10-Q 1 mack-10q_20160930.htm FORM 10-Q mack-10q_20160930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 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: 001-35409

 

Merrimack Pharmaceuticals, Inc.

 

(Exact name of registrant as specified in its charter)

 

Delaware

04-3210530

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

One Kendall Square, Suite B7201

Cambridge, MA

02139

(Address of principal executive offices)

(Zip Code)

 

(617) 441-1000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

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

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

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

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

As of November 4, 2016, there were 129,615,944 shares of Common Stock, $0.01 par value per share, outstanding.

 

 

 

 

 


 

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

 

 

PART II

OTHER INFORMATION

 

Item 1A.

Risk Factors.

35

 

 

 

Item 5.

Other Information.

63

 

 

 

Item 6.

Exhibits.

63

 

 

Signatures

64

 

 

Exhibit Index

65

 

 

 

i


 

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

The forward-looking statements in this Quarterly Report on Form 10-Q include, among other things, statements about:

 

the market potential and our commercialization efforts for ONIVYDE®, which we market in the United States;

 

our plans to develop and commercialize our clinical stage product candidates and diagnostics;

 

our ongoing and planned discovery programs, preclinical studies and clinical trials;

 

the timing of the completion of our clinical trials and the availability of results from such trials;

 

our collaborations with Baxalta Incorporated, Baxalta US Inc. and Baxalta GmbH, which we collectively refer to as Baxalta, and PharmaEngine, Inc., or PharmaEngine, related to ONIVYDE;

 

our ability to establish and maintain additional collaborations;

 

the timing of and our ability to obtain and maintain regulatory approvals for our products and product candidates;

 

the rate and degree of market acceptance and clinical utility of our products;

 

our intellectual property position;

 

our commercialization, marketing and manufacturing capabilities and strategy;

 

the potential advantages of our systems biology approach to drug research and development;

 

the potential use of our systems biology approach in fields other than oncology; and

 

our estimates regarding expenses, future revenues, capital requirements and needs for additional financing.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in Part II, Item 1A. Risk Factors, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, collaborations or investments that we may make.

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

NOTE REGARDING TRADEMARKS

ONIVYDE® is a trademark of Merrimack Pharmaceuticals, Inc. Any other trademarks, trade names and service marks referred to in this Quarterly Report on Form 10-Q are the property of their respective owners.

 

 

1


 

PART I

FINANCIAL INFORMATION

Item 1.Financial Statements.

Merrimack Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets

 

(in thousands, except per share amounts)

(unaudited)

 

September 30,

2016

 

 

December 31,

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

36,463

 

 

$

185,606

 

Marketable securities

 

 

12,003

 

 

 

 

Restricted cash

 

 

102

 

 

 

101

 

Accounts receivable, net

 

 

22,170

 

 

 

6,483

 

Inventory

 

 

14,770

 

 

 

3,717

 

Prepaid expenses and other current assets

 

 

4,109

 

 

 

5,487

 

Total current assets

 

 

89,617

 

 

 

201,394

 

Restricted cash

 

 

674

 

 

 

584

 

Property and equipment, net

 

 

17,564

 

 

 

21,915

 

Other assets

 

 

27

 

 

 

27

 

Intangible assets, net

 

 

6,922

 

 

 

7,355

 

Goodwill

 

 

3,605

 

 

 

3,605

 

Total assets

 

$

118,409

 

 

$

234,880

 

Liabilities, non-controlling interest and stockholders’ deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other

 

$

49,699

 

 

$

52,082

 

Deferred revenues

 

 

36,610

 

 

 

50,137

 

Deferred rent

 

 

1,974

 

 

 

1,527

 

Total current liabilities

 

 

88,283

 

 

 

103,746

 

Deferred revenues, net of current portion

 

 

36,328

 

 

 

51,197

 

Deferred rent, net of current portion

 

 

3,905

 

 

 

4,926

 

Deferred tax incentives, net of current portion

 

 

165

 

 

 

1,045

 

Long-term debt

 

 

216,871

 

 

 

257,655

 

Total liabilities

 

 

345,552

 

 

 

418,569

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Non-controlling interest

 

 

(361

)

 

 

239

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value: 10,000 shares authorized at September 30, 2016 and

   December 31, 2015; no shares issued or outstanding at September 30, 2016 or

   December 31, 2015

 

 

 

 

 

 

Common stock, $0.01 par value: 200,000 shares authorized at September 30, 2016 and

   December 31, 2015; 129,435 and 115,871 shares issued and outstanding at

   September 30, 2016 and December 31, 2015, respectively

 

 

1,294

 

 

 

1,159

 

Additional paid-in capital

 

 

693,449

 

 

 

617,145

 

Accumulated other comprehensive loss

 

 

(2

)

 

 

 

Accumulated deficit

 

 

(921,523

)

 

 

(802,232

)

Total stockholders’ deficit

 

 

(226,782

)

 

 

(183,928

)

Total liabilities, non-controlling interest and stockholders’ deficit

 

$

118,409

 

 

$

234,880

 

 

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

 

2


 

Merrimack Pharmaceuticals, Inc.
Condensed Consolida
ted Statements of Operations and Comprehensive Loss

 

(in thousands, except per share amounts)

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(unaudited)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues, net

 

$

14,493

 

 

$

 

 

$

37,312

 

 

$

 

License and collaboration revenues

 

 

12,417

 

 

 

16,440

 

 

 

43,062

 

 

 

67,839

 

Other revenues

 

 

1,161

 

 

 

 

 

 

2,659

 

 

 

 

Total revenues

 

 

28,071

 

 

 

16,440

 

 

 

83,033

 

 

 

67,839

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

1,010

 

 

 

 

 

 

3,593

 

 

 

 

Research and development expenses

 

 

32,078

 

 

 

37,763

 

 

 

105,956

 

 

 

116,248

 

Selling, general and administrative expenses

 

 

18,048

 

 

 

16,956

 

 

 

56,523

 

 

 

38,460

 

Restructuring expenses

 

 

809

 

 

 

 

 

 

809

 

 

 

 

Total costs and expenses

 

 

51,945

 

 

 

54,719

 

 

 

166,881

 

 

 

154,708

 

Loss from operations

 

 

(23,874

)

 

 

(38,279

)

 

 

(83,848

)

 

 

(86,869

)

Other income and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

64

 

 

 

13

 

 

 

258

 

 

 

93

 

Interest expense

 

 

(6,850

)

 

 

(4,476

)

 

 

(36,579

)

 

 

(13,524

)

Other income, net

 

 

385

 

 

 

356

 

 

 

278

 

 

 

580

 

Net loss

 

 

(30,275

)

 

 

(42,386

)

 

 

(119,891

)

 

 

(99,720

)

Net (loss) income attributable to non-controlling interest

 

 

(207

)

 

 

208

 

 

 

(600

)

 

 

412

 

Net loss attributable to Merrimack Pharmaceuticals, Inc.

 

$

(30,068

)

 

$

(42,594

)

 

$

(119,291

)

 

$

(100,132

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on available-for-sale securities

 

 

(3

)

 

 

6

 

 

 

(2

)

 

 

74

 

Other comprehensive (loss) income

 

 

(3

)

 

 

6

 

 

 

(2

)

 

 

74

 

Comprehensive loss

 

$

(30,071

)

 

$

(42,588

)

 

$

(119,293

)

 

$

(100,058

)

Net loss per share available to common stockholders—basic and

   diluted

 

$

(0.23

)

 

$

(0.38

)

 

$

(0.96

)

 

$

(0.91

)

Weighted-average common shares used in computing net loss per

   share available to common stockholders—basic and diluted

 

 

129,212

 

 

 

112,417

 

 

 

123,832

 

 

 

109,928

 

 

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

 

 

3


 

Merrimack Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

 

(in thousands)

 

Nine Months Ended

September 30,

 

(unaudited)

 

2016

 

 

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(119,891

)

 

$

(99,720

)

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

 

 

 

 

 

 

 

 

Non-cash interest expense

 

 

4,672

 

 

 

6,131

 

Non-cash loss on extinguishment of convertible notes due 2020

 

 

14,566

 

 

 

 

Loss on disposal of property and equipment

 

 

227

 

 

 

 

Gain on sale of property and equipment

 

 

(40

)

 

 

 

Depreciation and amortization expense

 

 

5,210

 

 

 

4,320

 

Stock-based compensation expense

 

 

11,061

 

 

 

12,027

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(15,687

)

 

 

1,262

 

Inventory

 

 

(10,745

)

 

 

 

Accounts payable, accrued expenses and other

 

 

(2,367

)

 

 

335

 

Deferred revenues

 

 

(28,396

)

 

 

(25,922

)

Other assets and liabilities, net

 

 

2,046

 

 

 

(481

)

Net cash used in operating activities

 

 

(139,344

)

 

 

(102,048

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(84,262

)

 

 

 

Proceeds from sales and maturities of marketable securities

 

 

72,160

 

 

 

81,899

 

Purchases of property and equipment

 

 

(2,868

)

 

 

(8,127

)

Net cash (used in) provided by investing activities

 

 

(14,970

)

 

 

73,772

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from exercise of options and warrants to purchase common stock

 

 

4,007

 

 

 

8,295

 

Proceeds from issuance of convertible promissory notes by Silver Creek

   Pharmaceuticals, Inc.

 

 

1,185

 

 

 

 

Proceeds from at the market offering, net of issuance costs

 

 

 

 

 

38,560

 

Proceeds from issuance of preferred stock by Silver Creek Pharmaceuticals, Inc.

 

 

 

 

 

2,083

 

Other financing activities, net

 

 

(21

)

 

 

 

Net cash provided by financing activities

 

 

5,171

 

 

 

48,938

 

Net (decrease) increase in cash and cash equivalents

 

 

(149,143

)

 

 

20,662

 

Cash and cash equivalents, beginning of period

 

 

185,606

 

 

 

35,688

 

Cash and cash equivalents, end of period

 

$

36,463

 

 

$

56,350

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment in accounts payable, accrued expenses and other

 

$

105

 

 

$

1,800

 

Receivables related to stock option exercises in prepaid expenses and other current assets

 

 

39

 

 

 

87

 

Receivables related to the sale of property and equipment in prepaid expenses and other

   current assets

 

 

40

 

 

 

 

Principal amount of convertible notes due 2020 converted into shares of common stock

 

 

64,209

 

 

 

 

Transaction costs related to conversion of convertible notes due 2020 in accounts

   payable, accrued expenses and other

 

 

148

 

 

 

 

Supplemental disclosure of cash flows

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

13,851

 

 

$

8,837

 

 

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

 

 

4


 

Merrimack Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

 

1. Nature of the Business

Merrimack Pharmaceuticals, Inc. (the “Company”) is a biopharmaceutical company discovering, developing and commercializing innovative medicines consisting of novel therapeutics paired with diagnostics for the treatment of cancer. The Company has one marketed therapeutic oncology product and multiple targeted therapeutic oncology candidates in clinical development. The Company’s most advanced program is its therapeutic ONIVYDE, which it markets in the United States. In addition to ONIVYDE and its product candidates in clinical development, the Company has multiple product candidates in preclinical development and a discovery effort advancing additional candidate medicines. The Company has tailored ONIVYDE and its other product candidates to target specific disease mechanisms that its research suggests are common across many solid tumor types. The Company believes that ONIVYDE and its other product candidates have the potential to address major unmet medical needs. The Company also has an agreement to utilize its manufacturing expertise to develop, manufacture and exclusively supply bulk drug product to a third party, who will in turn process the drug into finished product and commercialize it globally following regulatory approval. The Company was incorporated in the Commonwealth of Massachusetts in 1993 and reincorporated in the State of Delaware in October 2010.

The Company is subject to risks and uncertainties common to companies in the biopharmaceutical industry, including, among other things, its ability to secure additional capital to fund operations, success of clinical trials, development by competitors of new technological innovations, dependence on collaborative arrangements, protection of proprietary technology, compliance with government regulations and dependence on key personnel. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel, infrastructure and extensive compliance reporting capabilities.

The Company has incurred significant expenses and operating losses to date, and it expects to continue to incur significant expenses and operating losses for at least the next several years. The accompanying condensed consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business.

The Company may seek additional funding through public or private debt or equity financings, or through existing or new collaboration arrangements. The Company may not be able to obtain financing on acceptable terms, or at all, and the Company may not be able to enter into additional collaborative arrangements. The terms of any financing may adversely affect the holdings or the rights of the Company’s stockholders. Arrangements with collaborators or others may require the Company to relinquish rights to certain of its technologies or product candidates. If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate its research and development programs or commercialization efforts, which could adversely affect its business prospects.

 

 

2. Basis of Presentation and Consolidation

The accompanying condensed consolidated financial statements as of September 30, 2016 and December 31, 2015, and for the three and nine months ended September 30, 2016 and 2015, have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and generally accepted accounting principles in the United States of America (“GAAP”) for condensed consolidated financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these condensed consolidated financial statements reflect all adjustments which are necessary for a fair statement of the Company’s financial position and results of its operations, as of and for the periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on February 26, 2016.

The information presented in the condensed consolidated financial statements and related notes as of September 30, 2016, and for the three and nine months ended September 30, 2016 and 2015, is unaudited. The December 31, 2015 condensed consolidated balance sheet included herein was derived from the audited financial statements as of that date, but does not include all disclosures, including notes, required by GAAP for complete financial statements.

Interim results for the nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016, or any future period.

5


 

These condensed consolidated financial statements include the accounts of the Company and its majority owned subsidiary, Silver Creek Pharmaceuticals, Inc. (“Silver Creek”). All intercompany transactions and balances have been eliminated in consolidation.

As of September 30, 2016, the Company’s unrestricted cash and cash equivalents includes $0.4 million of cash and cash equivalents held by Silver Creek. This $0.4 million held by Silver Creek is designated for the operations of Silver Creek.

During the nine months ended September 30, 2015, Silver Creek issued and sold a total of 1.6 million shares of Silver Creek Series B preferred stock at a price per share of $1.35 to investors and received net proceeds of $2.1 million, after deducting issuance costs. No shares of Silver Creek Series B preferred stock were sold during the nine months ended September 30, 2016. The Company’s ownership of Silver Creek was 56% as of both September 30, 2016 and December 31, 2015. The change in the non-controlling interest related to Silver Creek was as follows:

 

(in thousands)

 

Non-

Controlling

Interest

 

Balance at December 31, 2015

 

$

239

 

Net loss attributable to Silver Creek

 

 

(600

)

Balance at September 30, 2016

 

$

(361

)

 

(in thousands)

 

Non-

Controlling

Interest

 

Balance at December 31, 2014

 

$

69

 

Net income attributable to Silver Creek

 

 

412

 

Balance at September 30, 2015

 

$

481

 

 

 

3. Net Loss Per Common Share

Basic net loss per share is calculated by dividing the net loss available to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss available to common stockholders by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, convertible preferred stock, stock options and warrants are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

As discussed in Note 10, “Borrowings,” in July 2013, the Company issued $125.0 million aggregate principal amount of 4.50% convertible notes due 2020 (the “Convertible Notes”) in an underwritten public offering. Following the repayment and satisfaction in full of the Company’s obligations to Hercules Technology Growth Capital, Inc. (“Hercules”) under its Loan and Security Agreement with Hercules (the “Loan Agreement”), which occurred in December 2015, upon any conversion of the Convertible Notes, the Convertible Notes may be settled, at the Company’s election, in cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock. For purposes of calculating the maximum dilutive impact, it is presumed that the conversion premium will be settled in common stock, inclusive of a contractual make-whole provision resulting from a fundamental change, and the resulting potential common shares included in diluted earnings per share if the effect is more dilutive. As of September 30, 2016, $60.8 million aggregate principal amount of the Convertible Notes remain outstanding.

The stock options, warrants and conversion premium on the Convertible Notes are excluded from the calculation of diluted loss per share because the net loss for the three and nine months ended September 30, 2016 and 2015 causes such securities to be anti-dilutive. Outstanding securities excluded from the calculation of diluted loss per share for the three and nine months ended September 30, 2016 and 2015 are shown in the chart below:

 

 

 

Three and Nine Months Ended

September 30,

 

(in thousands)

 

2016

 

 

2015

 

Outstanding options to purchase common stock

 

 

21,000

 

 

 

19,436

 

Common stock warrants

 

 

 

 

 

370

 

Conversion of the Convertible Notes

 

 

12,158

 

 

 

25,000

 

 

 

6


 

4. License and Collaboration Agreements

Baxalta

On September 23, 2014, the Company and Baxter International Inc., Baxter Healthcare Corporation and Baxter Healthcare SA entered into a license and collaboration agreement (the “Baxalta Agreement”) for the development and commercialization of ONIVYDE outside of the United States and Taiwan (the “Licensed Territory”). In connection with Baxter International Inc.’s separation of the Baxalta business, the Baxalta Agreement was assigned to Baxalta Incorporated, Baxalta US Inc. and Baxalta GmbH (collectively, “Baxalta”) during the second quarter of 2015. As part of the Baxalta Agreement, the Company granted Baxalta an exclusive, royalty-bearing right and license under the Company’s patent rights and know-how to develop and commercialize ONIVYDE in the Licensed Territory. Baxalta is responsible for using commercially reasonable efforts to develop, obtain regulatory approvals for and, following regulatory approval, commercialize ONIVYDE in the Licensed Territory. A joint steering committee comprised of an equal number of representatives from each of Baxalta and the Company is responsible for approving changes to the global development plan for ONIVYDE, including all budgets, and overseeing the parties’ development and commercialization activities with respect to ONIVYDE. Unless otherwise agreed, the Company will be responsible for conducting all clinical trials contemplated by the global development plan for ONIVYDE and manufacturing all clinical material needed for such trials. Baxalta also has the option to manufacture ONIVYDE, in which case the Company will perform a technology transfer of its manufacturing process to Baxalta.

Under the terms of the Baxalta Agreement, the Company received a $100.0 million upfront, nonrefundable cash payment in September 2014. In addition, the Company is eligible to receive from Baxalta (i) up to an aggregate of $100.0 million upon the achievement of specified research and development milestones, of which the Company has received $62.5 million from Baxalta through September 30, 2016, (ii) up to an aggregate of $520.0 million upon the achievement of specified regulatory milestones, of which the Company has received $30.0 million from Baxalta through September 30, 2016, and (iii) up to an aggregate of $250.0 million upon the achievement of specified sales milestones. Under the terms of the Baxalta Agreement, the Company will bear up to the first $98.8 million of costs related to the development of ONIVYDE for pancreatic cancer patients who have not previously received gemcitabine-based therapy; however, the Company expects most of these costs to be offset by payments received upon the achievement of clinical trial-related milestones. The Company and Baxalta will share equally all other clinical trial costs contemplated by the global development plan. The Company is also entitled to tiered, escalating royalties ranging from sub-teen double digits to low twenties percentages of net sales of ONIVYDE in the Licensed Territory.

If not terminated earlier by either party, the Baxalta Agreement will expire upon expiration of all royalty and other payment obligations of Baxalta under the Baxalta Agreement. Either party may terminate the Baxalta Agreement in the event of an uncured material breach by the other party. Baxalta may also terminate the Baxalta Agreement on a product-by-product, country-by-country or sub-territory-by-sub-territory basis or in its entirety, for its convenience, upon 180 days’ prior written notice. In addition, the Company may terminate the Baxalta Agreement if Baxalta challenges or supports any challenge of the Company’s licensed patent rights.

At the inception of the collaboration, the Company identified the following deliverables as part of the Baxalta Agreement: (i) license to develop and commercialize ONIVYDE in Baxalta’s territories, (ii) discovery, research, development and manufacturing services required to complete ongoing clinical trials related to ONIVYDE, (iii) discovery, research, development and manufacturing services needed to complete future clinical trials in further indications related to ONIVYDE, (iv) the option to perform a technology transfer of the Company’s manufacturing process related to the production of ONIVYDE to Baxalta and (v) participation on the joint steering committee.

The Company concluded that none of the deliverables identified at the inception of the collaboration has standalone value from the other undelivered elements. As such, all deliverables represent a single unit of accounting.

The Company has determined that the collaboration represents a services agreement and as such has estimated the level of effort expected to be completed as a result of providing the identified deliverables. The Company will recognize revenue from the nonrefundable upfront payment, forecasted non-substantive milestone payments and estimated payments related to discovery, research, development and technology transfer services based on proportional performance as effort is completed over the expected services period, which is estimated to be substantially complete by June 30, 2022. The Company will periodically review and, if necessary, revise the estimated service period related to its collaboration with Baxalta. As of September 30, 2016, the Company has achieved $62.5 million of the $90.0 million of forecasted non-substantive milestones that are included in the Company’s proportional performance revenue recognition model and $30.0 million of the $530.0 million of substantive milestones that are included in the Baxalta Agreement.

Research, development and regulatory milestones that are considered substantive on the basis of the contingent nature of the milestone will be recognized as revenue in full in the period in which the associated milestone is achieved, assuming all other revenue

7


 

recognition criteria are met. All sales milestones will be accounted for in the same manner as royalties and recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met.

During the second quarter of 2015, the European Medicines Agency (“EMA”) accepted for review a Marketing Authorization Application (“MAA”) filed by Baxalta for ONIVYDE. As a result of this acceptance, the Company recognized $20.0 million of revenue related to a substantive milestone payment owed from Baxalta. In August 2015, the Company achieved a $15.0 million milestone related to the submission of the protocol for the Company’s Phase 2 clinical trial of ONIVYDE in front-line metastatic pancreatic cancer. This milestone is a non-substantive milestone, and revenue related to the achievement of this milestone will be recognized through the proportional performance revenue recognition model. In October 2015, the Company achieved an additional $47.5 million milestone related to the enrollment of the first patient in a Phase 2 clinical trial of ONIVYDE in front-line pancreatic cancer. This milestone is also a non-substantive milestone, and revenue related to the achievement of this milestone will be recognized through the proportional performance revenue recognition model. In the second quarter of 2016, the South Korean Ministry of Food and Drug Safety (the “MFDS”) accepted for review a new drug application filed by Baxalta for ONIVYDE. As a result of this acceptance, the Company recognized $10.0 million of license and collaboration revenue related to a substantive milestone payment owed from Baxalta.

During the three and nine months ended September 30, 2016 and 2015, the Company recognized revenue based on the following components of the Baxalta Agreement:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(in thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Proportional performance revenue recognition model

 

$

12,417

 

 

$

16,440

 

 

$

33,062

 

 

$

47,839

 

Substantive milestones

 

 

 

 

 

 

 

 

10,000

 

 

 

20,000

 

Total

 

$

12,417

 

 

$

16,440

 

 

$

43,062

 

 

$

67,839

 

 

As of September 30, 2016 and December 31, 2015, the Company maintained the following assets and liabilities related to the Baxalta Agreement:

 

(in thousands)

 

September 30,

2016

 

 

December 31,

2015

 

Accounts receivable, billed

 

$

594

 

 

$

1,336

 

Accounts receivable, unbilled

 

 

385

 

 

 

626

 

Deferred revenues

 

 

68,944

 

 

 

97,365

 

 

Of the $68.9 million of deferred revenues related to the Baxalta Agreement as of September 30, 2016, $36.6 million is classified as current in the condensed consolidated balance sheets based upon the Company’s estimate of revenues that will be recognized under the proportional performance revenue recognition model as a result of effort expected to be completed within the next twelve months.

In February 2016, the Company and Baxalta entered into a commercial supply agreement (the “Baxalta Supply Agreement”) pursuant to which the Company supplies ONIVYDE bulk drug substance to Baxalta and, at Baxalta’s option, manages fill and finish activities conducted by a third-party contract manufacturer for Baxalta. The Company began supplying bulk drug substance under the Baxalta Supply Agreement during the second quarter of 2016 and recognized $1.2 million and $2.4 million of revenue during the three and nine months ended September 30, 2016, respectively. Revenue and cost of goods sold associated with the Baxalta Supply Agreement are included within “Other revenues” and “Cost of revenues” on the consolidated statements of operations and comprehensive loss.

PharmaEngine, Inc.

On May 5, 2011, the Company and PharmaEngine, Inc. (“PharmaEngine”) entered into an assignment, sublicense and collaboration agreement (the “PharmaEngine Agreement”) under which the Company reacquired rights in Europe and certain countries in Asia to ONIVYDE. In exchange, the Company agreed to pay PharmaEngine a nonrefundable, noncreditable upfront payment of $10.0 million and up to an additional $80.0 million in aggregate development and regulatory milestones and $130.0 million in aggregate sales milestones. PharmaEngine is also entitled to tiered royalties on net sales of ONIVYDE in Europe and certain countries in Asia. PharmaEngine is not responsible for any future development costs of ONIVYDE except those required specifically for regulatory approval in Taiwan.

On September 22, 2014, the Company amended the PharmaEngine Agreement to redefine sublicense revenue and reduce the portion of sublicense revenue that the Company is required to pay to PharmaEngine. As a result of this amendment, the Company

8


 

made a $7.0 million milestone payment to PharmaEngine in September 2014. Additionally, as a result of this amendment, a previously contingent $5.0 million milestone payment was paid to PharmaEngine in the second quarter of 2015. Prior to the amendment of the PharmaEngine Agreement, this milestone payment was contingent upon the award of certain specified regulatory designations. These milestone payments were recognized as research and development expense during the year ended December 31, 2014. In July 2015, the Company made an $11.0 million milestone payment to PharmaEngine in connection with the EMA’s acceptance for review of an MAA for ONIVYDE, which occurred, and was recognized as research and development expense, in the second quarter of 2015. In June 2016, the Company also made a $10.0 million milestone payment to PharmaEngine in connection with the MFDS’s acceptance for review of a new drug application for ONIVYDE, which occurred, and was recognized as research and development expense, in the second quarter of 2016.

During the three months ended September 30, 2016 and 2015, the Company recognized research and development expenses related to the PharmaEngine Agreement of less than $0.1 million and $0.1 million, respectively. During the nine months ended September 30, 2016 and 2015, the Company recognized research and development expenses related to the PharmaEngine Agreement of $10.1 million and $11.4 million, respectively.

In August 2015, the Company and PharmaEngine also entered into a commercial supply agreement (the “PharmaEngine Supply Agreement”) pursuant to which the Company supplies ONIVYDE bulk drug substance to PharmaEngine. The Company began supplying bulk drug substance under the PharmaEngine Supply Agreement in the second quarter of 2016 and has recognized $0.3 million of revenue during the nine months ended September 30, 2016. No revenue related to the PharmaEngine Supply Agreement was recognized during the three months ended September 30, 2016. Revenue and cost of goods sold associated with the PharmaEngine Supply Agreement are included within “Other revenues” and “Cost of revenues” on the consolidated statements of operations and comprehensive loss.

Actavis

In November 2013, the Company and Watson Laboratories, Inc. (“Actavis”) entered into a development, license and supply agreement (the “Actavis Agreement”) pursuant to which the Company will develop, manufacture and exclusively supply the bulk form of doxorubicin HCl liposome injection (the “Initial Product”) to Actavis. The Actavis Agreement was subsequently amended in January 2015 to transfer certain responsibilities from the Company to Actavis in exchange for reducing the aggregate milestone payments that the Company is eligible to receive by $0.4 million. Under the Actavis Agreement, Actavis is responsible for all costs related to finished product processing and global commercialization. Pursuant to the agreement, additional products may be developed for Actavis in the future, the identities of which will be mutually agreed upon. The Company is eligible to receive up to $15.1 million in milestone and development payments, as well as additional reimbursement for specific activities performed by the Company at the request of Actavis, of which $4.0 million in total has been received through September 30, 2016. The Company will also receive a mid-twenties percentage of net profits on global sales of the Initial Product and any additional products. The Company will manufacture and supply the Initial Product to Actavis in bulk form at an agreed upon unit price. In October 2016, the U.S. Food and Drug Administration accepted for review an Abbreviated New Drug Application filed by Actavis for the Initial Product.

The Actavis Agreement will expire with respect to the Initial Product and any additional products developed in the future ten years after Actavis’ first sale of the applicable product, unless terminated earlier, and will automatically renew for additional two year periods thereafter unless either party provides notice of non-renewal. Either party may terminate the Actavis Agreement in the event of an uncured material breach or bankruptcy filing by the other party. Actavis may also terminate the Actavis Agreement for convenience in specified circumstances upon 90 days’ prior written notice.

The Company applied revenue recognition guidance to determine whether the performance obligations under the Actavis Agreement, including the license, participation on steering committees, development services, and manufacturing and supply services could be accounted for separately or as a single unit of accounting. The Company determined that these obligations represent a single unit of accounting and will recognize revenue as product is supplied to Actavis. Therefore, the Company has recorded $4.0 million of billed and billable milestones and development expenses related to the Actavis Agreement as deferred revenue as of both September 30, 2016 and December 31, 2015. This revenue is expected to be recognized by the Company over the ten year period that begins after Actavis’ first sale of the applicable product under the Actavis Agreement.

 

 

9


 

5. Product Revenue Reserves and Allowances

The following table summarizes activity in each of the product revenue reserve and allowance categories for the nine months ended September 30, 2016:

 

(in thousands)

 

Trade

Allowances

 

 

Rebates and

Chargeback

Discounts

 

 

Product

Returns

 

 

Other

Incentives

 

 

Total

 

Balance at December 31, 2015

 

$

138

 

 

$

362

 

 

$

32

 

 

$

8

 

 

$

540

 

Provisions related to sales in the current year

 

 

1,332

 

 

 

4,073

 

 

 

278

 

 

 

7

 

 

 

5,690

 

Adjustments related to sales in the prior year

 

 

 

 

 

(156

)

 

 

 

 

 

 

 

 

(156

)

Credits and payments made

 

 

(978

)

 

 

(3,354

)

 

 

(26

)

 

 

(7

)

 

 

(4,365

)

Balance at September 30, 2016

 

$

492

 

 

$

925

 

 

$

284

 

 

$

8

 

 

$

1,709

 

 

 

6. Fair Value of Financial Instruments

The carrying values of cash, restricted cash, prepaid expenses, accounts receivable, accounts payable and accrued expenses, and other short-term assets and liabilities approximate their respective fair values due to the short-term maturities of these assets and liabilities.

Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is determined based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect certain market assumptions. As a basis for considering such assumptions, GAAP establishes a three-tier value hierarchy, which prioritizes the inputs used to develop the assumptions and for measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets for identical assets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

Recurring Fair Value Measurements

The following tables show assets measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015:

 

 

 

September 30, 2016

 

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

32,288

 

 

$

 

 

$

 

Total cash equivalents

 

$

32,288

 

 

$

 

 

$

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

 

 

$

7,000

 

 

$

 

Corporate debt securities

 

 

 

 

 

5,003

 

 

 

 

Total marketable securities

 

$

 

 

$

12,003

 

 

$

 

 

 

 

December 31, 2015

 

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

704

 

 

$

 

 

$

 

Total cash equivalents

 

$

704

 

 

$

 

 

$

 

 

There were no changes in valuation techniques or transfers between the fair value measurement levels during the three or nine months ended September 30, 2016 or during the year ended December 31, 2015. There were no liabilities measured at fair value on a recurring basis as of September 30, 2016 or December 31, 2015.

10


 

Non-Recurring Fair Value Measurements

Certain assets, including in-process research and development intangible assets, may be measured at fair value on a non-recurring basis in periods subsequent to initial recognition. No non-recurring fair value measurements were required during the three or nine months ended September 30, 2016 or during the year ended December 31, 2015.

Other Fair Value Measurements

The estimated fair value of the Convertible Notes was $74.2 million as of September 30, 2016. The Company estimated the fair value of the Convertible Notes by using a quoted market rate in an inactive market, which is classified as a Level 2 input. The carrying value of the Convertible Notes was $46.0 million as of September 30, 2016 due to the bifurcation of the conversion feature of the Convertible Notes as described more fully in Note 10, “Borrowings.”

As discussed in Note 10, “Borrowings,” in December 2015, the Company closed a private placement of $175.0 million aggregate principal amount of 11.50% senior secured notes due 2022 (the “2022 Notes”). The Company estimated the fair value of the 2022 Notes by using publicly-available information related to one of the 2022 Notes borrower’s portfolio of debt investments based on unobservable inputs, which is classified as a Level 3 input. The estimated fair value of the 2022 Notes was $173.5 million as of September 30, 2016. The carrying value of the 2022 Notes was $169.7 million as of September 30, 2016.

As discussed in Note 10, “Borrowings,” Silver Creek issued $1.0 million of convertible promissory notes (the “Silver Creek Notes”) in May 2016. In August 2016, Silver Creek issued $0.2 million of additional Silver Creek Notes under the same terms as the May 2016 issuance. The Company estimated the fair value of the Silver Creek Notes using a probability-weighted valuation based upon the likelihood of Silver Creek Notes being converted to shares of Silver Creek equity, which is classified as a Level 3 input. The estimated fair value of the Silver Creek Notes was $1.2 million as of September 30, 2016. The carrying value of the Silver Creek Notes was also $1.2 million as of September 30, 2016.

 

 

7. Marketable Securities

The Company classifies marketable securities with a remaining maturity when purchased of greater than three months as available-for-sale. Available-for-sale securities may consist of U.S. government agency securities, commercial paper, corporate notes and bonds and certificates of deposit, which are maintained by an investment manager. Available-for-sale securities are carried at fair value, with the unrealized gains and losses included in other comprehensive income (loss) as a component of stockholders’ deficit until realized. The amortized cost of securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Realized gains and losses are recognized within interest income.

Cash equivalents and marketable securities as of September 30, 2016 consisted of the following:

 

 

 

September 30, 2016

 

(in thousands)

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair

Value

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

32,288

 

 

$

 

 

$

 

 

$

32,288

 

Total cash equivalents

 

$

32,288

 

 

$

 

 

$

 

 

$

32,288

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

7,000

 

 

$

 

 

$

-

 

 

$

7,000

 

Corporate debt securities

 

 

5,005

 

 

 

 

 

 

(2

)

 

 

5,003

 

Total marketable securities

 

$

12,005

 

 

$

 

 

$

(2

)

 

$

12,003

 

 

As of December 31, 2015, the Company maintained only cash equivalents comprised of money market funds.

 

There were no realized gains or losses on available-for-sale securities during the three or nine months ended September 30, 2016 or 2015. As of September 30, 2016, the Company held three securities that had been in an immaterial unrealized loss position for less than twelve months. The aggregate fair value of these three securities was $12.0 million. As of September 30, 2016, the Company did not intend to sell, and it was not more likely than not that the Company would be required to sell, the securities in an unrealized loss position before recovery of their amortized cost bases. As a result, the Company determined that there was no material change in the credit risk of the investments, and the Company did not hold any securities with an other-than-temporary-impairment as of September 30, 2016.

 

 

11


 

8. Inventory

Inventory as of September 30, 2016 and December 31, 2015 consisted of the following:

 

(in thousands)

 

September 30,

2016

 

 

December 31,

2015

 

Raw materials

 

$

4,669

 

 

$

900

 

Work in process

 

 

8,775

 

 

 

2,743

 

Finished goods

 

 

1,326

 

 

 

74

 

Total inventory

 

$

14,770

 

 

$

3,717

 

 

Inventory acquired prior to receipt of marketing approval of ONIVYDE was expensed as research and development expense as incurred. The Company began to capitalize the costs associated with the production of ONIVYDE upon receipt of approval from the U.S. Food and Drug Administration on October 22, 2015.

 

 

9. Accounts Payable, Accrued Expenses and Other

Accounts payable, accrued expenses and other as of September 30, 2016 and December 31, 2015 consisted of the following:

 

(in thousands)

 

September 30,

2016

 

 

December 31,

2015

 

Accounts payable

 

$

8,114

 

 

$

5,049

 

Accrued goods and services

 

 

13,602

 

 

 

14,295

 

Accrued clinical trial costs

 

 

11,495

 

 

 

12,764

 

Accrued drug purchase costs

 

 

35

 

 

 

7,460

 

Accrued payroll and related benefits

 

 

8,186

 

 

 

9,009

 

Accrued restructuring expenses

 

 

809

 

 

 

 

Accrued interest

 

 

6,447

 

 

 

3,041

 

Accrued dividends payable

 

 

19

 

 

 

19

 

Deferred tax incentives

 

 

992

 

 

 

445

 

Total accounts payable, accrued expenses and other

 

$

49,699

 

 

$

52,082

 

 

 

10. Borrowings

2022 Notes

On December 22, 2015, the Company closed a private placement of $175.0 million aggregate principal amount of 11.50% 2022 Notes. As a result of this placement, the Company received net proceeds of approximately $168.5 million, after deducting private placement and offering expenses payable by the Company. The 2022 Notes bear interest at a rate of 11.50% per year, payable semi-annually on June 15 and December 15 of each year, beginning on June 15, 2016. The Company will pay semi-annual installments of principal on the 2022 Notes of $21,875,000 each on June 15 and December 15 of each year, beginning on June 15, 2019. The 2022 Notes will mature on December 15, 2022, unless earlier redeemed or repurchased in accordance with their terms prior to such date.

The 2022 Notes are senior secured obligations of the Company and will be equal in right of payment to all existing and future pari passu indebtedness of the Company (including the Company’s outstanding Convertible Notes), will be senior in right of payment to all existing and future subordinated indebtedness of the Company, will have the benefit of a security interest in the 2022 Notes collateral and will be junior in lien priority in respect of any asset-based lending collateral that secures any first priority lien obligations from time to time. The 2022 Notes contain customary covenants, including covenants that limit or restrict the Company’s ability to incur liens, incur indebtedness, and make certain restricted payments, but do not contain covenants related to future financial performance. The 2022 Notes are secured by a first priority lien on substantially all of the Company’s assets.

The Company assessed the 2022 Notes pursuant to Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging, to determine if any features necessitated bifurcation from the host instrument. The Company concluded that none of the embedded redemption features within the 2022 Notes require bifurcation as these features are clearly and closely related to the host instrument.

Debt issuance costs incurred by the Company are accounted for as a direct deduction to the carrying value of the 2022 Notes and are amortized to interest expense using the effective interest method over the life of the 2022 Notes. For the three and nine months ended September 30, 2016, interest expense related to the 2022 Notes was $5.2 million and $15.6 million, respectively.

12


 

Convertible Notes

In July 2013, the Company issued $125.0 million aggregate principal amount of Convertible Notes in an underwritten public offering. As a result of the Convertible Notes offering, the Company received net proceeds of approximately $120.6 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company.

The Convertible Notes bear interest at a rate of 4.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, beginning on January 15, 2014. The Convertible Notes are general unsecured senior obligations of the Company and rank (i) pari passu in seniority with respect to the 2022 Notes, (ii) senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Convertible Notes, (iii) equal in right of payment to any of the Company’s unsecured indebtedness that is not so subordinated, (iv) effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness and (v) structurally junior to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries.

The Company separately accounted for the liability and equity components of the Convertible Notes by bifurcating gross proceeds between the indebtedness, or liability component, and the embedded conversion option, or equity component. This bifurcation was done by estimating an effective interest rate as of the date of issuance for similar notes which do not contain an embedded conversion option. The gross proceeds received from the issuance of the Convertible Notes less the initial amount allocated to the indebtedness resulted in a $53.8 million allocation to the embedded conversion option. The embedded conversion option was recorded in stockholders’ deficit and as debt discount, to be subsequently amortized as interest expense over the term of the Convertible Notes. Underwriting discounts and commissions and offering expenses totaled $4.4 million and were allocated to the indebtedness and the embedded conversion option based on their relative values.

On April 13, 2016, the Company entered into separate, privately-negotiated conversion agreements (the “Conversion Agreements”) with certain holders of the Convertible Notes. Under the Conversion Agreements, such holders agreed to convert an aggregate principal amount of $64.2 million of Convertible Notes held by them. The Company initially settled each $1,000 principal amount of Convertible Notes surrendered for conversion by delivering 136 shares of the Company’s common stock on April 18, 2016. In total, the Company issued an aggregate of 8,732,152 shares of its common stock on this initial closing date. In addition, pursuant to the Conversion Agreements, at the additional closings (as defined in the Conversion Agreements), the Company issued an aggregate of 3,635,511 shares of the Company’s common stock representing an aggregate of $27.7 million as additional payments in respect of the conversion of the Convertible Notes. The number of additional shares was determined based on the daily VWAP (as defined in the Conversion Agreements) of the Company’s common stock for each of the trading days in the 10-day trading period following the date of the Conversion Agreements. The issuance of 12,367,663 total shares of the Company’s common stock pursuant to the Conversion Agreements resulted in an increase to common stock and additional paid-in capital of $101.0 million.

As a result of the conversion, the Company recognized an overall loss on extinguishment of $14.6 million representing the difference between the total settlement consideration transferred to the holders that was attributed to the liability component of the Convertible Notes, based on the fair value of that component at the time of conversion, and the net carrying value of the liability. The loss on extinguishment was recorded as interest expense during the second quarter of 2016. The remaining settlement consideration transferred was allocated to the reacquisition of the embedded conversion option and recognized as a $39.8 million reduction of additional paid-in capital. Transaction costs incurred with third parties related to the conversion were allocated to the liability and equity components and resulted in an additional $0.2 million of interest expense and a $0.2 million reduction of additional paid-in capital.

The outstanding Convertible Notes will mature on July 15, 2020 (the “Maturity Date”), unless earlier repurchased by the Company or converted at the option of holders. Holders may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding April 15, 2020 only under the following circumstances:

 

during any calendar quarter commencing after September 30, 2013 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

 

during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price (as defined in the Convertible Notes) per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or

 

upon the occurrence of specified corporate events set forth in the indenture governing the Convertible Notes.

13


 

On or after April 15, 2020 until the close of business on the business day immediately preceding the Maturity Date, holders may convert their Convertible Notes at any time, regardless of the foregoing circumstances.

Following the repayment and satisfaction in full of the Company’s obligations to Hercules under the Loan Agreement, which occurred in December 2015, upon any conversion of the Convertible Notes, the Convertible Notes may be settled, at the Company’s election, in cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock.

The initial conversion rate of the Convertible Notes is 160 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of $6.25 per share of common stock. The conversion rate will be subject to adjustment in some events, but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the Maturity Date, the Company will increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such a corporate event in certain circumstances.

For the three months ended September 30, 2016 and 2015, interest expense related to the Convertible Notes was $1.7 million and $3.4 million, respectively. For the nine months ended September 30, 2016 and 2015, interest expense related to the Convertible Notes was $21.1 million and $10.3 million, respectively. As discussed above, interest expense for the nine months ended September 30, 2016 includes the loss on extinguishment of $14.6 million associated with the April 2016 conversion of the Convertible Notes as well as $0.2 million of related transaction costs.

Silver Creek Convertible Promissory Notes

In May 2016, Silver Creek issued an aggregate of $1.0 million of Silver Creek Notes. In August 2016, Silver Creek issued $0.2 million of additional Silver Creek Notes under the same terms as the May 2016 issuance. The Silver Creek Notes are automatically convertible into shares of Silver Creek equity under a variety of conversion scenarios. The Silver Creek Notes bear interest at 6% per annum and mature and convert, along with accrued interest, into Silver Creek Series B preferred stock at a conversion price of $1.35 per share on December 31, 2016. If, prior to maturity, Silver Creek enters into a sale or series of related sales of equity securities resulting in at least $4.0 million of gross proceeds, the Silver Creek Notes will convert into the equity securities sold at the lesser of the price paid per share for the equity securities or $1.60 per share. Principal and accrued interest related to the Silver Creek Notes may not be paid in cash by Silver Creek without the consent of the majority noteholders. The Silver Creek Notes are classified as non-current as of September 30, 2016, as it is not expected that the Silver Creek Notes will be settled in cash.

Future Minimum Payments under Outstanding Borrowings

Future minimum payments under outstanding borrowings as of September 30, 2016 are as follows:

 

(in thousands)

 

Convertible

Notes

 

 

2022 Notes

 

Remainder of 2016

 

$

 

 

$

10,063

 

2017

 

 

2,736

 

 

 

20,125

 

2018

 

 

2,736

 

 

 

20,125

 

2019

 

 

2,736

 

 

 

62,617

 

2020 and thereafter

 

 

63,527

 

 

 

157,664

 

Total

 

 

71,735

 

 

 

270,594

 

Less interest

 

 

(10,943

)

 

 

(95,594

)

Less unamortized discount

 

 

(14,820

)

 

 

(5,286

)

Less current portion

 

 

 

 

 

 

Long-term debt

 

$

45,972

 

 

$

169,714

 

 

 

14


 

11. Restructuring Activities

On October 3, 2016, the Company announced a 22% reduction in headcount as part of a major corporate restructuring with the objective of prioritizing its research and development on a focused set of systems biology-derived oncology products and strengthening its financial runway. On this same date, the Company also announced the resignation of Robert Mulroy, the Company’s former President and Chief Executive Officer.  

Under this corporate restructuring, the Company recognized total restructuring expenses of $0.8 million during the three and nine months ended September 30, 2016 related to contractual termination benefits for employees with pre-existing severance arrangements. The Company also expects to incur approximately $4.0 million of additional restructuring expenses during the fourth quarter of 2016 related to one-time employee termination benefits. These one-time employee termination benefits are comprised of severance, benefits and related costs, all of which are expected to result in cash expenditures. The Company anticipates that the majority of these payments will be made during the fourth quarter of 2016.

The following table summarizes the charges related to the restructuring activities as of September 30, 2016:

 

(in thousands)

 

Expenses

 

 

Payments

 

 

Accrued restructuring expenses at

September 30, 2016

 

Severance, benefits and related costs due to

   workforce reduction

 

$

809

 

 

$

 

 

$

809

 

Totals

 

$

809

 

 

$

 

 

$

809

 

 

 

12. Stock-Based Compensation

As of December 31, 2015, there were 2.5 million shares of common stock available to be granted under the Company’s 2011 Stock Incentive Plan (the “2011 Plan”). The 2011 Plan is administered by the Company’s board of directors and permits the Company to grant incentive and non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards.

In February 2016, 4.1 million additional shares of common stock became available for grant to employees, officers, directors and consultants under the 2011 Plan. At September 30, 2016, there were 3.5 million shares remaining available for grant under the 2011 Plan.

During the nine months ended September 30, 2016 and 2015, the Company issued options to purchase 4.2 million and 3.3 million shares of common stock, respectively. These options generally vest over a three-year period for employees. Options granted to directors vest immediately.

The fair value of stock options granted to employees during the three and nine months ended September 30, 2016 and 2015 was estimated at the date of grant using the following assumptions:

 

 

 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 

 

2016

 

2015

 

2016

 

2015

Risk-free interest rate

 

1.1 – 1.4%

 

1.7 – 1.9%

 

1.1 – 1.5%

 

1.5 – 1.8%

Expected dividend yield

 

0%

 

0%

 

0%

 

0%

Expected term

 

5.8 years

 

5.8 – 5.9 years

 

5.0 – 5.8 years

 

5.0 – 5.9 years

Expected volatility

 

67%

 

67%

 

67 – 69%

 

66 – 67%

 

The Company uses the simplified method to calculate the expected term, as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. The computation of expected volatility is based on the historical volatility of comparable companies from a representative peer group selected based on industry and market capitalization. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. Management estimates expected forfeitures based on historical experience and recognizes compensation costs only for those equity awards expected to vest.

15


 

The Company recognized stock-based compensation expense during the three and nine months ended September 30, 2016 and 2015 as follows:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(in thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Employee awards:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expense

 

$

1,596

 

 

$

2,116

 

 

$

5,268

 

 

$

6,451

 

Selling, general and administrative expense

 

 

1,663

 

 

 

1,565

 

 

 

6,100

 

 

 

5,519

 

Stock-based compensation expense for

   employee awards

 

 

3,259

 

 

 

3,681

 

 

 

11,368

 

 

 

11,970

 

Stock-based compensation expense for

   non-employee awards

 

 

 

 

 

9

 

 

 

1

 

 

 

57

 

Less: stock-based compensation expense

  capitalized to inventory

 

 

(88

)

 

 

 

 

 

(308

)

 

 

 

Total stock-based compensation expense

 

$

3,171

 

 

$

3,690

 

 

$

11,061

 

 

$

12,027

 

 

The following table summarizes stock option activity during the nine months ended September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average

Remaining

 

 

Aggregate