5. Equity Method Investment

On August 29, 2016, the Company executed a stock purchase agreement with Kleo Pharmaceuticals, Inc. (“Kleo”), a privately held Delaware corporation, to purchase 3,000,000 shares of Kleo’s common stock at an initial closing, with a commitment to purchase an aggregate of 5,500,000 additional shares of common stock, in each case at a share price of $1.00 per share (the “Kleo SPA”). Kleo is a development-stage biopharmaceutical company focused on advancing the field of immunotherapy by developing small molecules that emulate biologics. Under the terms of the Kleo SPA, the Company purchased 3,000,000 shares upon the initial closing on August 31, 2016, and the remaining 5,500,000 shares are to be purchased in four equal tranches of 1,375,000 shares beginning six months from the initial closing and then every three months thereafter. The Company completed three of the four remaining tranche purchases in March, June and October of 2017, with each tranche purchase consisting of 1,375,000 shares for cash consideration of $1,375 (see Note 17).

In connection with the Kleo SPA, the Company agreed to purchase an additional 500,000 shares of Kleo common stock from an officer and stockholder of Kleo. On March 30, 2017, the Company completed the purchase of these shares. The consideration paid for these shares consisted of a cash payment of $250 and the Company’s issuance of 32,500 common shares with a fair value of $10.82 per share on the date of issuance, or $352.

In addition, on October 5, 2017, the Company entered into two separate subscription agreements with Kleo (“First Subscription Agreement” and “Second Subscription Agreement”) in order to maintain the Company’s relative ownership interest in Kleo. Pursuant to the First Subscription Agreement, the Company purchased 1,397,904 shares of Kleo’s common stock at a purchase price of $1.0993 per share, for total consideration of $1,537. Pursuant to the Second Subscription Agreement, the Company purchased an additional 651,639 shares of Kleo’s common stock at a purchase price of $1.0993 per share, for total consideration of $716. Upon completion of the third tranche purchase and the purchases under the First Subscription Agreement and the Second Subscription Agreement, the Company’s ownership interest in the outstanding stock of Kleo increased to 43.3% (see Note 17).

The Company has a variable interest in Kleo through its equity investment. Kleo is a variable interest entity due to the equity investment at risk being insufficient to finance its activities. An assessment of whether or not the Company has the power to direct activities that most significantly impact Kleo’s economic performance and to identify the party that obtains the majority of the benefits of the investment was performed as of September 30, 2017 and December 31, 2016, and will be performed as of each subsequent reporting date. After each of these assessments, the Company concluded that the activities that most significantly impact Kleo’s economic performance are the ability to direct the research activities, the ability to select vendors to perform the research, the ability to maintain research staff and the ability to raise additional funds. Based on the outcome of these assessments, the Company concluded that consolidation of Kleo is not appropriate, and has therefore accounted for the investment under the equity method.

The Company’s purchase of 3,000,000 shares of Kleo’s common stock during the year ended December 31, 2016 and 3,250,000 shares during the nine months ended September 30, 2017 resulted in the Company owning 18.6% and 33.0% of the outstanding shares of Kleo stock as of December 31, 2016 and September 30, 2017, respectively. In connection with the initial investment, the Company also received the right to designate two of the five members of Kleo’s board of directors. The Company accounts for its investment in Kleo under the equity method of accounting. The Company has recorded its investments in Kleo to date based on the costs of those investments, as adjusted for the Company’s proportional share of Kleo’s net income or loss in each period. The difference between the cost of the Company’s investments in Kleo and its proportionate share of the net assets of Kleo was allocated to goodwill and indefinite-lived intangible assets. The Company records future adjustments to the carrying value of its investment at each reporting date equal to its proportionate share of Kleo’s net loss for the corresponding period. The Company recorded other expense and a corresponding reduction in the carrying value of its investment in Kleo of $638 and $1,204 for its proportionate share of Kleo’s net loss for the three and nine months ended September 30, 2017, respectively.

The carrying value of the Company’s investment in Kleo was $4,900 and $2,753 as of September 30, 2017 and December 31, 2016, respectively, and is reported as equity method investment on the consolidated balance sheet. The carrying value of the investment represents the Company’s maximum loss exposure as of September 30, 2017.

The following table provides a roll forward of the carrying value of the Company’s equity method investment:

	Carrying Value

Balance at December 31, 2016	$	2,753
Purchases of Kleo common stock	3,351
Loss recognized in connection with equity method investment	(1,204		)

Balance at September 30, 2017	$	4,900

Summarized financial information for Kleo is as follows:

	September 30,		December 31,
	2017		2016
Current assets	$	5,977	$	4,276
Total assets	$	6,357	$	4,323
Current liabilities	$	536	$	413
Total liabilities	$	4,225	$	1,554

	Three Months Ended			Nine Months Ended
	September 30, 2017			September 30, 2017
Revenue	$	—		$	—
Loss from operations	$	(1,784	)	$	(4,305	)
Net loss	$	(1,785	)	$	(4,327	)

The summarized financial information as of and for the year ended December 31, 2016 has been revised to reflect the revised financial statements received from Kleo.