UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended June 30, 2016

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)

9380 Judicial Drive,

San Diego, California 92121

(Address of Principal Executive Offices)

(858) 210-3700

(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   x     No   ¨ .

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨   (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

The number of shares of the issuer’s common stock, par value $0.0001 per share, outstanding as of August 2, 2016 was 57,570,468.

 

 

 

 

 


 

Sorrento Therapeutics, Inc.

Index to Consolidated Financial Statements

 

Part I

 

Financial Information

 

1

Item 1.

 

Consolidated Financial Statements

  

1

 

 

Consolidated Balance Sheets as of June 30, 2016 (Unaudited) and December 31, 2015 (Audited)

  

1

 

 

Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015

  

2

 

 

Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2016 and 2015

 

3

 

 

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015

  

4

 

 

Notes to Unaudited Consolidated Financial Statements

  

5

Item 2.

 

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

  

28

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

35

Item 4.

 

Controls and Procedures

  

36

 

 

 

Part II

 

Other Information

 

37

Item 1.

 

Legal Proceedings

  

37

Item 1A.

 

Risk Factors

  

37

Item 6.

 

Exhibits

  

37

Signatures

  

38

 

 

 

 


 

P ART I. FINANCIAL INFORMATION

 

I tem 1.

Consolidated Financial Statements.

SORRENTO THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share amounts)

 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(Unaudited)

 

 

(Audited)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

98,179

 

 

$

39,038

 

Marketable securities

 

 

34,946

 

 

 

97,366

 

Grants and accounts receivables, net

 

 

867

 

 

 

903

 

Income tax receivable

 

 

1,715

 

 

 

1,715

 

Notes receivable

 

 

10,000

 

 

 

 

Prepaid expenses and other, net

 

 

556

 

 

 

1,996

 

Total current assets

 

 

146,263

 

 

 

141,018

 

Property and equipment, net

 

 

9,203

 

 

 

7,246

 

Intangibles, net

 

 

3,690

 

 

 

3,912

 

Goodwill

 

 

20,626

 

 

 

20,626

 

Investments in common stock

 

 

112,008

 

 

 

112,008

 

Equity method investments

 

 

59,090

 

 

 

58,119

 

Other, net

 

 

524

 

 

 

590

 

Total assets

 

$

351,404

 

 

$

343,519

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,423

 

 

$

1,339

 

Accrued payroll and related

 

 

1,491

 

 

 

2,361

 

Current portion of deferred compensation

 

 

944

 

 

 

891

 

Accrued expenses

 

 

37,102

 

 

 

3,927

 

Acquisition consideration payable

 

 

12,000

 

 

 

12,000

 

Derivative liability

 

 

 

 

 

5,520

 

Current portion of debt

 

 

5,067

 

 

 

4,835

 

Total current liabilities

 

 

61,027

 

 

 

30,873

 

Long-term debt

 

 

1,801

 

 

 

4,394

 

Deferred compensation

 

 

12

 

 

 

12

 

Deferred tax liabilities

 

 

35,047

 

 

 

49,341

 

Deferred revenue

 

 

110,875

 

 

 

110,900

 

Deferred rent and other

 

 

7,414

 

 

 

7,061

 

Total liabilities

 

 

216,176

 

 

 

202,581

 

Commitments and contingencies

 

 

 

 

 

 

 

 

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

   65,448,566 and 37,771,459 shares issued and outstanding at

   June 30, 2016 and December 31, 2015, respectively

 

 

7

 

 

 

4

 

Additional paid-in capital

 

 

336,952

 

 

 

184,898

 

Accumulated other comprehensive income

 

 

25,454

 

 

 

73,579

 

Stock subscription receivable

 

 

(43,502

)

 

 

 

Accumulated deficit

 

 

(176,668

)

 

 

(113,329

)

Total Sorrento Therapeutics, Inc. stockholders' equity

 

 

142,243

 

 

 

145,152

 

Noncontrolling interests

 

 

(7,015

)

 

 

(4,214

)

Total equity

 

 

135,228

 

 

 

140,938

 

Total liabilities and equity

 

$

351,404

 

 

$

343,519

 

 

See accompanying unaudited notes

1


 

SORRENTO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grant

 

$

328

 

 

$

459

 

 

$

757

 

 

$

697

 

Sales and services

 

 

574

 

 

 

714

 

 

 

1,133

 

 

 

1,453

 

Total revenues

 

 

902

 

 

 

1,173

 

 

 

1,890

 

 

 

2,150

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of revenues

 

 

295

 

 

 

314

 

 

 

654

 

 

 

823

 

Research and development

 

 

10,631

 

 

 

7,971

 

 

 

18,408

 

 

 

15,811

 

Acquired in-process research and development

 

 

32,000

 

 

 

 

 

 

45,000

 

 

 

 

General and administrative

 

 

4,220

 

 

 

3,072

 

 

 

8,715

 

 

 

5,291

 

Intangible amortization

 

 

111

 

 

 

349

 

 

 

222

 

 

 

935

 

Total costs and operating expenses

 

 

47,257

 

 

 

11,706

 

 

 

72,999

 

 

 

22,860

 

Loss from operations

 

 

(46,355

)

 

 

(10,533

)

 

 

(71,109

)

 

 

(20,710

)

Gain on expiration of derivative liability

 

 

 

 

 

 

 

 

5,520

 

 

 

 

Income (loss) on equity investments

 

 

470

 

 

 

 

 

 

(29

)

 

 

 

Interest expense

 

 

(273

)

 

 

(442

)

 

 

(580

)

 

 

(881

)

Interest income

 

 

45

 

 

 

 

 

 

58

 

 

 

 

Income (loss) before income tax

 

 

(46,113

)

 

 

(10,975

)

 

 

(66,140

)

 

 

(21,591

)

Income tax benefit

 

 

 

 

 

(17

)

 

 

 

 

 

(195

)

Net loss

 

 

(46,113

)

 

 

(10,958

)

 

 

(66,140

)

 

 

(21,396

)

Net loss attributable to noncontrolling interests

 

 

(1,164

)

 

 

 

 

 

(2,801

)

 

 

 

Net loss attributable to Sorrento

 

$

(44,949

)

 

$

(10,958

)

 

$

(63,339

)

 

$

(21,396

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share - basic and diluted per share attributable

   to Sorrento

 

$

(0.97

)

 

$

(0.30

)

 

$

(1.50

)

 

$

(0.59

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares used during period - basic

  and diluted per share attributable to Sorrento

 

 

46,498

 

 

 

36,315

 

 

 

42,228

 

 

 

36,261

 

 

See accompanying unaudited notes

2


 

SORRENTO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Sorrento

 

$

(44,949

)

 

$

(10,958

)

 

$

(63,339

)

 

$

(21,396

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Unrealized loss on marketable securities, net of tax

 

 

(11,236

)

 

 

 

 

 

(48,125

)

 

 

 

Total other comprehensive income

 

 

(11,236

)

 

 

 

 

 

(48,125

)

 

 

 

Comprehensive income (loss) attributable to Sorrento

 

 

(56,185

)

 

 

(10,958

)

 

 

(111,464

)

 

 

(21,396

)

Comprehensive income (loss) attributable to

   noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(56,185

)

 

$

(10,958

)

 

$

(111,464

)

 

$

(21,396

)

 

See accompanying unaudited notes

3


 

SORRENTO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(66,140

)

 

$

(21,396

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,101

 

 

 

1,427

 

Non-cash interest expense

 

 

123

 

 

 

202

 

Stock-based compensation

 

 

2,391

 

 

 

2,830

 

Acquired in-process research and development

 

 

30,000

 

 

 

 

Provision for doubtful accounts

 

 

29

 

 

 

4

 

Gain on expiration of derivative liability

 

 

(5,520

)

 

 

 

Loss on equity investments

 

 

29

 

 

 

 

Deferred tax provision

 

 

 

 

 

(199

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Grants and other receivables

 

 

7

 

 

 

(170

)

Prepaid expenses and other

 

 

478

 

 

 

(242

)

Accounts payable

 

 

3,084

 

 

 

321

 

Deferred revenue

 

 

(25

)

 

 

 

Accrued expenses and other liabilities

 

 

2,081

 

 

 

9,671

 

Net cash used for operating activities

 

 

(32,362

)

 

 

(7,552

)

Investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,230

)

 

 

(500

)

Investments in common stock

 

 

 

 

 

(11,500

)

Net cash used in investing activities

 

 

(2,230

)

 

 

(12,000

)

Financing activities

 

 

 

 

 

 

 

 

Net principal payments under loan and security agreement

 

 

(2,431

)

 

 

(758

)

Net payments of deferred compensation

 

 

 

 

 

(1,000

)

Proceeds from issuance of common stock, net of issuance costs

 

 

95,751

 

 

 

 

Proceeds from exercise of stock options

 

 

413

 

 

 

1,107

 

Net cash provided by (used in) financing activities

 

 

93,733

 

 

 

(651

)

Net change in cash and cash equivalents

 

 

59,141

 

 

 

(20,203

)

Cash and cash equivalents at beginning of period

 

 

39,038

 

 

 

71,902

 

Cash and cash equivalents at end of period

 

$

98,179

 

 

$

51,699

 

Supplemental disclosures:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Income taxes

 

$

1

 

 

$

 

Interest paid

 

$

580

 

 

$

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Change in unrealized gains or (losses) on marketable securities

 

$

(62,420

)

 

$

 

Stock subscription receivable and note receivable issued

 

$

53,502

 

 

$

 

Property and equipment costs incurred but not paid

 

$

578

 

 

$

497

 

 

See accompanying unaudited notes

 

 

4


 

SORRENTO THERAPEUTICS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2016

 

 

1. Nature of Operations and Business Activities

Nature of Operations and Basis of Presentation

Sorrento Therapeutics, Inc. (NASDAQ: SRNE), together with its subsidiaries (collectively, the “Company”) is a biopharmaceutical company focused on the discovery, acquisition, development and commercialization of proprietary drug therapeutics for addressing significant unmet medical needs worldwide. The Company’s primary therapeutic focus is oncology, including the treatment of chronic cancer pain, but is also developing therapeutic products for other indications, including immunology and infectious diseases. The Company currently has multiple clinical development programs underway: (i) Chimeric Antigen Receptor-T Cell (“CAR-T”) programs for solid tumors, (ii) resiniferatoxin, or RTX, a non-opiate, ultra-potent and selective agonist of the TRPV-1 receptor for intractable pain in end-stage disease, and (iii) its clinical development programs for its biosimilar/biobetter antibodies.

The Company’s pipeline also includes preclinical fully human therapeutic monoclonal antibodies (mAbs), including its biosimilars/biobetters, its fully human anti-PD-L1 and anti-PD-1 checkpoint inhibitors derived from its proprietary G-MAB ® library platform, antibody drug conjugates (ADCs), bispecific antibodies (BsAbs), as well as Chimeric Antigen Receptor-T Cell (CAR-T) and Chimeric Antigen Receptor Natural Killer (NK) cells (CAR.NK™) for adoptive cellular immunotherapy. The Company’s objective is to develop its antibody drug products and adoptive cellular immunotherapies as: (i) First in Class (FIC), and/or (ii) Best in Class (BIC), which may offer greater efficacy and/or fewer adverse events or side effects as compared to existing drugs, as well as fully human therapeutic antibodies derived from its proprietary G-MAB ® antibody platform and ADCs.  

Through June 30, 2016, the Company had devoted substantially all of its efforts to research and product development, raising capital and building infrastructure, and had not realized revenues from its planned principal operations.

The accompanying interim consolidated financial statements have been prepared by the Company, without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of its financial position, results of operations and cash flows in accordance with United States generally accepted accounting principles (GAAP). The accompanying consolidated financial statements include the accounts of the Company’s wholly-owned subsidiaries and those of a variable interest entity where the Company is the primary beneficiary. For consolidated entities where the Company owns or are exposed to less than 100% of the economics, the Company records net income (loss) attributable to noncontrolling interests in its consolidated statements of operations equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties.  Sorrento Therapeutics, Inc. Hong Kong Limited had no operating activity through June 2016.  All intercompany balances and transactions have been eliminated in consolidation.

In determining whether the Company is the primary beneficiary of an entity, the Company applies a qualitative approach that determines whether it has both (i) the power to direct the economically significant activities of the entity and (ii) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. These considerations impact the way the Company accounts for its existing collaborative relationships and other arrangements. The Company continuously assesses whether it is the primary beneficiary of a variable interest entity as changes to existing relationships or future transactions may result in the Company consolidating or deconsolidating one or more of its collaborators or partners.

The balance sheet at December 31, 2015 is derived from the audited consolidated financial statements at that date which are not presented herein.

In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, which are only normal and recurring, necessary for a fair statement of financial position, results of operations and cash flows. These 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, 2015. Operating results for interim periods are not expected to be indicative of operating results for the Company’s 2016 fiscal year.    

Liquidity

The Company anticipates that it will continue to incur net losses in the foreseeable future as it (i) advances clinical stage product candidates such as biosimilar/biobetter antibodies, CAR-T programs and RTX in the clinic and potentially pursues other development, (ii) continues to identify a number of potential mAb and ADC drug candidates and further advances various preclinical and

5


 

development activities, (iii) advances its product candidates into the clinic, (iv) invests in additional joint ventures or third party collaboration or acquisition agreements, and (v) expands corporate infrastructure, including the costs associated with being a NASDAQ listed public company. Based on currently available resources, the Company believes it has the ability to meet all obligations due over the course of the next twelve months.

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 that may be 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 common stock of the Company (“Common Stock”) and warrants to purchase shares of Common Stock. Upon the closing of the ABG Private Placement, the Company will issue to each ABG Purchaser (1) such number of shares (the “ABG Shares”) of Common Stock as is equal to the amount of such ABG Purchaser’s investment divided by $5.55, and (2) a warrant to purchase such number of shares of Common Stock as is equal to 30% of the ABG Shares sold and issued to such ABG Purchaser (each, an “ABG Warrant”); provided that , following the consummation of the ABG Private Placement, Ally Bridge and its affiliates will not beneficially own more than 9.99% of the outstanding shares of Common Stock. Each ABG Warrant will have an exercise price of $8.50 per share, will be immediately exercisable upon issuance, will have a term of three years and will be exercisable on a cash or cashless exercise basis.

Under the terms of the ABG Purchase Agreement, the Company is obligated to prepare and file with the Securities and Exchange Commission (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 to be issued pursuant to each of the Additional Purchase Agreements (collectively, the “Additional Warrants” and, together with each ABG Warrant, the “Warrants”) will have an exercise price of $8.50 per share, will be immediately exercisable upon issuance, will have a term of three years and will be exercisable on a cash or cashless exercise basis.

Under the terms of the Additional Purchase Agreements, each of Beijing Shijilongxin, Frejoy and Yuhan has the right to demand, at any time beginning six months after the closing of the transactions contemplated by the applicable Additional 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 announced that it closed its previously announced private placement financing of common stock and warrants with Yuhan Corporation 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.

On June 8, 2016 the Company announced that is closed on the remainder of the $150.0 million financing. Ally Bridge Group ("ABG"), a global healthcare-focused investment group based in Hong Kong, led the financing and, together with Beijing Shijilongxin Investment Co., Ltd. ("Beijing Shijilongxin"), and FREJOY Investment Management Co., Ltd. ("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 consideration of $140.0 million.

The Company plans to continue 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.

6


 

On July 11, 2016 the Company announced a license and co llaboration agreement with Les Laboratoires Servier, SAS, a corporation incorporated under the laws of France, and Institut de Recherches Internationales Servier, a company duly organized and existing under the laws of France (individually and collectively , “Servier”) for the development, manufacture and commercialization of products using Sorrento's fully human immuno-oncology anti-PD-1 monoclonal antibody (mAb) STI-A1110. Pursuant to the financial terms of that agreement the Company received a non-refunda ble up-front payment of $27.4 million in July of 2016.

The Company filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”), which was declared effective by the SEC in July 2013 (the “2013 Shelf Registration Statement”). The 2013 Shelf Registration Statement provides the Company the ability to offer up to $100.0 million of securities, including equity and other securities as described in the registration statement. After the May 2014 underwritten offering the Company has the ability to offer up to $36.6 million of additional securities under the 2013 Shelf Registration Statement. In November 2014, the Company filed a universal shelf registration statement on Form S-3 with the SEC, which was declared effective by the SEC in December 2014 (the “2014 Shelf Registration Statement”). The 2014 Shelf Registration Statement provides the Company with the ability to offer up to $250.0 million of securities, including equity and other securities as described in the registration statement. Included in the 2014 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 $50.0 million of the Company’s common stock that may be issued and sold under a sales agreement with MLV & Co. LLC (the “ATM Facility”).   During the six months ended June 30, 2016 the Company sold approximately $3.6 million under the ATM Facility.  After the first quarter 2016 sales activities the Company has the ability to offer up to $46.4 million of additional securities under the ATM Facility.  The Company cannot be sure that such additional funds will be available on reasonable terms, or at all. If the Company is unable to secure adequate additional funding, the Company may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could materially harm the Company’s business, results of operations, and future prospects.

Subsequent to June 30, 2016, the Company completed a letter agreement with the Chan Soon-Shiong Family Foundation (“Foundation”) and Cambridge Equities, LP (“Cambridge”) (the “Letter Agreement”). Pursuant to the terms of the Letter Agreement, among other things, (a) the Company agreed to sell to Foundation, and Foundation agreed to purchase from the Company, an aggregate of 5,618,326 shares of common stock of NantKwest, Inc. held by the Company, (b) Foundation agreed to sell to the Company, and the Company agreed to purchase all reported shares held by Foundation and Cambridge, an aggregate of 7,878,098 shares of common stock of the Company (“Common Stock”) held by Foundation and Cambridge, (c) Cambridge agreed to forfeit its right to purchase 500,000 shares of Common Stock issuable pursuant a warrant to purchase 1,724,138 shares of Common Stock held by Cambridge, and (d) the Company agreed to pay to Foundation an aggregate of approximately $15.6 million. The transactions contemplated under the Letter Agreement closed on July 7, 2016. Effective with the close of the transaction in July 2016, the Company will retire the 7,878,098 shares and has the ability to sell these shares for additional funds.

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 covenants that may restrict the Company’s ability to operate its business.

 

2. Significant Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in conformity with 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 financial statements and the reported amounts of expenses during the reporting period.  On an ongoing basis, the Company evaluates its estimates, including those related to the valuation of warrants, stock-based compensation and the valuation allowance for deferred tax assets. The Company bases its estimates on historical experience and on various other market-specific and relevant assumptions that it believes to be reasonable under the circumstances. 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.

7


 

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 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 our 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 as 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 are classified as short-term available-for-sale securities and are reported as a component of current assets in the accompanying consolidated balance sheets. Marketable securities that 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 consolidated balance sheets.

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 six months ended June 30, 2016, no other-than-temporary impairment charges were recorded.

Grants and Accounts Receivable

Grants receivable at June 30, 2016 and December 31, 2015 represent amounts due under several federal contracts with the National Institute of Allergy and Infectious Diseases, or NIAID, a division of the National Institutes of Health, or NIH, collectively, the NIH Grants. 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 June 30, 2016 and December 31, 2015 consists 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 June 30, 2016 and December 31, 2015, the allowance for doubtful accounts was $29,000 and $4,000, respectively.

8


 

Property and Equipment

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 activity. The accounting for business combinations 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 each acquisition, 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 2015, noting no impairment.  There have not been any triggering events through June 30, 2016.

The Company evaluates its long-lived 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 the 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 June 30, 2016.

Derivative Liability

Derivative liabilities are recorded on the consolidated balance sheets at 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 other income (expense), net.

The Company’s cost method investments are included in investments in common stock on the consolidated balance sheets.  The Company’s equity method investments are included in equity method investments on the 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: market value or exit price of the investment based on either market-

9


 

quoted prices or future rounds of financing by the investee; length of time that the market value was below its cost basis; financial condition and business prospects of the investee; the Company’s intent and ability to retain the investment for a sufficient period of time to allow for recovery in market value of the investment; issues that raise concerns about the investee's ability to continue as a going concern; any other information that we may be aware of related to the inv estment. 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, as well as future milestone license payments, 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.

Income Taxes

The provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740-10, Uncertainty in Income Taxes, address 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 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.

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 June 30, 2016 and December 31, 2015, the Company maintained a full valuation allowance against its deferred tax assets, with the exception of an amount equal to its deferred tax liabilities, which can be expected to reverse over a definite life.

Revenue Recognition

The Company’s revenues are generated primarily from various NIH grant awards, and from the sale of customized reagents and the provision of contract development services. 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.

Revenues from sales are generated from the sale of customized reagents which include industrial standard cytotoxins, linkers, and linker-toxins used for preparing ADCs.  Contract development services include providing synthetic expertise to customer’s synthesis by delivering proprietary cytotoxins, linkers and linker-toxins and ADC service using industry standard toxin and antibodies provided by customers. Revenue is recognized when, (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered, (iii) the price is fixed or determinable, and (iv) collectability is reasonably assured.

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.

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.

10


 

Stock-based Compensation

The Company accounts for stock-based compensation in accordance with FASB ASC Topic 718, 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.

Net Earnings (Loss) per Share

Basic net earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net earnings (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 earnings (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.

Comprehensive Income (Loss )

Comprehensive income (loss) is comprised of net income (loss) and adjustments for the change in unrealized gains and losses on our investments in available-for-sale marketable securities, net of taxes. The Company displays comprehensive income (loss) and its components in its consolidated statements of comprehensive income (loss).

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 March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This update amends the principal-versus-agent implementation guidance and illustrations in the Board’s new revenue standard (ASC 606). The FASB issued the ASU in response to concerns identified by stakeholders, including those related to (1) determining the appropriate unit of account under the revenue standard’s principal-versus-agent guidance and (2) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s control principle. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the effect that the updated standard will have on its consolidated results of operations, financial position or cash flows.  

In April 2016, the FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This update clarifies how an entity identifies performance obligations related to customer contracts as well as help to improve the operability and understanding of the licensing implementation guidance. The amendments in this update affect the guidance in Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective but will become effective for annual and interim periods beginning after December 15, 2017. The Company has not yet selected a transition method nor has it determined the effect of the standard on its consolidated results of operations, financial position or cash flows.  

In May 2016, the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. This update clarifies the objectives of collectability, sales and other taxes, noncash consideration, contract modifications at transition, completed contracts at transition and technical correction. The amendments in this update affect the guidance in Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers

11


 

(Topic 606), which is not yet effective but will be come effective for annual and interim periods beginning after December 15, 2017. The Company has not yet selected a transition method nor has it determined the effect of the standard on its consolidated results of operations, financial position or cash flo ws.   

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . This update provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the effect that the updated standard will have on its consolidated results of operations, financial position or cash flows.

 

 

3. Fair Value Measurements

 

The Company measures the fair value of financial assets and liabilities based on authoritative guidance that defines fair value, establishes a framework consisting of three levels for measuring fair value, and requires disclosures about fair value measurements.  Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.

 

The Company’s marketable securities are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.  The Company’s derivative liability was classified within Level 3 of the fair value hierarchy because the value was calculated using significant judgment based on the Company’s own assumptions in the valuation of this liability.

 

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 June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance

 

 

Quoted Prices in Active Markets (Level 1)

 

 

Significant Other Observable Inputs (Level 2)

 

 

Significant Unobservable Inputs (Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities

 

$

34,946

 

 

$

34,946

 

 

$

 

 

$

 

Total assets

 

$

34,946

 

 

$

34,946

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance

 

 

Quoted Prices in Active Markets (Level 1)

 

 

Significant Other Observable Inputs (Level 2)

 

 

Significant Unobservable Inputs (Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities

 

$

97,366

 

 

$

97,366

 

 

$

 

 

$

 

Total assets

 

$

97,366

 

 

$

97,366

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability

 

$

5,520

 

 

$

 

 

$

 

 

$

5,520

 

Total liabilities

 

$

5,520

 

 

$

 

 

$

 

 

$

5,520

 

 

12


 

The following table includes a summary of the derivative liability measured at fair value using significant unobservable inputs (Level 3) during the six months en ded June 30, 2016 (in thousands): 

 

 

 

 

 

 

 

 

Derivative Liability

 

 

 

 

 

 

Beginning balance at December 31, 2015

 

$

5,520

 

  Gain on expiration of derivative liability

 

 

(5,520

)

Ending balance at June 30, 2016

 

$

 

 

 

4 . Marketable Securities

Marketable securities consisted of the following as of June 30, 2016 (in thousands):

 

 

 

June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Fair Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NantKwest common shares

 

$

10,000

 

 

$

87,366

 

 

$

(62,420

)

 

$

34,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On July 27, 2015, NantKwest, Inc., or NantKwest, completed its initial public offering (“IPO”).  Prior to the IPO the Company’s investment in NantKwest was accounted for using the cost method and the total investment of $10.0 million was classified as part of investments in common stock on the Company’s consolidated balance sheets.  The common shares were subject to restrictions in a lock-up agreement through December 27, 2015 as well as limitations under Rule 144 of the Securities Act of 1933. As these were short term restrictions, the Company did not apply a marketability discount.  For the three and six months ended June 30, 2016, the Company recorded an unrealized loss of $11.2 million and $48.1 million, respectively, representing the difference between the $10.0 million cost basis and the estimated fair value net of tax of $0 as of June 30, 2016, as accumulated other comprehensive income in the stockholder's equity section of the Company’s consolidated balance sheet and as a change in unrealized gains and losses on marketable securities in the Company’s consolidated statements of comprehensive income (loss).   The tax effect of $14.3 million on the unrealized gain on marketable securities as of December 31, 2015 was reversed during the three months ended March 31, 2016 due to the decrease in the value of the marketable securities as of March 31, 2016.   The Company’s investment in NantKwest, Inc. will be revalued on each balance sheet date.  The fair value of the Company’s holdings in NantKwest at June 30, 2016 is a Level 1 measurement. Subsequent to June 30, 2016, the Company closed a transaction with the Chan Soon-Shiong Family Foundation and Cambridge Equities, LP to sell all of its investment in NantKwest, Inc.

 

5. Notes Receivable

 

In June 2016, the Company closed its previously announced securities purchase agreements with certain investors. In addition to the cash received the Company received consideration in the form of secured promissory notes for 9,640,060 shares totaling $53.5 million (the Secured Notes).  The Secured Notes accrue interest at 5% per annum, and all principal and interest is due and payable in December, 2016.  The Secured Notes are collateralized by the assets of the investors.  

 

In July 2016, the Company received a partial payment with accrued interest from one investor totaling $10.0 million and the Company expects to receive the remaining $43.5 million prior to December 31, 2016. The $43.5 million in notes are reflected as a stock subscription receivable in the Company’s consolidated balance sheets.

 

 

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6 . Investments  

As of June 30, 2016 and December 31, 2015, the aggregate carrying amount of the Company’s cost-method investments in non-publicly traded companies was $112.0 million and included an ownership interest in NantCell, Inc., NantBioScience, Inc., Brink Biologics, Inc., Coneksis, Inc., and Globavir Biosciences, 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 three and six months ended June 30, 2016 and 2015.

 

CARgenix

I n August 2015,  the Company and TNK Therapeutics, Inc. (“TNK”), its subsidiary entered into a Membership Interest Purchase Agreement (the “Membership Interest Purchase Agreement”) with CARgenix Holdings LLC (“CARgenix”) and the members of CARgenix (the “Members”) pursuant to which the Members sold all of their membership interests in CARgenix to TNK for: (1) a cash payment of $100.00, and (2) $6.0 million in shares of TNK Class A common stock, subject to adjustment in certain circumstances, to be issued to the Members 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 the March 2016, Amendment No. 1, in the event a Qualified Financing does not occur by September 15, 2016 or TNK does not complete an initial public offering of shares of its capital stock by October 15, 2016, in lieu of receiving shares of TNK pursuant to the acquisition, the Members shall receive an aggregate of 309,917 shares of Company common stock, subject to adjustment in certain circumstances. The Membership Interest Purchase Agreement further provides that 20% of the shares of TNK or the Company’s, as applicable, issuable to the Members shall be held in escrow to secure certain post-closing adjustment and indemnification rights of TNK for a period of 12 months following the closing of the transaction.  The aggregate purchase price of $6.0 million was recognized as acquired in-process research and development expense in the consolidated statement of operations during the three months ended September 30, 2015.  The corresponding acquisition liability will remain until settlement.  

 

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 common stock, subject to adjustment in certain circumstances, to be issued to the Stockholders upon a Qualified Financing.  In accordance with the March 2016, Amendment No. 1, in the event a Qualified Financing does not occur by September 15, 2016 or TNK does not complete an initial public offering of shares of its capital stock by September 30, 2016, in lieu of receiving shares of TNK pursuant to the acquisition, the Stockholders shall receive an aggregate of 309,917 shares of Company common stock, subject to adjustment in certain circumstances. The Stock Purchase Agreement further provides that 20% of the shares of TNK or the Company’s, as applicable, issuable to the Stockholders shall be held in escrow to secure certain post-closing adjustment and indemnification rights of TNK for a period of 12 months following the closing of the transaction.  The aggregate purchase price of $6.0 million was recognized as acquired in-process research and development expense in the consolidated statement of operations during the three months ended September 30, 2015.  The corresponding acquisition liability will remain until settlement.  

 

7 . Equity Method Investments

NANTibody

In April 2015, the Company and NantCell, Inc., or NantCell, a wholly-owned subsidiary of NantWorks, Inc., a private company owned by Dr. Patrick Soon-Shiong, an affiliate of the Company, established a new joint venture called Immunotherapy NANTibody, LLC, or 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, LLC, or NantPharma, contribute its portion of the initial joint funding of $40.0 million to NANTibody from the proceeds of the sale of IgDraSol.  NANTibody will focus on accelerating the development of multiple immuno-oncology monoclonal antibodies (mAbs) for the treatment of cancer, including but not limited to anti-PD-1, anti-PD-L1, anti-CTLA4 mAbs, and other immune-check point antibodies as well as antibody drug conjugates (ADCs) and bispecific antibodies.

The Company is accounting for its interest in NANTibody as an equity method investment, due to the significant influence the Company has over the operations of NANTibody through its board representation and 40% voting interest.  The Company’s investment in NANTibody is reported in equity method investments on the consolidated balance sheets and its share of NANTibody’s income or loss is recorded in income (loss) on equity investments on the consolidated statement of operations.  The financial

14


 

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 o n a quarter lag.  As of June 30, 2016, the carrying value of the Company’s investment in NANTibody was approximately $39.9 million.

NANTibody recorded a total net income of $806,000 for the three months ended March 31, 2016 and a net loss of $964,000 for the three months ended December 31, 2015.  The Company recorded a total net income of $322,000 for the three months ended June 30, 2016 and a loss of $63,000 for the six months ended June 30, 2016 from NANTibody in income (loss) on equity investments on the consolidated statement of operations. As of March 31, 2016, NANTibody had $100.4 million in current assets and $628,000 in current liabilities.

NantStem

In July 2015, the Company and NantBioScience, Inc., or NantBioScience, a wholly-owned subsidiary of NantWorks, established a new joint venture called NantCancerStemCell, LLC, or 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, LP, a related party to the Company and to NantBioScience.  The call option was a derivative as defined in ASC 815 and was recognized at fair value every reporting period the call option agreement was in effect, with changes in fair value recognized in current operations.  The call option expired unexercised on March 31, 2016 and the Company recorded a gain of $5.5 million upon the cancellation of the derivative liability.

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 the consolidated balance sheets and its share of NantStem’s income or loss is recorded in income (loss) on equity investments on the consolidated statement of operations.  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.  As of June 30, 2016, the carrying value of the Company’s investment in NantStem was approximately $18.2 million.

NantStem recorded a total net income of $739,000 for the three months ended March 31, 2016 and a loss of $566,000 for the three months ended December 31, 2015.  For the three and six months ended June 30, 2016, the Company recorded $148,000 and $34,000, respectively, in income from NantStem in income (loss) on equity investments on the consolidated statement of operations.  As of March 31, 2016, NantStem had $80.3 million in current assets and $142,000 in current liabilities.

Shanghai Three

The Company is accounting for its interest in Shanghai Three-Alliance Biotech Co. LTD (“Shanghai Three”), a China based company, 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 consolidated balance sheets and its share of Shanghai Three’s income or loss is recorded in income (loss) on equity investments on the consolidated statement of operations.  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.  As of June 30, 2016, the carrying value of the Company’s investment in Shanghai Three was approximately $1.0 million. 

Shanghai Three incurred no operating expenses for the three months ended March 31, 2016.  As of March 31, 2016, Shanghai Three had $540,000 in current assets and $3.0 million in current liabilities.

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3SBio

In June 2016, the Company and TNK entered into a joint venture agreement with Shenyang Sunshine Pharmaceutical Company Ltd (“3SBio”), a China based company, to develop and commercialize proprietary immunotherapies, including those developed from, including or using TNK’s chimeric antigen receptor T cell (“CAR-T”) technology targeting carcinoembryonic antigen (“CEA”) positive cancers.  In June 2016, 3SBio purchased $10.0 million of Company common stock and warrants as part of the Company’s private placement offering.

Under the terms of the agreement 3SBio will contribute an initial investment of $10.0 million to the joint venture and TNK will grant the joint venture an exclusive license to the CEA CAR-T technology and two additional CARs for cellular therapy for the Greater China market, including Mainland China, Hong Kong and Macau. 3SBio will own 51% of the joint venture while TNK will own 49%.  As of June 30, 2016, funding and operations of the joint venture had not yet begun, as a result no investment has been recorded as of June 30, 2016.  

Yuhan

In March 2016, the Company and Yuhan Corporation, or Yuhan, a South Korea company, entered into an agreement to form a joint venture company called ImmuneOncia Therapeutics, LLC, to develop and commercialize a number of immune checkpoint antibodies against undisclosed targets for both hematological malignancies and solid tumors.  During the three months ended June 30, 2016, Yuhan purchased $10.0 million of Company common stock and warrants as part of the Company’s private placement offering.

Under the terms of the joint venture agreement, Yuhan will contribute an initial investment of $10.0 million to ImmuneOncia, and the Company will grant ImmuneOncia an exclusive license for one of its immune checkpoint antibodies for specified countries while retaining the rights for US, 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. Yuhan will own 51% of ImmuneOncia, while the Company will own 49%. Yuhan’s Chief Scientific Officer Dr. Su Youn Nam will be appointed CEO of ImmuneOncia.   As of June 30, 2016, funding and operations of the joint venture had not yet begun, as a result no investment has been recorded as of June 30, 2016.  

8. Goodwill and Intangible Assets

As of both June 30, 2016 and December 31, 2015, the Company had goodwill of $20.6 million, respectively.  The Company performed a qualitative test for goodwill impairment as of December 31, 2015. 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 or six months ended June 30, 2016 and 2015.

 

The Company’s intangible assets, excluding goodwill, include patent rights, core technologies and customer relationships. 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 is as follows (in thousands):

 

 

 

June 30, 2016

 

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Intangibles, net

 

Customer relationships

 

$

1,320

 

 

$

668

 

 

$

652

 

Acquired technology

 

 

3,410

 

 

 

446

 

 

 

2,964

 

Patent rights

 

 

90

 

 

 

16

 

 

 

74

 

Total intangible assets

 

$

4,820

 

 

$

1,130

 

 

$

3,690

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Intangibles, net

 

Customer relationships

 

$

1,320

 

 

$

536

 

 

$

784

 

Acquired technology

 

 

3,410

 

 

 

358

 

 

 

3,052

 

Patent rights

 

 

90

 

 

 

14

 

 

 

76

 

Total intangible assets

 

$

4,820

 

 

$

908

 

 

$

3,912

 

 

As of June 30, 2016, the remaining weighted average life for identifiable intangible assets is 15 years.

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Patent rights are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the as sets, determined to be approximately 19 years from the date of transfer of the rights to the Company in April 2013. Amortization expense for both the three months ended June 30, 2016 and 2015 was $1,250, respectively.  Amortization expense for both the six months ended June 30, 2016 and 2015 was $2,500, respectively, which has been included in intangibles amortization.

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 both the three months ended June 30, 2016 and 2015 was $44,000, respectively.  Amortization expense for both the six months ended June 30, 2016 and 2015 was $88,000, respectively, which has been included in intangibles amortization.

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 in December 2013. Amortization expense for both the three months ended June 30, 2016 and 2015 was $66,000, respectively.  Amortization expense for both the six months ended June 30, 2016 and 2015 was $132,000, respectively, which has been included in intangibles amortization.

Estimated future amortization expense related to intangible assets at June 30, 2016 is as follows (in thousands):

 

Years Ending December 31,

 

Amount

 

2016 (remaining 6 months)

 

$

223

 

2017

 

 

445

 

2018

 

 

436

 

2019

 

 

181

 

2020

 

 

181

 

Thereafter

 

 

2,224

 

Total

 

$

3,690

 

 

 

9. Significant Agreements and Contracts

License Agreement with The Scripps Research Institute

In January 2010, the Company entered into a license agreement, or the TSRI License, with The Scripps Research Institute, or TSRI. Under the TSRI License, TSRI granted the Company an exclusive, worldwide license to certain TSRI patent rights and materials based on quorum sensing for the prevention and treatment of Staphylococcus aureus (“Staph”) infections, including Methicillin-resistant Staph. In consideration for the license, the Company: (i) issued TSRI a warrant for the purchase of common stock, (ii) agreed to pay TSRI a certain annual royalty commencing in the first year after certain patent filing milestones are achieved, (iii) agreed to pay a royalty on any sales of licensed products by the Company or its affiliates and a royalty for any revenues generated by the Company through its sublicense of patent rights and materials licensed from TSRI under the TSRI License. The TSRI License requires the Company to indemnify TSRI for certain breaches of the agreement and other matters customary for license agreements. The parties may terminate the TSRI License at any time by mutual agreement. In addition, the Company may terminate the TSRI License by giving 60 days’ notice to TSRI and TSRI may terminate the TSRI License immediately in the event of certain breaches of the agreement by the Company or upon the Company’s failure to undertake certain activities in furtherance of commercial development goals. Unless terminated earlier by either or both parties, the term of the TSRI License will continue until the final expiration of all claims covered by the patent rights licensed under the agreement. The warrant was exercised in February 2015.  For the three months ended June 30, 2016 and 2015, the Company recorded $2,000   and $21,000 in patent prosecution and maintenance costs associated with the TSRI License, respectively.  For the six months ended June 30, 2016 and 2015, the Company recorded $22,000   and $46,000 in patent prosecution and maintenance costs associated with the TSRI License, respectively.  All such costs have been included in general and administrative expenses.

17


 

License Agreement with Mabtech Limited

I n August 2015, the Company entered into an exclusive licensing agreement to develop and commercialize multiple prespecified biosimilar and biobetter antibodies from Mabtech Limited.  Under the terms of the agreement, the Company will develop and market these four monoclonal antibodies (mAbs) for the North American, European and Japanese market. The Company made an initial license payment of $10.0 million and in February 2016, paid an additional $10.0 million license payment, both of which were recognized as acquired in-process research and development expense in the consolidated statements of operations as the Company determined there was no alternative future use for the license.  In June 2016, the Company agreed to accelerate and pay a $30.0 million milestone license payment by July 31, 2016, which has been accrued and recognized as acquired in-process research and development expense as of June 30, 3016, in exchange for the purchase by Mabtech Limited and one or more of its affiliates in June 2016, of $20.0 million of Company common stock and warrants.  The amended agreement includes additional milestone payments totaling $150.0 million payable over the next three years.      

License Agreement with NantCell

In April 2015, the Company and NantCell entered into a license agreement. Under the terms of the agreement the Company granted an exclusive license to NantCell covering patent rights, know-how, and materials related to certain antibodies, anti-body drug conjugates (ADC) and two CAR-TNK products.  NantCell agreed to pay a royalty not to exceed five percent (5%) to the Company on any net sales of products (as defined) from the assets licensed by the Company to NantCell.  In addition to the future royalties payable under this agreement, NantCell paid an upfront payment of $10.0 million to the Company and issued 10 million shares of NantCell common stock to the Company valued at $100.0 million based on recent NantCell equity activity with a third party.  As of June 30, 2016, the Company had not yet provided all of the items noted in the agreement and therefore has recorded the entire upfront payment and value of the equity interest received as deferred revenue.  The Company will recognize the upfront payment and the value of the equity interest received over the expected license period of approximately ten years on a straight line basis.  The Company’s ownership interest in NantCell does not provide the Company with control or the ability to exercise significant influence, therefore the $100.0 million investment will be carried at cost in the consolidated balance sheets and evaluated for other-than-temporary impairment on a quarterly basis.

NIH Grants

In June 2014, the NIAID awarded the Company a Phase II STTR grant to support the advanced preclinical development of human bispecific antibody therapeutics to prevent and treat Staphylococcus aureus ( S. aureus or Staph) infections, including methicillin-resistant S. aureus (MRSA), or the Staph Grant III award. The project period for this Phase II grant covers a two-year period which commenced in June 2014, with total funds available of approximately $1.0 million per year for up to 2 years. During the three months ended June 30, 2016 and 2015, the Company recorded $218,000 and $331,000 of revenue, respectively, associated with the Staph Grant III award.  During the six months ended June 30, 2016 and 2015, the Company recorded $457,000 and $417,000 of revenue, respectively, associated with the Staph Grant III award.       

In June 2014, the NIAID awarded the Company a Phase I STTR grant entitled “Anti-Pseudomonas Immunotherapy and Targeted Drug Delivery”. This grant will support the preclinical development of novel anti- Pseudomonas aeruginosa mAb immunotherapy or an antibody-mediated targeted antibiotic delivery vehicle. Each modality may be an effective and safe stand-alone therapy and/or a component of a “cocktail” therapeutic option for prevention and treatment of P. aeruginosa infections. The project period for this Phase I grant covers a two-year period which commenced in July 2014, with total funds available of approximately $300,000 per year for up to 2 years. During the three months ended June 30, 2016 and 2015, the Company recorded $98,000 and $38,000 of revenue, respectively, associated with the Phase I STTR grant award.  During the six months ended June 30, 2016 and 2015, the Company recorded $224,000 and $93,000 of revenue, respectively, associated with the Phase I STTR grant award.   

In July 2014, the National Cancer Institute (NCI), a division of the NIH, awarded the Company a Phase I STTR grant, entitled “Targeting of Myc-Max Dimerization for the Treatment of Cancer”. This grant will support the preclinical development of the Myc inhibitor, which interferes with the protein-protein interaction (PPI) between Myc and its obligatory dimerization partner, Max, preventing sequence-specific binding to DNA and subsequent initiation of oncogenic transformation. The project period for this Phase I grant covers a one-year period which commenced in August 2014, with total funds available of approximately $225,000. During the three months ended June 30, 2016 and 2015, the Company recorded $0 and $56,000 of revenue, respectively, associated with the Phase I Myc grant award.  During the six months ended June 30, 2016 and 2015, the Company recorded $0 and $130,000 of revenue, respectively, associated with the Phase I Myc grant award.     

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In August 2014, the National Heart, Lung, and Blood Institute (NHBLI), a division of the NIH awarded the Company a Phase I Small Business Technology Transfer (SBIR) grant entitled “Human Anti-WISP-1 Antibodies for Treatment of Idiopathic Pulmonary Fibrosis”. This grant will advance th e Company’s immunotherapy targeting WNT-1 Inducible Signaling Protein-1(WISP1) for the treatment of Idiopathic Pulmonary Fibrosis (IPF). WISP1 is a protein that has been shown to be upregulated in IPF, linked to key growth factors, cellular proliferation, hyperplasia and is correlated with late stage cancers. IPF is a fatal disease, which results in progressive loss of lung function due to fibrosis of the lungs. The project period for this Phase I grant covers a one-year period which commenced in August 201 4, with total funds available of approximately $225,000.  During the three months ended June 30, 2016 and 2015, the Company recorded $0 and $21,000 of revenue, respectively, associated with the Phase I WISP1 grant award. During the six months ended June 30 , 2016 and 2015, the Company recorded $52,000 and $31,000 of revenue, respectively, associated with the Phase I WISP1 grant award.     

 

 

10. Loan and Security Agreement

In September 2013, the Company entered into a $5.0 million loan and security agreement with two banks pursuant to which: (i) the lenders provided the Company a term loan which was funded at closing, (ii) the Company repaid its then outstanding equipment loan balance of $762,000, and (iii) the lenders received a warrant to purchase an aggregate 31,250 shares of the Company’s common stock at an exercise price of $8.00 per share exercisable for seven years from the date of issuance. The value of the warrants, totaling $215,000, was recorded as debt discount and additional paid-in capital.

In March 2014, the Company entered into an amended and restated loan and security agreement, increasing the September 2013 facility to $12.5 million from $5.0 million, with the same two banks. Such loan was funded at closing and is secured by a lien covering substantially all of the Company’s assets, excluding intellectual property, which is subject to a negative pledge. In October 2014, the Company entered into a second amendment to its amended and restated loan and security agreement to extend the interest only payments on the outstanding amount of the loan from October 1, 2014 to May 1, 2015, after which equal monthly payments of principal and interest are due until the loan maturity date of September 30, 2017. The amended and restated loan: (i) interest rate is 7.95% per annum, and (ii) provided the Lenders additional warrants to purchase an aggregate of 34,642 shares of the Company’s common stock at an exercise price of $12.99 per share, exercisable for seven years from the date of issuance. The value of the warrants, totaling $322,000, was recorded as debt discount and additional paid-in capital.

At the Company’s option, it may prepay all of the outstanding principal balance, subject to certain pre-payment fees ranging from 1% to 3% of the prepayment amount. In the event of a final payment of the loans under the loan agreement, either in the event of repayment of the loan at maturity or upon any prepayment, the Company is obligated to pay the amortized portion of the final fee of $781,000.

The Company is also subject to certain affirmative and negative covenants under the loan agreement, including limitations on its ability to: undergo certain change of control events; convey, sell, lease, license, transfer or otherwise dispose of any equipment financed by loans under the loan agreement; create, incur, assume, guarantee or be liable with respect to indebtedness, subject to certain exceptions; grant liens on any equipment financed under the loan agreement; and make or permit any payment on specified subordinated debt. In addition, under the loan agreement, subject to certain exceptions, the Company is required to maintain with the lender its primary operating, other deposit and securities accounts.

Long-term debt and unamortized discount balances are as follows (in thousands):

 

Face value of amended and restated loan

 

$

6,974

 

Fair value of all warrants

 

 

(536

)

Accretion of debt discount

 

 

430

 

Balance at June 30, 2016

 

$

6,868

 

 

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Future minimum payments under the amended and restated loan and security agreement are as follows (in thousands):

 

Year Ending December 31,

 

 

 

 

2016

 

$

2,748

 

2017

 

 

4,579

 

Total future minimum payments

 

 

7,327

 

Unamortized interest

 

 

(353

)

Debt discount

 

 

(106

)

Total minimum payment

 

 

6,868

 

Current portion

 

 

(5,067

)

Long-term debt

 

$

1,801

 

 

11. Stockholders’ Equity

 

Common Stock

 

The Company has a Sales Agreement with MLV & Co. LLC, ("MLV") to permit the sale by MLV, acting as its sales agent, of up to $50.0 million in additional shares of the Company's common stock from time to time in an at-the-market offering under the Sales Agreement. All sales of shares have been and will continue to be made pursuant to an effective shelf registration statement on Form S-3 filed with the SEC. The Company pays MLV a commission of approximately 2% of the aggregate gross proceeds the Company receives from all sales of the Company's common stock under the Sales Agreement. There were net proceeds on sales of approximately $3.5 million at a weighted average price of $6.37 under the Sales Agreement during the three months ended March 31, 2016.  There was no sales activity under the Sales Agreement during the three months ended June 30, 2016 or during the six months ended June 30, 2015.

During the three months ended June 30, 2016 the Company closed its private placement offering of common stock and warrants with Yuhan Corporation, Ally Bridge Group ("ABG"), together with Beijing Shijilongxin Investment Co., Ltd. ("Beijing Shijilongxin"), and FREJOY Investment Management Co., Ltd. ("Frejoy").  The Company collectively sold 27,027,027 shares of common stock at $5.55 per share, and warrants to purchase 5,290,936 shares of common stock for total consideration of $150.0 million.  The Company incurred $4.2 million in offering commissions and expenses which have been netted against the gross proceeds.  The warrants are exercisable for three years at an exercise price of $8.50 per share.  The Company received consideration in the form of secured promissory notes for 9,640,060 shares totaling $53.5 million.  In July 2016, the Company received a partial payment with accrued interest from one investor totaling $10.0 million and as of June 30, 2016, has recorded this as notes receivable on the consolidated balance sheets.  The remaining $43.5 million in notes are reflected as a stock subscription receivable in the Company’s consolidated balance sheets.

 

12. Stock Incentive Plans

2009 Non-Employee Director Grants

In September 2009, prior to the adoption of the 2009 Stock Incentive Plan, the Company’s Board of Directors approved the reservation and issuance of 8,000 nonstatutory stock options to the Company’s non-employee directors. The options vested on the one year anniversary of the vesting commencement date in October 2010, and were exercisable for up to 10 years from the grant date. No further shares may be granted under this plan and, as of June 30, 2016, all options had been cancelled and no   options were outstanding.

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2009 Stock Incentive Plan

In October 2009, the Company’s stockholders approved the 2009 Stock Incentive Plan. In June 2016, the Company’s stockholders approved, among other items, the amendment and restatement of the 2009 Stock Incentive Plan, or the Stock Plan, to increase the number of common shares authorized to be issued pursuant to the Stock Plan to 6,260,000. Such shares of the Company’s common stock are reserved for issuance to employees, non-employee directors and consultants of the Company. The Stock Plan provides for the grant of incentive stock options, non-incentive stock options, stock appreciation rights, restricted stock awards, unrestricted stock awards, restricted stock unit awards and performance awards to eligible recipients. Recipients of stock options shall be eligible to purchase shares of the Company’s common stock at an exercise price equal to no less than the estimated fair market value of such stock on the date of grant. The maximum term of options granted under the Stock Plan is ten years. Employee option grants will generally vest 25% on the first anniversary of the original vesting commencement date, with the balance vesting monthly over the remaining three years. The vesting schedules for grants to non-employee directors and consultants will be determined by the Company’s Compensation Committee.  

The following table summarizes stock option activity as of June 30, 2016 and the changes for the period then ended (dollar values in thousands):

 

 

 

Options Outstanding

 

 

Weighted-

Average

Exercise Price

 

 

Aggregate Intrinsic Value

 

Outstanding at December 31, 2015

 

 

2,957,616

 

 

$

8.95

 

 

$

4,506

 

Options Granted

 

 

462,950

 

 

$

5.86

 

 

 

 

 

Options Canceled

 

 

(443,481

)

 

$

8.73

 

 

 

 

 

Options Exercised

 

 

(89,976

)

 

$

4.76

 

 

 

 

 

Outstanding at June 30, 2016

 

 

2,887,109

 

 

$

8.62

 

 

$

934

 

  

The Company uses the Black-Scholes valuation model to calculate the fair value of stock options. The fair value of employee stock options was estimated at the grant date using the following assumptions: