nk-10q_20190331.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, 2019

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)

Registrant’s telephone number, including area code: (858) 633-0300 

 

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, 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 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

 

NK

 

The Nasdaq Global Select Market

As of May 3, 2019 the registrant had 98,674,153 shares of common stock, par value $0.0001 per share, outstanding.

 

 

 

 


TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

 

Part I—Financial Information

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

1

Item 2.

 

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

 

23

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

34

Item 4.

 

Controls and Procedures

 

34

 

 

 

 

 

Part II—Other Information

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

36

Item 1A.

 

Risk Factors

 

37

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

72

Item 3.

 

Defaults Upon Senior Securities

 

72

Item 4.

 

Mine Safety Disclosures

 

73

Item 5.

 

Other Information

 

73

Item 6.

 

Exhibits

 

73

Signatures

 

74

 

 

 

-i-


PART IFINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

NantKwest, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except for share amounts)

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,279

 

 

$

16,821

 

Restricted cash

 

 

1,200

 

 

 

 

Due from related parties

 

 

86

 

 

 

90

 

Prepaid expenses and other current assets

 

 

13,595

 

 

 

13,810

 

Marketable debt securities, available-for-sale

 

 

76,270

 

 

 

57,328

 

Notes receivable, held-to-maturity

 

 

 

 

 

723

 

Total current assets

 

 

113,430

 

 

 

88,772

 

Marketable debt securities, noncurrent

 

 

4,190

 

 

 

5,701

 

Property, plant and equipment, net

 

 

67,921

 

 

 

76,885

 

Operating lease right-of-use assets, net

 

 

13,155

 

 

 

 

Investment in equity securities

 

 

9,251

 

 

 

8,500

 

Intangible assets, net

 

 

 

 

 

565

 

Other assets

 

 

314

 

 

 

1,527

 

Total assets

 

$

208,261

 

 

$

181,950

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,804

 

 

$

2,793

 

Accrued expenses

 

 

20,242

 

 

 

21,104

 

Due to related parties

 

 

1,531

 

 

 

1,696

 

Other current liabilities

 

 

3,124

 

 

 

1,667

 

Total current liabilities

 

 

27,701

 

 

 

27,260

 

Operating lease liability, less current portion

 

 

12,752

 

 

 

 

Financing obligation, less current portion

 

 

 

 

 

5,945

 

Deferred rent

 

 

 

 

 

2,739

 

Total liabilities

 

 

40,453

 

 

 

35,944

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value; 500,000,000 shares authorized; 98,674,153

   and 79,087,734 issued and outstanding as of March 31, 2019 and

   December 31, 2018

 

 

10

 

 

 

8

 

Additional paid-in capital

 

 

781,790

 

 

 

741,246

 

Accumulated other comprehensive loss

 

 

(206

)

 

 

(267

)

Accumulated deficit

 

 

(613,786

)

 

 

(594,981

)

Total stockholders’ equity

 

 

167,808

 

 

 

146,006

 

Total liabilities and stockholders’ equity

 

$

208,261

 

 

$

181,950

 

 

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,

 

 

 

2019

 

 

2018

 

Revenue

 

$

5

 

 

$

5

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development (including amounts with related parties)

 

 

12,598

 

 

 

13,991

 

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

 

 

5,742

 

 

 

14,298

 

Total operating expenses

 

 

18,340

 

 

 

28,289

 

Loss from operations

 

 

(18,335

)

 

 

(28,284

)

Other income (expense):

 

 

 

 

 

 

 

 

Investment income, net

 

 

370

 

 

 

505

 

Interest expense (including amounts to related parties)

 

 

(3

)

 

 

(33

)

Other income, net (including amounts with related parties)

 

 

47

 

 

 

169

 

Total other income

 

 

414

 

 

 

641

 

Loss before income taxes

 

 

(17,921

)

 

 

(27,643

)

Income tax benefit

 

 

36

 

 

 

124

 

Net loss

 

$

(17,885

)

 

$

(27,519

)

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.22

)

 

$

(0.35

)

 

 

 

 

 

 

 

 

 

Weighted-average number of shares during the period:

 

 

 

 

 

 

 

 

Basic and diluted

 

 

81,261,302

 

 

 

79,036,614

 

 

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,

 

 

 

2019

 

 

2018

 

Net loss

 

$

(17,885

)

 

$

(27,519

)

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

 

 

 

 

 

 

 

 

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

 

 

61

 

 

 

(174

)

Total other comprehensive income (loss)

 

 

61

 

 

 

(174

)

Comprehensive loss

 

$

(17,824

)

 

$

(27,693

)

 

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

3


NantKwest, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except for share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Total

 

Balance at December 31, 2018

 

 

79,087,734

 

 

$

8

 

 

$

741,246

 

 

$

(267

)

 

$

(594,981

)

 

$

146,006

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,351

 

 

 

 

 

 

 

 

 

1,351

 

Exercise of warrants

 

 

17,589,250

 

 

 

2

 

 

 

35,149

 

 

 

 

 

 

 

 

 

35,151

 

Exercise of stock options

 

 

1,986,300

 

 

 

 

 

 

4,070

 

 

 

 

 

 

 

 

 

4,070

 

Vesting of restricted stock units (RSUs)

 

 

49,775

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee payroll taxes withheld related to

   vesting of RSUs and exercise of stock options

 

 

(38,906

)

 

 

 

 

 

(26

)

 

 

 

 

 

 

 

 

(26

)

Cumulative effect of the adoption of the new

   lease standard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(920

)

 

 

(920

)

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

 

 

61

 

 

 

 

 

 

61

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,885

)

 

 

(17,885

)

Balance at March 31, 2019

 

 

98,674,153

 

 

$

10

 

 

$

781,790

 

 

$

(206

)

 

$

(613,786

)

 

$

167,808

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

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

 

 

 

 

 

 

 

 

9,073

 

 

 

 

 

 

 

 

 

9,073

 

Exercise of warrants

 

 

14,270

 

 

 

 

 

 

23

 

 

 

 

 

 

 

 

 

23

 

Vesting of RSUs

 

 

70,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee payroll taxes withheld related to

   vesting of RSUs

 

 

(18,148

)

 

 

 

 

 

(73

)

 

 

 

 

 

 

 

 

(73

)

Cumulative effect of the adoption of the new

   revenue standard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

186

 

 

 

186

 

Other comprehensive loss, 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,

 

 

 

2019

 

 

2018

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(17,885

)

 

$

(27,519

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,395

 

 

 

1,623

 

Stock-based compensation expense

 

 

1,351

 

 

 

9,073

 

Amortization of operating lease right-of-use assets

 

 

624

 

 

 

 

Amortization of net premiums on marketable debt securities

 

 

41

 

 

 

201

 

Non-cash interest items, net

 

 

(95

)

 

 

149

 

Deferred income tax benefit

 

 

 

 

 

(124

)

Loss on disposal of assets

 

 

 

 

 

36

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses, other current assets and other assets

 

 

88

 

 

 

(847

)

Operating lease right-of-use assets

 

 

(247

)

 

 

 

Accounts payable

 

 

670

 

 

 

117

 

Accrued expenses and other liabilities

 

 

797

 

 

 

1,878

 

Due to related parties

 

 

(162

)

 

 

20

 

Operating lease liability, less current portion

 

 

(655

)

 

 

 

Deferred rent

 

 

 

 

 

(118

)

Net cash used in operating activities

 

 

(13,078

)

 

 

(15,511

)

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(2,104

)

 

 

(4,902

)

Purchases of marketable debt securities, available-for-sale

 

 

(50,273

)

 

 

(32,038

)

Sales/maturities of marketable debt securities

 

 

32,918

 

 

 

39,860

 

Net cash (used in) provided by investing activities

 

 

(19,459

)

 

 

2,920

 

Financing activities:

 

 

 

 

 

 

 

 

Principal payments of financing lease obligations

 

 

 

 

 

(65

)

Proceeds from exercise of stock options and warrants

 

 

39,221

 

 

 

23

 

Net share settlement for RSU vesting and option exercises

 

 

(26

)

 

 

(43

)

Net cash provided by (used in) financing activities

 

 

39,195

 

 

 

(85

)

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

 

 

6,658

 

 

 

(12,676

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

17,000

 

 

 

24,051

 

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

 

$

23,658

 

 

$

11,375

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,279

 

 

$

11,196

 

Restricted cash

 

 

1,379

 

 

 

179

 

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

 

$

23,658

 

 

$

11,375

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

3

 

 

$

34

 

Income taxes

 

$

 

 

$

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment purchases included in accounts payable, accrued expenses,

   and other liabilities

 

$

2,031

 

 

$

5,930

 

Conversion of Viracta convertible notes and accrued interest into investment in equity

   securities of Viracta (Note 4)

 

$

751

 

 

$

 

Unrealized gains (losses) on marketable debt securities

 

$

118

 

 

$

(174

)

Cashless exercise of stock options

 

$

29

 

 

$

 

 

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

5


NantKwest, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1.     Description of Business

Organization

NantKwest, Inc., or NantKwest, 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. We are 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. In these notes, the terms “we,” “our,” “our company” and “us” refer to NantKwest.

We are focused on harnessing the power of the innate immune system by using the natural killer cell to treat cancer and viral infectious diseases. A critical aspect of our strategy is to invest significantly in innovating new therapeutic candidates, based upon our activated natural killer, or aNK, cell platform, as well as clinical testing and scale manufacturing of our leading product candidates.

We hold 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. We own corresponding United States, or U.S., and foreign composition and methods-of-use patents and applications covering the cells, improvements, methods of expansion and manufacture and use of aNK cells as a therapeutic to treat a spectrum of clinical conditions.

We also license 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. We have non-exclusively licensed or sub-licensed our CD16 bearing aNK cell lines and corresponding intellectual property to numerous pharmaceutical and biotechnology companies for such non-clinical uses.

Liquidity

As of March 31, 2019, the company had an accumulated deficit of approximately $613.8 million. We also had negative cash flow from operations of approximately $13.1 million during the three months ended March 31, 2019. The company expects that it will likely need additional capital to further fund development of, and seek regulatory approvals for, our product candidates, and to begin to commercialize any approved products.

We are currently focused primarily on the development of immunotherapeutic treatments for cancers and debilitating viral infections using targeted cancer killing cell lines, and we believe 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 our product candidates fail or produce unsuccessful results and those product candidates do not gain regulatory approval, or if any of our product candidates, if approved, fail to achieve market acceptance, we 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 us when needed and, if available, financing may not be obtained on terms favorable to the company or its stockholders.

While we expect our existing cash and cash equivalents and marketable debt securities will enable us to fund operations and capital expenditure requirements for at least the next 12 months, we may not have sufficient funds to reach commercialization. Failure to obtain adequate financing when needed may require us to delay, reduce, limit, or terminate some or all of our development programs or future commercialization efforts or grant rights to develop and market product candidates that we might otherwise prefer to develop and market ourselves, which could adversely affect our ability to operate as a going concern. If we raise additional funds from the issuance of equity securities, substantial dilution to existing stockholders may result. If we raise 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 our ability to operate our business.

6


2.     Summary of Significant Accounting Policies

There have been no material changes in our significant accounting policies other than the adoption of accounting pronouncements described below under Application of New or Revised Accounting Standards – Adopted, as compared to the significant accounting policies described in our Annual Report on Form 10‑K for the year ended December 31, 2018.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The 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, 2018.

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 U.S. GAAP. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2018 included in our 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 our audited financial statements, but does not include all disclosures required by U.S. GAAP.

Principles of Consolidation and Equity Investments

The condensed consolidated financial statements include the accounts of NantKwest and its wholly owned subsidiaries. All intercompany amounts have been eliminated.

We apply the variable interest model under Accounting Standards Codification, or ASC, Topic 810, Consolidation, to any entity in which we hold an equity investment or to which we have 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, or VIE, we consider whether we must consolidate the VIE or provide additional disclosures regarding our involvement with the VIE. If we determine that we are the primary beneficiary of the VIE, we will consolidate the VIE. This analysis is performed at the initial investment in the entity or upon any reconsideration event.

For entities we hold as an equity investment that are not consolidated under the VIE Model, we consider whether our 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 we are able to exercise significant influence, but not control, are accounted for using the equity method. Our 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 we are 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 condensed consolidated statements of operations. In the instance the equity investment does not have a readily determinable fair value and does not qualify for the practical expedient to estimate fair value in accordance with ASC 820, Fair Value Measurement, or ASC 820, we will apply the measurement alternative under ASC 321, Investments—Equity Securities, or ASC 321, pursuant to which we will measure the investment at its cost less impairment, adjusted for observable price changes in an orderly market for an identical or similar investment of the same issuer.

We own non-marketable equity securities that are accounted for using the measurement alternative under ASC 321 because the preferred stock held by us 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’ earnings 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 we 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 our investment and the rights and preferences of those equity instruments compared to ours.

7


Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. 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, we evaluate our estimates, including those related to valuation of equity-based awards, valuation of the allowance for deferred tax assets, preclinical and clinical trial accruals, impairment assessments, and the useful lives of long-lived assets. We base our estimates on historical experience and on various other market-specific and relevant assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates.

Risks and Uncertainties

Contingencies

We record accruals for loss contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. We evaluate, on a quarterly basis, developments in legal proceedings and other matters that could cause a change in the potential amount of the liability recorded or of the range of potential losses disclosed. Additionally, we record our rights to insurance recoveries, limited to the extent of incurred or probable losses, as a receivable when such recoveries have been agreed to with our third-party insurers and when receipt is deemed probable. This includes instances when our third-party insurers have agreed to pay, on our behalf, certain legal defense costs and settlement amounts directly to applicable law firms and a settlement fund.

Concentration of Credit Risk and Other Risks and Uncertainties

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

Our cash and cash equivalents are held by one major financial institution in the U.S. and one in Korea.

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

Lease Obligations

We adopted Financial Accounting Standards Board, or FASB, ASC Topic 842, Leases, or ASC 842, effective January 1, 2019. For contracts entered into on or after the effective date, we determine if an arrangement is, or contains, a lease at lease inception. Our assessment is based on: (1) whether the contract involves the use of a distinct identified asset; (2) whether we obtain the right to substantially all of the economic benefit from the use of the asset throughout the period; and (3) whether we have the right to direct the use of the asset. At inception of a lease, we allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. Leases entered into prior to January 1, 2019, which were accounted for under ASC 840, Leases, were not reassessed as we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. We determine the lease term by assuming the exercise of renewal options that are reasonably assured. The exercise of lease renewal options is at our sole discretion. Several of our leases have renewal options, however, exercise of renewal is only assured for the El Segundo current Good Manufacturing Practices, or cGMP, facility, where we have made significant improvements.

For all leases at the lease commencement date, a right-of-use asset and a lease liability are recognized. The right-of-use asset represents the right to use the leased asset for the lease term. At lease commencement, leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: (1) the lease transfers ownership of the underlying asset by the end of the lease term; (2) the lease contains an option to purchase the underlying asset that is reasonably certain to be exercised; (3) the lease term is for a major part of the remaining economic life of the underlying asset; (4) the present value of the sum of the lease payments and any guaranteed residual value that is not already included in the lease payments equals or exceeds substantially all of the fair value of the underlying asset; or (5) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. A lease is classified as an operating lease if it does not meet any one of these criteria.

8


We do not currently have any leases classified as finance leases. Our operating leases are included in operating lease right-of-use assets, net, other current liabilities, and operating lease liabilities on the condensed consolidated balance sheets. At the commencement date, operating lease right-of-use assets and operating lease liabilities are determined based on the present value of lease payments to be made over the lease term. Operating lease right-of-use assets also include any rent paid prior to the commencement date, less any lease incentives received, and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. We have elected to combine our lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) with non-lease components (e.g., common-area maintenance costs and equipment maintenance costs) and as such, we account for lease and non-lease components as a single component. Lease expense also includes amounts relating to variable lease payments. Variable lease payments include amounts relating to common area maintenance and real estate taxes.

We also elected not to recognize right-of-use assets and lease liabilities for qualifying short-term leases with an initial lease term of 12 months or less at lease inception. Such leases are expensed on a straight-line basis over the lease term.

The depreciable life of operating right-of-use-assets and leasehold improvements is limited by the expected lease term.

Basic and Diluted Net Loss per Share of Common Stock

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

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

 

 

 

As of March 31,

 

 

 

2019

 

 

2018

 

Outstanding options

 

 

4,506,950

 

 

 

5,693,250

 

Outstanding RSUs

 

 

821,936

 

 

 

874,164

 

Outstanding warrants

 

 

 

 

 

17,706,818

 

Total

 

 

5,328,886

 

 

 

24,274,232

 

 

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

Recent Accounting Pronouncements

Application of New or Revised Accounting Standards – Adopted

We adopted ASC 842 on January 1, 2019, using the simplified transition approach which allows us to not recast the comparative periods presented when transitioning to the new lease standard, while including required disclosures under ASC 840 for all periods presented under ASC 840. In addition, we elected the package of practical expedients permitted under the transition guidance, which among other things, allowed us to not reassess (1) whether a contract is or contains a lease, and (2) the classification of existing leases.

The adoption of ASC 842 had a substantial impact on our balance sheet. The most significant impacts were (i) the recognition of $13.5 million of operating lease right-of-use assets, net, and $16.4 million of operating lease liabilities, and (ii) the derecognition of assets and liabilities associated with the build-to-suit leases under ASC 840 (resulting in the derecognition of property, plant and equipment, net, of $6.6 million and net adjustments to related liabilities of $5.7 million). The build-to-suit leases were recorded as normal operating leases under ASC 842. The difference between the excess of build-to-suit related liabilities and assets of $0.9 million was recorded as an increase to our accumulated deficit. The cumulative-effect adjustment had no tax impact due to the valuation allowance against the gross deferred tax asset less reversing deferred tax liabilities. Adoption of this standard had no material impact on our results of operations and cash flows.

In February 2018, the FASB issued Accounting Standards Update, or ASU, 2018‑02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income or loss to retained earnings or accumulated deficit 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. Our adoption of this standard on January 1, 2019 did not have a material impact on our condensed consolidated financial statements and disclosures.

9


Application of New or Revised Accounting Standards – Not Yet Adopted

In June 2016, the FASB issued ASU 2016‑13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance supersedes existing U.S. GAAP for measuring and recording of credit losses on financial assets measured at amortized cost by replacing the incurred-loss model with an expected-loss model. Accordingly, these financial assets will be presented at the net amount expected to be collected. This new standard also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment model. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, but may be adopted earlier. With certain exceptions, adjustments are to be applied using a modified-retrospective approach by reflecting adjustments through a cumulative-effect impact on retained earnings as of the beginning of the fiscal year of adoption. We are currently evaluating the impact that this new standard will have on our consolidated financial statements and we intend to adopt the standard on January 1, 2020. However, as the impact is dependent upon the investments held as of the adoption date, it is not possible for us to quantify the impact until the date of adoption.

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 during the three months ended March 31, 2019 did not, or are not expected to, have a material effect on our consolidated financial statements.

3.     Financial Statement Details

Prepaid expenses and other current assets

As of March 31, 2019 and December 31, 2018, prepaid expenses and other current assets were made up of (in thousands):

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

(Unaudited)

 

 

 

 

 

Insurance claim receivables

 

$

11,144

 

 

$

10,882

 

Interest receivable - marketable debt securities

 

 

563

 

 

 

473

 

Prepaid supplies

 

 

431

 

 

 

532

 

Prepaid rent

 

 

368

 

 

 

536

 

Prepaid insurance

 

 

344

 

 

 

343

 

Prepaid services

 

 

341

 

 

 

230

 

Prepaid equipment maintenance

 

 

188

 

 

 

329

 

Insurance premium financing asset

 

 

85

 

 

 

339

 

Prepaid license fees

 

 

51

 

 

 

104

 

Other

 

 

80

 

 

 

42

 

 

 

$

13,595

 

 

$

13,810

 

 

Property, plant and equipment, net

As of March 31, 2019 and December 31, 2018, property, plant and equipment, net was made up of (in thousands):

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

(Unaudited)

 

 

 

 

 

Construction in progress

 

$

 

 

$

2,480

 

Leasehold improvements

 

 

33,540

 

 

 

4,087

 

Buildings

 

 

23,463

 

 

 

59,356

 

Equipment

 

 

21,222

 

 

 

20,878

 

Software

 

 

1,264

 

 

 

1,264

 

Furniture & fixtures

 

 

369

 

 

 

381

 

 

 

 

79,858

 

 

 

88,446

 

Accumulated depreciation

 

 

(11,937

)

 

 

(11,561

)

 

 

$

67,921

 

 

$

76,885

 

 

Depreciation expense related to property, plant and equipment was $1.8 million and $1.1 million for the three months ended March 31, 2019 and 2018, respectively.

10


As a result of adoption of ASC 842 (Note 2), we (i) reclassified $32.0 million of assets from buildings to leasehold improvements, and (ii) derecognized $6.6 million of assets associated with build-to-suit leases under ASC 840.

The impact of adoption of ASC 842 on property, plant, and equipment at December 31, 2018 was as follows (in thousands):

 

 

 

Balance

December 31, 2018

 

 

Adoption of

ASC 842

Increase (Decrease)

 

 

Balance

January 1, 2019

 

Leasehold improvements

 

$

4,087

 

 

$

32,014

 

 

$

36,101

 

Buildings

 

 

59,356

 

 

 

(39,893

)

 

 

19,463

 

Property, plant and equipment, gross

 

 

88,446

 

 

 

(7,879

)

 

 

80,567

 

Accumulated depreciation

 

 

(11,561

)

 

 

1,293

 

 

 

(10,268

)

Property, plant and equipment, net

 

$

76,885

 

 

$

(6,586

)

 

$

70,299

 

 

Intangible assets, net

As of March 31, 2019 and December 31, 2018, intangible assets were made up of (in thousands):

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

(Unaudited)

 

 

 

 

 

Technology license

 

$

9,042

 

 

$

9,042

 

Less accumulated amortization

 

 

(9,042

)

 

 

(8,477

)

 

 

$

 

 

$

565

 

 

Amortization expense was $0.6 million and $0.6 million for the three months ended March 31, 2019 and 2018, respectively. Amortization of our technology license is included in research and development expense on the condensed consolidated statements of operations.

Other assets

As of March 31, 2019 and December 31, 2018, other assets were made up of (in thousands):

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

(Unaudited)

 

 

 

 

 

Prepaid rent

 

$

 

 

$

1,205

 

Restricted cash

 

 

179

 

 

 

179

 

Security deposit

 

 

113

 

 

 

113

 

Other

 

 

22

 

 

 

30

 

 

 

$

314

 

 

$

1,527

 

 

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

11


Accrued expenses

As of March 31, 2019 and December 31, 2018, accrued expenses were made up of (in thousands):

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

(Unaudited)

 

 

 

 

 

Litigation settlement accruals

 

$

12,500

 

 

$

12,000

 

Accrued bonus

 

 

2,654

 

 

 

2,079

 

Accrued construction costs

 

 

1,379

 

 

 

3,341

 

Accrued compensation

 

 

1,272

 

 

 

943

 

Accrued preclinical and clinical trial costs

 

 

1,082

 

 

 

704

 

Accrued professional and service fees

 

 

806

 

 

 

912

 

Accrued laboratory equipment and supplies

 

 

277

 

 

 

678

 

Accrued franchise, sales/use and property taxes

 

 

173

 

 

 

250

 

Other

 

 

99

 

 

 

197

 

 

 

$

20,242

 

 

$

21,104

 

 

Other current liabilities

As of March 31, 2019 and December 31, 2018, other current liabilities were made up of (in thousands):

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

(Unaudited)

 

 

 

 

 

Operating lease liability - current portion

 

$

2,938

 

 

$

 

Financing obligation - current portion

 

 

85

 

 

 

965

 

Deferred rent - current portion

 

 

 

 

 

598

 

Other

 

 

101

 

 

 

104

 

 

 

$

3,124

 

 

$

1,667

 

 

Investment income, net

Net investment income is as follows for the three months ended March 31, 2019 and 2018 (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

Interest income

 

$

410

 

 

$

704

 

Investment amortization accretion expense, net

 

 

(40

)

 

 

(201

)

Net realized gains on investments

 

 

 

 

 

2

 

 

 

$

370

 

 

$

505

 

 

Interest income includes interest from marketable debt securities, notes receivable, and interest from our bank deposits. We did not recognize an impairment loss on any investments for the three months ended March 31, 2019 and 2018.

4.     Viracta Investment and Convertible Notes

In March 2017, we participated in a Series B convertible preferred stock financing and invested $8.5 million in Viracta Therapeutics, Inc., or Viracta, a clinical stage drug development company. In May 2017, we 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.

12


In June 2018, Viracta executed a 2018 Note and Warrant Purchase Agreement with existing and new investors, including us. The initial closing under the Purchase Agreement