

(198

)

Purchase of Inex Bio Inc., net of cash acquired

 

 

(1,818

)

 

 

 

Investment in intangible assets

 

 

(141

)

 

 

(53

)

Net cash used in investing activities

 

 

(3,245

)

 

 

(251

)

Cash flows provided by financing activities:

 

 

 

 

 

 

 

 

Proceeds from equity offerings, net of issuance costs

 

 

316,189

 

 

 

5,781

 

Payments on notes payable

 

 

(132

)

 

 

(52

)

Proceeds from exercise of Class B common stock

 

 

 

 

 

69

 

Proceeds from exercise of warrants

 

 

7,340

 

 

 

 

Repurchase of common stock

 

 

(4,798

)

 

 

 

Employee payroll taxes paid related to net share settlement of restricted stock units

 

 

(2,415

)

 

 

 

Proceeds from exercise of stock options

 

 

843

 

 

 

80

 

Net cash provided by financing activities

 

 

317,027

 

 

 

5,878

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(50

)

 

 

 

Net increase in cash and cash equivalents

 

 

299,512

 

 

 

2,829

 

Cash and cash equivalents, beginning of period

 

 

59,104

 

 

 

350

 

Cash and cash equivalents, end of period

 

$

358,616

 

 

$

3,179

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Income taxes

 

$

6

 

 

$

1

 

Interest

 

$

 

 

$

52

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Conversion of debt and payables into common stock

 

$

 

 

$

1,339

 

Conversion of debt into Preferred Series C stock

 

$

 

 

$

1,000

 

Issuance of warrants in Inex Bio, Inc. acquisition

 

$

5,170

 

 

$

 

Change in par value from $0.001 to $0.0001

 

$

 

 

$

1

 

Cashless exercise of warrants

 

$

1,773

 

 

$

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


NantKwest, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

 

 

1. Description of Business and Basis of Presentation

Organization

NantKwest, Inc. (the Company) was incorporated in Illinois on October 7, 2002 under the name ZelleRx Corporation. On January 22, 2010, the Company changed its name to Conkwest, Inc., and on July 10, 2015, the Company changed its name to NantKwest, Inc. The Company is a biotechnology company headquartered in San Diego, California with certain operations in Culver City, California. The Company is commercially developing targeted direct-acting immunotherapeutic agents for a variety of clinical conditions.

The Company holds the exclusive right to commercialize activated natural killer (aNK) cells, a commercially viable natural killer cell-line, and a variety of genetically modified derivatives capable of killing cancer and virally infected cells. The Company owns corresponding U.S. and foreign composition and methods-of-use patents and applications covering the clinical use of aNK cells as a therapeutic to treat a spectrum of clinical conditions.

The Company also licensed exclusive commercial rights to a portfolio of CD16 bearing aNK cells along with the corresponding U.S. and foreign composition and methods-of-use patents and applications covering the non-clinical use in laboratory testing of monoclonal antibodies as well as clinical use as a therapeutic to treat cancers in combination with antibody products. The Company has licensed or sub-licensed its cell lines and intellectual property to numerous pharmaceutical and biotechnology companies for such non-clinical uses.

The Company retains exclusive worldwide rights to clinical and research data, intellectual property and know-how developed with the Company’s aNK cells, as well as the only clinical grade master cell bank.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Inex Bio, Inc. (Note 3), and have been prepared in accordance with accounting principles generally accepted in the United States of America. All intercompany accounts and transactions have been eliminated in consolidation.

Domicile Change

In March 2014, the Company entered into a definitive merger and share exchange agreement pursuant to which the Company redomesticated from the State of Illinois to the State of Delaware and the Illinois Company ceased to exist (the Redomestication). In connection with the Redomestication, the holders of Class A and Class B common stock received one share of Class A and Class B common stock of the Delaware Company, respectively, in exchange for fifteen shares of the Illinois Company. The holders of Series B preferred stock received one share of Series B preferred stock of the Delaware Company in exchange for one share of the Illinois Company. The holders of any options, warrants or other securities are subject to adjustment based on the ratio of one for fifteen. All share numbers and per share prices in the accompanying financial statements have been adjusted to reflect the 1 for 15 exchange.

Liquidity

As of September 30, 2015, the Company had an accumulated deficit of approximately $172,723. The Company also had negative cash flow from operations of approximately $14,220 during the nine months ended September 30, 2015. The Company expects that it will likely need additional capital to further fund development of, and seek regulatory approvals for, its product candidates, and begin to commercialize any approved products.

6


The Company is currently focused primarily on the development of immunotherapeutic treatments for cancers and debilitating viral infections using targeted cancer killing cell lines, and believes such activities will result in the Company’s continued incurrence of significant research and development and other expenses related to those programs. If the clinical trials for any of the Company’s product candidates fail or produce unsuccessful results and those product candidates do not gain regulatory approval, or if any of the Company’s product candidates, if approved, fails to achieve market acceptance, the Company may never become profitable. Even if the Company achieves profitability in the future, it may not be able to sustain profitability in subsequent periods. The Company intends to cover its future operating expenses through cash and cash equivalents on hand and through a combination of equity offerings, debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. Additional financing may not be available to the Company when needed and, if available, financing may not be obtained on terms favorable to the Company or its stockholders.

While the Company expects its existing cash and cash equivalents will enable it to fund operations and capital expenditure requirements for at least the next twelve months, it may not have sufficient funds to reach commercialization. Failure to obtain adequate financing when needed may require the Company to delay, reduce, limit or terminate some or all of its development programs or future commercialization efforts or grant rights to develop and market product candidates that the Company might otherwise prefer to develop and market itself which could adversely affect the Company’s ability to operate as a going concern. If the Company raises additional funds from the issuance of equity securities, substantial dilution to existing stockholders may result. If the Company raises additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict the Company’s ability to operate its business.

Forward Stock Split

On July 10, 2015, the Company effected a 1.8515-for-1 forward stock split of its outstanding common stock. All applicable share data, per share amounts and related information in the financial statements and notes thereto have been adjusted retroactively to give effect to the 1.8515-for-1 forward stock split.

Unaudited Interim Financial Information

The accompanying unaudited financial statements and notes have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) as contained in the Financial Accounting Standards Board (the FASB) Accounting Standards Codification (the Codification or ASC) for interim financial information. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position and cash flows. The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results for the full year or the results for any future periods. These financial statements should be read in conjunction with the audited financial statements and related notes for the year ended December 31, 2014 which are included in the Company’s final prospectus filed with the SEC on July 29, 2015 relating to the Company’s Registration Statement on Form S-1/A (File No. 333-205124) for the Company’s initial public offering.

 

 

2. Summary of Significant Accounting Policies

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 certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to the recoverability of patent costs included in intangible assets, valuation of warrants, stock-based compensation, the valuation allowance for deferred tax assets, allowance for doubtful accounts and business combinations. The Company bases its estimates on historical experience and on various other market-specific and relevant assumptions that it believes to be reasonable under the circumstances. Actual results could differ from those estimates.

Risks and Uncertainties

Concentration of Credit Risk

Financial instruments, which potentially expose the Company to concentrations of credit risk, consist principally of cash balances on deposit with a bank, which exceed insured limits.

7


USPTO Proceeding

In March 2009, the Company received a final rejection in one of the Company’s original patent applications pertaining to certain limited methods of use claims for NK-92 from the U.S. Patent and Trademark Office (the USPTO) (but the USPTO allowed claims on all of the other proposed claims, including other methods of use). The Company appealed this decision with the USPTO Board of Appeals and, in the fall of 2013, the Board of Appeals reversed the Examiner’s rejection of the claim to certain limited methods of use with NK-92, but affirmed the Examiner’s rejection of the remaining patent claims. In December 2013, the Company brought an action in the U.S. District Court for the Eastern District of Virginia to review the decision of the USPTO as the Company disagreed with the decision as to the certain limited non-allowed claims. On September 2, 2015, the U.S. District Court granted the USPTO’s motion for summary judgment. The Company has filed a notice of appeal and will be appealing the decision.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.  The Company minimizes its credit risk associated with cash and cash equivalents by periodically evaluating the credit quality of its primary financial institution.  The balance at times may exceed federally insured limits.  The Company has not experienced any losses on such accounts.  

Intangible Assets

Intangible assets consist of costs incurred in connection with patent applications (principally legal fees), patent purchases, trademarks related to the Company’s aNK cells and technology acquired in the asset purchase of Inex Bio. The Company calculates amortization expense for its patents and acquired technology using the straight-line method over the estimated useful lives, generally 4-15 years. Other intangibles, consisting of trademarks and copyrights, are considered to have indefinite lives and are not amortized but reviewed for impairment annually, or sooner under certain circumstances.

The Company has no historical data to support a probable future economic benefit for patent applications, filing and prosecution costs other than for the Company’s aNK cells. Therefore, these patent-related costs are expensed as incurred and are included in selling, general and administrative in the statements of operations. The Company capitalizes patent application costs for those patents that are generating revenue currently. Should the Company experience a legal cost to defend a patent in the future, that cost would be capitalized only when it is part of the cost of retaining and obtaining the future economic benefit of the patent. Costs related to an unsuccessful outcome would be expensed.

Fair Value of Financial Instruments

The accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in absence of a principal, most advantageous market for the specific asset or liability.

The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value.

The three tiers are defined as follows:

 

·

Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets;

 

·

Level 2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and

 

·

Level 3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions.

8


Deferred Rent

Rent expense is recognized on a straight-line basis over the term of the lease. The difference between rent expense and amounts paid under lease agreements is recorded as deferred rent in the liability section of the consolidated balance sheets.

Revenue Recognition and Deferred Revenue

The Company derives substantially all of its revenue from non-exclusive license agreements with numerous pharmaceutical and biotechnology companies granting them the right to use the Company’s cell lines and intellectual property for non-clinical use. These license agreements generally include upfront fees and annual research license fees for such use, as well as commercial fees for sales of the licensees’ products developed or manufactured using the Company’s intellectual property and cell lines. The Company’s license agreements also may include milestone payments, although to date, the Company has not generated any revenue from milestone payments. The Company recognizes revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the fees are fixed or determinable; and (iv) collectibility is reasonably assured.

When entering into an arrangement, the Company first determines whether the arrangement includes multiple deliverables and is subject to accounting guidance in Accounting Standards Codification (ASC) Subtopic 605-25, Multiple-Element Arrangements. If the Company determines that an arrangement includes multiple elements, it determines whether the arrangement should be divided into separate units of accounting and how the arrangement consideration should be measured and allocated among the separate units of accounting.

An element qualifies as a separate unit of accounting when the delivered element has standalone value to the customer. The Company’s agreements do not include a general right of return relative to delivered elements. Any delivered elements that do not qualify as separate units of accounting are combined with other undelivered elements within the arrangement as a single unit of accounting. If the arrangement constitutes a single combined unit of accounting, the Company determines the revenue recognition method for the combined unit of accounting and recognizes the revenue over the period from inception through the date the last deliverable within the single unit of accounting is delivered.

License rights and non-contingent deliverables, such as knowledge transfer, do not have standalone value as they are not sold separately and they cannot be resold and, consequently are considered a single unit of accounting.

Therefore, license revenue in the form of upfront payments is deferred and recognized over the applicable relationship period, which historically has been the estimated period of the Company’s substantive performance obligations or the period the rights granted are in effect.

The Company recognizes a milestone payment when earned if it is substantive and the Company has no ongoing performance obligations related to the milestone. A milestone payment is considered substantive if it 1) is commensurate with either the Company’s performance to achieve the milestone or the enhanced value of the delivered item as a result of a specific outcome resulting from the Company’s performance to achieve the milestone; 2) relates solely to past performance; and 3) is reasonable relative to all of the deliverables and payment terms, including other potential milestone consideration, within the arrangement.

The Company records any amounts received prior to satisfying the revenue recognition criteria as deferred revenue in the accompanying balance sheets.

Stock-Based Compensation

The Company measures and recognizes compensation expense for all stock-based payment awards made to employees, officers and directors based on the estimated fair values of the awards as of the grant date. The Company records the value of the portion of the award that is ultimately expected to vest as expense over the requisite service period.

The Company also accounts for equity instruments issued to non-employees using a fair value approach under ASC Subtopic 505-50, Equity-Based Payments to Non-Employees. The Company values equity instruments and stock options granted using the Black-Scholes option-pricing model. The value of non-employee stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest and is recognized as an expense over the term of the related financing or the period over which services are received.

9


Basic and Diluted Net Loss per Share of Common Stock

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period. Diluted loss per share is computed similarly to basic loss per share except that the denominator is increased to include the number of additional shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.

For all periods presented, potentially dilutive securities are excluded from the computation of fully diluted loss per share as their effect is anti-dilutive. The following table details those securities which have been excluded from the computation of potentially dilutive securities:

 

 

 

As of September 30,

 

 

 

2015

 

 

2014

 

Series B convertible preferred stock

 

 

 

 

 

8,888,597

 

Series C convertible preferred stock

 

 

 

 

 

5,789,699

 

Class B common shares not exercised

 

 

 

 

 

5,509,925

 

Outstanding options

 

 

9,811,356

 

 

 

3,055,469

 

Outstanding restricted stock units

 

 

485,150

 

 

 

 

Outstanding warrants

 

 

17,824,525

 

 

 

2,052,408

 

Total

 

 

28,121,031

 

 

 

25,296,098

 

 

Amounts in the table above reflect the common stock equivalents of the noted instruments.

Comprehensive Loss

The functional currency of our foreign subsidiary is the South Korean Won.  Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded as part of a separate component of the condensed consolidated statements of comprehensive loss.  

Segment and Geographic Information

Operating segments are defined as components of an enterprise (business activity from which it earns revenue and incurs expenses) for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker (CODM) is its Chief Executive Officer. The Company views its operations and manages its business as a single operating and reporting segment.

Recent Accounting Pronouncements

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which amends ASC 205, Presentation of Financial Statements, and ASC 360, Property, Plant and Equipment. This ASU changes the criteria for determining which disposals can be presented as a discontinued operation and modifies existing disclosure requirements. The provisions of this update were effective as of January 1, 2015, and the Company has adopted this standard accordingly.  

The FASB issued ASU 2014-15, Presentation of Financial Statements — Going Concern, which will require management to make a going concern assessment for 24 months after the financial statement date. Previously, this assessment was made by the external auditors. The provisions of this update are effective as of December 31, 2016, and are not expected to significantly impact the Company.

In May 2014, the FASB issued guidance codified in ASC Topic 606, Revenue Recognition—Revenue from Contracts with Customers, which amends the guidance in former ASC Topic 605, Revenue Recognition, and was initially to be effective beginning January 1, 2017. This guidance requires that entities 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. The Company is currently evaluating the impact of the provisions of ASC Topic 606 on its financial statements and disclosures. On August 12, 2015, the FASB issued guidance which defers the effective date of ASC Topic 606 by one year to January 1, 2018.

10


In June 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments when the Terms of an Award Provide that a Performance Target Could Be Achieved After the Requisite Service Period, or ASU 2014-12. The ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2014-12 on its financial statements and disclosures.

In January 2015, the FASB issued ASU No. 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20); Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, which eliminates from GAAP the concept of extraordinary items, stating that the concept causes uncertainty because (1) it is unclear when an item should be considered both unusual and infrequent and (2) users do not find the classification and presentation necessary to identify those events and transactions. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect this standard to have an impact on its financial statements upon adoption.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810)—Amendments to the Consolidation Analysis, or ASU 2015-02. ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (2) eliminate the presumption that a general partner should consolidate a limited partnership, (3) affect the consolidated analysis of reporting entities that are involved with VIEs, and (4) provide a scope exception for certain entities. ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company is currently evaluating the impact of the adoption of ASU 2015-02 on its financial statements and disclosures.

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30), or ASU 2015-03, which requires the debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the presentation of debt discounts. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company does not expect this standard to have a material impact on its financial statements upon adoption.

 

 

3. Investment in Inex Bio, Inc.

In April 2012, the Company made a strategic decision to enter into a License Agreement with Inex Bio, Inc. (Inex Bio), a Republic of Korea corporation (the Inex License Agreement). Under the Inex License Agreement, the Company provided Inex Bio with an exclusive license to the Company’s technology to be used in products only in certain Asian countries. In exchange for the Inex License Agreement, the Company received a $300 up-front license fee. In addition, the Company was eligible to receive milestone payments of up to $775 based upon completion of clinical trials and a 5% royalty on net sales of applicable products using the aNK cells. No milestone payments were due or received for the nine months ended September 30, 2014 or 2015.

In May 2012, the Company acquired 57,000 shares of Inex Bio for $249, which represented 22.2% of the outstanding shares and 17.4% of the fully-diluted shares of Inex Bio. The Company accounted for its investment under the equity method. The Company reviewed its investment for impairment in accordance with ASC Topic 320, Investments—Debt and Equity Securities.

In February and March 2015, InexBio Holdings (Holdings), an entity owned fifty percent (50%) by Cambridge Equities, L.P., an entity in which Dr. Soon-Shiong, the Company’s chief executive officer and one of the Company’s directors, is the sole member of its general partner, and fifty percent (50%) Eragon Ventures, LLC, an entity of which Dr. Ji, one of our directors, is managing member, acquired 220,000 shares or 67.3% of Inex Bio from third party owners for $1,100.

On March 30, 2015, the Company entered into a Stock Purchase Agreement with Holdings and the third party owners, pursuant to which the Company acquired all the remaining outstanding shares of Inex Bio not previously held by the Company.

The Company paid to the other owners of Inex Bio cash of $1,482 and issued warrants to acquire 593,072 shares of the Company’s Class A common stock at an exercise price of $2.00 per share. The Company valued the warrants using the Black-Sholes option-pricing model with a stock price of $10.72 per share as of March 30, 2015, an expected term of 0.04 years, and a volatility of 80%. In April 2015, the Company received $1,185 for the full exercise of the warrants.

The Company recorded the transaction as an asset purchase because Inex Bio was a shell corporation without any employees or other significant assets and did not meet the definition of a business under ASC Topic 805, Business Combinations.

11


The purchase price paid to acquire Inex Bio from the other owners is as follows:

 

Consideration

 

Total

 

Cash paid by InexBio Holdings, LLC

 

$

1,100

 

Cash paid by Company

 

 

1,482

 

Fair value of warrants

 

 

5,170

 

Aggregate purchase price

 

$

7,752

 

 

The following table summarizes the assets acquired and liabilities assumed:

 

Cash

 

$

763

 

Intangible assets—reacquired rights of Company technology

 

 

7,199

 

Other assets

 

 

12

 

Investment in Inex Bio

 

 

(221

)

Accounts payable

 

 

(1

)

Total assets acquired and liabilities assumed

 

$

7,752

 

 

The license solely covers pending patent applications at this time. The Company will amortize the intangible assets related to the reacquired rights of the Company technology over 4 years, which represents the period until the next action date of the pending patent application in the territory of the license issued to Inex Bio.

The Company paid Holdings cash of $6,518 and issued warrants to acquire 2,609,520 shares of the Company’s Class A common stock at an exercise price of $2.00 per share for their assistance in negotiating the acquisition of Inex Bio from the other owners. The Company valued the warrants using the Black-Sholes option-pricing model with a stock price of $10.72 per share as of March 30, 2015, an expected term of 0.04 years, and a volatility of 80%. In April 2015, the Company received $5,215 for the full exercise of the warrants.

The following summarizes the net consideration paid to Holdings:

 

Consideration

 

Total

 

Cash

 

$

6,518

 

Fair value of warrants

 

 

22,747

 

Less cash paid to acquire shares in Inex Bio

 

 

(1,100

)

Net consideration

 

$

28,165

 

 

 

The Company recorded compensation expense for the portion of the cash and warrants issued to Holdings that exceeded the fair value of the shares acquired consistent with ASC Topic 718. The Company recorded $22,747 of stock-based compensation and $5,418 of cash compensation to the Company’s chief executive officer and the director as a result of acquiring their interest in Inex Bio.

 

4. Notes Payable

2013 Promissory Note—In June 2013, the Company entered into a Securities Purchase Agreement (the 2013 Securities Purchase Agreement) whereby the Company issued to an institutional investor a $1,000 note payable (the 2013 Promissory Note) plus 1,851 shares of Series B preferred stock for aggregate proceeds of $1,000. The 2013 Promissory Note accrued interest at 5% per annum and was scheduled to mature on June 20, 2014. The 2013 Promissory Note was secured by all of the assets of the Company.

The Company allocated the proceeds under the 2013 Securities Purchase Agreement to the 2013 Promissory Note and Series B preferred stock based on their relative fair values, which resulted in $364 and $636 being allocated to the 2013 Promissory Note and Series B preferred stock, respectively. The Company recorded a debt discount of $636, which was being amortized to interest expense over the term of the 2013 Promissory Note using the effective interest method.

12


In April 2014, the Company entered into the 2014 Securities Purchase Agreement at which time the holder of the 2013 Promissory Note agreed to convert the $1,000 principal into 771,458 shares of Series C preferred stock plus a warrant to purchase 192,865 shares of Class A common stock having the same terms as the warrants issued in the 2014 Securities Purchase Agreement. The Company paid accrued interest of $39 in cash.

Other Notes and Payables—The 2013 Securities Purchase Agreement was a qualified financing. As a result, certain holders of notes payable and accounts payable totaling $950 (Converting Creditors) converted their outstanding payable balances into Class A common stock at a conversion price of $2.44 per share. The Series A preferred stock holders and Converting Creditors also entered into a shareholder lock up agreement.

2009 Convertible Notes—In 2009, the Company executed a Bridge Loan Agreement to sell and issue $426 of convertible promissory notes (the 2009 Convertible Notes). The 2009 Convertible Notes accrued interest at 15% per annum until maturity on September 30, 2010 (the Maturity Date). After the Maturity Date, the 2009 Convertible Notes accrued interest at 24% per annum. The 2009 Convertible Notes were convertible at the option of the holders into securities issued in the Company’s next financing. The 2009 Convertible Notes were secured by all of the Company’s assets. At December 31, 2013, there was $426 of principal and $396 of accrued interest outstanding on the 2009 Convertible Notes. As discussed below, the 2009 Convertible Notes were exchanged for shares of Class A common stock, and there was no balance outstanding on the 2009 Convertible Notes at December 31, 2014.

Each holder of the 2009 Convertible Notes also received a warrant to purchase shares of Class A common stock (2009 Warrants). The 2009 Warrants are exercisable only if and to the extent that the holder subscribed to the next financing for a number of shares equal to 300% of the number of shares issued to the holder in the next financing.

The exercise price of the 2009 Warrants initially is the purchase price for the shares in the next financing. However, for up to two years after the date that the Company becomes a public company, the exercise price is adjusted to a price equal to the price of the new equity securities should the Company enter into any new equity transaction whereby the price of the equity in the new transaction is lower than the exercise price of the 2009 Warrants.

In conjunction with the 2013 Securities Purchase Agreement, each holder of the 2009 Convertible Notes entered into a consent, amendment and exchange agreement (the Exchange Agreement). The Exchange Agreement (i) modified the Maturity Date to June 20, 2014; (ii) caused each holder to execute a subordination and shareholder lock-up agreement, and; (iii) upon a Mandatory Exchange Financing, automatically exchanged the outstanding principal and accrued interest under the 2009 Convertible Notes and the 2009 Warrants for shares of Class A common stock at an exchange rate of three times the principal amount of the 2009 Convertible Notes divided by the per share price of the Mandatory Exchange Financing. In April 2014, the 2014 Securities Purchase Agreement qualified as a Mandatory Exchange Financing and the $426 principal balance plus $422 accrued interest on the 2009 Convertible Notes and the 2009 Warrants were exchanged for 985,229 shares of the Company’s Class A common stock.

In connection with the sale of the 2009 Convertible Notes, the Company used a placement agent. The placement agent received a corporate advisory warrant (the CA Warrant) for common stock equal to 20% of the issued and outstanding common stock of the Company on a fully diluted basis immediately following the final closing of the bridge financing. The CA Warrant had an exercise price of $2.44 per share and was to expire on September 30, 2019. The placement agent also received a warrant for common stock for the number of shares equal to 9% of the number of warrant shares issued to the holders who subscribe to the next financing (the PA Warrant). The initial exercise price of the PA Warrant is equal to the price of the next financing.

In conjunction with the 2013 Securities Purchase Agreement, the placement agent agreed to exchange the CA Warrant and PA Warrant into shares of Class A common stock equal to 10% of the shares of fully-diluted stock outstanding immediately following the closing of a Mandatory Exchange Financing less certain exempted issuances.

At the 2014 Securities Purchase Agreement closing, the CA Warrant and PA Warrant were exchanged for 3,052,608 shares of the Company’s Class A common stock.

The Company also issued to the placement agent 34,715 shares of Class A common stock in exchange for a cash commission.

Settlement Agreement—In 2007, the Company entered into a settlement agreement with a former officer of the Company (the Settlement Agreement). The Settlement Agreement included a cash payment to the former officer of $265 payable upon the Company’s receipt of any debt or equity financing. As part of the 2009 Convertible Notes financing, the Settlement Agreement was amended so that the $265 will convert into Class A common stock at a conversion price of $2.44 per share on the second anniversary of Company being a publicly traded company. In March 2015, the Company entered into a Supplemental Agreement and General Release (the Supplemental Agreement) with the former officer related to the Settlement Agreement. As a result, (i) the Company agreed to pay $132 in exchange for retiring the note and (ii) the former officer agreed to exercise a warrant to purchase 32,675 shares of Class A common stock at an exercise price of $2.44 per share. The $133 difference between the carrying value of the note payable and the amount paid to retire the note is reflected in other income on the condensed consolidated statement of operations.

13


Founder Note—As of December 31, 2013, the Company owed a founder of the Company $23 associated with a license agreement and miscellaneous other obligations. In April 2014, the outstanding balance was paid in full.

Other Notes and Creditors—As part of the 2009 Convertible Notes financing, certain other note holders and creditors with obligations totaling $194 (Other Creditors) executed agreements either to defer payment for three years or convert the obligations into Class A common stock upon the Company closing a financing of at least $1,200 at a conversion price of $2.44 per share. In conjunction with the 2013 Securities Purchase Agreement, Other Creditors holding $20 of principal plus $29 of accrued interest elected to convert their obligations into 20,205 shares of Class A common stock.

Other Creditors holding $50 of principal entered into exchange agreements whereby, upon the Company completing a Mandatory Exchange Financing, the balance plus any accrued interest is automatically exchanged for shares of Class A common stock at an exchange rate of three times the amount owed divided by the per share price of the Mandatory Exchange Financing. At the close of the 2014 Securities Purchase Agreement, the $50 principal plus accrued interest of $50 were exchanged for 230,859 shares of Class A common stock. In April 2014, an Other Creditor with $95 of outstanding principal and interest agreed to sell its note to a third party who agreed to exchange the note for 114,369 shares of Class A common stock. Other Creditors with $29 of outstanding principal plus $13 of accrued interest were repaid in cash in April 2014.

Side Agreement Notes—Payables and debt totaling $249 were sold by certain creditors to existing investors (the Side Agreements). In conjunction with the Side Agreements, the Company issued to the investors convertible notes pursuant to an exchange agreement whereby upon the Company completing a Mandatory Exchange Financing, the outstanding balance under the convertible notes are automatically exchanged for shares of Class A common stock at an exchange rate of the amount divided by the per share price of the Mandatory Exchange Financing (the Side Agreement Notes). At the close of the 2014 Securities Purchase Agreement, the $249 balance of the convertible notes was exchanged for 192,341 shares of Class A common stock.

 

 

5. Commitments and Contingencies

Contingencies

In March 2009, the Company received a final rejection in one of the Company’s original patent applications pertaining to certain limited methods of use claims for NK-92 from the U.S. Patent and Trademark Office (the USPTO) (but the USPTO allowed claims on all of the other proposed claims, including other methods of use). The Company appealed this decision with the USPTO Board of Appeals and, in the fall of 2013, the Board of Appeals reversed the Examiner’s rejection of the claim to certain limited methods of use with NK-92, but affirmed the Examiner’s rejection of the remaining patent claims. In December 2013, the Company brought an action in the U.S. District Court for the Eastern District of Virginia to review the decision of the USPTO as the Company disagreed with the decision as to the certain limited non-allowed claims. On September 2, 2015, the U.S. District Court granted the USPTO’s motion for summary judgment.  The Company has filed a notice of appeal and will be appealing the decision.

Leases

The Company leases: (i) office space in Cardiff-by-the-Sea, California under a non-cancelable operating lease that expires in August 2016; (ii) a research facility in Boston, Massachusetts on a month-to-month basis; (iii) a research and manufacturing facility in San Diego, California (below) and; (iv) office and research space in Culver City, California from a related party (Note 6).

In June 2015, the Company entered into a lease agreement for an approximately 44,681 square foot facility in San Diego, California for a research and development laboratory, related office and other related uses. The term of the lease extends for seven years commencing on August 1, 2016. The base rent is $179 per month with 3% annual increases on each anniversary date. In July 2015 the Company entered into a sublease for the building with the current lessee for a term of year commencing August 1, 2015.  There is no fixed rent or operating expenses during the sublease term other than utilities.

The Company recognizes rent expense under our operating leases on a straight-line basis. Rent expense for the three months ended September 30, 2015 and 2014 was $667 and $59, respectively. Rent expense for the nine months ended September 30, 2015 and 2014 was $825 and $158, respectively.

Collaborative Arrangement

A collaborative arrangement is a contractual arrangement that involves a joint operating activity. These arrangements involve two or more parties who are (i) active participants in the activity, and (ii) exposed to significant risks and rewards dependent on the commercial success of the activity.

14


Joint Development and License Agreement—In December 2014, the Company entered into a Joint Development and License Agreement (the Joint Development and License Agreement) with Sorrento Therapeutics, Inc. (Sorrento). Under the Joint Development and License Agreement, the Company and Sorrento agreed to exclusively collaborate on research, development and commercialization with respect to certain technologies and intellectual property rights as may be agreed between the parties for the purpose of jointly developing therapeutic applications of certain effector cell lines.

To fund the Company’s joint research and development efforts, Sorrento agreed to make research credit payments to the Company in the aggregate amount of $2,000 payable in December 2015 and 2016, reduced by certain expenses for which the Company is responsible under the agreements. The research credit payments will be paid in the form of full-time employee expense credits by Sorrento to work on behalf of the Company and for the Company’s portion of any development costs and a laboratory credit towards maintaining a laboratory on Sorrento’s premises.

For each cell line or product to be developed by the parties pursuant to the Joint Development and License Agreement, one party (the Primary Party), as mutually agreed upon by a designated steering committee comprised of three representatives from each party when a statement of work is agreed to by the parties, will have the right and authority to initiate and control the development, testing, regulatory approval or commercialization of such cell line or joint product, including the right to license and sublicense all applicable intellectual property rights (including joint product rights) with respect thereto. The Primary Party will also bear all costs associated with the development of the applicable cell line or product unless the other party shares in such costs. The ratio of such split between the parties is conditioned on the stage of development of the cell line or product and each party’s contribution towards development costs.

Sorrento and the Company each will own an undivided interest in and to all rights, title and interest in and to the joint product rights. The Joint Development and License Agreement expires upon the later of three years or completion of the series of collaborative research and development efforts.

In connection with the Joint Development and License Agreement, Sorrento entered into a subscription and investment agreement with the Company under which the Company sold to Sorrento 4,557,537 shares of the Company’s Class A common stock for gross proceeds of $8,000. Subsequently, Sorrento purchased 1,060,789 shares of the Company’s Class A common stock for an additional $2,000 in gross proceeds.

There was no additional activity under the Joint Development and License Agreement during the three or nine months ended September 30, 2015. As of the date hereof, the Company and Sorrento have not yet agreed upon any projects under the Joint Development and License Agreement; therefore Sorrento has no rights to use the Company’s NK cells or other technologies or intellectual property rights or to begin related research, development or commercialization activities and the Company is free to pursue, and is actively pursuing, research, development and commercialization activities with antibodies that may bind to various targets, including PDL1, ROR-1, CD33 and CD123.

Royalties and In-licensing Agreements

Founder License Agreement—In 2003, the Company entered into a licensing agreement with a founding shareholder of the Company for the exclusive license to the NK-92 cell line and related know-how for payment of certain royalties related to the sales of licensed products (the Founder License Agreement). In 2009 and 2010, the Founder License Agreement was amended for the sale and assignment of the licensed patents to the Company. As consideration for the sale and assignment of the licensed patents and technical information to the Company, the founding shareholder was to receive a one-time cash payment of $75, which was converted to a non-interest bearing note (the Founder Note) (Note 4). In addition, the Company is obligated to (i) pay low single digit percentage royalties of net sales of licensed products for therapeutic and diagnostic use; (ii) issue additional shares of common stock of the Company in conjunction with the closing of a financing of at least $1,000 after the 2013 Securities Purchase Agreement to ensure the founder retains no less than a 7% ownership interest of the total outstanding common shares of the Company on a fully diluted basis; (iii) pay the British Columbia Cancer Agency a low single digit percentage royalty on net sales on a NK cell-based products, a responsibility assumed by the Company for the founding shareholder; and (iv) issue a warrant (Founder Warrant) to purchase up to 123,433 additional shares of Class A common stock at a purchase price of $2.44 per share with a 10 year exercise term subject to the completion of five milestones pertaining to granting of a patent, completion of clinical trials and issuance of a commercial biologic license. In 2013, the first milestone, a claim granted for a certain patent application in the United States, was achieved and as a result 37,030 shares underlying the Founder Warrant became exercisable.

15


In March 2014, the Founder License Agreement was amended to (i) provide for payment to the founder of low single digit percentage royalties on net sales of licensed products for therapeutic and diagnostic use and mid-single digit percentage royalties from sublicenses for net sales of licensed products; (ii) exchange warrants held by the founder to purchase up to 156,109 shares of Class A common stock for a fully-vested incentive stock option to purchase up to 740,600 shares of Class A common stock at fair market value on the date of issuance upon the Company closing a private placement of stock or other securities of at least $3,000 (the Mandatory Exchange Financing); and (iii) remove the requirement for the founder to retain not less than a 7% ownership interest of the total outstanding common shares of the Company on a fully diluted basis. As of September 30, 2015, no royalties have been earned or paid.

Fox Chase Cancer Center License Agreement—In 2004 and amended in 2008, the Company entered into an exclusive license agreement with Fox Chase Cancer Center (Fox Chase) for the exclusive, worldwide rights to certain patents and know-how pertaining to CD16 receptors bearing NK-92 cell lines. In consideration for this exclusive license granted, the Company agreed to pay Fox Chase (i) low single-digit percentage royalties on net sales of licensed products for therapeutic and diagnostic use; and (ii) mid-twenties percentage royalties on any compensation the Company receives from sublicensees.

The Company recorded royalty expense of $0 and $29 for the three months ended September 30, 2015 and 2014 and $51 and $149 for the nine months ended September 30, 2015 and 2014, respectively, related to the Fox Chase Cancer Center License Agreement. Royalty expense is included in selling, general and administrative in the condensed consolidated statements of operations.

Rush University Medical Center License Agreement—In 2004, the Company entered into a 12-year licensing agreement with Rush University Medical Center for the exclusive rights to license and grant sublicenses of certain intellectual property related to clinical use of NK-92. The Company is required to pay low to mid-single digit percentage royalties on net sales depending upon the various fields of studies and other factors. The Company is required to pay a minimum annual royalty of $25. The Rush University Medical Center License Agreement also provides for payments in the aggregate amount of $2,500 upon the Company achieving various milestones, including upon (i) the completion of Phase II clinical trial associated with the licensed intellectual property; (ii) the approval by the Food and Drug Administration (the FDA) of a new drug application for a licensed product; and (iii) the first year that sales of the licensed product equals or exceeds $250,000. The Rush University Medical Center License Agreement terminates on the 12th anniversary of the first payment of royalties, which occurred in 2006, at which point the license is deemed a perpetual, irrevocable, fully-paid royalty-free, exclusive license, and may be terminated earlier by either party for material breach.

During the three months ended September 30, 2015 and 2014, the Company recorded royalty expense of $6 and $6, and during the nine months ended September 30, 2015 and 2014, the Company recorded royalty expense of $19 and $44 related to the Rush University Medical Center License Agreement. Royalty expense is included in selling, general and administrative in the condensed consolidated statements of operations. No milestones were met during the nine months ended September 30, 2015 or 2014.

 

Chemotherapeutisches Forschungsinstitut Georg-Speyer-Haus (GSH) and DRK-Blutspendedienst Baden-Wurttemberg-Hessen gGmbH (BSD) License Agreement—In August 2015 the Company entered into a license agreement with GSH and BSD under which the Company was granted an exclusive license to certain GSH-BSD patents, materials and know-how that specifically targets ErbB2 expressing cancers.  In addition, GSH granted the Company an exclusive license to certain GSH only technology and materials.  In consideration for the licenses, the Company agreed to pay initial and annual licensing fees, regulatory and commercial milestones and low single-digit percentage royalties on net sales of licensed products.  The royalty term shall continue in a particular country until the later of (i) the expiration of the valid patent claims in such country or (ii) a specified period of time after the first commercial sale of licensed product in such country.  The license agreement shall continue until no further payments are due at which time the licenses and rights will continue on a non-exclusive, royalty-free basis.  The license agreement can be terminated earlier for:  (i) material breach by either party after 60 days cure period, (ii) the Company declaring bankruptcy or insolvency, (iii) the Company in its sole discretion upon 60 days prior written notice. The Company paid initial license fees under the license, which are included in research and development expenses in the condensed consolidated statements of operations for the three months ended September 30, 2015.

 

6. Related Party Agreements

In June 2015, the Company spun out Brink Biologics, Inc. and Coneksis, Inc. (Note 8).  The Company’s chairman and chief executive officer has a controlling interest in Brinks Biologics and Coneksis.

The Company’s chairman and chief executive officer founded and has a controlling interest in NantWorks, Inc. (NantWorks), which is a collection of multiple companies in the healthcare and technology space. The Company has entered into arrangements with NantWorks and certain affiliates of NantWorks, as described below, to facilitate the development of new genetically modified NK cells for the Company’s product pipeline.

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In June 2015, the Company entered into an agreement with NantOmics, LLC (NantOmics) to obtain genomic sequencing and proteomic analysis services, as well as related data management and bioinformatics services, exclusively from NantOmics. The Company is obligated to pay NantOmics a fixed, per sample fee, determined based on the type of services being provided. The agreement has an initial term of five years and renews automatically for successive one year periods, unless terminated earlier.

In June 2015, the Company entered into an agreement with NanoCav, LLC (NanoCav) pursuant to which the Company obtained access to NanoCav’s virus-free cell transfection technologies on a non-exclusive basis. Under the agreement, NanoCav will conduct certain, mutually-agreed feasibility studies, on a fee for service basis, to evaluate the use of its cell transfection technologies with the Company’s aNK cells. The agreement has an initial term of five years and renews automatically for successive one year periods, unless terminated earlier.  In September 2015, the Company made a $45 feasibility study retainer payment as required by the agreement which is recorded in prepaid expenses and other current assets in the condensed consolidated balance sheets.

In June 2015, the Company also entered into a supply agreement with NantCell, Inc. (NantCell) pursuant to which the Company has the right to purchase NantCell’s proprietary bioreactors, made according to specifications mutually agreed to with NantCell. The Company also has the right to purchase reagents and consumables associated with such equipment from NantCell. In September 2015, the Company made a $500 nonrefundable, upfront payment to NantCell as required by the agreement, which upfront payment is creditable against the Company’s future development activities and equipment purchases under the agreement. The agreement has an initial term of five years and renews automatically for successive one year periods unless terminated earlier. The upfront payment is included in prepaid expenses and other current assets in the condensed consolidated balance sheets.

In November 2015, the Company entered into a shared services agreement with NantWorks under which NantWorks will provide corporate, general and administrative, manufacturing strategy, regulatory and clinical trial strategy and other support services to the Company. The Company will be charged for the services at cost plus reasonable allocation for indirect costs that relate to the employees providing the services.  The agreement is effective as of August 1, 2015. For the three and nine months ended September 30, 2015, the Company recorded operating expenses of $80 to research and development and $349 to selling, general and administrative under this arrangement in the condensed consolidated statement of operations.

In November 2015, the Company entered into a facility license agreement with NantWorks for approximately 9,500 square feet of office space in Culver City, California, a portion of which is to be converted to a research and development laboratory and a Good Manufacturing Practices (GMP) laboratory. The Company is responsible for costs to build out the laboratories and has incurred costs of approximately $1,153 as of September 30, 2015. The term of the license extends through December 2020. The Company has the option to extend the license through December 2023. The monthly license fee is $47 with annual increases of 3% beginning in January 2017. The agreement is effective as of May 22, 2015.     For the three and nine months ended September 30, 2015, the Company recorded rent expense of $181, which is included in research and development in the condensed consolidated statement of operations.

 

 

7. Out-Licensing Agreement

Intrexon License Agreement—In February 2010, the Company entered into a 17-year license agreement with Intrexon Corporation (Intrexon) pursuant to which the Company granted to Intrexon a non-exclusive, worldwide, sublicensable license to research and sell products under certain patents relating to modified NK-92 cells that express Intrexon’s proprietary gene sequences for use as a therapeutic and prophylactic agent in humans in specified therapeutic areas. In consideration for the license agreement, Intrexon paid the Company a one-time fee of $350 and will pay the Company the following milestone payments: $50 upon the first IND filing; $100 upon the commencement of the first Phase II clinical trial; $350 upon the commencement of the first Phase III clinical trial; and $500 upon the first commercial sale relating to the licensed products. Intrexon is obligated to pay the Company a low single digit percentage royalty based on net sales of the licensed products by Intrexon and a mid-teen percentage royalty based on revenues received by Intrexon in connection with sublicenses of the licensed products. No milestone payments were due or received in the nine months ended September 30, 2015 or 2014. For the three and nine months ended September 30, 2015 and 2014, the Company recorded revenue of $5 and $15 respectively, related to the agreement in the condensed consolidated statements of operations.

 

 

8. Spinout of Brink Biologics and Coneksis

On June 9, 2015, the Company spun out its business related to testing and diagnostic products and services into the entity, Brink Biologics, Inc. (Brink Biologics) in exchange for all of the issued and outstanding shares of Brink Biologics which were subsequently distributed by a dividend to our stockholders. Under the spin-out arrangement, the Company transferred to Brink Biologics all of the Company’s existing revenue-earning, non-exclusive license agreements that allow third parties to use the Company’s cell lines and intellectual property for non-clinical laboratory testing. In addition, the Company transferred or licensed to Brink Biologics the Company’s other assets associated with testing and diagnostics products and services. The Company granted to Brink Biologics worldwide, exclusive licenses to the use of certain cell lines limited to the field of in vitro and in vivo testing and diagnostic products and services, trademarks, intellectual property, and patents, including the Company’s rights under its license agreement with Fox

17


Chase Cancer Center. As part of the agreement, the Company also has a non-exclusive license to any results and data arising from Brink Biologics’ use of the Company’s cell lines and intellectual property for the Company’s use for internal research purposes and outside of Brink Biologics’ field. In consideration for the license grants, Brink Biologics is obligated to pay the Company a low single-digit royalty on amounts received for the sale of licensed products and services, as well as a low single-digit percentage share of other revenue received by Brink Biologics from the grant of sublicenses under the Company’s rights. For the three and nine months ended September 30, 2015, the Company recorded $4 in revenue for royalties. Brink Biologics and the Company have the right to terminate the license agreement under certain conditions. Also, as part of the spin-out arrangement, the Company has agreed to provide certain services to Brink Biologics for a transitional period on a fee-for-service basis. In the three and nine months ended September 30, 2015, the Company has invoiced $58 for services to Brink Biologics which is recorded in other income on the condensed consolidated statement of operations.  Had the Company consummated the spin out as of the beginning of the year, for the nine months ended September 30, 2015, the Company’s revenue would have been $23 and selling, general and administrative expense would have been $152,792.

On June 9, 2015, the Company spun out its business related to veterinary oncology into the entity, Coneksis, Inc. (Coneksis) in exchange for all of the issued and outstanding shares of Coneksis which were subsequently distributed by a dividend to our stockholders. In connection with the spin-out arrangement, the Company granted to Coneksis worldwide, exclusive licenses for use of certain cell lines in the field of veterinary medical research and therapeutics, trademarks, intellectual property, and patents, including the Company’s rights under its license agreement with Fox Chase Cancer Center. As part of the agreement, the Company also has a non-exclusive license to any results and data arising from Coneksis’ use of the Company’s cell lines and intellectual property for the Company’s use for internal research purposes and outside of Coneksis’ field. In consideration for the license grants, Coneksis is obligated to pay the Company a single-digit royalty on amounts received for the sale of licensed products and services, as well as a single-digit percentage share of other revenue received by Coneksis from the grant of sublicenses under the Company’s rights. Coneksis and the Company have the right to terminate the license agreement under certain conditions. Also, as part of the spin-out arrangement, the Company has agreed to provide certain services to Coneksis for a transitional period on a fee-for-service basis. For the three and nine months ended September 30, 2015, the Company has invoiced Coneksis for service fees in the amount of $3 which is recorded in other income on the condensed consolidated statement of operations. Had the Company consummated the spin out as of the beginning of the year, there would have been no material impact to the statement of operations for the nine months ended September 30, 2015.

In April 2014, the FASB issued ASU No. 2014-08 - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which amends the definition of a discontinued operation, and requires additional disclosures about discontinued operations, as well as disposal transactions that do not meet the discontinued operations criteria. Under the new guidance, only disposals of a component representing a strategic shift in operations, that has or will have a major impact on the Company’s operations or financial results, should be classified as discontinued operations. The spin out of Banks Biologics and Coneksis did not have a major impact on the Company’s operations or financial results, and accordingly, are not being reported as discontinued operations.

 

 

9. Stockholders’ Equity

Conversion —In June 2015, the board of directors and the requisite shareholders approved the conversion of Class A common stock to common stock. Each share of Class A common stock converted into 1.00 share of common stock. Additionally, the number of authorized shares of common stock was increased from 80,000,000 to 100,000,000.

Forward Stock Split—On July 10, 2015, the Company amended its amended and restated certificate of incorporation effecting a 1.8515-for-1 forward stock split of its common stock. The forward stock split did not cause an adjustment to the par value or the authorized shares of the common stock or preferred stock. As a result of the forward stock split, the Company also adjusted the share and per-share amounts under its 2014 Equity Incentive Stock Plan and common stock warrant agreements with third parties. No fractional shares were issued in connection with the forward stock split. All disclosure of common shares and per common share data in the accompanying financial statements and related notes have been adjusted retroactively to reflect the forward stock split for all periods presented.

Amended and Restated Certificate of Incorporation—On July 31, 2015 the Company amended its Certificate of Incorporation to increase the number of authorized shares of common stock from 100,000,000 to 500,000,000.

Common Stock—In June 2015, the Company sold 3,698,695 shares of common stock in a private placement offering for net proceeds of $70,976 after $28 of issuance costs.  On July 8, 2015, the Company sold 364,638 shares of common stock in a private placement offering for gross proceeds of $7,000. On July 31, 2015, the Company closed its initial public offering and sold 9,531,200 shares of common stock for net proceeds of $221,214 after underwriters’ discounts and commissions and offering expenses. In addition, the Company completed a separate private placement concurrent with the completion of the initial public offering and sold 680,000 shares of common stock for proceeds of $17,000.

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Class A Common Stock—In December 2014, the Company issued 4,557,537 shares of Class A common stock at $1.76 per share for gross proceeds of $8,000 in a private placement transaction with Sorrento (Note 5). Subsequently in December 2014, the Company entered into a private placement offering and sold 26,252,262 shares of Class A common stock at $1.89 per share for gross proceeds of $49,495, of which Sorrento purchased 1,060,789 shares for $2,000. Related stock issuance costs totaled $159. In conjunction with the offering, the Company amended its Bylaws to increase the size of the board of directors to nine.

In conjunction with the 2013 Securities Purchase Agreement, 389,437 shares of Class A common stock were issued for conversion of certain debt and payables totaling $950, and 406,048 shares were issued in exchange for all outstanding shares of Series A preferred stock. In conjunction with the 2014 Securities Purchase Agreement, the placement agent agreed to exchange $45 of its cash commission for 34,715 shares of Class A common stock.

Common Stock Warrants—In 2010, the Company issued, in conjunction with a termination and release agreement, a warrant to purchase 114,822 shares of Class A common stock. The warrant was initially exercisable at $2.44 per share and is currently exercisable at $1.76 per share. The warrant expires in February 2020. The warrant includes a provision that for a period through two years after a reverse merger, the exercise price of the warrant is protected against down-round financing unless 66.67% of shareholders consent to the new transaction. Pursuant to ASC Subtopic 815-15 and ASC Subtopic 815-40, the fair value of the warrant of $439 was recorded as a derivative liability on the issuance date. The fair value of the warrant was estimated at the issuance date and is revalued at each reporting period, using a Monte Carlo simulation. At December 31, 2014 and April 30, 2015, the date of exercise, the Company recorded a derivative liability of approximately $177 and $1,543, respectively. The change in fair value of the derivative liability is included in other income (expense) in the condensed consolidated statements of operations. In April 2015, the warrant was exercised.

In March 2015, the board of directors approved the issuance of a stock option and a warrant to purchase Class A common stock to an officer of the Company (Note 10).

In connection with its acquisition of Inex Bio in March 2015, the Company issued warrants to purchase 3,202,593 shares of Class A common stock with an exercise price of $2.00 per share (Note 3). In April 2015, the Company received $6,400 for the full exercise of the warrants.

On June 18, 2015, the Company repurchased 249,952 shares of common stock from an employee at $19.20 per share for $4,798.

 

 

10. Stock-Based Compensation

2014 Equity Incentive Plan—In March 2014, the Company’s board of directors and stockholders approved the 2014 Equity Incentive Plan (2014 Plan) under which 11,109,000 shares of Class A common stock are reserved for the granting of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units and performance awards to employees, directors and consultants. Recipients of stock awards are eligible to purchase shares of the Company’s common stock at an exercise price equal to no less than the estimated fair market value of such stock on the date of grant. The maximum term of awards granted under the 2014 Plan is ten years. Stock awards are generally not exercisable prior to the applicable vesting date, unless otherwise accelerated under the terms of the applicable stock plan agreement. Unvested shares of the Company’s common stock issued in connection with an early exercise allowed by the Company may be repurchased by the Company upon termination of the optionee’s service with the Company.

2015 Equity Incentive Plan—In July 2015, the Company’s board of directors adopted the 2015 Equity Incentive Plan (2015 Plan). The 2015 Plan permits the grant of incentive stock options, within the meaning of Section 422 of the Code, to the Company’s employees and for the grant of nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to the Company’s employees, directors and consultants.  A total of 4,257,572 shares are reserved for issuance pursuant to the 2015 Plan. In addition, the shares reserved for issuance under the 2015 Plan will include shares subject to stock options or similar awards granted under the 2014 Plan that expire or terminate without having been exercised in full and shares issued pursuant to awards granted under the 2014 Plan that are forfeited to or repurchased by the Company (provided that the maximum number of shares that may be added to the 2015 Plan pursuant to this provision is 8,439,494 shares).

Stock-based Awards to an Officer—In March 2015, the Company granted to an officer an option to purchase 1,851,500 shares of the Company’s Class A common stock at an exercise price of $2.20 per share. The option vests in equal monthly installments over a period of four years from the date of grant. In March 2015, the board of directors approved the issuance of a warrant to purchase Class A common stock to an officer of the Company. The warrant has a four year term and an exercise price of $2.00 per share. The maximum number of shares underlying the warrant is 17,589,250 of which 7,406,000 vest over a 40-month service period beginning on April 1, 2015 and the remaining 10,183,250 vest based on the achievement of various milestones.  At September 30, 2015, a total of 9,442,650 were vested.

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Issuance of options and restricted stock units to Officers—In accordance with their employment agreements, the Company granted to its Chief Executive Officer and Chief Operating Officer upon the initial public offering a total of 1,455,450 options to purchase common stock with an exercise price of $25.00 per share and 970,300 restricted stock units representing the right to receive one share of the Company’s common stock for each restricted stock unit that becomes vested. The options and restricted stock units vested 50% at grant and the remaining 50% will vest upon the first anniversary of the initial public offering.

Stock Options

The following table summarizes stock option activity under the equity incentive plans for the nine months ended September 30, 2015:

 

 

 

Number of

Shares

 

 

Weighted-

Average

Exercise Price

 

 

Aggregate

Intrinsic

Value

 

 

Weighted-

Average

Remaining

Contractual Life

(in years)

 

Outstanding at December 31, 2014

 

 

5,137,914

 

 

 

 

 

 

 

 

 

 

 

 

 

Options granted

 

 

5,713,899

 

 

$

7.92

 

 

 

 

 

 

 

 

 

Options forfeited

 

 

(7,715

)

 

$

0.42

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(1,032,742

)

 

$

0.82

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2015

 

 

9,811,356

 

 

$

4.97

 

 

$

83,335

 

 

 

7.65

 

Vested and Exercisable at September 30, 2015

 

 

4,046,009

 

 

$

5.32

 

 

$

34,694

 

 

 

8.18

 

 

The following table provides a summary of options outstanding and vested as of September 30, 2015:

 

Exercise Prices

 

 

Number

Outstanding

 

 

Weighted-

Average

Life (in

Years)

 

 

Number

Exercisable

 

 

Weighted-

Average

Life (in

Years)

 

$0.22

 

 

 

1,404,060

 

 

 

8.46

 

 

 

987,472

 

 

 

8.46

 

$0.42