nk-10q_20180930.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, 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 every Interactive Data File required to be submitted 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 such files).  Yes   No

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

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 5, 2018 the registrant had 79,226,083 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

 

25

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

36

Item 4.

 

Controls and Procedures

 

36

 

 

 

 

 

Part II – Other Information

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

38

Item 1A.

 

Risk Factors

 

39

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

75

Item 3.

 

Defaults Upon Senior Securities

 

75

Item 4.

 

Mine Safety Disclosures

 

75

Item 5.

 

Other Information

 

75

Item 6.

 

Exhibits

 

76

 

 

 

-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, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

15,310

 

 

$

23,872

 

Due from related parties

 

 

107

 

 

 

154

 

Prepaid expenses and other current assets

 

 

16,432

 

 

 

4,152

 

Marketable debt securities, available-for-sale

 

 

67,998

 

 

 

104,280

 

Notes receivable, held-to-maturity

 

 

723

 

 

 

 

Total current assets

 

 

100,570

 

 

 

132,458

 

Marketable debt securities, noncurrent

 

 

12,585

 

 

 

29,600

 

Property, plant and equipment, net

 

 

77,273

 

 

 

76,726

 

Equity investment

 

 

8,500

 

 

 

8,500

 

Intangible assets, net

 

 

1,130

 

 

 

2,826

 

Other assets

 

 

1,583

 

 

 

330

 

Total assets

 

$

201,641

 

 

$

250,440

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,525

 

 

$

5,865

 

Accrued expenses

 

 

22,785

 

 

 

11,267

 

Due to related parties

 

 

2,175

 

 

 

2,363

 

Other current liabilities

 

 

1,919

 

 

 

1,373

 

Total current liabilities

 

 

30,404

 

 

 

20,868

 

Build-to-suit liability, less current portion

 

 

 

 

 

4,909

 

Financing obligation, less current portion

 

 

6,108

 

 

 

1,741

 

Deferred rent

 

 

2,897

 

 

 

3,325

 

Deferred tax liability

 

 

122

 

 

 

498

 

Other liabilities

 

 

24

 

 

 

255

 

Total liabilities

 

 

39,555

 

 

 

31,596

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

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

   79,226,083 and 79,021,878 issued and outstanding as of

   September 30, 2018 and December 31, 2017

 

 

8

 

 

 

8

 

Additional paid-in capital

 

 

739,839

 

 

 

717,930

 

Accumulated other comprehensive loss

 

 

(348

)

 

 

(381

)

Accumulated deficit

 

 

(577,413

)

 

 

(498,713

)

Total stockholders’ equity

 

 

162,086

 

 

 

218,844

 

Total liabilities and stockholders’ equity

 

$

201,641

 

 

$

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

 

$

31

 

 

$

8

 

 

$

40

 

 

$

33

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development (including amounts to

   related parties)

 

 

14,559

 

 

 

11,069

 

 

 

43,238

 

 

 

30,023

 

Selling, general and administrative (including amounts to

   related parties)

 

 

9,580

 

 

 

13,381

 

 

 

37,472

 

 

 

43,736

 

Total operating expenses

 

 

24,139

 

 

 

24,450

 

 

 

80,710

 

 

 

73,759

 

Loss from operations

 

 

(24,108

)

 

 

(24,442

)

 

 

(80,670

)

 

 

(73,726

)

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment income, net

 

 

447

 

 

 

680

 

 

 

1,442

 

 

 

2,140

 

Interest expense (including amounts to related parties)

 

 

(149

)

 

 

(393

)

 

 

(288

)

 

 

(584

)

Other income (expense), net (including amounts to

   related parties)

 

 

47

 

 

 

87

 

 

 

255

 

 

 

(87

)

Total other income

 

 

345

 

 

 

374

 

 

 

1,409

 

 

 

1,469

 

Loss before income taxes

 

 

(23,763

)

 

 

(24,068

)

 

 

(79,261

)

 

 

(72,257

)

Income tax benefit

 

 

128

 

 

 

99

 

 

 

375

 

 

 

321

 

Net loss

 

$

(23,635

)

 

$

(23,969

)

 

$

(78,886

)

 

$

(71,936

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.30

)

 

$

(0.30

)

 

$

(1.00

)

 

$

(0.89

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of shares during the period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

79,204,765

 

 

 

79,440,591

 

 

 

79,116,805

 

 

 

80,996,732

 

 

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,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

 

$

(23,635

)

 

$

(23,969

)

 

$

(78,886

)

 

$

(71,936

)

Other comprehensive income (loss), net of income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

100

 

 

 

59

 

 

 

33

 

 

 

(177

)

Reclassification of net realized gains on available-for-sale

   securities included in net loss

 

 

 

 

 

(24

)

 

 

 

 

 

(25

)

Total other comprehensive income (loss)

 

 

100

 

 

 

35

 

 

 

33

 

 

 

(202

)

Comprehensive loss

 

$

(23,535

)

 

$

(23,934

)

 

$

(78,853

)

 

$

(72,138

)

 

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

 

 

Loss

 

 

Deficit

 

 

Total

 

Balance at December 31, 2017

 

 

79,021,878

 

 

$

8

 

 

$

717,930

 

 

$

(381

)

 

$

(498,713

)

 

$

218,844

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

21,975

 

 

 

 

 

 

 

 

 

21,975

 

Vesting of restricted stock units

 

 

172,330

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of warrants

 

 

93,254

 

 

 

 

 

 

57

 

 

 

 

 

 

 

 

 

57

 

Employee payroll taxes withheld related to

   vesting of restricted stock units

 

 

(61,379

)

 

 

 

 

 

(123

)

 

 

 

 

 

 

 

 

(123

)

Cumulative effect of the adoption of the new

   revenue standard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

186

 

 

 

186

 

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

 

 

33

 

 

 

 

 

 

33

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(78,886

)

 

 

(78,886

)

Balance at September 30, 2018

 

 

79,226,083

 

 

$

8

 

 

$

739,839

 

 

$

(348

)

 

$

(577,413

)

 

$

162,086

 

 

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,

 

 

 

2018

 

 

2017

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(78,886

)

 

$

(71,936

)

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

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

21,975

 

 

 

28,113

 

Depreciation and amortization

 

 

6,768

 

 

 

3,997

 

Amortization of net premiums on marketable debt securities

 

 

382

 

 

 

1,298

 

Non-cash interest items, net

 

 

323

 

 

 

648

 

Loss on disposal of assets

 

 

134

 

 

 

64

 

Deferred income tax benefit

 

 

(376

)

 

 

(315

)

Gain on sales of marketable debt securities

 

 

 

 

 

(25

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(12,452

)

 

 

(576

)

Other assets

 

 

(1,217

)

 

 

464

 

Accounts payable

 

 

(66

)

 

 

1,493

 

Accrued expenses and other liabilities

 

 

14,619

 

 

 

(446

)

Due to related parties

 

 

(182

)

 

 

759

 

Deferred rent and revenue

 

 

(370

)

 

 

1,322

 

Net cash used in operating activities

 

 

(49,348

)

 

 

(35,140

)

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(11,057

)

 

 

(23,382

)

Purchase of equity investment

 

 

 

 

 

(8,500

)

Purchases of debt securities, held-to-maturity

 

 

(723

)

 

 

 

Purchases of marketable debt securities, available-for-sale

 

 

(82,257

)

 

 

(75,115

)

Sales/maturities of marketable debt securities

 

 

135,204

 

 

 

186,815

 

Proceeds from sales of property, plant and equipment

 

 

20

 

 

 

 

Net cash provided by investing activities

 

 

41,187

 

 

 

79,818

 

Financing activities:

 

 

 

 

 

 

 

 

Principal payments of financing/capital lease obligations

 

 

(335

)

 

 

(19,868

)

Proceeds from exercise of stock options and warrants

 

 

57

 

 

 

1,192

 

Repurchase of common stock with commissions

 

 

 

 

 

(12,456

)

Net share settlement for RSU vesting and option exercises

 

 

(123

)

 

 

(709

)

Net cash used in financing activities

 

 

(401

)

 

 

(31,841

)

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

 

 

(8,562

)

 

 

12,837

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

24,051

 

 

 

8,262

 

Cash, cash equivalents, and restricted cash, end of period

 

$

15,489

 

 

$

21,099

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

15,310

 

 

$

20,920

 

Restricted cash included in other assets

 

 

179

 

 

 

179

 

Cash, cash equivalents, and restricted cash, end of period

 

$

15,489

 

 

$

21,099

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

217

 

 

$

632

 

Income taxes

 

$

4

 

 

$

3

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment purchases acquired under capital lease

 

$

 

 

$

19,448

 

Property and equipment purchases included in accounts payable, accrued

   expenses, and other liabilities

 

$

4,437

 

 

$

17,561

 

Unrealized gains on marketable debt securities

 

$

33

 

 

$

108

 

Cashless exercise of warrants

 

$

94

 

 

$

16

 

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

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 activated natural killer (aNK) platform and the development of the Company’s product candidates.

The Company holds the exclusive right to commercialize 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 United States (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 CD16 receptor expressing improvement of our aNK cell line, covered in a portfolio of U.S. and foreign composition and methods-of-use patents and applications covering both 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 non-exclusively licensed or sub-licensed its CD16 bearing aNK cell lines and corresponding intellectual property to numerous pharmaceutical and biotechnology companies for such non-clinical uses. The Company also licensed exclusive commercial rights to a unique Her2 Chimeric Antigen-Receptor (CAR) bearing aNK cell clone, 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.

Liquidity

As of September 30, 2018, the Company had an accumulated deficit of approximately $577.4 million. The Company also had negative cash flow from operations of approximately $49.3 million during the nine months ended September 30, 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.

6


Basis of Presentation

The accompanying condensed financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (GAAP). The unaudited condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to present fairly the results for the interim periods presented and have been prepared on the same basis as the audited consolidated financial statements for the fiscal year ended December 31, 2017.

The unaudited condensed consolidated financial statements do not include all information and notes necessary for a complete presentation of results of income, comprehensive income, financial position, and cash flows in conformity with GAAP. Accordingly, these financial statements should be read in conjunction with the audited 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 GAAP.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP 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.

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 in 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 an equity investment in 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.

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.

7


Concentration of Credit Risk and Other Risks and Uncertainties

Financial instruments that potentially subject the Company to concentrations of risk consist principally of cash and cash equivalents and marketable debt securities.

The Company’s cash and cash equivalents are with one major financial institution in the U.S. and one in Korea.

Drug candidates developed by the Company will require approvals or clearances from the U.S. Food and Drug Administration (FDA) or international regulatory agencies prior to commercial sales. There can be no assurance that the Company’s drug candidates will receive any of the required approvals or clearances. If the Company was to be denied approval or clearance or any such approval or clearance was to be delayed, it would have a material adverse impact on the Company.

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 September 30,

 

 

 

2018

 

 

2017

 

Outstanding options

 

 

6,493,250

 

 

 

5,693,250

 

Outstanding restricted stock units

 

 

947,461

 

 

 

1,066,993

 

Outstanding warrants

 

 

17,589,250

 

 

 

17,735,527

 

Total

 

 

25,029,961

 

 

 

24,495,770

 

 

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

Recently Adopted Accounting Policies

Financial Assets and Financial Liabilities

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 Financial Accounting Standards Board (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. (Viracta), 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.

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 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.

8


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.

To date, the Company has generated minimal revenue related to the non-clinical use of its cells lines and intellectual property. The Company has no products approved for commercial sale and 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 are also required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. 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 ASU 2016-15 or ASU 2016-18.

Recently Issued Accounting Pronouncements – Not Yet Adopted

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The existing guidance on nonemployee share-based payments is significantly different from current guidance for employee share-based payments. This ASU expands the scope of the employee share-based payments guidance to include share-based payments issued to nonemployees, including measuring equity awards to nonemployees at grant-date fair value, aligning the accounting for share-based awards with performance conditions, and eliminating the requirement to reassess the classification of nonemployee share-based awards upon vesting. ASU 2018-07 will be effective for the Company beginning January 1, 2019, with early adoption permitted. Adoption of ASU 2018-07 is not expected to have a significant impact on the Company’s consolidated financial statements and disclosures.

9


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 will be effective for the Company beginning January 1, 2019, with early adoption 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 will be effective for the Company beginning January 1, 2020, with early adoption permitted beginning in 2019. Adoption of ASU 2016-13 is not expected to have a significant impact on 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 will be effective for the Company beginning January 1, 2019, with early adoption permitted. The Company continues to assess the effect the guidance will have on its accounting policies, internal controls, and consolidated financial statements and anticipates a material increase in assets and liabilities due to the recording of the required right-of-use asset and corresponding liability for its lease obligations. The Company plans to adopt the new guidance as of the effective date.

Other recent authoritative guidance issued by the FASB (including technical corrections to the ASC), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission (SEC) during the three months ended September 30, 2018 did not, or are not expected to, have a material effect on the Company’s consolidated financial statements.

3. Financial Statement Details

Prepaid Expenses and Other Current Assets

As of September 30, 2018 and December 31, 2017, prepaid expenses and other current assets consisted of (in thousands):

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

Insurance claim receivable

 

$

12,991

 

 

$

340

 

Insurance premium financing asset

 

 

590

 

 

 

 

Prepaid rent

 

 

531

 

 

 

373

 

Prepaid services

 

 

498

 

 

 

416

 

Interest receivable - marketable debt securities

 

 

441

 

 

 

764

 

Prepaid insurance

 

 

362

 

 

 

572

 

Prepaid license fees

 

 

327

 

 

 

597

 

Prepaid equipment maintenance

 

 

300

 

 

 

123

 

Prepaid supplies

 

 

189

 

 

 

210

 

Equipment deposits

 

 

 

 

 

482

 

Other

 

 

203

 

 

 

275

 

 

 

$

16,432

 

 

$

4,152

 

 

Property, Plant and Equipment, Net

As of September 30, 2018 and December 31, 2017, property, plant and equipment, net consisted of (in thousands):

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

Construction in progress

 

$

1,200

 

 

$

42,281

 

Buildings

 

 

59,356

 

 

 

23,811

 

Equipment

 

 

20,333

 

 

 

9,625

 

Leasehold improvements

 

 

4,071

 

 

 

3,918

 

Software

 

 

1,247

 

 

 

1,092

 

Furniture & fixtures

 

 

381

 

 

 

302

 

 

 

 

86,588

 

 

 

81,029

 

Accumulated depreciation

 

 

(9,315

)

 

 

(4,303

)

 

 

$

77,273

 

 

$

76,726

 

 

10


Depreciation expense related to property, plant and equipment was $2.2 million and $0.9 million for the three months ended September 30, 2018 and 2017, respectively, and $5.1 million and $2.3 million for the nine months ended September 30, 2018 and 2017, respectively.

Buildings of $59.4 million include buildings under build-to-suit leases of $39.9 million and $19.5 million related to the Company’s purchased warehouse and distribution facility. Building value under build-to-suit leases represents the estimated fair market value of the buildings and capitalized construction costs where the Company is the “deemed owner” of the assets, for accounting purposes only. See Note 8 – Financing Lease Obligation for further discussion on the Company’s build-to-suit leases.

Intangible Assets, Net

As of September 30, 2018 and December 31, 2017, intangible assets consisted of (in thousands):

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

Technology license

 

$

9,042

 

 

$

9,042

 

Less accumulated amortization

 

 

(7,912

)

 

 

(6,216

)

 

 

$

1,130

 

 

$

2,826

 

 

Amortization expense related to intangible assets was $0.6 million and $0.6 million for the three months ended September 30, 2018 and 2017, respectively, and $1.7 million and $1.7 million for the nine months ended September 30, 2018 and 2017, respectively. Amortization for the Company’s technology license is included in research and development expense on the condensed consolidated statements of operations.

Other Assets

As of September 30, 2018 and December 31, 2017, other assets consisted of (in thousands):

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

Prepaid rent

 

$

1,245

 

 

$

 

Restricted cash

 

 

179

 

 

 

179

 

Security deposits

 

 

113

 

 

 

127

 

Other

 

 

46

 

 

 

24

 

 

 

$

1,583

 

 

$

330

 

 

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

Accrued Expenses

As of September 30, 2018 and December 31, 2017, accrued expenses consisted of (in thousands):

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

Litigation settlement accrual

 

$

12,000

 

 

$

 

Accrued construction costs

 

 

3,341

 

 

 

6,212

 

Accrued bonus

 

 

1,936

 

 

 

1,930

 

Accrued professional and service fees

 

 

1,808

 

 

 

1,048

 

Accrued compensation

 

 

1,264

 

 

 

944

 

Accrued preclinical and clinical trial costs

 

 

1,076

 

 

 

521

 

Accrued laboratory equipment and supplies

 

 

881

 

 

 

 

Other

 

 

479

 

 

 

612

 

 

 

$

22,785

 

 

$

11,267

 

 

11


Other Current Liabilities

As of September 30, 2018 and December 31, 2017, other current liabilities were made up of (in thousands):

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

Financing obligation - current portion

 

$

1,195

 

 

$

284

 

Deferred rent - current portion

 

 

577

 

 

 

520

 

Build-to-suit lease liability - current portion

 

 

 

 

 

334

 

Other

 

 

147

 

 

 

235

 

 

 

$

1,919

 

 

$

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 and nine months ended September 30, 2018 and 2017 (in thousands):

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Interest income

 

$

486

 

 

$

1,005

 

 

$

1,822

 

 

$

3,408

 

Investment amortization accretion expense, net

 

 

(39

)

 

 

(359

)

 

 

(382

)

 

 

(1,298

)

Net realized gains on investments

 

 

 

 

 

34

 

 

 

2

 

 

 

30

 

 

 

$

447

 

 

$

680

 

 

$

1,442

 

 

$

2,140

 

 

The Company did not recognize an impairment loss on any investments for the three and nine months ended September 30, 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, a clinical stage drug development company. The Company did not exercise its 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 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.

As of September 30, 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 September 30, 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 September 30, 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 September 30, 2018.

In June 2018, Viracta executed a 2018 Note and Warrant Purchase Agreement with existing and new investors, including the Company. The initial closing under the Purchase Agreement occurred in June 2018, at which point the Company purchased a convertible note, for $0.4 million, which under certain circumstances is convertible into Series B Preferred Stock, and a warrant to purchase Viracta’s common shares. The convertible note accrues interest at 8% and has a one year maturity date.

In September 2018, Viracta executed the milestone closing under the 2018 Note and Warrant Purchase Agreement, at which point the Company purchased a second convertible note, for $0.4 million, which is also convertible into Series B Preferred Stock under certain circumstances, and a warrant to purchase Viracta’s common shares. The convertible note accrues interest at 8% and has a nine-month maturity date.

The Company classified the convertible notes as debt securities, held-to-maturity, on the condensed consolidated balance sheets.

12


5. Cash Equivalents and Marketable Debt Securities

As of September 30, 2018, all of the Company’s marketable debt securities are classified as available-for-sale or held-to-maturity and are scheduled to mature within 3.0 years. At September 30, 2018, the detail of the Company’s cash equivalents and marketable debt securities is as follows (in thousands):

 

 

September 30, 2018

 

 

 

(Unaudited)

 

 

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Value

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

58,598

 

 

$

1

 

 

$

(81

)

 

$

58,518

 

Government sponsored securities

 

 

4,000

 

 

 

 

 

 

 

 

 

4,000

 

Commercial paper

 

 

3,983

 

 

 

1

 

 

 

 

 

 

3,984

 

U.S. treasury securities

 

 

1,496

 

 

 

 

 

 

 

 

 

1,496

 

Total available-for-sale

 

 

68,077

 

 

 

2

 

 

 

(81

)

 

 

67,998

 

Held-to-maturity, notes receivable

 

 

723

 

 

 

 

 

 

 

 

 

723

 

Current portion

 

 

68,800

 

 

 

2

 

 

 

(81

)

 

 

68,721

 

Noncurrent:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

10,097

 

 

 

 

 

 

(203