nk-10q_20170930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10‑Q

 

(Mark One)

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

For the quarterly period ended September 30, 2017  

OR

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      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).    Yes      No  

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,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

 

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 standards provided pursuant to Section 13(a) of the Exchange Act. 

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

As of November 6, 2017 the registrant had 79,455,139 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

 

39

Item 4.

 

Controls and Procedures

 

39

 

 

 

 

 

Part II – Other Information

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

40

Item 1A.

 

Risk Factors

 

41

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

77

Item 3.

 

Defaults Upon Senior Securities

 

77

Item 4.

 

Mine Safety Disclosures

 

77

Item 5.

 

Other Information

 

78

Item 6.

 

Exhibits

 

78

 

 

 

-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, 2017

 

 

December 31, 2016

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

20,920

 

 

$

8,083

 

Due from related parties

 

 

61

 

 

 

1,089

 

Prepaid expenses and other current assets

 

 

4,525

 

 

 

5,135

 

Marketable securities

 

 

131,347

 

 

 

190,838

 

Total current assets

 

 

156,853

 

 

 

205,145

 

Marketable securities, noncurrent

 

 

34,198

 

 

 

87,571

 

Property, plant and equipment, net

 

 

74,471

 

 

 

18,906

 

Cost method investment

 

 

8,500

 

 

 

 

Intangible assets, net

 

 

3,391

 

 

 

5,086

 

Other assets

 

 

324

 

 

 

788

 

Total assets

 

$

277,737

 

 

$

317,496

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

9,485

 

 

$

4,045

 

Accrued expenses

 

 

15,838

 

 

 

5,864

 

Due to related parties

 

 

1,986

 

 

 

1,753

 

Other current liabilities

 

 

1,365

 

 

 

891

 

Total current liabilities

 

 

28,674

 

 

 

12,553

 

Build-to-suit liability, less current portion

 

 

5,062

 

 

 

5,651

 

Financing obligation, less current portion

 

 

1,814

 

 

 

2,025

 

Deferred rent

 

 

3,461

 

 

 

2,426

 

Deferred tax liability

 

 

681

 

 

 

996

 

Other liabilities

 

 

341

 

 

 

427

 

Total liabilities

 

 

40,033

 

 

 

24,078

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

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

   79,440,700 and 81,983,937 issued and outstanding as of

   September 30, 2017 and December 31, 2016

 

 

8

 

 

 

8

 

Additional paid-in capital

 

 

709,353

 

 

 

680,757

 

Accumulated other comprehensive loss

 

 

(202

)

 

 

(284

)

Accumulated deficit

 

 

(471,455

)

 

 

(387,063

)

Total stockholders’ equity

 

 

237,704

 

 

 

293,418

 

Total liabilities and stockholders’ equity

 

$

277,737

 

 

$

317,496

 

 

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,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue

 

$

8

 

 

$

12

 

 

$

33

 

 

$

30

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

11,069

 

 

 

8,364

 

 

 

30,023

 

 

 

19,708

 

Selling, general and administrative

 

 

13,381

 

 

 

24,423

 

 

 

43,736

 

 

 

79,678

 

Total operating expenses

 

 

24,450

 

 

 

32,787

 

 

 

73,759

 

 

 

99,386

 

Loss from operations

 

 

(24,442

)

 

 

(32,775

)

 

 

(73,726

)

 

 

(99,356

)

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment income, net

 

 

680

 

 

 

795

 

 

 

2,140

 

 

 

2,302

 

Interest expense

 

 

(393

)

 

 

(29

)

 

 

(584

)

 

 

(29

)

Other income (expense), net

 

 

87

 

 

 

60

 

 

 

(87

)

 

 

89

 

Total other income

 

 

374

 

 

 

826

 

 

 

1,469

 

 

 

2,362

 

Loss before income taxes

 

 

(24,068

)

 

 

(31,949

)

 

 

(72,257

)

 

 

(96,994

)

Income tax benefit

 

 

(99

)

 

 

(52

)

 

 

(321

)

 

 

(423

)

Net loss

 

$

(23,969

)

 

$

(31,897

)

 

$

(71,936

)

 

$

(96,571

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.30

)

 

$

(0.39

)

 

$

(0.89

)

 

$

(1.18

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares during the period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

79,440,591

 

 

 

82,154,219

 

 

 

80,996,732

 

 

 

82,019,203

 

 

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,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net loss

 

$

(23,969

)

 

$

(31,897

)

 

$

(71,936

)

 

$

(96,571

)

Other comprehensive income, net of income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss) on available-for-sale securities

 

 

59

 

 

 

(241

)

 

 

(177

)

 

 

405

 

Reclassification of net realized gains on available-for-sale

   securities included in net loss

 

 

(24

)

 

 

(48

)

 

 

(25

)

 

 

(78

)

Total other comprehensive income (loss)

 

 

35

 

 

 

(289

)

 

 

(202

)

 

 

327

 

Comprehensive loss

 

$

(23,934

)

 

$

(32,186

)

 

$

(72,138

)

 

$

(96,244

)

 

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

3


NantKwest, Inc.

Condensed Consolidated Statement of Stockholders’ Equity

(in thousands, except for share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Total

 

Balance at December 31, 2016

 

 

81,983,937

 

 

$

8

 

 

$

680,757

 

 

$

(284

)

 

$

(387,063

)

 

$

293,418

 

Exercise of stock options

 

 

614,136

 

 

 

 

 

 

1,154

 

 

 

 

 

 

 

 

 

1,154

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

28,113

 

 

 

 

 

 

 

 

 

28,113

 

Vesting of restricted stock units

 

 

35,793

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of warrants

 

 

32,787

 

 

 

 

 

 

38

 

 

 

 

 

 

 

 

 

38

 

Employee payroll taxes withheld related to

   option exercises and vesting of restricted

   stock units

 

 

(153,744

)

 

 

 

 

 

(709

)

 

 

 

 

 

 

 

 

(709

)

Repurchase of common stock

 

 

(3,072,209

)

 

 

 

 

 

 

 

 

 

 

 

(12,456

)

 

 

(12,456

)

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

 

 

82

 

 

 

 

 

 

82

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(71,936

)

 

 

(71,936

)

Balance at September 30, 2017

 

 

79,440,700

 

 

$

8

 

 

$

709,353

 

 

$

(202

)

 

$

(471,455

)

 

$

237,704

 

 

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,

 

 

 

2017

 

 

2016

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(71,936

)

 

$

(96,571

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,997

 

 

 

1,768

 

Stock-based compensation expense

 

 

28,113

 

 

 

62,586

 

Deferred income tax benefit

 

 

(315

)

 

 

(423

)

Non-cash interest items, net

 

 

648

 

 

 

(273

)

Loss on disposal of assets

 

 

64

 

 

 

18

 

Amortization of net premiums on marketable securities

 

 

1,298

 

 

 

1,567

 

Gain on sales of marketable securities

 

 

(25

)

 

 

(118

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(576

)

 

 

(1,380

)

Other assets

 

 

464

 

 

 

75

 

Accounts payable

 

 

1,493

 

 

 

321

 

Accrued expenses and other liabilities

 

 

(446

)

 

 

2,454

 

Due to related parties

 

 

759

 

 

 

501

 

Deferred rent and revenue

 

 

1,322

 

 

 

1,635

 

Net cash used in operating activities

 

 

(35,140

)

 

 

(27,840

)

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(23,382

)

 

 

(5,202

)

Purchase of cost method investment

 

 

(8,500

)

 

 

 

Purchases of marketable securities

 

 

(75,115

)

 

 

(207,891

)

Sales/maturities of marketable securities

 

 

186,815

 

 

 

107,885

 

Net cash provided by (used in) investing activities

 

 

79,818

 

 

 

(105,208

)

Financing activities:

 

 

 

 

 

 

 

 

Principal payments of financing/capital lease obligations

 

 

(19,868

)

 

 

(10

)

Proceeds from exercise of stock options and warrants

 

 

1,192

 

 

 

1,044

 

Repurchase of common stock with commissions

 

 

(12,456

)

 

 

(11,898

)

Net share settlement for RSU vesting and option exercises

 

 

(709

)

 

 

(592

)

Net cash used in financing activities

 

 

(31,841

)

 

 

(11,456

)

Net increase (decrease) in cash and cash equivalents

 

 

12,837

 

 

 

(144,504

)

Cash and cash equivalents, beginning of period

 

 

8,083

 

 

 

175,908

 

Cash and cash equivalents, end of period

 

$

20,920

 

 

$

31,404

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

632

 

 

$

29

 

Income taxes

 

$

3

 

 

$

1

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment purchases acquired under capital lease

 

$

19,448

 

 

$

 

Estimated fair value of building under build-to-suit lease

 

$

 

 

$

5,139

 

Property and equipment purchases included in accounts payable and accrued

   expenses

 

$

17,561

 

 

$

1,092

 

Unrealized gain on marketable securities

 

$

108

 

 

$

506

 

Cashless exercise of stock options and warrants

 

$

16

 

 

$

456

 

Lease incentive

 

$

 

 

$

239

 

 

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

 

5


NantKwest, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

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. In March 2014, the Company redomesticated from the State of Illinois to the State of Delaware and the Illinois Company ceased to exist.  The Company is a pioneering clinical-stage immunotherapy biotechnology company headquartered in San Diego, California with certain operations in Culver City and El Segundo, California and Woburn, Massachusetts.

The Company is focused on harnessing the power of the innate immune system by using the natural killer cell to treat cancer, infectious diseases and inflammatory diseases.  A critical aspect of our strategy is to invest significantly in expanding our aNK platform and the development of our product candidates.

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.

In addition, the Company 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 CD16 bearing aNK cell lines and intellectual property to numerous pharmaceutical and biotechnology companies for such non-clinical uses.  The Company also licensed exclusive commercial rights to a unique HER2-specific receptor bearing aNK cell line along with the corresponding U.S. and foreign composition and methods-of-use patents and applications covering clinical use as a therapeutic to treat cancers.

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.

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet at September 30, 2017, the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2017, the condensed consolidated statements of cash flows for the nine months ended September 30, 2017, and the condensed consolidated statement of stockholders’ equity for the nine months ended September 30, 2017 have been prepared by management of the Company and have not been audited. These financial statements have been prepared on the same basis as the audited consolidated financial statements for the fiscal year ended December 31, 2016 and, in the opinion of management, include all normal recurring adjustments necessary for a fair statement of the Company’s results for the periods presented. These financial statements should be read in conjunction with the financial statements and notes thereto for the fiscal year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K.  Interim operating results are not necessarily indicative of operating results for the full year. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP).

Principles of Consolidation

The Company’s condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Inex Bio, Inc. and 557 Doug St, LLC, and have been prepared in accordance with GAAP.  All intercompany amounts have been eliminated.

Liquidity

As of September 30, 2017, the Company had an accumulated deficit of approximately $471.5 million. The Company also had negative cash flow from operations of approximately $35.1 million during the nine months ended September 30, 2017. 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 and marketable securities 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 and marketable securities 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.

2. Summary of Significant Accounting Policies

With the exception of the policy for cost method investments noted below, there have been no significant changes to the items that the Company disclosed as its summary of significant accounting policies in the Annual Report on Form 10-K for the year ended December 31, 2016.

Accounting for Cost Method Investments

The Company owns non-marketable equity securities that are accounted for under the cost method because the preferred stock is not considered in-substance common stock and the preferred stock does not have a readily determinable fair value. All investments are reviewed on a regular basis for possible impairment. If an investment's fair value is determined to be less than its net carrying value and the decline is determined to be other-than-temporary, the investment is written down to its fair value. Such an evaluation is judgmental and dependent on specific facts and circumstances. Factors considered in determining whether an other-than-temporary decline in value has occurred include: market value of the investment based on most recent rounds of financing by the investee, length of time that the market value was below its cost basis, financial condition and business prospects of the investee, the Company’s intent and ability to retain the investment for a sufficient period of time to allow for recovery in market value of the investment, issues that raise concerns about the investee's ability to continue as a going concern, and any other information that the Company may be aware of related to the investment.

Use of Estimates

The preparation of condensed consolidated 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 condensed consolidated 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 stock-based compensation, warrants, the valuation allowance for deferred tax assets, preclinical and clinical trial accruals, impairment assessments, and the valuation of build-to-suit lease assets. 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.

Basic and Diluted Net Loss per Share of Common Stock

Basic net loss per share is calculated by dividing 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.

7


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 that have been excluded from the computation of potentially dilutive securities:  

 

 

As of  September 30,

 

 

 

2017

 

 

2016

 

Outstanding options

 

 

5,693,250

 

 

 

6,518,062

 

Outstanding restricted stock units

 

 

1,066,993

 

 

 

859,022

 

Outstanding warrants

 

 

17,735,527

 

 

 

17,775,257

 

Total

 

 

24,495,770

 

 

 

25,152,341

 

 

 

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

Recent Accounting Pronouncements

Application of New or Revised Accounting Standards – Not Yet Adopted

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash.  This guidance requires restricted cash and restricted cash equivalents to be included with the cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the consolidated statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, but the Company does not plan to adopt early. The evaluation of ASU 2016-18 has been completed and will not have a significant impact in the Company’s consolidated financial statements and disclosures.  

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):  Measurement of Credit Losses on Financial Instruments.  This new guidance is intended to present credit losses on available for sale debt securities as an allowance rather than as a write-down.  ASU 2016-13 is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted for those fiscal years beginning after December 15, 2018.  Adoption of ASU 2016-13 is not expected to have a significant impact in the Company’s consolidated financial statements and disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize assets and liabilities for operating leases with lease terms greater than twelve months in the balance sheet. The update also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-02 in its financial statements and disclosures.  The adoption is expected to result in a significant increase in the total assets and liabilities reported in the Company’s consolidated balance sheet.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.  This new guidance changes the recognition of the periodic revaluation of financial assets for fair value purposes from unrealized gains and losses in the equity section of the consolidated balance sheet to realized gains and losses in the consolidated statement of operations from the time of purchase through the final conversion back to cash.  ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is not permitted. Adoption of ASU 2016-01 is not expected to have a significant impact in the Company’s consolidated financial statements and disclosures.

8


In May 2014, the FASB issued guidance codified in ASC Topic 606, ASU 2014-09, 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.  On August 12, 2015, the FASB issued guidance which defers the effective date of ASC Topic 606 by one year to January 1, 2018 for public companies.  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. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP, including identifying performance obligations in a contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.  The new standard allows for two methods of adoption: (1) full retrospective adoption, meaning the standard is applied to all periods presented, or (2) modified retrospective adoption, meaning the cumulative effect of applying the new standard is recognized as an adjustment to the opening retained earnings balance.  The Company is in the process of finalizing its initial impact assessment and does not currently anticipate a material impact of the adoption of ASU 2014-09 on revenue in the condensed consolidated statements of operations.  Changes to the Company’s accounting policies, business processes, internal controls and disclosures to support the new accounting are not expected to be significant.

3. Financial Statement Details

Prepaid Expenses and Other Current Assets

As of September 30, 2017 and December 31, 2016, prepaid expenses and other current assets consisted of (in thousands):

 

 

 

September 30, 2017

 

 

December 31, 2016

 

 

 

(Unaudited)

 

 

 

 

 

Prepaid services

 

$

1,037

 

 

$

1,191

 

Interest receivable - marketable securities

 

 

836

 

 

 

1,484

 

Prepaid insurance

 

 

816

 

 

 

531

 

Equipment and supply deposits

 

 

602

 

 

 

482

 

Tenant improvement allowance receivable

 

 

387

 

 

 

 

Prepaid rent

 

 

369

 

 

 

360

 

Prepaid license fees

 

 

192

 

 

 

462

 

Prepaid legal fees

 

 

 

 

 

350

 

Other

 

 

286

 

 

 

275

 

 

 

$

4,525

 

 

$

5,135

 

 

Property, Plant and Equipment, Net

As of September 30, 2017 and December 31, 2016, property, plant and equipment consisted of (in thousands):

 

 

 

September 30, 2017

 

 

December 31, 2016

 

 

 

(Unaudited)

 

 

 

 

 

Construction in progress

 

$

41,025

 

 

$

6,939

 

Buildings

 

 

23,811

 

 

 

4,348

 

Equipment

 

 

9,104

 

 

 

5,458

 

Leasehold improvements

 

 

2,494

 

 

 

2,367

 

Software

 

 

1,082

 

 

 

769

 

Furniture & fixtures

 

 

233

 

 

 

203

 

 

 

 

77,749

 

 

 

20,084

 

Accumulated depreciation

 

 

(3,278

)

 

 

(1,178

)

 

 

$

74,471

 

 

$

18,906

 

Depreciation expense related to property, plant and equipment was $0.9 million and $0.3 million for the three months ended September 30, 2017 and 2016, respectively, and $2.3 million and $0.4 million for the nine months ended September 30, 2017 and 2016, respectively.

Construction in progress as of September 30, 2017 includes the estimated fair value of $5.1 million for the Company’s build-to-suit lease related to its facility in El Segundo, California, for which the Company is the “deemed owner” for accounting purposes only.  See Note 8 – Build-to-suit Lease.

9


Buildings of $23.8 million are comprised of $19.5 million related to the purchased warehouse and distribution facility in El Segundo, California, originally accounted for as a capital lease (See Note 8 – Capital Lease) and $4.3 million under a financing lease  representing the estimated fair market value of a building in Culver City, California, for which the Company is the “deemed owner” for accounting purposes only, and related non-normal tenant improvements.   See Note 8 – Financing Lease Obligation.  

Intangible Assets, Net

As of September 30, 2017 and December 31, 2016, intangible assets consisted of (in thousands):

 

 

 

September 30, 2017

 

 

December 31, 2016

 

 

 

(Unaudited)

 

 

 

 

 

Technology license

 

$

9,042

 

 

$

9,042

 

Less accumulated amortization

 

 

(5,651

)

 

 

(3,956

)

 

 

$

3,391

 

 

$

5,086

 

 

Amortization expense was $0.6 million and $0.4 million for the three months ended September 30, 2017 and 2016, respectively, and $1.7 million and $1.3 million for the nine months ended September 30, 2017 and 2016, respectively.  Amortization for the Company’s technology license is included in research and development expense in the condensed consolidated statement of operations.

Other Assets

As of September 30, 2017 and December 31, 2016, other assets consisted of (in thousands):

 

 

 

September 30, 2017

 

 

December 31, 2016

 

 

 

(Unaudited)

 

 

 

 

 

Restricted cash

 

$

179

 

 

$

179

 

Security deposits

 

 

127

 

 

 

137

 

Equipment not placed in service

 

 

 

 

 

362

 

Other

 

 

18

 

 

 

110

 

 

 

$

324

 

 

$

788

 

 

Accrued Expenses

As of September 30, 2017 and December 31, 2016, accrued expenses consisted of (in thousands):

 

 

 

September 30, 2017

 

 

December 31, 2016

 

 

 

(Unaudited)

 

 

 

 

 

Accrued construction costs

 

$

11,068

 

 

$

1,053

 

Accrued bonus

 

 

1,434

 

 

 

1,732

 

Accrued compensation

 

 

992

 

 

 

898

 

Accrued professional and service fees

 

 

882

 

 

 

1,008

 

Accrued preclinical and clinical trial costs

 

 

651

 

 

 

662

 

Accrued laboratory equipment and supplies

 

 

393

 

 

 

190

 

Other

 

 

418

 

 

 

321

 

 

 

$

15,838

 

 

$

5,864

 

 

Other Current Liabilities

As of September 30, 2017 and December 31, 2016, other current liabilities were made up of (in thousands):

 

 

 

September 30, 2017

 

 

December 31, 2016

 

 

 

(Unaudited)

 

 

 

 

 

Deferred rent - current portion

 

$

501

 

 

$

197

 

Build-to-suit lease liability - current portion

 

 

355

 

 

 

281

 

Financing obligation - current portion

 

 

276

 

 

 

253

 

Other

 

 

233

 

 

 

160

 

 

 

$

1,365

 

 

$

891

 

10


Investment Income, Net

Net investment income includes interest income from all bank accounts as well as marketable securities, net realized gains or losses on sales of investments and the amortization of the premiums and discounts of the investments and is as follows for the three and nine months ended September 30, 2017 and 2016 (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

Interest income

 

$

1,005

 

 

$

1,371

 

 

$

3,408

 

 

$

3,802

 

 

Investment amortization accretion expense, net

 

 

(359

)

 

 

(625

)

 

 

(1,298

)

 

 

(1,567

)

 

Net realized gains on investments

 

 

34

 

 

 

49

 

 

 

30

 

 

 

67

 

 

 

 

$

680

 

 

$

795

 

 

$

2,140

 

 

$

2,302

 

 

Interest income includes interest from the Company’s bank deposits.  The Company did not recognize an impairment loss on any investments for the nine months ended September 30, 2017 and 2016.

4. Cost Method Investment

In March 2017, the Company participated in a Series B convertible preferred stock financing and invested $8.5 million in Viracta Therapeutics, Inc. (Viracta), a clinical stage drug development company. The Company did not exercise the option to purchase up to an additional $8.5 million worth of shares of the Series B convertible preferred stock by September 30, 2017. In May 2017, the Company executed an exclusive worldwide license with Viracta to develop and commercialize Viracta’s proprietary histone deacetylase inhibitor drug candidate for use in combination with NK cell therapy and possibly additional therapies. See Note 7 for further information regarding the license.

Based on the level of equity investment at risk, Viracta is not a Variable Interest Entity (VIE). The Company is not consolidating Viracta, but is accounting for this investment using the cost method because the preferred stock is not considered in-substance common stock and preferred stock does not have a readily determinable fair value. As of September 30, 2017, the Company did not estimate the fair value of this cost method investment as there were no events or changes in circumstances that may have had a significant adverse effect on the fair value of the investment. The $8.5 million cost of the investment is recorded in cost method investment in the condensed consolidated balance sheet as of September 30, 2017.

5. Cash Equivalents and Marketable Securities

As of September 30, 2017, all of the Company’s marketable securities are classified as available-for-sale and are scheduled to mature within 4.8 years.  At September 30, 2017, the detail of the Company’s cash equivalents and marketable securities is as follows (in thousands):

 

 

 

September 30, 2017

 

 

 

(unaudited)

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

5,145

 

 

$

1

 

 

$

 

 

$

5,146

 

Corporate debt securities

 

 

93,609

 

 

 

19

 

 

 

(58

)

 

 

93,570

 

Government sponsored securities

 

 

24,263

 

 

 

 

 

 

(28

)

 

 

24,235

 

Foreign government bonds

 

 

8,402

 

 

 

 

 

 

(6

)

 

 

8,396

 

Current portion

 

 

131,419

 

 

 

20

 

 

 

(92

)

 

 

131,347

 

Noncurrent:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

31,540

 

 

 

25

 

 

 

(109

)

 

 

31,456

 

Government sponsored securities

 

 

2,761

 

 

 

 

 

 

(19

)

 

 

2,742

 

Noncurrent portion

 

 

34,301

 

 

 

25

 

 

 

(128

)

 

 

34,198

 

Total

 

$

165,720

 

 

$

45

 

 

$

(220

)