nk-10q_20180331.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 March 31, 2018  

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)

 

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 May 3, 2018 the registrant had 78,088,476 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

 

24

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

39

Item 4.

 

Controls and Procedures

 

40

 

 

 

 

 

Part II – Other Information

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

41

Item 1A.

 

Risk Factors

 

42

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

80

Item 3.

 

Defaults Upon Senior Securities

 

80

Item 4.

 

Mine Safety Disclosures

 

80

Item 5.

 

Other Information

 

81

Item 6.

 

Exhibits

 

81

 

 

 

-i-


NANTKWEST, INC.

PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

NantKwest, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except for share amounts)

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,196

 

 

$

23,872

 

Due from related parties

 

 

55

 

 

 

154

 

Prepaid expenses and other current assets

 

 

4,958

 

 

 

4,152

 

Marketable debt securities

 

 

110,593

 

 

 

104,280

 

Total current assets

 

 

126,802

 

 

 

132,458

 

Marketable debt securities, noncurrent

 

 

15,091

 

 

 

29,600

 

Property, plant and equipment, net

 

 

76,826

 

 

 

76,726

 

Equity investment

 

 

8,500

 

 

 

8,500

 

Intangible assets, net

 

 

2,260

 

 

 

2,826

 

Other assets

 

 

366

 

 

 

330

 

Total assets

 

$

229,845

 

 

$

250,440

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,566

 

 

$

5,865

 

Accrued expenses

 

 

12,077

 

 

 

11,267

 

Due to related parties

 

 

2,456

 

 

 

2,363

 

Other current liabilities

 

 

1,299

 

 

 

1,373

 

Total current liabilities

 

 

19,398

 

 

 

20,868

 

Build-to-suit liability, less current portion

 

 

4,797

 

 

 

4,909

 

Financing obligation, less current portion

 

 

1,663

 

 

 

1,741

 

Deferred rent

 

 

3,188

 

 

 

3,325

 

Deferred tax liability

 

 

374

 

 

 

498

 

Other liabilities

 

 

65

 

 

 

255

 

Total liabilities

 

 

29,485

 

 

 

31,596

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

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

   79,088,200 and 79,021,878 issued and outstanding as of

   March 31, 2018 and December 31, 2017

 

 

8

 

 

 

8

 

Additional paid-in capital

 

 

726,953

 

 

 

717,930

 

Accumulated other comprehensive loss

 

 

(555

)

 

 

(381

)

Accumulated deficit

 

 

(526,046

)

 

 

(498,713

)

Total stockholders’ equity

 

 

200,360

 

 

 

218,844

 

Total liabilities and stockholders’ equity

 

$

229,845

 

 

$

250,440

 

 

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 March 31,

 

 

 

 

2018

 

 

2017

 

 

Revenue

 

$

5

 

 

$

11

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development (including amounts to related parties)

 

 

13,991

 

 

 

9,248

 

 

Selling, general and administrative (including amounts to related parties)

 

 

14,298

 

 

 

16,227

 

 

Total operating expenses

 

 

28,289

 

 

 

25,475

 

 

Loss from operations

 

 

(28,284

)

 

 

(25,464

)

 

Other income:

 

 

 

 

 

 

 

 

 

Investment income, net

 

 

505

 

 

 

779

 

 

Interest expense (including amounts to related parties)

 

 

(33

)

 

 

(37

)

 

Other income, net (including amounts to related parties)

 

 

169

 

 

 

109

 

 

Total other income

 

 

641

 

 

 

851

 

 

Loss before income taxes

 

 

(27,643

)

 

 

(24,613

)

 

Income tax benefit

 

 

(124

)

 

 

(98

)

 

Net loss

 

$

(27,519

)

 

$

(24,515

)

 

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.35

)

 

$

(0.30

)

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares during the period:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

79,036,614

 

 

 

82,138,438

 

 

 

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 March 31,

 

 

 

 

2018

 

 

2017

 

 

Net loss

 

$

(27,519

)

 

$

(24,515

)

 

Other comprehensive income, net of income taxes:

 

 

 

 

 

 

 

 

 

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

 

 

(174

)

 

 

44

 

 

Total other comprehensive income (loss)

 

 

(174

)

 

 

44

 

 

Comprehensive loss

 

$

(27,693

)

 

$

(24,471

)

 

 

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, 2017

 

 

79,021,878

 

 

$

8

 

 

$

717,930

 

 

$

(381

)

 

$

(498,713

)

 

$

218,844

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

9,073

 

 

 

 

 

 

 

 

 

9,073

 

Vesting of restricted stock units

 

 

70,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of warrants

 

 

14,270

 

 

 

 

 

 

23

 

 

 

 

 

 

 

 

 

23

 

Employee payroll taxes withheld related to

   vesting of restricted stock units

 

 

(18,148

)

 

 

 

 

 

(73

)

 

 

 

 

 

 

 

 

(73

)

Cumulative effect of the adoption of the new revenue standard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

186

 

 

 

186

 

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

 

 

(174

)

 

 

 

 

 

(174

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(27,519

)

 

 

(27,519

)

Balance at March 31, 2018

 

 

79,088,200

 

 

$

8

 

 

$

726,953

 

 

$

(555

)

 

$

(526,046

)

 

$

200,360

 

 

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)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(27,519

)

 

$

(24,515

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,623

 

 

 

1,162

 

Stock-based compensation expense

 

 

9,073

 

 

 

10,018

 

Deferred income tax benefit

 

 

(124

)

 

 

(93

)

Non-cash interest items, net

 

 

149

 

 

 

253

 

Loss on disposal of assets

 

 

36

 

 

 

 

Amortization of net premiums on marketable debt securities

 

 

201

 

 

 

572

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(847

)

 

 

(13

)

Other assets

 

 

-

 

 

 

126

 

Accounts payable

 

 

117

 

 

 

725

 

Accrued expenses and other liabilities

 

 

1,878

 

 

 

434

 

Due to related parties

 

 

20

 

 

 

1,314

 

Deferred rent and revenue

 

 

(118

)

 

 

(40

)

Net cash used in operating activities

 

 

(15,511

)

 

 

(10,057

)

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(4,902

)

 

 

(4,509

)

Purchase of equity investment

 

 

-

 

 

 

(8,500

)

Purchases of marketable debt securities

 

 

(32,038

)

 

 

(25,207

)

Sales/maturities of marketable debt securities

 

 

39,860

 

 

 

54,254

 

Net cash provided by investing activities

 

 

2,920

 

 

 

16,038

 

Financing activities:

 

 

 

 

 

 

 

 

Principal payments of financing obligations

 

 

(65

)

 

 

(22

)

Proceeds from exercise of stock options and warrants

 

 

23

 

 

 

1,154

 

Repurchase of common stock with commissions

 

 

 

 

 

(1,050

)

Net share settlement for RSU vesting and option exercises

 

 

(43

)

 

 

(550

)

Net cash used in financing activities

 

 

(85

)

 

 

(468

)

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

(12,676

)

 

 

5,513

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

24,051

 

 

 

8,262

 

Cash, cash equivalents and restricted cash, end of period

 

$

11,375

 

 

$

13,775

 

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash at end of period:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,196

 

 

$

13,596

 

Restricted cash included in other assets

 

 

179

 

 

 

179

 

Cash, cash equivalents and restricted cash at end of period

 

 

11,375

 

 

 

13,775

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

34

 

 

$

37

 

Income taxes

 

$

 

 

$

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment purchases included in accounts payable and accrued

   expenses

 

$

5,930

 

 

$

2,492

 

Unrealized gain (loss) on marketable debt securities

 

$

(174

)

 

$

70

 

 

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 the Company’s strategy is to invest significantly in expanding the aNK platform and the development of the Company’s 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.

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 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 March 31, 2018, the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2018 and 2017, the condensed consolidated statements of cash flows for the three months ended March 31, 2018 and 2017, and the condensed consolidated statement of stockholders’ equity for the three months ended March 31, 2018 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, 2017 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, 2017 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 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).

6


Liquidity

As of March 31, 2018, the Company had an accumulated deficit of approximately $526.0 million. The Company also had negative cash flow from operations of approximately $15.5 million during the three months ended March 31, 2018. 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.  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, fail 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 debt 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 debt 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

There have been no material changes in the Company’s significant accounting policies other than the adoption of accounting pronouncements below, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.  

Principles of Consolidation and Equity Investments

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.

The Company applies the variable interest model under Accounting Standards Codification (ASC) Topic 810, Consolidation, to any entity in which the Company holds an equity investment or to which the Company has the power to direct the entity's most significant economic activities and the ability to participate in the entity's economics. If the entity is within the scope of the variable interest model and meets the definition of a variable interest entity (VIE), the Company considers whether it must consolidate the VIE or provide additional disclosures regarding the Company's involvement with the VIE. If the Company determines that it is the primary beneficiary of the VIE, the Company will consolidate the VIE. This analysis is performed at the initial investment in the entity or upon any reconsideration event.  

For entities the Company holds as an equity investment and are not consolidated under the VIE Model, the Company considers whether its investment constitutes ownership of a majority of the voting interests in the entity and therefore should be considered for consolidation under the voting interest model.

 

Unconsolidated equity investments in the common stock or in-substance common stock of an entity under which the Company is able to exercise significant influence, but not control, are accounted for using the equity method. The Company’s ability to exercise significant influence is generally indicated by ownership of 20 to 50 percent interest in the voting securities of the entity.  

 

All other unconsolidated equity investments on which the Company is not able to exercise significant influence will be subsequently measured at fair value with unrealized holding gains and losses included in other income, net on the consolidated statements of operations. In the instance the equity investment does not have a readily determinable fair value, the Company will apply the practicability exception and estimate the fair value at its cost minus impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

7


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, 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.

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  March 31,

 

 

 

2018

 

 

2017

 

Outstanding options

 

 

5,693,250

 

 

 

5,693,250

 

Outstanding restricted stock units

 

 

874,164

 

 

 

1,060,381

 

Outstanding warrants

 

 

17,706,818

 

 

 

17,768,314

 

Total

 

 

24,274,232

 

 

 

24,521,945

 

 

 

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

Recently Adopted Accounting Policies

Financial Assets and Liabilities and Equity Investment

Effective January 1, 2018, the Company adopted Accounting Standard Update (ASU) 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU 2016-01, associated with the recognition and measurement of financial assets and liabilities. During the first quarter of 2018, the FASB issued further clarifications with the issuance of ASU 2018-03, effective for fiscal years beginning after December 15, 2017 and interim periods beginning after June 15, 2018, and ASU 2018-04, effective upon issuance. The Company has early adopted ASU 2018-03 and adopted ASU 2018-04 effective January 1, 2018 concurrently with ASU 2016-01.  ASU 2016-01 requires that equity investments, except those accounted for under the equity method of accounting, be measured at fair value and changes in fair value are recognized in net income. ASU 2016-01 also provides a new measurement alternative for equity investments that do not have a readily determinable fair value (cost method investments). These investments are measured at cost, less any impairment, adjusted for observable price changes. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. Effective January 1, 2018, the Company elected to record its preferred stock equity investment in Viracta Therapeutics, Inc., which does not have a readily determinable fair value using the alternative method.  Adoption of the Updates did not have a material effect on the Company’s accounting for equity investments, fair value disclosures and other disclosure requirements.

8


The Company owns non-marketable equity securities that are accounted for as an equity investment at cost minus impairment and plus or minus changes resulting from observable price changes because the preferred stock held by the Company is not considered in-substance common stock and such 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, 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 impairment indicator is present include: the investees’ earning performance and clinical trial performance, change in the investees’ industry and geographic area in which it operates, offers to purchase or sell the security for a price less than the cost 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. Factors considered in determining whether an observable price change has occurred include: the price at which the investee issues equity instruments similar to those of the Company’s investment and the rights and preferences of those equity instruments compared to the Company’s.

Revenue Recognition

Beginning January 1, 2018, the Company follows the provisions of ASC Topic 606, Revenue from Contracts with Customers. The guidance provides a unified model to determine how revenue is recognized. The Company has applied the guidance to all contracts as of the date of initial application.  The Intrexon, Brink and Coneksis Agreements are contracts with customers that are within the scope of ASC Topic 606.

The Company derives substantially all of its revenue from non-exclusive license agreements with a limited number of pharmaceutical and biotechnology companies granting them the right to use the Company’s cell lines and intellectual property for non-clinical use. These agreements generally include upfront fees and annual research license fees for such use, as well as commercial license fees for sales of the Company’s licensee’s products developed or manufactured using the Company’s intellectual property and cell lines.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation based on relative standalone selling price and recognized as revenue when, or as, the performance obligation is satisfied.

Under the Company’s license agreements with customers, the Company typically promises to provide a license to use certain cell lines and related patents, the related know-how, and future research and development data that affects the license. The Company concluded that these promises represent one performance obligation due to the highly interrelated nature of the promises. The Company provides the cell lines and know-how immediately upon entering into the contracts. The research and development data is provided throughout the term of the contract when and if available.

The Company’s license agreement with Intrexon included a nonrefundable upfront payment of $0.4 million, received when the Company entered into the contract in 2010.  In this instance, the Company determined that under ASC 606 it would be appropriate to recognize the initial milestone payment at a point in time, when it transferred the license.  In this case, the intellectual property provided under the contract is functional intellectual property under ASC 606 and was determined to be a distinct performance obligation in the context of the arrangement. Prior to adoption, the upfront payment had been initially recorded as deferred revenue and was being recognized into revenue on a straight-line basis. As a result, upon adoption of ASC 606, the Company adjusted its opening retained deficit for the effects of recognizing revenue upfront for the initial milestone.  The adjustment to opening retained deficit upon adoption was not material.  

The license agreements may include nonrefundable upfront payments, event-based milestone payments, sales-based royalty payments, or some combination of these.  The event-based milestone payments represent variable consideration and the Company uses the most likely amount method to estimate this variable consideration. Given the high degree of uncertainly around achievement of these milestones, the Company does not recognize revenue from these milestone payments until the uncertainty associated with these payments is resolved. The Company currently estimates variable consideration related to milestone payments to be zero and, as such, no revenue has been recognized for milestone payments.  The Company will recognize revenue from sales-based royalty payments when or as the sales occur. On a quarterly basis, the Company will re-evaluate its estimate of milestone variable consideration to determine whether any amount should be included in the transaction price and recorded in revenue prospectively.

Upon adoption, the Company changed its accounting policy from accounting for milestones payments under the milestone method to accounting for variable consideration as discussed above. The change in accounting policy did not change any amounts in the financial statements because of the significant uncertainty surrounding the estimate of variable consideration for milestone payments.

9


The Company’s revenue from non-clinical license agreements is nominal. In the future, the Company may generate revenue from license agreements entered into for therapeutic uses. To date, the Company has not generated any revenue from product sales. If the Company fails to complete the development of its product candidates in a timely manner or fails to obtain regulatory approval for them, the Company may never be able to generate substantial future revenue.

Statement of Cash Flows

Effective January 1, 2018, the Company adopted ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. Also, effective January 1, 2018, the Company adopted ASU 2016-18, Statement of Cash Flows: Restricted Cash, a consensus of the FASB’s Emerging Issues Task Force. ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. Both Updates will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods. Prior periods were retrospectively adjusted to conform to the current period’s presentation. There was no material impact on the Company’s statement of cash flows on adoption of either Update.

Recent Accounting Pronouncements – Not Yet Adopted

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.  This new standard provides financial statement preparers with an option to reclassify stranded tax effects within Accumulated Other Comprehensive Income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recorded.  ASU 2018-02 is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2018.  Early adoption is permitted.  Adoption of ASU 2018-02 is not expected to 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.

3. Financial Statement Details

Prepaid Expenses and Other Current Assets

As of March 31, 2018 and December 31, 2017, prepaid expenses and other current assets consisted of (in thousands):

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

Insurance claim receivable

 

$

1,576

 

 

$

340

 

Prepaid license fees

 

 

843

 

 

 

597

 

Interest receivable - marketable debt securities

 

 

615

 

 

 

764

 

Equipment deposits

 

 

442

 

 

 

482

 

Prepaid insurance

 

 

381

 

 

 

572

 

Prepaid rent

 

 

373

 

 

 

373

 

Prepaid supplies

 

 

243

 

 

 

210

 

Prepaid services

 

 

157

 

 

 

416

 

Other

 

 

328

 

 

 

398

 

 

 

$

4,958

 

 

$

4,152

 

10


 

Property, Plant and Equipment, Net

As of March 31, 2018 and December 31, 2017, property, plant and equipment, net consisted of (in thousands):

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

Construction in progress

 

$

43,339

 

 

$

42,281

 

Buildings

 

 

23,811

 

 

 

23,811

 

Equipment

 

 

9,702

 

 

 

9,625

 

Leasehold improvements

 

 

3,967

 

 

 

3,918

 

Software

 

 

1,095

 

 

 

1,092

 

Furniture & fixtures

 

 

279

 

 

 

302

 

 

 

 

82,193

 

 

 

81,029

 

Accumulated depreciation

 

 

(5,367

)

 

 

(4,303

)

 

 

$

76,826

 

 

$

76,726

 

Depreciation expense related to property, plant and equipment was $1.1 million and $0.6 million for the three months ended March 31, 2018 and 2017, respectively.

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 and $4.3 million under a financing lease representing the estimated fair market value of the 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 section Financing Lease Obligation.  

Construction in progress as of March 31, 2018 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.

Intangible Assets, Net

As of March 31, 2018 and December 31, 2017, intangible assets consisted of (in thousands):

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

Technology license

 

$

9,042

 

 

$

9,042

 

Less accumulated amortization

 

 

(6,782

)

 

 

(6,216

)

 

 

$

2,260

 

 

$

2,826

 

 

Amortization expense was $0.6 million for both the three months ended March 31, 2018 and 2017.  Amortization for the Company’s technology license is included in research and development expense on the condensed consolidated statement of operations.

Other Assets

As of March 31, 2018 and December 31, 2017, other assets consisted of (in thousands):

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

Restricted cash

 

$

179

 

 

$

179

 

Security deposits

 

 

127

 

 

 

127

 

Other

 

 

60

 

 

 

24

 

 

 

$

366

 

 

$

330

 

Restricted cash is a certificate of deposit that is collateral for the letter of credit required as a security deposit for the Company’s San Diego, California, facility by the Company’s landlord.  

11


Accrued Expenses

As of March 31, 2018 and December 31, 2017, accrued expenses consisted of (in thousands):

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

Accrued construction costs

 

$

5,019

 

 

$

6,212

 

Accrued bonus

 

 

2,476

 

 

 

1,930

 

Accrued professional and service fees

 

 

1,471

 

 

 

1,048

 

Accrued compensation

 

 

1,396

 

 

 

944

 

Accrued preclinical and clinical trial costs

 

 

938

 

 

 

521

 

Accrued laboratory equipment and supplies

 

 

467

 

 

 

 

Other

 

 

310

 

 

 

612

 

 

 

$

12,077

 

 

$

11,267

 

 

Other Current Liabilities

As of March 31, 2018 and December 31, 2017, other current liabilities were made up of (in thousands):

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

Deferred rent - current portion

 

$

539

 

 

$

520

 

Financing obligation - current portion

 

 

292

 

 

 

284

 

Build-to-suit lease liability - current portion

 

 

271

 

 

 

334

 

Other

 

 

197

 

 

 

235

 

 

 

$

1,299

 

 

$

1,373

 

Investment Income, Net

Net investment income includes interest income from all bank accounts as well as marketable debt 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 months ended March 31, 2018 and 2017 (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

 

(Unaudited)

 

 

 

 

2018

 

 

2017

 

 

Interest income

 

$

704

 

 

$

1,354

 

 

Investment amortization accretion expense, net

 

 

(201

)

 

 

(572

)

 

Net realized gains (losses) on investments

 

 

2

 

 

 

(3

)

 

 

 

$

505

 

 

$

779

 

 

Interest income includes interest from the Company’s bank deposits.  The Company did not recognize an impairment loss on any investments for the three months ended March 31, 2018 and 2017.

4. Equity 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 the expiration date of 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.

Based on the level of equity investment at risk, Viracta is not a Variable Interest Entity (VIE) and therefore is not consolidated under the VIE Model. Also, the Company does not hold a controlling financial interest in Viracta and therefore is not consolidating Viracta under the voting interest model.  As the preferred stock is not considered in-substance common stock, the investment is not within the scope of accounting for the investment under the equity method.  As the preferred stock does not have a readily determinable fair value, the Company has elected to apply the practicability exception noted under ASC 825 and estimates the fair value at its $8.5 million cost minus impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

12


As of March 31, 2018, the Company’s qualitative impairment assessment did not indicate there were events or changes in circumstances that may have had a significant adverse effect on the fair value of the investment.  The Company has not recorded any impairments as of March 31, 2018 or on a cumulative basis. Further, the Company has not identified any downward or upward adjustments due to observable price changes in the investment as of the March 31, 2018  or on a cumulative basis. The $8.5 million cost of the investment is recorded in equity investment on the condensed consolidated balance sheet as of March 31, 2018.

5. Cash Equivalents and Marketable Debt Securities

As of March 31, 2018, all of the Company’s marketable debt securities are classified as available-for-sale and are scheduled to mature within 3.5 years.  At March 31, 2018, the detail of the Company’s cash equivalents and marketable debt securities is as follows (in thousands):

 

 

 

March 31, 2018

 

 

 

(unaudited)

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

86,952

 

 

$

1

 

 

$

(222

)

 

$

86,731

 

Government sponsored securities

 

 

12,508

 

 

 

 

 

 

(15

)

 

 

12,493

 

Foreign government bonds

 

 

5,936

 

 

 

 

 

 

(5

)

 

 

5,931

 

Commercial paper

 

 

5,441

 

 

 

 

 

 

(3

)

 

 

5,438

 

Current portion

 

 

110,837

 

 

 

1

 

 

 

(245

)

 

 

110,593

 

Noncurrent:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

12,642

 

 

 

 

 

 

(248

)

 

 

12,394

 

Government sponsored securities

 

 

2,759

 

 

 

 

 

 

(62

)

 

 

2,697

 

Noncurrent portion

 

 

15,401

 

 

 

-

 

 

 

(310

)

 

 

15,091

 

Total

 

$

126,238

 

 

$

1

 

 

$

(555

)

 

$

125,684

 

 

At December 31, 2017, the detail of the Company’s cash equivalents and marketable debt securities is as follows (in thousands):

 

 

 

December 31, 2017

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

82,188

 

 

$

5

 

 

$

(84

)

 

$

82,109

 

Government sponsored securities

 

 

19,261

 

 

 

 

 

 

(28

)

 

 

19,233

 

Foreign government bonds

 

 

6,441

 

 

 

 

 

 

(5

)

 

 

6,436

 

Current portion

 

 

107,890

 

 

 

5

 

 

 

(117

)

 

 

107,778

 

Noncurrent:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

27,109

 

 

 

 

 

 

(226

)

 

 

26,883

 

Government sponsored securities

 

 

2,760

 

 

 

 

 

 

(43

)

 

 

2,717

 

Noncurrent portion

 

 

29,869

 

 

 

 

 

 

(269

)

 

 

29,600

 

Total

 

$

137,759

 

 

$

5

 

 

$

(386

)

 

$

137,378

 

Included in foreign government bonds is $3.5 million of cash equivalents at December 31, 2017.

Available-for-sale investments that had been in an unrealized loss position for more and less than 12 months at March 31, 2018 and December 31, 2017 are as follows (in thousands): 

 

 

 

March 31, 2018

 

 

 

(unaudited)

 

 

 

Less than 12 months

 

 

More than 12 months

 

 

 

Estimated Fair

Value

 

 

Gross Unrealized

Losses

 

 

Estimated Fair

Value

 

 

Gross Unrealized

Losses

 

Corporate debt securities

 

$

73,914

 

 

$

(208

)

 

$

23,211

 

 

$

(262

)

Government sponsored securities

 

 

1,999

 

 

 

(7

)

 

 

13,191

 

 

 

(70