UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

 
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 001-36150
 
SORRENTO THERAPEUTICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
Delaware
 
33-0344842
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
4955 Directors Place
San Diego, California 92121
(Address of Principal Executive Offices)
(858) 203-4100
(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 file, 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   ☒.
The number of shares of the issuer’s common stock, par value $0.0001 per share, outstanding as of November 6, 2018 was 122,273,467 .





Sorrento Therapeutics, Inc.
Form 10-Q for the Quarter Ended September 30, 2018
Table of Contents
 
 
 
 
 
 
 
 
 





PART I. FINANCIAL INFORMATION
 
Item 1.    Condensed Consolidated Financial Statements.
 
SORRENTO THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except for share amounts)
 
September 30,
2018
 
December 31,
2017
 
 
 
 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
135,441

 
$
20,429

Marketable securities
297

 
441

Grants and accounts receivables, net
2,278

 
2,211

Income tax receivable
424

 
1,715

Prepaid expenses and other
6,805

 
4,904

Total current assets
145,245

 
29,700

Property and equipment, net
21,467

 
19,345

Intangibles, net
69,133

 
71,013

Goodwill
38,298

 
38,298

Cost method investments
237,008

 
237,008

Equity method investments
29,073

 
32,999

Restricted cash
45,000

 

Other, net
2,740

 
3,250

Total assets
$
587,964

 
$
431,613

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
17,203

 
$
9,911

Accrued payroll and related benefits
8,168

 
4,485

Accrued expenses
12,938

 
7,274

Current portion of deferred revenue
632

 
3,864

Current portion of deferred rent
309

 
212

Acquisition consideration payable
14,929

 
53,209

Current portion of debt
28,231

 

Total current liabilities
82,410

 
78,955

Long-term debt
145,535

 
5,211

Deferred tax liabilities
12,472

 
15,535

Deferred revenue
118,127

 
119,287

Deferred rent and other
5,860

 
6,015

Total liabilities
364,404

 
225,003

Commitments and contingencies (See Note 14)


 


Equity:
 

 
 

Sorrento Therapeutics, Inc. equity
 

 
 

Preferred stock, $0.0001 par value; 100,000,000 shares authorized and no shares issued or outstanding

 

Common stock, $0.0001 par value; 750,000,000 shares authorized and 118,867,459 and 82,903,567 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
13

 
9

Additional paid-in capital
588,938

 
413,901

Accumulated other comprehensive income (loss)
79

 
242

Accumulated deficit
(317,974
)
 
(165,120
)
Treasury stock, 7,568,182 shares at cost at September 30, 2018, and December 31, 2017
(49,464
)
 
(49,464
)
Total Sorrento Therapeutics, Inc. stockholders' equity
221,592

 
199,568

Noncontrolling interests
1,968

 
7,042

Total equity
223,560

 
206,610

Total liabilities and stockholders' equity
$
587,964

 
$
431,613

See accompanying unaudited notes

1



SORRENTO THERAPEUTICS, INC.  
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 


 
 
Revenues:
 

 
 

 
 

 
 

Grant
$
294

 
$
11

 
$
294

 
$
206

Royalty and license
120

 
118,667

 
360

 
123,500

Sales and services
3,691

 
3,232

 
13,610

 
7,743

Total revenues
4,105

 
121,910

 
14,264

 
131,449

Operating costs and expenses:
 

 
 

 
 

 
 

Costs of revenues
2,177

 
1,085

 
4,715

 
2,965

Research and development
19,567

 
16,604

 
52,124

 
42,667

Acquired in-process research and development
9,478

 
902

 
9,478

 
1,102

General and administrative
20,102

 
10,214

 
41,102

 
31,194

Intangible amortization
655

 
656

 
1,974

 
1,948

Loss (gain) on contingent liabilities and acquisition consideration payable
33

 
(4,468
)
 
13,696

 
(8,558
)
Total operating costs and expenses
52,012

 
24,993

 
123,089

 
71,318

Income (loss) from operations
(47,907
)
 
96,917

 
(108,825
)
 
60,131

Income (loss) on trading securities
(26
)
 
231

 
(144
)
 
(218
)
Gain (loss) on foreign currency exchange
18

 
(215
)
 
(551
)
 
(215
)
Interest expense
(2,684
)
 
(1,208
)
 
(48,744
)
 
(4,017
)
Interest income
219

 
(265
)
 
229

 
192

Income (loss) before income tax
(50,380
)
 
95,460

 
(158,035
)
 
55,873

Income tax expense (benefit)
(826
)
 
57,480

 
(3,152
)
 
54,386

Loss on equity method investments
(900
)
 
(36,527
)
 
(3,926
)
 
(38,577
)
Net income (loss)
(50,454
)
 
1,453

 
(158,809
)
 
(37,090
)
Net income (loss) attributable to noncontrolling interests
(3,126
)
 
3,514

 
(5,045
)
 
2,223

Net loss attributable to Sorrento
$
(47,328
)
 
$
(2,061
)
 
$
(153,764
)
 
$
(39,313
)
Net loss per share - basic per share attributable to Sorrento
$
(0.40
)
 
$
(0.03
)
 
$
(1.52
)
 
$
(0.59
)
Net loss per share - diluted per share attributable to Sorrento
$
(0.40
)
 
$
(0.03
)
 
$
(1.52
)
 
$
(0.59
)
Weighted-average shares used during period - basic per share attributable to Sorrento
117,021

 
76,887

 
100,959

 
66,122

Weighted-average shares used during period - diluted per share attributable to Sorrento
117,021

 
76,888

 
100,959

 
66,122

 
See accompanying unaudited notes

2



SORRENTO THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 


 
 
 
 
 
 
Net income (loss)
$
(50,454
)
 
$
1,453

 
$
(158,809
)
 
$
(37,090
)
Other comprehensive income (loss):
 

 
 

 
 

 
 

Foreign currency translation adjustments
(74
)
 
(95
)
 
(163
)
 
241

Total other comprehensive income (loss)
(74
)
 
(95
)
 
(163
)
 
241

Comprehensive income (loss)
(50,528
)
 
1,358

 
(158,972
)
 
(36,849
)
Comprehensive income (loss) attributable to noncontrolling interests
(3,126
)
 
3,514

 
(5,045
)
 
2,223

Comprehensive loss attributable to Sorrento
$
(47,402
)
 
$
(2,156
)
 
$
(153,927
)
 
$
(39,072
)
 
See accompanying unaudited notes

3



SORRENTO THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except for share amounts)
 
 
Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Noncontrolling
Interest
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Total
Balance, December 31, 2017
82,903,567

 
$
9

 
7,568,182

 
(49,464
)
 
$
413,901

 
$
242

 
$
(165,120
)
 
$
7,042

 
$
206,610

Adoption impact of ASC 606

 

 

 

 

 

 
910

 

 
910

Issuance of common stock upon exercise of stock options
42,565

 

 

 

 
302

 

 

 

 
302

Issuance of common stock for BDL settlement
309,916

 

 

 

 
2,340

 

 

 

 
2,340

Issuance of common stock for Scilex settlement
1,381,346

 

 

 

 
13,744

 

 

 

 
13,744

Issuance of common stock for public placement, net
10,396,489

 
2

 

 

 
71,475

 

 

 

 
71,477

Issuance of common stock for Virttu settlement
1,795,011

 

 

 

 
11,308

 

 

 

 
11,308

Issuance of common stock related to conversion of notes payable
22,038,565

 
2

 

 

 
49,998

 

 

 

 
50,000

Beneficial conversion feature recorded on convertible notes

 

 

 

 
12,006

 

 

 

 
12,006

Warrants issued in connection with convertible notes

 

 

 

 
9,646

 

 

 

 
9,646

Stock-based compensation

 

 

 

 
4,218

 

 

 
(29
)
 
4,189

Foreign currency translation adjustment

 

 

 

 

 
(163
)
 

 

 
(163
)
Net loss

 

 

 

 

 

 
(153,764
)
 
(5,045
)
 
(158,809
)
Balance, September 30, 2018
118,867,459

 
$
13

 
7,568,182

 
(49,464
)
 
$
588,938

 
$
79

 
$
(317,974
)
 
$
1,968

 
$
223,560


 
Three Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Noncontrolling
Interest
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Total
Balance, June 30, 2018
116,240,963

 
12

 
7,568,182

 
(49,464
)
 
574,316

 
153

 
(270,646
)
 
5,094

 
259,465

Issuance of common stock upon exercise of stock options
16,750

 

 

 

 
141

 

 

 

 
141

Issuance of common stock for public placement, net
2,609,746

 
1

 

 

 
13,204

 

 

 

 
13,205

Stock-based compensation

 

 

 

 
1,277

 

 

 

 
1,277

Foreign currency translation adjustment

 

 

 

 

 
(74
)
 

 

 
(74
)
Net income (loss)

 

 

 

 

 

 
(47,328
)
 
(3,126
)
 
(50,454
)
Balance, September 30, 2018
118,867,459

 
13

 
7,568,182

 
(49,464
)
 
588,938

 
79

 
(317,974
)
 
1,968

 
223,560


 
 

4



 
Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Noncontrolling
Interest
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Total
Balance, December 31, 2016
50,882,856

 
$
6

 
7,568,182

 
(49,464
)
 
$
303,865

 
$
(118
)
 
$
(174,252
)
 
$
6,465

 
$
86,502

Scilex acquisition adjustments

 

 

 

 
(627
)
 

 

 
(1,400
)
 
(2,027
)
Issuance of common stock for public placement and investments, net
26,082,325

 
3

 

 

 
47,641

 

 

 

 
47,644

Issuance of common stock for private placement and investments, net
4,246

 

 

 

 
30

 

 

 

 
30

Stock-based compensation

 

 

 

 
3,936

 

 

 

 
3,936

Foreign currency translation adjustment

 

 

 

 

 
241

 

 

 
241

Issuance of common stock for business combinations, net
1,552,011

 

 

 

 
3,053

 

 

 

 
3,053

Net income (loss)

 

 

 

 

 

 
(39,313
)
 
2,223

 
(37,090
)
Balance, September 30, 2017
78,521,438

 
$
9

 
7,568,182

 
(49,464
)
 
$
357,898

 
$
123

 
$
(213,565
)
 
$
7,288

 
$
102,289


 
Three Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Noncontrolling
Interest
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Total
Balance, June 30, 2017
76,540,055

 
9

 
7,568,182

 
(49,464
)
 
353,162

 
218

 
(211,503
)
 
3,774

 
96,196

Issuance of common stock for public placement and investments, net
1,226,453

 

 

 

 
2,045

 

 

 

 
2,045

Stock-based compensation

 

 

 

 
1,310

 

 

 

 
1,310

Foreign currency translation adjustment

 

 

 

 

 
(95
)
 

 

 
(95
)
Issuance of common stock for business combinations, net
754,930

 

 

 

 
1,381

 

 

 

 
1,381

Net income (loss)

 

 

 

 

 

 
(2,062
)
 
3,514

 
1,453

Balance, September 30, 2017
78,521,438

 
9

 
7,568,182

 
(49,464
)
 
357,898

 
123

 
(213,565
)
 
7,288

 
102,289


 
 
See accompanying unaudited notes

5



SORRENTO THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands )
 
Nine Months Ended September 30,
 
2018
 
2017
Operating activities


 
 
Net loss
$
(158,809
)
 
$
(37,090
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation and amortization
6,192

 
5,271

Non-cash interest expense
44,272

 
920

Loss on trading securities
144

 
218

Acquired in process research and development
9,478

 

Amortization of debt issuance costs and debt discount
2,634

 
455

Stock-based compensation
4,188

 
3,936

Loss on equity method investments
3,926

 
38,577

Non-cash income on cost method investments

 
(116,249
)
Loss (gain) on contingent liabilities and acquisition consideration payable
13,696

 
(8,558
)
Deferred tax provision
(3,062
)
 
54,445

Changes in operating assets and liabilities, excluding effect of acquisitions:
 

 
 

Grants and other receivables
(67
)
 
3

Accrued payroll
3,683

 
593

Prepaid expenses and other
(1,900
)
 
886

Deposits and other assets
1,801

 
233

Accounts payable
7,233

 
4,572

Deferred revenue
(3,482
)
 
(2,243
)
Deferred rent and other
(359
)
 
212

Acquisition consideration payable
(2,020
)
 

Accrued expenses and other liabilities
5,663

 
(509
)
Net cash used for operating activities
(66,789
)
 
(54,328
)
Investing activities
 

 
 

Purchases of property and equipment
(5,748
)
 
(9,371
)
     Purchase of assets related to Sofusa
(10,000
)
 

     Investment in Celularity

 
(5,000
)
Purchase of business, net of cash acquired

 
(557
)
Net cash used in investing activities
(15,748
)
 
(14,928
)
Financing activities
 

 
 

Proceeds from bridge loan for Scilex regulatory milestone
20,000

 

Repayment of bridge loan for Scilex regulatory milestone
(20,000
)
 

Repayment under the amended loan and security agreement

 
(21,500
)
Proceeds from loan agreement
1,586

 

Payments under deferred compensation arrangements

 
(1,012
)
Short-term bridge loan, net of issuance costs
19,675

 

Scilex consideration for regulatory milestone
(22,466
)
 

Proceeds from issuance of common stock, net of issuance costs
71,481

 
47,674

Proceeds from issuance of Scilex notes
140,000

 

Scilex notes issuance costs
(5,725
)
 

Proceeds from issuance of convertible notes
37,849

 

Proceeds from exercise of stock options
303

 

Net cash provided by financing activities
242,703

 
25,162

Net change in cash, cash equivalents, and restricted cash
160,166

 
(44,094
)
Net effect of exchange rate changes on cash
(154
)
 
19

Cash, cash equivalents, and restricted cash at beginning of period
20,429

 
82,398

Cash, cash equivalents, and restricted cash at end of period
$
180,441

 
$
38,323

Supplemental disclosures:
 

 
 

Cash paid during the period for:
 

 
 

Income taxes
$
15

 
$
34


6



Interest paid
$
1,453

 
$
2,808

Supplemental disclosures of non-cash investing and financing activities:
 

 
 

Virttu acquisition non-cash consideration
$
11,308

 
$
15,465

BDL non-cash consideration
$
2,340

 
$

Property and equipment costs incurred but not paid
$
59

 
$
130

     Scilex non-cash consideration for regulatory milestone
$
13,744

 
$
1,380

     Conversion of convertible notes
$
50,000

 
$

Reconciliation of cash, cash equivalents, and restricted cash within the Company's condensed consolidated balance sheets:
 
 
 
Cash and cash equivalents
135,441

 
38,323

Restricted cash
45,000

 

Cash, cash equivalents, and restricted cash
180,441

 
38,323

 
  See accompanying unaudited notes

7



SORRENTO THERAPEUTICS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
 
1 . Nature of Operations and Business Activities
Na t ure of Operations and Basis of Presentation
Sorrento Therapeutics, Inc. (Nasdaq: SRNE), together with its subsidiaries (collectively, the “Company”), is a clinical stage biotechnology company focused on delivering clinically meaningful therapies to patients and their families, globally. The Company’s primary focus is to transform cancer into a treatable or chronically manageable disease. The Company also has programs assessing the use of its technologies and products in auto-immune, inflammatory, neurodegenerative, infectious diseases and pain indications with high unmet medical needs.
At its core, the Company is an antibody-centric company and leverages its proprietary G-MAB™ library to identify, screen and validate fully human antibodies against high impact oncogenic targets and mutations, immune modulators and intracellular targets. To date, the Company has screened over 100 validated targets and generated a number of fully human antibodies against these targets which are at various stages of preclinical development. These include PD-1, PD-L1, CD38, CD123, CD47, c-MET, VEGFR2, CCR2, OX40, TIGIT and CD137 among others.
The Company’s vision is to leverage these antibodies in conjunction with proprietary targeted delivery modalities to generate the next generation of cancer therapeutics. These modalities include proprietary antibody drug conjugates (“ADCs”), bispecific approaches, as well as T-Cell Receptor (“TCR”)-like antibodies.  With LA Cell, Inc. (“LA Cell”), the Company’s joint venture with City of Hope, the Company’s objective is to become the global leader in the development of antibodies against intracellular targets such as STAT3, mutant KRAS, MYC, p53 and TAU. Additionally, the Company has acquired and is assessing the regulatory and strategic path forward for its portfolio of late stage biosimilar/biobetter antibodies based on Erbitux ® , Remicade ® , Xolair ® , and Simulect ® as these may represent nearer term commercial opportunities.
With each of its programs, the Company aims to tailor its therapies to treat specific stages in the evolution of cancer, from elimination, to equilibrium and escape. In addition, the Company’s objective is to focus on tumors that are resistant to current treatments and where the Company can design focused trials based on a genetic signature or biomarker to ensure patients have the best chance of a durable and significant response. The Company has several immuno-oncology programs that are in or near to entering the clinic.  These include cellular therapies, an oncolytic virus and a palliative care program targeted to treat intractable cancer pain.  Finally, as part of its global aim to provide a wide range of therapeutic products to meet underserved therapeutic markets, the Company has made investments and developed a separate pain focused franchise, which the Company believes will serve to provide short term upside to its core thesis as well as investments in drug delivery technology aimed at increased efficacy for delivering injectable medicines.
Through September 30, 2018 , the Company had devoted substantially all of its efforts to product development, raising capital and building infrastructure.  
The accompanying condensed consolidated financial statements include the accounts of the Company’s subsidiaries.  For consolidated entities where the Company owns or is exposed to less than 100% of the economics, the Company records net income (loss) attributable to noncontrolling interests in its condensed consolidated statements of operations equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties.  All intercompany balances and transactions have been eliminated in consolidation.
In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, which are only normal, recurring and necessary for a fair statement of financial position, results of operations and cash flows. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 . Operating results for interim periods are not expected to be indicative of operating results for the Company’s 2018 fiscal year, or any subsequent period.
2. Liquidity and Going Concern
The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has historically operated with working capital deficiencies and expects to operate in the future with working capital deficiencies and has incurred substantial net losses for the years ended December 31, 2017 and 2016, and

8



anticipates that it will continue to do so for the foreseeable future as it continues to identify and invest in advancing product candidates, as well as expanding corporate infrastructure. These conditions, among others, raise substantial doubt about the Company's ability to continue as a going concern.
As of September 30, 2018 , the Company had $37.8 million of long term debt issued in a private placement (the "Private Placement") pursuant to a Securities Purchase Agreement, dated as of March 26, 2018, as amended by Amendment No. 1 thereto, dated as of June 13, 2018 (the “Securities Purchase Agreement”), among the Company and certain accredited investors (collectively, the “Purchasers”). Pursuant to the Securities Purchase Agreement, the Company issued and sold to the Purchasers (1) convertible promissory notes in an aggregate principal amount of $37,848,750 (the “Notes”), which accrue simple interest at a rate equal to 5.0% per annum and mature upon the earlier to occur of (a) June 13, 2023, and (b) the date of the closing of a change in control of the Company (the “Maturity Date”), and (2) warrants (the “Warrants”) to purchase an aggregate of 2,698,662 shares of the common stock of the Company.
Each of the Notes provide that, upon the occurrence of an event of default, the Purchasers thereof may, by written notice to the Company, declare all of the outstanding principal and interest under such Notes immediately due and payable. For purposes of the Notes, an event of default includes, among other things, one or more events that have, or could reasonably be expected to have, a material adverse effect on (i) the Company’s ability to comply with its obligations under the Securities Purchase Agreement, the Notes or the Warrants or the registration rights agreement entered into with the Purchasers in connection with the Private Placement, or (ii) the rights of the Purchasers under the Notes. The Company believes that it is not probable that the material adverse event clause under the Notes will be exercised.
As of September 30, 2018, the Company had approximately $224.0 million of senior notes issued by Scilex Pharmaceuticals Inc. (“Scilex”), a majority owned subsidiary of the Company, which entered into Purchase Agreements (the “2018 Purchase Agreements”) with certain investors (collectively, the “Purchasers”) and the Company on September 7, 2018. Pursuant to the 2018 Purchase Agreements, on September 7, 2018, Scilex, among other things, issued and sold to the Purchasers senior secured notes due 2026 in an aggregate principal amount of $224,000,000 (the “Scilex Notes”) for an aggregate purchase price of $140,000,000 (the “Offering”). In connection with the Offering, Scilex also entered into an indenture (the “Indenture”) governing the Scilex Notes with U.S. Bank National Association, a national banking association, as trustee (the “Trustee”) and collateral agent (the “Collateral Agent”), and the Company. Pursuant to the Indenture, the Company agreed to irrevocably and unconditionally guarantee, on a senior unsecured basis, the punctual performance and payment when due of all obligations of Scilex under the Indenture (the “Guarantee”).
The net proceeds of the Offering were approximately $89.3 million , after deducting the Offering expenses payable by Scilex and funding a segregated reserve account with $20.0 million (the “Reserve Account”) and a segregated collateral account with $25.0 million (the “Collateral Account”) pursuant to the terms of the Indenture. The net proceeds of the Offering will be used by Scilex to support the commercialization of ZTlido™ (lidocaine topical system 1.8%), for working capital and general corporate purposes in respect of the commercialization of ZTlido™ (lidocaine topical system 1.8%). Funds in the Reserve Account will be released to Scilex upon receipt by the Trustee of an officer’s certificate under the Indenture from Scilex confirming receipt of a marketing approval letter from the United States Food and Drug Administration with respect to ZTlido™ (lidocaine topical system 5.4%) or a similar product with a concentration of not less than 5% (the “Marketing Approval Letter”) on or prior to July 1, 2023.
Funds in the Collateral Account will be released upon receipt of a written consent authorizing such release from the holders of a majority in principal amount of the Scilex Notes issued.
The Company has plans in place to obtain sufficient additional fundraising to fulfill its operating and capital requirements for the next 12 months. The Company’s plans include continuing to fund its operating losses and capital funding needs through public or private equity or debt financings, strategic collaborations, licensing arrangements, asset sales, government grants or other arrangements. Although management believes such plans, if executed as planned, should provide the Company sufficient financing to meet its needs, successful completion of such plans is dependent on factors outside of the Company’s control. As such, management cannot conclude that such plans will be effectively implemented within one year after the date that the condensed consolidated financial statements are issued.
If the Company is unable to raise additional capital in sufficient amounts or on terms acceptable, the Company may have to significantly delay, scale back or discontinue the development or commercialization of one or more of its product candidates. The Company may also seek collaborators for one or more of its current or future product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available.
The condensed consolidated financial statements do not reflect any adjustments that might be necessary if the Company is unable to continue as a going concern.
Universal Shelf Registration

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In November 2014, the Company filed a universal shelf registration statement on Form S-3 (the “2014 Shelf Registration Statement”) with the SEC, which was declared effective by the SEC in December 2014. This 2014 Shelf Registration Statement provided the Company with the ability to offer up to $250 million of securities, including equity and other securities as described in the registration statement. Included in the 2014 shelf registration was a sales agreement prospectus covering the offering, issuance and sale by the Company of up to a maximum aggregate offering price of $50.0 million of the Company’s common stock that could be issued and sold under a sales agreement with MLV & Co. LLC (the “2014 ATM Facility”). During the twelve months ended December 31, 2017, the Company sold approximately $13.9 million in shares of common stock under the 2014 ATM Facility. The 2014 Shelf Registration Statement expired in December 2017.
In April 2017, the Company completed a public offering of $47.5 million of shares of common stock pursuant to the 2014 Shelf Registration Statement for net proceeds of approximately $43.1 million .
In November 2017, the Company filed a universal shelf registration statement on Form S-3 (the “2017 Shelf Registration Statement”) with the SEC, which was declared effective by the SEC in December 2017. The 2017 Shelf Registration Statement provides the Company with the ability to offer up to $350 million of securities, including equity and other securities as described in the registration statement. Included in the 2017 Shelf Registration Statement is a sales agreement prospectus covering the offering, issuance and sale by the Company of up to a maximum aggregate offering price of $100.0 million of the Company’s common stock that may be issued and sold under a sales agreement with B. Riley FBR, Inc. (the “ATM Facility”). During the twelve months ended December 31, 2017, the Company sold approximately $0.9 million in shares of common stock under the ATM Facility. During the three and nine month periods ended September 30, 2018 , the Company sold approximately $0.5 million and approximately $60.7 million in shares of common stock, respectively, under the ATM Facility. The Company can offer up to approximately $39.3 million of additional shares of common stock under the ATM Facility, subject to certain limitations.
Pursuant to the 2017 Shelf Registration Statement, the Company may offer such securities from time to time and through one or more methods of distribution, subject to market conditions and the Company’s capital needs. Specific terms and prices will be determined at the time of each offering under a separate prospectus supplement, which will be filed with the SEC at the time of any offering. However, the Company cannot be sure that such additional funds will be available on reasonable terms, or at all.
2016 Private Investment in Public Entity Financing
On April 3, 2016, the Company entered into a Securities Purchase Agreement (the “ABG Purchase Agreement”) with ABG SRNE Limited and Ally Bridge LB Healthcare Master Fund Limited (collectively, “Ally Bridge”), pursuant to which, among other things, the Company agreed to issue and sell to Ally Bridge and other purchasers designated by Ally Bridge (collectively, the “ABG Purchasers”), in a private placement transaction (the “ABG Private Placement”), up to $50.0 million in shares of the Company’s common stock and warrants to purchase shares of common stock. Upon the closing of the ABG Private Placement, the Company issued to the ABG Purchasers (1) an aggregate of 9,009,005 shares (the “ABG Shares”) of common stock,   and (2) warrants to purchase an aggregate of 2,702,700 shares of common stock (each, an “ABG Warrant”).   Each ABG Warrant has an exercise price of $8.50 per share, was immediately exercisable upon issuance, has a term of three years and is exercisable on a cash or cashless exercise basis. 
Under the terms of the ABG Purchase Agreement, the Company was obligated to prepare and file with the SEC, within 30 days of the closing date of the ABG Private Placement, a registration statement to register for resale the ABG Shares and the shares of common stock issuable upon exercise of each ABG Warrant (the “ABG Warrant Shares”), and may be required to effect certain registrations to register for resale the ABG Shares and the ABG Warrant Shares in connection with certain “piggy-back” registration rights granted to the ABG Purchasers.
On April 3, 2016, the Company also entered into a Securities Purchase Agreement (collectively, the “Additional Purchase Agreements”) with each of Beijing Shijilongxin Investment Co., Ltd. (“Beijing Shijilongxin”), FREJOY Investment Management Co., Ltd. (“Frejoy”) and Yuhan Corporation (“Yuhan”), pursuant to which, among other things, the Company agreed to issue and sell, in separate private placement transactions: (1) to Beijing Shijilongxin, 8,108,108 shares of common stock, and a warrant to purchase 1,176,471 shares of common stock, for an aggregate purchase price of $45.0 million ; (2) to Frejoy, 8,108,108 shares of common stock, and a warrant to purchase 1,176,471 shares of common stock, for an aggregate purchase price of $45.0 million ; and (3) to Yuhan, 1,801,802 shares of common stock, and a warrant to purchase 235,294 shares of common stock, for an aggregate purchase price of $10.0 million . The warrants issued pursuant to each of the Additional Purchase Agreements (collectively, the “Additional Warrants” and, together with each ABG Warrant, the “ABG Warrants”) have an exercise price of $8.50 per share, were immediately exercisable upon issuance, have a term of three years and are exercisable on a cash or cashless exercise basis.
Under the terms of the Additional Purchase Agreements, each of Beijing Shijilongxin, Frejoy and Yuhan had the right to demand, at any time beginning six months after the closing of the transactions contemplated by the applicable Additional

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Purchase Agreement, that the Company prepare and file with the SEC a registration statement to register for resale such investor’s shares of common stock purchased pursuant to the applicable Additional Purchase Agreement and the shares of common stock issuable upon exercise of such investor’s Additional Warrant. In addition, the Company may be required to effect certain registrations to register for resale such shares in connection with certain “piggy-back” registration rights granted to Beijing Shijilongxin, Frejoy and Yuhan.
On May 2, 2016, the Company closed its private placement of common stock and warrants with Yuhan for gross proceeds of $10.0 million .  Yuhan purchased 1,801,802 shares of common stock at $5.55 per share and a warrant to purchase 235,294 shares of common stock.  The warrant is exercisable for three years at an exercise price of $8.50 per share.
Between May 31, 2016 and June 7, 2016, the Company closed on the remainder of the $150.0 million financing with the ABG Purchasers, Beijing Shijilongxin, and Frejoy. The ABG Purchasers led the financing and, together with Beijing Shijilongxin and Frejoy, collectively purchased  25,225,221 shares of common stock at  $5.55  per share and warrants to purchase 5,055,642 shares of common stock for total cash consideration of  $86.5 million and secured promissory notes (the “ABG Notes”) in an aggregate principal amount of $53.5 million .
On December 31, 2016, the Company entered into Warrant and Note Cancellation and Share Forfeiture Agreements (the “Cancellation and Forfeiture Agreements”) with certain investors (the “Investors”) that held an aggregate of 7,838,259 shares of common stock and certain of the Warrants granting the right to purchase an aggregate of 1,137,316 shares of common stock.  Pursuant to the Cancellation and Forfeiture Agreements, effective December 31, 2016, the ABG Warrants held by the Investors and the ABG Notes, of which $43.5 million was then outstanding, were cancelled and the shares of common stock held by the Investors were forfeited and returned to the Company.
2017 Private Investment in Public Entity Financing
On December 11, 2017, the Company entered into a Securities Purchase Agreement (the "December 2017 Securities Purchase Agreement") with certain accredited investors (collectively, the "December 2017 Purchasers"). Pursuant to the December 2017 Securities Purchase Agreement, on December 21, 2017, the Company issued and sold to the December 2017 Purchasers, in a private placement transaction, (1) convertible promissory notes in an aggregate principal amount of $50,000,000 (the "December 2017 Notes"), which accrued simple interest at a rate equal to 5.0% per annum and would mature upon the earlier to occur of (a) December 21, 2022, and (b) the date of the closing of a change in control of the Company (the "December 2017 Warrant Maturity Date"), and (2) warrants (the "December 2017 Warrants") to purchase an aggregate of 12,121,210 shares of the common stock of the Company.
At any time and from time to time before the December 2017 Warrant Maturity Date, each December 2017 Purchaser had the option to convert any portion of the outstanding principal amount of such December 2017 Purchaser’s December 2017 Note that was equal to or greater than the lesser of: (1) $4,000,000 , and (2) the then-outstanding principal amount of such December 2017 Purchaser's December 2017 Note into shares of common stock at a price per share of $2.26875 , subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions. Accrued but unpaid interest on the December 2017 Notes was to be paid in cash semi-annually in arrears on or prior to the 30th day of June and 31st day of December of each calendar year commencing with the year ending December 31, 2018.
Each December 2017 Warrant has an exercise price of $2.61 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, became exercisable on June 20, 2018, has a term of five and a half years and is exercisable on a cash basis, unless there is not an effective registration statement covering the resale of the shares issuable upon exercise of the December 2017 Warrants, in which case the December 2017 Warrants shall also be exercisable on a cashless exercise basis.
On May 17, 2018, the December 2017 Purchasers converted the full outstanding principal under the December 2017 Notes into 22,038,565 shares of the Company's common stock, and the Company paid to the December 2017 Purchasers cash in an aggregate amount of $1.0 million in accrued but unpaid interest. The unamortized discount remaining at the date of conversion of $44.3 million was recognized immediately at that date as interest expense.
See Note 3 for discussion of the Company’s policies for accounting for debt with detachable warrants. In connection with the issuance of the Notes and Warrants, the Company recorded a debt discount of approximately  $44.8 million  based on an allocation of proceeds to the Warrants of approximately  $12.7 million  and a beneficial conversion feature of approximately  $32.1 million , before issuance costs. The Company accounts for the debt at amortized cost and amortizes the debt discount to interest expense using the effective interest method over the expected term of the Notes.
2018 Private Investment in Public Entity Financing

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On March 26, 2018, the Company entered into the Securities Purchase Agreement with the Purchasers. Pursuant to the Securities Purchase Agreement, the Company agreed to issue and sell to the Purchasers, in the Private Placement, the Notes in an aggregate principal amount of $120,500,000 and Warrants to purchase an aggregate of 8,591,794 shares.
On June 13, 2018, the Company entered into an amendment (the “Amendment”) to the Securities Purchase Agreement. Under the terms of the Amendment, the Company and the Purchasers agreed that the aggregate principal amount of the Notes was reduced to $37,848,750 and that the aggregate number of shares of the common stock issuable upon exercise of the Warrants was reduced to 2,698,662 , and also agreed to certain other adjustments to the threshold principal amount of the Notes required to remain outstanding in order for certain rights and obligations to apply to the Notes.
On June 13, 2018, pursuant to the Securities Purchase Agreement, the Company issued and sold to the Purchasers, in the Private Placement (1) Notes in an aggregate principal amount of $37,848,750 , and (2) Warrants to purchase an aggregate of 2,698,662 shares of the common stock of the Company.
At any time and from time to time before the Maturity Date, each Purchaser shall have the option to convert any portion of the outstanding principal amount of such Purchaser’s Note that is equal to or greater than the lesser of: (1) $4,000,000 , and (2) the then-outstanding principal amount of such Purchaser’s Note into shares of common stock at a price per share of $7.0125 , subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions. Accrued but unpaid interest on the Notes shall be paid in cash semi-annually in arrears on or prior to the 30th day of June and 31st day of December of each calendar year commencing with December 31, 2018. If a Purchaser elects to convert any of the principal amount of their Note, then all accrued but unpaid interest on such portion of the principal amount shall become due and payable in cash. The Notes contain restrictive covenants and event of default provisions that are customary for transactions of this type.
Each Warrant has an exercise price of $8.77 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, will become exercisable on December 11, 2018, has a term of five and a half years from the date of issuance and will be exercisable on a cash basis, unless there is not an effective registration statement covering the resale of the shares issuable upon exercise of the Warrants, in which case the Warrants shall also be exercisable on a cashless exercise basis.
If the Company raises additional funds by issuing equity securities, substantial dilution to existing stockholders would 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.
3. Significant Accounting Policies
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make 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 expenses during the reporting period. Management believes that these estimates are reasonable; however, actual results may differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company minimizes its credit risk associated with cash and cash equivalents by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits. The Company has not experienced any losses on such accounts.
Restricted Cash
Restricted cash in our condensed consolidated balance sheet as of September 30, 2018, included approximately $45 million of restricted cash related to the Scilex Notes in the form of both the Reserve Account and the Collateral Account.
Fair Value of Financial Instruments
The Company follows accounting guidance on fair value measurements for financial instruments measured on a recurring basis, as well as for certain assets and liabilities that are initially recorded at their estimated fair values. Fair value is

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defined as the exit price, or the amount that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses the following three-level hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs to value its financial instruments:
Level 1: Observable inputs such as unadjusted quoted prices in active markets for identical instruments.
Level 2: Quoted prices for similar instruments that are directly or indirectly observable in the marketplace.
Level 3: Significant unobservable inputs which are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires it to make judgments and consider factors specific to the asset or liability. The use of different assumptions and/or estimation methodologies may have a material effect on estimated fair values. Accordingly, the fair value estimates disclosed or initial amounts recorded may not be indicative of the amount that the Company or holders of the instruments could realize in a current market exchange.
The carrying amounts of cash equivalents and marketable securities approximate their fair value based upon quoted market prices. Certain of the Company’s financial instruments are not measured at fair value on a recurring basis, but are recorded at amounts that approximate their fair value due to their liquid or short-term nature, such as cash, accounts receivable and payable, and other financial instruments in current assets or current liabilities.
Marketable Securities
Marketable securities are designated either as trading or available-for-sale securities and are accounted for at fair value. Marketable securities are classified as short-term or long-term based on the nature of the securities and their availability to meet current operating requirements. Marketable securities that are readily available for use in current operations and are classified as short-term available-for-sale securities are reported as a component of current assets in the accompanying condensed consolidated balance sheets. Marketable securities that are not trading securities and are not considered available for use in current operations are classified as long-term available-for-sale securities and are reported as a component of long-term assets in the accompanying condensed consolidated balance sheets.
Securities that are classified as trading are carried at fair value, with changes to fair value reported as a component of income. Securities that are classified as available-for-sale are carried at fair value, with temporary unrealized gains and losses reported as a component of stockholders' equity until their disposition. The cost of securities sold is based on the specific identification method.
All of the Company’s marketable securities are subject to a periodic impairment review. The Company recognizes an impairment charge when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary. For the three and nine months ended September 30, 2018 and 2017 , no other-than-temporary impairment charges were recorded.  
Grants and Accounts Receivable
Grants receivable at September 30, 2018 and December 31, 2017 represent amounts due under several federal contracts with the National Institute of Allergy and Infectious Diseases (“NIAID”), a division of the National Institutes of Health (“NIH”). The Company considers the grants receivable to be fully collectible; accordingly, no allowance for doubtful amounts has been established. If amounts become uncollectible, they are charged to operations.
Accounts receivable at September 30, 2018 and December 31, 2017 consist of trade receivables from sales and services provided to certain customers, which are generally unsecured and due within 30 days. Estimated credit losses related to trade accounts receivable are recorded as general and administrative expenses and as an allowance for doubtful accounts within grants and accounts receivable, net. The Company reviews reserves and makes adjustments based on historical experience and known collectability issues and disputes. When internal collection efforts on accounts have been exhausted, the accounts are written off by reducing the allowance for doubtful accounts. As of each of September 30, 2018 and December 31, 2017 , the allowance for doubtful accounts was $20 thousand .  
Property and Equipment

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Property and equipment are carried at cost less accumulated depreciation. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets, which are generally three to five years . Leasehold improvements are amortized over the lesser of the life of the lease or the life of the asset. Repairs and maintenance are charged to expense as incurred.
Acquisitions and Intangibles
The Company has engaged in business combination and asset acquisition activity. The accounting for business combinations and asset acquisitions not meeting the criteria of a business combination requires management to make judgments and estimates of the fair value of assets acquired, including the identification and valuation of intangible assets, as well as liabilities assumed. Such judgments and estimates directly impact the amount of goodwill recognized in connection with a business combination, as goodwill presents the excess of the purchase price of an acquired business over the fair value of its net tangible and identifiable intangible assets.
Goodwill and Other Long-Lived Assets
Goodwill, which has an indefinite useful life, represents the excess of cost over fair value of net assets acquired. Goodwill is reviewed for impairment at least annually during the fourth quarter, or more frequently if events occur indicating the potential for impairment. During its goodwill impairment review, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying amount, including goodwill. The qualitative factors include, but are not limited to, macroeconomic conditions, industry and market considerations, and the overall financial performance of the Company. If, after assessing the totality of these qualitative factors, the Company determines that it is not more likely than not that the fair value of its reporting unit is less than its carrying amount, then no additional assessment is deemed necessary. Otherwise, the Company proceeds to perform the two-step test for goodwill impairment. The first step involves comparing the estimated fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the Company performs the second step of the goodwill impairment test to determine the amount of loss, which involves comparing the implied fair value of the goodwill to the carrying value of the goodwill. The Company may also elect to bypass the qualitative assessment in a period and elect to proceed to perform the first step of the goodwill impairment test. The Company performed its annual assessment for goodwill impairment in the fourth quarter of 2017 , noting no impairment. There have not been any triggering events indicating the potential for impairment through September 30, 2018 .
The Company evaluates its long-lived and intangible assets with definite lives, such as property and equipment, acquired technology, customer relationships, patent and license rights, for impairment by considering competition by products prescribed for the same indication, the likelihood and estimated future entry of non-generic and generic competition with the same or similar indication and other related factors. The factors that drive the estimate of useful life are often uncertain and are reviewed on a periodic basis or when events occur that warrant review. Recoverability is measured by comparison of the assets’ book value to future net undiscounted cash flows that the assets are expected to generate. There have not been any impairment losses of long-lived assets through September 30, 2018 .
Acquisition Consideration Payable - Gain or Loss on Contingent Liabilities
Acquisition consideration payable relates to the Company’s acquisition of businesses and various other assets and is recorded on the Company’s condensed consolidated balance sheets at fair value and is re-measured at each balance sheet date until such contingent liabilities have been settled, with changes in fair value recorded as gain or loss on contingent liabilities. The Company estimates the fair value of contingent consideration based on level 3 inputs primarily driven by the probability of achieving certain financing or operating related milestones.
Debt with Detachable Warrants
Debt with detachable warrants are evaluated for the classification of warrants as either equity instruments, derivative liabilities, or liabilities depending on the specific terms of the warrant agreement. In circumstances in which debt is issued with equity-classified warrants, the proceeds from the issuance of convertible debt are first allocated to the debt and the warrants at their relative estimated fair values. The portion of the proceeds so allocated to the warrants are accounted for as paid-in capital and a debt discount. The remaining proceeds, as further reduced by discounts created by the bifurcation of embedded derivatives and beneficial conversion features, are allocated to the debt. The Company accounts for debt as liabilities measured at amortized cost and amortizes the resulting debt discount from the allocation of proceeds, to interest expense using the effective interest method over the expected term of the debt instrument. The Company considers whether there are any embedded features in debt instruments that require bifurcation and separate accounting as derivative financial instruments pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815.

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If the amount allocated to the convertible debt results in an effective per share conversion price less than the fair value of the Company’s common stock on the commitment date, the intrinsic value of this beneficial conversion feature is recorded as a discount to the convertible debt with a corresponding increase to additional paid in capital. The beneficial conversion feature discount is equal to the difference between the effective conversion price and the fair value of the Company’s common stock at the commitment date, unless limited by the remaining proceeds allocated to the debt.
Derivative Liability
Derivative liabilities are recorded on the Company’s condensed consolidated balance sheets at their fair value on the date of issuance and are revalued on each balance sheet date until such instruments are exercised or expire, with changes in the fair value between reporting periods recorded as other income or expense.  The Company estimates the fair value of derivative liabilities using the Black-Scholes option pricing model.
Investments in Other Entities
The Company holds a portfolio of investments in equity securities that are accounted for under either the equity method or cost method. Investments in entities over which the Company has significant influence but not a controlling interest are accounted for using the equity method, with the Company’s share of earnings or losses reported in loss on equity method investments.
The Company’s cost method investments are included in cost method investments on the condensed consolidated balance sheets.  The Company’s equity method investments are included in equity method investments on the condensed consolidated balance sheets.
All investments are reviewed on a regular basis for possible impairment. If an investment's fair value is determined to be less than its net carrying value and the decline is determined to be other-than-temporary, the investment is written down to its fair value. Such an evaluation is judgmental and dependent on specific facts and circumstances. Factors considered in determining whether an other-than-temporary decline in value has occurred include: the magnitude of the impairment and length of time that the market value was below the cost basis; financial condition and business prospects of the investee; the Company’s intent and ability to retain the investment for a sufficient period of time to allow for recovery in market value of the investment; issues that raise concerns about the investee's ability to continue as a going concern; any other information that the Company may be aware of related to the investment. The Company does not report the fair value of its equity investments in non-publicly traded companies because it is not practical to do so.
Research and Development Costs and Collaborations
All research and development costs are charged to expense as incurred. Such costs primarily consist of lab supplies, contract services, stock-based compensation expense, salaries and related benefits.
Acquired In-Process Research and Development Expense
The Company has acquired and may continue to acquire the rights to develop and commercialize new drug candidates. The up-front payments to acquire a new drug compound or drug delivery devices, as well as future milestone payments associated with asset acquisitions that do not meet the definition of derivative and are deemed probable to achieve the milestones, are immediately expensed as acquired in-process research and development provided that the drug has not achieved regulatory approval for marketing and, absent obtaining such approval, have no alternative future use. The acquired in-process research and development related to the business combinations of Virttu Biologics Limited ("Virttu") and Scilex, for which certain products are under development and expected to be commercialized in the future, was capitalized and recorded within “Intangibles, net” on the accompanying condensed consolidated balance sheet. The Company intends to commence amortization of acquired in-process research and development upon commercialization of the related products. Capitalized in-process research and development will be reviewed annually for impairment or more frequently as changes in circumstance or the occurrence of events suggest that the remaining value may not be recoverable. (See Note 4 for further discussion of acquired in-process research and development expense related to the Sofusa acquisition).
Income Taxes
The provisions of ASC Topic 740 “Income Taxes,” addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC Topic 740-10, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The Company has determined that it has uncertain tax positions.

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The Company accounts for income taxes using the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts, using currently enacted tax rates.
The Company has deferred tax assets, which are subject to periodic recoverability assessments. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. As of each of December 31, 2017 and September 30, 2018 , the Company maintained a full valuation allowance against its deferred tax assets, with the exception of an amount equal to its deferred tax liabilities, an amount equal to its alternative minimum tax credits and state research and development tax credits for which there is no expiration and the deferred tax assets related to its investment in Scilex.
Revenue Recognition
The Company’s revenues are generated from various NIH grant awards, license fees, the sale of customized reagents and other materials, and the provision of contract manufacturing and other services. The Company does not have significant costs associated with costs to obtain contracts with its customers. Substantially all of the Company’s grants and accounts receivable result from contracts with customers.
Grant Revenues
The revenue from the NIH grant awards is based upon subcontractor and internal costs incurred that are specifically covered by the grant, and where applicable, a facilities and administrative rate that provides funding for overhead expenses. These revenues are recognized when expenses have been incurred by subcontractors or when the Company incurs internal expenses that are related to the grant.
Royalty and License Revenues
License fees for the licensing of product rights are recorded as deferred revenue upon receipt of cash and recognized as revenue on a straight-line basis over the license period, with the exception of license agreements with no remaining performance obligations or undelivered obligations. The Company applies judgment in determining the timing of revenue recognition related to contracts that include multiple performance obligations. The total transaction price of the contract is allocated to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. For goods or services for which observable standalone selling prices are not available, the Company develops an estimated standalone selling price of each performance obligation.
As of December 31, 2017 and September 30, 2018 , the future performance obligations for royalty and license revenues relate to the ImmuneOncia Therapeutics, LLC (“ImmuneOncia”) and NantCell, Inc. (“NantCell”) license agreements.
The total consideration for the ImmuneOncia license performance obligation, effective September 1, 2016, represented $9.6 million . The estimated revenue expected to be recognized for future performance obligations, as of December 31, 2017 and September 30, 2018 , was approximately $9.0 million and $8.6 million , respectively. The Company expects to recognize license revenue of approximately $0.5 million of the remaining performance obligation annually through the remaining term. The Company applied judgment in estimating the 20 -year contract term, analogous to the expected life of the patent, over which revenue is recognized over time given the ongoing performance obligation related to the Company's participation on a steering committee for the technologies under the agreement.
As of December 31, 2017 and September 30, 2018 , the NantCell license agreement, effective April 21, 2015, represented $110 million of contract liabilities reflected in long-term deferred revenue. See Note 11 for additional information regarding the remaining performance obligation for the significant agreement.
Sales and Services Revenues
Sales and services revenues are comprised of contract manufacturing associated with sales of customized reagents at Concortis Biosystems Corporation, materials and supply agreements, contract manufacturing services at BioServ Corporation, and the Company’s joint development agreement with Celularity Inc.
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which it recognizes revenue at the amount to which it has the right to invoice for services performed. The Company applied the practical expedient in ASC Topic 606-10-50-14 to the revenue contracts for our Concortis Biosystems Corporation sales and services and materials and supply agreements due to the short-term length of such contracts.

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The following table shows sales and service revenues disaggregated by product and services type for the three and nine months ended September 30, 2018 (in thousands):
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
 
 
 
Concortis sales and services
1,042

 
3,400

Materials and supply agreements
1,121

 
1,982

Bioserv sales and services
1,528

 
4,895

Joint development agreement

 
3,333

 
$
3,691

 
$
13,610

The Company is obligated to accept from customers the return of products sold that are damaged or do not meet certain specifications. The Company may authorize the return of products sold in accordance with the terms of its sales contracts, and estimates allowances for such amounts at the time of sale. The Company has not experienced any sales returns.
Concortis Biosystems Corporation (“Concortis”)
Contract manufacturing associated with sales of customized reagents for Concortis operations relate to providing synthetic expertise to customers’ synthesis by delivering proprietary cytotoxins, linkers and linker-toxins and ADC service using industry standard toxin and antibodies provided by customers which are recognized upon the transfer of control, which is generally upon shipment given the short contract terms which are generally three months or less.
Materials and Supply Agreements
Revenues from the sale of materials associated with our research and development arrangements are recognized upon the transfer of control, which is generally, upon shipment. Outstanding performance obligations related to materials and supply agreements was $1.2 million as of September 30, 2018 , and the Company expects to fulfill such obligations during the remainder of 2018.
Bioserv Corporation ( Bioserv )
Contract manufacturing services associated with the Company's Bioserv operations related to finish and fill activities for drug products and reagents are recognized ratably over the contract term based on a time-based measure which reflects the transfer of services to the customer because the manufactured products are highly customized and do not have an alternative use to the Company. As of December 31, 2017 and September 30, 2018 , the Company had approximately $0.5 million and $0.3 million of unbilled accounts receivable for which revenue has been recognized but not billed at the reporting date, respectively. As of December 31, 2017 and September 30, 2018 , the Company had approximately $0.4 million and $0.2 million of upfront payments related to its contract manufacturing services included in deferred revenue, respectively.
As of December 31, 2017 and September 30, 2018 , the estimated revenue expected to be recognized for future performance obligations associated with contract manufacturing services was approximately $3.0 million and $1.8 million , respectively. The Company expects to recognize revenue on approximately $1.0 million of these remaining performance obligations over the next twelve months.
The following table includes Bioserv sales and services revenue expected to be recognized in the future related to performance obligations that are undelivered or partially delivered at the end of the reporting period and do not include contracts with original durations of one year or less (in thousands):
 
 
Remainder of 2018
 
2019
 
2020 and thereafter
Contract manufacturing services
 
$693
 
$742
 
$410

Joint Development Agreement
On September 26, 2017, the Company entered into a joint development agreement with Celularity Inc. whereby the Company agreed to provide research services to Celularity Inc. through June 30, 2018 in exchange for an upfront payment of $5.0 million . The revenue related to the joint development agreement of $5.0 million will be recognized over the length of the service agreement as services are performed. The Company recorded sales and services revenues under the joint development

17



agreement of $0 million and $3.3 million for the three and nine months ended September 30, 2018 , respectively, and $1.7 million for the year ended December 31, 2017 .
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC Topic 718 “ Compensation – Stock Compensation, ” which establishes accounting for equity instruments exchanged for employee services. Under such provisions, stock-based compensation cost is generally measured at the grant date, based on the calculated fair value of the award and an estimate of forfeitures, and is recognized as an expense, under the straight-line method, over the employee’s requisite service period (generally the vesting period of the equity grant).
The Company accounts for equity instruments, including restricted stock or stock options, issued to non-employees in accordance with authoritative guidance for equity based payments to non-employees. Stock options issued to non-employees are accounted for at their estimated fair value determined using the Black-Scholes option-pricing model. The fair value of options and restricted stock granted to non-employees is re-measured over the vesting period, and the resulting changes in fair value are recognized as expense in the period of the change in proportion to the services rendered to date.
Comprehensive Income (Loss)
Comprehensive income (loss) is primarily comprised of net income (loss) and adjustments for the change in unrealized gains and losses on the Company’s investments in available-for-sale marketable securities, net of taxes. The Company displays comprehensive income (loss) and its components in its condensed consolidated statements of comprehensive income (loss).
Net Loss per Share
Basic net loss per share is computed by dividing net loss for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share reflects the additional dilution from potential issuances of common stock, such as stock issuable pursuant to the exercise of stock options or the exercise of outstanding warrants. The treasury stock method and if-converted method are used to calculate the potential dilutive effect of these common stock equivalents. Potentially dilutive shares are excluded from the computation of diluted net loss per share when their effect is anti-dilutive. In periods where a net loss is presented, all potentially dilutive securities are anti-dilutive and are excluded from the computation of diluted net loss per share.
These outstanding securities consist of the following:
 
Quarters Ended September 30,
 
2018
 
2017
Outstanding options
10,207,700
 
6,932,300
Outstanding warrants
19,346,132
 
5,932,998
Segment Information
The Company is engaged primarily in the discovery and development of innovative therapies focused on oncology and the treatment of chronic cancer pain as well as immunology and infectious diseases based on its platform technologies. Accordingly, the Company has determined that it operates in one operating segment.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) , which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. ASU No. 2014-09 was originally effective for annual reporting periods beginning after December 15, 2016, and interim periods thereafter. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of the new standard for annual reporting periods beginning after December 15, 2017, and interim periods thereafter. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. The standard allows for either a full retrospective or modified retrospective method of adoption. The Company adopted this standard on its effective date, January 1, 2018 under the modified retrospective method of adoption. Under this method, entities recognize the cumulative impact of applying the new standard at the date of adoption without restatement of prior

18



periods presented. The cumulative effect of applying the new standard to contracts that were not completed as of January 1, 2018 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities . The ASU amends the guidance in GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. ASU No. 2016-01 is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The adoption of this standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases . ASU No. 2016-02 is aimed at making leasing activities more transparent and comparable, and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. ASU No. 2016-20 is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU No. 2016-02 will have on its consolidated financial position, results of operations and cash flows which may result in an increase in assets and liabilities due to the recognition of the required right-of-use asset and corresponding liability for all lease obligations currently classified as operating leases. The Company's leases are discussed in Note 14. The Company currently expects to record right-of-use assets and lease liabilities with regard to its leases in the consolidated balance sheets using the modified retrospective approach for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The ASU also requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early application will be permitted for all organizations for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of ASU No. 2016-13 will have on its consolidated financial position, results of operations and cash flows.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments , to improve financial reporting in regards to how certain transactions are classified in the statement of cash flows. The ASU requires that (1) debt extinguishment costs be classified as cash outflows for financing activities and provides additional classification guidance for the statement of cash flows, (2) the classification of cash receipts and payments that have aspects of more than one class of cash flows to be determined by applying specific guidance under generally accepted accounting principles, and (3) each separately identifiable source or use within the cash receipts and payments be classified on the basis of their nature in financing, investing or operating activities. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).” The ASU requires the statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents are to be included with cash and cash equivalents when reconciling the beginning of period and end of period amounts shown on the statement of cash flows. The ASU is effective for the Company for annual reporting periods beginning after December 15, 2017 and is required to be adopted using a retrospective approach, if applicable, with early adoption permitted. The Company adopted the new standard on January 1, 2018. The adoption of this ASU impacted the presentation of cash flows with the inclusion of restricted cash for the nine months ended September 30, 2018.


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In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business , to clarify the definition of a business to add guidance for evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Specifically, this ASU provides a screen to assist entities in determining when a set should not be considered a business, which screen provides that if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar assets, the set is not a business. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company applied this standard in the evaluation of the Sofusa acquisition. (See Note 4).
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350) . This standard eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted. This guidance must be applied on a prospective basis. The Company is currently evaluating the impact that the adoption of ASU No. 2017-04 will have on the Company’s consolidated financial position, results of operations or cash flows.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting , to provide clarity and reduce both the diversity in practice and cost of complexity when applying the guidance. Specifically, the ASU provides additional modification conditions in determining whether or not modification accounting should be applied. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income , to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and improves the usefulness of information reported to financial statement users. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting , to include share-based payment transactions for acquiring goods and services from nonemployees. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of ASU No. 2018-07 will have on the Company’s consolidated financial position, results of operations or cash flows.
In August 2018, the FASB issued ASU No. 2018-13,  Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, to improve the effectiveness of the disclosure requirements for fair value measurements. The ASU is effective for fiscal years and interim periods beginning after December 15, 2019. Amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty will be applied prospectively as of the beginning of the fiscal year of adoption with all other amendments being applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. The Company is evaluating the impact of adopting this standard.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments in this update are effective for interim and annual periods for the Company beginning on January 1, 2020, with early adoption permitted. The amendments in this update may be applied either retrospectively or prospectively. The Company is evaluating the impact the standard will have on its consolidated financial statements.
In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606. The amendments in this update provide guidance on how to assess whether certain transactions between collaborative arrangement participants should be accounted for within the revenue recognition standard. The amendments in this update are effective for interim and annual periods for the Company beginning on January 1, 2020, with early adoption permitted. The Company is in the process of evaluating the impact the standard will have on its consolidated financial statements.

20



4. Acquisitions
Acquisition of Virttu Biologics Limited
On April 27, 2017, the Company entered into a Share Purchase Agreement (the “Virttu Purchase Agreement”) with TNK Therapeutics, Inc., a majority-owned subsidiary of the Company (“TNK”), Virttu, the shareholders of Virttu (the “Virttu Shareholders”) and Dayspring Ventures Limited, as the representative of the Virttu Shareholders ("Dayspring"), pursuant to which, among other things, TNK acquired from the Virttu Shareholders 100% of the outstanding ordinary shares of Virttu (the “Virttu Acquisition”).
Virttu focuses on the development of oncolytic viruses that infect and selectively multiply in and destroy tumor cells without damaging healthy tissue. Its lead oncolytic virus candidate, Seprehvir, infects and replicates in cancer cells selectively, leaving normal cells unharmed.
Under the Virttu Purchase Agreement, the total amount of the consideration payable to the Virttu Shareholders in the Virttu Acquisition is equal to $25 million , less Virttu’s net debt (the “Virttu Base Consideration”). An additional $10 million contingent consideration is payable upon the achievement of certain regulatory milestones (as described below) (the “Regulatory Approval Consideration”).
At the closing of the Virttu Acquisition (the “Virttu Closing”), the Company issued to the Virttu Shareholders consideration valued at approximately $2.2 million , which consisted primarily of an aggregate of 797,081 shares (the “Virttu Closing Shares”) and approximately $557,000 in cash (the “Cash Consideration”). The issuance of the Virttu Closing Shares and the payment of the Cash Consideration satisfied TNK’s obligation to pay 20% of the Virttu Base Consideration at the Virttu Closing. Under the terms of the Virttu Purchase Agreement, the Company agreed to provide additional consideration to the Virttu Shareholders, as follows:
(1) Upon a financing resulting in gross proceeds (individually or in the aggregate) to TNK of at least $50.0 million (a “Qualified Financing”), TNK would have issued to the Virttu Shareholders an aggregate number of shares of its capital stock (“TNK Capital Stock”) as is equal to the quotient obtained by dividing 80% of the Virttu Base Consideration by the lowest per share price paid by investors in the Qualified Financing (the “TNK Financing Consideration”); provided, however, that 20% of the TNK Financing Consideration was held in escrow until April 27, 2018 (the “Financing Due Date”), to be used to, among other things, satisfy the indemnification obligations of the Virttu Shareholders. In the event that a Qualified Financing did not occur, then on the Financing Due Date, the Company would issue to the Virttu Shareholders an aggregate number of shares of the Company’s common stock as is equal to the quotient obtained by dividing 80% of the Virttu Base Consideration, by $5.55 (as adjusted, as appropriate, to reflect any stock splits or similar events affecting the Company’s common stock after the Virttu Closing).
(2) Within 45 business days after Virttu becomes aware that certain governmental bodies in the United States, the European Union, the United Kingdom or Japan have approved for commercialization, on or before October 26, 2024, Seprehvir (or any enhancement, combination or derivative thereof) as a monotherapy or in combination with one or more other active components (each of the first two such approvals by a governmental body being a “Regulatory Approval”), TNK shall pay half of the Regulatory Approval Consideration to the Virttu Shareholders, in a combination of (a) up to $5.0 million in cash (the “Regulatory Approval Cash”) and/or (b) (i) such number of shares of the Company’s common stock as is equal to the quotient obtained by dividing $5.0 million less the Regulatory Approval Cash (the “Regulatory Approval Share Value”) by the 30 Day VWAP (as defined below) of one share of the Company’s common stock; (ii) if TNK has completed its first public offering of TNK Capital Stock, the number of shares of TNK Capital Stock as is equal to the quotient obtained by dividing the Regulatory Approval Share Value by the 30 Day VWAP of one share of TNK Capital Stock; or (iii) such number of shares of common stock of a publicly traded company as is equal to the quotient obtained by dividing the Regulatory Approval Share Value by the volume weighted average price of the relevant security, as reported on the Nasdaq Capital Market (or other principal stock exchange or securities market on which the shares are then listed or quoted) for the thirty trading days immediately following the receipt of Regulatory Approval (the “30 Day VWAP”), with the composition of the Regulatory Approval Consideration to be at TNK’s option. In order for a second regulatory approval to qualify as a Regulatory Approval under the Virttu Purchase Agreement, the second approval must be granted by a different governmental body in a different jurisdiction than that which granted the first Regulatory Approval.
At April 27, 2017, the 80% of the Virttu Base Consideration was valued at $12.8 million . The fair value of the 80% of the Virttu Base Consideration is recorded as a current liability and will be adjusted quarterly for changes in fair value or as events and circumstances arise. At April 27, 2017, the contingent Regulatory Approval Consideration was valued at $1.0 million . The fair value of the contingent Regulatory Approval Consideration is recorded as a non-current liability within "Deferred rent and other" on the accompanying condensed consolidated balance sheet and will be adjusted quarterly for changes in fair value or as events and circumstances arise.

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The consolidated financial statements include the preliminary results of operations from this transaction, which have been accounted for as a business combination, and require, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The final valuation of the acquired assets and liabilities resulted in the recognition of identifiable assets of approximately $16.0 million comprised mainly of in-process research and development of approximately $15.4 million , deferred tax liabilities of $0.8 million and goodwill of approximately $1.4 million . Various factors contributed to the establishment of goodwill, including an assembled workforce.
In connection with the Virttu transaction, the Company recorded acquisition costs of approximately $0.9 million in general and administrative expenses for the twelve months ended December 31, 2017, for legal and related costs. No acquisition costs in connection with the Virttu transaction were recorded for the three and nine months ended September 30, 2018. Acquisition costs are expensed as incurred.
TNK did not complete a Qualified Financing prior to the Financing Due Date and on April 27, 2018, the Company, TNK and Dayspring entered into the Amendment, pursuant to which, among other things, the Company agreed that the acquisition consideration, otherwise payable on April 27, 2018 to the Virttu Shareholders, shall be as follows: (1) an issuance of 1,795,011 shares of its common stock to the Virttu Shareholders and (2) $9.9 million payable in cash.
The Company issued an aggregate of 1,795,011 shares of its common stock to the Virttu Shareholders on April 27, 2018 for a value of $11.3 million . The approximately $9.9 million payable in cash has not been paid as of the date of this filing.
Acquisition of Scilex Pharmaceuticals Inc.
On November 8, 2016, the Company entered into a Stock Purchase Agreement (the “Scilex Purchase Agreement”) with Scilex and a majority of the stockholders of Scilex (the “Scilex Stockholders”) pursuant to which, on November 8, 2016, the Company acquired from the Scilex Stockholders, and the Scilex Stockholders sold to the Company, approximately 72% of the outstanding capital stock of Scilex (the “Scilex Acquisition”). The remainder of the outstanding capital stock of Scilex represents a noncontrolling interest of which approximately 23% continues to be held by ITOCHU CHEMICAL FRONTIER Corporation following the Scilex Acquisition.
Scilex focuses on the development and commercialization of specialty pharmaceutical products for the treatment of pain; its lead product, ZTlido TM (lidocaine topical system 1.8%, is a branded lidocaine topical system formulation being developed for the treatment of chronic pain. ZTlido™ (lidocaine topical system 1.8%) will be manufactured by a contract manufacturer.
Under the terms of the Scilex Purchase Agreement, upon receipt of notice from the U.S. Food and Drug Administration (the "FDA") that the FDA has approved Scilex's new drug application for ZTlido™ (lidocaine topical system 1.8%) for the treatment of postherpetic neuralgia (the "NDA") for commercialization, the Company was obligated to deliver to the Scilex Stockholders cash and shares of its common stock in such proportion to be determined in the Company’s sole discretion as a milestone payment. On February 28, 2018, the Company received notice from the FDA that the FDA had approved the NDA. As a result, the Company issued to the Scilex Stockholders consideration valued at approximately $38.2 million , which included an aggregate of 1,381,346 shares of common stock of approximately $13.7 million , cash payment of approximately $24.5 million , which included a bridge loan of approximately $20.0 million with B. Riley FBR to facilitate the timing of the cash payment and resulted in a change in fair value of $6.0 million since December 31, 2017, for the contingent consideration upon settlement.
Acquired In-process Research and Development of BDL
In August 2015, the Company and TNK entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with BDL Products, Inc. (“BDL”) and the stockholders of BDL (“Stockholders”) pursuant to which the Stockholders sold all of their shares of capital stock in BDL to TNK for: (1) a cash payment of $100.00 , and (2)  $6.0 million in shares of TNK Class A Stock, subject to adjustment in certain circumstances, to be issued to the Stockholders upon a financing resulting in gross proceeds (individually or in the aggregate) to TNK of at least $50.0 million (a “Qualified Financing”).  In accordance with subsequent amendments to the Stock Purchase Agreement, in the event a Qualified Financing does not occur by October 15, 2017 (which is subject to further extension as implied and based on previously amended dates) or TNK does not complete an initial public offering of shares of its capital stock by September 15, 2017, in lieu of receiving shares of TNK pursuant to the acquisition, the Stockholders shall receive an aggregate of 309,916 shares of the Company’s common stock, subject to adjustment in certain circumstances.   TNK did not complete a Qualified Financing by the financing deadline and the Company issued 309,916 shares of its common stock to the Stockholders on March 19, 2018.
Sofusa TM Acquisition

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On July 2, 2018, the Company entered into an Asset Purchase Agreement (the “Sofusa Purchase Agreement”) with Kimberly-Clark Corporation (“KCC”); Kimberly-Clark Global Sales, LLC (“KCCGS”); and Kimberly-Clark Worldwide, Inc. (“KCCW” and together with KCC and KCCGS, “Kimberly-Clark”) pursuant to which, among other things, the Company acquired certain of Kimberly-Clark’s assets related to micro-needle drug delivery system, including the Sofusa TM platform (the “Sofusa Assets”) and related fixed assets, and assumed certain of Kimberly-Clark’s liabilities related to the Sofusa Assets (the “Sofusa Acquisition”).  The closing of the Sofusa Acquisition (the “Sofusa Closing”) occurred on July 2, 2018. At the Sofusa Closing, the Company paid $10 million and agreed to pay additional consideration to Kimberly-Clark upon the achievement of certain regulatory and net sales milestones, as well as a percentage in the low double-digits of any non-royalty amounts received by the Company in connection with any license, sale or other grant of rights by the Company to develop or commercialize the Sofusa Assets (all such additional consideration, the “Sofusa Contingent Consideration”). Under the Sofusa Purchase Agreement, the aggregate amount of the Sofusa Contingent Consideration payable by the Company will not exceed $300.0 million .  The Company also agreed to pay Kimberly-Clark a low single-digit royalty on all net sales with respect to the first five products developed by the Company or its licensees that utilizes intellectual property included in the Sofusa Assets. The transaction was accounted for as an asset acquisition since substantially all the value of the gross assets was concentrated in single asset.  Under the Asset Purchase Agreement, the Company acquired the Sofusa DoseDisc micro-needle technology designed to increase the efficacy of drug delivery by way of transdermal drug delivery for cash consideration of $10.0 million which was allocated based on the relative fair value of the assets acquired. No contingent consideration was recorded at September 30, 2018 since the related regulatory approval milestones are not deemed probable until they actually occur. As a result, $9.5 million was expensed as a component of acquired in-process research and development and the remaining $0.5 million was recorded primarily to fixed assets during the three months ended September 30, 2018.
5. Fair Value Measurements  
Fair value measurement is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
Level 3—Unobservable inputs based on the Company's own assumptions.

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The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis (in thousands):
 
Fair Value Measurements at September 30, 2018
 
Balance
 
Quoted Prices in Active Markets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Assets:
 

 
 

 
 

 
 

Cash and cash equivalents
$
135,441

 
$
135,441

 
$

 
$

Restricted cash
$
45,000

 
$
45,000

 
$

 
$

Marketable securities
$
297

 
$
250

 
$

 
$
47

Total assets
$
180,738

 
$
180,691

 
$

 
$
47

Liabilities:
 

 
 

 
 

 
 

Acquisition consideration payable
$
16,089

 
$

 
$

 
$
16,089

Total liabilities
$
16,089

 
$

 
$

 
$
16,089

 
 
 
 
 
 
 
 
 
Fair Value Measurements at December 31, 2017
 
Balance
 
Quoted Prices in Active Markets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Assets:
 

 
 

 
 

 
 

Cash and cash equivalents
$
20,429

 
$
20,429

 
$

 
$

Marketable securities
$
441

 
$
356

 
$

 
$
85

Total assets
$
20,870

 
$
20,785

 
$

 
$
85

Liabilities:
 

 
 

 
 

 
 

Acquisition consideration payable
$
54,272

 
$

 
$

 
$
54,272

Total liabilities
$
54,272

 
$

 
$

 
$
54,272

The Company's financial assets and liabilities carried at fair value are comprised of cash and cash equivalents, restricted cash, and acquisition consideration payable. Cash and cash equivalents consist of money market accounts and bank deposits which are highly liquid and readily tradable. These investments are valued using inputs observable in active markets for identical securities. Marketable securities are valued using inputs observable in active markets for identical securities. The Company recorded contingent consideration as part of its investment in Shanghai Three Alliance Biotech Co. LTD (“Shanghai Three”), agreement with Roger Williams Medical Center (“RWMC”), and acquisitions of Concortis, Inc., (“Concortis”), and Virttu. The fair value of the contingent consideration is measured at fair value on a recurring basis using significant unobservable inputs (Level 3). Contingent consideration is measured using the income approach and discounting to present value the contingent payments expected to be made based on assessment of the probability that the company would be required to make such future payment.
The following table includes a summary of the Company’s contingent consideration liabilities and acquisition consideration payables associated with acquisitions. The contingent consideration is measured at fair value using significant unobservable inputs (Level 3) during the nine months ended September 30, 2018 :
(in thousands)
 
Fair Value
Beginning Balance at December 31, 2017
 
54,272

Re-measurement of Fair Value
 
13,696

Payment of current year contingent consideration
 
(51,879
)
Ending Balance at September 30, 2018
 
$
16,089

The payment of current year contingent consideration for the nine months ended September 30, 2018 includes the settlement of Scilex and BDL liabilities for $38.2 million and $2.3 million , respectively, and the $11.3 million partial settlement of the Virttu financing milestone in common shares of the Company ( $9.9 million of the Virttu contingent liability remains to be paid in cash).

24



The following table includes a summary of the Company’s contingent and financing liabilities, related inputs used to determine fair value, and the valuation methodologies used for the fair value measurements using significant unobservable inputs (Level 3) at September 30, 2018
(in thousands)
 
Fair Value Measurements at September 30, 2018
 
Valuation Methodology
 
Significant Unobservable Input
 
Weighted Average
(range, if applicable)
Virttu Contingent Consideration (Non-current)
 
$
1,160

 
Multiple outcome
discounted cash flow
 
Discount Rate
Probability of Regulatory Milestone
 
12.21%
16%
Concortis Contingent Consideration
 
$
511

 
Multiple outcome
discounted cash flow
 
Discount Rate
Percent probabilities assigned to scenarios
 
19.20%
20%
Shanghai Three Contingent Consideration
 
$
1,782

 
Multiple outcome
discounted cash flow
 
Discount Rate
Percent probabilities assigned to scenarios
 
12.21%
50%
RWMC Contingent Consideration
 
$
2,673

 
Multiple outcome
discounted cash flow
 
Discount Rate,
Percent probabilities assigned to scenarios
 
12.21%
50%
 
The principal significant unobservable inputs used in the valuations of the contingent considerations are the discount rates and probabilities assigned to scenario outcomes. An increase in the discount rate or decrease in the probability of regulatory milestone achievement will cause a decrease in the fair value of the contingent consideration. Conversely, a decrease in the discount rate will cause an increase in the fair value of the contingent consideration. An increase in the probabilities assigned to certain scenarios will cause the fair value of contingent consideration to increase. Conversely, a decrease in the probabilities assigned to certain scenarios will cause the fair value of contingent considerations to decrease.
6. Marketable Securities
Marketable securities consisted of the following as of September 30, 2018 and December 31, 2017 (in thousands):
 
September 30, 2018
 
Cost
 
Gross Unrealized Gains (Losses)
 
Gross Realized Gains (Losses)
 
Fair Value
Trading securities:
 

 
 

 
 

 
 

MedoveX common shares and warrants
$
750

 
$
(453
)
 
$

 
$
297

 
December 31, 2017
 
Cost
 
Gross Unrealized Gains (Losses)
 
Gross Realized Gains (Losses)
 
Fair Value
Trading securities:
 

 
 

 
 

 
 

MedoveX common shares and warrants
$
750

 
$
(309
)
 
$

 
$
441

Trading Securities
On August 5, 2016, the Company entered into a Unit Purchase Agreement (the “Unit Purchase Agreement”) with MedoveX Corporation (“MedoveX”). Pursuant to the terms of the Unit Purchase Agreement, the Company purchased three Units for $750,000 .  Each Unit had a purchase price of $250,000 and consisted of (i) 208,333 shares of MedoveX common stock (the “MedoveX Common Stock”), and (ii) a warrant to purchase 104,167 shares of MedoveX Common Stock (the “MedoveX Warrant”).  The MedoveX Warrant has an initial exercise price of $1.52 per share, subject to adjustment, and is initially exercisable six months following the date of issuance for a period of five years from the date of issuance.  In addition, the Company entered into a Registration Rights Agreement with MedoveX pursuant to which MedoveX was required to file a registration statement registering for resale all shares of MedoveX Common Stock and shares of MedoveX Common Stock issuable pursuant to the MedoveX Warrant issued as part of the Units. 
For the three months ended September 30, 2018 and 2017 , the Company recorded a loss of $26 thousand and a gain of $231 thousand , respectively, on trading securities. For the nine months ended September 30, 2018 and 2017 , the Company

25



recorded a loss of $144 thousand and a loss of $218 thousand on trading securities, respectively. The Company’s investment in MedoveX will be revalued on each balance sheet date.  The fair value of the Company’s holding in MedoveX Common Stock at September 30, 2018 is a Level 1 measurement.  The fair value of the Company’s holdings in the MedoveX Warrant was estimated using the Black-Scholes option-pricing method. The risk-free rate was derived from the U.S. Treasury yield curve, matching the MedoveX Warrant’s term, in effect at the measurement date. The volatility factor was determined based on MedoveX’s historical stock prices. The warrant valuation is a Level 3 measurement.
The following table includes a summary of the warrant measured at fair value using significant unobservable inputs (Level 3) during the nine months ended September 30, 2018 (in thousands):
 
Total
Beginning balance at December 31, 2017
$
84

Change in fair value of warrant
(37
)
Ending balance at September 30, 2018
$
47

7. Property and Equipment
Property and equipment consisted of the following as of September 30, 2018 and December 31, 2017 (in thousands):
 
September 30, 2018
 
December 31, 2017
Furniture and fixtures
1,096

 
1,035

Office equipment
621

 
493

Machinery and lab equipment
24,981

 
19,868

Leasehold improvements
7,491

 
7,327

Construction in progress
827

 

 
35,016

 
28,723

Less accumulated depreciation
(13,549
)
 
(9,378
)
 
$
21,467

 
$
19,345

Depreciation expense for the three months ended September 30, 2018 and 2017 was $1.5 million and $1.4 million , respectively. Depreciation expense for the nine months ended September 30, 2018 and 2017 was $4.1 million and $3.3 million , respectively.
8. Cost Method Investments
As of September 30, 2018 and December 31, 2017 , the aggregate carrying amount of the Company’s cost-method investments in non-publicly traded companies was $237.0 million and included an ownership interest in NantCell, Inc. (“NantCell”), NantBioScience, Inc. (“NantBioScience”), Globavir Biosciences, Inc., Brink Biologics, Inc., Coneksis, Inc., and Celularity Inc.
The Company’s cost-method investments are assessed for impairment quarterly. The Company has determined that it is not practicable to estimate the fair value of its cost-method investments on a regular basis and does not reassess the fair value of cost-method investments if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investments.   No impairment losses were recorded during the nine months ended September 30, 2018 .
9. Equity Method Investments  
NANTibody
In 2013, the Company acquired IgDraSol Inc. (“IgDraSol”), a private company focused on the development of oncologic agents for the treatment of cancer, from a third party unrelated to the NantWorks, LLC (“NantWorks”) affiliated entities for 3.0 million shares of the Company's common stock and $380,000 of cash for a total purchase price of $29.1 million . This transaction included the acquisition of IgDraSol’s lead compound, CynviloqTM, a micellar diblock copolymeric paclitaxel formulation drug product.

26



In May 2015, the Company entered into an agreement with NantPharma, LLC (“NantPharma”), a NantWorks company, pursuant to which the Company sold to NantPharma all of its equity interests in IgDraSol, which continued to hold the rights to CynviloqTM. Pursuant to the agreement, NantPharma paid the Company an upfront fee of $90.1 million , of which $60.0 million was required to be used by the Company to fund two joint ventures, as described below.
In April 2015, the Company and NantCell, a subsidiary of NantWorks, a private company owned by Dr. Patrick Soon-Shiong, established a new entity called Immunotherapy NANTibody, LLC (“NANTibody”) as a stand-alone biotechnology company with $100.0 million initial joint funding. NantCell owns 60% of the equity interest of NANTibody and agreed to contribute $60.0 million to NANTibody. The Company owns 40% of NANTibody and in July 2015, the Company had NantPharma, contribute its portion of the initial joint funding of $40.0 million to NANTibody from the proceeds of the sale of IgDraSol. Additionally, the Company and NantCell were allowed to appoint two and three representatives, respectively, to NANTibody’s five -member Board of Directors. NANTibody will focus on accelerating the development of multiple immuno-oncology mAbs for the treatment of cancer, including but not limited to anti-PD-1, anti-PD-L1, anti-CTLA4mAbs, and other immune-check point antibodies as well as ADCs and bispecific antibodies.
NANTibody had been formed to advance pre-clinical and clinical immunology assets contributed by the Company and NantCell. The Company continues to hold 40% of the outstanding equity of NANTibody and NantCell holds the remaining 60% . Until July 2, 2017, NANTibody held approximately $100.0 million of cash and cash equivalents, and the Company recorded its investment in NANTibody at approximately $40.0 million . As an equity method investment, the Company's ratable portion of 40% of money expended for the development of intellectual property assets held by NANTibody would be reflected within income (loss) on equity method investments in its statement of operations. As a result of limited spending at NANTibody, the cash on hand at NANTibody remained at approximately at $100.0 million since the inception of the NANTibody joint venture until July 2, 2017. Further, the Company's equity method investment in NANTibody remained at approximately $40.0 million until July 2, 2017.
The financial statements of NANTibody are not received sufficiently timely for the Company to record its portion of earnings or loss in the current financial statements and therefore the Company reports its portion of earnings or loss on a quarter lag.
In February 2018, NANTibody notified the Company that on July 2, 2017, NANTibody acquired all of the outstanding equity of IgDraSol in exchange for $90.1 million in cash. NANTibody purchased IgDraSol from NantPharma, which is controlled by NantWorks, an entity with a controlling interest in NantCell and NantPharma.
Although the Company has had a designee serving on the Board of Directors of NANTibody since the formation of NANTibody in April 2015, and although the Company has held 40% of the outstanding equity of NANTibody since NANTibody’s formation, neither the Company nor its director designee was given any advance notice of NANTibody’s purchase of IgDraSol or of any board meeting or action to approve such purchase. As such, the Company's designee on NANTibody’s Board of Directors was not given an opportunity to consider or vote on the transaction as a director and the Company was not given an opportunity to consider or vote on the transaction in its position as a significant ( 40% ) equity holder of NANTibody.
As a result of the July 2, 2017 purchase of IgDraSol, NANTibody’s cash and cash equivalents were reduced from $99.6 million as of June 30, 2017 to $9.5 million as of September 30, 2017, and NANTibody’s contributed capital was reduced from $100.0 million as of June 30, 2017 to $10.0 million as of September 30, 2017, to effect the transfer of IgDraSol from NantPharma to NANTibody. No additional information was provided to the Company to explain why NANTibody’s total assets as of September 30, 2017 were reduced by approximately $90.1 million . The Company requested, but did not receive, additional information from NANTibody for purposes of supporting the value of IgDraSol, including any information regarding clinical advancements in the entity since the sale of IgDraSol by the Company in May 2015.
Prior to the communication of the transfer of IgDraSol from NantPharma to NANTibody, the Company relied on the cash and cash equivalents of NANTibody for purposes of determining the value of its investment in NANTibody, which capital was expended by NANTibody to acquire IgDraSol on July 2, 2017. As a result of the transfer of IgDraSol, the Company reassessed the recoverability of its equity method investment in NANTibody as of July 2, 2017. In doing so, the Company considered the expected outcomes for the intellectual property assets held by NANTibody as of July 2, 2017. As a result of the lack of evidence of any development activity associated with any of the assets held in NANTibody, given the passage of time since the formation of the joint venture, many competitive products from other drug developers worldwide have advanced and/or commercialized for the targeted disease indications of the assets held in NANTibody, and given the Company's minority interest in NANTibody (the investee), the Company concluded that it does not have the ability to recover the carrying amount of the investment and an other-than-temporary decline in the value of the investment had occurred. Accordingly, an impairment was recorded to the Company's equity method investment in NANTibody for the three and nine months ended September 30, 2017. The fair value of the Company’s investment in NANTibody was measured at fair value on July 2, 2017 using significant unobservable inputs (Level 3) due to the determination of fair value requiring significant judgment, including the potential outcomes of the intellectual property assets held by NANTibody. For these reasons, fair value was determined by applying the

27



Company's 40% equity interest in NANTibody to the remaining cash and cash equivalents, which resulted in an impairment of $36.0 million . The impairment resulted in a revised carrying value of the Company's investment in NANTibody of $3.7 million which approximates its ratable 40% ownership of the cash maintained by NANTibody expected to be used for future research and development. As of September 30, 2018 , the carrying value of the Company’s investment in NANTibody was approximately $3.4 million .
NANTibody recorded net loss of $66 thousand and net profit $375 thousand for the three months ended June 30, 2018 and 2017, respectively. The Company recorded its portion of loss from NANTibody in loss on equity method investments on its condensed consolidated statement of operations for the nine months ended September 30, 2018 and 2017 .  As of June 30, 2018, NANTibody had $9.6 million in current assets and $1.6 million in current liabilities and no noncurrent assets or noncurrent liabilities.
NantStem
In July 2015, the Company and NantBioScience, a wholly-owned subsidiary of NantWorks, established a new entity called NantCancerStemCell, LLC (“NantStem”) as a stand-alone biotechnology company with $100.0 million initial joint funding.  As initially organized, NantBioScience was obligated to make a $60.0 million cash contribution to NantStem for a 60% equity interest in NantStem, and the Company was obligated to make a $40.0 million cash contribution to NantStem for a 40% equity interest in NantStem.   Fifty percent of these contributions were funded in July 2015 and the remaining amounts were to be made by no later than September 30, 2015. The Company had NantPharma contribute its portion of the initial joint funding of $20.0 million to NantStem from the proceeds of the sale of IgDraSol.  Pursuant to a Side Letter dated October 13, 2015, the NantStem joint venture agreement was amended to relieve the Company of the obligation to contribute the second $20.0 million payment, and its ownership interest in NantStem was reduced to 20% .  NantBioScience’s funding obligations were unchanged.  The Side Letter was negotiated at the same time the Company issued a call option on shares of NantKwest that it owned to Cambridge Equities, L.P. (“Cambridge”), a related party to NantBioScience.  
In the fourth quarter of 2015, the Company determined it had an other-than-temporary decline in the value of NantStem and recognized a loss of $4.0 million in loss on equity method investments on its condensed consolidated statement of operations for the year ended December 31, 2015. There was no loss related to other-than-temporary impairment recognized for the equity investment for the year ended December 31, 2017. A loss related to other-than-temporary impairment of $0.5 million was recognized for the equity investment in NantStem for the three months ended June 30, 2018.
The Company is accounting for its interest in NantStem as an equity method investment, due to the significant influence the Company has over the operations of NantStem through its board representation and 20% voting interest.  The Company’s investment in NantStem is reported in equity method investments on its condensed consolidated balance sheets and its share of NantStem’s loss is recorded in loss on equity method investments on its condensed consolidated statement of operations.  As of September 30, 2018 , the carrying value of the Company’s investment in NantStem was approximately $18.0 million . The difference between the Company’s investment in NantStem and the Company’s 20% interest in the net assets of Nantstem was approximately $1.7 million at September 30, 2018 .
The financial statements of NantStem are not received sufficiently timely for the Company to record its portion of earnings or loss in the current financial statements and therefore the Company reports its portion of earnings or loss on a quarter lag.
NantStem recorded net loss of $621 thousand and net profit of $461 thousand for the three months ended June 30, 2018 and 2017, respectively.  The Company recorded its portion of loss from NantStem (in addition to the immaterial impairment) in loss on equity method investments on its condensed consolidated statement of operations for the nine months ended September 30, 2018 and 2017 .  As of June 30, 2018, NantStem had $74.0 million in current assets and $119 thousand in current liabilities and $7.8 million noncurrent assets and no noncurrent liabilities.
Yuhan Agreement
In March 2016, the Company and Yuhan , a South Korea company, entered into an agreement to form a joint venture company called ImmuneOncia Therapeutics, LLC (“ImmuneOncia”) to develop and commercialize a number of immune checkpoint antibodies against undisclosed targets for both hematological malignancies and solid tumors.  Under the terms of the joint venture agreement, Yuhan contributed an initial investment of $10.0 million to ImmuneOncia, and the Company granted ImmuneOncia an exclusive license to one of its immune checkpoint antibodies for specified countries while retaining the rights for the U.S., European and Japanese markets, as well as global rights for ImmuneOncia to two additional antibodies that will be selected by ImmuneOncia from a group of pre-specified antibodies from the Company’s immuno-oncology antibody portfolio. During October 2016, funding and operations of ImmuneOncia commenced. Yuhan owns 51% of ImmuneOncia, while the Company owns 49% .

28



The Company is accounting for its interest in ImmuneOncia as an equity method investment, due to the significant influence the Company has over the operations of ImmuneOncia through its board representation and 49% voting interest while not sharing joint control with Yuhan.  The Company’s investment in ImmuneOncia is reported in equity method investments on its condensed consolidated balance sheets and its share of ImmuneOncia’s loss is recorded in loss on equity method investments on its condensed consolidated statement of operations.  As of September 30, 2018 , the carrying value of the Company’s investment in ImmuneOncia was approximately $3.8 million . The difference between the Company’s investment in ImmuneOncia and the Company’s 49% interest in the net assets of ImmuneOncia was approximately $0.7 million at September 30, 2018 .
ImmuneOncia recorded a net loss of $1.5 million and $0.5 million for the three months ended September 30, 2018 and 2017, respectively.  ImmuneOncia recorded a net loss of $6.2 million and $2.0 million for the nine months ended September 30, 2018 and 2017, respectively. The Company recorded its portion ( 49% equity interest) of loss from ImmuneOncia in loss on equity method investments on its condensed consolidated statement of operations for the three and nine months ended September 30, 2018 and 2017.  As of September 30, 2018 , ImmuneOncia had $1.9 million in current assets, $187 thousand in current liabilities, $7.5 million in noncurrent assets, and $18 thousand in noncurrent liabilities.
In April 2016, Yuhan purchased $10.0 million of shares of common stock, and warrants as part of the Company’s private placement offering.
Shanghai Three
On March 7, 2016, TNK agreed to issue to SiniWest Holdings, Inc. (“SiniWest Holdings”) $4.0 million in shares of TNK Class A Stock, subject to certain circumstances, to be issued upon a financing resulting in gross proceeds (individually or in the aggregate) to TNK of at least $10.0 million and a $1.0 million upfront cash payment in exchange for SiniWest Holdings transferring certain assets to TNK, including SiniWest Holdings’ 25% interest in Shanghai Three, a China based company. The Company is accounting for its interest in Shanghai Three as an equity method investment, due to the significant influence the Company has over the operations of Shanghai Three through its 25% voting interest.  The Company’s investment in Shanghai Three is reported in equity method investments on the condensed consolidated balance sheets and its share of Shanghai Three’s income or loss is recorded in income (loss) on equity method investments on the condensed consolidated statement of operations.  As of September 30, 2018 , the carrying value of the Company’s investment in Shanghai Three was approximately $3.8 million .
The financial statements of Shanghai Three are not received sufficiently timely for the Company to record its portion of earnings or loss in the current financial statements and therefore the Company reports its portion of earnings or loss on a quarter lag. 
Shanghai Three incurred no operating expenses or net loss for the three and nine months ended June 30, 2018 and 2017.  As of June 30, 2018, Shanghai Three had $0.4 million in current assets, $2.9 million in current liabilities, $5.5 million in noncurrent assets, and $2.2 million in noncurrent liabilities. 
Fair Value of Equity Method Investment
The Company periodically evaluates the carrying value of its equity method investments, when events and circumstances indicate that the carrying amount of an asset may not be recovered. The Company determines the fair value of its equity method investments to evaluate whether impairment losses shall be recorded using Level 3 inputs. These investments include the Company's holdings in privately held biotechnology companies that are not exchange traded and therefore not supported with observable market prices. However, these investments are valued by reference to their net asset values and unobservable inputs, including future cash flows.

29



10. Goodwill and Intangible Assets
 At September 30, 2018 and December 31, 2017 , the Company had recorded goodwill of $38.3 million .  The Company performed a qualitative test for goodwill impairment during the quarter ended December 31, 2017 . Based upon the results of the qualitative testing the Company concluded that it is more-likely-than-not that the fair values of the Company’s goodwill was in excess of its carrying value and therefore performing the first step of the two-step impairment test was unnecessary. No goodwill impairment was recognized for the three and nine months ended September 30, 2018 and 2017 and will perform its annual test for goodwill impairment in the fourth quarter of 2018. A summary of the Company's goodwill as of September 30, 2018 is as follows (in thousands):
 
Total
Balance at December 31, 2017
$
38,298

    Goodwill Acquired from Acquisitions

Balance at September 30, 2018
$
38,298

The Company’s intangible assets, excluding goodwill, include acquired license and patent rights, core technologies, customer relationships and acquired in-process research and development. Amortization for the intangible assets that have finite useful lives is generally recorded on a straight-line basis over their useful lives.  A summary of the Company’s identifiable intangible assets as of September 30, 2018 and December 31, 2017 is as follows (in thousands):
 
September 30, 2018
 
Gross Carrying Amount
 
Accumulated Amortization
 
Intangibles, net
Customer relationships
$
1,585

 
$
1,310

 
$
275

Acquired technology
3,410

 
841

 
2,569

Acquired in-process research and development
37,660

 

 
37,660

Patent rights
32,720

 
4,196

 
28,524

Other
$
105

 
$

 
$
105

Total intangible assets
$
75,480

 
$
6,347

 
$
69,133

 
December 31, 2017
 
Gross Carrying Amount
 
Accumulated Amortization
 
Intangibles, net
Customer relationships
$
1,585

 
$
1,091

 
$
494

Acquired technology
3,410

 
709

 
2,701

Acquired in-process research and development
37,660

 

 
37,660

Patent rights
32,720

 
2,562

 
30,158

Total intangible assets
$
75,375

 
$
4,362

 
$
71,013

As of September 30, 2018 , the remaining weighted average life for identifiable intangible assets is 15 years .
Patent rights are stated at cost and amortized on a straight-line basis over the estimated useful lives of the assets, determined to be approximately fifteen years or nineteen years from the date of transfer of the rights to the Company. Amortization expense for the three months ended September 30, 2018 and 2017 was $545 thousand and $538 thousand , respectively, which has been included in intangible amortization on the condensed consolidated statement of operations. Amortization expense for the nine months ended September 30, 2018 and 2017 was $1,635 thousand and $1,597 thousand , respectively, which has been included in intangible amortization on the condensed consolidated statement of operations.
Acquired technology is stated at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, determined to be approximately 19 years from the date of acquisition of the technology in December 2013. Amortization expense for each of the three months ended September 30, 2018 and 2017 was $44 thousand , which has been included in intangibles amortization on the condensed consolidated statement of operations. Amortization expense for each of the nine months ended September 30, 2018 and 2017 was $132 thousand , which has been included in intangible amortization on the condensed consolidated statement of operations.
Customer relationships are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, determined to be approximately five years from the date of acquisition. Amortization expense for the three months

30



ended September 30, 2018 and 2017 , was $73 thousand and $73 thousand , respectively, which has been included in intangibles amortization. Amortization expense for each of the nine months ended September 30, 2018 and 2017 was $218 thousand , which has been included in intangible amortization on the condensed consolidated statement of operations.
Acquired in-process research and development is stated at cost and may be immediately expensed if there is no alternative future use. The Company intends to begin amortization of acquired in-process research and development costs associated with the Scilex and Virttu business combinations upon commercialization of the respective products. The acquired in-process research and development is reviewed annually for impairment or more frequently as changes in circumstance or the occurrence of events suggest that the remaining value may not be recoverable.
Estimated future amortization expense related to intangible assets at September 30, 2018 is as follows (in thousands):
Years Ending December 31,
 
Amount
2018
 
$
1,019

2019
 
3,845

2020
 
3,845

2021